Commission File Number 32297

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Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.  Form 20-F ___X___ Form 40-F _______

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No ___X____

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_________________

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São Paulo, May 11, 2017 – CPFL Energia S.A. (BM&FBOVESPA: CPFE3 and NYSE: CPL), announces its 1Q17 results. The financial and operational information herein, unless otherwise indicated, is presented on a consolidated basis and is in accordance with the applicable legislation. Comparisons are relative to 1Q16, unless otherwise stated.

 

CPFL ENERGIA ANNOUNCES ITS 1Q17 RESULTS

 

 

 

Notes:

(1)   EBITDA is calculated from the sum of net income, taxes, financial result, depreciation/amortization, as CVM Instruction no. 527/12. See the calculation in item 4.6 of this report;

(2)   Includes investment related to the construction of transmission lines of CPFL Transmissão  Piracicaba and Morro Agudo and, according to the requirements of IFRIC 12, it was recorded as “Financial Asset of Concession” (in non-current assets). Does not include special obligations.

 

1Q17 HIGHLIGHTS

 

•     Stable load in the concession area (-0.4%);

•     Contracted demand is being preserved: -0.6% Off Peak and -0.2% Peak (Mar-17 x Mar-16);

•     Increases of 27.7% in Net Operating Revenue and of 15.6% in EBITDA;

•     Investments of R$ 681 million;

•     Pro forma net debt of R$ 13.8 billion and leverage of 3.30x pro forma Net Debt/EBITDA;

•     CPFL Paulista tariff adjustment, in Apr-17, with an average effect of -10.50% to be perceived by the consumers;

•     RGE Sul tariff adjustment, in Apr-17, with an average effect of -6.43% to be perceived by the consumers;

•     Current status of State Grid transaction: appraisal report of the Unified Tender Offer in preparation, as approved in the EGM of March 27, 2017;

•     Launch of Envo, a company that will offer solutions in distributed solar power generation, manly to residential clients;

•     2016 Annual Report released on April 5, 2017.

 

 

 

 

 

INDEX

1) MESSAGE FROM THE CEO	4
2) ENERGY SALES	5
2.1) Sales within the Distributors’ Concession Area	5
2.1.1) Sales by Segment – Concession Area	6
2.1.2) Sales to the Captive Market	7
2.1.3) Free Clients	7
2.2) Contracted Demand (% - high voltage)	8
2.3) Generation Installed Capacity	8
3) INFORMATION ON INTEREST IN COMPANIES AND CRITERIA OF FINANCIAL STATEMENTS
CONSOLIDATION	10
3.1) Consolidation of CPFL Renováveis Financial Statements	12
3.2) Consolidation of RGE Sul Financial Statements	12
3.3) Economic-Financial Performance Presentation	12
4) ECONOMIC-FINANCIAL PERFORMANCE	13
4.1) Opening of economic-financial performance by business segment	13
4.2) Reclassification of the Concession Financial Asset	14
4.3) Sectoral Financial Assets and Liabilities	14
4.4) Operating Revenue	14
4.5) Cost of Electric Energy	14
4.6) Operating Costs and Expenses	15
4.7) EBITDA	18
4.8) Financial Result	18
4.9) Net Income	20
5) DEBT	21
5.1) Debt (IFRS)	21
5.2) Debt in Financial Covenants Criteria	22
5.2.1) Debt Amortization Schedule in Financial Covenants Criteria	22
5.2.2) Indexation and Debt Cost in Financial Covenants Criteria	23
5.3) Net Debt in Financial Covenants Criteria and Leverage	24
6) INVESTMENTS	24
6.1) Capital Expenditures	24
6.2) Projected Capital Expenditures	25
7) STOCK MARKETS	26
7.1) Stock Performance	26
7.2) Daily Average Volume	26
8) CORPORATE GOVERNANCE	27
9) SHAREHOLDERS STRUCTURE	28
9.1) Launch of Envo	28
10) PERFORMANCE OF THE BUSINESS SEGMENTS	30
10.1) Distribution Segment	30
10.1.1) Economic-Financial Performance	30
10.1.1.1) Reclassification of the Adjustments to the Concession´s Financial Asset	30
10.1.1.2) Sectoral Financial Assets and Liabilities	30
11.1.1.3) Operating Revenue	31
10.1.1.4) Cost of Electric Power	32
10.1.1.5) Operating Costs and Expenses	33
10.1.1.6) EBITDA	35
10.1.1.7) Financial Result	35

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10.1.1.8) Net Income	37
10.1.2) Tariff events	38
10.1.3) Operating Performance of Distribution	39
10.2) Commercialization and Services Segments	41
10.2.1) Commercialization Segment	41
10.2.2) Services Segment	41
10.3) Conventional Generation Segment	42
10.3.1) Economic-Financial Performance	42
10.3.1.1) Operating Revenue	42
10.3.1.2) Cost of Electric Power	42
10.3.1.3) Operating Costs and Expenses	43
10.3.1.4) Equity Income	44
10.3.1.5) EBITDA	45
10.3.1.6) Financial Result	45
10.3.1.7) Net Income	46
10.4) CPFL Renováveis	46
10.4.1) Economic-Financial Performance	46
10.4.1.1) Variations in the Income Statement of CPFL Renováveis	46
10.4.1.2) Operating Revenue	47
10.4.1.3) Cost of Electric Power	47
10.4.1.4) Operating Costs and Expenses	48
10.4.1.5) EBITDA	48
10.4.1.6) Financial Result	49
10.4.1.7) Net Income	49
10.4.2) Status of Generation Projects – 100% Participation	50
11) ATTACHMENTS	51
11.1) Statement of Assets – CPFL Energia	51
11.2) Statement of Liabilities – CPFL Energia	52
11.3) Income Statement – CPFL Energia	53
11.4) Cash Flow – CPFL Energia	54
11.5) Income Statement – Conventional Generation Segment	55
11.6) Income Statement – CPFL Renováveis	56
11.7) Income Statement – Distribution Segment	57
11.8) Income Statement – Distribution Segment (without RGE Sul)	58
11.9) Income Statement – Distribution Segment	59
11.10) Sales within the Concession Area by Distributor (In GWh)	62
11.11) Sales to the Captive Market by Distributor (in GWh)	63
11.12) Reconciliation of Net Debt/Ebitda Pro Forma ratio of CPFL Energia for purposes of financial
covenants calculation	64

