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Business Description We operate a growing, profitable business with 39 years of operating history. We provide two principal services in the state of Parana, Brazil: water supply and wastewater collection, treatment and disposal. We are the principal provider of these services in the state of Parana, where we operate in 342 out of its 399 municipalities, including the state capital, Curitiba, which has a population of approximately 1.6 million. As of December 31, 2001, the state of Parana had a population of approximately 9.7 million people, based on information derived from the Brazilian Institute of Geography and Statistics, or IBGE, and we estimate the population of our service areas to be approximately 7.7 million. Within our service areas, we estimate that we provide water to approximately 7.6 million people, or approximately 99% of the population of our service areas. We estimate that we provide wastewater collection, treatment and disposal services to approximately 3.2 million people, or 42% of the population of our service areas. We have consistently expanded our customer base over the past five years, with especially rapid growth in wastewater services. The following chart shows the number of water and wastewater connections in our service areas at the end of each year from 1997 to 2001: AS OF DECEMBER 31, ------------------------------------- 1997 1998 1999 2000 2001 ----- ----- ----- ----- ----- (IN THOUSANDS) Water connections.............................. 1,717 1,781 1,847 1,914 1,968 Wastewater connections......................... 433 497 600 676 720 Despite the rapid growth in wastewater connections, we estimate that approximately 4.5 million people, or 58% of the population in our service areas, do not have access to wastewater collection and disposal services. We plan to continue rolling out our wastewater network at an aggressive pace in order to increase our customer base. We believe this situation presents a significant growth opportunity. As of December 31, 2001, we had assets of R$2.89 billion. The following chart shows our growth in revenue, net income and operating cash flow for the past five years: FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- (IN MILLIONS OF REAIS) Net operating revenue.............. R$469.2 R$504.2 R$561.1 R$647.6 R$749.9 Net income......................... 42.0 44.4 51.8 139.6 177.8 Net operating cash flows........... 136.5 153.3 212.4 272.3 308.5 Until 1998, we were wholly owned by the state of Parana. In June 1998, Domino Holdings S.A., or Domino, a private consortium, acquired 39.71% of our common shares. This private consortium currently consists of: - Sanedo Ltda., an indirect subsidiary of Vivendi Environnement S.A., the world's leading water company and one of the world's largest waste-management service providers; - Andrade Gutierrez Concessoes S.A., a subsidiary of Andrade Gutierrez S.A., one of Brazil's largest conglomerates, which manages construction services in Brazil and Portugal and public concessions for infrastructure and telecommunications services; - Opportunity Daleth S.A., a holding company for the water and sanitation investments of CVC/Opportunity, a Brazilian private-equity fund; and - Copel Participacoes S.A., a subsidiary of Companhia Paranaense de Energia Eletrica -- COPEL, the principal power company of the state of Parana and one of Brazil's largest state-owned utilities. Under current state law, 60% of our common shares must be held by the state of Parana. KEY STRENGTHS Our key strengths include the following: - Stable, well established business. For the past 39 years we have operated as a monopoly in our service areas, which include 78% of the population of the state of Parana. We estimate that we provide services to 7.6 million people. We have had rapid revenue and net income growth since 1997. We have a track record of generating strong cash flows that fund a significant portion of our capital expenditures, as well as regular dividends to our shareholders. We have formal concession contracts with 96% of the municipalities we serve (including the municipality of Curitiba, Parana's state capital), representing approximately 99% of our revenues in 2001. - Significant opportunities for growth. Only 42% of the population in our service areas, or 3.2 million people, receives wastewater services (through approximately 720,000 wastewater connections). We plan to increase this level to 60% over the next four years by adding more than 430,000 new wastewater connections. We are also implementing plans to provide specialized water and wastewater services to major industries in our service areas. - High-quality, recognized operations. We believe that our company is well known throughout Brazil and Latin America for quality and innovation. We are the first company in Brazil to have received both the ISO 14001 certification for a complete water and wastewater system (at Foz do Iguacu) and the ISO 9002 certification for a full water system (at Campo Largo). We are the only company to have been awarded the Brazilian National Sanitation Quality Award in each of the past four years. All of our customers are metered, including our public-sector customers. - Experienced, forward-looking partners. A private consortium holds 39.71% of the common shares of our company. This consortium includes subsidiaries of one of the world's leading water and wastewater companies and one of the world's largest solid-waste-management service providers, one of Brazil's largest infrastructure conglomerates, an investment vehicle for a Brazilian private equity fund and the principal power company in the state of Parana. - Access to attractive financing. Our capital expenditure projects historically have been financed in part by long-term loans from development banks at attractive interest rates. A portion of our capital expenditure plan for the next three years will be financed from an existing, low-interest rate, long-term Yen facility. - Operations in an economically progressive state. Parana has attracted a wide range of industries through an aggressive incentive program. According to Parana Business and Opportunities, a magazine published by the state of Parana, nearly US$29 billion of investments in private industry and infrastructure will be made in the state from 1995 to 2003. Parana is home to industrial plants of Trytech (a Mercedes/BMW joint venture), Audi/Volkswagen, Renault, Volvo, Bosch, Coca-Cola and Siemens, among others. Brazilian companies that either have operations or are in the process of building plants in the state include Petrobras (the national oil and gas company); AmBev (one of the world's largest brewers); Companhia Siderurgica Nacional, or CSN (one of Brazil's leading steel companies); and Ultrafertil S.A. (one of the largest fertilizer producers in Brazil). The progressive policies of the state of Parana have resulted in economic growth that has benefited us and other service providers in the state. You should consider these strengths together with the risks that we believe are inherent in an investment in the ADSs and preferred shares. OUR STRATEGY Our strategy is primarily focused on the expansion of our water and wastewater services to the population of the state of Parana. We intend to focus in particular on the expansion of wastewater services to existing water customers. We believe the prospect of long-term growth in wastewater services in the state of Parana is significant. Additionally, we are considering business opportunities in other water and wastewater concessions outside of the state of Parana, and we have begun exploring related types of sanitation services. In order to develop our business, we intend to pursue the following strategic goals: - Continue to expand and improve our business within our existing service areas by expanding our wastewater network and maintaining nearly universal water coverage in our service areas. - Continue to maintain and improve our high level of operating efficiency compared to other large Brazilian water and wastewater companies, principally through improving our service quality, reducing physical leaks and other losses, continuing investments in control systems and developing human resources. - Maintain our existing concessions and obtain new water and wastewater concessions outside of the state of Parana. We believe that there are substantial business opportunities in the water and wastewater concessions in other states. Where it is profitable to do so, we intend to compete for these concessions. - Seek business opportunities in related sanitation concession services. We are actively exploring business lines related to our core water and wastewater services. We recently signed a 20-year solid-waste agreement with the municipality of Cianorte, and we are considering other municipal solid-waste waste management concessions in Parana. We currently offer water and wastewater consulting services throughout Latin America. We are also considering offering specialized water and wastewater services to large companies with specific needs that are not currently being met in a cost-effective manner. In addition, we recently began operating our first treatment plant for water for industrial use. At this plant we capture water from a polluted, non-potable source, thus reducing the cost to industrial customers.