UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2011
Commission File Number 1-32297
CPFL ENERGIA S.A.
(Exact name of registrant as specified in its charter)
CPFL ENERGY INCORPORATED | The Federative Republic of Brazil |
(Translation of registrant’s name into English) | (Jurisdiction of incorporation or organization) |
Rua Gomes de Carvalho, 1,510, 14th floor - Suite 142
CEP 04547-005 Vila Olímpia - São Paulo, São Paulo
Federative Republic of Brazil
+55 11 3841-8507
(Address of principal executive offices)
Lorival Nogueira Luz Júnior
+55 19 3756 8704 – lorival.luz@cpfl.com.br
Rodovia Campinas Mogi Mirim, km 2,5 – Campinas, São Paulo - 13088 900
Federative Republic of Brazil
(Name, telephone, e-mail and/or facsimile
number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: | Name of each exchange on which registered: |
Common Shares, without par value* | New York Stock Exchange |
*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of December 31, 2011, there were 962,274,260 common shares, without par value, outstanding
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes T No £
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
Yes £ No T
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes £ No £ N/A T
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non‑accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer T Accelerated Filer £ Non‑accelerated Filer £
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP £ IFRS T Other £
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17£ Item 18 £
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).
Yes £ No T
ii
Table of Contents
Page
1 | ||
Certain Terms and Conventions | 1 | |
ITEM 1. | ||
ITEM 2. | ||
ITEM 3. | ||
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| Exchange Rates | 6 |
| RISK FACTORS | 7 |
| Risks Relating to Our Operations and the Brazilian Power Industry | 7 |
| Risks Relating to Brazil | 12 |
| Risks Relating to the ADSs and Our Common Shares | 14 |
ITEM 4. | Information on the Company | 15 |
| Overview | 15 |
| Our Strategy | 18 |
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| Tariffs for the Use of the Distribution and Transmission Systems | |
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| Energy Reallocation Mechanism | 52 |
ITEM 4B. | Unresolved Staff Comments | 52 |
ITEM 5. | Operating and Financial Review and Prospects | 53 |
ITEM 6. | Directors, Senior Management and Employees | 77 |
ITEM 7. | Major Shareholders and Related Party Transactions | 85 |
ITEM 8. | Financial Information | 88 |
ITEM 9. | The Offer and Listing | 89 |
ITEM 10. | Additional Information | 91 |
| Material Contracts | 98 |
ITEM 11. | ||
ITEM 12. | Description of Securities Other than Equity Securities | |
| Reimbursement of Fees and Direct and Indirect Payments by the Depositary | 109 |
ITEM 13. | Defaults, Dividend Arrearages and Delinquencies | 109 |
ITEM 14. | Material Modifications to the Rights of Security Holders and Use Of Proceeds | 109 |
ITEM 15. | Controls and Procedures | 109 |
| Internal Control over Financial Reporting | 110 |
ITEM 16. | 110 |
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ITEM 16A. | Audit Committee Financial Expert | 110 |
ITEM 16B. | Code of Ethics | 111 |
iii
iv
FORWARD-LOOKING STATEMENTS
This annual report contains information that constitutes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words, such as “believe,” “may,” “aim,” “estimate,” “continue,” “anticipate,” “will,” “intend,” “expect” and “potential,” among others. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Those statements appear in a number of places in this annual report, principally under the captions “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements. These factors include:
· general economic, political, demographic and business conditions in Brazil and particularly in the markets we serve;
· changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to environmental, tax and employment matters;
· electricity shortages;
· changes in tariffs;
· our inability to generate electricity due to water shortages, transmission outages, operational or technical problems or physical damages to our facilities;
· potential disruption or interruption of our services;
· inflation and exchange rate variation;
· the early termination of our concessions to operate our facilities;
· increased competition in the power industry markets in which we operate;
· our inability to implement our capital expenditure plan, including our inability to arrange financing when required and on reasonable terms;
· changes in consumer demand;
· existing and future governmental regulations relating to the power industry; and
· the risk factors discussed under “Item 3. Key Information—Risk Factors,” beginning on page 7.
Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to revise them after we distribute this annual report because of new information, future events or other factors. In light of these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.
CERTAIN TERMS AND CONVENTIONS
A glossary of electricity industry terms is included in this annual report, beginning on page 113.
1
PRESENTATION OF FINANCIAL INFORMATION
We maintain our books and records inreais. We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). Our consolidated annual financial statements as of and for the year ended December 31, 2010 were our first financial statements prepared in accordance with IFRS. IFRS 1 – “First‑time Adoption of International Financial Reporting Standards” has been applied in preparing our financial statements as of and for the year ended December 31, 2010 and for the year ended December 31, 2009 for comparative purposes. Until December 31, 2009, our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil (“Brazilian Accounting Principles”), and reconciled to generally accepted accounting principles in the United States.
Brazilian Accounting Principles differ in certain significant respects from IFRS. When preparing our 2010 consolidated financial statements under IFRS, management amended certain accounting methods in the Brazilian Accounting Principles financial statements to comply with IFRS, as issued by the IASB. The reconciliations and descriptions of the effect of the transition from Brazilian Accounting Principles to IFRS are presented in note 5 to our audited consolidated financial statements included in our 2010 annual report. Following our adoption of IFRS, as issued by the IASB, we are no longer required to reconcile our financial statements prepared in accordance with IFRS to generally accepted accounting principles in the United States.
We have translated certain of thereal amounts contained in this annual report into U.S. dollars. The rate used to translate such amounts was R$1.876 to US$1.00, which was the rate for the selling of U.S. dollars in effect as of December 31, 2011 as reported by the Central Bank of Brazil (the “Central Bank”). The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of investors and should not be construed as implying that thereal amounts represent, or could have been or could be converted into, U.S. dollars at the above rate. See “Item 3. Key Information—Exchange Rates” for more information regarding the Brazilian foreign exchange rate system and historical data on the exchange rate betweenreais and U.S. dollars.
ITEM 1. Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM 2. Offer Statistics and Expected Timetable
Not applicable.
ITEM 3. Key Information
Selected Financial and Operating Data
The tables below contain a summary of our financial data as of and for each of the periods indicated. The summary of our financial data was derived from our consolidated annual financial statements, prepared in accordance with IFRS, as issued by the IASB. You should read this selected financial data in conjunction with our consolidated financial statements and the related notes included in this annual report.
The selected consolidated financial information as of and for the years ended December 31, 2009, 2010 and 2011, prepared in accordance with IFRS, as issued by the IASB, has been derived from our audited consolidated financial statements, which appear elsewhere in this annual report.
The following tables present our selected financial data as of and for each of the periods indicated.
2
STATEMENT OF OPERATIONS DATA
| For the year ended December 31, | |||
| 2011 | 2011 | 2010 | 2009 |
| US$ | R$ | R$ | R$ |
| (in millions, except per share and per ADS data) | |||
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Net operating revenue | 6,805 | 12,764 | 12,024 | 11,358 |
Cost of electric energy services: |
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Cost of electric energy | 3,316 | 6,221 | 6,222 | 6,015 |
Operating cost | 617 | 1,158 | 1,068 | 1,054 |
Services rendered to third parties | 607 | 1,139 | 1,051 | 621 |
Gross operating income | 2,265 | 4,246 | 3,683 | 3,668 |
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Operating expenses: |
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Sales expenses | 194 | 364 | 301 | 255 |
General and administrative expenses | 328 | 615 | 443 | 403 |
Other operating expense | 115 | 216 | 200 | 227 |
Income from electric energy service | 1,628 | 3,051 | 2,739 | 2,783 |
Financial income (expense): |
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Income | 372 | 698 | 483 | 351 |
Expense | (739) | (1,387) | (837) | (661) |
Net financial income (expenses) | (367) | (689) | (354) | (310) |
Income before taxes | 1,261 | 2,362 | 2,385 | 2,473 |
Social contribution | (112) | (210) | (221) | (208) |
Income tax | (304) | (570) | (604) | (576) |
Total taxes | (416) | (780) | (825) | (784) |
Net income | 845 | 1,582 | 1,560 | 1,689 |
Net income attributable to controlling shareholders | 816 | 1,530 | 1,538 | 1,657 |
Net income attributable to non controlling shareholders | 28 | 52 | 22 | 32 |
Net income per share(1) | 0.85 | 1.59 | 1.60 | 1.73 |
Net income per ADS | 1.70 | 3.18 | 4.80 | 5.18 |
Dividends(2) | 803 | 1,506 | 1,260 | 1,227 |
Weighted average of number of common shares (in million) | 962 | 962 | 962 | 960 |
Dividends per share(1)(2) | 0.83 | 1.57 | 1.31 | 1.28 |
Dividends per ADS(2) | 1.67 | 3.13 | 2.62 | 2.56 |
3
BALANCE SHEET DATA
| For the year ended December 31, | |||
| 2011 | 2011 | 2010 | 2009 |
| US$ | R$ | R$ | R$ |
| (in millions, except per share and per ADS data) | |||
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Current assets: |
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Cash and cash equivalents | 1,439 | 2,700 | 1,563 | 1,487 |
Consumers, concessionaires and licensees | 999 | 1,874 | 1,816 | 1,753 |
Other current assets | 421 | 789 | 519 | 409 |
Total current assets | 2,859 | 5,363 | 3,898 | 3,649 |
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Noncurrent assets: |
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Accounts receivable | 97 | 182 | 196 | 225 |
Financial asset of concession | 734 | 1,377 | 935 | 674 |
Property, plant and equipment | 4,421 | 8,292 | 5,786 | 5,213 |
Intangible Assets | 4,759 | 8,927 | 6,585 | 6,063 |
Other noncurrent assets | 1,744 | 3,272 | 2,657 | 2,666 |
Total noncurrent assets | 11,755 | 22,050 | 16,159 | 14,841 |
Total assets | 14,614 | 27,413 | 20,057 | 18,490 |
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Current liabilities: |
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Short-term debt(3) | 881 | 1,653 | 2,251 | 1,364 |
Other current liabilities | 1,517 | 2,846 | 2,177 | 2,059 |
Total current liabilities | 2,398 | 4,499 | 4,428 | 3,423 |
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Noncurrent liabilities: |
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Long-term debt(3) | 6,373 | 11,955 | 7,167 | 6,548 |
Other long-term liabilities | 1,283 | 2,406 | 1,712 | 1,983 |
Noncurrent liabilities | 7,656 | 14,361 | 8,879 | 8,531 |
Noncontrolling interest | 792 | 1,485 | 256 | 267 |
Net equity attributable to controlling shareholders | 3,768 | 7,067 | 6,494 | 6,269 |
Total liabilities and shareholders’ equity | 14,614 | 27,413 | 20,057 | 18,490 |
4
OPERATING DATA(*)
| For the year ended December 31, | ||||
| 2011 | 2010 | 2009 | 2008 | 2007 |
Energy sold (in GWh): |
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Residential | 13,626 | 12,983 | 12,346 | 11,649 | 10,766 |
Industrial | 14,718 | 15,413 | 14,970 | 16,066 | 16,692 |
Commercial | 8,140 | 7,695 | 7,297 | 6,938 | 6,509 |
Rural | 1,991 | 2,100 | 2,256 | 2,449 | 2,511 |
Public administration | 1,154 | 1,112 | 1,074 | 1,027 | 972 |
Public lighting | 1,495 | 1,444 | 1,408 | 1,355 | 1,284 |
Public services | 1,823 | 1,742 | 1,664 | 1,634 | 1,590 |
Own consumption | 33 | 33 | 33 | 32 | 30 |
Total energy sold to Final Consumers | 42,979 | 42,522 | 41,048 | 41,150 | 40,354 |
Electricity sales to wholesalers (in GWh) | 14,089 | 12,737 | 12,925 | 9,551 | 8,731 |
Total consumers (in thousands)(4) | 6,952 | 6,748 | 6,567 | 6,425 | 6,257 |
Installed capacity (in MW) | 2,644 | 2,309 | 1,737 | 1,704 | 1,588 |
Assured energy (in GWh) | 11,678 | 7,786 | 7,485 | 7,134 | 6,698 |
Energy generated (in GWh) | 9,638 | 9,142 | 5,984 | 6,659 | 6,382 |
(*) Unaudited.
(1) Net income per share and Dividends per share are based on the number of shares resulting from the reverse and forward stock split of our common shares as if they had occurred in 2009.
(2) “Dividends” represent the total amount of dividends from net income for each period indicated, subject to approval of the shareholders at the general shareholders’ meeting to be held in the following year.
(3) Short-term debt and Long‑term debt include derivative and accrued interest.
(4) Represents active consumers (meaning consumers who are connected to the distribution network), rather than consumers invoiced at period-end.
5
Exchange Rates
The Central Bank allows thereal/U.S. dollar exchange rate to float freely, and it has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let thereal float freely or will intervene in the exchange rate market through a currency band system or otherwise. Thereal may substantially depreciate or appreciate against the U.S. dollar. For more information on these risks, see “Item 3. Additional Information—Risk Factors—Risks Relating to Brazil.”
The following table provides information on the selling exchange rate, expressed inreais per U.S. dollar (R$/US$), for the periods indicated.
| Year-end | Average for period(1) | Low | High |
| (reais per U.S. dollar) | |||
Year ended: |
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December 31, 2007 | 1.771 | 1.930 | 1.733 | 2.156 |
December 31, 2008 | 2.337 | 1.833 | 1.559 | 2.500 |
December 31, 2009 | 1.741 | 1.990 | 1.702 | 2.422 |
December 31, 2010 | 1.666 | 1.759 | 1.655 | 1.881 |
December 31, 2011 | 1.876 | 1.671 | 1.535 | 1.902 |
| Month-end | Average for period(1) | Low | High |
| (reais per U.S. dollar) | |||
Month ended: |
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September 2011 | 1.854 | 1.750 | 1.604 | 1.902 |
October 2011 | 1.689 | 1.773 | 1.689 | 1.886 |
November 2011 | 1.811 | 1.790 | 1.727 | 1.894 |
December 2011 | 1.876 | 1.837 | 1.783 | 1.876 |
January 2012 | 1.739 | 1.790 | 1.739 | 1.868 |
February 2012 | 1.709 | 1.718 | 1.702 | 1.738 |
March (through March 27, 2012) | 1.814 | 1.790 | 1.715 | 1.827 |
(1) The figures provided for months in 2011 and 2012, as well as for the month of March up to and including March 27, 2012, represent the average of the selling exchange rates at the close of trading on each business day during such period.
6
RISK FACTORS
Risks Relating to Our Operations and the Brazilian Power Industry
We are subject to comprehensive regulation of our business, which fundamentally affects our financial performance.
Our business is subject to extensive regulation by various Brazilian regulatory authorities, particularly the National Electric Energy Agency,Agência Nacional de Energia Elétrica (“ANEEL”). ANEEL regulates and oversees various aspects of our business and establishes our tariffs. If we are obliged by ANEEL to make additional and unexpected capital investments and are not allowed to adjust our tariffs accordingly, or if ANEEL modifies the regulations related to such adjustment, we may be adversely affected.
In addition, both the implementation of our strategy for growth, and our the ordinary business may be adversely affected by governmental actions such as changes to current legislation, the termination of federal and state concession programs, creation of more rigid criteria for qualification in public energy auctions, or a delay in the revision and implementation of new annual tariffs.
If regulatory changes require us to conduct our business in a manner substantially different from our current operations as a result of regulatory changes, our operations and financial results may be adversely affected.
The regulatory framework under which we operate is subject to legal challenge.
The Brazilian government implemented fundamental changes in the regulation of the power industry under 2004 legislation known as theLei do Novo Modelo do Setor Elétrico, or New Industry Model Law. Challenges to the constitutionality of the New Industry Model Law are still pending before the Brazilian Supreme Court. If all or part of the New Industry Model Law were held to be unconstitutional, there would be uncertain consequences for the validity of existing regulation and the further development of the regulatory framework. The outcome of the legal proceedings is difficult to predict, but it could have an adverse impact on the entire energy sector, including our business and results of operations.
We are uncertain as to the renewal of our concessions.
We carry out our generation and distribution activities pursuant to concession agreements entered into with the Brazilian Federal Government. Our concessions range in duration from 16 to 35 years, with the first expiration date in 2015. Five of our distribution subsidiaries, as well as three small hydroelectric power plants and six micro hydroelectric power plants that generate energy exclusively for these distribution subsidiaries, have concessions that expire in July 2015 with options to renew for an additional 20 years. In 2011, these five distribution subsidiaries represented 6.0% of net operating revenues of our distribution companies and 5.6% of the energy distributed by our distribution companies.
The Brazilian constitution requires that all concessions relating to public services be awarded through a bidding process. Under laws and regulations specific to the electric sector, the Federal Government may renew existing concessions for additional periods of up to 30 years without a bidding process, provided that the concessionaire has met minimum performance standards and that the proposal is otherwise acceptable to the Federal Government. The Federal Government has considerable discretion under the Concessions Law and the concession contracts with respect to renewal of concessions. Moreover, there is no extensive history of administrative renewal practice. As a result, we cannot assure you that our concessions will be renewed at all, or that they will be renewed on the same terms.
The tariffs that we charge for sales of electricity to captive consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.
ANEEL has substantial discretion to establish the tariff rates our distribution companies charge our consumers. Our tariffs are determined pursuant to concession agreements with the Brazilian Federal Government, and in accordance with ANEEL’s regulations and decisions.
7
Our concession agreements and the Brazilian law establish a mechanism that permits three types of tariff adjustments: (i) the annual adjustment (“reajuste tarifário anual”), (ii) the periodic revision (“revisão tarifária periódica”) and (iii) the extraordinary revision (“revisão tarifária extraordinária”). We are entitled to apply each year for the annual adjustment, which is designed to offset some effects of inflation on tariffs and pass through to consumers certain changes in our cost structure that are beyond our control, such as the cost of electricity we purchase from certain sources and certain regulatory charges, including charges for the use of transmission and distribution facilities. In addition, ANEEL carries out a periodic revision every four or five years that is aimed at identifying variations in our costs as well as setting a factor based on our operational efficiency that will be applied against the index of our ongoing annual tariff adjustments, the objective of which is to share any related gains with our consumers. We are also subject to extraordinary revision of our tariffs that may affect (negatively or positively) our results of operations or financial position.
We cannot be sure if ANEEL will establish tariffs at rates that are favorable to us, due to changes in the methods in calculating the periodic revision adjustments. In addition, to the extent that any of these adjustments are not granted by ANEEL in a timely manner, our financial condition and results of operations may be adversely affected.
On November 22, 2011, ANEEL defined the methodology applicable to the third periodic revision cycle (2011 to 2014) through Resolution No. 457/2011. For the third cycle, ANEEL has designated a new method of recognizing which costs we may pass through to our consumers. In addition, ANEEL approved the new methodology for calculating the TUSD and other electricity tariffs, under which distributors assume all market risk resulting from tariff indicators As compared to the previous tariff cycle, this new methodology negatively impacts our financial condition and results of operations.
