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 12, 2016 – CPFL Energia S.A. (BM&FBOVESPA: CPFE3 and NYSE: CPL), announces its 1Q16 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 1Q15, unless otherwise stated.

 

 

CPFL ENERGIA ANNOUNCES ITS 1Q16 RESULTS

 

 

 

 

Notes:

(1)   Disregard construction revenues;

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

(3)   Adjusted EBITDA considers CPFL Energia stake in each of the generation assets and excludes the non-recurring effects and the exchange variation in Itaipu invoices;

(4)   Adjusted Net Income considers CPFL Energia stake in each of the generation assets and excludes the non-recurring effects.

 

 

1Q16 HIGHLIGHTS

•     Sales dropped 6.4% in the concession area - residential (-4.6%), commercial (-5.2%) and industrial (-10.5%)

•     Stability in contracted demand: +0.5% Off Peak and +0.1% Peak (Mar-16 x Mar-15)

•     Decrease of 56% in CVA balance – from R$ 1.7 billion in Dec-15 to R$ 0.7 billion in Mar-16

•     CPFL Paulista tariff readjustment, in Apr-16, with an average effect of 7.55% on consumer billings

•     Approval of periodic tariff review of 5 discos, with an average effect on consumer billings of: CPFL Jaguari (13.25%), CPFL Mococa (9.02%), CPFL Leste Paulista (13.32%), CPFL Santa Cruz (7.15%) and CPFL Sul Paulista (12.82%)

•     Commercial start-up of Mata Velha SHPP (24 MW) and of 4 generation units in Campo dos Ventos and São Benedito wind complexes (8 MW), in May-16

•     Renegotiation of the hydrological risk of Baesa HPP (26 MW average), bringing up an additional benefit of R$ 8 million

•     Decrease of R$ 143 million in GSF expenses

•     Investments of R$ 446 million

•     Announcement of CEO succession process, with a transition phase until July 1^st, 2016

•     Approval of the proposal of capital increase through stock dividend; new shares distributed to shareholders on May 5, 2016

•     2015 Annual Report released on Mar 31, 2016

 

 

Conference Call with Simultaneous Translation into English  (Bilingual Q&A) ·         Friday, May 13, 2016 – 11:00 a.m. (Brasília), 10:00 a.m. (ET) (   Portuguese: 55-11-3193-1001 or 55-11-2820-4001 (Brazil) (   English: 1-888-700-0802 (USA) and 1-786-924-6977 (Other Countries) ·         Webcast: www.cpfl.com.br/ir

Investor Relations Department 55-19-3756-6083 [email protected] www.cpfl.com.br/ir

 

 

 

 

11.1.2) Annual Tariff Adjustment	41
11.1.3) Periodic Tariff Review	41
11.1.4) 4th Periodical Tariff Review Cycle	42
11.1.5) 2015 Extraordinary Tariff Review (ETR)	42
11.1.6) Operating Performance of Distribution	43
11.1.6.1) SAIDI and SAIFI	43
11.1.6.2) Losses	44
11.2) Commercialization and Services Segments	45
11.3) Conventional Generation Segment	45
11.3.1) Economic-Financial Performance	45
11.4) CPFL Renováveis	49
11.4.1) Economic-Financial Performance	49
11.4.2) Status of Generation Projects – 100% Participation	52
12) ATTACHMENTS	54
12.1) Statement of Assets – CPFL Energia	54
12.2) Statement of Liabilities – CPFL Energia	55
12.3) Income Statement – CPFL Energia (IFRS)	56
12.4) Income Statement – CPFL Energia (Adjusted)	57
12.5) Cash Flow – CPFL Energia	58
12.6) Income Statement – Conventional Generation Segment (IFRS)	59
12.7) Income Statement – Conventional Generation Segment (Adjusted)	60
12.8) Income Statement – CPFL Renováveis (IFRS)	61
12.9) Income Statement – CPFL Renováveis (Adjusted)	62
12.10) Income Statement – Distribution Segment (IFRS)	63
12.11) Income Statement – Distribution Segment (Adjusted)	64
12.12) Economic-Financial Performance – Distributors.	65
12.13) Sales within the Concession Area by Distributor (in GWh)	67
12.14) Sales to the Captive Market by Distributor (in GWh)	68

 

 

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1) MESSAGE FROM THE CEO

We started another year of big challenges facing both Brazil and the electricity sector. In 1Q16, electricity consumption in the concession area of the group’s distribution companies continued to suffer from the effects of the economic downturn and the high tariff increases (all of them non-manageable by distributors), decreasing 6.4% in relation to 1Q15. The residential segment registered a 4.6% decline in consumption, driven also by the increase in unemployment and decrease in real income. The commercial segment registered a 5.2% drop, mainly reflecting the decline in retail sales. Finally, the industrial segment declined sharply by 10.5%, heavily influenced by the decline in industrial production. CPFL has been concerned about the possible impact of the crisis on default levels and has intensified its collections efforts since July 2015, increasing by more than 50% the number of disconnections, collections efforts and reporting to credit bureaus, among other actions.

The five distribution companies that signed new concession agreements in December 2015 (CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Mococa and CPFL Jaguari) underwent the 4th Tariff Review Cycle in March and the investments during the previous cycle, coupled with better terms offered in the new cycle, enabled increases of between 6% and 20% in Portion B. CPFL Paulista, the biggest distributor of the CPFL group, applied its annual tariff adjustment in early April, with an increase of 7.55% for consumers, which is good news considering that the tariff increase is lower than the inflation indices for the period. This trend of falling energy tariffs, driven also by the application of green flag billing (without any surcharge in the tariffs) since April 2016, should repeat in other distribution companies across the sector. 

The Brazilian Electricity Regulatory Agency (Aneel) has been addressing the issue of overcontracting of energy distributors and has so far concluded Public Hearings 004/2016 (quotas) and 012/2016 (bilateral renegotiation of agreements with generators). These measures serve to mitigate the issue of overcontracting of CPFL Energia group distributors in 2016. However, we see a long way ahead before the problem is structurally resolved. According to rules, distributors must contract between 100% and 105% of their energy needs to supply their captive market.

With regard to the hydrological risk of hydroelectric generation plants (GSF), after renegotiating most of our contracts in the Regulated Contracting Environment (ACR) in 4Q15, we concluded renegotiation of the Baesa plant (Barra Grande Energia) in the SP100 regime, protecting the plant from 100% of the effects of GSF until the end of its regulated contracts. This generated a benefit of R$ 8 million in EBITDA in 1Q16. The strategy of renegotiating this risk is aimed at returning the predictability and stability of cash flows to hydroelectric generators.

