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.  

.

São Paulo, May 12, 2014 – CPFL Energia S.A. (BM&FBOVESPA: CPFE3 and NYSE: CPL), announces its 1Q14 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 1Q13, unless otherwise stated.

CPFL ENERGIA ANNOUNCES 1Q14 NET INCOME

OF R$ 174 MILLION

Notes:

(1)     Disregard construction revenues;

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

(3)     Adjusted EBITDA considers, besides the items mentioned on note (2) above, the regulatory assets and liabilities and excludes the non-recurring effects;

(4)     Adjusted Net Income considers the regulatory assets and liabilities and excludes the non-recurring effects.

1Q14 HIGHLIGHTS

•  Increase of 7.0% in sales in the concession area - residential (+13.5%) and commercial (+11.3%)

•  Disbursement from sector fund (CDE) in the amount of R$ 1,170 million in 1Q14, to cover the involuntary exposure and thermal dispatch

•  Commercialization and Services - EBITDA  of R$ 77 million in 1Q14

•  Re-contracting of Semesa‘s energy with Furnas  for 14 additional years (until the end of the concession)

•  CPFL Renováveis expansion: (i) CADE  (Apr/14) and ANEEL  (May/14) approvals, related to the joint venture with DESA, and (ii) completion of construction of Macacos I wind complex (May/14)

•  Investments  of R$ 240 million in 1Q14

•  Payment on May 08 of R$ 568 million (R$ 0.59/share) in complementary dividends, related to 2H13, with dividend yield of 4.8% (LTM)

•  Economic tariff readjustment of  17.18%  for CPFL Paulista, in Apr/14

•  Increase of 16.6%  in the daily average volume (BM&FBOVESPA + NYSE), reaching R$ 44.4 million; increase of 59.9%  in the number of trades (BM&FBOVESPA), reaching a daily average of 6,292 

•  CPFL Telecom implementation: coverage of 10 cities and 544 km of implemented networks

 

INDEX

Page 2 of 54

1) MESSAGE FROM THE CEO

The adverse hydrological scenario continued to hamper the recovery of reservoirs during the wet period of the year. In Brazil’s Southeast/Midwest subsystem, which represents around 70% of the country’s storage capacity, the period from January to April 2014 registered the 3rd worst flow of hydropower in 84 years. In the Northeast, it was the 2nd worst flow. As a result, the National Electricity System Operator (ONS), envisioning an adverse operating scenario, ordered the thermal power plants in Brazil’s energy grid to supply their entire energy generation in order to save water in the reservoirs of hydroelectric plants. Consequently, spot market energy prices reached the ceiling in February and remained there until late April.

Energy distributors, on the other hand, were exposed to the spot market due to the insufficient allocation of quotas by Provisional Presidential Decree (MP) 579 in late 2012, and the partial frustration in the recontracting of energy during the auction of existing energy (A-1) in December 2013.  Consequently, the distribution segment came under heavy pressure on working capital since nearly 3,600 average MW of energy was being settled at a price of over R$ 800/MWh. In this stressful scenario, CPFL Energia, together with the Brazilian Association of Electricity Distributors (ABRADEE), led negotiations with the federal government and the energy regulatory agency ANEEL to mitigate the impacts of the increase in spot prices on energy distributors. These efforts resulted in the announcement of a package in March 2014, which included financial aid of R$ 1.2 billion from the National Treasury, the creation of an ACR account pursuant to Decree 8,221/14, and the holding of an Auction A at the end of April for the immediate contracting of energy for terms until December 2019.

Under the ACR Account mechanism, the Electric Power Trading Chamber (CCEE) will raise R$ 11.2 billion from a syndicate of banks to absorb the transfers of high energy acquisition costs to the final consumer. A sum of R$ 4.7 billion had already been passed on to distributors through this mechanism. For March, the amount determined by ANEEL stands at R$ 3.3 billion.  In 1Q14, CPFL Energia received R$ 167 million from the Treasury to cover the involuntary exposure of over R$ 677 million in January, through the ACR Account, pertaining to the thermal dispatches and involuntary exposure in February. For March, ANEEL has determined the transfer of R$ 439 million.

At the Auction A, the company contracted a little over 2,000 average MW at an average price of R$ 268.33/MWh. It is estimated that, given the seasonality of the distributors’ load, this amount will be sufficient to cover around 85% of the involuntary exposure that the companies will still be subject to until the end of 2014, thus significantly reducing the costs of acquiring energy in the spot market.

In the beginning of April, our subsidiary CPFL Paulista, which accounts for nearly half of the results of the Group’s distribution segment, carried out its annual tariff increase (RTA). The result was an average impact of 17.18% on energy tariffs, essentially on account of the increase in the non-manageable portion, that is, energy acquisition costs. The difference in relation to our initial demand of about 26% is mainly due to the coverage of costs announced by Decree 8,221/14 and the reduction in the Energy Development Account (CDE) quota determined by ANEEL.

I wish to highlight the recontracting of energy from the Serra da Mesa (Semesa) Hydroelectric Plant. The original contract, with Furnas Centrais Elétricas S.A., expired on March 31, 2014. Consequently, we analyzed a few possibilities for recontracting this portion of energy, of around 345.4 average MW. We then decided to renew the contract with the same party, fixing the price at R$ 156.70/MWh, net of charges, as of April 2014, until the exploration rights held by CPFL Geração for this portion of energy expire in 2028. The equivalent gross price, including the respective industry charges, is R$ 182.90/MWh. Our strategy was based on contracting for the long term, with the priority being on stable cash flows and on minimizing volatility in our generation company.

 

 

In the distribution segment, sales in our concession area registered the highest year-on-year growth in the company’s history: 7.0% compared to 6.0% growth across Brazil. The residential and commercial segments registered growth of 13.5% and 11.3%, respectively, strongly influenced by the heat wave that swept across the country early this year.

I wish to also highlight the results from our commercialization and services segment, thanks to the right strategy adopted in the first quarter: due to the price pressures in the spot market, in the Commercialization area, we contracted more energy than our delivery commitments and settled the surplus in the spot market. We also accelerated the portfolio of works at CPFL Serviços, thus diluting fixed costs and gaining scale. The result of this strategy was an EBITDA of R$ 77 million in 1Q14, which is more than the EBITDA from the whole of 2013.