We could be penalized by ANEEL for failing to comply with the terms of our concession agreements, which could result in fines, other penalties and, depending on the gravity of the non‑compliance, in our concessions being terminated.
ANEEL may impose penalties on us in the event that we fail to comply with any provision of our concession agreements. Depending on the gravity of the non‑compliance, these penalties could include the following:
· warning notices;
· fines per breach of up to 2.0% of the revenues from the relevant concession in the year ended immediately prior to the date of the relevant breach;
· injunctions related to the construction of new facilities and equipment;
· restrictions on the operation of existing facilities and equipment;
· intervention by ANEEL in the management of the concessionaire; and
· termination of the concession.
In addition, the Brazilian government has the power to terminate any of our concessions by means of expropriation for reasons related to the public interest.
We are currently in compliance with all of the material terms of our concession agreements. However, we cannot assure you that we will not be penalized by ANEEL for breaching our concession agreements or that our concessions will not be terminated in the future. The compensation to which we are entitled upon termination of our concessions may not be sufficient for us to realize the full value of certain assets. If any of our concession agreements is terminated for reasons attributable to us, the effective amount of compensation by the granting authorities could be materially reduced through the imposition of fines or other penalties. Accordingly, the imposition of fines or penalties on us or the termination of any of our concessions could have a material adverse effect on our financial condition and results of operations.
8
We may not be able to fully pass through the costs of our electricity purchases and, to meet demand, we could be forced to enter into short‑term agreements to purchase electricity at prices substantially higher than under our long‑term purchase agreements.
Under the New Industry Model Law, an electricity distributor must contract in advance, through public bids, for 100% of its forecasted electricity needs for its distribution concession areas. Over- or under-forecasting demand can have adverse consequences. If our forecasted demand is incorrect and we purchase less or more electricity than we need, we may be prevented from fully passing through the costs of our electricity purchases and we may also be forced to enter into short‑term agreements to purchase electricity at prices substantially higher than under our long‑term purchase agreements. For instance, the New Industry Model Law provides, among other restrictions, that if our forecasts fall significantly short of actual electricity demand, we may be forced to make up the shortfall with shorter term electricity purchase agreements. If our acquisitions of electricity in the public auctions are above the Annual Reference Value (Valor Anual de Referência), as defined in “Item 4. Information on the Company—The New Industry Model Law—The Annual Reference Value,” established by the Brazilian government, we may not be able to fully pass through the costs of our electricity purchases. Our forecasted electricity demand may prove inaccurate, including as a result of consumers moving between the different markets (regulated and free). If there are significant variations between our electricity needs and the volume of our electricity purchases, our results of operations may be adversely affected. See “Item 4. Information on the Company—The Brazilian Power Industry—The New Industry Model Law.”
We generate a significant portion of our operating revenues from consumers that qualify as Free Consumers, which are allowed to seek alternative electricity suppliers. We may face other types of competition that could adversely affect our market share and revenues.
Within our concession areas, other electricity suppliers are permitted to compete with us in offering electricity to certain consumers that qualify as Free Consumers, to whom our distribution subsidiaries may supply electricity only at regulated tariffs. These consumers qualified as Free Consumers may elect to opt out of our regulated distribution system upon the expiration of their contracts with us, by providing six months’ prior notice, or by providing a year’s prior notice if their contract has no fixed termination date. At December 31, 2011, we supplied energy to 48 consumers qualified as Free Consumers, which accounted for approximately 2.2% of our net operating revenues and approximately 2.7% of the total volume of electricity sold by our distributors during 2011. In addition, other consumers meeting certain criteria may become Free Consumers if they move to energy from renewable energy sources, such as small hydroelectric power plants or biomass. At December 31, 2011 we had a total of 1,615 potentially Free Consumers which accounted for approximately 13.3% of our net operating revenues and approximately 14.9% of the total volume of electricity sold by our distribution companies during 2011. If our consumers that are not currently qualified as Free Consumers decide to become Free Consumers and purchase electricity from other electricity suppliers in our concession areas, our market share and results of operations would be adversely affected.
In addition, it is possible that our large industrial clients could be authorized by ANEEL to generate electric energy for own consumption or sale to other parties, in which case they may obtain an authorization or concession for the generation of electric power in a given area, which could adversely affect our results of operations.
Our operating results depend on prevailing hydrological conditions. The impact of an electricity shortage and related electricity rationing, as in 2001 and 2002, may have a material adverse effect on our business and results of operations.
We are dependent on the prevailing hydrological conditions in the geographic region in which we operate. In 2011, according to data from the National Electrical System Operator,Operador Nacional do Sistema Elétrico (“ONS”), more than 91% of Brazil’s electricity supply came from hydroelectric generation facilities. Our region is subject to unpredictable hydrological conditions, with non‑cyclical deviations from average rainfall. The most recent period of low rainfall was between 2000 and 2001, when the Brazilian government instituted the Rationing Program, a program to reduce electricity consumption that was in effect from June 1, 2001 to February 28, 2002. The Rationing Program established limits for energy consumption for industrial, commercial and residential consumers, which ranged from a 15.0% to a 25.0% reduction in energy consumption. If Brazil experiences another electricity shortage, the Brazilian government may implement similar or other policies in the future to address the shortage that could have a material adverse effect on our financial condition and results of operations. A recurrenceof poor hydrological conditions that result in a low supply of electricity to the Brazilian market could cause, among other things, the implementation of broad electricity conservation programs, including mandated reductions in electricity consumption. We cannot assure you that periods of severe or sustained below-average rainfall will not adversely affect our future financial results.
9
Construction, expansion and operation of our electricity generation and distribution facilities and equipment involve significant risks that could lead to lost revenues or increased expenses.
The construction, expansion and operation of facilities and equipment for the generation and distribution of electricity involves many risks, including:
· the inability to obtain required governmental permits and approvals;
· the unavailability of equipment;
· supply interruptions;
· work stoppages;
· labor unrest;
· social unrest;
· weather and hydrological interferences;
· unforeseen engineering and environmental problems;
· increases in electricity losses, including technical and commercial losses;
· construction and operational delays, or unanticipated cost overruns;
· the inability to win electricity auctions promoted by ANEEL; and
· unavailability of adequate funding.
If we experience these or other problems, we may not be able to generate and distribute electricity in amounts consistent with our projections, which may have an adverse effect on our financial condition and results of operations.
We are subject to environmental and health regulations that may become more stringent in the future and may result in increased liabilities and increased capital expenditures.
Our distribution and generation activities are subject to comprehensive federal and state legislation as well as supervision by Brazilian governmental agencies that are responsible for the implementation of environmental and health laws and policies. These agencies could take enforcement action against us for our failure to comply with their regulations. These actions could include, among other things, the imposition of fines and revocation of licenses. It is possible that enhanced environmental and health regulations will force us to allocate capital expenditures to compliance, and consequently, divert funds from planned investments. Such a diversion could have a material adverse effect on our financial condition and results of operations.
If we are unable to complete our proposed capital expenditure program in a timely manner, the operation and development of our business may be adversely affected.
We plan to invest approximately R$3,097 million in our generation activities, and R$4,984 million in our distribution activities during the period from 2012 through 2016. Our ability to carry out this capital expenditure program depends on a variety of factors, including our ability to charge adequate tariffs for our services, our access to domestic and international capital markets and a variety of operating, regulatory and other contingencies. Wecannot be certain that we will have the financial resources to complete our proposed capital expenditure program, and failure to do so could have a material adverse effect on the operation and development of our business.
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We are strictly liable for any damages resulting from inadequate provision of electricity services, and our contracted insurance policies may not fully cover such damages.
Under Brazilian law, we are strictly liable for direct and indirect damages resulting from the inadequate provision of electricity distribution services. In addition, our distribution facilities may, together with our generation utilities, be held liable for damages caused to others as a result of interruptions or disturbances arising from the generation, transmission or distribution systems, whenever these interruptions or disturbances are not attributed to an identifiable member of the ONS. We cannot assure you that our contracted insurance policies will fully cover damages resulting from inadequate rendering of electricity services, which may have an adverse effect on us.
We may not be able to create the expected benefits and return on investments from the energy generation businesses we recently entered into.
We have entered into a number of energy generation businesses (wind, thermoelectric and biomass energy) with substantial capital investments. We have few operating history and track record in these industries and may not be able to foster the synergies with our traditional businesses. In addition:
· In the biomass business, we may suffer from a lack of sugar cane (a necessary input for the generation of this type of energy) in the market. In addition, we depend to a certain extent on the performance of our partners in these projects in the construction and operation of the plants;
· Among the significant uncertainties and risks with respect to our wind farms under construction, we have financial risk associated with the difference between the energy we generate and the energy contracted through the reserve energy contract (Contrato de Energia de Reserva – CER), in which we bear the risk of divergences arising from: (a) wind intensity and duration different from that contemplated in the study phase of the project; (b) delay in commencement of operations of the wind farms under construction; and (c) unavailability of wind turbines at levels above the performance benchmarks;
If these generation plants are not able to (i) generate the energy contracted by our clients, or (ii) generate the energy necessary to supply any clients in the free market, and (iii), the energy provided to us is insufficient to supply the contracted demand, we may be obliged to buy the shortfall in the spot market, in which the price per MWh is usually more volatile and may be higher than our price, resulting in an adverse effect on us. See “Item 4. Information on the Company—The Brazilian Power Industry—The New Industry Model Law.”
Our growth, operating results and financial condition may be negatively affected by one or more of the above factors.
We are controlled by a few shareholders acting together, and their interests could conflict with yours.
As of December 31, 2011, VBC Energia S.A. (“VBC”), PREVI (through BB Carteira Livre I FIA), Energia São Paulo FIP (including through Bonaire Participações S.A.), owned 25.55%, 31.02% and 12.62%, respectively, of our outstanding common shares. These entities are parties to a shareholders’ agreement, pursuant to which they share the power to control us. Our controlling shareholders may take actions that could be contrary to your interests, and our controlling shareholders will be able to prevent other shareholders, including you, from blocking these actions. In particular, our controlling shareholders control the outcome of decisions at shareholders’ meetings, and they can elect a majority of the members of our Board of Directors. Our controlling shareholders can direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. Their decisions on these matters may be contrary to the expectations or preferences of our noncontrolling shareholders, including holders of our ADSs. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreement.”
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We are exposed to increases in prevailing market interest rates, as well as foreign exchange rate risk.
As of December 31, 2011, approximately 87.1% of our total indebtedness was denominated inreais and indexed to Brazilian money-market rates or inflation rates, or bore interest at floating rates. The remaining 12.9% of our total indebtedness was denominated in U.S. dollars and substantially subject to currency swaps that converted these obligations intoreais. In addition, the costs of electricity purchased from the Itaipu power plant (“Itaipu”) are indexed to the U.S. dollar exchange variation. Our tariffs are adjusted annually in order to contemplate the losses or gains’ effects from such electricity acquisition. Accordingly, if these indexation rates rise or the U.S. dollar/real exchange rates appreciate, our financing expenses will increase.
Our indebtedness and debt service obligations could adversely affect our ability to operate our business and make payments on our debt.
As of December 31, 2011, we had a debt of R$13,608 million. Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal, interest or other amounts due in respect of our indebtedness. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions applicable under our existing indebtedness. If we incur additional debt, the risks associated with our leverage would increase.
We may acquire other companies in the electricity business, as we have in the past, and these acquisitions could increase our leverage or adversely affect our consolidated performance.
We regularly analyze opportunities to acquire other companies engaged in activities along the entire electricity generation, transmission and distribution chain. If we do acquire other electricity companies, it could increase our leverage or reduce our profitability. Furthermore, we may not be able to integrate the acquired company’s activities and achieve the economies of scale and expected efficiency gains that often drive such acquisitions, and failure to do so could harm our financial condition and results of operations.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could adversely affect our business and the trading price of our ADSs and our common shares.
The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Our business, financial condition and results of operations may be adversely affected by changes in policy or regulations at the federal, state or municipal levels involving or affecting factors such as:
· interest rates;
· monetary policy;
· currency fluctuations;
· inflation;
· liquidity of domestic capital and lending markets;
· tax policies;
· changes in labor laws;
· regulatory environment of our sector;
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· exchange rates and exchange controls and restrictions on remittances abroad, such as those that were briefly imposed in 1989 and early 1990; and
· other political, social and economic developments in or affecting Brazil.
We cannot assure you that the Brazilian government will continue with the current economic policies, or that any changes implemented by the Brazilian government will not, directly or indirectly, affect our business and results of operations.
Exchange rate instability may adversely affect our financial condition and results of operations and the market price of the ADSs and our common shares.
The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. In the context of the crisis in the global financial markets after mid-2008, thereal depreciated against the U.S. dollar during 2008 and reaching R$2.337 per US$1.00 at year end 2008. During 2009, thereal appreciated 25.5% against the U.S. dollar in the context of the economic recovery and reaching R$1.741 per US$1.00 at year-end 2009. On December 31, 2011, the exchange rate of thereal against the U.S. dollar was R$1.876 per US$1.00. On March 27, 2012, the exchange rate was R$1.814 per US$1.00. We cannot assure that thereal will not depreciate against the U.S. dollar in the future.
Depreciation of thereal increases the cost of servicing our foreign currency denominated debt and the cost of purchasing electricity from the Itaipu power plant, a hydroelectric facility that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs. Depreciation of thereal against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation of thereal against the U.S. dollar can also lead to decreased consumer spending, deflationary pressures and reduced growth in the economy as a whole. On the other hand, appreciation of thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current account, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
Depreciation of thereal also reduces the U.S. dollar value of distributions and dividends our ADSs and the U.S. dollar equivalent of the market price of our common shares and, as a result, the ADSs.
Government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm our business.
Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highestreal interest rates in the world. Between 2006 and 2011, the base interest rate in Brazil (“SELIC”) varied between 8.7% p.a. and 18.0% p.a. Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may in future have significant effects on the Brazilian economy and our business. Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, volatility in growth and the need for sudden and significant interest rate increases, which could negatively affect our business. In addition, if Brazil again experiences high inflation, we may not be able to adjust the rates we charge our consumers to offset the effects of inflation on our cost structure.
Developments and the perception of risk in other countries, including the United States and emerging market countries, may adversely affect the market price of Brazilian securities, including our ADSs and common shares.
The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor reactions todevelopments in other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the trading price of the ADSs or our common shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
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The current global financial crisis, especially in the European Union, has generated significant consequences, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates and inflationary pressure, among others, which may, directly or indirectly, adversely affect us and the market price of Brazilian securities, including the ADSs and our common shares. It is still not clear how these consequences will affect Brazilian economy in 2012.
Risks Relating to the ADSs and Our Common Shares
Holders of our ADSs may encounter difficulties in the exercise of voting rights.
Holders of our common shares are entitled to vote on shareholder matters. You may encounter difficulties in the exercise of some of your rights as a shareholder if you hold our ADSs rather than the underlying common shares. For example, you are not entitled to attend a shareholders’ meeting, and you can only vote by giving timely instructions to the depositary in advance of the meeting.
If you surrender your ADSs and withdraw common shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.
As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our common shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the common shares into non‑Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw common shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the common shares, you will not be able to remit abroad non‑Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration. If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our common shares.
If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our common shares or the return of your capital in a timely manner. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.
Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares.
We may not be able to offer our common shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our common shares in connection with any future issuance of our common shares unless a registration statement under the Securities Act is effective with respect to such common shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our common shares, and we cannot assure you that we will file any such registration statement. If such a registration statement is not filed and an exemption from registration does not exist, Deutsche Bank, as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale. However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.
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The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the common shares underlying the ADSs at the price and time you desire.
Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented 52.6% of the aggregate market capitalization of theBM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias & Futuros(“BM&FBOVESPA”), as of December 31, 2011. The top ten stocks in terms of trading volume accounted for 53.7%, 50.0% and 47.2% of all shares traded on the BM&FBOVESPA in 2009, 2010 and 2011, respectively.
ITEM 4. Information on the Company
Overview
We are a corporation (sociedade por ações) incorporated and existing under the laws of Brazil with the legal name CPFL Energia S.A. Our principal executive offices are located at Rua Gomes de Carvalho, 1,510, 14th floor – Suite 142, Vila Olímpia, CEP 04547-005, in the City of São Paulo, state of São Paulo, Brazil and our telephone number is +55 11 3841-8507.
We are a holding company that, through our subsidiaries, distributes, generates and commercializes electricity in Brazil. We were incorporated in 1998 as a joint venture among VBC, 521 Participações S.A. and Bonaire to combine their interests in companies operating in the Brazilian power sector.
We are one of the largest electricity distributors in Brazil, based on the 39,917 GWh of electricity we distributed to approximately 7.0 million consumers in 2011. In 2011, our installed capacity was 2,644 MW. We are also involved in building four biomass generation projects, one small hydroelectric power plant and 25wind farms, through which we expect to increase our installed capacity to 3,301 MW1once they are completed over the next three years.
We also engage in electricity commercialization, and provide agency services to Free Consumers before the CCEE and other agents, as well as electricity-related services to our affiliates and unaffiliated parties. In 2011, the total amount of electricity sold by our commercialization subsidiaries was 5,037 GWh and 8,665 GWh to affiliated and unaffiliated parties, respectively.
In 2011 and through March 29, 2012, the following developments affected our corporate structure:
· On April 19, 2011, we entered into an agreement with Energias Renováveis S.A. (“ERSA”) to combine assets and projects relating to renewable energy sources (wind, biomass and small hydroelectric power plants). The transaction encompassed: (i) the transfer of wind, biomass and small hydroelectric plants previously owned and operated by CPFL Geração and CPFL Comercialização Brasil S.A. (“CPFL Brasil”) to certain companies, which subsequently transferred the wind, biomass and small hydroelectric power plants to a holding company, SMITA Empreendimentos e Participações S.A. (“SMITA”); (ii) the establishment of SMITA by CPFL Geração and CPFL Brasil; (iii) the incorporation of SMITA by ERSA, of which we turned out holding 54.5% interest; and (iv) the change of ERSA’s corporate name to CPFL Energia Renováveis S.A. (“CPFL Energias Renováveis”). CPFL Energias Renováveis’ financial statements have been consolidated in our consolidated financialstatements since August 1, 2011. The transaction was ratified by our shareholders on December 19, 2011.
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· On April 7, 2011, CPFL Energia S.A. entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Jantus for R$823 million. On September 21, 2011, CPFL Energia S.A. assigned the Sale and Purchase Agreement to CPFL Energias Renováveis. In order to complete the acquisition, our subsidiary CPFL Brasil contributed funds to CPFL Energias Renováveis, of which we now hold 63% interest. The transaction contemplated the acquisition of: (i) four wind farms in operation in the state of Ceará with installed capacity of 210 MW, and (ii) a portfolio of wind farm projects with total installed capacity of 732 MW in the states of Ceará and Piauí, of which 412 MW has already been certified and eligible for participation in the next electricity auctions. The acquisition was complete on December 19, 2011.