 

 

1) MESSAGE FROM THE CEO

The beginning of 2017 was marked by new prospects and possibilities for the CPFL Group, after the conclusion of the acquisition of the controlling interest in the Company by the Chinese State Grid, the largest global player in the electricity sector. Its long-term strategic vision and technological development will make a great contribution to CPFL’s next steps.

After eight consecutive quarters of decrease, the distribution segment registered stable energy sales in the first quarter of 2017 (+0.1%), disregarding the positive effect of the acquisition of RGE Sul. The residential class registered an increased 1.5%, while industrial and commercial classes fell by 2.2% and 0.7%, respectively, reflecting the effects of the slowdown in economic activity in the country. The acquisition of RGE Sul, consolidated since November 2016, added 2,549 GWh to volumes sold in the first quarter of 2017.

It is also worth mentioning the considerable migration of consumers from the captive market (a 5.3% market reduction) to the free market (+16.1%) during the year 2016. In March 2017, the demand contracted by the high-voltage clients remained practically stable – a reduction of 0.6% during off-peak hours and 0.2% during peak hours, in comparison with the same month of the previous year, which preserves the majority of the remuneration of the business coming from high-voltage clients of this segment.

The group posted EBITDA of R$ 1,196 million in the quarter (+16% vs. 1Q16), reflecting the contribution of the full consolidation of RGE Sul and the improvement in the results from our subsidiary CPFL Renováveis, among other effects. Consolidated leverage of CPFL Energia reached 3.30x net debt/EBITDA at the end of the quarter, in accordance with the criteria used to measure our financial covenants. The decline in interest rates throughout the year will be beneficial for the Company, which has around three-fourths of its debt pegged to the CDI interbank rate.

CPFL maintained its growth strategy at the beginning of 2017. In the renewable energy segment, the company is advancing on construction of the Pedra Cheirosa wind complex, with total installed capacity of 48 MW. In transmission, the Morro Agudo project showed progress in the quarter, reaching 95% progress in the works.

In addition, CPFL founded a new company in early May, Envo, focused on the solar distributed generation market for households, and small commercial clients, thus expanding the portfolio of energy products and services offered by the Group.

Regarding the sale of controlling interest of CPFL Energia, its migration from category A to category B of the Brazilian Securities and Exchange Commission (CVM) and the delisting of its shares from the Novo Mercado segment of the São Paulo Stock Exchange were approved at the Shareholders Meeting held on March 27, 2017. This Unified Tender Offer process requires the preparation of a valuation report, which will be done by the bank Credit Suisse, as approved by minority shareholders at said meeting.

Finally, CPFL’s management remains optimistic about the advances of the Brazilian electricity sector and remains confident in its business platform. For the year 2017, approximately R$ 2.8 billion in investments are projected, and more than R$10 billion in investments are estimated for the next five years, which reinforces the Group’s commitment to its long-term development strategy.

 

Andre Dorf

CEO of CPFL Energia

 

 

2) ENERGY SALES

2.1) Sales within the Distributors’ Concession Area

 

 

Note: RGE Sul was consolidated in November 2016. For more information, see item 3.2 of this report.

 

In 1Q17, sales within the concession area, achieved by the distribution segment, totaled 16,715 GWh, an increase of 18.1%, mainly due to the acquisition of RGE Sul. Disregarding the effect of this acquisition, sales within the concession area would have totaled 14,166 GWh, an increase of 0.1%.

Sales to the captive market totaled 12,103 GWh in 1Q17, an increase of 14.5%, mainly due to the acquisition of RGE Sul; disregarding the effect of this acquisition, sales to the captive market would have totaled 10,009 GWh, a reduction of 5.3%, reflecting mainly the strong client migration to the free market. The quantity of energy, in GWh, which corresponds to the consumption of free clients in the concession area of group’s distributors, billed through the Tariff for the Usage of the Distribution System (TUSD), reached 4,611 GWh in 1Q17, an increase of 28.8%, mainly due to the acquisition of RGE Sul; disregarding the effect of this acquisition, the quantity of energy billed through TUSD would have reached 4,157 GWh, an increase of 16.1%.

 

 

 

 

 

 

Note: The tables with sales within the concession area by distributor are attached to this report in item 11.10.

 

 

Noteworthy in 1Q17, in the concession area:

·         Residential class (30.7% of total sales): increase of 20.2%, influenced by the acquisition of RGE Sul. Disregarding the effect of this acquisition, we would have an increase of 1.5%, reflecting the high temperature in 1Q17 in comparison with the 1Q16;

·         Commercial class (17.6% of total sales): increase of 13.9%, influenced by the acquisition of RGE Sul. Disregarding the effect of this acquisition, we would have a reduction of 0.7%, still reflecting the low economic activity in comparison with the 1Q16;

·         Industrial class (33.9% of total sales): increase of 10.0%, influenced by the acquisition of RGE Sul. Disregarding the effect of this acquisition, we would have a reduction of 2.2%, still reflecting the low economic activity in comparison with the 1Q16. It is noteworthy that a large client of the steel business in the area of CPFL Piratininga has reduced consumption by 50.1% in comparison with the 1Q16; this represents 1.9% of the 2.2% reduction. Therefore, CPFL Piratininga recorded a reduction of 7.3% (117 GWh) in this class (or a reduction of 1.3% disregarding this client). CPFL Paulista recorded a reduction of 0.6% (14 GWh) and RGE had an increase of 3.7% (28 GWh).