Our subsidiary CPFL Renováveis is continuing its full-fledged expansion: we inaugurated the Atlântica Wind Farm Complex, in southern Brazil, which has 120-meter towers and wind turbines with installed capacity of 3 MW, and is one of the biggest and most modern wind farms in Brazil. We also concluded the acquisition of the Rosa dos Ventos wind farms, which have an installed capacity of 13.7 MW. As a result, our asset portfolio grew 23% in relation to 1Q13. We also concluded construction of the Macacos I wind farm complex, which is awaiting ANEEL’s dispatch to start billing its energy.

As for debt, our net leverage stood at 3.58x according to the criterion in the financial covenants, which adds up the variation in the regulatory assets and liabilities, and adjusts our stake in each of the generation assets. This leverage represents a degree of stability in relation to the 3.59x reported at the end of 2013. We had a healthy cash position of R$ 4.2 billion, which is sufficient to cover more than three times our short-term liabilities. The average term of our debt is longer than four years and only 8% of it matures in the next 12 months. Our strategy is to maintain a comfortable level of liquidity, which can enable us to smoothly go through turbulent and adverse times such as this.

We will certainly have a difficult and volatile year ahead.  On the other hand, it is precisely in adverse environments that opportunities arise. That is why I have been working together with my entire team to place CPFL Energia at the forefront, trying to anticipate market developments and adopting a solid and conservative financial strategy. Our aim in this regard is to implement actions that are focused on the long term and which generate value for our shareholders continuously and in a sustainable manner.

Wilson Ferreira Jr.

CEO of CPFL Energia

 

2) MACROECONOMIC CONTEXT

Despite the winter storms that hit North America and withdrew dynamism of industry and sales earlier this year, the U.S. economy seems to have found the path to recovery and is expected to grow 2.8% in 2014, 0.9 p.p. higher than in 2013. Recovery of investments in the context of improved business and consumer confidence, higher retail sales and positive performance in labor market help explain this scenario. The uncertainties are due to FED movements (dissensions regarding the timing and speed of normalization of monetary conditions), which may raise interest rates, slow down the real estate industry and increase volatility in emerging markets’ currencies.

In the European Union, economic activity is moving towards a positive result in 2014, after two years of recession. However, there is still the risk of deflation, in a context in which idleness in industrial segment remains expressive. Unemployment is still high and the real income of population, stagnant.

In Asia, the scenario of soft economic slowdown in Chinese economy remains. To prevent it from being higher than expected, new state investments in railways and water and sewer segments were announced. The expectation for Chinese GDP is a 7.5% growth in 2014.

For the world economy, it is expected a growth of 3.6% in 2014, compared to 3.0% in 2013.

Forecasts for 2014 and 2015 GDP (%) | selected economies

Source: IMF

In Brazil, the industry sector remains oscillating and has accumulated growth of 0.4% in the 1Q14, compared to the same period of 2013, and growth of 2.1% in the last twelve months, reinforcing the trend of less impetus in industrial activity in recent years.

Total income and retail sales, in turn, have positive results in 2014. Total income grew 3.8% in 1Q14, compared to 1Q13, while retail sales were up by 7.4%¹ in the first two months of the year, compared to the same period of 2013. Although signaling an accommodation trend, these indicators remain influenced by the improved conditions for credit and income in recent years.

The indicators available so far point to a slowdown in activity this year. It is estimated that Brazilian GDP will be up by 1.7% in 2014², compared to 2.3% in 2013, depending on the accommodation of the total income, the deterioration in confidence indicators, the high inventory in industry sector, the squeezed credit conditions and the uncertainty regarding the monetary policy. However, the improvement in external environment, favored by new impetus in international trade, should cheer economic activity out. For 2015, forecasts indicate a GDP growth of 1.9%.

 

 

Evolution of Brazilian GDP | Annual growth (%)

Source: IBGE

Temperatures hit record highs and boost consumption in the residential and commercial segments in 1Q14

In 1Q14, the consumption of the residential and commercial segments, observed in the regions served by CPFL Energia, showed high growth rates, especially in the month of February.

Monthly growth of residential and commercial segments | %

These high rates are due to unusually high temperatures for the period, which affected the whole country; some cities had record highs. This variation was mainly caused by a "high pressure system", rather atypical climatic phenomenon that occurred in Brazil in January and February, causing a significant reduction in rainfall and increase in temperature.

 

The chart below shows significant deviations in the quarter, between the observed temperatures and its historical average, in some cities served by CPFL Energia.

Temperature 1Q14 - CDD | Deviations to historical average

Source: Somar

One way to demonstrate how temperature can affect energy consumption is the analysis of CDD (cooling degree days) metrics. It is an index calculated from the sum, day by day, of the values that correspond to the positive difference between the average daily temperature and the threshold of 18 ºC. It takes into account that the average daily temperature above 18 °C triggers the need for energy consumption for cooling, increasing the consumption of refrigeration and air conditioning equipments present mainly in residential and commercial consumers.

As can be seen in the chart below, the degrees accumulated above the threshold stipulated by the methodology amounted to 715^oC in Campinas-SP and 466^oC in the city of Caxias do Sul-RS during the 1Q14. This volume is much higher than observed in the previous years, during the period from January to March, which highlights the atypicality of 2014.

Accumulated CDD in 1Q | ^oC

Source: Somar

The record high temperatures observed in 1Q14 demanded higher energy consumption in residences. This effect can also be seen in a breakdown of the factors that stimulate residential consumption by (i) economic effects, (ii) temperature effects and (iii) others³. In the chart below, we see a peak of consumption in early 2014, reflecting the weather conditions of the period.

 

Breakdown of consumption/residential consumers in CPFL Energia | (kWh/month)

This is because about 36% of the consumption of a residence is positively related to higher temperatures. The refrigerator and freezer are responsible for 23% of the average consumption of a typical residence in the concession area of CPFL Paulista and CPFL Piratininga; the fan and the air conditioner contribute with 13% of consumption. On the other hand, the shower (19% of consumption) tends to consume less power when the temperature rises. Among the other equipment - lighting (15%), television (10%) and others (20%) – there is no influence of temperature.

Residential consumption breakdown by equipment | CPFL Paulista and CPFL Piratininga (2013)

Source: CPFL Energia Ownership and Habits Survey and Procel

 

 

Based on these data, it was possible to estimate the average monthly consumption of the typical residence during the Summer and the Winter. The power consumption of the fan and/or air conditioning is about 41.2 kWh/month in Summer and nonexistent in Winter. The consumption of refrigerators and freezers reaches 64.7 kWh/month during the Summer, an amount about 2.3 times higher than that recorded by the same equipment in Winter (27.7 kWh/month). The shower, in turn, has a consumption 43% lower (32.3 kWh/month during Summer versus 56.7 kWh/month during Winter). Other equipment reach 98.8 kWh/month and do not vary depending on the season of the year.