· On December 29, 2011, through our subsidiary CPFL Energias Renováveis, we acquired all of the shares of Santa Luzia Energética S.A. (“Santa Luzia”), representing 100% of its capital stock for R$132 million through assumption of debts with BNDES. As a result, we now have Santa Luzia small hydroelectric power plant, located in the cities of São Domingos and Iguaçu, in the state of Santa Catarina, with installed capacity of 28,5 MW.
· On January 12, 2012, through our subsidiary CPFL Energias Renováveis, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Atlântica I Parque Eólico S.A. (“Atlântica I”), Atlântica II Parque Eólico S.A. (“Atlântica II”), Atlântica IV Parque Eólico S.A. (“Atlântica IV”) and Atlântica V Parque Eólico S.A. (“Atlântica V”). Atlântica I, Atlântica II, Atlântica IV and Atlântica V hold authorizations to produce energy from wind sources as independent producers for a term of 35 years. These wind farms are located in the state of Rio Grande do Sul and have aggregate installed capacity of 120 MW, all of which have been certified and sold at the auction of alternative sources of energy held on August 2010. The acquisition is subject to certain conditions provided for in the Sale and Purchase Agreement and approval by the ANEEL.
· On February 24, 2012, through our subsidiary CPFL Energias Renováveis, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of BVP S.A., which holds 100% of the shares of Bons Ventos Geradora de Energia S.A. (“Bons Ventos”). The total acquisition cost was R$1,062 million, distributed as follows: (i) R$600 million in cash, and (ii) R$462 million through assumption of net debts, which amount may be adjusted by the acquisition closing date. Bons Ventos holds authorizations to explore the following wind farms: (i) Taíba Albatroz, with installed capacity of 16,8 MW, (ii) Bons Ventos, with installed capacity of 50,4 MW, (iii) Enacel, with installed capacity of 31,5 MW and (iv) Canoa Quebrada, with installed capacity of 58,8 MW. All of these wind farms are fully operational in the state of Ceará, and have entered into agreements with Eletrobrás to sell all of the generated energy under the Proinfa Program. The acquisition is subject to certain conditions provided for in the Sale and Purchase Agreement, including authorizations from regulatory authorities.
· On March 9, 2012, through our subsidiary CPFL Energias Renováveis, we entered into an agreement to purchase 100% of the electric energy and water steam co-generation assets of SPE Lacenas Participações Ltda., a subsidiary of Usina Açucareira Ester (“Usina Ester”). Usina Ester holds authorization from ANEEL to exploit electric energy from biomass (sugar cane), with installed capacity of 40,0 MW. These co-generation plants, located in the city of Cosmópolis, in the state of São Paulo, are fully operational. The acquisition is subject to certain conditions provided for in the agreement, including authorizations from regulatory authorities.
The following chart provides an overview of our corporate structure, as of March 29, 2012:
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(1) Includes the 0.1% stake of Camargo Corrêa S.A.
(2) Termoparaíba and Termonordeste thermoelectric facilities
Note: CPFL Energia owns a 63% interest in CPFL Energias Renováveis (35.5% through CPFL Geração and 27.5% through CPFL Brasil)
Our core businesses are:
· Distribution. In 2011, our eight fully-consolidated distribution subsidiaries delivered 39,917 GWh of electricity to approximately 7.0 million consumers primarily in the states of São Paulo and Rio Grande do Sul.
· Conventional generation sources. As of December 31, 2011, we had installed capacity of 2,233 MW. During 2011, we generated a total of 8,903 GWh of electricity, and we had 9,949 GWh of assured energy, the amount of energy representing our long‑term average electricity production, as established by ANEEL, which is the primary driver of our revenues relating to generation activities. We hold equity interests in eight hydroelectric plants (Serra da Mesa, Monte Claro, Barra Grande, Campos Novos, Luiz Eduardo Magalhães-Lajeado, Castro Alves, 14 de Julho and Foz do Chapecó). Although the concession for Serra da Mesa hydroelectric generation facility is held by Furnas, we are entitled to 51.54% of its assured energy. In October 2010, Foz do Chapecó hydroelectric plant started operations, currently representing an installed capacity of 855 MW, of which we hold a share of 51%, or 436.1 MW. We also own three thermoelectric power plants, two of which were acquired in 2009 (Termonordeste and Termoparaíba) through the acquisition of EPASA. In December 2010 and January 2011, respectively, Termonordeste and Termoparaíba power plants started operations with installedcapacity of 170.8 MW each one. We hold an aggregate 52.75%2 interest in Termonordeste and Termoparaíba, or 180.2 MW.
2We acquired 51% of the shares of EPASA in September 2009. However, as a result of a dilution of EPASA’s capital stock in December 2011, we now hold a 52.75% interest in it.
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· Renewable generation sources.In 2011, we established CPFL Energias Renováveis, in which we own 63% interest, to concentrate our activities in energy generation through renewable sources. Currently, all of our wind farms and thermoelectric biomass plants, as well as 35 of our 47 small hydroelectric power plants, are managed by CPFL Energias Renováveis. These 35 small hydroelectric power plants are responsible for 92.1% of the aggregate capacity generated by our small hydroelectric plants as a whole, of which: (i) 34 are operational, with aggregate installed capacity of 307 MW, located in the states of São Paulo, Santa Catarina, Rio Grande do Sul, Minas Gerais and Mato Grosso, and (ii) one is under construction in the state of Santa Catarina, with an estimated installed capacity of 20 MW and scheduled to commence operations in 2013. Additionally, we have 33 wind farms, of which (i) eight3are operational, with aggregate installed capacity of 367.5 MW, located in the state of Ceará, and (ii) 25are under construction, with an estimated installed capacity of 670 MW and scheduled to commence operations between 2012 and 2014. We also have nine thermoelectric biomass plants, of which: (i) three are operational, with aggregate installed capacity of 135 MW, located in the states of São Paulo and Rio Grande do Norte, and (ii) four are under construction, with an estimated capacity of 195 MW and scheduled to start operations between 2012 and 2014. We closed 2011 with total installed capacity (i.e., including through our conventional generation sources segment) of 2,644 MW. We will use part of our increased installed capacity for our own distribution and commercialization activities.
· Commercialization and Services. Our subsidiary CPFL Brasil handles our commercialization operations and provides agency services to Free Consumers before the CCEE and other agents, including guidance on their operational requirements. CPFL Brasil procures and sells electricity to Free Consumers, other commercialization and generation companies and distribution facilities. Our subsidiary CPFL Serviços provides electricity-related services, such as project design and construction, to our affiliates and unaffiliated parties. In 2011, we sold 13,702 GWh of electricity, of which 8,665 GWh was sold to unaffiliated third parties.
Our Strategy
Our overall objective is to consolidate our leadership position in the Brazilian electricity sector while creating value for our shareholders. We seek to achieve these goals in all of our sectors (distribution, conventional generation sources, renewable generation sources, and commercialization and services) by pursuing operational efficiency (through innovation and technology) and growth (through business synergies and new projects). Our strategies are grounded on financial discipline, social responsibility and enhanced corporate governance. More specifically, our approach involves the following key business strategies.
Complete the development of our existing renewable generation projects, and expand our generation portfolio by developing new conventional and renewable energy generation projects to maintain our position as market leader in renewable energy sources. In 2011, we became the largest renewable energy company in Latin America by establishing CPFL Energias Renováveis and acquiring 100% of the shares of Jantus, a company engaged in the generation of energy through renewable sources, especially wind power. In 2011, our installed capacity increased to 2,644 MW, 2,233 MW of which was conventionally generated, and 411 MW of which was generated through renewable sources. This represented a 14.5% increase as compared to 2010, when our installed capacity was 2,309 MW. This increase was due to (i) the creation of CPFL Renováveis, in which we currently hold a 63% ownership interest, (ii) the commencement of operations at Bio Formosa and Bio Buriti biomass thermoelectric power plants, and (iii) the acquisition of new renewable energy facilities (the Jantus’ wind farms andSanta Luzia small hydroelectric power plant). In January 2012, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Atlântica I, Atlântica II, Atlântica IV and Atlântica V, companies engaged in generation of energy through wind sources. In February 2012, we executed a Sale and Purchase Agreement for the acquisition of 100% of the shares of BVP, the holding company of Bons Ventos. Which is still subject to certain conditions, including approval by the regulatory authorities.
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By the end of 2012, when CPFL Bio Ipê, CPFL Bio Pedra and Santa Clara wind farms are expected to become fully operational, our installed capacity may reach 2,922 MW3. By the end of 2013, when Coopcana and Alvorada biomass thermoelectric power plants and Salto Góes small hydroelectric power plant, Campo dos Ventos II, Macacos I and Atlântica wind farms are expected to become fully operational, this capacity may reach 3,141 MW and, by the end of 2014, when we expect the Campo dos Ventos and São Benedito wind farms to become operational, it may reach 3,301 MW. Part of these generation facilities have associated long‑term power purchase agreements (“PPAs”), approved by ANEEL, which we believe will ensure us an attractive rate of return on our investment. We also have a 2,743 MW (of which our share is 1,728 MW) portfolio of projects to be developed in the next years through our subsidiary CPFL Energias Renováveis. As consumption of electricity in Brazil increases, we believe that there will continue to be new opportunities for us to explore investments in additional conventional and renewable generation projects.
Focus on further improving our operating efficiency. The distribution of electricity in our distribution concession areas is our largest business segment, representing approximately 60% of our consolidated EBITDA. We continue to focus on improving the quality of our service and maintaining efficient operating costs by exploiting synergies and technologies. We also make an effort to standardize and update our operations regularly, introducing automated systems where possible. In 2011, we started the Tauron project, aiming at an efficiency breakthrough in our distribution operations, based on new technologies, performance management, asset management and leadership. We expect to fully implement Tauron project by 2013.
Expand and strengthen our commercialization and services business. Free Consumers represent a significant segment of the electricity market in Brazil (approximately 25% of the market share). We strive to enter into bilateral contracts (through our subsidiary CPFL Brasil, our commercialization subsidiary) with former consumers of our distribution companies that become Free Consumers, in addition to attracting additional Free Consumers from outside of our distribution companies’ concession areas. In order to achieve this objective, we foster positive relationships with customers by providing electricity-related services, strategic advice and decision-making support.
Position ourselves to take advantage of consolidation in our industry by using our experience in successfully integrating and restructuring other operations. We believe that with the stabilization of the regulatory environment in the Brazilian power industry, there may be substantial consolidation in the generation, the transmission and, particularly, the distribution sectors. Given our financial strength and managerial expertise, we believe that we are well-positioned to take advantage of this consolidation. If promising assets are available on attractive terms, we may make acquisitions that complement our existing operations and afford us and our consumers further opportunities to take advantage of economies of scale.
Maintain a high level of social responsibility in the communities in which we operate. We aim to hold our business operations to the highest standards of social responsibility and sustainable development. We also support initiatives to advance the economic, cultural and social interests of the communities in which we operate and contribute effectively to their further development.
Follow enhanced corporate governance standards. We are dedicated to maintaining the highest levels of management transparency and corporate governance, providing equitable shareholder rights and, through various measures, including the increase of our free float and the liquidity of our shares, seeking value for our shareholders.
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Our Service Territory
Distribution
We are one of the largest electricity distributors in Brazil, based on the amount of electricity we delivered in 2011. Our eight distribution subsidiaries together supply electricity to a region covering 175,2374square kilometers, primarily in the States of São Paulo and Rio Grande do Sul. Their concession areas include 559 municipalities and a population of approximately 17.7 million people. Together, they provided electricity to approximately 7.0 million consumers as of December 31, 2011. Our eight subsidiaries distributed approximately 13% of the total electricity distributed in Brazil, based on data from the Energetic Studies Company (Empresa de Pesquisas Energéticas - EPE).
4The decrease as compared to 2010 was due to the fact that certain cooperatives within the CPFL Piratininga concession distribution area have been classified by ANEEL as permissionaires (and, as such, they are now considered as distributors). However, this decrease did not impact our revenues and results of operations.
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Distribution Companies
We have eight distribution subsidiaries:
· CPFL Paulista. Companhia Paulista de Força e Luz (“CPFL Paulista”) supplies electricity to a concession area covering 90,440 square kilometers in the state of São Paulo with a population of approximately 9.4 million people. Its concession area covers 2345municipalities, including the cities of Campinas, Bauru, Ribeirão Preto, São José do Rio Preto, Araraquara and Piracicaba. CPFL Paulista had approximately 3.7 million consumers as of December 31, 2011. In 2011, CPFL Paulista distributed 21,008 GWh of electricity, which accounts for approximately 22.7% of the total electricity distributed in the state of São Paulo, and 6.6% of the total electricity distributed in Brazil, during that period.
· CPFL Piratininga. Companhia Piratininga de Força e Luz (“CPFL Piratininga”) supplies electricity to a concession area covering 5,618 square kilometers in the southern part of the state of São Paulo with a population of approximately 3.6 million people. Its concession area covers 275municipalities, including the cities of Santos, Sorocaba and Jundiaí. CPFL Piratininga had approximately 1.5 million consumers as of December 31, 2011. In 2011, CPFL Piratininga distributed 9,041 GWh of electricity, accounting for approximately 9.8% of the total electricity distributed in the state of São Paulo, and 2.8% of the total electricity distributed in Brazil, during that period.
· RGE. Rio Grande Energia S.A. (“RGE”) supplies electricity to a concession area covering 58,823 square kilometers in the state of Rio Grande do Sul with a population of approximately 3.8 million people. Its concession area covers 2535 municipalities, including the cities of Caxias do Sul and Gravataí. RGE had approximately 1.3 million consumers as of December 31, 2011. In 2011, RGE supplied 7,622 GWh of electricity (6,548 GWh distributed to Final Consumers, and 1,074 GWh delivered principally to small electric concessionaires and small rural cooperatives), which accounts for approximately 31.4% of the total electricity distributed in the state of Rio Grande do Sul, and 2.4% of the total electricity distributed in Brazil, during that period.
· CPFL Santa Cruz. Companhia Luz e Força Santa Cruz (“CPFL Santa Cruz”) supplies electricity to a concession area covering 11,870 square kilometers, which includes 245municipalities in the northwest part of the state of São Paulo and three5municipalities in the state of Paraná. In 2011, CPFL Santa Cruz distributed 967 GWh of electricity to approximately 186,000 consumers, accounting for approximately 1.0% of the total electricity distributed in the state of São Paulo, and 0.3% of the total electricity distributed in Brazil, during that period.
· CPFL Jaguari. Companhia Jaguari de Energia (“CPFL Jaguari”) supplies electricity to a concession area covering 252 square kilometers, which includes two5municipalities of the state of São Paulo. In 2011, CPFL Jaguari distributed 431 GWh of electricity to approximately 34,000 consumers.
· CPFL Mococa. Companhia Luz e Força de Mococa (“CPFL Mococa”) supplies electricity to a concession area covering 1,844 square kilometers, which includes one5municipality of the state of São Paulo and three5municipalities in the state of Minas Gerais. In 2011, CPFL Mococa distributed 211 GWh of electricity to approximately 42,000 consumers.
· CPFL Leste Paulista. Companhia Leste Paulista de Energia (“CPFL Leste Paulista”) supplies electricity to a concession area covering 2,589 square kilometers, which includes seven5municipalities of the state of São Paulo. In 2011, CPFL Leste Paulista distributed 263 GWh of electricity to approximately 52,000 consumers.
· CPFL Sul Paulista. Companhia Sul Paulista de Energia (“CPFL Sul Paulista”) supplies electricity to a concession area covering 3,802 square kilometers, which includes five5municipalities of the state ofSão Paulo. In 2011, CPFL Sul Paulista distributed 373 GWh of electricity to approximately 75,000 consumers.
5These numbers consider municipalities within the concession area of each subsidiary only. Please note that we also serve consumers in municipalities within the concession area of other concessionaire where, for any reason, those consumers are not assisted by such concessionaire.
21
Distribution Network
Our eight distribution subsidiaries own distribution lines with voltage levels ranging from 34.5 kV to 138 kV. These lines distribute electricity from the connection point with the Basic Network to our power sub-stations, in each of our concession areas. All consumers that connect to these distribution lines, such as Free Consumers or other concessionaires, are required to pay a tariff for using the system -Tarifa de Uso do Sistema de Distribuição (“TUSD”).
Each of our subsidiaries has a distribution network consisting of a widespread network of predominantly overhead lines and sub-stations having successively lower voltage ranges. Consumers are classified in different voltage levels based on their consumption of, and demand for, electricity. Large industrial and commercial consumers receive electricity at high voltage ranges (up to 138 kV) while smaller industrial, commercial and residential consumers receive electricity at lower voltage ranges (2.3 kV and below).
As of December 31, 2011, our distribution network consisted of 210,491 kilometers of distribution lines, including 276,561 distribution transformers. Our eight distribution subsidiaries had 9,437 km of high voltage distribution lines between 34.5 kV and 138 kV. At that date, we had 434 transformer sub-stations for transforming high voltage into medium voltages for subsequent distribution, with total transforming capacity of 13,650 mega-volt amperes. Of the industrial and commercial consumers in our concession area, 283 had 69 kV, 88 kV or 138 kV high-voltage electricity supplied through direct connections to our high voltage distribution lines.
System Performance
Electricity Losses
We experience two types of electricity losses: technical losses and commercial losses. Technical losses are those that occur in the ordinary course of our distribution of electricity. Commercial losses are those that result from illegal connections, fraud or billing errors and similar matters. Electricity loss rates of our three largest distribution subsidiaries (CPFL Paulista, CPFL Piratininga and RGE) compare favorably to the average for other major Brazilian electricity distributors in 2010 according to the most recent information available from the Brazilian Association of Electric Energy Distributors,Associação Brasileira de Distribuidores de Energia Elétrica (“ABRADEE”), an industry association.
We are also actively engaged in efforts to reduce commercial losses from illegal connections, fraud or billing errors. To achieve this, in each of our eight subsidiaries, we have deployed trained technical teams to conduct inspections, enhanced monitoring for irregular consumption, increased replacements for obsolete measuring equipment and developed a computer program to discover and analyze irregular invoicing. Approximately 437,330 inspections were conducted during 2011, which we believe led to a recovery of receivables estimated at more than R$163.8 million.
Power Outages
The following table sets forth the frequency and duration of electricity outages per consumer for the years 2011 and 2010 for each of our distribution subsidiaries:
| Year ended December 31, 2011 | |||||||
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| |||||||
| CPFL Paulista | CPFL Piratininga | RGE | CPFL Santa Cruz | CPFL Jaguari | CPFL Mococa | CPFL Leste Paulista | CPFL Sul Paulista |
|
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|
FEC1 | 5.36 | 4.87 | 9.44 | 8.15 | 5.10 | 5.24 | 6.17 | 5.73 |
DEC2 | 6.77 | 6.44 | 15.19 | 8.43 | 7.00 | 5.95 | 9.66 | 9.06 |
(1) Frequency of outages per consumer per year (number of outages).
