Sabesp Profile - Financial Statements 2005 - Notes to the Financial Statements

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Loans and Credit Facilities

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(a) Banco do Brasil

In March 1994, existing loan agreements with Caixa Econômica Federal were refinanced and the loan rights were transferred by that financial institution to the Federal Government, with Banco do Brasil acting as an agent. Under the terms of the agreement signed with the Federal Government, charges and payments are made on the “Price” amortization system, indexed monthly to the Standard Reference Unit (UPR), which is equal to the Government’s benchmark Interest Rate (TR), plus interest 8.5% per year. Interest and principal are payable monthly, with final maturity in 2014. This financing is guaranteed by the State of São Paulo Government’s revenue and by the Company’s own revenues.

(b) Debentures

(i) 4^th Issue

On April 01, 2001 the Company made a public placement of 30,000 non-convertible, registered, book-entry type, single series, non-renegotiable debentures, at the unit value of R$ 10, in an aggregate amount of R$ 300,000. The placement of these debentures in the local market occurred through an auction held on June 8, 2001.

The amortization shall be made in 12 quarterly installments, beginning on March 15, 2004, with final scheduled redemption date on December 15, 2006.

The debentures bear interest at the daily interbank deposit rate - DI, as calculated and disclosed by the CETIP - Securities Custody and Financial Settlement Agency, plus 1.20% per annum spread. Interest is paid quarterly, the first payment having occurred on June 15, 2001.

Funds raised from the issue were used for settling debts becoming payable in the funding year.

In 2005, accrued interest was R$ 30,020 (2004 - R$ 42,472). The outstanding balance payable, in the amount of R$ 775, is recorded under “Loans and financing” in the current liabilities.

(ii) 5^th Issue

On April 1, 2002 the Company made a public placement for the 5^th issue of simple, book-entry, registered, unsecured, non-convertible debentures, with face value of R$ 10. The value of the 2^nd Issue is monthly changed, due to of its type, in conformity with the indenture.

Funds raised from the issue were used for settling debts during fiscal year 2002.

40,000 debentures were issued, distributed in two series, as follows:

	1^st Series	2^nd Series
Placement date	05/16/2002	05/16/2002
Number	31,372	8,628
Face value of Issue	R$ 313,720	R$ 86,280
Original yield	CDI + 1.85% per year	IGP-M + 13.25% per year
Interest payments	Quarterly, except for last installment on 03/01/2007	Annual, except for last installment in 03/01/2007
Amortization	3 installments on 04/01/2005, 04/01/2006 and 03/01/2007	3 installments on 04/01/2005, 04/01/2006 and 03/01/2007

The interest rates for the two series were renegotiated for the last time in April, 2005, whereby the rate for the 1^st Series was changed from CDI + 2% per year to CDI + 1.1% per year, and for the 2^nd Series was changed from IGPM + 12.7% per year to IGPM + 10.65% per year, in effect until the agreement conclusion.

In 2005, accrued interest was R$ 45,015 (2004 - R$ 54,376) relating to the 1^st Series, paid on a quarterly basis, and R$ 11,584 (2004 - R$ 16,641) relating to the 2^nd Series, paid on an annual basis. The remaining balances of R$ 9,443 (2004 - R$ 13,893) for the 1^st Series and of R$ 7,032 (2004 - R$ 12,328) for the 2^nd Series, are recorded under “Loans and financing”, in current liabilities.

(iii) 6^th Issue

On September 17, 2004, the Company registered with the CVM a securities program by which it shall be able to offer debt securities, including non-convertible debentures and commercial papers, up to a total amount of R$ 1,500,000. As part of such program, on September 1, 2004 the Company issued 600,000 debentures, distributed in three series, without renegotiation, with face value of R$ 1 each, totaling R$ 600,000. The date of the financial settlement of the transaction was September 21, 2004, for the 1^st series, and September 22, 2004, for the 2^nd and 3^rd series.

The debentures were placed on the market as follows:

	Amount	Adjustment	Interests	Interest Payment	Amortization	Maturity Date
1^st Series	231,813	-	CDI+1.75% p.a.	Semiannual	Single payment	Sep/2007
2^nd Series	188,267	IGP-M	11%	Annual	Single payment	Sep/2009
3^rd Series	179,920	IGP-M	11%	Annual	Single payment	Sep/2010

The raised amount was used for final settlement of the 3^rd Issue of debentures and promissory notes issued in June, 2004, in the amount of R$ 130,000.