Estimated monthly average consumption of electric equipment during Summer and Winter (kWh) | CPFL Paulista and CPFL Piratininga

Source: CPFL Energia Ownership and Habits Survey and Procel

3) ENERGY SALES

3.1) Sales within the Distributors’ Concession Area

In 1Q14, Sales within the concession area, achieved by the distribution segment, totaled15,507 GWh, an increase of 7.0%.

In 1Q14, sales to the captive market totaled 11,355 GWh, an increase of 9.0%. The energy volume, in GWh, consumed by free customers in the distributors’ concession areas, billed through the Distribution System Usage Tariff (TUSD), reached 4,153 GWh in 1Q14, an increase of 1.9%, reflecting the migration of customers from captive market to the free market.

Noteworthy in 1Q14, in the concession area:

·           Residential and commercial segments (28.8% and 17.5% of total sales, respectively): up by 13.5% and 11.3%, respectively, favored mainly by the high temperatures observed in CPFL Energia concession area, and the accumulated effects of the good performance of employment and income, with the consequent increase in retail sales and, in particular, sales of home appliances (for more details see chapter 2);

·           Industrial segment (39.1% of total sales): decrease of 0.4%, confirming the slower pace of recovery in the world economy and, consequently, the industrial production. It is worthy noting once more the good performance of RGE, where the industrial consumption grew 2.0%, and CPFL Sul Paulista, with an increase of 54.5% due to the expansion of a large consumer.

 

 

3.1.1) Sales by segment – Concession Area

3.1.2) Sales to the Captive Market

Note: The tables with captive market sales by distributor are attached to this report in item 13.11.

The significant increase in sales to the captive market is mainly due to the high temperatures recorded in areas served by CPFL Energia. Lower sales in the industrial segment, in turn, reflect the migration of customers to the free market and the poor performance of the segment, as mentioned before.

3.1.3) TUSD

 

 

3.2) Commercialization and Generation Sales – Excluding Related Parties

Considering pro forma amounts, for purposes of management analysis only, in which the generation assets are accounted for according to CPFL Energia’s stake in each project, commercialization and generation sales decreased by 8.7% to 3,645 GWh in 1Q14.

Notes: Excludes sales to related parties and in the CCEE. Take into account proportional consolidation of all generation assets (conventional and renewable). Take into account the provision adjustment of -13 GWh in1Q13.

This variation is due to:

(i)            lower sales in bilateral agreements and free consumers in the commercialization segment. Although the number of consumers in the portfolio has increased from 262 in 1Q13 to 283 in 1Q14, the consumption of these consumers have not shown significant growth on the relative stagnation of the industrial sector and the difficulties imposed by the adverse energy scenario. Likewise, the uncertainty regarding the regulatory environment inhibited negotiations between traders, especially short-term contracts, reducing the volume negotiated in bilateral agreements;

Partially off-set by:

(ii)           the increase in sales of CPFL Renováveis mainly due to the entry into operation of Atlântica and Campo dos Ventos II wind complexes and Coopcana and Alvorada biomass TPPs,  and the conclusion of the acquisition of Rosa dos Ventos wind farms.

4) 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 bellow. 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 March 31, 2014 and 2013, and December 31, 2013, 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.

Notes:

(1)     Due to changes in the accounting standards, these companies are treated as joint arrangements and 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. Their assets, liabilities and results are accounted for using the equity method of accounting;

(2)       Paulista Lajeado has a 7% stake in the installed capacity of Investco S.A..

Notes:

(1)     Former Chumpitaz Serviços S.A.;

(2)     Former CPFL Bio Anicuns S.A.;

(3)     Former CPFL Bio Itapaci S.A..

4.1) Consolidation of CPFL Renováveis Financial Statements

On March 31, 2014, CPFL Energia indirectly held 58.83% 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.

4.2) Presentation of adjusted figures

As of the 1Q14, the presentation of adjusted figures will be considering 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.

5) ECONOMIC-FINANCIAL PERFORMANCE

Notes:

(1)    Disregard construction revenues;

(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  considers, besides the items mentioned above, the regulatory assets and liabilities and excludes the non-recurring effects;

(4)    Adjusted Net Income  considers the regulatory assets and liabilities and excludes the non-recurring effects.

5.1) Operating Revenue

Disregarding 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) reached R$ 5,027 million in 1Q14, a increase of 6.7% (R$ 314 million). The Managerial Gross Operating Revenue was of R$ 5,106 million, a increase of 6.5% (R$ 312 million).

Net Operating revenue (IFRS disregarding the revenue from building the infrastructure of the concession) reached R$ 3,739 million in 1Q14, a increase of 8.2% (R$ 282 million). The Managerial Net Operating Revenue amounted to R$ 3,827 million, a increase of 8.8% (R$ 310 million).

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

·        Increase of R$ 250 million in the revenues from the Distribution segment (for more details, see item 12.1.1);

·        Increase in the revenue from the Conventional Generation segment, in the amount of R$ 50 million;

·          Increase in the revenue from CPFL Renováveis, in the amount of R$ 30 million;

 

 

Partially offset by:

·        Reduction in the revenue from the Commercialization and Services segment, in the amount of R$ 44 million;

5.2) 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$ 2,552 million in 1Q14, representing a reduction of 34.3% (R$ 651 million).

·      The cost of electric power purchased for resale in 1Q14 was R$ 2,354 million, representing an increase of 32.6% (R$ 581 million), due to the following effects:

         (i)   Increase in the cost of short-term energy purchase (R$ 1,218 million) due to the increase of 105.9% in the average purchase price and of 234.8% (1,634 GWh) in the quantity of the energy purchased. In part, this increase is caused by the purchase energy for Atlantica Wind Complex (R$ 26 million) and 3 SHPP´s (Três Saltos, Americana e Socorro) (R$ 39 million), from CPFL Renováveis, to meet their contractual obligations in the power purchase agreements and CPFL Geração by the exposure to the Energy Reallocatin Mechanism (“MRE”)  – Generation Scaling Factor (GSF)  - (R$ 22 million)  – Non-recurring; 

        (ii)   Increase in the cost of energy purchased through auction in the regulated environment and bilateral contracts (R$ 109 million), mainly caused by the increase of 6.0% in the average purchase price partially offset by the reduction of 6.9% (751 GWh) in the volume of purchased energy;

       (iii)   Increase in the cost of energy from Itaipu (R$ 47 million), mainly due to the 18.3% increase in the average purchase price partially offset by the reduction of 1.9% (50 GWh) in the volume of purchased energy;

      (iv)   Increase in the PROINFA cost (R$ 4 million), due to the 7.3% in the average purchase price;

Partially offset by:

       (v)   Resources from the CDE in the amount of R$ 738 million;

      (vi)   Increase in PIS and Cofins tax credits, generated from the energy purchase (R$ 60 million).