 

2.1.1) Sales by Segment – Concession Area

Note: in parentheses, the variation in percentage points from 1Q16 to 1Q17.

 

 

2.1.2) Sales to the Captive Market

 

 

 

 

 

Note: The tables with captive market sales by distributor are attached to this report in item 11.11.

 

The increase of 14.5% (1,535 GWh) in sales to the captive market, from 10,568 GWh in 1Q16 to 12,103 GWh in 1Q17, was influenced by the acquisition of RGE Sul. Disregarding the effect of this acquisition, the sales to the captive market would have totaled 10,009 GWh in 1Q17, representing a reduction of 5.3% (559 GWh), mainly due to the performance of the industrial and commercial classes, still reflecting the low economic activity and the migration to the free market, as explained before.

 

2.1.3) Free Clients

 

 

 

 

 

 

 

 

 

Note: (*) Considers the quantity of energy billed through the TUSD from 1Q17.

 

2.2) Contracted Demand (% - high voltage)

Contracted Demand Evolution | % compared to the same month of the previous year

 

2.3) Generation Installed Capacity

In 1Q17, the installed capacity of generation of CPFL Energia, considering the proportional stake in each project, reached 3,258 MW, representing an expansion of 4.2% compared to 1Q16. This increase is due to the commercial start-up of Mata Velha SHPP and Campo do Ventos and São Benedito Wind Complexes.

 

Generation Installed Capacity | MW

 

Note: Take into account CPFL Energia’s 51.61% stake in CPFL Renováveis.

 

 

3) INFORMATION ON INTEREST IN COMPANIES AND CRITERIA OF FINANCIAL STATEMENTS CONSOLIDATION

The interests directly or indirectly held by CPFL Energia in its subsidiaries and jointly-owned entities are described below. Except for: (i) the jointly-owned entities ENERCAN, BAESA, Foz do Chapecó and EPASA, that, as from January 1, 2013 are no longer proportionally consolidated in the Company’s financial statements, being their assets, liabilities and results accounted for using the equity method of accounting, and (ii) the investment in Investco S.A. recorded at cost by the subsidiary Paulista Lajeado, the other units are fully consolidated.

As of March 31, 2017 and 2016, the participation of non-controlling interests stated in the consolidated statements refers to the third-party interests in the subsidiaries CERAN, Paulista Lajeado and CPFL Renováveis. Since November 1^st, 2016 CPFL Energia is considering the full consolidation of RGE Sul.

 

 

 

 

 

Notes:

(a)     SHPP – Small Hydroelectric Power Plant;

(b)     The joint venture Chapecoense fully consolidates the interim financial statements of its direct subsidiary, Foz de Chapecó;

(c)     Paulista Lajeado has a 7% participation in the installed power of Investco S.A. (5.94% share of its capital);

(d)     MHPP – Micro Hydroelectric Power Plant;

 

 

 

 

 

 

(e)     In September, 2014 the direct subsidiary TI Nect Serviços de Informática Ltda. (“Authi”), was set up with the objective of providing informatics, information technology maintenance, system update, program development and customization and computer and peripheral equipment maintenance services;

(f)      The main objective of CPFL GD S.A., incorporated in August 2015 and fully controlled by CPFL Eficiência Energética S.A., is the provision of general consultancy services in the electric energy market and commercialization of assets related to the electric energy generation plants;

 

 

 

 

(g)     The incorporation of CPFL Transmissora Morro Agudo S.A., subsidiary of CPFL Geração, was approved in January 2015, with the objective of building and operating electric energy transmission concessions, including construction, implementation, operation and maintenance of transmission facilities of the basic network of the Interlinked National System (“SIN”).

 

3.1) Consolidation of CPFL Renováveis Financial Statements

On March 31, 2017, CPFL Energia indirectly held 51.61% of CPFL Renováveis, through its subsidiary CPFL Geração.

CPFL Renováveis has been fully consolidated (100%, line by line), in CPFL Energia’s financial statements since August 1, 2011, and the interest held by the non-controlling shareholders has been mentioned bellow the net income line (in the Financial Statements), as “Non-Controlling Shareholders’ Interest”, and in the Shareholders Equity (in the Balance Sheet) in the line with the same name.

 

3.2) Consolidation of RGE Sul Financial Statements

On March 31, 2017, CPFL Energia indirectly held 100% of RGE Sul, through its subsidiary CPFL Jaguariúna. RGE Sul has been fully consolidated (100%, line by line), in CPFL Energia’s financial statements since November 1^st, 2016.

In the analysis presented in this report, we consider the impact of the inclusion of RGE Sul as an isolated item.

 

3.3) Economic-Financial Performance Presentation

In accordance with U.S. SEC (Securities and Exchange Commission) guidelines and pursuant to items 100(a) and (b) of Regulation G, with the disclosure of 4Q16/2016 results, in order to avoid the disclosure of non-GAAP measures, we no longer disclose the economic-financial performance considering the proportional consolidation of the generation projects and the adjustment of the numbers for non-recurring items, focusing the disclosure in the IFRS criterion. Only in chapter 5, of Indebtedness, we continue presenting the information in the financial covenants criterion, considering that the proper reconciliation with the numbers in the IFRS criterion are presented in item 11.12 of this report.