In the case of renewable generation, we once again showcased the successful strategy of our subsidiary CPFL Renováveis in implementing its projects. At the start of May, the 24MW SHP Mata Velha went operational more than a year and a half ahead of the start of supply as per its contract, which opened up the possibility of selling its energy on the free market until the end of 2017. The first wind turbines at the Campo dos Ventos and São Benedito wind farms, located in the state of Rio Grande do Norte, also obtained authorization from Aneel, adding 8.4 MW of installed capacity. It will be our biggest wind power complex (installed capacity of 231MW) and with the highest capacity factor (58.5%), which will be sold on the free market for our trading company, CPFL Brasil. Renewable energy generation increased 2.5%, thanks to portfolio diversification in terms of both geographical location and energy sources, which helped the weak wind power generation in the quarter to be offset by other energy sources.

Leverage of the CPFL Energia Group, measured by the Net Debt/EBITDA ratio, reached 3.42x at the end of 1Q16, considering the proportional contribution of each project in this indicator, which is the same used to measure the company’s financial covenants. Continuing the initiative we launched in 4Q15, we are recovering the balance of CVAs (regulatory assets), which ended the quarter at R$ 0.7 billion, reducing the need for borrowings to cover the gap in tariffs. The Company’s cash balance of R$4.2 billion is more than sufficient to honor debts maturing until the end of 2017, which underscores the group’s strategy of placing emphasis on liquidity that has proven successful at this time of a credit squeeze.

 

 

 

In April, the Board of Directors chose André Dorf for the position of Chief Executive Officer of the Company as part of my succession process. After 18 years at the CPFL group, I am satisfied to see a very well planned and smooth transition, which will continue till July 1, 2016, when André will take over. André has already been with the group for three years leading CPFL Renováveis and has all the qualities and the competence to take on the challenge of leading the new growth phase of the group.

I place on record my gratitude to the Board of Directors for their trust in me during all these years at the helm of CPFL Energia. In this new phase, the Board of Executive Officers continues the strategy of financial discipline, operational excellence and pursuit of productivity in order to ensure the long-term sustainability of our businesses. 

 

Wilson Ferreira Jr.

CEO of CPFL Energia

 

2) ENERGY SALES

2.1) Sales within the Distributors’ Concession Area

In 1Q16, sales within the concession area, achieved by the distribution segment, totaled 14,147 GWh, a decrease of 6.4%.

 

 

In 1Q16, sales to the captive market totaled 10,568 GWh, a decrease of 5.2%. The energy volume, in GWh, consumed by free customers in the distributors’ concession areas, billed through the Distribution System Usage Tariff (TUSD), reached 3,579 GWh in 1Q16, a decrease of 9.7%. These reductions reflect the turmoil of the macroeconomic scenario, which has resulted in the drop in industrial production, lower sales volume of retail trade and reducing real payroll.

 

 

Note: The tables with sales within the concession area by distributor are attached to this report in item 12.13.

 

Noteworthy in 1Q16, in the concession area:

·           Residential and commercial segments (30.1% and 18.3% of total sales, respectively): down by 4.6% and 5.2%, respectively. This performance reflects the changes in the labor market, with the hike of unemployment, the declining real income mass and the increase in electricity prices observed in 2015.

·           Industrial segment (36.4% of total sales): decrease of 10.5%, reflecting weaker performance of the economic activity and the fall of the business confidence in the industry recently and excessive inventories observed in the industry in recent months. In the same period, industrial production fell by 11.9%. Among the largest distributors of the group, we highlight CPFL Piratininga, with a decrease of 16.1% (or 308 GWh). The CPFL Paulista recorded a drop of -6.8% (or 184 GWh) and RGE had a decrease of 8.7% (or 73 GWh).

 

 

 

 

2.1.1) Sales by segment – Concession Area

 

2.1.2) Sales to the Captive Market

 

 

Note: The tables with captive market sales by distributor are attached to this report in item 12.14.

 

The retail sales were influenced mainly by the decrease in consumption in the industrial class which, in turn, reflects the slowdown in economic activity and the fall of the confidence level and excessive inventories, as explained above. Another key factor that influenced the captive market was the performance of the residential segment, which decreased 4.6% from the strong comparison base of 1Q15, the run-up to significant tariff increases and the deterioration in the labor market.

 

2.1.3) TUSD (consumption of free customers)

 

 

 

 

 

 

 

 

2.2) Contracted Demand in % (high voltage)

 

2.3) Generation Installed Capacity

In 1Q16, the Generation installed capacity of CPFL Energia, considering the stake in each project, reached 3,128 MW of installed capacity, an increase of 0.4% compared to 1Q15. This increase is mainly due to the addition of Morro dos Ventos II (2Q15) wind farms.

 

 

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 (and for comparative purpose for the balances of 2012) 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 December 31, 2015 and 2014, 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.

 

 

               

 

 

 

 

 

 

 

3.1) Consolidation of CPFL Renováveis Financial Statements

On December 31, 2015, 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) Presentation of adjusted figures

Since the 1Q14, the presentation of adjusted figures considers similar holdings in each of the assets in which CPFL Energia has a stake. Therefore, the result of adjusted figures already excludes non-controlling shareholders’ interests.

 

 

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4) ECONOMIC-FINANCIAL PERFORMANCE

 

  

 

Notes:

(1)    Adjusted figures take into account CPFL’s equivalent stake in each generation project and disregard non-recurring effects. Details about the adjustments in the Adjusted EBITDA and in the Adjusted Net Income are in items 4.5 and 4.7 of this report;

(2)    Disregard Construction Revenue, in the amount of R$ 217 million in 1Q16 and of R$ 231 million in 1Q15;

(3)    EBITDA is calculated from the sum of net income, taxes, financial result and depreciation/amortization, according to CVM Instruction no. 527/12.

 

4.1) Sectoral Financial Assets and Liabilities

On November 25, 2014, through Dispatch no. 4,621, Aneel approved the amendment to concession agreements of distribution companies, in order to include a specific clause guaranteeing that the balance remaining of any insufficient payment or reimbursement of tariff due to termination of the concession, for any reason, will be indemnified.