·         Charges for the use of the transmission and distribution system reached R$ 192 million in 1Q14, a 57.7% increase (R$ 70 million), due to the following factors:

          (i)        Reduction of 100% (R$ 266 million) in the resources from the CDE – Decree 7,945/13;

         (ii)        Increase of 15.3% in the basic network charges (R$ 20 million);

     Partially offset by:

        (iii)        Reduction of 84.9% in the system service usage charges – ESS (R$ 207 million);

       (iv)        Reduction of 18.1% in the charges of use of the distribution system (R$ 2 million)

        (v)        Increase in PIS and Cofins tax credits, generated from the tax charges (R$ 6 million);

Page 17 of 54

 

 

5.3) Operating Costs and Expenses

Operating costs and expenses (IFRS + Construction Cost) were R$ 938 million in 1Q14, registering a reduction of 8.7% (R$ 89 million), due to the following factors:

·      Reduction of 27.0% (R$ 70 million) in the cost of building the infrastructure of the concession (which does not affect the results because of the related revenue, in the same amount). This item, which reached R$ 189 million in 1Q14, has its counterpart in the “operating revenue”;

·         Reduction of 41.4% in the Private Pension Fund expenses (R$ 8 million).

·      The PMSO item, that reached R$ 458 million in 1Q14, compared to R$ 486 million in 1Q13, registering a decrease of 5.8% (R$ 28 million).

Partially offset by:

·         Depreciation and Amortization, which represented a increase of 6.8% (R$ 18 million), mainly due to an increase of R$ 16 million in CPFL Renováveis: (i) an increase of R$ 7 million for depreciation of assets that went into operation in 2013; and (ii) the increase from the review of the live cycle of the assets, with effect from R$ 5 million.

The table below lists the main variations in PMSO:

Thus, the Adjusted PMSO in 1Q14 would reached R$ 376 million, compared to R$ 367 million in 1Q13, a increase of 2.7% (R$ 10 million). This PMSO variation is explained below:

       (i)        Personnel expenses, that recorded a increase of 9.7% (R$ 15 million), mainly due to the 2013 Collective Bargaining Agreement, that readjusted the wages by 6.9% in the average;

 

 

      (ii)        Other operational costs/expenses, that registered a increase of 2.9% (R$ 2 million) and;

     (iii)        Out-sourced services expenses, which registered a decrease of 6.9% (R$ 8 million)

5.4) Regulatory Assets and Liabilities

The regulatory assets and liabilities, which are no longer registered, in accordance with the pronouncements issued by the Accounting Pronouncements Committee (CPC) and the international practices (IFRS), represented a net asset of R$ 181 million in 1Q14 and a net liability of R$ 147 million in 1Q13 (impact in EBITDA). The amounts related to the deferral of the regulatory assets and liabilities will be passed through the tariffs in the next tariff readjustment, through the financial components. The amounts related to the amortization are reflected in the tariffs of each period.

5.5) EBITDA

1Q14 IFRS EBITDA reached R$ 787 million, registering a decrease of 25.4% (R$ 268 million). The adjusted EBITDA in 1Q14 registered R$ 1,086 million, compared to R$ 1,081 million in 1Q13, a increase of 0.46%.

5.6) Financial Result

The 1Q14 net financial expense (IFRS) was of R$ 223 million, an increase of 55.2% (R$ 79 million) compared to the net financial expense of R$ 144 million reported in 1Q13.

The items explaining these changes are as follows:

·         Financial Revenues: increase of R$ 73 million, from R$ 229 million in 1Q14 to R$ 155 million in 1Q13, mainly due to the following factors:

            (i)        Increase in the income from financial investments (R$ 50 million), due to the higher cash balance and the increase in the CDI Interbank rate;

           (ii)        Financial Revenue in the Distribution Companies due to the adjustment for distributors’ financial asset  (CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Jaguari and CPFL Mococa) in 1Q14 (R$ 27 million – positive variation);

          (iii)        Increase in update of escrow deposits (R$ 6 million), due to the increase in the CDI Interbank rate;

         (iv)        Increase in restatement of tax credits (R$ 3 million)

Partially offset by:

          (v)        Reduction in arrears of interest and fines and monetary and exchange restatement (R$ 8 million).

         (vi)        Reduction in other financial revenues (R$ 5 million);

·         Financial Expenses: increase of 51.0% (R$ 152 million), from R$ 299 million in 1Q13 to R$ 452 million in 1Q14, mainly due to the following factors:

            (i)        Increase of debt of charge (R$ 95 million), mainly due to the increase in the CDI Interbank rate;

           (ii)        Increase in monetary and exchange variations (R$ 52 million),

 

 

mainly due to the non-recurring effect of R$ 26 million related to the mark to market of the funding of financing (through Law No. 4131/62);

          (iii)        Increase in Other financial expenses (R$ 6 million);

5.7) Net Income

Net income (IFRS) in 1Q14 was R$ 174 million. Adjusted Net Income in 1Q14 registered R$ 396 million, a reduction of 7.9%. This result reflects mainly: (i) full implementation of the 3^rd cycle of tariff review in the distribution companies CPFL Paulista and RGE and (ii) higher financial expenses due to the increase in the CDI Interbank rate.

6) DEBT

6.1) Financial Debt (Including Hedge)

Note: (*) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA.

CPFL Energia’s financial debt (including hedge), in IFRS criteria, reached R$ 17,511 million in 1Q14, increase of R$ 1,817 million, or 11.6%, compared to 1Q13. This increase in net debt is mainly a reflection of:

·         the increase in indebtedness due to the funding, net of amortizations, in the amount of R$ 1,144 million, in CPFL Energia (Holding) and the other Group companies;

·         the increase in the other charges, fundings and monetary and exchange rate updates (net of hedge) in the period, in the amount of R$ 673 million.