Accrued interes in 2005 was R$ 46,481 (2004 - R$ 13,484) relating to the 1^st Series, paid on a semiannual basis; R$ 21,420 (2004 - R$ 6,757) relating to the 2^nd Series and R$ 20,470 (2004 - R$ 6,457) relating to the 3^rd Series, which will be paid annually. Remaining balances to be paid in the amount of R$ 14,837 (2004 - R$13,484) of the 1^st Series; R$ 6,757 (2004 - R$ 6,757) of the 2^nd Series and R$ 6,458 (2004 - R$ 6,457) of the 3^rd Series. Such amounts are recorded under “Loans and financing” in current liabilities.

(iv) 7^th Issue of Debentures

Within the program registered together with the CVM on September 17, 2004, the Company issued, in March 1, 2005, 300,000 debentures distributed into two series, without re-covenants, at the par value of R$ 1, totaling R$ 300,000. The date of financial settlement was March 14, 2005.

The debentures have been placed in the market as follows:

	Amount	Adjustment	Interests	Interest Payment	Amortization	Maturity Date
1^st Series	200,000	-	CDI+1.5% p.a.	Semiannual	Single payment	Mar/2009
2^nd Series	100,000	IGP-M	10.80% p.a.	Annual	Single payment	Mar/2010

The raised amount was used ofr final settlement of the 4^th and 5^th issues of debentures and for payment of other loan installments.

Accrued interest in 2005 was R$ 33,378 referring to the 1^st series, paid semi-annually, and R$ 9,013 referring to the 2^nd Series, that will be paid annually from March, 2006. The amount relating to the 2^nd Series plus the remaining balance of R$ 12,631 relating to the 1^st Series are registered under the line item “Loans and financing” in current liabilities.

(v) 8^th Issue of Debentures

In completion to the program registered at the CVM on September 17, 2004 the Company issued, on June 1^st, 2005, 700,000 debentures, using the option of increase the quantity of debentures allowed in up to 20%, according to the paragraph 2^nd of article 14 of the CVM inscription nr. 400/03, distributed into two series, without re-covenants, at par value of R$ 1, amounting to R$ 700,000. The settlement date of the financial operation was June 24, 2005.

The debentures have been placed in the market as follows:

	Amount	Adjustment	Interests	Interest Payment	Amortization	Maturity Date
1^st Series	350,000	-	CDI+1.5% p.a.	Semiannual	Single payment	Jun/2009
2^nd Series	350,000	IGP-M	10.75% p.a.	Annual	Single payment	Jun/2011

The amount received has been destined to the settlement of the Euro Bonds contract (note 9 (e) (i)).

In the fiscal year of 2005, interests in the amount of R$ 41,028 have been provisioned referring to the 1^st series, paid semi-annually, and R$ 21,420 referring to the 2^nd series, that will be paid annually from June, 2006. The amount referring to the 2^nd series, plus the remaining balance of R$ 5,341 referring to the 1^st series, are registered under the line item “Loans and Financing” in current liabilities.

Financial covenants of the 6^th, 7^th and 8^th issue

Adjusted current ratio over 1.0; current assets divided by current liabilities, excluding from the current liabilities the short-term portion of the long-term debts undertaken by the Company.
EBITDA/Financial Expenses equal to or less than 1.5.
Non-compliance with these obligations will not be evidenced unless if recorded in quarterly financial statements, for at least two consecutive quarters, or for two non-consecutive quarters within a period of twelve months.

Caixa Econômica Federal

Pró-Saneamento (Pro-Sanitation) Program

(i) Water and sewage agreements

During 1996 through 2004, the Company entered into several loan agreements under the Federal Government Pro-Sanitation Program, with a view to expanding and improving the water supply and sewage systems of several municipalities of the State of São Paulo and of the City of São Paulo. The loans are collateralized by collections of the daily billings from water supply and sewage services up to the total amount of the debt.

Contractually established repayment terms range from 120 to 180 months, from the date the related projects become operational.

The balance at December 31, 2005 is R$ 482,984 (2004 - R$ 480,389). In addition, amounts available from these loans are R$ 462,875.

Contract charges are as follows:

	1996	1997	1988 - 2004
Contract executed in:
Interest rates	9.5% p.a.	6.5% to 8.0% p.a.	6.5% to 8.0% p.a.

In the grace period:
Risk fee	1.0% on disbursed amount	1.0% on disbursed amount	0.6% p.a. or 2% p.a. on outstanding balance
Management fee	0.12% p.m. on contract value	2.0% p.a. on disbursed value	1.0% p.a. on disbursed value or 2% p.a. on outstanding balance por agreements executed in 2003-2004.