After this change, the Securities and Exchange Commission of Brazil (CVM) approved, on December 9, 2014, through Resolution no. 732, the recognition of assets and liabilities that were previously called “regulatory assets and liabilities” in the financial statements of distribution companies, which are now called “sectorial financial assets and liabilities”.

In 1Q16, it was accounted the total sectoral financial liabilities in the amount of R$ 732 million, compared to the total sectoral financial assets in the amount of R$ 689 million in 1Q15, a variation of R$ 1,421 million. On March 31, 2016, the balance of these sectoral financial assets and liabilities was of R$ 707 million (R$ 737 million, excluding the special obligations recorded as the methodology of the 4^th Cycle of Tariff Review), compared to a balance of R$ 1,954 million (R$ 1,682 million, excluding the amount related to the tariff flags not approved by Aneel and special obligations recorded as the methodology of the 4^th Cycle of Tariff Review) on December 31, 2015.

 

 

4.2) Operating Revenue

Disregarding the revenue from the construction of concession infrastructure, gross operating revenue (IFRS) reached R$ 7,281 million in 1Q16, representing a reduction of 1.7% (R$ 124 million). The adjusted gross operating revenue was of R$ 7,233 million in 1Q16, a reduction of 0.4% (R$ 29 million).

Net operating revenue (IFRS, disregarding the revenue from the construction of concession infrastructure) reached R$ 4,032 million in 1Q16, registering a reduction of 20.3% (R$ 1,027 million). The adjusted net operating revenue, disregarding the revenue from the construction of concession infrastructure, amounted to R$ 3,985 million in 1Q16, a reduction of 19.6% (R$ 969 million).

The increase in net operating revenue, already considering revenue eliminations, was mainly caused by the following factors:

·      Reduction of revenues in the Distribution segment, in the amount of R$ 917 million (for more details, see item 11.1.2);

·      Reduction of revenues in the Conventional Generation segment, in the amount of R$ 45 million;

·      Reduction of revenues in CPFL Renováveis, in the amount of R$ 39 million;

Partially offset by:

·      Increase of revenues in the Commercialization and Services segment, in the amount of R$ 32 million.

 

4.3) Cost of Electric Energy

The cost of electric energy (IFRS), comprising the purchase of electricity for resale and charges for the use of the distribution and transmission system, amounted to R$ 2,528 million in 1Q16, registering a reduction of 29.7% (R$ 1,070 million). The adjusted cost of electric energy was R$ 2,400 million in 1Q16, a reduction of 28.5% (R$ 956 million).

The factors that explain these variations follow below:

·      The cost of electric power purchased for resale (IFRS) in 1Q16 reached R$ 2,166 million, a reduction of 32.4% (R$ 1,038 million), mainly due to the following non-recurring events:

ü CPFL Renováveis’ energy purchase for SHPPs, totaling R$ 1 million in 1Q15;

ü Gain with the strategy put in place for the seasonality of physical guarantee, totaling R$ 68 million in 1Q15 (R$ 65 million in the Conventional Generation segment and R$ 3 million in CPFL Renováveis); the total gain with the strategy put in place for the seasonality of physical guarantee was of R$ 72 million in 1Q15 (R$ 65 million in the Conventional Generation segment and R$ 7 million in CPFL Renováveis), considering that the difference of R$ 4 million of CPFL Renováveis was considered in the Operating Revenue;

ü GSF (Generation Scale Factor), in the amount of R$ 154 million in 1Q15;

ü Renegotiation of GSF related to the ACR (regulated market) portion of BAESA (reversal of GSF expenses net of R$ 9.50/MWh risk premium), in the amount of R$ 8 million in 1Q16.

 

 

 

Note: after the GSF renegotiation in 4Q15, the Company has considered the remaining GSF as a recurring effect, and has considered the gains with the strategy put in place for the seasonality of physical guarantee of 2015 as a non-recurring effect, since the effects of seasonality are significantly reduced after the renegotiation of the GSF.

 

 

 

Note: (*) The remaining GSF expense refers to the portion of the free market (ACL) contracts that were not renegotiated.

 

In the adjusted figures, that disregard these effects, the cost of electric power purchased for resale in 1Q16 was R$ 2,031 million, representing a reduction of 31.3% (R$ 925 million). The decrease mainly reflects the variations below:

               (i)       Reduction in the amount of energy purchased in the spot market/PROINFA cost (R$ 470 million), excluding the GSF and the gain with the strategy put in place for the seasonality of physical guarantee (non-recurring effects), due to lower spot prices (in SE/CW, R$ 34.60/MWh in 1Q16 vs. R$ 388.48/MWh in 1Q15; in South, R$ 34.59/MWh in 1Q16 vs. R$ 388.48/MWh in 1Q15);

              (ii)       Reduction of 23.2% (R$ 486 million) in the cost of energy purchased through auction in the regulated environment and bilateral contracts, due to the reduction of 31.6% in the average purchase price (R$ 153.14/MWh in 1Q16 vs. R$ 223.73/MWh in 1Q15), partially offset by the increase of 13.2% (1,278 GWh) in the volume of purchased energy;

             (iii)       Reduction of 10.0% (R$ 61 million) in the cost of energy from Itaipu, due to the reductions of 9.3% in the average purchase price (R$ 217.28/MWh in 1Q16 vs. R$ 239.45/MWh in 1Q15) and of 0.9% (22 GWh) in the volume of purchased energy;

Partially offset by:

            (iv)       Reduction of 31.3% (R$ 92 million) in PIS and COFINS tax credits (cost reducer), generated from the energy purchase.

 

·         Charges for the use of the transmission and distribution system (IFRS) reached R$ 362 million in 1Q16, a reduction of 8.1% (R$ 32 million). In adjusted figures, that take into account the proportionate consolidation of generation assets, sector charges reached R$ 369 million in 1Q16, a reduction of 7.7% (R$ 31 million), due to the following factors:

               (i)       Reduction of 25.8% (R$ 44 million) in the system service usage charges – ESS, due to the spot price (PLD) reduction;

              (ii)       Reduction of 10.1% (R$ 23 million) in basic network charges;

             (iii)       Reduction of 18.6% (R$ 3 million) in Itaipu transmission charges;

Partially offset by:

 

           

              (iv)       Expense of R$ 31 million in Reserve Energy Charge – EER, paid in 1Q16 and not observed in 1Q15;

             (v)       Increase of R$ 6 million in charges for connection and usage of the distribution system;

            (vi)       Reduction of 7.8% (R$ 3 million) in PIS and COFINS tax credits (cost reducer), generated from the charges.