(2) Duration of outages per consumer per year (in hours).
22
| Year ended December 31, 2010 | |||||||
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| CPFL Paulista | CPFL Piratininga | RGE | CPFL Santa Cruz | CPFL | CPFL Mococa | CPFL Leste Paulista | CPFL Sul Paulista |
|
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|
|
FEC1 | 5.05 | 5.22 | 9.66 | 6.52 | 7.81 | 4.52 | 7.69 | 7.75 |
DEC2 | 5.65 | 6.88 | 14.71 | 5.49 | 9.24 | 4.59 | 8.28 | 9.21 |
(1) Frequency of outages per consumer per year (number of outages)
(2) Duration of outages per consumer per year (in hours)
We seek to improve the quality and reliability of our power supply, as measured by the frequency and duration of our power outages. According to data from ABRADEE for 2010, our frequency and duration of interruptions per consumer in the past few years compare favorably to the averages for other Brazilian distribution companies.
Based on data published by ANEEL, the duration and frequency of outages at CPFL Paulista and CPFL Piratininga are among the lowest in Brazil compared to companies of similar size. The duration of outages at RGE are comparatively higher than those at CPFL Paulista and CPFL Piratininga, but they remain in line with the average rate for power companies in Southern Brazil mainly as a result of the lack of redundancies in its distribution system, the use of medium voltage lines and a lower level of automation in the network.
ANEEL establishes performance indicators per consumer to be complied with by power companies. If these indicators are not reached, we are obliged to reimburse our consumers, and our revenues are negatively affected. In 2010, according to data from ANEEL, the amount we reimbursed our consumers was lower than the average amount reimbursed by power companies of similar size.
Our distribution subsidiaries have construction and maintenance technology that allows for repairs of the electricity network without interruption in electricity service, which allows us to have low levels of scheduled interruption, amounting to approximately up to 14% of total interruptions. Unscheduled interruptions due to accidents or natural causes, including lightning storms, fire and wind represented the remainder of our total interruptions. In 2011, we invested a total of R$1,081 million in improvements of (i) the logistics of our operations, (ii) our systems, and (iii) our infrastructure to support operations, across our different business segments. We expect to invest an additional R$1,108 million for such purposes in 2012.
We strive to improve response times for our repair services. The quality indicators for the provision of energy by CPFL Paulista and CPFL Piratininga have maintained levels of excellence while complying with regulatory standards. This was also mainly the result of our efficient operational logistics, including the strategic positioning of our teams and the technology and automation of our network and operation centers, together with a preventive maintenance and conservation plan.
Purchases of Electricity
Most of the electricity we sell is purchased from unrelated parties, rather than generated by our facilities. In 2011, 11.1% of the total electricity our distribution subsidiaries acquired was purchased from our generation subsidiaries.
In 2011, we purchased 10,855 GWh of electricity from the Itaipu power plant, amounting to 21.3% of the total electricity we purchased. Itaipu is located on the border of Brazil and Paraguay and is subject to a bilateral treaty between the two countries pursuant to which Brazil has committed to purchasing specified amounts of electricity. This treaty will expire in 2023. Electric utilities operating under concessions in the Midwest, South and Southeast regions of Brazil are required by law to purchase a portion of the electricity that Brazil is obligated to purchase from Itaipu. The amounts that these companies must purchase are governed by take-or-pay contracts with tariffs established in US$/kW. ANEEL annually determines the amount of electricity to be sold by Itaipu. We pay for energy purchased from Itaipu in accordance with the ratio between the volume established by ANEEL and our statutorily established share, regardless of whether Itaipu generates such amount of electricity, at a price ofUS$24.88/kW. Our purchases represent approximately 17.0% of Itaipu’s total supply to Brazil. This share was fixed by law according to the amount of electricity sold in 1991. The rates at which companies are required to purchase Itaipu’s electricity are established pursuant to the bilateral treaty, and fixed to cover Itaipu’s operating expenses and payments of principal and interest on Itaipu’s U.S. dollar-denominated debts, as well as the cost of transmitting the power to their concession areas.
23
The Itaipu plant has an exclusive transmission network. Distribution companies pay a fee for the use of this network.
In 2011, we paid an average of R$89.68 per MWh for purchases of electricity from Itaipu, as compared to R$93.23 during 2010 and R$104.41 during 2009. These figures do not include the transmission fee.
We purchased 39,998 GWh of electricity in 2011 from generating companies other than Itaipu, representing 78.7% of the total electricity we purchased. We paid an average of R$110.73 per MWh for purchases of electricity from generating companies other than Itaipu, as compared to R$109.47 per MWh in 2010 and R$104.44 per MWh in 2009. For more information on the regulated market and the free market, see “—The Brazilian Power Industry—The New Industry Model Law.”
The following table shows amounts purchased from our suppliers in the regulated market and in the free market, for the periods indicated.
| Year Ended December 31, | ||
| 2011 | 2010 | 2009 |
| (in GWh) | ||
Energy purchased for resale |
|
|
|
Itaipu Binacional | 10,855 | 10,835 | 11,084 |
Electric Energy Trading Chamber - CCEE | 5,002 | 3,373 | 3,101 |
PROINFA | 1,032 | 1,133 | 958 |
Energy purchased in the regulated market and through bilateral contracts | 33,964 | 37,043 | 37,531 |
TOTAL | 50,853 | 52,384 | 52,674 |
The provisions of our electricity supply contracts are governed by ANEEL regulations. The main provisions of each contract relate to the amount of electricity purchased, the price, including adjustments for various factors such as inflation indexes, and the duration of the contract.
Transmission Tariffs. In 2011, we paid a total of R$1,314 million in tariffs for the use of the transmission network, including Basic Network tariffs, connection tariffs and transmission of high-voltage electricity from Itaipu at rates set by ANEEL.
Consumers and Tariffs
Consumers
We classify our consumers into five principal categories. See note 26 to our audited consolidated financial statements for a breakdown of our sales by category.
· Industrial consumers. Sales to final industrial consumers accounted for 27.7% of our revenue of electricity sales in 2011.
· Residential consumers. Sales to final residential consumers accounted for 40.1% of our revenue of electricity sales in 2011.
· Commercial consumers. Sales to final commercial consumers, which include service businesses, universities and hospitals, accounted for 20.7% of our revenue of electricity sales in 2011.
24
· Rural consumers. Sales to final rural consumers accounted for 3.0% of our revenue of electricity sales in 2011.
· Other consumers. Sales to other consumers, which include public and municipal services such as street lighting, accounted for 8.5% of our revenue of electricity sales in 2011.
Retail Distribution Tariffs. We classify our consumers into two different groups, Group A consumers and Group B consumers, based on the voltage level at which the electricity is supplied to them. Each consumer is placed in a certain tariff level defined by law and based on its respective classification, although some volume-based discounts are available. Group B consumers pay higher tariffs. Tariffs in Group B vary by type of consumer (industrial, residential, commercial or rural). Consumers in Group A pay lower tariffs, decreasing from A4 to Al, because they are supplied electricity at higher voltages, which requires lower use of the energy distribution system. The tariffs we charge for sales of electricity to Final Consumers are determined pursuant to our concession agreements and regulations established by ANEEL. These concession agreements and related regulations establish a cap on tariffs that provides for annual, periodic and extraordinary adjustments. For a discussion of the regulatory regime applicable to our tariffs and their adjustment, see “—The Brazilian Power Industry.”
Group A consumers receive electricity at 2.3 kV or higher. Tariffs for Group A consumers are based on the voltage level at which electricity is supplied, and the time of year and the time of day electricity is supplied, although consumers may opt for a different tariff applicable in peak periods in order to optimize the use of the electric network. Tariffs for Group A consumers consist of two components: a “capacity charge” and an “energy charge.” The capacity charge, expressed inreais per kW, is based on the higher of (i) contracted firm capacity or (ii) power capacity actually used. The energy charge, expressed inreais per MWh, is based on the amount of electricity actually consumed. Group A consumers are those that will likely qualify as Free Consumers under the New Industry Model Law. See “—The Brazilian Power Industry—The New Industry Model Law.”
Group B consumers receive electricity at less than 2.3 kV (220V and 127V). Tariffs for Group B consumers consist solely of an energy consumption charge and are based on the classification of the consumer.
The following tables sets forth our average retail prices for each consumer category for 2011 and 2010. These prices include taxes (ICMS, PIS and COFINS) and were calculated based on our revenues and the volume of electricity sold in 2011 and 2010.
| Year ended December 31, 2011 | |||||||
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| CPFL Paulista | CPFL Piratininga | RGE | CPFL Santa Cruz | CPFL Leste Paulista | CPFL Sul Paulista | CPFL Jaguari | CPFL Mococa |
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|
| (R$/MWh) | |||||||
Residential | 416.68 | 418.90 | 541.53 | 483.21 | 511.15 | 481.14 | 404.51 | 551.81 |
Industrial | 322.85 | 313.27 | 365.08 | 373.34 | 416.55 | 325.14 | 292.58 | 355.70 |
Commercial | 349.56 | 366.33 | 516.05 | 437.55 | 476.79 | 457.17 | 363.79 | 461.81 |
Rural | 192.31 | 226.27 | 278.91 | 235.28 | 257.46 | 252.16 | 211.65 | 264.64 |
Other | 263.01 | 278.88 | 375.98 | 312.84 | 340.36 | 308.73 | 262.51 | 317.38 |
Total | 348.63 | 359.99 | 440.20 | 399.14 | 400.59 | 384.20 | 314.96 | 409.66 |
| Year ended December 31, 2010 | |||||||
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| CPFL Paulista | CPFL Piratininga | RGE | CPFL Santa Cruz | CPFL Leste Paulista | CPFL Sul Paulista | CPFL Jaguari | CPFL Mococa |
|
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|
|
| (R$/MWh) | |||||||
Residential | 400.76 | 394.42 | 509.89 | 432.07 | 458.09 | 452.57 | 379.55 | 507.27 |
Industrial | 311.90 | 295.54 | 346.97 | 323.89 | 342.95 | 287.54 | 275.80 | 330.85 |
Commercial | 339.05 | 347.41 | 491.23 | 395.70 | 428.93 | 432.77 | 344.44 | 428.78 |
Rural | 181.49 | 213.16 | 235.64 | 212.40 | 232.12 | 243.18 | 198.59 | 243.94 |
Other | 250.07 | 246.31 | 231.00 | 184.17 | 303.61 | 295.12 | 246.49 | 294.39 |
Total | 334.34 | 335.74 | 380.34 | 323.59 | 352.11 | 353.03 | 296.27 | 376.04 |
25
Under current regulations, residential consumers may be eligible to pay reduced tariffs if: (i) their monthly earnings are equal or lower than half of the minimum wage, (ii) their monthly earnings are lower than three minimum wages, and one (or more) of the family members has a disease that requires continuous use of an electric-powered equipment, or (iii) they receive certain benefits under Brazilian government’s social programs . In order to benefit from the regulations, these consumers must register with the respective federal government registry. The discounts applied to the tariffs depend on the amount of energy consumed. Discounts range from 10% to 65% for energy consumption varying from less than 30 KW to 220 KW per month. Another benefit afforded to these residential consumers is that they are not required to pay emergency capacity and emergency acquisition charges or any extraordinary tariff approved by ANEEL.
TUSD. Under applicable laws and regulations, we are required to allow other consumers to use our high‑voltage distribution lines, including Free Consumers within our distribution concession areas that are supplied by other distributors. All of our consumers must pay a fee for the use of our network. In 2011, tariff revenues for the use of our network by Free Consumers amounted to R$1,314 million. The average tariff for the use of our network was R$90.03/MWh and R$88.15/MWh in 2011 and 2010, respectively, including the TUSD we charge to other distributors connected to our distribution network.
Billing Procedures
The procedure we use for billing and payment for electricity supplied to our consumers is determined by consumer category. Meter readings and invoicing take place on a monthly basis for low voltage consumers, with the exception of rural consumers, whose meters are read in intervals varying from one to three months, as authorized by relevant regulation. Bills are prepared from meter readings or on the basis of estimated usage. Low voltage consumers are billed within three business days after the meter reading, with payment required within five business days after the invoice date. In case of nonpayment, we send the consumer a notice of nonpayment with the following month’s invoice and we allow the consumer 15 days to settle the amount owed to us. If payment is not received within three business days after that 15-day period, the consumer’s electricity supply may be suspended. We may also take other measures, such as inclusion of the consumer in the list of debtors of credit reporting agencies, or extrajudicial or judicial collection through collection agencies.
High voltage consumers are billed on a monthly basis with payment required within five business days after the invoice date. In the event of nonpayment, we send the consumer a notice four business days after the due date, giving a deadline of 15 days to make payment. If payment is not made within three business days after that 15‑day period, the consumer’s service is discontinued.
According to data from ABRADEE for 2010, the percentage of customers in default of our three largest distribution subsidiaries compare favorably to the average for other major Brazilian electricity distributors. For this purpose, consumers in default are consumers whose bills are one to 89 days due. Bills due for over 89 days are deemed not recoverable.
Customer Service
We strive to provide high-quality customer service to our distribution consumers. We operate call centers at each of our distribution subsidiaries providing customer service 24 hours a day, 7 days a week. In 2011, our call centers responded to approximately 10.6 million calls. We also provide customer service through our Internet website, which handled approximately 12.2 million customer requests in 2011, and through our branch offices, which handled approximately 4.0 million customer requests in 2011. The growth in electronic requests has allowed us to reduce our customer service costs and provide customer service through our call center to a larger number of customers without access to the Internet. Following receipt of a customer service request, we dispatch our technicians to make any necessary repairs.
Generation of Electricity
We are actively expanding our generating capacity. In accordance with Brazilian regulation, revenues from generation are based mainly on assured energy of each facility, rather than its installed capacity or actual output. Assured energy is a fixed output of electricity established by the Brazilian government in the relevant concessionagreement. For certain companies, actual output is determined periodically by the ONS in view of demand and hydrological conditions. Provided generators have sold their electricity and participate in the Energy Reallocation Mechanism,Mecanismo de Realocação de Energia (“MRE”), they will receive at least the revenue amount corresponding to the assured energy, even if they do not actually generate all of it. Conversely, if a generating facility’s output exceeds its assured energy, its incremental revenue is equal only to the costs associated therewith. Most of our hydroelectric plants are members of the MRE, which mitigates hydrologic risks.
26
At December 31, 2011, CPFL Geração owned a 51.54% interest in the assured energy from the Serra da Mesa power plant. Through our generation subsidiaries CERAN, BAESA, ENERCAN and Chapecoense, CPFL Geração also owned interests in the Monte Claro, Barra Grande, Campos Novos, Castro Alves, 14 de Julho and Foz do Chapecó plants, which have been operational since December 2004, November 2005, February 2007, March 2008, December 2008 and October 2010, respectively. Through CPFL Jaguari Geração, we owned a 6.93% interest in the Luis Eduardo Magalhães power plant. We also operated three thermoelectric power plants, two of which were acquired in 2009 (Termonordeste and Termoparaíba) through the acquisition of EPASA (subsidiary of CPFL Geração). Termonordeste started operations on December 24, 2010 and Termoparaíba, on January 13, 2011.
At December 31, 2011, through our subsidiaries CPFL Geração and CPFL Brasil, we owned 63.0% interest in CPFL Energias Renováveis, a company resulting from an association with ERSA, and which holds our subsidiaries engaged in the generation of electricity from renewable sources. We have fully consolidated CPFL Energias Renováveis in our financial statements since August 1, 2011, upon the incorporation of SMITA by ERSA. On a meeting held on March 8, 2012, our Board of Directors approved engagement of investment banks to commence studies regarding a potential public offering of CPFL Energias Renováveis.As of the date of this annual report, CPFL Energias Renováveis is comprised of:
· 18 subsidiaries involved in the generation of electric energy through 35 small hydroelectric power plants, of which: (i) 34 are operational, with total installed capacity of 307 MW, located in the states of São Paulo, Santa Catarina, Rio Grande do Sul, Minas Gerais and Mato Grosso, and (ii) one is under construction, with estimated installed capacity of 20 MW, scheduled to start operations in 2013;
· 33 subsidiaries involved in the generation of electric energy from wind sources, of which (i) eightare operational, with total installed capacity of 367.5 MW, located in the state of Ceará, and (ii) 25are under construction, with an estimated installed capacity of 670 MW, scheduled to start operations between 2012 and 2014;
· Seven subsidiaries involved in the generation of electric energy from biomass, of which (i) three are operational, with total installed capacity of 135 MW, located in the states of São Paulo and Rio Grande do Norte and (ii) four are under construction, with an estimated installed capacity of 195 MW, scheduled to start operations between 2012 and 2014. On August 27, 2010, our first sugarcane bagasse-powered plant started operations, through CPFL Bioenergia (Baldin energy generation plant) with 45 MW of capacity. CPFL Bio Formosa began operations on September 2, 2011, with capacity of 40 MW. CPFL Bio Buriti became operational on October 7, 2011 with capacity of 50 MW.
We also owned 12 small hydroelectric power plants through CPFL Geração and certain of our distribution companies at December 31, 2011.
Our total installed capacity from all of these facilities was 2,644 MW as of December 31, 2011. Most of the electricity we produce comes from our hydroelectric plants. We generated 9,638 GWh in 2011, 9,142 GWh in 2010 and 5,984 GWh in 2009.
6This number includes four wind farms from the Bons Ventos complex which acquisition is still subject to the approval of ANEEL and other contractual conditions.
27
We are currently involved in the construction of CPFL Bio Ipê, CPFL Bio Pedra, Alvorada and Coopcana co‑generation plants, Salto Góes small hydroelectric power plant and Santa Clara, Campo dos Ventos, Macacos I, São Benedito and Atlântica wind farms. We expect to refurbish two small hydroelectric power plants in the state of Rio Grande do Sul in 2013. Once these facilities are complete, we expect our share in the aggregate installed capacity of these projects will be 3,301 MW by the end of 2014.