In the repayment stage:
Management fee	Difference between calculation of installment at the rate of 10.5% p.a. less rate of 9.5% p.a.	1.0% p.a. on outstanding balance	1.0% p.a. on outstanding balance

(ii) Pro-sanitation programs – “Pró-Sanear”

In 1997 and 1998 contracts were signed under the Pro-Sanitation – “Pró-Sanear” program for the improvement of water and sewage services in several municipalities of the Metropolitan Region of São Paulo, with the participation of the communities receiving the services. The loans are collateralized by collections of the billings from water supply and sewage services up to the total amount of the debt. Contractually established repayment terms are 180 months from the date the related projects become operational. Outstanding loan balances were R$ 19,873 at December 31, 2005 (2004 - R$ 17,591), the amount available for use from these loans, for the projects already in progress, is R$ 24,287.

Applicable financial charges:

Interest rate - 5.0% p.a.
Management fee (Grace period) - 2.0% p.a. on outstanding balance
Management fee (amortization stage) – 1.0% p.a. on outstanding balance
Risk fee (grace period) - 1.0% on disbursement

Financial covenants:

Under the Performance Improvement Agreement, goals are set for financial indexes (operating margin, personnel expense margin and revenue evasion index) and operating indexes which, based on the previous 2 years, are semiannually projected for the next 2 years.

(d) BNDES

Agreement 01.2.619.3.1 - Executed in August 2002, in the total amount of R$ 60,000, with the purpose of financing part of the Company’s counterparty in the performance of the Tietê River Depolluting Project - Stage II, object also of loan agreement no. 1212/OC - BR, with the Interamerican Development Bank - IDB. The related project is in the execution stage, the total amount disbursed in 2005 having been R$ 8,093, and the outstanding balance at December 31, 2005 was R$ 52,735 (2004 - R$ 44,446).

Onlending agreement 10/669.748-6, in the total amount of R$ 180,000, distributed among the financial agents in the following proportions:

Agent	Amount
Unibanco - União de Bancos Brasileiros S.A.	60,000
Banco BBA Creditanstalt S.A.	51,000
Banco Alfa de Investimento S.A.	39,000
Banco Itaú S.A.	30,000
Total	180,000

The related project is in the execution stage, the total amount disbursed at December 31, 2005 were R$ 24,280, and the outstanding balance was R$ 158,322 (R$ 133,340 in 2004). The onlending agreement funds are passed on from BNDES to the financial agents, and by the agents to the Company. The onlending agreement has the same purpose as the agreement entered into between BNDES and the Company, and the charges and amortization terms are equal for both:

Interest – Long-Term Interest Rate TJLP limited to 6% p.a., plus a spread of 3% per annum, payable quarterly during the grace period, and monthly in the repayment period.

Any portion of the TJLP exceeding 6% p.a. is added to the principal balance.

Montly principal repayments began in September 2005, with final maturity in February 2013.

The agreements are collateralized by part of the revenue from water and sewage services.

Financial covenants:

Adjusted current ratio: over 1.0;
EBITDA / ROL: equal or higher than 38%;
Total connections (water and sewage) / own employees: equal or higher than 520;
EBITDA / Debt Service: equal or higher than 1.5;
Shareholders’ Equity / Total Liabilities: equal or higher than 0.8.

(e) Eurobonds

(i) A foreign credit transaction was entered into in July, 1997, having “UBS - Securities LLC” as lead arranger and “Deutsche Morgan Grenfell” and “BB Securities” as co-lead arrangers, in the amount of US$ 275,000 thousand, with interest rate of 10% p.a. payable semiannually and final maturity date in July 28, 2005. These funds were intended for advanced settlement of the 8^th issue of debentures.

(ii) In June 2003, the Company issued US$ 225 million 12% Notes due 2008. Interest is payable semiannually with final maturity in June 2008. “The Bank of New York” acted as lead arranger and “The Bank of Tokyo Mitsubishi Ltd.” as principal paying agent. These funds were used for final settlement of the Eurobonds issue of US$ 200,000 thousand matured in July 2003.

Financial covenants (In constant purchasing power currency)

No incurrence of additional indebtedness if the debt/adjusted capitalization (*) ratio is greater than 0.42;
Debt service coverage ratio cannot not be less than 2.5 (adjusted EBITDA(**)/financial expenses);
Loans to controlling shareholder must be limited to the respective amount of accounts receivable.

(*) Adjusted capitalization excludes from the Shareholders’ Equity overdue accounts receivable, both from the State of São Paulo Government and from self-operated wholesale water distribution companies in the Metropolitan Region of São Paulo - RMSP.

(**) Adjusted EBITDA is calculated by excluding unpaid sales of water and sewage services to the State of São Paulo Government and unpaid sales of wholesale water to self-operated systems in the Metropolitan Region of São Paulo - RMSP (non-accounting information).