 

4.4) Operating Costs and Expenses

Operating costs and expenses (IFRS) were R$ 1,146 million in 1Q16, an increase of 9.0% (R$ 94 million) if compared to 1Q15, R$ 1,051 million. Adjusted operating costs and expenses were R$ 1,123 million in 1Q16, an increase of 1.6% (R$ 18 million), if compared to 1Q15, R$ 1,106 million, due to the following factors:

     (i)        The adjusted PMSO item, that reached R$ 620 million in 1Q16, compared to R$ 580 million in 1Q15, registering a decrease of 7.0% (R$ 40 million);

The table below lists the main variation in PMSO:

 

 

This variation is explained mainly by the following aspects:

ü  Personnel expenses, that recorded an increase of 8.5% (R$ 19 million), mainly due to: (i.a) Collective Bargaining Agreement – wages and benefits (R$ 13 million); (i.b) increase in the Services segment business, due to  business expansion of CPFL Serviços, CPFL Atende and Nect (R$ 7 million);

ü  Out-sourced services expenses, which registered an increase of 7.1% (R$ 9 million), mainly due to increase in the Distribution segment business (R$ 5 million) through expenses with the maintenance of the power grid, meter reading and use, collection actions, bill delivery and collection, tree pruning and increase in the  Services segment business (R$ 5 million)

ü  Other operational costs/expenses, that registered an increase of 74.2% (R$ 75 million), mainly due to:

 

 

·         Increase of 109.9% of legal and court expenses (R$ 29 million)

·         Increase of 116.0% in allowance for doubtful accounts (R$ 25 million), due to deterioration of the macroeconomic scenario and tariff adjustments that occurred in 2015;

·         Hydrologic risk premium amortization – GSF in the Generation segment business (Conventional/Renewables) (R$ 5 million)

·         Increase of 132.2% in assets disposal (R$ 5 million);

·         Increase of operating fines (DIC, FIC, DMIC and DICRI) in the Distribution segment (R$ 3 million), mainly in CPFL Paulista (R$ 2 million); and

·         Others (R$ 7 million)

Partially offset by:

ü  Decrease of 46.9% in Material (R$ 62 million), mainly explained by

·         In the Conventional Generation segment business, additional material expenses related to the oil acquisition by Epasa (Termonordeste TPP and Termoparaíba TPP), that reduced R$ 69 million in Conventional Generation. The average Unit Variable Cust (CVU) this termal plant decreased of R$ 426.75/MWh in 1Q15 to R$ 272.36/MWh in 1Q16. The item related to oil acquisition by Epasa is directly associated to revenue generation from this activity.

·         In the Distribution segment business, that increased R$ 7 million, mainly due to replacement of the line and grid maintenance materials (R$ 4 million) and acquisition of materials for fleet maintenance (R$ 3 million);

    (ii)       Depreciation and Amortization, which represented an increase of 5.1% (R$ 11 million), are mainly explained by (i) the increase in the Distribution segment business (R$ 6 million) in  amortization of intangible distribution infrastructure asset, mainly due to additions to the intangible assets base in the period and (ii) CPFL Renováveis (R$ 4 million) due to conclusion of the DESA acquisition report, with the consequent reclassification of a part of the amortization that was booked under amortization of exploration rights in general and administrative expenses to costs with depreciation and amortization, and also the adjustment of the terms of depreciation of some of the projects in operation and under construction.

Partially offset by:

   (iii)       Decrease of 31.6% in Intangible of Concession Amortization (R$ 20 million), due to:

ü  Decrease in the Intangible of Concession balance accounted in the holding company CPFL Energia, due to the renewal of the concessions of the subsidiaries CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Jaguari e CPFL Mococa (R$ 10 million);

ü  Change in accounting practice, due to until December 31, 2015, the intangible assets acquired of Distribution companies and Generation companies, which registered in the CPFL Energia holding and in the CPFL Geração (parent company) were amortized on a straight-line basis or based on the net projected profit curve of the concessionaries, as applicable. As of January 1, 2016, the Company will amortize the intangible assets acquired on a straight-line basis, in all cases (R$ 6 million) and;

ü  Decrease in CPFL Renováveis (R$ 3 million), as a result of the reclassification to the line of depreciation costs, due to the conclusion of the DESA acquisition report.

   (iv)       Decrease of 5.7% (R$ 13 million) in the cost of building the infrastructure of the concession.

 

 

This item, which reached R$ 217 million in 1Q16, has its counterpart in the “operating revenue”;

    (v)        Decrease of 14.9% in the Private Pension Fund expenses (R$ 2 million).

 

4.5) EBITDA

In 1Q16, IFRS EBITDA reached R$ 947 million, registering a reduction of 2.6% (R$ 25 million). Adjusted EBITDA in 1Q16 totaled R$ 949 million, compared to R$ 1,003 million in 1Q15, a reduction of 5.3% (R$ 53 million).

 

 

 

Note: (*) To better reflect the actual operating cash generation of the distribution segment, we adjust Itaipu foreign exchange variation in the adjusted EBITDA. This effect has its counterpart in the Financial Result, with no effect on Net Income.

 

4.6) Financial Result

In 1Q16, net financial expense (IFRS) was of R$ 232 million, a reduction of 36.8% (R$ 135 million) compared to the net financial expense of R$ 367 million reported in 1Q15. The adjusted net financial expense, considering the proportional consolidation in the segments of conventional and renewable generation, and excluding the effect of the exchange variation in Itaipu’s invoices, was of R$ 217 million, a reduction of 23.7% (R$ 67 million).

 

 

 

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Note: (*) The effect of Itaipu foreign exchange variation was positive in R$ 3 million in 1Q16 and negative in R$ 71 million in 1Q15.