The following table sets forth certain information relating to our principal facilities in operation as of December 31, 2011:
| Holding company | Partic. | Capacity* (MW) |
| Assured energy* (GWh) |
| Placed in service | Facility upgraded | Concession expires | ||
Hydroelectric plants: |
|
| Our share | TOTAL |
| Our share | TOTAL |
|
|
|
|
Serra da Mesa | CPFL Geração | 51,54% | 657,1 | 1.275,0 |
| 3,029.5 | 5,878.0 |
| 1998 |
| 2028(1) |
Monte Claro | CPFL Geração | 65% | 84,5 | 130,0 |
| 335.9 | 516.8 |
| 2004 |
| 2036 |
Barra Grande | CPFL Geração | 25,01% | 172,6 | 690,0 |
| 833.9 | 3,334.1 |
| 2005 |
| 2036 |
Campos Novos | CPFL Geração | 48,72% | 428,7 | 880,0 |
| 1.612.8 | 3,310.4 |
| 2007 |
| 2035 |
Castro Alves | CPFL Geração | 65% | 84,5 | 130,0 |
| 364.4 | 560.6 |
| 2008 |
| 2036 |
14 de Julho | CPFL Geração | 65% | 65,0 | 100,0 |
| 284.7 | 438.0 |
| 2008 |
| 2036 |
Luis Eduardo Magalhães |
CPFL Jaguari Geração |
6,93% | 62,5 |
902,5 |
| 319.7 |
4,613.0 |
| 2001 |
| 2032 |
Foz do Chapecó | CPFL Geração | 51% | 436,1 |
855,0 |
| 1,930.0 | 3,784.3 |
| 2010 |
| 2036 |
SUBTOTAL - Hydroelectric plants |
|
| 1.991,0 |
|
| 8,710.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thermoelectric plants: |
|
|
|
|
|
|
|
|
|
|
|
Carioba | CPFL Geração | 100% | 36,0 | 36,0 |
| 93.7 | 93.7 |
| 1954 |
| 2027 |
EPASA |
|
|
|
|
|
|
|
|
|
|
|
Termonordeste | CPFL Geração | 52,75% | 90,1 | 170,8 |
| 572.1 | 1,084.5 |
| 2010 |
| 2042 |
Termoparaíba | CPFL Geração | 52,75% | 90,1 | 170,8 |
| 572.1 | 1,084.5 |
| 2011 |
| 2042 |
SUBTOTAL - Thermoelectric plants |
|
| 216,2 |
|
| 1,237.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewable sources |
|
|
|
|
|
|
|
|
|
|
|
Small Hydroelectric Plants |
|
|
|
|
|
|
|
|
|
|
|
Cariobinha | CPFL Geração | 100% | 1,3 | 1,3 |
| - | - |
| 1936 | (3) | 2027 |
Salto do Pinhal | CPFL Geração | 100% | 0,6 | 0,6 |
| - | - |
| 1911 | (3) | 2027 |
Ponte do Silva | CPFL Geração | 100% | 0,1 | 0,1 |
| - | - |
| 1956 |
| (4) |
Lavrinha | CPFL Sul Paulista | 100% | 0,3 | 0,3 |
| (5) |
|
| 1947 |
| (4) |
Macaco Branco | CPFL Jaguari | 100% | 2,4 | 2,4 |
| (5) |
|
| 1911 |
| 2015 |
Pinheirinho | CPFL Mococa | 100% | 0,6 | 0,6 |
| (5) |
|
| 1911 |
| (4) |
Rio do Peixe I | CPFL Leste Paulista | 100% | 3,1 | 3,1 |
| (5) |
|
| 1925 |
| 2015 |
Rio do Peixe II | CPFL Leste Paulista | 100% | 15,0 | 15,0 |
| (5) |
|
| 1998 |
| 2015 |
Santa Alice | CPFL Leste Paulista | 100% | 0,6 | 0,6 |
| (5) |
|
| 1907 |
| (4) |
São José | CPFL Sul Paulista | 100% | 0,8 | 0,8 |
| (5) |
|
| 1934 |
| (4) |
São Sebastião | CPFL Mococa | 100% | 0,7 | 0,7 |
| (5) |
|
| 1925 |
| (4) |
Turvinho | CPFL Sul Paulista | 100% | 0,8 | 0,8 |
| (5) |
|
| 1912 |
| (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Americana | CPFL Renováveis | 63,00% | 18,9 | 30,0 |
| 49.6 | 78.8 |
| 1949 | 2002 | 2027 |
Andorinhas | CPFL Renováveis | 63,00% | 0,3 | 0,5 |
| 2.5 | 4.0 |
| 1937 | (2) | (4) |
Buritis | CPFL Renováveis | 63,00% | 0,5 | 0,8 |
| 5.0 | 7.9 |
| 1922 |
| 2027 |
Capão Preto | CPFL Renováveis | 63,00% | 2,7 | 4,3 |
| 12.6 | 20.0 |
| 1911 | 2008 | 2027 |
Chibarro | CPFL Renováveis | 63,00% | 1,6 | 2,6 |
| 9.3 | 14.8 |
| 1912 | 2008 | 2027 |
28
Dourados | CPFL Renováveis | 63,00% | 6,8 | 10,8 |
| 42.8 | 68.0 |
| 1926 | 2002 | 2027 |
Eloy Chaves | CPFL Renováveis | 63,00% | 12,0 | 19,0 |
| 67.3 | 106.9 |
| 1954 | 1993 | 2027 |
Esmeril | CPFL Renováveis | 63,00% | 3,2 | 5,0 |
| 15.9 | 25.2 |
| 1912 | 2003 | 2027 |
Gavião Peixoto | CPFL Renováveis | 63,00% | 3,0 | 4,8 |
| 21.1 | 33.5 |
| 1913 | 2007 | 2027 |
Guaporé | CPFL Renováveis | 63,00% | 0,4 | 0,7 |
| 3.4 | 5.4 |
| 1950 | (2) | (4) |
Jaguari | CPFL Renováveis | 63,00% | 7,4 | 11,8 |
| 49.6 | 78.8 |
| 1917 | 2002 | 2027 |
Lençóis | CPFL Renováveis | 63,00% | 1,1 | 1,7 |
| 9.3 | 14.7 |
| 1917 | 1988 | 2027 |
Monjolinho | CPFL Renováveis | 63,00% | 0,4 | 0,6 |
| 1.7 | 2.7 |
| 1893 | 2003 | 2027 |
Pinhal | CPFL Renováveis | 63,00% | 4,3 | 6,8 |
| 20.4 | 32.4 |
| 1928 | 1993 | 2027 |
Pirapó | CPFL Renováveis | 63,00% | 0,4 | 0,7 |
| 3.5 | 5.6 |
| 1952 |
| (4) |
Saltinho | CPFL Renováveis | 63,00% | 0,5 | 0,8 |
| 4.0 | 6.4 |
| 1950 |
| (4) |
Salto Grande | CPFL Renováveis | 63,00% | 2,9 | 4,6 |
| 15.0 | 23.8 |
| 1912 | 2003 | 2027 |
Socorro | CPFL Renováveis | 63,00% | 0,6 | 1,0 |
| 3.3 | 5.3 |
| 1909 | 1994 | 2027 |
Santana | CPFL Renováveis | 63,00% | 2,7 | 4,3 |
| 16.0 | 25.4 |
| 1951 | 2002 | 2027 |
Três Saltos | CPFL Renováveis | 63,00% | 0,4 |
0,6 |
| 3.3 |
5.3 |
| 1928 |
| 2027 |
São Joaquim | CPFL Renováveis | 63,00% | 5,1 | 8,1 |
| 31.1 | 49.3 |
| 1911 | 2002 | 2027 |
Diamante | CPFL Renováveis | 63,00% | 2,6 |
4,2 |
| 9.8 | 15.5 |
| 2005 |
| 2019 |
Santa Luzia | CPFL Renováveis | 63,00% | 18,0 |
28,5 |
| 99.3 | 157.7 |
| 2007 |
| 2037 |
Arvoredo | CPFL Renováveis | 63,00% | 8,2 |
13,0 |
| 42.5 | 67.5 |
| 2010 |
|
|
Alto Irani | CPFL Renováveis | 63,00% | 13,2 |
21,0 |
| 75.1 | 119.1 |
| 2008 |
| 2032 |
Plano Alto | CPFL Renováveis | 63,00% | 10,1 |
16,0 |
| 56.3 | 89.4 |
| 2008 |
| 2032 |
Barra da Paciência | CPFL Renováveis | 63,00% | 14,5 |
23,0 |
| 85.5 | 135.8 |
| 2011 |
| 2029 |
Cocais Grande | CPFL Renováveis | 63,00% | 6,3 |
10,0 |
| 28.1 | 44.7 |
| 2009 |
| 2029 |
Corrente Grande | CPFL Renováveis | 63,00% | 8,8 |
14,0 |
| 50.8 | 80.6 |
| 2010 |
| 2030 |
Ninho da Águia | CPFL Renováveis | 63,00% | 6,3 |
10,0 |
| 32.6 | 51.7 |
| 2010 |
| 2029 |
Paiol | CPFL Renováveis | 63,00% | 12,6 |
20,0 |
| 60.2 | 95.5 |
| 2010 |
| 2032 |
São Gonçalo | CPFL Renováveis | 63,00% | 6,9 |
11,0 |
| 35.9 | 56.9 |
| 2010 |
| 2030 |
Varginha | CPFL Renováveis | 63,00% | 5,7 |
9,0 |
| 29.3 | 46.4 |
| 2010 |
| 2029 |
Várzea Alegre | CPFL Renováveis | 63,00% | 4,7 |
7,5 |
| 26.5 | 42.0 |
| 2011 |
| 2029 |
SUBTOTAL - Small Hydroelectric power plants |
| 219,5 | 333,0 | ## | 1,018.7 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Thermoelectric biomass plants: |
|
|
|
|
|
|
|
|
|
|
|
Baldin (CPFL Bioenergia) | CPFL Renováveis | 63,00% | 28,4 | 45,0 |
| 70.8 | 112.4 |
| 2010 |
| 2039 |
Bio Buriti | CPFL Renováveis | 63,00% | 31,5 | 50,0 |
| 115.9 | 184.0 |
| 2011 |
| 2040 |
Bio Formosa | CPFL Renováveis | 63,00% | 25,2 | 40,0 |
| 88.3 | 140.2 |
| 2011 |
| 2032 |
SUBTOTAL - Thermoelectric biomass plants |
| 85,1 | 135,0 |
| 275.0 | 436.5 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Wind farm plants |
|
|
|
|
|
|
|
|
|
|
|
Praia Formosa | CPFL Renováveis | 63,00% | 66,2 | 105,0 |
| 165.0 | 261.9 |
| 2009 |
| 2029 |
Icaraizinho | CPFL Renováveis | 63,00% | 34,4 | 54,6 |
| 56.8 | 90.2 |
| 2009 |
| 2029 |
Choró | CPFL Renováveis | 63,00% | 15,9 | 25,2 |
| 69.0 | 109.5 |
| 2009 |
| 2029 |
Paracuru | CPFL Renováveis | 63,00% | 15,9 | 25,2 |
| 144.6 | 229.5 |
| 2008 |
| 2028 |
SUBTOTAL - Wind Farms |
|
| 132,3 | 210,0 |
| 435.5 | 691.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL (our share only) |
|
| 2.644,1 |
|
| 11,677.9 |
|
|
|
|
|
(*) Unaudited by our independent auditors.
(1) The concession for Serra da Mesa is held by Furnas. We have a contractual right to 51.54% of the assured energy of this facility, under a 30-year rental agreement, expiring in 2028.
(2) Power plants that will be upgraded by 2013.
(3) Power plants that are not active.
(4) Hydroelectric projects with an installed capacity equal to or less than 1,000 kW that are registered with the regulatory authority and the administrator of power concessions, but do not require concession or authorization processes for operating.
(5) Power plants that currently do not have assured energy approved by the MME. The energy that they produce is used by our distribution subsidiaries, reducing our energy purchases. We have applied for the assignment of a total of 78.6 GWh per year of assured energy for these nine small hydroelectric power plants and are waiting for MME and ANEEL approval.
29
Hydroelectric plants
Serra da Mesa. Our largest hydroelectric facility in operation is the Serra da Mesa facility, which we acquired in 2001 from VBC, one of our controlling shareholders. Furnas began construction of the Serra da Mesa facility in 1985. In 1994, construction was suspended due to a lack of resources, which led to a public bidding procedure in order to resume construction. Serra da Mesa currently consists of three hydroelectric facilities located on the Tocantins River in the state of Goiás. The Serra da Mesa facility began operations in 1998 and has an installed capacity of 1,275 MW. The concession for the Serra da Mesa facility is owned by Furnas, which is also the operator, and we own part of the facility. Under Furnas’ rental agreement with us, which has a 30-year term commencing in 1998, we have the right to 51.54% of the assured energy of the Serra da Mesa facility until 2028, irrespective of the actual electricity produced by the facility, even if, during the term of the concession, there is an expropriation or forfeiture of the concession or the term of the concession expires. We sell all of such electricity to Furnas under an electricity purchase contract that expires in 2014 at a price that is adjusted annually based on the IGP-M. After the expiration of this electricity purchase arrangement with Furnas, we will retain, until 2028, the right to 51.54% of the assured energy of Serra da Mesa. We will be allowed to commercialize it in accordance with regulations applicable at such time. Our share of the installed capacity and assured energy of the Serra da Mesa facility is 657 MW and 3,030 GWh/year, respectively. On May 5, 2008, Furnas requested the renewal of the plant concession term for an additional 35 years. On February 15, 2011, ANEEL forwarded Furna’s request to the Ministry of Mines and Energy, Ministério de Minas e Energia (“MME”), which approval is still pending.
CERAN Complex. We own a 65.0% interest in CERAN, a subsidiary that was granted a 35-year concession in March 2001 to construct, finance and operate the CERAN hydroelectric complex. The other shareholders are CEEE (30.0%) and Desenvix (5.0%). The CERAN hydroelectric complex consists of three hydroelectric plants: Monte Claro, Castro Alves and 14 de Julho. The complex is located on the Antas River approximately 120 km north of Porto Alegre, near the city of Bento Gonçalves, in the state of Rio Grande do Sul. The entire CERAN Complex has an installed capacity of 360 MW and estimated assured energy of 1,515.5 GWh per year, of which our share will be 985.1 GWh/year. We sell our participation in the assured energy of this complex to affiliates in our group. These facilities are operated by CERAN, under CPFL Geração’s supervision.
Monte Claro (CERAN Complex). In 2004, Monte Claro’s first generating unit became operational, with an installed capacity of 65 MW and assured energy of 509.8 GWh a year, and in 2006, the second generating unit became operational, with an installed capacity of 65 MW and assured energy of 7.0 GWh per year. The plant has a total of 130 MW in installed capacity and 516.8 GWh in assured energy per year.
Castro Alves (CERAN Complex). In March 2008, the first generation unit of the Castro Alves plant became operational, with an installed capacity of 43.4 MW and annual assured energy of 353.0 GWh. In April 2008, the second generation unit became operational, with an installed capacity of 43.4 MW and annual assured energy of 207.6 GWh. This plant became fully operational in June 2008, with a total installed capacity of 130 MW and annual assured energy of 560.6 GWh. Castro Alves added 84.5 MW to our capacity and an annual assured energy of 364.4 GWh.
30
14 de Julho (CERAN Complex). The first generation unit of the 14 de Julho plant became operational in December, 2008, and the second generation unit became fully operational in March, 2009. This plant has a total installed capacity of 100 MW and an annual assured energy of 438.0 GWh. 14 de Julho added 65 MW to our capacity and an annual assured energy of 284.7 GWh.
Barra Grande. This facility became fully operational on May 1, 2006 with a total installed capacity of 690 MW and total assured energy of 3,334.1 GWh per year. CPFL Geração owns a 25.01% interest in this plant. The other shareholders of the joint venture are Alcoa (42.18%), CBA (Companhia Brasileira de Alumínio) (15.00%), DME (Departamento Municipal de Eletricidade de Poços de Caldas) (8.82%), andCamargo Corrêa Cimentos S.A. (9.00%). We sell our participation in the assured energy of this facility to affiliates in our group.
Campos Novos. We own a 48.72% interest in ENERCAN, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in May 2000 to construct, finance and operate the Campos Novos hydroelectric facility. The plant was constructed on the Canoas River in the state of Santa Catarina, and became fully operational on May 1, 2007 with a total installed capacity of 880 MW and assured energy of 3,310.4 GWh per year, of which our interest is 1,612.9 GWh per year. The other shareholders of ENERCAN are CBA (24.73%), Votorantim Metais Níqueis S.A. (20.04%) and CEEE (6.51%). The plant is operated by ENERCAN under CPFL Geração’s supervision. This plant increased our installed capacity by 428.8 MW. We sell our participation in the assured energy of this joint venture to affiliates in our group.
Foz do Chapecó. We own a 51.0% interest in Chapecoense, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in November 2001 to construct, finance and operate the Foz do Chapecó hydroelectric facility. The remaining 49.0% interest in the joint venture is divided among Furnas, which holds a 40% interest, and CEEE, which holds a 9.0% interest. The Foz do Chapecó hydroelectric plant is located on the Uruguay River, on the border between the states of Santa Catarina and Rio Grande do Sul. The first generating unit started commercial operations on October 14, 2010, the second one on November 23, 2010, the third one on December 30, 2010 and the fourth one on March 12, 2011. The Foz do Chapecó hydroelectric plant has added 436.1 MW to our installed capacity. Of our 51% share in the assured energy of this project, we sell 40% to affiliates in our group and 11% through CCEARs.
Luis Eduardo Magalhães Power Plant. We own a 6.93% interest in the Luis Eduardo Magalhães power plant, also known as UHE Lajeado. The plant is located on the Tocantins river in the state of Tocantins, and became fully operational in November, 2002 with a total installed capacity of 902.5 MW and assured energy of 4,613 GWh per year. The plant was built by Investco S.A., a consortium comprised of Lajeado Energia, EDP (Energias de Portugal), CEB (Companhia Energética de Brasília) and Paulista Lajeado (which we acquired in 2007). We sell our participation in the assured energy of this plant to affiliates in our group.
Thermoelectric power plants
We operate three thermoelectric power plants. Termonordeste and Termoparaíba are powered by fuel oil from the EPASA complex, with total installed capacity of 341.6 MW and assured energy of 2,169.0 GWh. We own an aggregate 52.75% interest in Termonordeste and Termoparaíba. The Termonordeste and Termoparaíba thermoelectric power plants are located in the city of João Pessoa, in the state of Paraíba. The construction of these plants began in October 2009. Termonordeste started commercial operations on December 24, 2010, and Termoparaíba on January 13, 2011. The electricity of these power plants was sold in CCEARs, and part of this energy was bought by our own distributors. The Carioba facility has an installed capacity of 36 MW; however, it is out of commercial operations since February 19, 2011. We have applied to terminate Carioba’s concession once ANEEL reduced the subsidy associated with the CCC account. ANEEL is currently analyzing our request.
Small Hydroelectric Power Plants
We operate 46 small hydroelectric power plants, of which 34 are owned by CPFL Energias Renováveis, three by CPFL Geração and nine by some of our distribution companies. Since 1988, we have been investing in their renovation and automation to increase their output. The program principally involves the replacement of existing turbines and upgrade of peripheral equipment and automated systems, as well as restoring infrastructure. Through these initiatives, we hope to increase these plants’ assured energy and electricity production and reduce operational costs.
31
For instance, due to the modernization projects we carried out at Gavião Peixoto, Chibarro and Capão Preto, the MME approved new assured energy levels at these plants, which increased from 19.3 GWh per year to 33.5 GWh per year for Gavião Peixoto, from 6.1 GWh per year to 14.8 GWh per year for Chibarro and from 8.7 GWh per year to 19.9 GWh per year for Capão Preto.