(f) Inter-American Development Bank - IDB

Agreement 229 – In June 1987, the Company signed a loan agreement with the IDB for US$ 163 million to finance improvements and expansion of the sewage systems in the São Paulo Metropolitan Region. Semiannual principal repayments began in January 1994, with final maturity in July 2007. The loan bears interest of 7.7% per annum. A guarantee agreement between the Federative Republic of Brazil and the IDB was executed in June 1987, to warrant the provision of funds to meet the obligations set forth in the financing agreement. The outstanding balance of such agreement on December 31, 2005 was US$ 26,082 thousand, R$ 61,051 (2004 - R$ 109,421).

Agreement 713 – In December 1992, the Company signed a loan agreement with the IDB for US$ 400 million to finance the Tietê River Clean-up Project – Stage I. Semiannual principal repayments began in June 1999, with final maturity in December 2017. The loan bears interest at variable rate based on the cost of funding to the IDB. A guarantee agreement between the Federative Republic of Brazil and the IDB was executed in December 1992, to warrant the provision of funds to meet the obligations set forth in the financing agreement. The outstanding balance of such agreement on December 31, 2005 was US$ 253,714 thousand, R$ 593,868 (2004 - R$ 782,609).

Agreement 896 – In December 1992, the Company signed an additional loan agreement with the IDB for US$ 50 million for the Tietê River Clean-up Project – Stage I. This loan bears interest at 3.0% per annum. Semiannual principal repayments began in June 1999, with final maturity in December 2016. A guarantee agreement between the Federative Republic of Brazil and the IDB was executed in December 1992, to warrant the provision of funds to meet the obligations set forth in the financing agreement. The outstanding balance of such agreement at December 31, 2005 was US$ 30,556 thousand, R$ 71,521 (2004 - R$ 88,480).

Agreement 1.212 – In July 2000, the Company signed a loan agreement with the IDB for US$ 200 million to finance the Tietê River Clean-up Project – Stage II. The related project is in the execution stage, the total amount disbursed in 2005 having been US$ 36,691 thousand and the amount available for use from these loans is US$ 74,901 thousand.

The loan will be repaid in semiannual installments, the first of them in January 2006 and the last one in July, 2025. The loan bears interest semiannually, on the daily outstanding balance, at the annual rate determined in accordance with the costs of loans borrowed by the bank in the preceding semester, plus a spread, being variable for each semester. The outstanding balance of such agreement at December 31, 2005 was US$ 125,099 thousand, R$ 292,820 (2004 - R$ 234,671).

Financial covenants

Agreement 229 - Long term debt must not exceed 1.5 times the shareholders’ equity.
Agreements 713, 896 and 1.212 - Tariffs must: a) produce enough revenue to cover the system operating expenses, including those related to management, operation, maintenance and depreciation; b) ensure profitability on property, plant and equipment of not less than 7%. During the performance of the project the outstanding balances of short-term loans must not exceed 8.5% of the Company’s shareholders’ equity.

(g) International Bank for Reconstruction and Development - BIRD

Agreement 3.504 – In March 1993, the Company signed an agreement with the State Government for the transfer of the funds received by the State Government from the World Bank in December 1992. The proceeds from this loan were designated to finance the environmental clean-up of the Guarapiranga Basin. In December 1992, a guarantee agreement was executed between the Federative Republic of Brazil and the BIRD, to warrant the provision of funds to meet the obligations set forth in the financing agreement. Semiannual principal repayments began in October 1997, with final maturity in April 2007. The loan bears interest at 0.5% p.a. above the BIRD’s funding cost. The outstanding balance of such agreement at December 31, 2005 was US$ 6,439 thousand, R$ 15,072 (2004 - R$ 31,200).

(h) Syndicated loans

Deutsche Bank Luxembourg

In October 2000, the Company signed a loan agreement for US$ 100,000 thousand having the Deutsche Trust Bank Limited as paying agent and the Brazilian American Merchant Bank as arranger, for the purpose of refinancing own financial obligations. The loan bears interest at 11.125% per year, and was repaid in 10 semiannual installments, comprising principal and interest for the period, with final maturity in October 2005, at which date the final installment was paid.

Financial covenants (In constant purchasing power currency)

No incurrence of additional indebtedness if debt/adjusted capitalization (*) ratio is greater than 0.42;
Interest coverage may not be less than 2.5 (adjusted EBITDA(**)/financial expenses);
Loans to controlling shareholder must be limited to the respective amount of accounts receivable.

	2006	2007	2008	2009	2010	2011	2012 onward	Total
In domestic currency	632,849	675,299	317,027	1,085,952	653,816	741,483	981,847	5,088,273
In foreign currency	126,164	106,180	597,290	70,632	70,632	70,632	534,418	1,575,948
Total	759,013	781,479	914,317	1,156,584	724,448	812,115	1,516,265	6,664,221