 

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

·         Financial Revenues: in IFRS, an increase of 41.0% (R$ 118 million), from R$ 287 million in 1Q15 to R$ 405 million in 1Q16. In the adjusted figures, considering the proportional consolidation in the segments of conventional and renewable generation, an increase of 45.2% (R$ 124 million), from R$ 274 million in 1Q15 to R$ 398 million in 1Q16 mainly due to the following factors:

(i)            Increase of 412.2% (R$ 40 million) in the sectoral financial assets update;

(ii)           Increase of 209.7% (R$ 37 million) in the monetary and foreign exchange updates, due to: (a) the increase of R$ 16 million in revenues from fines, interest and monetary adjustment relating to installment payments made by consumers; (b) the increase of R$ 3 million in the update of the balance of tariff subsidies, as determined by ANEEL; (c) gain of R$ 28 million with the zero-cost collar derivative¹; partially offset by (d) other monetary and foreign exchange updates (R$ 11 million);

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(iii)          Increase of 55.7% (R$ 33 million) in the adjustment of expected cash flow (monetary update of concession’s financial asset), due to: (a) the higher inflation (IGP-M index of 1.86% in 1Q15 vs. IPCA index² of 2.64% in 1Q16); (b) the higher assets base in CPFL Paulista, CPFL Piratininga and RGE; partially offset by (c) 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)³;

(iv)         Increase of 18.6% (R$ 20 million) in the income from financial investments, due to the increases in the average balance of investments and in the average CDI interbank rate;

(v)          Increase of 32.7% (R$ 14 million) in additions and late payment fines, due to the increase in the tariff;

(vi)         Increase of R$ 9 million in other financial revenues;

Partially offset by:

(vii)        Reduction of 46.0% (R$ 8 million) in judicial deposits update;

(viii)       PIS and COFINS on financial revenues (R$ 21 million).

 

·         Financial Expenses: in IFRS, a reduction of 2.6% (R$ 17 million), from R$ 654 million in 1Q15 to R$ 636 million in 1Q16. In adjusted figures, considering the proportional consolidation in the segments of conventional and renewable generation, and excluding the effect of the exchange variation in Itaipu’s invoices, an increase of 10.1% (R$ 57 million), from R$ 558 million in 1Q15 to R$ 615 million in 1Q16, mainly due to the following factors:

(i)            Increase of 12.0% (R$ 15 million) in the monetary and foreign exchange updates, due to: (a) the increase of debt charges in foreign currency, with swap to CDI interbank rate (R$ 42 million); partially offset by (b) the mark-to-market positive effect for financial operations under Law 4,131 – non-cash effect (R$ 27 million);

(ii)           Increase of 2.1% (R$ 8 million) of debt charges in local currency, reflecting the increases in the average cost and stock of debt;

(iii)          Increase of 20.5% (R$ 4 million) in the financial expenses with the Use of Public Asset (UBP), due to the variation of the IGP-M, inflation index used to update this item;

(iv)         Increase of R$ 29 million in other financial expenses, due to: (a) CDE subsidy update (R$ 12 million); and (b) other effects (R$ 17 million).

 

4.7) Net Income

In 1Q16, net income (IFRS) was R$ 232 million, registering an increase of 63.3% (R$ 90 million). Adjusted net income totaled R$ 267 million, compared to R$ 251 million in 1Q15, an increase of 6.7% (R$ 17 million).

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5) DEBT

5.1) Debt (IFRS)

 

 

     

 

1) For debt linked to foreign currency (30.4% of total), swaps are contracted, which convert indexing for CDI;

2) PSI - Investment Support Program.

 

Net Debt and Leverage in IFRS

 

 

 

 

 

5.2) Debt (Pro forma)

5.2.1) Debt Evolution in Pro forma criteria (R$ Billion)

 

 

1) These graphics do not consider MTM and expenses with funding and issuance.

 

5.2.2) Debt Amortization Schedule in Pro forma 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 18-24 months and anticipates market access on more favorable terms of liquidity and cost. Thus, at the beginning of 2016, CPFL Energia is working in 2017 and 2018 prefunding.

 

 

 

 

 

 

 

 

Debt Amortization Schedule in Pro forma criteria (Mar-16)¹

 

  

 

1) Considers only the principal debt, including hedge and excluding funding costs;

2) Twelve months (Apr-16 to Mar-17);

3) April-17 to Dec-17

 

The cash position at the end of 1Q16 has coverage ratio of 2.32x the amortizations of the next 12 months, enough to honor all amortization commitments until around the beginning of 2018. The average amortization term, calculated by this schedule, is 3.43 years.

 

 

 

 

 

 

 

5.2.3) Indexation and Debt Cost in Proforma criteria

 

Indexation¹ After Hedge² in Proforma criteria – 1Q15 vs. 1Q16

 

   

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

2) For debt linked to foreign currency (33.5% of total), swaps are contracted, which convert the indexation to CDI;

3) PSI - Investment Support Program.

 

 

 

 

 

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

 

 

 

 

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5.3) Net Debt and Leverage (Covenant criteria)

In 1Q16, Net Debt Pro-forma totaled R$ 12.2 billion, a decrease of 9.9% compared to net debt position at the end of 1Q15 in the amount of R$ 13.6 billion.

 

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 participation of CPFL Energia in each of the projects. Also, include in the calculation of adjusted EBITDA the effects of the CVA – "Account for the Compensation of the Variations of Parcel A" and the historic EBITDA of newly acquired projects. Considering that, adjusted net debt totaled R$ 12.2 billion and adjusted EBITDA reached R$ 3.6 billion, the adjusted Net Debt / adjusted EBITDA at the end of 1Q16 reached 3.42x.

 

5.4) Ratings

On March 2016, Fitch Ratings affirmed the AA (bra) ratings of CPFL Energia and its subsidiaries. However, the agency changed the outlook from stable to negative. Despite of the Brazilian Sovereign downgrade in May by the agency, the ratings of CPFL Energia were maintained. The following table shows the ratings and the outlooks assigned by the agencies.

 

 

 

 

6)  INVESTMENTS

6.1)  Capital Expenditures

 

 

Notes:

1) The R$ 8 million difference in the first quarter of 2016 between the numbers reported by CPFL Renováveis's Earnings Release is accounted in the line “Non-  cash transactions and other information” from CPFL Renováveis ITR (Note 30);

2) Others – all type of investment that is not included on the segments listed above.

 

In 1Q16, R$ 446 million were invested in business maintenance and expansion, 34.8% higher than 1Q15. In addition, we invested R$ 4 million in the quarter in the construction of CPFL Transmissão’s transmission lines and, according to the requirements of IFRIC 12, it was recorded as “Financial Asset of Concession” in non-current assets. CPFL Energia also booked R$ 44 million in Special Obligations in the quarter among other items financed by the consumer.