 

4) ECONOMIC-FINANCIAL PERFORMANCE

 

 

 

Note: (1) EBITDA is calculated from the sum of net income, taxes, financial result and depreciation/amortization, according to CVM Instruction no. 527/12. See the calculation in item 4.6 of this report.

 

4.1) Opening of economic-financial performance by business segment

 

 

 

Note: an analysis of the economic-financial performance by business segment is presented in chapter 10.

 

 

4.2) Reclassification of the Concession Financial Asset

The Company and its electric energy distribution subsidiaries, aiming at the better presentation of their operational and financial performance, concluded that the adjustment of expectation of the cash flow of the indemnable financial asset of the concession of each distributor, originally presented under financial revenue item, in financial result, should be more adequately classified in the operating revenues group, together with other revenues related to its activity. This allocation reflects more accurately the business model of electric energy distribution and provides a better presentation regarding its performance.

Pursuant to CPC 23 / IAS 8 - Accounting Policies, Changes in Estimates and Error Rectification, the CPFL Energia and its Subsidiaries changed their accounting policy previously adopted by an accounting policy that better reflects the performance of the Company's and its subsidiaries' businesses and, therefore, reclassified retrospectively into their income statements for 1Q16.

 

4.3) Sectoral Financial Assets and Liabilities

In 1Q17, it was accounted the total sectoral financial liabilities in the amount of R$ 565 million, compared to the total sectoral financial liabilities in the amount of R$ 732 million in 1Q16, a reduction of 22.8% (R$ 167 million).

On March 31, 2017, the balance of these sectoral financial assets and liabilities was negative in R$ 1,525 million, compared to a negative balance of R$ 915 million on December 31, 2016 and a positive balance of R$ 707 million on March 31, 2016.

As established by the applicable regulation, any sectoral financial assets or liabilities shall be included in the tariffs of the distributors in their respective annual tariff events.

 

4.4) Operating Revenue

In 4Q16, gross operating revenue reached R$ 8,730 million, representing an increase of 15.1% (R$ 1,145 million). Deductions from the gross operating revenue was of R$ 3,192 million in 1Q17, representing a reduction of 1.8% (R$ 57 million). Net operating revenue reached R$ 5,539 million in 1Q17, registering an increase of 27.7% (R$ 1,202 million).

The main factors that affected the net operating revenue were:

·      Increase of revenues in the Distribution segment, in the amount of R$ 935 million, mainly due to the acquisition of RGE Sul (for more details, see item 10.1.1.2);

·      Increase of revenues in the Commercialization segment, in the amount of R$ 189 million;

·      Increase of revenues in CPFL Renováveis, in the amount of R$ 97 million;

·      Increase of revenues in Others, in the amount of R$ 35 million;

·      Increase of revenues in the Conventional Generation segment, in the amount of R$ 20 million;

·      Increase of revenues in the Services segment, in the amount of R$ 18 million;

Partially offset by:

·      Reduction of R$ 92 million, due to the eliminations.

 

4.5) Cost of Electric Energy

In the analysis presented in this report, we consider the impact of the inclusion of RGE Sul as an isolated item.

 

In 1Q17, the cost of electric energy, comprising the purchase of electricity for resale and charges for the use of the distribution and transmission system, amounted to R$ 3,221 million, registering an increase of 27.4% (R$ 693 million).

The factors that explain these variations follow below:

·      The cost of electric power purchased for resale reached R$ 3,018 million in 1Q17, an increase of 39.4% (R$ 852 million), due to the following factors:

               (i)       Impact of the inclusion of RGE Sul in our consolidation in 1Q17. The total cost of electric power purchased for resale in relation to RGE Sul (which was not included in our consolidation in 1Q16) totaled R$ 419 million for 1Q17;

              (ii)       Increase of 27.1% (R$ 496 million) in the cost of energy purchased through auction in the regulated environment and bilateral contracts, due to the increases of 10.8% in the average purchase price (R$ 170.98/MWh in 1Q17 vs. R$ 154.37/MWh in 1Q16) and of 14.8% (1,750 GWh) in the volume of purchased energy;

             (iii)       Increase in the amount of energy purchased in the spot market/PROINFA cost (R$ 63 million);

Partially offset by:

            (iv)       Reduction of 15.2% (R$ 83 million) in the cost of energy from Itaipu, due to the reductions of 11.9% in the average purchase price (R$ 191.38/MWh in 1Q17 vs. R$ 217.28/MWh in 1Q16) and of 3.8% (94 GWh) in the volume of purchased energy;

             (v)       Increase of 19.3% (R$ 42 million) in PIS and COFINS tax credits (cost reducer), generated from the energy purchase.

 

·         Charges for the use of the transmission and distribution system reached R$ 202 million in 1Q17, a reduction of 44.1% (R$ 160 million), due to the following factors:

               (i)       Variation of R$ 198 million in the System Service Usage Charges – ESS, from an expense of R$ 127 million in 1Q16 to a revenue of R$ 71 million in 1Q17;

              (ii)       Variation of R$ 31 million in Reserve Energy Charges – EER, since there was no registration of this charge in 1Q17 and there was a revenue of financial resources derived from the Reserve Energy Account (CONER) in the amount of R$ 31 million in 1Q16;

Partially offset by:

             (iii)       Impact of the inclusion of RGE Sul in our consolidation in 1Q17. The total charges for the use of the transmission and distribution system in relation to RGE Sul (which was not included in our consolidation in 1Q16) totaled R$ 38 million for 1Q17;

            (iv)       Increase of R$ 10 million in the basic network, connection and usage of the distribution system charges;

             (v)       Reduction of 59.4% (R$ 21 million) in PIS and COFINS tax credits (cost reducer), generated from the charges.