The automation of these power plants allows us to carry out control, supervision and operations remotely. We have established an operational center for the management and monitoring of our power plants in Campinas, making it possible for the entire production cycle of the power plants to be remotely controlled in real time.
Through 2013 we expect to begin projects to refurbish two power plants: Andorinhas and Guaporé.
Biomass thermoelectric power plants
CPFL Bioenergia. In partnership with Baldin Bioenergia, we have constructed a co-generation plant in the city of Pirassununga, in the state of São Paulo. The total cost of the biomass thermoelectric power plant was R$104 million. The construction began in October 2008 and commercial operations started on August 27, 2010. This co-generation plant has added 45.0 MW to our installed capacity. All of this electricity has been sold to CPFL Brasil.
CPFL Bio Formosa. In 2009, CPFL Brasil established the Baia Formosa power plant (CPFL Bio Formosa), with an installed capacity of 40 MW. The construction of CPFL Bio Formosa plant began in March 2010 and the plant began operations on September 2, 2011. The total cost of construction was R$132 million. In 2006, our consulting group helped the Farias Group to sell approximately 11 MW in the A-5 auction (an auction held five years before the initial delivery date, see “Auctions on the Regulated Market”), with CCEARs in force until 2025. The success of the auction helped CPFL Brasil to establish Usina Baia Formosa (currently CPFL Bio Formosa) in 2009.
CPFL Bio Buriti. On March 23, 2010, CPFL Bio Buriti (which was formed to develop electric energy generation projects using sugar cane bagasse) executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects. The construction of CPFL Bio Buriti began in March 2010 and the plant began operations on October 7, 2011. The installed capacity of this plant is 50 MW and the investment was R$148 million. CPFL Bio Buriti has an associated PPA in force until 2030.
Wind Farms:
Praia Formosa:Praia Formosa wind farm, in the state of Ceará, began operations in August 26, 2009. It has an installed capacity of 105 MW and an associated PPA in force until 2029.
Icaraizinho:Icaraizinho wind farm, in the state of Ceará, began operations in October 14, 2009. It has an installed capacity of 54.6 MW and an associated PPA in force until 2029.
Foz do Rio Choró:Foz do Rio Choró wind farm, in the state of Ceará, began operations in January 31, 2009. It has an installed capacity of 25.2 MW and an associated PPA in force until 2029.
Paracuru:Paracuru wind farm, in the state of Ceará, began operations in November 29, 2008. It has an installed capacity of 25.2 MW and an associated PPA in force until 2028.
Taíba Albatroz: Taíba Albatroz wind farm, in the state of Ceará, has an installed capacity of 16.8 MW and an associated agreement with Eletrobrás under the Proinfa Program to sell all of the energy generated for a period of 20 years. The acquisition of Taíba Albatroz wind farm is subject to ANEEL’s approval.
Bons Ventos: Bons Ventos wind farm, in the state of Ceará, has an installed capacity of 50.4 MW and an associated agreement with Eletrobrás under the Proinfa Program to sell all of the energy generated for a period of 20 years. The acquisition of Bons Ventos wind farm is subject to ANEEL’s approval.
32
Enacel: Enacel wind farm, in the state of Ceará, has an installed capacity of 31.5 MW and an associated agreement with Eletrobrás under the Proinfa Program to sell all of the energy generated for a period of 20 years. The acquisition of Enacel wind farm is subject to ANEEL’s approval.
Canoa Quebrada: Canoa Quebrada wind farm, in the state of Ceará, has an installed capacity of 58.8 MW and an associated agreement with Eletrobrás under the Proinfa Program to sell all of the energy generated for a period of 20 years. The acquisition of Canoa Quebrada wind farm is subject to ANEEL’s approval.
Expansion of Installed Capacity
Demand for electricity in our distribution concession areas continues to grow. To address this increase in demand, and to improve our margins, we are expanding our installed capacity. Through our subsidiary CPFL Energias Renováveis, we are building CPFL Bio Ipê, CPFL Bio Pedra, Alvorada and Coopcana co-generation plants, Salto Góes small hydroelectric power plant and Santa Clara, Campo dos Ventos, Macacos I, São Benedito and Atlântica wind farms, which together will have an installed capacity of 885 MW (our share will be 558 MW). By the end of 2014, we expect that the total generating capacity from these facilities will become fully operational.
The following table sets forth information regarding our current generation projects as of the date of this annual report:
| Estimated Installed Capacity* | Estimated Assured Energy* | Estimated Construction Cost | Start of Construction | Expected Start of Operations | Our Ownership | Estimated Installed Capacity Available* | Estimated Assured Energy Available to us* |
Plants under development | (MW) | (GWh/yr) | (R$ million) |
|
| (%) |
| (GWh/yr) |
Thermoelectric biomass |
|
|
|
|
|
|
|
|
CPFL Bio Ipê | 25 | 71.7 | 29 | December 2010 | 2012 | 63,00 | 16 | 45,2 |
CPFL Bio Pedra | 70 | 213.9 | 226 | September 2010 | 2012 | 63,00 | 44 | 134,8 |
Alvorada Thermoelectric plant | 50 | 157.7 | 154 | February 2012 | 2013 | 63,00 | 32 | 99,3 |
Coopcana Thermoelectric plant | 50 | 157.7 | 153 | February 2012 | 2013 | 63,00 | 32 | 99,3 |
Subtotal | 195 | 601.0 | 562 |
|
|
| 123 | 378,6 |
|
|
|
|
|
|
|
|
|
Hydroelectric power plant |
|
|
|
|
|
|
|
|
Salto Góes | 20 | 97.2 | 135 | November 2010 | 2013 | 63,00 | 13 | 61,3 |
Subtotal | 20 | 97.2 | 135 |
|
|
| 13 | 61,3 |
|
|
|
|
|
|
|
|
|
Wind Farms |
|
|
|
|
|
|
|
|
Santa Clara wind farms (7 companies) (1) | 188 | 693.3 | 879 | August 2010 | 2012 | 63,00 | 118 | 436,8 |
Campo dos Ventos II Wind Farm | 30 | 131.8 | 143 | 2012 | 2013 | 63,00 | 19 | 83,0 |
Campo dos Ventos Wind Farms (5 companies) (2) | 138 | 600.1 | 657 | Awaiting approval of ANEEL | 2014 | 63,00 | 87 | 378,0 |
Macacos I Wind Farms (4 companies)(3) | 78 | 326.3 | 372 | November 2010 | 2013 | 63,00 | 49 | 205,6 |
São Benedito Wind Farms (4 companies)(4) | 116 | 530.9 | 504 | 2012 | 2014 | 63,00 | 73 | 334,4 |
Atlântica Wind Farms (4 companies)(5) | 120 | 461.7 | 538 | 2012 | 2013 | 63,00 | 76 | 290,9 |
Subtotal | 670 | 2,744.0 | 3093 |
|
|
| 422 | 1.728,7 |
|
|
|
|
|
|
|
|
|
TOTAL | 885 | 3,442.2 | 3790 |
|
|
| 558 | 2168,6 |
(*) Unaudited by our independent auditors.
(1) Santa Clara I, II, III, IV, V and VI and Eurus VI.
(2) Campo dos Ventos I, III, IV, São Domingos and Ventos de São Martinho.
(3) Macacos, Pedra Preta, Costa Branca and Juremas.
(4) Ventos de São Benedito, Ventos de Santo Dimas, Santa Mônica and Santa Úrsula.
(5) Atlântica I, II, IV and V.
33
Biomass Thermoelectric power plants
Project Bio Ipê. On March 23, 2010, CPFL Bio Ipê (which was formed to develop electric energy generation projects using sugar cane bagasse) executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects. The construction of CPFL Bio Ipê began in December 2010 and operations are scheduled to start in the first half of 2012. The installed capacity of this plant is expected to be of 25 MW and the investment is approximately R$29 million. This project has an associated PPA in force until 2030.
Project Bio Pedra. On March 23, 2010, CPFL Bio Pedra (which we formed to develop electric energy generation projects using sugar cane bagasse) executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects. The installed capacity of this project is expected to be 70 MW and the investment is approximately R$226 million. Operations are scheduled to start in the first half of 2012. The electricity from Bio Pedra has been sold through an auction held in 2010, with CCEARs in force until 2027.
Project Alvorada. The construction of CPFL Bio Alvorada will begin in 2012 in the city of Araporã, in the state of Minas Gerais, and operations are scheduled to start in the first half of 2013. The installed capacity of CPFL Bio Alvorada is expected to be 50 MW and assured energy is 157,7 GWh. The investment is approximately R$154 million. This project has an associated PPA in force until 2032.
Project Coopcana.The construction of CPFL Bio Coopcana will begin in 2012 in the city of São Carlos do Avaí, in the state of Paraná, and operations are scheduled to start in the first half of 2013. The installed capacity of CPFL Bio Alvorada is expected to be 50 MW and assured energy is 157,7 MWh. The investment is approximately R$153 million. This project has an associated PPA in force until 2033.
Small hydroelectric power plant
Project Salto Góes.The construction of Salto Góes small hydroelectric power plant began in November 2010 in the city of Tangará, in the state of Santa Catarina, and operations are scheduled to start in the first half of 2013. The installed capacity of Salto Góes is expected to be 20 MW and the investment is approximately R$135 million. The electricity from Salto Góes has been sold through an auction of alternative sources held in 2010, with CCEARs in force until 2042.
Wind Farms
Project Santa Clara Wind Farms. During 2009, CPFL Geração developed and planned a number of wind power generation projects and, in September 2009, acquired a complex of additional wind farms. The Santa Clara wind farms I, II, III, IV, V, VI and Eurus VI will have aggregate installed capacity of 188 MW and aggregate assured energy of 693.3 GWh. The construction of the wind farms has already started, and operations are scheduled to start in the second half of 2012. The total estimated cost of construction is R$879 million. The electricity from these wind farms have been sold through an auction held in 2009, with CCEARs in force until 2032.
Project Campo dos Ventos Wind Farms. In 2010, CPFL Geração acquired Campo dos Ventos I, III, V, São Domingos and Ventos do São Martinho wind farms7.The total estimated cost of construction of these five wind farms is R$657 million, and operations are scheduled to start in the second half of 2014. They will have installed capacity of 138 MW and assured energy of 600.1 GWh. This project has an associated PPA in force until 2033.
Project Campo dos Ventos II Wind Farm.In 2010, CPFL Geração acquired Campo dos Ventos II wind farm. Construction of Campo dos Ventos II in the cities of João Câmara and Parazinho, in the state of Rio Grande do Norte, is in progress. Operations are scheduled to start in the second half of 2013. The total estimated cost of construction is R$143 million. This wind farm will have an installed capacity of 30 MW and assured energy of 131.8 GWh. The electricity from Campo dos Ventos II has been sold through an auction held in 2010, with CCEARs in force until 2033.
7Please note that Campo dos Ventos IV and Eurus V wind farms, which we mentioned in our 2010 annual report, have been deactivated due to technical reasons, and have been replaced with São Domingos and Ventos do São Martinho wind farms.
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Project Macacos I Wind Farms. The Macacos I complex is comprise of by Macacos, Pedra Preta, Costa Branca and Juremas wind farms, which will have an aggregate installed capacity of 78 MW and aggregate assured energy of 326.3 GWh. The construction of these wind farms has already started and operations are scheduled to commence in the second half of 2013. The total estimated cost of construction is R$372 million. The electricity from these wind farms has been sold through an auction of alternative sources held in 2010, with CCEARs in force until 2032.
Project São Benedito Wind Farms. The São Benedito complex is comprised of Ventos de São Benedito, Ventos de Santo Dimas, Santa Mônica and Santa Úrsula wind farms, which will have an aggregate installed capacity of 116 MW and aggregate assured energy of 530.9 GWh. The total estimated cost of construction of these wind farms is R$504 million, and operations are scheduled to start in the second half of 2014. This project has an associated PPA in force until 2034.
Project Atlântica Wind Farms.The Atlântica complex is comprised of Atlântica I, II, IV and V wind farms, which will have an aggregate installed capacity of 120 MW and aggregate assured energy of 461.7 GWh. Operations are scheduled to start in the second half of 2013. The total estimated cost of construction of these wind farms is R$538 million. The electricity from these wind farms has been sold through an auction of alternative sources held in 2010, with CCEARs in force until 2033.
Electricity Commercialization and Services
Commercialization Operations
Our subsidiary CPFL Brasil carries out our electricity commercialization operations. Its key functions are:
· procuring electricity for commercialization activities by entering into bilateral contracts with energy companies (including our generation subsidiaries and third parties) and purchasing electricity in public auctions;
· reselling electricity to Free Consumers; and
· reselling electricity to distribution companies (including CPFL Paulista, CPFL Piratininga and RGE) and other agents in the electricity market through bilateral contracts.
The rates at which CPFL Brasil purchases and sells electricity in the free market are determined by bilateral negotiations with its suppliers and consumers. The contracts with distribution companies are regulated by ANEEL. In addition to marketing electricity to unaffiliated parties, CPFL Brasil resells electricity to CPFL Paulista, CPFL Piratininga and RGE, but profit margins from sales to related parties have been limited by ANEEL regulations. Prior to the New Industry Model Law, distribution companies were permitted to purchase up to 30.0% of their electricity requirements from affiliated companies. The ability to sell electricity to affiliated companies has been eliminated under the New Industry Model Law, with the exception of those contracts approved by ANEEL prior to March 2004. However, we are allowed to sell electricity to distributors through the open bidding process in the regulated market.
Services
Through CPFL Brasil, we provide agency services to Free Consumers before the CCEE and other agents, such as guidance on their operational requirements. We also offer our consumers a wide range of electricity-related services through CPFL Brasil and CPFL Serviços. These services are designed to help consumers improve the efficiency, cost and reliability of the electric equipment they use. Our main electricity-related services include:
· Electric network maintenance:CPFL Serviçosoffers maintenance services on medium- and high-voltage networks on one-time or periodic basis with rapid diagnosis and precise service. We also perform remodels on our sub-stations, maintenance services on generating units and work on live-wire networks.
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· Distribution networks:CPFL Serviços plans and constructs all electric energy distribution system network, including above and underground electricity grids, medium-voltage sub-stations and transformers, industrial plants and lighting solutions. Our experience in the market and familiarity with norms in different regions of Brazil allow us to respect the relevant standards in all parts of the country. As a result, we are able to bring quality and technologically-advanced energy to our consumption points.
· Transmission networks: CPFL Serviços plans, constructs, commissions and provides electricity to substations and transmission lines, always in line with each consumer’s needs and growth expectations and in accordance with the most rigorous safety criteria, aiming for an optimal use of resources.
· Self-production networks:The self-production networks offered by CPFL Brasil are made up of electric energy production alternatives. They ensure supply of energy to consumers, diversify inputs and reduce costs. We have generators (diesel and natural gas) that that operate only in peak periods, which reduces electricity costs of our customers. Our co-generation activities (natural gas) include the simultaneous and sequential production of electric and thermoelectric energy using a single kind of fuel. We also offer solutions in acclimatization and energy-efficiency projects, as well as distributed generation of solar energy.
· Equipment recovery:CPFL Serviços has experience refurbishing electric assets in any state in order to restore their efficiency. Our familiarity with refurbishing equipment also allow us to produce distribution and high-power transformers. In addition, we self-produce and fabricate measurement panels, as well as panels for protection and command networks.
Competition
We face competition from other generation and commercialization companies in the sale of electricity to Free Consumers. Distribution and transmission companies are required to permit the use of their lines and ancillary facilities for the distribution and transmission of electricity by other parties upon payment of a tariff.
Brazilian law provides that all of our concessions can be renewed once with approval from the MME or ANEEL as the granting authority, provided that the concessionaire so requests and that certain requirements related to the rendering of public services are met. We intend to apply for the extension of each concession upon its expiration. We may face significant competition from third parties in bidding for renewal of such concessions or for any new concessions. ANEEL has absolute discretion over whether to renew existing concessions, and the acquisition of certain concessions by competing investors could adversely affect our results of operations.
Our Concessions and Authorizations
Hydroelectric generation projects with a capacity greater than 1,000 kW operated by an independent producer can usually only be implemented through concessions granted by ANEEL through public biddings (and the execution of a concession agreement). Requests to renew these concessions are examined by ANEEL on a case‑by‑case basis, according to the terms of the related agreement and public bidding note. However, ANEEL retains the power to deny the request to extend the concession period.
Certain projects such as wind farms, small scale hydroelectric power plants and thermoelectric power plants are implemented through an authorization awarded by the granting authority without the need for a public bidding process (unlike concessions). Renewal of these authorizations is also at the discretion of ANEEL and is decided on a case-by-case basis. ANEEL must provide justification for its decisions and any renewal must foster the public interest.
For further information about concessions and authorizations, see “The Brazilian Power Industry – Concessions.”
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Concessions
We operate under concessions granted by the Brazilian government through ANEEL for our generation and distribution businesses. We have the following concessions with respect to our distribution business:
Concession no. | Concessionaire | State | Term |
014/1997 | CPFL Paulista | São Paulo | 30 years from November 1997 |
09/2002 | CPFL Piratininga | São Paulo | 30 years from October 1998 |
013/1997 | RGE | Rio Grande do Sul | 30 years from November 1997 |
021/1999 | CPFL Santa Cruz | São Paulo and Paraná | 16 years (from February 1999 to July 2015) |
015/1999 | CPFL Jaguari | São Paulo | 16 years (from February 1999 to July 2015) |
017/1999 | CPFL Mococa | São Paulo and Minas Gerais | 16 years (from February 1999 to July 2015) |
018/1999 | CPFL Leste Paulista | São Paulo | 16 years (from February 1999 to July 2015) |
019/1999 | CPFL Sul Paulista | São Paulo | 16 years (from February 1999 to July 2015) |
The table below summarizes the concessions relative to our generation business. In addition to these concessions, CPFL Sul Centrais, as an Independent Producer with generating capacity of less than 1,000 kW, operates under a regulatory authorization rather than a concession agreement.