 

Listed below are some of the main investments made by CPFL Energia in 1Q16, in each segment:

 

    (i)        DisCos:

 

a.    Strengthening and expansion 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)   GenCos:

a.    Campo dos Ventos II Wind Complex;

b.    São Benedito Wind Complex;

c.    Pedra Cheirosa Wind Complex;

d.    Mata Velha SHPP.

 

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6.2)  Projected Capital Expenditures

In December 2015, the Board of Executive Officers' proposal for the 2016 Annual Budget and the 2017/2020 Multiannual Plan for CPFL Energia and its subsidiaries, which was previously discussed by the Budget and Corporate Finance Commission.

 

 

Notes:

(i) Constant currency;

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

(iii) IFRS – Considers 100% on CPFL Renováveis and Ceran; Pro forma – Considers proportional stakes in the generation projects.

 

 

 

 

 

 

 

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7) ALLOCATION OF RESULTS

The Company’s Bylaws require the distribution annually of at least 25% of net income adjusted according to law, as dividends to its shareholders.  The proposal for allocation of net income from the fiscal year is shown below:

 

 

Minimum Mandatory Dividend (25%)

The Board of Directors proposed the payment of R$ 205 million in dividends to holders of common shares traded on the BM&FBovespa – Bolsa de Valores, Mercadorias e Futuros S.A. (BM&FBOVESPA). This proposed amount corresponds to R$ 0.206868475 per share, related to the year 2015. This proposal was approved by the Annual General Shareholders’ Meeting (AGM) held on April 29, 2016.

CPFL Energia informed its shareholders and the market, through a Notice to Shareholders released on April 29, 2016, that the Annual General Shareholders’ Meeting held on April 29, 2016, approved the declaration of “Dividend” to be imputed to the 2015 mandatory dividends, pursuant to the following instructions:

(i) Value: the amount of dividends to be paid is R$ 205,423,336.52 (two hundred and five million, four hundred and twenty-three thousand, three hundred and thirty-six reais and fifty-two centavos), equivalent to R$ 0.206868475 per common share.

(ii) Ex-dividend: shareholders owning shares on April 29, 2016 are entitled to receive these dividends. Shares were traded ex-dividend on the São Paulo Stock Exchange (BM&FBovespa S.A. Bolsa de Valores, Mercadorias e Futuros - BM&FBOVESPA) and New York Stock Exchange (NYSE) as of May 2, 2016.

(iii) Payment: said dividends will be paid on July 1, 2016.

 

Statutory Reserve – Strengthening of Working Capital

For this fiscal year, considering the current adverse economic scenario and the uncertainties regarding market projections for distributors due to energy efficiency campaigns and extraordinary tariff increases occurred during the year 2015, the Company’s Management proposed the allocation of R$ 393 million to the statutory reserve – strengthening of working capital.

 

Stock Dividend for Shareholders

To strengthen the Company’s capital structure, the Board of Executive Officers meeting held on March 7, 2016, recommended that the Board of Directors propose to the Shareholders Meeting the capitalization of the balance of the statutory reserve – strengthening of working capital, through the issue of new shares to shareholders. This proposal was approved by the Extraordinary Shareholders Meeting held on April 29, 2016.

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CPFL Energia informed its shareholders and the market, through a Notice to Shareholders released on April 29, 2016, that the Extraordinary General Meeting, held on April 29, 2015, decided the following corporate action:

(i) Increase in the capital stock: the increase in the subscribed and paid in capital stock in the amount of R$ 392,972,219.68 (three hundred ninety-two million, nine hundred seventy-two thousand, two hundred nineteen reais and sixty-eight centavos), the said subscribed and paid in capital stock increasing from R$ 5,348,311,955.07 (five billion, three hundred forty-eight million, three hundred eleven thousand, nine hundred fifty-five reais and seven centavos) to R$ 5,741,284,174.75 (five billion, seven hundred forty-one million, two hundred eighty-four thousand, one hundred seventy-four reais and seventy-five centavos), through the capitalization (reversal) of the statutory reserve for working capital reinforcement.

(ii) Bonus in shares of 2.507570448%: the capital increase was effected with the issue of 24,900,531 (twenty-four million, nine hundred thousand and five hundred thirty-one) common book entry shares, without par value, which were granted to the holders of shares as a bonus in the proportion of 0.02507570448 new share of the same type for each share held, being the shares held as treasury stock also enjoying the bonus rights.

(ii.i) Baseline date: stockholders with shares held at the close of the record date of April 29, 2016 were entitled to bonus rights.

(ii.ii) Trading: the shares were released for trading ex-bonus rights as from May 2, 2016; additionally, the new shares were included in the stockholders position on May 5, 2016.

(ii.iii) Bonus Share Rights: the new shares shall be entitled in full to dividend payouts that may be declared as from May 5, 2016, under the same conditions as the common shares of CPFL Energia, as applicable.

(ii.iv) Share Fractions: the bonus was effected in whole numbers. Shareholders wishing to transfer share fractions resulting from the bonus, may do so for the period between May 5, 2016 and June 6, 2016, pursuant to Paragraph 3, Article 169 of Law 6.404/76. This period having elapsed, any eventual amounts remaining from the share fractions shall be separated, grouped into whole numbers and sold on the BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange and the product of the sale shall be made available to shareholders entitled to these fractions on a date to be notified in due course.

(ii.v) Cost of Bonus Shares: the cost attributed to the bonus shares is R$ 15.781680012 per share, for the purposes of the provision in Article 10 of Law 9,249 of December 26, 1995.

(ii.vi) International Market: on the New York Stock Exchange (NYSE) where each American Depositary Receipt (ADR) represents 2 (two) common shares, investors received 0.02507570448 new ADR for every 1 (one) ADR already held.

 

 

 

 

 

 

 

 

 

8) STOCK MARKETS

8.1) Stock Performance

CPFL Energia, which has a current free float of 31.9% (up to march 31, 2016), is listed on both the BM&FBOVESPA (Novo Mercado) and the NYSE (ADR Level III), segments with the highest levels of corporate governance

 

 

 

On March 31, the price shares closed at R$ 19.60 on BM&FBovespa and $ 10.89 on NYSE. In 1Q16, the shares’ prices valued 29.1 % and 45.2 %, respectively. Year over year, the shares devalued 1.1% on BM&FBovespa and 14.4% on NYSE.