The main contributing funding and amortizations to the variation in the balance of financial debt described above were:

·         CPFL Renováveis: funding (BNDES and other financial institutions), net of amortizations, in the amount of R$ 316 million:

+      Funding of BNDES financing, in the amount of R$ 736 million;

+      Funding of financial institutions financing, in the amount of R$ 463 million;

-      Amortizations of BNDES financing, in the amount of R$ 352 million;

-      Amortization of financial institutions financing, in the amount of R$ 531 million.

 

 

·         Group’s Distributors: amortizations (BNDES and other financial institutions), net of funding, totaling R$ 737 million:

+      Funding of BNDES financing for CPFL Paulista (R$ 188 million), CPFL Piratininga (R$ 60 million), RGE (R$ 103 million), CPFL Santa Cruz (R$ 1 million) and CPFL Jaguariúna (R$ 4 million);

+      Funding of financial institutions financing for CPFL Paulista (R$ 1,106 million), CPFL Piratininga (R$ 413 million), RGE (R$ 205 million), CPFL Santa Cruz (R$ 53 million) and CPFL Jaguariúna (R$ 96 million);

-      Amortizations of BNDES financing for CPFL Paulista (R$ 148 million), CPFL Piratininga (R$ 83 million), RGE (R$ 73 million), CPFL Santa Cruz (R$ 24 million) and CPFL Jaguariúna (R$ 26 million);

-      Amortizations of financial institutions financing for CPFL Paulista (R$ 1,105 million), CPFL Piratininga (R$ 488 million), RGE (R$ 125 million), CPFL Santa Cruz (R$ 12 million) and CPFL Jaguariúna (R$ 42 million);

-      Amortizations of the debentures principal of CPFL Paulista’s (3rd Issuance of R$ 484 million), CPFL Piratininga’s (5rd Issuance of R$ 160 million) and RGE (3rd Issuance of R$ 197 million).

·         CPFL Geração and CERAN: funding, net of amortizations, totaling R$ 1,612 million:

+      Funding of financial institutions financing for CPFL Geração (R$ 693 million);

+      Debentures issuance by CPFL Geração (5^th Issuance of R$ 1,092 million - due to corporate restructuring in CPFL Geração and CPFL Brasil - and 6^th Issuance of R$ 460 million);

-      Amortizations of BNDES financing for CPFL Geração (R$ 7 million) and CERAN (R$ 14 million);

-      Amortizations of financial institutions financing for CPFL Geração (R$ 612 million).

·         CPFL Brasil and CPFL Serviços: amortizations, net of funding, totaling R$ 1,083 million:

+      Funding of BNDES financing for CPFL Serviços (R$ 23 million);

-      Amortizations of BNDES financing for CPFL Brasil (R$ 9 million) and CPFL Serviços (R$ 3 million);

-      Amortizations of financial institutions financing for CPFL Brasil (R$ 1 million) and CPFL Serviços (R$ 2 million);

-      Amortizations of the debentures principal of CPFL Brasil (2^nd Issuance of R$ 1,092 million - due to corporate restructuring in CPFL Brasil and CPFL Geração). 

·         CPFL Telecom and CPFL Transmissão Piracicaba: funding, net of amortizations, totaling R$ 46 million:

+      Funding of BNDES financing for CPFL Transmissão Piracicaba (R$ 8 million);

+      Funding of financial institutions financing for CPFL Telecom (R$ 38 million).

·         CPFL Energia (Holding): funding, net of amortizations, totaling R$ 990 million:

+      Debentures issuance by CPFL Energia (4^th Issuance of R$ 1,290 million);

-      Amortization of the principal of CPFL Energia’s debentures (3^rd Issuance of R$ 300 million).

 

Of the total indebtedness of R$ 17,511 million in 1Q14, R$ 15,826 million (90.4%) are considered long term and R$ 1,684 million (9.6%) are considered short term. In 1Q13, of the total of R$ 15,693 million, R$ 13,764 million (87.7%) are considered long term and R$ 1,930 million (12.3%) are considered short term.

6.2) Debt Amortization Schedule

Note: Includes hedge (net negative effect of R$ 186 million) and disregard financial charges (ST = R$ 298 million; LT = R$ 95 million), MTM (R$ 90 million) and debt raising and debenture issuance costs (net negative effect of R$ 59 million); In 2015, amortization is from April/2015.

The cash position at the end of 1Q14 has coverage ratio of 3,1x the amortizations of the next 12 months, enough to honor all amortization commitments until around de beginning of 2016. The average amortization term, calculated by this schedule, is 4.03 years.

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6.3) Total Debt (Financial Debt + Hedge + Debt with the Private Pension Fund)

Note: (*) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA.

Total debt in IFRS criteria, comprising financial debt, hedge (asset/liability) and debt with the private pension fund, amounted to R$ 17,917 million in 1Q14, growth of 8.1%. The nominal average cost of debt went from 8.4% p.a. in 1Q13 to 9.1% p.a. in 1Q14, due to the increase in the CDI interbank rate (from 6.8% to 8.2%), among other reasons. (accrued rates in the last 12 months)

Debt Profile – IFRS – 1Q13

As a result of the funding operations and amortizations, considering the indexation after hedge, there was an increase in the BNDES-TJLP-indexed portion (from 22.1%, in 1Q13, to 22.2%, in 1Q14) and prefixed-PSI (from 6.9%, in 1Q13, to 7.2%, in 1Q14), and CDI-pegged portion (from 65.0%, in 1Q13, to 67.8%, in 1Q14) and a decrease in the portion tied to the IGP-M/IGP-DI (from 5.8%, in 1Q13, to 2.7%, in 1Q14).

The foreign-currency debt would have come to 15.8% of the total, if banking hedge operations had been excluded. Considering the contracted swap operations, which convert the indexation of debt in foreign-currency to the CDI, the effective foreign-currency debt is 0.01% (which has natural hedge).

The portion of the debt tied to the IGP-M/IGP-DI is related mostly to the debt with the private pension fund.

Note: (*) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA.

6.4) Net Debt and Leverage

Note: (*) Considering proportional consolidation of CPFL Renováveis, CERAN, BAESA, ENERCAN, Foz do Chapecó and EPASA.