Concession no. | Independent Producers | Plant | State | Term | Maximum renewal period |
128/2001 | Foz do Chapecó | Foz do Chapecó | Santa Catarina and Rio Grande do Sul | 35 years from November 2001 | At the discretion of ANEEL |
036/2001 | Barra Grande | Barra Grande | Rio Grande do Sul | 35 years from May 2001 | At the discretion of ANEEL |
008/2001 | CERAN | 14 de Julho, Castro Alves and Monte Claro | Rio Grande do Sul | 35 years from March 2001 | At the discretion of ANEEL |
043/2000 | ENERCAN | Campos Novos | Santa Catarina | 35 years from May 2000 | At the discretion of ANEEL |
005/1997 | Investco | Luiz Eduardo Magalhães | Tocantins | 35 years from December 1997 | At the discretion of ANEEL |
015/1997 | CPFL Geração | 2 small hydroelectric power plants and one thermoelectric facility | São Paulo | 30 years from November 1997 | 30 years |
Decree No. 85,983/81 | CPFL Geração | Serra da Mesa | Goiás | (1) | 20 years |
09/1999 | CPFL Jaguari | Macaco Branco (small hydroelectric power plant) | São Paulo | 16 years (from February 1999 to July 2015) | 20 years |
10/1999 | CPFL Leste Paulista | Rio do Peixe I and II (small hydroelectric power plants) | São Paulo | 16 years (from February 1999 to July 2015) | 20 years |
015/1997 | CPFL Renováveis | Americana | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Andorinhas | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Buritis | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Capão Preto | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Chibarro | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Dourados | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Eloy Chaves | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Esmeril | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Gavião Peixoto | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Guaporé | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Jaguari | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Lençóis | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Monjolinho | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Pinhal | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Pirapó | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Saltinho | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Salto Grande | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Socorro | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Santana | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | Três Saltos | São Paulo | 30 years from November 1997 | 30 years |
015/1997 | CPFL Renováveis | São Joaquim | São Paulo | 30 years from November 1997 | 30 years |
Ordinance No. 475 | CPFL Renováveis | Diamante | São Paulo | 30 years from November 1997 | 30 years |
(1) We have the contractual right to 51.54% of the assured energy of this facility under a 30-year rental agreement, expiring in 2028. The concession for Serra da Mesa is held by Furnas and expired on May 7, 2011. On May 5, 2008, Furnas requested renewal of the concession for Serra da Mesa plant for an additional term of 29 years. On February 15, 2011, ANEEL forwarded Furna’s request to MME, which approval is still pending.
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Authorizations
Authorization no. | Independent Producers | Plant | State | Term | Maximum renewal period |
2106/2009 | CPFL Bioenergia | Baldin thermoelectric power plant | São Paulo | 30 years from September 24, 2009 | At the discretion of MME |
2277/2010 | EPASA | Termoparaíba thermoelectric power plant | Paraíba | 35 years from December 7, 2007 | At the discretion of MME |
2277/2010 | EPASA | Termonordeste thermoelectric power plant | Paraíba | 35 years from December 12, 2007 | At the discretion of MME |
259/2002 | CPFL Bio Formosa | Baía Formosa thermoelectric power plant | Rio Grande do Norte | 30 years from May 15, 2002 | At the discretion of MME |
2643/2010 | CPFL Bio Buriti | Buriti thermoelectric power plant | São Paulo | 30 years from December 7, 2010 | At the discretion of MME |
2375/2010 | CPFL Bio Ipê | Ipê thermoelectric power plant | São Paulo | 30 years from May 3, 2010 | At the discretion of MME |
129/2010 | CPFL Bio Pedra | Pedra thermoelectric power plant | São Paulo | 35 years from February 28, 2010 | At the discretion of MME |
609/2010 | Santa Clara I Energia Renováveis | Santa Clara I | Rio Grande do Norte | 35 years from July 1, 2010 | At the discretion of MME |
683/2010 | Santa Clara II Energia Renováveis | Santa Clara II | Rio Grande do Norte | 35 years from August 4, 2010 | At the discretion of MME |
610/2010 | Santa Clara III Energia Renováveis | Santa Clara III | Rio Grande do Norte | 35 years from July 1, 2010 | At the discretion of MME |
672/2010 | Santa Clara IV Energia Renováveis | Santa Clara IV | Rio Grande do Norte | 35 years from July 29, 2010 | At the discretion of MME |
838/2010 | Santa Clara V Energia Renováveis | Santa Clara V | Rio Grande do Norte | 35 years from October 8, 2010 | At the discretion of MME |
670/2010 | Santa Clara VI Energia Renováveis | Santa Clara VI | Rio Grande do Norte | 35 years from July 29, 2010 | At the discretion of MME |
749/2010 | Eurus VI Energias Renováveis | Eurus VI | Rio Grande do Norte | 35 years from August 24, 2010 | At the discretion of MME |
Resolution No. 606 | CPFL Renováveis | Arvoredo | Santa Catarina | 30 years from November 5, 2002 | At the discretion of MME |
Resolution No. 587 | CPFL Renováveis | Alto Irani | Santa Catarina | 30 years from October, 29, 2002 | At the discretion of MME |
Resolution No. 607 | CPFL Renováveis | Plano Alto | Santa Catarina | 30 years from November 7, 2002 | At the discretion of MME |
Resolution No. 348 | CPFL Renováveis | Barra da Paciência | Minas Gerais | 30 years from December 17, 1999 | At the discretion of MME |
Resolution No. 349 | CPFL Renováveis | Cocais Grande | Minas Gerais | 30 years from December 22, 1999 | At the discretion of MME |
Resolution No. 17 | CPFL Renováveis | Corrente Grande | Minas Gerais | 30 years from January, 14, 2000 | At the discretion of MME |
Resolution No. 370 | CPFL Renováveis | Ninho da Águia | Minas Gerais | 30 years from December 29, 1999 | At the discretion of MME |
Resolution No. 406 | CPFL Renováveis | Paiol | Minas Gerais | 30 years from August 06, 2002 | At the discretion of MME |
Resolution No. 13 | CPFL Renováveis | São Gonçalo | Minas Gerais | 30 years from January, 13, 2000 | At the discretion of MME |
Resolution No. 355 | CPFL Renováveis | Varginha | Minas Gerais | 30 years from December 22, 1999 | At the discretion of MME |
Resolution No. 367 | CPFL Renováveis | Várzea Alegre | Minas Gerais | 30 years from December 29, 1999 | At the discretion of MME |
Ordinance No. 352 | CPFL Renováveis | Santa Luzia | Santa Catarina | 35 years from December 20, 2007 | At the discretion of MME |
Resolution No. 307 | CPFL Renováveis | Praia Formosa | Ceará | 30 years from June 04, 2002 | At the discretion of MME |
Resolution No. 454 | CPFL Renováveis | Icaraizinho | Ceará | 30 years from August 27, 2002 | At the discretion of MME |
Resolution No. 306 | CPFL Renováveis | Choró | Ceará | 30 years from June 04, 2002 | At the discretion of MME |
Resolution No. 460 | CPFL Renováveis | Paracuru | Ceará | 30 years from August 27, 2002 | At the discretion of MME |
Ordinance No. 564/11 | CPFL Renováveis | Pedra Preta | Rio Grande do Norte | 35 years from October 11, 2011 | At the discretion of MME |
Ordinance No. 557/11 | CPFL Renováveis | Macacos | Rio Grande do Norte | 35 years from September 27, 2011 | At the discretion of MME |
Ordinance No. 556/11 | CPFL Renováveis | Juremas | Rio Grande do Norte | 35 years from September 27, 2011 | At the discretion of MME |
Ordinance No. 585/11 | CPFL Renováveis | Costa Branca | Rio Grande do Norte | 35 years from October 11, 2011 | At the discretion of MME |
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Independent Producers
A generation company classified as an independent producer under Brazilian law receives a concession or authorization to produce energy for its own consumption or for sale to local distribution companies, Free Consumers, and other types of consumers. The price to be charged by Independent Producers for the sale of energy to certain types of consumer is subject to general criteria established by ANEEL, whereas the sale price to others can be freely negotiated between the parties.
Concessionaires
A generation company classified as a concessionaire under Brazilian law receives a concession to distribute, transmit or generate electric energy. Since concessions involve public services, they can only be granted through a public bidding procedure (licitação pública). All tariffs charged by concessionaires are determined by ANEEL and concessionaires are not free to negotiate these rates with consumers.
The concession agreement and related documents establish the concession period and whether the related concession can be extended. For concessions to generate electric energy, the amortization period for the related investment is 35 years, renewable once for a maximum period of 20 years.
Although concession agreements and applicable laws generally allow for the extension of the concession period, such extension is not a right. The decision to extend a concession agreement is subject to the discretion ofthe granting authority, which must provide justification for its decision, and the decision must foster the public interest.
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Properties
Our principal properties consist of hydroelectric generation plants. Due to the adoption of IFRS, we have reclassified our distribution companies’ fixed assets, comprised mainly of substations and distribution networks, partially as intangible assets and partially as financial assets of concession. The net book value of our total property, plant and equipment as of December 31, 2011 was R$8,292 million. No single one of our properties produces more than 10.0% of our total revenues. Our facilities are generally adequate for our present needs and suitable for their intended purposes.
Pursuant to Brazilian law, the essential properties and facilities that we use in performing our obligations under our concession agreements cannot be transferred, assigned, pledged or sold to, or encumbered by, any of our creditors without prior approval from ANEEL.
Environmental
The Brazilian constitution gives both the Brazilian Federal and State Governments the power to enact laws designed to protect the environment. A similar power is given to municipalities whose local interests may be affected. Municipal laws are considered to be a supplement to federal and state laws. A violator of applicable environmental laws may be subject to administrative and criminal sanctions, and will have an obligation to remediate and/or provide compensation for environmental damages. Administrative sanctions may include substantial fines and suspension of activities, while criminal sanctions may include fines and, for individuals (including executive officers and employees of companies who commit environmental crimes), imprisonment.
Our energy distribution and generation facilities are subject to environmental licensing procedures, which include the preparation of environmental impact assessments before such facilities are constructed. Once the respective environmental licenses are obtained, the holder of the license remains subject to compliance with specific requirements.
The environmental issues regarding the construction of new electricity generation facilities require specially-tailored oversight. For this reason, CPFL Geração manages these matters in order to ensure that its policies and environmental obligations are given adequate consideration. Decisions are made by environmental committees, whose members include representatives of each project partner and of each plant’s environmental management office. Our environmental committees are constantly interacting with government agencies to ensure environmental compliance and future electricity generation. In addition, we support local community programs that relocate rural families in collective resettlements and provide institutional support for families involved in the conservation of local biodiversity.
In order to facilitate compliance with environmental laws, we use an environmental management system compliant with ISO 14001 that has been implemented in all of our segments. We have established a system to identify, evaluate and update matters relating to applicable environmental laws, as well as other requirements applicable to our environmental management system. Our generation and distribution of electricity is subject to internal and external audits that verify whether our activities are in compliance with ISO 14001. Our environmental management processes take into consideration our budgets and realistic forecasts, and always aim to achieve improvements at the financial, social and environmental levels.
The Brazilian Power Industry
In 2011, the MME approved a ten-year expansion plan under which Brazil’s installed power generation capacity is projected to increase to 171.1 GW by 2020, of which 115.1 GW (67.3%) is projected to be hydroelectric, 28.9 GW (16.9%) is projected to be thermoelectric and nuclear and 27.1 GW (15.8%) is projected to be from renewable sources.
In 2011, Eletrobrás owned 36% of Brazilian generation assets. Through its subsidiaries, Eletrobrás is also responsible for 56% of Brazil’s installed transmission capacity. In addition, it holds interests in certain Brazilianstate-controlled entities involved in the generation, transmission and distribution of electricity. They include, among others, Companhia Hidroelétrica do São Francisco — CHESF and Furnas Centrais Elétricas.
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In 2011, private companies represented approximately 35% of the markets for generation activities, in terms of total capacity and demand, and 30% of the transmission market in terms of revenue.
Principal Regulatory Authorities
Ministry of Mines and Energy — MME
The MME is the Brazilian government’s primary regulator the power industry. Following the adoption of the New Industry Model Law, the Brazilian government, acting primarily through the MME, has assumed certain duties that were previously the responsibility of ANEEL, including drafting guidelines for the granting of concessions and issuing directives governing the bidding process for concessions that relate to public services and public assets.
National Energy Policy Council — CNPE
The National Energy Policy Council,Conselho Nacional de Política Energética (“CNPE”), a committee created in August 1997, advises the President of Brazil on the development of national energy policy. The CNPE is chaired by the Minister of Mines and Energy and consists of six government ministers and three members selected by the President of Brazil. The CNPE was created to optimize the use of Brazil’s energy resources and to guarantee national energy supply.
ANEEL is an independent federal regulatory agency whose primary responsibility is to regulate and supervise the power industry in accordance with policies set forth by the MME, together with other matters delegated to it by the Brazilian government and the MME. ANEEL’s current responsibilities include, among others, (i) administering concessions for electric energy generation, transmission and distribution, including the approval of electricity tariffs, (ii) enacting regulations for the electric energy industry, (iii) implementing and regulating the exploitation of energy sources, including the use of hydroelectric power, (iv) promoting the public bidding process for new concessions, (v) settling administrative disputes among electricity generation entities and electricity purchasers and (vi) defining the criteria and methodology for the determination of transmission tariffs.
National Electrical System Operator — ONS
The ONS is a non‑profit organization that coordinates and controls electric utilities engaged in the generation, transmission and distribution of electric energy, and private market participants such as importers, exporters, and Free Consumers. The primary role of the ONS is to oversee generation and transmission operations in the Interconnected Power System, or SIN; subject to regulation and supervision by ANEEL. The ONS’ objectives and principal responsibilities include: operational planning for the generation industry, organizing the use of the domestic Interconnected Power System and international interconnections, guaranteeing that all parties in the industry have access to the transmission network in a non‑discriminatory manner, assisting in the expansion of the electric energy system, proposing plans to the MME for extensions of the Basic Network, and submitting rules for the operation of the transmission system for ANEEL’s approval.
Electric Energy Trading Chamber — CCEE
The Electric Energy Trading Chamber,Câmara de Comercialização de Energia Elétrica (“CCEE”), is a nonprofit organization that is subject to authorization, inspection and regulation by ANEEL. The CCEE replaced the Wholesale Energy Market, or MAE.
The CCEE is responsible, among other things, for (i) registering all the energy purchase agreements in the Regulated Market,Contratos de Comercialização de Energia no Ambiente Regulado (“CCEAR”), and registering agreements that result from market adjustments and the volume of electricity contracted in the free market, and (ii) accounting for and clearing of short‑term transactions. The CCEE consists of holders of concessions and permissions, authorized entities within the electricity industry, and Free and Special Consumers. Its board ofdirectors is composed of four members appointed by these parties, together with one appointed by the MME. The MME also acts as chairman of the board of directors.
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Energy Research Company — EPE
On August 16, 2004 the Brazilian government created the Energy Research Company,Empresa de Pesquisa Energética (“EPE”), a state-owned company responsible for conducting strategic research on the energy industry, including with respect to electric energy, oil, gas, coal and renewable energy sources. The research carried out by EPE is used by MME in its policymaking role in the energy industry.
Energy Industry Monitoring Committee — CMSE
The New Industry Model Law created the Energy Industry Monitoring Committee,Comitê de Monitoramento do Setor Elétrico (“CMSE”), which acts under the direction of the MME. The CMSE is responsible for monitoring supply conditions within the system and for indicating steps to be taken to correct problems.
Concessions, Permissions and Authorizations
The Brazilian constitution provides that the development, use and sale of electric energy may be undertaken directly by the Brazilian government or indirectly through the granting of concessions, permissions or authorizations. Historically, the Brazilian electric energy industry has been dominated by generation, transmission and distribution concessionaires controlled by the Federal or State governments.
Companies or consortia that wish to build or operate facilities for generation, transmission or distribution of electricity in Brazil must apply to the MME or to ANEEL, as representatives of the Brazilian government, for a concession, permission or authorization, as the case may be.
Concessions
Concessions grant rights to generate, transmit or distribute electricity in the relevant concession area for a specified period (as opposed to permissions and authorizations, which may be revoked at any time at the discretion of the MME, in consultation with ANEEL). This period is usually 35 years for new generation concessions, and 30 years for new transmission or distribution concessions. An existing concession may be renewed at the granting authority’s discretion.
The Concession Law establishes, among other things, the conditions that the concessionaire must comply with when providing electricity services, the rights of consumers, and the obligations of the concessionaire and the granting authority. Furthermore, the concessionaire must comply with regulations governing the electricity sector. The main provisions of the Concession Law are summarized below:
Adequate service. The concessionaire must render adequate service with respect to regularity, continuity, efficiency, safety and accessibility.
Use of land. The concessionaire may use public land or request the granting authority to expropriate necessary private land for the benefit of the concessionaire. In such case, the concessionaire shall compensate the affected private landowners.
Strict liability. The concessionaire is strictly liable for all damages arising from the provision of its services.
Changes in controlling interest. The granting authority must approve any direct or indirect change in controlling interests in the concessionaire.
Intervention by the granting authority. The granting authority may intervene in the concession, by means of a presidential decree, to ensure the adequate performance of services, as well as full compliance with applicable contractual and regulatory provisions. Within 30 days after the date of the decree, the granting authority’s representative is required to commence an administrative proceeding in which the concessionaire is entitled to contest the intervention. During the term of the administrative proceeding, a person appointed pursuant to thegranting authority’s decree becomes responsible for carrying on the concession. If the administrative proceeding is not completed within 180 days after the date of the decree, the intervention ceases and the concession is returned to the concessionaire. The concession is also returned to the concessionaire if the granting authority’s representative decides not to terminate the concession and the concession term has not yet expired.
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Termination of the concession. The termination of the concession agreement may be accelerated by means of expropriation and/or forfeiture. Expropriation is the early termination of a concession for reasons related to the public interest that must be expressly declared by law. Forfeiture must be declared by the granting authority after ANEEL or the MME has made a final administrative ruling that the concessionaire, among other things, (i) has failed to render adequate service or to comply with applicable law or regulation, (ii) no longer has the technical, financial or economic capacity to provide adequate service, or (iii) has not complied with penalties assessed by the granting authority. The concessionaire may contest any expropriation or forfeiture in the courts. The concessionaire is entitled to indemnification for its investments in expropriated assets that have not been fully amortized or depreciated, after deduction of any fines and damages due by the concessionaire.
Expiration. When the concession expires, all assets, rights and privileges that are materially related to the rendering of the electricity services revert to the Brazilian government. Following the expiration, the concessionaire is entitled to indemnification for its investments in assets that have not been fully amortized or depreciated as of the expiration.
Penalties. ANEEL regulations govern the imposition of sanctions against the participants in the electricity sector and classify the appropriate penalties based on the nature and importance of the breach (including warnings, fines and forfeiture). For each breach, the fines can be up to two per cent of the revenue (net of value-added tax and services tax) of the concessionaire in the 12-month period preceding any assessment notice. Infractions that may result in fines relate to the failure of the agent to request ANEEL’s approval in the following cases among others: (i) execution of contracts between related parties in the cases provided by regulation; (ii) sale or assignment of the assets related to services rendered as well as the imposition of any encumbrance (including any security, bond, guarantee, pledge and mortgage) on them or any other assets related to the concession or the revenues of the electricity services; and (iii) changes in controlling interests of the holder of the concession. In cases of contracts executed between related parties that are submitted for ANEEL’s approval, ANEEL may seek to impose restrictions on the terms and conditions of these contracts and, in extreme circumstances, determine that the contract be rescinded.
Permissions
Permissionshas a very limited usewithin the Brazilian electric sector. Permissions are grantedto rural power generation cooperatives,which supply power to their members and occasionally to consumers that are not part of the cooperative, in areas not regularly served by large distributors. Permissions represent an irrelevant share in the Brazilian power matrix.