 

8.2) Daily Average Volume

The daily trading volume in 1Q16 averaged R$ 40.5 million, of which R$ 28.3 million on the BM&FBOVESPA and R$ 12.2 million on the NYSE, 11.6 % up compared to 1Q15. The number of trades on the BM&FBOVESPA increased by 52.2%, rising from a daily average of 5,581, in 1Q15, to 8.492 in 1Q16.

 

 

Note: Considers the sum of the average daily volume on the BM&FBovespa and NYSE

 

 

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9) CORPORATE GOVERNANCE

The corporate governance model adopted by CPFL Energia ("CPFL" or "Company") and its subsidiaries is based on the principles of transparency, fairness, accountability and corporate responsibility.

In 2015, CPFL marked 11 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 external members, one of whom an Independent Member, whose term of office is 1 year and who are eligible for reelection.

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 (Risk Management Processes, People Management and Related Parties), which support the Board in its decisions and monitor relevant and strategic themes, such as people and risk management, sustainability and the surveillance of internal audits, analysis of transactions with Parties Related to controlling shareholders and handling of incidents recorded through complaint hotlines and ethical conduct channels.

To ensure that best practices permeate all activities of the Board and its relations with the Company while the Board members are focused on their decision-making functions, in 2006 the Company created the Board of Directors Advisory Council, which reports directly and solely to the Chairman of the Board. In 2015, the name was changed from Board of Directors Advisory Council to Corporate Governance Advisory Council.

This Advisory Council acts as the guardian of best practices to ensure compliance with Governance Guidelines; speed of communication between the Company and its Board members; quality and timeliness of information; integration and evaluation of members of the Board of Directors and the Audit Board; constant improvement of governance processes and institutional relations with government authorities and entities.

The composition of Executive board, in line with governance guidelines, was changed on May 2015.  The change in Company’s Bylaws, which were approved at the General Shareholders Meeting held on April 29, 2015, created a new vice President position subordinated to the CEO, who passes 5 (five) to 6 (six) Executive vice Presidents, standing in line with our succession program. The mandates of the Executive vice Presidents endures two years, with a re election possibility, besides they sit on the Boards of the subsidiaries. Therefore, the changes in CPFL Energia aims to create the bases required to consolidate as the leader of Brazilian power Market, always seeking the efficient management of its assets and sustainable opportunities to create value for its stakeholders.

CPFL has a permanent Audit Board, made up of 5 members, 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.

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

 

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10) CURRENT SHAREHOLDERS STRUCTURE – 03/31/2016

CPFL Energia is a holding company, whose results depend directly on those of its subsidiaries.

 

 

Notes:

(1) Controlling shareholders;

(2) Includes the 0,5% stake of Caixa de Previdência dos Funcionários do Banco do Brasil;

(3) Includes the 0.2% stake of Petros e Sistel pension funds;

(4) Bounded shares, according to the Shareholders Agreement;

(5) 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.

 

11) PERFORMANCE OF THE BUSINESS SEGMENTS

11.1) Distribution Segment

11.1.1) Economic-Financial Performance

 

Notes:

(1)     Excludes Construction Revenue;

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

(3)     Adjusted EBITDA, besides the items mentioned above, excludes  non-recurring effects and the exchange variation in Itaipu invoices (negative effect of R$ 3 million in 1Q16 compared to a positive effect of R$ 71 million in 1Q15);

(4)     Adjusted Net Income excludes the non-recurring effects;

(5)     The distributors’ financial performance tables are attached to this report in item 12.12.

 

11.1.1.1) Sectoral Financial Assets and Liabilities

On November 25, 2014, through Dispatch no. 4,621, Aneel approved the amendment to concession agreements of distribution companies, in order to include a specific clause guaranteeing that the balance remaining of any insufficient payment or reimbursement of tariff due to termination of the concession, for any reason, will be indemnified.

After this change, the Brazilian Securities and Exchange Commission (CVM) approved, in December 2014, through Deliberation no. 732, the recognition of assets and liabilities that were previously called “regulatory assets and liabilities” in the financial statements of the electric energy distributors, which are now called “sectoral financial assets and liabilities”.

In 1Q16, the total sectoral financial liabilities accounted for the amount of R$ 732 million, compared to an amount of sectoral financial assets of R$ 689 million in 1Q15, a variation of R$ 1.421 million. On March 31, 2016, the balance of sectoral financial assets and liabilities was of R$ 707 million (R$ 737 million, excluding the amount related to special obligations recorded according to the methodology of the 4^th Cycle of Tariff Review), compared to a balance of R$ 1,954 million (R$ 1,682 million, excluding the amount related to the tariff flags not approved by Aneel and the amount related to special obligations recorded according to the methodology of the 4th Cycle of Tariff Review) on December 31, 2015.

 

 

11.1.1.2) Operating Revenue

Excluding the revenue from building the infrastructure of the concession (which does not affect the results, because of the related cost, in the same amount), gross operating revenue (IFRS) amounted to R$ 6,380 million in 1Q16, a decrease of 0.7% (R$ 47 million), due to the following factors:

·      Variation of R$ 1,421 million in the Sectoral Financial Assets and Liabilities, from an asset of R$ 689 million in 1Q15 to a liability of R$ 732 million in 1Q16;

Partially offset by:

·      Increase of 23.7% (R$ 1,275 million) in the revenue with energy sale (captive + TUSD), due to the positive average tariff adjustment in the distribution companies for the period between 1Q15 and 1Q16 (due to the annual tariff readjustments and the adoption of Extraordinary Tariff Review as of March 2015), an effect that was enough to offset the reduction of 6.4% in the sales volume within the concession area;

·      Increase of R$ 74 million in tariff subsidies (CDE resources), mainly discounts in TUSD (for special consumers) and in low income tariffs, following tariff readjustment;

·      Increase of R$ 18 million in Short-term Electric Energy; and

·      Increase of R$ 7 million in Other Revenues and Income;

The adjusted gross operational revenue, which excludes the effect of the exchange variation in Itaipu invoices over the sectoral financial assets and liabilities, reached R$ 6,383 million, an increase of 0.5% (R$ 35 million) if compared to 1Q15.