In 1Q14, net debt totaled R$ 13,268 million, an increase of 2.7% or R$ 346 million, compared to net debt position at the end of 1Q13 in the amount of R$ 12,921 million. This increase is explained on the following factors:

·         Increase of R$ 1,817 million in the gross indebtedness, as described in the item 6.1;

·         Increase of R$ 1,471 million in the balance of the cash, from R$ 2,772 million in 1Q13 to R$ 4,243 million in 1Q14, mainly explained by:

          (i)        Cash generation of operating activities in the period: +R$ 2,018 million;

         (ii)        Investments in the period: -R$ 1,443 million;

        (iii)        Net funding in the period: +R$ 1,489 million;

        (iv)        Payment of dividends: -R$ 844 million;

         (v)        Public Offering of Shares of Subsidiary (CPFL Renováveis): +R$ 329 million;

        (vi)        Other movements: -R$ 78 million.

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. As a result, adjusted net debt totaled R$ 12,783 million and adjusted EBITDA reached R$ 3,570 million, and the adjusted Net Debt / adjusted EBITDA at the end of 1Q14 reached 3.58x. 

7) INVESTMENTS

In 1Q14, R$ 240 million were invested in business maintenance and expansion, of which R$ 170 million in distribution, R$ 42.4 million in generation (R$ 42.2 million of CPFL Renováveis and R$ 0.2 million of conventional generation) and R$ 27 million in commercialization and services.

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

         (i)   Distribution:  strengthening and expanding the electricity system to keep pace with market growth, both in terms of energy sales and numbers of customers. Other allocations included electricity system maintenance and improvements, operational infrastructure, the upgrading of management and operational support systems, customer help services and research and development programs, among others;

        (ii)   Generation: chiefly focused on Atlântica Wind Complexes, project that went into operation in March 24, 2014, and Macacos I, project completed in April 2014, which await for ANEEL’s dispatch, and Campo dos Ventos, São Benedito and Pedra Cheirosa Wind Complexes, projects still under construction.

Investments Projected by the Group for the Next 5 Years

IFRS – 100% CPFL Renováveis and CERAN (R$ million)

Note: (*) Considers 100% of CPFL Renováveis and CERAN.

Considering the proportional stake in the generation projects, on 1Q14, R$ 30.4 million were invested in generation (R$ 24.8 million of CPFL Renováveis and R$ 5.6 million of conventional generation).

Investments Projected by the Group for the Next 5 Years

Pro-forma – Proportional Stake in the Generation Projects (R$ million)

Note: (*) Considers the proportional stake in the generation projects.

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8) DIVIDENDS

On May 08, 2014, dividends for the 2H13 were paid to holders of common shares traded on the BM&FBovespa – Bolsa de Valores, Mercadorias e Futuros S.A. (BM&FBOVESPA). The total declared amount was R$ 568 million, corresponding to R$ 0.590062200 per share.

Adding the amount of R$ 363 million, related to the 1H13 (paid in October 2013), the total declared amount for the full year of 2013 was R$ 931 million, corresponding to R$ 0.967344326 per share.

Note: (1) Based on the average of the closing quotations in each half year period.

The 2H13 dividend yield, calculated on the average of the closing quotations in the period (R$ 19.80 per share) is 3.0% (4.8% in the last 12 months).

Dividend Distribution – R$ Million

The declared amounts are in line with the Company’s dividend policy, which states that shareholders will receive at least 50% of adjusted half-yearly net income as dividends and/or interest on equity (IOE). CPFL Energia has presented a payout ratio close to 95% since its IPO, respecting the constitution of the legal reserve of 5%.

9) STOCK MARKET

9.1) Share Performance

CPFL Energia, which has a current free float of 30.5% (up to March 31, 2014), is listed on both the BM&FBOVESPA (Novo Mercado) and the NYSE (ADR Level III), segments with the highest levels of corporate governace.

 

 

The shares closed the period priced at R$ 18.60 per share and US$ 16.33 per ADR, respectively (closing price on 03/31/2014).

In 1Q14, the shares depreciated 2.6% on the BM&FBOVESPA and valued 1.1% on the NYSE.

In the last twelve months, the shares depreciated 8.1% on the BM&FBOVESPA and 18.7% on the NYSE.

9.2) Average Daily Volume

The daily trading volume in 1Q14 averaged R$ 44.5 million, of which R$ 26.1 million on the BM&FBOVESPA and R$ 18.4 million on the NYSE, 15.6% up compared to 1Q13. The number of trades on the BM&FBOVESPA increased by 59.9%, rising from a daily average of 3,935, in 1Q13, to 6,292, in 1Q14.

9.3) Ratings

In March 2014, Fitch issued a report reaffirming its credit rating for CPFL Energia. Thus, the Company maintains AA + national scale rating with a stable outlook.

The following table shows the evolution of CPFL Energia’s corporate ratings:

       Note: Close-of-period positions.

10) CORPORATE GOVERNANCE

CPFL Energia’s corporate governance model is based on four basic principles: transparency, equity, accountability and corporate responsibility, applied by all the companies in the group.

CPFL Energia is listed on the segments of the highest governance level - the Novo Mercado of the BM&FBovespa and Level III ADRs on the New York Stock Exchange (NYSE). CPFL Energia’s capital stock is composed exclusively of common shares, and ensures 100% tag-along rights in the case of disposal of control.

The Board of Directors’ duties include defining the overall business guidelines and electing the Board of Executive Officers, among other responsibilities determined by the law and the Company’s Bylaws. Its rules were defined in the Board of Directors’ internal rules document. The Board is composed of one independent member and six members nominated by the controlling shareholders and all of them carry a one-year term of office reelection being admitted. It normally meets once a month but may be convened whenever necessary. The Chairman and the Vice-Chairman are elected among the Board of Directors’ members and no member may serve on the Board of Executive Officers.

The Board of Directors constituted three committees and defined their competences in a sole Internal Rules. They are: the Human Resources Committee, Related Parties Committee and Management Processes Committee. Whenever necessary, ad hoc commissions are installed to advise the Board on such specific issues as: corporate governance, strategy, budgets, energy purchase, new operations and financial policies.

CPFL Energia maintains a permanent Fiscal Council comprising five members who also carry out the attributes of the Audit Committee foreseen in the Sarbanes Oxley Act and pursuant to the rules of the Securities and Exchange Commission (SEC). The Fiscal Council rules were defined in its Internal Rules document and in the Fiscal Council Guide.