 

4.6) Operating Costs and Expenses

For this report, we regarded the impact of RGE Sul as an isolated item.

Operating costs and expenses were R$ 1,579 million in 1Q17, an increase of 37.8% (R$ 433 million) if compared to 1Q16 that reached R$ 1,146 million, due to the following factors:

 

 

PMSO

PMSO item, that reached R$ 759 million in 1Q17, compared to R$ 607 million in 1Q16, an increase of 25.1% (R$ 152 million).

 

 

    (i)        Personnel - increase of 35.7% (R$ 88 million), mainly due to:

ü  RGE Sul acquisition (R$ 41 million);

ü  Collective bargaining agreement – wages and benefits (R$ 18 million);

 

ü  Increase in the Services segment business, due to business expansion of CPFL Serviços, CPFL Atende, Nect and CPFL Eficiência (R$ 15 million);

ü  Other effects (R$ 4 million);

 

   (ii)        Material – increase of 38.5% (R$ 15 million), mainly explained by:

ü  RGE Sul acquisition (R$ 9 million);

ü  Services business segment increase (R$ 3 million);

ü  Distribution segment business increase (R$ 3 million);

 

  (iii)        Out-sourced services - increase of 24.1% (R$ 36 million), mainly due to RGE Sul acquisition (R$ 31 million) and other effects (R$ 5 million);

 

 (iv)        Other operational costs/expenses - increase of 7.7% (R$ 13 million), mainly due to increase in the expenses in:

ü  RGE Sul acquisition (R$ 23 million);

ü  Collection fee expenses increase (R$ 4 million);

ü  Write-off assets (R$ 3 million);

ü  GSF risk premium payment – Conventional Generation segment business and CPFL Renováveis (R$ 2 million);

ü  Increase of the expenses with collecting actions (R$ 2 million);

Partially offset by:

ü  Reduction in allowance for doubtful account (R$ 7 million);

ü  Reduction of 10.3% in legal and judicial expenses (R$ 6 million);

ü  Reduction of 18.3% in leases and rental (R$ 2 million);

ü  Reduction of regulatory penalties – DIC, FIC, DMIC and DICRI (R$ 1 million);

ü  Other effects (R$ 5 million).

 

Other operating costs and expenses

Other operating costs and expenses reached R$ 820 million in 1Q17, compared to R$ 539 million in 1Q16, registering an increase of 52.1% (R$ 281 million), with the variations below:

·         Acquisition of RGE Sul (R$ 133 million);

·         Increase of 91.0% (R$ 113 million) in cost of building the concession´s infrastructure;

·         Increase of 87.0% (R$ 12 million) in Private Pension Fund expenses, due to actuarial report update;

·         Increase of 9.1% (R$ 22 million) in Depreciation and Amortization;

·         Increase of 1.3% (R$ 1 million) in Amortization of Intangible of Concession Asset.

 

 

4.7) EBITDA

In 1Q17, EBITDA reached R$ 1,196 million, registering an increase of 15.6% (R$ 161 million).

EBITDA is calculated according to CVM Instruction no. 527/12 and showed in the table below:

 

 

 

 

4.8) Financial Result

 

 

 

 

 

 

 

In the analysis presented in this report, we consider the impact of the inclusion of RGE Sul as an isolated item.

In 1Q17, net financial expense was of R$ 436 million, an increase of 36.7% (R$ 117 million) compared to the net financial expense of R$ 319 million reported in 1Q16.

The items explaining these variations in Financial Result are as follows:

·         Financial Revenues: a reduction of 10.1% (R$ 32 million), from R$ 312 million in 1Q16 to R$ 281 million in 1Q17, mainly due to the following factors:

(i)            Variation of R$ 49 million in sectoral financial assets update, since there was no balance to be updated in 1Q17 and there was a revenue in the amount of R$ 49 million in 1Q16;

(ii)           Reduction of 43.3% (R$ 24 million) in the monetary and foreign exchange updates, due to: (a) the reduction of R$ 13 million in the gain with the zero-cost collar derivative¹; (b) the reduction of R$ 8 million in revenues from fines, interest and monetary adjustment relating to installment payments made by consumers; and (c) the reduction of R$ 3 million in the update of the balance of tariff subsidies, as determined by ANEEL;

(iii)          Reduction of 46.7% (R$ 10 million) in other financial revenues;

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(iv)         Reduction of 55.9% (R$ 4 million) in discount on the acquisition of ICMS credit;

(v)          Reduction of 1.7% (R$ 1 million) in additions and late payment fines;

Partially offset by:

(vi)         Increase of 17.0% (R$ 23 million) in the income from financial investments, due mainly to the increase in the average balance of investments;

(vii)        Impact of the inclusion of RGE Sul in our consolidation in 1Q17. The total financial revenue in relation to RGE Sul (which was not included in our consolidation in 1Q16) totaled R$ 22 million for 1Q17;

(viii)       Reduction of 38.1% (R$ 8 million) in PIS and COFINS over Other Financial Revenue (revenue reducer);

(ix)         Increase of 43.4% (R$ 4 million) in judicial deposits update.