Deductions from the gross operating revenue were R$ 3,158 million in 1Q16, representing an increase of 40.7% (R$ 914 million), due to the following increases:

·      of 96.6% in the CDE sector charge (R$ 414 million), due to the adoption of new CDE quotas (adoption of 2015 quota of CDE System Usage and the inclusion of CDE Energy as of Mar-15 and the adoption of CDE charges in order to cover ACR Account loans as of each disco´s tariff event);

·      of 30.4% in ICMS tax (R$ 306 million);

·      of 130.7% in tariff flags approved by the CCEE (R$ 199 million);

·      of 1.2% in PIS and COFINS taxes (R$ 7 million);

·      of 28.1% in other charges (R$ 1 million);

Partially offset by the reduction:

·      of 23.0% in the R&D and Energy Efficiency Program (R$ 10 million);

·      of 15.0% in the PROINFA (R$ 4 million).

Excluding the revenue from building the infrastructure of the concession (which does not affect the results because of the related cost, in the same amount), net operating revenue (IFRS) reached R$ 3,221 million in 1Q16, representing a reduction of 23.0% (R$ 960 million). Adjusted net operating revenue, which excludes non-recurring effects and the exchange variation in Itaipu invoices, reached R$ 3,224 million, a decrease of 22.1% (R$ 916 million).

 

11.1.1.3) Cost of Electric Power

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$ 2,222 million in 1Q16, representing a decrease of 30.4% (R$ 973 million):

 

·        The cost of electric power purchased for resale was R$ 1,882 million in 1Q16, representing a reduction of 33.4% (R$ 942 million), due to the following factors:

          (i)        Reduction of 99.3% (R$ 502 million) in the cost of energy purchased in the short term and Proinfa, mainly due to the reductions of 76.3% in the volume of purchased energy (1.055 GWh) and of average PLD (from R$ 388.48/MWh in 1Q15 to R$ 34.60/MWh in 1Q16, in the Southeast/Midwest submarket, and from R$ 388.48/MWh in 1Q15 to R$ 34.59/MWh in 1Q16, in the South submarket), partially offset by the 61.4% increase in the average purchase price (from R$ 254.71/MWh in 1Q15 to R$ 411.16/MWh in 1Q16);

         (ii)        Decrease of 23.8% (R$ 476 million) in the cost of energy purchased in the regulated environment and bilateral contracts, mainly due to the reduction of 30.7% in the average purchase price (from R$ 222.32/MWh in 1Q15 to R$ 153.97/MWh in 1Q16), despite the 10.0% increase (902 GWh) in the volume of purchased energy;

        (iii)        Decrease of 10.0% (R$ 61 million) in the cost of energy from Itaipu, mainly due to the 9.3% decrease in the average purchase price (from R$ 239.45/MWh in 1Q15 to R$ 217.28/MWh in 1Q16) and by the reduction of 0.9% (22 GWh) in the volume of purchased energy;

Partially offset by:

        (iv)        Reduction of 33.4% (R$ 96 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$ 340 million in 1Q16, a decrease of 8.1% (R$ 30 million) increase, due to the following factors:

          (i)        Decrease of 25.7% in the system service usage charges – ESS (R$ 44 million), due to the reduction in the PLD;

         (ii)        Reduction of 10.5% (R$ 22 million) in the basic network charges;

        (iii)        Reduction of 18.6% (R$ 3 million) in Itaipu transmission charges;

Partially offset by:

       (iv)        Accounting of the energy reserve charges – EER in 1Q16, in the amount of R$ 31 million (not observed in 1Q15);

        (v)        Increase of 30.8% (R$ 5 million) in the connection and use of the distribution system charges;

       (vi)        Decrease of 8.1% (R$ 3 million) in PIS and COFINS tax credits (cost reducer), generated from the charges.

 

11.1.1.4) Operating Costs and Expenses

Operating costs and expenses were R$ 834 million in 1Q16 compared to R$ 733 million in 1Q15, an increase of 13.8% (R$ 101 million), due to the following factors:

         (i)          Increase of 5.6% (R$ 7 million) in the Depreciation and Amortization item;

        (ii)          Increase of 0.4% (R$ 1 million) in the cost of building the infrastructure of the concession. This item, which reached R$ 214 million in 1Q16, has its counterpart in the “operating revenue”;

       (iii)          PMSO reached R$ 482 million in 1Q16, compared to R$ 386 million in 1Q15, registering an increase of 25.0% (R$ 96 million), due to the following factors:

ü Personnel expenses, which registered an increase of 5.0% (R$ 8 million), mainly due to the effects of the Collective Bargaining Agreement;

 

ü Material expenses, which registered an increase of 32.6% (R$ 7 million), mainly due to replacement of materials for the maintenance of the power grid, machinery and equipment and maintenance of buildings (R$ 4 million) and purchase of materials for maintenance of the fleet (R$ 3 million);

ü Outsourced services expenses, which registered an increase of 15.1% (R$ 19 million), mainly due to the increases in expenses with the maintenance of the power grid (R$ 6 million), meter reading and use (R$ 2 million), collection actions (R$ 2 million), bill delivery and collection (R$ 1 million), tree pruning (R$ 1 million), and other outsourced services (R$ 6 million);

ü Other operating costs/expenses, which registered an increase of 76.7% (R$ 63 million), mainly due to the following factors:

·      Increase of 122.3% (R$ 28 million) in legal, judicial, indemnities and penalties expenses;

·      Increase of 138.1% (R$ 26 million) in provision for doubtful accounts, due to the economic scenario and the 2015 tariff readjustments;

·      Increase of 20.5% (R$ 8 million) in other expenses, mainly due to regulatory fines – DIC, FIC, DMIC and DICRI (R$ 3 million), asset write-off (R$ 1 million), regulatory charges (R$ 1 million) and other effects (R$ 3 million);

 

Note: (1) Reported PMSO (IFRS) equivalent to Adjusted PMSO.

 

Partially offset by:

·  Reduction of 16.3% (R$ 3 million) in the Private Pension Fund item.

 

11.1.1.5) EBITDA

EBITDA (IFRS) totaled R$ 503 million in 1Q16, registering a reduction of 13.9% (R$ 81 million). Adjusted EBITDA, which excludes non-recurring effects and the exchange variation in Itaipu invoices, reached R$ 506 million, representing a decrease of 6.9% (R$ 37 million).

 

 

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11.1.1.6) Financial Result

In 1Q16, the net financial result (IFRS) was a decrease of 97.2% (R$ 153 million), with a net financial expense of R$ 4 million, compared to a net financial expense of R$ 158 million in 1Q15. The adjusted net financial result, which disregard the effects of exchange variation in Itaipu invoices, presented a decrease of 91.7% (R$ 79 million).