The Board of Executive Officers is comprised of six Executive Officers, all with a two-year term of office, with reelection admitted. The Executive Officers represent the Company and manage its business in accordance with the lines of direction defined by the Board of Directors. The Chief Executive Officer is responsible for nominating the other statutory Executive Officers.

The guidelines and set of documents related to Corporate Governance are available at the Investor Relations website www.cpfl.com.br/ir.

11) CURRENT SHAREHOLDERS STRUCTURE – 03/31/2014

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

Notes:

(1) Controlling shareholders;

(2) Includes the 0.1% stake of Camargo Corrêa S.A.;

(3) Includes the 0,2% stake of Petros e Sistel pension funds;

(4) 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.

12) PERFORMANCE OF THE BUSINESS SEGMENTS

12.1) Distribution Segment

12.1.1) 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 considers, besides the items mentioned above, the regulatory assets and liabilities and excludes the non-recurring effects;

(4)    Adjusted Net Income considers the regulatory assets and liabilities and excludes the non-recurring effects;

(5)    The distributors’ financial performance tables are attached to this report in item 13.9.

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 amounted to 4,108 million, an increase of 7.2% (R$ 278 million).

The upturn in gross operating revenue was mainly caused by the following factors:

·        Increase of 9.0% in the sales volume to the captive market, in the amount of R$ 308 million (market + mix);

·        Increase of R$ 81 million in the resources from the CDE;

·        Increase of R$ 1 million in Electricity Sales to Distributors;

·        Increase of R$ 55 million in Other Revenues;

Partially offset by:

·        Negative average tariff adjustment in the distribution companies for the period between 1Q13 and 1Q14, in the amount of R$ 139 million, due to the tariff reviews and readjustments and the effects of PM 579/2012 (converted into Law 12,783 in January 2013), through which ANEEL approved the result of the extraordinary tariff review ("RTE") of 2013, applied to the consumption as of January 24, 2013. The electric energy quotas of the generating plants that renewed their concession contracts were incorporated in this extraordinary review. The total of energy coming from these plants was divided into quotas for the distributors. The effects of extinctions of RGR and CCC, and the reductions of CDE and transmission costs were also computed;

·        Reduction of R$ 28 million in the gross revenue of TUSD from free customers. 

Deductions from the gross operating revenue were R$ 1,201 million, representing an increase of 2.4% (R$ 28 million), due to the following increases:

            (i)        of 2.4% in ICMS tax (R$ 17 million);

           (ii)        of 8.7% in PIS and COFINS taxes (R$ 28 million);

          (iii)        of 30.0% in the CDE sector charge (R$ 12 million);

         (iv)        of 4.5% in the R&D and Energy Efficiency Program (R$ 1 million);

          (v)        of 16.1% in Proinfa (R$ 3 million);

These increases were partially offset:

         (vi)        by the reduction of 100.0% in the CCC sector charge (R$ 34 million).

The increase in PIS and COFINS was impacted by non-recurring effect of R$ 13 million related to compensation for the difference in the effective and real rates of the two taxes. Excluding this effect, deductions from the gross revenue were R$ 1,188 million, representing an increase of 1.2% (R$ 15 million).

Net operating revenue (IFRS) reached R$ 2,907 million in 1Q14, representing an increase of 9.4% (R$ 250 million). Adjusted net operating revenue totalized R$ 2,929 million in 1Q14, an increase of 7.3%.

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 1Q14, representing an increase of 47.6% (R$ 716 million):

·         The cost of electric power purchased for resale in 1Q14 was R$ 2,045 million, representing an increase of 46.5% (R$ 649 million), due to the following effects:

          (i)        Increase of 695.8% in the cost of energy purchased in the short term (R$ 1,178 million), due to the increases of 240.0% in the volume of purchased energy (1,390 GWh) and of 134.1% in the average purchase price; 

         (ii)        Increase of 16.0% in the cost of energy from Itaipu (R$ 47 million), mainly due to the 18.2% increase in the average purchase price, partially offset by the decrease of 1.8% (47 GWh) in the volume of purchased energy;

        (iii)        Increase of 6.9% in the PROINFA cost (R$ 4 million), due to the increase of 7.3% in the average purchase price, partially offset by the decrease of 0.4% (1 GWh) in the volume of purchased energy;

        (iv)        Increase of 15.5% in the cost of energy purchased in the regulated environment (R$ 223 million), caused by the increase of 19.1% in the average purchase price, partially offset by the reduction of 3.0% (257 GWh) in the volume of purchased energy;

Partially offset by: 

         (v)        Increase of 170.9% (R$ 738 million) in the resources from the CDE (cost reducer);

        (vi)        Increase of 46.5% (R$ 66 million) in PIS and COFINS tax credits (cost reducer), generated from the energy purchase.

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·      Charges for the use of the transmission and distribution system reached R$ 177 million in 1Q14, a 61.7% increase (R$ 67 million), due to the following factors:

            (i)        Reduction of 100.0% (R$ 266 million) in the resources from the CDE (cost reducer);

           (ii)        Increase of 14.9% in the basic network charges (R$ 17 million);

Partially offset by:

          (iii)        Reduction of 85.0% in the system service usage charges – ESS (R$ 207 million);

         (iv)        Reduction of 33.2% in the charges for the use of the distribution system (R$ 2 million);

          (v)        Reduction of 61.7% in PIS and Cofins tax credits (cost reducer), generated from the charges (R$ 7 million).

The increase in charges for the use of the transmission and distribution system was impacted by non-recurring  effect of R$ 14 million related to relocation of costs with basic network losses basic network established by the CCEE.

Operating Costs and Expenses

Operating costs and expenses were R$ 683 million in 1Q14, registering a reduction of 13.0% (R$ 102 million), due to the following factors:

·         Reduction of 28.6% (R$ 74 million) in the cost of building the infrastructure of the concession (which does not affect the results because of the related revenue, in the same amount). This item, which reached R$ 185 million in 1Q14, has its counterpart in the “operating revenue”;

·         Reduction of 40.8% (R$ 8 million) in the Private Pension Fund item, due to the expected estimated impact on actuarial assets and liabilities, according to CVM Deliberations Nos. 371/00 and 600/09, as shown in the Actuarial Report;

·         The PMSO item, that reached R$ 373 million in 1Q14, compared to R$ 397 million in 1Q13, registering a reduction of 6.3% (R$ 25 million), mainly due to the following factor (that need to be excluded for comparison purposes with the 1Q13):

            (i)        Non-recurring  increase of 1Q13 in the legal and judicial expenses and indemnities (R$ 73 million);

           (ii)        Other adjustments related to the provision for contingencies of R$ 24 million in 1Q14.