 

·         Financial Expenses: an increase of 13.5% (R$ 85 million), from R$ 631 million in 1Q16 to R$ 717 million in 1Q17, mainly due to the following factors:

(i)            Impact of the inclusion of RGE Sul in our consolidation in 1Q17. The total financial expense in relation to RGE Sul (which was not included in our consolidation in 1Q16) totaled R$ 50 million for 1Q17;

(ii)           Increase of 18.1% (R$ 28 million) in the monetary and foreign exchange updates, due to: (a) the mark-to-market negative effect for financial operations under Law 4,131 – non-cash effect (R$ 19 million); (b) the increase of debt charges in foreign currency, with swap to CDI interbank rate (R$ 14 million), reflecting the increase in the stock of debt; partially offset by (c) the effect of Itaipu’s exchange variation (R$ 5 million);

(iii)          Increase of R$ 24 million in sectoral financial liabilities update, from an expense of R$ 2 million in 1Q16 to an expense of R$ 26 million in 1Q17;

(iv)         Increase of 2.9% (R$ 12 million) of debt charges in local currency, reflecting the increase in the stock of debt;

Partially offset by:

(v)          Reduction of 31.8% (R$ 17 million) in other financial expenses;

(vi)         Increase of 82.5% (R$ 11 million) in capitalized interest (expense reducer);

(vii)        Reduction of 13.0% (R$ 1 million) in the financial expenses with the Use of Public Asset (UBP).

 

4.9) Net Income

In 1Q17, net income was R$ 232 million, registering a reduction of 0.1%.

 

 

5) DEBT

5.1) Debt (IFRS)

  

1)     Do not consider mark-to-market effects and borrowing costs.

 

Indexation after Hedge¹ – 1Q16 vs. 1Q17

 

1Q16

 

1Q17

 

1) For debt linked to foreign currency (24% of total in 1Q17), swaps are contracted, which convert indexing for CDI;

 

 

Net Debt and Leverage in IFRS

 

 

 

5.2) Debt in Financial Covenants Criteria

5.2.1) Debt Amortization Schedule in Financial Covenants Criteria

CPFL Energia has always adopted a solid and conservative financial policy. Thus, the Company has used since 2011, a prefunding strategy, in other words, forecasts the cash needs for the next 24 months and anticipates market access on more favorable terms of liquidity and cost. Thus, at the beginning of 2016, CPFL Energia had worked in 2017 and 2018 prefunding.

 

Debt Amortization Schedule in Financial Covenants Criteria (Mar-17)¹

 

   

1) Considers only the principal debt of R$ 18,162 million, excluding accrued interests of R$ 546 million and including other adjustments in the amount of R$ 103 million) to reach in the debt value of R$ 18,606 million in the Covenant criteria;

2) Short-term (Apr-17 – Mar-18) = R$ 3,441 million.

 

The cash position at the end of 1Q17 had a coverage ratio of 1.39x the amortizations of the next 12 months, enough to honor all amortization commitments until the end of 1H18. The average amortization term, calculated by this schedule, is 2.80 years.

 

 

 

5.2.2) Indexation and Debt Cost in Financial Covenants Criteria

 

Indexation¹ After Hedge² in Financial Covenants Criteria – 1Q16 vs. 1Q17

 

1Q16

 

1Q17

1) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA;

2) For debt linked to foreign currency (24% of total), swaps are contracted, which convert the indexation to CDI. The debt amount indexed in Interbank Rate (CDI) increased from 74% to 76.0%, mainly due to the R$ 620 million borrowed by CPFL Energia (holding) and R$ 400 million by CPFL Brasil through debentures emission in 4Q16. Additionally, In 1Q17 there were debentures emission in amount of R$ 786 million from RGE, CPFL Piratinga and CPFL Renováveis (holding).

 

Gross Debt Cost¹ in Financial Covenants Criteria – LTM

  

1) Adjusted by the proportional consolidation since 2012; Financial debt (+) private pension fund (-) hedge.

 

 

5.3) Net Debt in Financial Covenants Criteria and Leverage

In 1Q17, Pro forma Net Debt totaled R$ 13,837 million, an increase of 13.0% compared to net debt position at the end of 1Q16 in the amount of R$ 12,241 million.

The increase in Net Debt in 1Q17 was mainly due to the acquisition of RGE Sul, which was consolidated in November 2016.

 

 

 

 

1) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA;

2) Adjusted EBITDA in the covenants criteria: adjusted according to equivalent participation of CPFL Energia in each of its subsidiaries, with the inclusion of regulatory assets and liabilities and the historical EBITDA of newly acquired projects.

 

In line with the criteria for calculation of financial covenants of loan agreements with financial institutions, net debt is adjusted according to the equivalent stake of CPFL Energia in each of its subsidiaries. Also, include in the calculation of adjusted EBITDA the effects of historic EBITDA of newly acquired projects. Considering that, adjusted net debt totaled R$ 13,837 million and EBITDA Proforma in the last 12 months reached R$ 4,192 million, the ratio adjusted Net Debt / EBITDA Proforma at the end of 1Q17 reached 3.30x.

 

6) INVESTMENTS

6.1) Capital Expenditures

 

 

 

Note:

1) Others – basically refer to assets and transactions that are not related to the listed segments.

 

In 1Q17, R$ 643 million were invested, an increase of 44.2% if compared to 1Q16. In addition, there was an investment of R$ 38 million in the quarter related to the transmission lines construction of CPFL Transmissão Morro Agudo, which, according to the requirements of IFRIC 12, was recorded as “Financial Asset of Concession” (non-current assets). CPFL Energia also accounted for R$ 64 million in Special Obligations in the quarter, among other items financed by the consumer.

 

 

 

We highlight investments made by CPFL Energia in each segment:

    (i)        Distribution:

a.    Expansion and strengthening of the electric system;

b.    Electricity system maintenance and improvements;

c.    Operational infrastructure;

d.    Upgrade of management and operational support systems;

e.    Customer help services;

f.     Research and development programs.

        (ii)   Generation:

a.    Mainly on Campo dos Ventos and São Benedito Wind Complexes;

b.    Pedra Cheirosa Wind Complex.

 

6.2)  Projected Capital Expenditures

On April 28, 2017, CPFL Energia’s Board of Directors approved Board of Executive Officers’ proposal for 2017 Annual Budget and 2018/2021 Multiannual Plan for the Company, which was previously discussed by the Budget and Corporate Finance Commission. Projections already include expected investments for RGE Sul.

 

Projected Capital Expenditures (R$ million)¹

Notes:

1) Constant currency;

2) Disregard investments in Special Obligations on Distribution segment (among other items financed by consumers);

3) Conventional + Renewable.

 

 

7) STOCK MARKETS

7.1) Stock Performance

CPFL Energia is listed on both the B3 (Novo Mercado) and the New York Stock Exchange (NYSE) (ADR Level III), segments with the highest levels of corporate governance.

 

 

 

 

On March 31, 2017 the price shares closed at R$ 25.77 per share on the B3 and US$ 16.39 per ADR on the NYSE, which represented a variation in the quarter of 3.1% and 7.3% respectively. In the last 12 months, the shares appreciated 37.4% on B3 and the ADR appreciated 53.3% on the NYSE.

 

7.2) Daily Average Volume

The daily trading volume in 1Q17 averaged R$ 49.3 million, of which R$ 34.9 million on the B3 and R$ 14.4 million on the NYSE, representing an increase of 21.1% compared to 1Q16. The number of trades on the B3 decreased by 60.4%, from a daily average of 8,492, in 1Q16, to 3,363, in 1Q17.

 

Note: Considers the sum of the average daily volume on the B3 and NYSE.

 

 

 

 

8) CORPORATE GOVERNANCE

The corporate governance model adopted by CPFL Energia and its subsidiaries is based on the principles of transparency, equity, accountability and corporate responsibility.

In 2016, CPFL marked 12 years since being listed on the BM&FBovespa and the New York Stock Exchange (“NYSE”). With more than 100 years of history in Brazil, the Company’s shares are listed on the Novo Mercado Special Listing Segment of the BM&FBovespa with Level III ADRs, a special segment for companies that comply with corporate governance best practices. All CPFL shares are common shares, entitling all shareholders the right to vote with 100% Tag Along rights guaranteed in case of sale of shareholding control.

CPFL’s Management is composed of the Board of Directors (“Board”), its decision-making authority, and the Board of Executive Officers, its executive body. The Board is responsible for defining the strategic business direction of the holding company and subsidiaries, and is composed of 7 members, whose term of office is 1 year and who are eligible for reelection. At the Ordinary and Extraordinary General Meetings held on April 28, 2017, 7 members were elected (of which 2 independent members).

The Bylaws of the Board establishes the procedures for evaluating the directors, under the leadership of the Chairman, their main duties and rights.

The Board set up three advisory committees (Management Processes, Risks and Sustainability, People Management and Related Parties), all coordinated by a director, which support the Board in its decisions and monitor relevant and strategic themes, such as people and risk management, sustainability, the surveillance of internal audits and analysis of transactions with Parties Related to controlling shareholders and handling of incidents recorded through complaint hotlines and ethical conduct channels. At a meeting of the Board of Directors, held on February 17, 2017, the new members of the advisory committees were elected.

The Board of Executive Officers is made up of 1 Chief Executive Officer and 6 Vice Presidents, with terms of two years, eligible for reelection, responsible for executing the strategy of CPFL Energia and its subsidiaries as defined by the Board of Directors in line with corporate governance guidelines. To ensure alignment of governance practices, Executive Officers sit on the Boards of Directors of companies that make up the CPFL group and nominate their respective executive officers. At the Ordinary and Extraordinary General Meetings held on April 28, 2017, among the amendments to the Bylaws, which were approved, is the amendment to article 18, which changes the number of members of the Board of Executive Officers, creates the position of Deputy Chief Executive Officer and modifies the nomenclature of some of the positions of the Board of Executive Officers.

CPFL has a permanent Fiscal Council that also exercises the duties of the Audit Committee, in line with Sarbanes-Oxley law (SOX) rulings applicable to foreign companies listed on U.S. stock exchanges. At the Ordinary and Extraordinary General Meetings held on April 28, 2017, 3 acting members and 3 deputy members were elected.

The guidelines and documents on corporate governance are available at the Investor Relations website http://www.cpfl.com.br/ir.

 

 

 

 

9) SHAREHOLDERS STRUCTURE

CPFL Energia is a holding company that owns stake in other companies. State Grid Corporation of China (SGCC) controls CPFL Energia through its subsidiaries State Grid International Development Co., Ltd, State Grid International Development Limited (SGID), International Grid Holdings Limited, State Grid Brazil Power Participações Ltda. (SGBP) and ESC Energia S.A.:

 

Reference date: 03/31/2017

Notes:

(1) 51.54% stake of the availability of power and energy of Serra da Mesa HPP, regarding the Power Purchase Agreement between CPFL Geração and Furnas;

(2) CPFL Energia holds a stake in RGE Sul through the CPFL Jaguariúna.