Excluding this effect, PMSO for 1Q14 would have totaled R$ 349 million, compared to R$ 324 million in 1Q13, an increase of 7.7% (R$ 25 million). 

The principal factors explaining the variation in PMSO, following the exclusion of the effect already mentioned were: 

            (i)        Personnel expenses, which reported an increase of 8.5% (R$ 11 million), mainly due to the 2013 Collective Bargaining Agreement, that readjusted the wages by 6.9% in the average, and lower investments during the quarter, reducing personnel costs capitalization; 

           (ii)        Out-sourced services expenses, which registered an increase of 7.0% (R$ 7 million):

ü  In CPFL Paulista (R$ 4 million) and in CPFL Piratininga (R$ 2 million), mainly due to the increase in the expenses with hardware/software maintenance;

          (iii)        Other operating costs/expenses, which registered an increase of 9.5% (R$ 7 million).

Partially offset by:

·         Depreciation and Amortization, which represented a net increase of 4.4% (R$ 5 million).

 

 

Regulatory Assets and Liabilities

The regulatory assets and liabilities, which are no longer registered, in accordance with the pronouncements issued by the Accounting Pronouncements Committee (CPC) and the international practices (IFRS), represented net receivables of R$ 181 million in 1Q14 and net payables of R$ 147 million in 1Q13 (impact in EBITDA). The amounts related to the deferral of the regulatory assets and liabilities will be passed through the tariffs in the next tariff readjustment, through the financial components. The amounts related to the amortization are reflected in the tariffs of each period.

EBITDA

EBITDA (IFRS) reached R$ 300 million in 1Q14, registering a reduction of 59.1% (R$ 433 million).

Considering the regulatory assets and liabilities and excluding the non-recurring effects and other adjustments, the Adjusted EBITDA totaled R$ 532 million in 1Q14 compared to R$ 660 million in 1Q13, a reduction of 19.4% (R$ 128 million).

Financial Result

The 1Q14 net financial expense was R$ 57 million, compared to the net financial expense of R$ 18 million in 1Q13 (R$ 39 million).

The items explaining these changes are as follows:

  (i)       Financial Revenues: increase of 28.8% (R$ 36 million), from R$ 125 million in 1Q13 to R$ 161 million in 1Q14, mainly due to the following factors:

ü  Increase in the income from financial investments (R$ 12 million), due to the increase in the CDI Interbank rate;

ü  Increase in the tax credits update (R$ 4 million);

ü  Increase in the judicial deposits update (R$ 6 million);

ü  Increase in the Financial Revenue in the Distribution Companies due to the adjustment for distibutors’ financial asset (R$ 27 million) (CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Jaguari and CPFL Mococa);

Partially offset by: 

ü  Reduction in the accruals and delinquent fines (R$ 5 million);

ü  Reduction in the monetary and foreign exchange update (R$ 3 million);

ü  Reduction of the discount in the ICMS tax credit (R$ 4 million).

 (ii)       Financial Expenses: increase of 52.1% (R$ 75 million), from R$ 143 million in 1Q13 to R$ 218 million in 1Q14, mainly due to the following factors:

ü  Increase in the debt charges (R$ 14 million), due to the increase in the CDI Interbank rate;

ü  Increase in the monetary and foreign exchange update (R$ 50 million), mainly due to the non-recurring effect of R$ 26 million related to the mark to market of the funding of financing (through Law No. 4131/62);

ü  Others (R$ 11 million).

 

Net Income

Net income (IFRS) in 1Q14 was R$ 77 million, registering a reduction of 80.6% (R$ 321 million).

Considering the regulatory assets and liabilities and excluding the non-recurring effects and other adjustments, the Adjusted Net Income totaled R$ 251 million in 1Q14, compared to R$ 351 million in 1Q13, a reduction of 28.5% (R$ 100 million).

12.1.2) Annual Tariff Adjustment

CPFL Piratininga

Aneel Ratifying Resolution No. 1,638 of October 22, 2013 readjusted electric energy tariffs of CPFL Piratininga by 7.42%, being 9.69% related to the Tariff Readjustment and -2.27% as financial components outside the Tariff Readjustment, corresponding to an average effect of 6.91% on consumer billings. The calculation took into account the change in the Tariff Readjustment referring to 2012, from 8.79% to 8.08%. The new tariffs came into force on October 23, 2013.

CPFL Santa Cruz, CPFL Leste Paulista, CPFL Jaguari, CPFL Sul Paulista and CPFL Mococa

On February 03, 2014, Aneel published in the Federal Official Gazette, the 2014 Annual Tariff Readjustment Indexes for the CPFL Santa Cruz, CPFL Leste Paulista, CPFL Jaguari, CPFL Sul Paulista and CPFL Mococa distributors, as shown in the table below:

These adjustments were applied to the tariffs set in Extraordinary Tariff Review mentioned in the

item "12.1.4." The new tariffs came into force on February 03, 2013.

CPFL Paulista

Aneel Ratifying Resolution No. 1,701 of April 07, 2014 readjusted electric energy tariffs of CPFL Paulista by 17.18%, being 14.56% related to the Tariff Readjustment and 2.62% as financial components outside the Tariff Readjustment, corresponding to an average effect of 6.91% on consumer billings. The calculation took into account the change in the Periodic Tariff Review referring to 2013, from 4.53% to 4.67%. The new tariffs came into force on April 08, 2013.

12.1.3) 2013 Extraordinary Tariff Adjustment (RTE)

As established by Law No. 12,783/2013, all distribution companies have adopted new electric energy tariffs from January 24, 2013, in order to comprise the effects promoted by the renewal of concessions for generation and transmission assets and the reduction of sector charges over energy prices.

The extraordinary tariff adjustments are stated per distributor in the following table:

12.1.4) Operating Performance of the Distribution Segment

The Group continues its strategy of encouraging the dissemination and sharing of best management and operational practices among the distribution companies, with the intention of raising operating efficiency and improving the quality of client service.

Below we are presenting the results achieved by the distribution companies with regard to the main indicators that measure the quality and reliability of their supply of electric energy. The DEC index (System Average Interruption Duration Index) measures the average duration, in hours, of interruption per consumer per year. The FEC index (System Average Interruption Frequency Index) measures the average number of interruptions per consumer per year.