 

9.1) Launch of Envo

On May 3, 2017, CPFL Energia released through an Announcement to the Market that, on that date, it was setting up a new company, Envo, to provide distributed solar power generation services to residential as well as small commercial and industrial clients. Envo broadens the portfolio of energy products and services offered by the CPFL Group to its consumers and consolidates the strategy of growth with the focus on sustainable businesses and renewable energy. Envo will initially focus its sales efforts and operations on cities in the region of Campinas, Sorocaba, Jundiaí and surrounding areas. As such, the service will be available to cities in the interior region of São Paulo, such as Jundiaí, Sorocaba, Vinhedo, Hortolândia, Indaiatuba, Valinhos, Paulínia, Americana, Itatiba, Jaguariúna, Piracicaba, Sumaré and Pedreira, in addition to Campinas and other regions. The Company has plans to expand to other regions in the state. CPFL Energia believes that distributed solar power generation is one of the most promising markets in Brazil’s electricity sector and its investment in this segment is in line with the CPFL Group’s efforts to generate new businesses focused on the low carbon economy, such as investments in renewable energy, energy efficiency and digitization of the electricity network, in addition to research in the field of electric mobility and storage. According to the business model, the Company will be responsible for all stages of the project for the client. Envo’s operations will span from technical design (evaluating items such as energy consumption, structural conditions of the building, levels of solar radiation and shadows at the place), as well as the sale and installation of the complete solution, to approval of the consumer at the distributor and intermediating the installation of digital meters. More information is available at the Envo website (www.envo.com.br).

 

 

 

10) PERFORMANCE OF THE BUSINESS SEGMENTS

10.1) Distribution Segment

10.1.1) Economic-Financial Performance

 

 

 

Notes:

(1) EBITDA (IFRS) is calculated from the sum of net income, taxes, financial result and depreciation/amortization, as CVM Instruction no. 527/12;

(2) The distributors’ financial performance tables are attached to this report in item 11.12.

 

10.1.1.1) Reclassification of the Adjustments to the Concession´s Financial Asset

The distribution subsidiaries, aiming at the better presentation of their operational and financial performance, concluded that the adjustment of expectation of the cash flow of the indemnable financial asset of the concession of each distributor, originally presented under financial revenue item, in financial result, should be more adequately classified in the operating revenues group, together with other revenues related to its activity. This allocation reflects more accurately the business model of electric energy distribution and provides a better presentation regarding its performance.

Pursuant to CPC 23 / IAS 8 - Accounting Policies, Changes in Estimates and Error Rectification, by the end of 2016, the CPFL Energia and its Subsidiaries changed their accounting policy previously adopted by an accounting policy that better reflects the performance of the Company's and its subsidiaries' businesses and, therefore, accounting the adjustments to the concession financial asset in Operating Revenues.

 

10.1.1.2) Sectoral Financial Assets and Liabilities

In 1Q17, total sectoral financial liabilities accounted for R$ 565 million, a decrease of 22.8% (R$ 167 million) if compared to 1Q16, when sectoral financial liabilities amounted to R$ 732 million.

On March 31, 2017, the balance of sectoral financial assets and liabilities was negative in R$ 1,525 million, compared to a negative balance of R$ 915 million on December 31, 2016 and a positive balance of R$ 707 on March 31, 2016.

As established by the applicable regulation, any sectoral financial assets or liabilities shall be included in the tariffs of the distributors in their respective annual tariff events.

 

 

11.1.1.3) Operating Revenue

In the analysis presented in this report, we consider the impact of the inclusion of RGE Sul as an isolated item.

In 1Q17, gross operating revenue amounted to R$ 7,536 million, an increase of 12.7% (R$ 850 million), due to the following factors:

·         Acquisition of RGE Sul (R$ 1,344 million);

·         Decrease of 38.8% (R$ 284 million) in the Sectoral Financial Liabilities;

·         Increase of 24.4% (R$ 62 million) in tariff subsidies (CDE resources), mainly discounts in TUSD (for special consumers) and low-income subsidies, in addition to discounts granted to consumers that obtained an injunction to disoblige the payment of specific components of CDE;

·         Increase of 37.8% (R$ 53 million) in Short-term Electric Energy;

·         Increase of 3.3% (R$ 2 million) in Other Revenues and Income;

·         Increase of 37.0% (R$ 79 million) in revenue from building the infrastructure of the concession;

Partially offset by:

·         Decrease of 13.9% (R$ 927 million) in the revenue with energy sales (captive + free clients), due to: (i) the adoption of green tariff flag in January and February 2017, compared to red tariff flag applied in the same period of 2016 (yellow tariff flag was adopted in March 2016 and 2017); (ii) the negative average tariff adjustment in the distribution companies for the period between 1Q16 and 1Q17 (highlight for the average reduction of 7.51% in RGE in June 2016 and of 24.21% in CPFL Piratininga in October 2016); (iii) the stability in the sales volume within the concession area (variation of +0.1%); and

·         Decrease of 53.3% (R$ 47 million) in the adjustments to the Concession´s Financial Asset, due to: (i) lower inflation (IPCA of 1.01% in 1Q17 and of 2.64% in 1Q16); and (ii) the reduction in concession’s financial asset observed in the distributors which have gone through the concession renewal process at the end of 2015 (CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Jaguari, and CPFL Mococa)².

Deductions from the gross operating revenue were R$ 3,073 million in 1Q17, representing a reduction of 2.7% (R$ 85 million), due to the following decreases:

·         of 91.1% in tariff flags approved by the CCEE (R$ 320 million);

·         of 13.7% in ICMS tax (R$ 180 million);

·         of 15.4% in the CDE sector charge (R$ 130 million), due to the adoption of CDE System Usage quotas in lower amount than 2016, partially offset by the increase in CDE Energy quotas and in the CDE charges in order to cover ACR Account loans;

·         of 8.9% in PIS and COFINS taxes (R$ 53 million);

Partially offset by the following factors:

·         acquisition of RGE Sul (R$ 577 million);

·         increase of 92.4% in the PROINFA (R$ 19 million); and

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