Authorizations
Authorizations are unilateral and discretionary acts carried out by the granting authority. Unlike concessions, authorizations generally do not require a public bidding process. As an exception to the general rule, authorizations may also be granted to potential power producers after specific bidding processes for the purchase of power conducted by ANEEL.
In the power generation sector, independent power producers (IPPs) and self generators hold an authorization as opposed to a concession. IPPs and self-generators do not receive public service concessions or permits to render public services. Rather, they are granted authorizations or specific concessions to explore water resources that merely allow them to produce, use or sell electric energy. Each authorization granted to an IPP or self-power producer sets forth the rights and duties of the authorized company. Authorized companies have the right to ask ANEEL to carry out expropriations on their benefit, are subject to ANEEL supervision and are subject to ANEEL’s prior approval in the event of a change in their controlling interests. Moreover, early unilateral termination of the authorization entitles the authorized company to seek compensation from the granting authority for damages suffered.
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An IPP may sell part or all of its output to customers on its own account and at its own and risk. A self‑generator may, upon specific authorization by ANEEL, sell or trade any exceeding energy it is unable to consume. IPPs and self‑generators are not granted monopoly rights and are not subject to price controls, with the exception of specific cases. IPPs compete with public utilities and among themselves for large customers, pools of customers of distribution companies or any customers not served by a public utility.
The New Industry Model Law
Since 1995, the Federal Government has taken a number of measures to reform the Brazilian electric energy industry. These culminated, on March 15, 2004, in the enactment of the New Industry Model Law, which further restructured the power industry with the ultimate goal of providing consumers with a secure electricity supply at an adequate tariff.
The New Industry Model Law introduced material changes to the regulation of the power industry, with a view to (i) providing incentives to private and public entities to build and maintain generation capacity and (ii) assuring the supply of electricity within Brazil at adequate tariffs through competitive electricity public bidding processes. The key features of the New Industry Model Law include:
· Creation of a parallel environment for the trading of electricity, including: (1) the regulated market, a more stable market in terms of supply of electricity; and (2) a market specifically addressed to certain participants (i.e., Free Consumers and commercialization companies), called the free market, that permits a certain degree of competition.
· Restrictions on certain activities of distributors, so as to require them to focus on their core business of distribution, to promote more efficient and reliable services to captive consumers.
· Elimination of self-dealing, in order to provide an incentive to distributors to purchase electricity at the lowest available prices rather then buying electricity from related parties.
· Maintenance of contracts entered into prior to the New Industry Model Law, in order to provide regulatory stability for transactions carried out before its enactment.
The New Industry Model Law excludes Eletrobrás and its subsidiaries from the National Privatization Program, which is a program originally created by the Brazilian government in 1990 to promote the process of privatization of state-owned companies.
Regulations under the New Industry Model Law include, among other items, rules relating to auction procedures, the form of power purchase agreements and the method of passing costs through to Final Consumers. Under these regulations, all electricity-purchasing agents must contract all of their electricity demand under the guidelines of the new model. Electricity-selling agents must provide evidentiary support linking the allotted energy to be sold to existing or planned power generation facilities. Agents that do not comply with such requirements are subject to penalties imposed by ANEEL.
Beginning in 2005, all electricity generation, distribution and trading companies, independent power producers and Free and Special Consumers are required to notify the MME, by August 1 of each year, of their estimated electricity demand or estimated electricity generation, as the case may be, for each of the subsequent five years. Each distribution company is required to notify the MME, within the 60-day period preceding each electricity auction, of the amounts of electricity that it intends to contract in the auction. Based on this information, the MME must establish the total amount of energy to be contracted in the regulated market and the list of generation projects that will be allowed to participate in the auctions. Distribution companies will also be required to specify the portion of the contracted amount they intend to use to supply consumers qualified as Free Consumers.
Parallel Environment for the Trading of Electric Energy
Under the New Industry Model Law, electricity purchase and sale transactions are carried out in two different segments: (i) the regulated market, which contemplates the purchase by distribution companies throughpublic auctions of all electricity necessary to supply their consumers and (ii) the free market, which contemplates the purchase of electricity by non-regulated entities (such as Free Consumers and energy traders).
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Electricity distribution companies fulfill their electricity supply obligations primarily through public auctions. In addition to these auctions, distribution companies will be able to purchase electricity outside the public bidding process from: (i) generation companies that are connected directly to such distribution company, except for hydro generation companies with capacity higher than 30 MW and certain thermo generation companies, (ii) electricity generation projects participating in the initial phase of the Proinfa Program, a program designed to diversify Brazil’s energy sources, and (iii) the Itaipu power plant. The electricity generated by Itaipu continues to be sold by Eletrobrás to the distribution concessionaires operating in the South/Southeast/Midwest Interconnected Power System, although no specific contract was entered into by such concessionaires. The rates at which the Itaipu-generated electricity is traded are denominated in U.S. dollars and established pursuant to a treaty between Brazil and Paraguay. As a consequence, Itaipu rates rise or fall in accordance with the variation of the U.S. dollar/real exchange rate. Changes in the price of Itaipu-generated electricity are, however, subject to the Parcel A cost recovery mechanism discussed below under “—Distribution Tariffs.”
The Regulated Market
In the regulated market, distribution companies purchase their expected electricity requirements for their captive consumers from generators through public auctions. The auctions are administered by ANEEL, either directly or indirectly through the CCEE.
Electricity purchases are made through two types of bilateral agreements: Energy Agreements (Contratos de Quantidade de Energia) and Capacity Agreements (Contratos de Disponibilidade de Energia). Under an Energy Agreement, a generator commits to supply a certain amount of electricity and assumes the risk that its electricity supply could be adversely affected by hydrological conditions and low reservoir levels, among other conditions, which could interrupt the supply of electricity. In such cases, the generator would be required to purchase the electricity elsewhere in order to comply with its supply commitments. Under a Capacity Agreement, a generator commits to make a certain amount of capacity available to the regulated market. In such case, the generator’s revenue is guaranteed and the distributors must bear the risk of a supply shortage. Together, these agreements comprise the energy purchase agreements in the Regulated Market,Contratos de Comercialização de Energia no Ambiente Regulado - CCEAR.
According to the New Industry Model Law, electricity distribution entities will be entitled to pass through to their respective consumers all costs related to electricity they purchased through public auction as well as any taxes and industry charges.
With respect to the granting of new concessions, the newly enacted regulations require bids for new hydroelectric generation facilities to include, among other things, the minimum percentage of electricity to be supplied to the regulated market.
The Free Market
The free market covers transactions between generation concessionaires, Independent Power Producers (“IPPs”), self-generators, energy traders, importers of electric energy, Free Consumers and Special Consumers, as defined below. IPPs are generation entities that sell the totality or part of their electricity to Free Consumers, distribution concessionaires and trading agents, among others. The free market will also include existing bilateral contracts between generators and distributors until they expire. Upon expiration, such contracts must be executed under the New Industry Model Law guidelines.
A consumer that is eligible to choose its supplier (a potentially Free Consumer) may only rescind its contract with the local distributor and become a Free Consumer by notifying such distributor at least 15 days before the date such distributor is required to state its estimated electricity needs for the next auction. Further, such consumer may only begin acquiring electricity from another supplier in the year following the one in which the local distributor was notified. Once a potentially Free Consumer has opted for the free market, it may only return to the regulated system after giving the distributor of its region five years’ advance notice, provided that the distributor may reduce such notice period at its discretion. This extended notice period seeks to assure that, if necessary, thedistributor is able to buy the additional energy in the regulated market without imposing extra costs on the captive market.
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In addition to Free Consumers, certain consumers with capacity equal to or greater than 500 kW may choose to purchase energy in the free market, subject to certain terms and conditions. These consumers are called “Special Consumers”. Special Consumers may only purchase energy from (i) small hydroelectric power plants with capacity between 1,000 kW and 30,000 kW, (ii) generators with capacity limited to 1,000 kW, and (iii) alternative energy generators (solar, wind and biomass enterprises) whose capacity supplied to the system does not exceed 30,000 kW. A Special Consumer may terminate its contract with the local distributor on 180 days’ prior notice for contracts with indefinite terms. For contracts with a definite term the consumer must fulfill the contract, and or for long‑term contracts the consumer may terminate its contract on three years’ prior notice. The Special Consumer may return to the regulated system upon 180 days’ prior notice to the distributor of its region.
State-owned generators may sell electricity to Free Consumers; however, unlike private generators, they may only do so through an auction process.
Auctions on the Regulated Market
Electricity auctions for new generation projects in process are held (i) five years before the initial delivery date (referred to as “A-5” auctions) or (ii) three years before the initial delivery date (referred to as “A-3” auctions). Electricity auctions from existing power generation facilities take place (i) one year before the initial delivery date (referred to as “A-1” auctions) or (ii) approximately four months before the delivery date (referred to as “market adjustments”). Invitations to bid in the auctions are prepared by ANEEL, in compliance with guidelines established by the MME, which include a requirement to use the lowest bid as the criterion to determine the winner of the auction.
Each generation company that participates in an auction executes a contract for purchase and sale of electricity with each distribution company, in proportion to the distribution companies’ respective estimated demand for electricity. The only exception to these rules relates to the market adjustment auction, where the contracts are between specific selling and distribution companies. The CCEAR of both “A-5” and “A-3” auctions have a term of between 15 and 30 years, and the CCEAR of “A-1” auctions have a term between five and 15 years. Contracts arising from market adjustment auctions are limited to a two-year term. The total amount of energy contracted in such market adjustment auctions may not exceed 1.0% of the total amount of energy contracted by each distributor, except for the auctions held in 2008 and 2009, for which the total amount of contracted energy may not exceed 5.0%.
With respect to the CCEAR related to electricity generated by existing generation facilities, there are three alternatives for the permanent reduction of contracted electricity: (i) compensation for the exit of potentially Free Consumers from the regulated market, (ii) a reduction, at the distribution company’s discretion, of up to 4.0% per year in the annual contracted amount due to market deviations from estimated market projections, beginning two years after the initial electricity demand was declared and (iii) adjustments to the amount of electricity established in energy acquisition contracts entered into before March 17, 2004.
Since 2005, CCEE has conducted fifteen auctions for new generation projects, eight auctions for existing power generation facilities, two auctions for alternate generation projects and four auctions for biomass and wind power generation, qualified as “reserve energy.” No later than August 1st of each year, generators and distributors must provide their estimated electricity generation or estimated electricity demand for the five subsequent years. Based on this information, the MME establishes the total amount of electricity to be traded in the auction and decides which generation companies may participate in the auction. The auction is carried out in two phases via an electronic system. As a general rule, contracts entered into in an auction have the following terms (i) from 15 to 30 years from commencement of supply in cases of new generation projects, (ii) from five to 15 years beginning in the year following the auction in cases of existing power generation facilities, (iii) from 10 to 30 years from commencement of supply in cases of alternate generation projects, (iv) 15 years from commencement of supply in cases of biomass reserve energy and (v) 20 years from commencement of supply in cases of wind power reserve energy.
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After the completion of the auction, generators and distributors execute the CCEAR, in which the parties establish the price and amount of the energy contracted in the auction. Great part of our CCEARs provides that the price will be adjusted annually in accordance with the IPCA broad consumer price index (Indice Nacional de Preços ao Consumidor Amplo, calculated and published byInstituto Brasileiro de Geografia e Estatística– IBGE). However, we also use other indexes to adjust prices in our CCEARs, such as fuel prices. Distributors grant financial guaranties (principally receivables from the distribution service) to generators in order to secure their payment obligations under the CCEAR.
The Annual Reference Value
The regulation also establishes a mechanism, the Annual Reference Value, which limits the amounts of costs that can be passed through to Final Consumers. The Annual Reference Value corresponds to the weighted average of electricity prices in the “A-5” and “A-3” auctions, calculated for all distribution companies.
The Annual Reference Value creates an incentive for distribution companies to contract for their expected electricity demands at the lowest price in “A-5” auctions and “A-3” auctions. Distributors that buy electricity at a price lower than the Annual Reference Value in these auctions are allowed to pass through the full amount of the Annual Reference Value to consumers for three years. The Annual Reference Value is also applied in the first three years of power purchase agreements for new power generation projects. After the fourth year, the electricity acquisition costs from these projects are allowed to be fully passed through. The regulation establishes the following limitations on the ability of distribution companies to pass through costs to consumers: (i) no pass‑through of costs for electricity purchases that exceed 103.0% of actual demand; (ii) limited pass‑through of costs for electricity purchases made in an “A-3” auction, if the volume of the acquired electricity exceeds 2.0% of the demand for electricity purchased in the “A-5” auctions; (iii) limited pass-through of electricity acquisition costs from new electricity generation projects if the volume contracted under the new contracts related to existing generation facilities is lower than 96.0% of the volume of electricity provided for in the expiring contract; and (iv) full pass-through of costs for electricity purchases from existing facilities in the “A-1” auction is limited to 1% of the charge verified in the year prior to the distributor’s notification of estimated electricity demand to the MME. If the acquired electricity in the “A-1” auction exceeds 1.0% of the charge, pass-through of costs related to the excess charge amount to Final Consumers is limited to 70.0% of the average value of such acquisition costs of electricity generated by existing generation facilities for delivery commencing in 2007 and ending in 2009. The MME establishes the maximum acquisition price for electricity generated by existing projects that is included in auctions for the sale of electricity to distributors; and, if distributors do not comply with the obligation to fully contract their demand, the pass-through of the costs from energy acquired in the short‑term market will be the lower of the spot price,Preço de Liquidação de Diferenças (“PLD”) and the Annual Reference Value.
Electric Energy Trading Convention
ANEEL Resolutions No. 109, of 2004 and No. 210, of 2006, govern the Electric Energy Trading Convention (Convenção de Comercialização de Energia Elétrica). This convention regulates the organization and administration of the CCEE as well as the conditions for trading electric energy. It also defines, among other things, (i) the rights and obligations of CCEE participants, (ii) the penalties to be imposed on defaulting participants, (iii) the structure for dispute resolution, (iv) the trading rules in both regulated and free markets and (v) the accounting and clearing process for short‑term transactions.
Restricted Activities of Distributors
Distributors in the Interconnected Power System are not permitted to (i) conduct businesses related to the generation or transmission of electric energy, (ii) sell electric energy to Free Consumers, except for those in their concession area and under the same conditions and tariffs that are applied to captive consumers, (iii) hold, directly or indirectly, any interest in any other company, corporation or partnership or (iv) conduct businesses that are unrelated to their respective concessions, except for those permitted by law or in the relevant concession agreement. Generators are not allowed to hold equity interests in excess of 10.0% in distributors.
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Elimination of Self-Dealing
Since the purchase of electricity for captive consumers is now performed through the regulated market, “self‑dealing” (under which distributors were permitted to meet up to 30.0% of their electric energy needs through energy that was either self-produced or acquired from affiliated companies) is no longer permitted, except in the context of agreements that were approved by ANEEL before the enactment of the New Industry Model Law.
Challenges to the Constitutionality of the New Industry Model Law
Political parties are currently challenging the New Industry Model Law on constitutional grounds before the Brazilian Supreme Court. In October 2007, a decision of the Brazilian Supreme Court on injunctions presented on the matter was published, denying the injunctions by a majority of votes. To date, the Brazilian Supreme Court has not reached a final decision, and we do not know when such a decision may be reached. While the Brazilian Supreme Court is reviewing the New Industry Model Law, its provisions remain in effect. Regardless of the Supreme Court’s final decision, certain portions of the New Industry Model Law relating to restrictions on distributors engaging in businesses unrelated to the distribution of electricity, including sales of energy by distributors to Free Consumers and the elimination of self-dealing, are expected to remain in full force and effect.
If all or a relevant portion of the New Industry Model Law is deemed unconstitutional by the Brazilian Supreme Court, the regulatory scheme introduced by the New Industry Model Law may become void, which will create uncertainty as to how and when the Brazilian government will be able to reform the electric energy sector.
Ownership Limitations
ANEEL had established limits on the concentration of certain services and activities within the electric energy industry, which it eliminated through Resolution No. 378 of November 10, 2009.
Pursuant to Resolution No. 378, ANEEL will submit potential antitrust violations within the electric energy sector for analysis by the Economical Law Department of the Ministry of Justice (Secretaria de Direito Econômico – SDE). ANEEL can also, spontaneously or upon SDE’s request, analyze potential antitrust acts by identifying: (i) the relevant markets, (ii) the influence of the agents involved in the exchange of energy on the submarkets where the parties operate, (iii) the actual exercise of market power in connection with market prices, (iv) the participation of the parties in the power generation market, (v) the transmission, distribution and commercialization of energy in all submarkets, and (vi) the efficiency gains of the distribution agents during the tariffs review processes.
In practical terms, ANEEL’s attribution is limited to supplying the SDE with technical information to support SDE’s technical opinion. SDE, on its turn, will observe ANEEL’s comments and appointments and will only be able to disregard them upon a motivated decision.
Tariffs for the Use of the Distribution and Transmission Systems
ANEEL oversees tariff regulations that govern access to the distribution and transmission systems and establish tariffs for these systems. The tariffs are (i) network usage charges, which are charges for the use of the proprietary local network of distribution companies (“TUSD”) and (ii) tariffs for the use of the transmission system, which is the Basic Network and its ancillary facilities (“TUST”).
TUSD
The TUSD is paid by generators and Free and Special Consumers for the use of the distribution system of the distribution concessionaire to which the relevant generator or Free or Special Consumer is connected. The TUSD has two purposes: (i) to remunerate the concessionaire for the use of the proprietary local network, through the TUSD Service, which varies in accordance with each consumer’s energy peak load, and (ii) to contemplate the regulatory charges applicable to the use of the local network, through the TUSD Charges, which are set by regulatory authorities and linked to the quantity of energy consumed by each consumer. The amount to be paid by the agent connected to the distribution system is calculated by multiplying the amount of electricity contracted withthe distribution concessionaire for each connection point, in kW, by two tariffs set by ANEEL: (i) a tariff in R$/kW, which includes the remuneration of the concessionaire and the TUST and (ii) a tariff in R$/MWh, which includes electric energy-related charges and other regulatory costs related to the distribution network.
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TUST
The TUST is paid by distribution companies, generators and Free and Special Consumers for the use of the Basic Network and is revised annually according to (i) an inflation index and (ii) the annual revenue of the transmission companies, as determined by ANEEL. According to criteria established by ANEEL, owners of the different parts of the transmission network were required to transfer the coordination of their facilities to the ONS in return for receiving regulated payments from the transmission system users. Network users, including generation companies, distribution companies and free and special Consumers, have signed contracts with the ONS entitling them to the use of the transmission network in return for the payment of certain tariffs. Other parts of the network that are owned by transmission companies but which are not considered part of the Basic Network are made directly available to the interested users for a specified fee.
Distribution Tariffs
Distribution tariff rates (including the TUSD) are subject to review by ANEEL, which has the authority to adjust and review these tariffs in response to changes in energy purchase costs and market conditions. When adjusting distribution tariffs, ANEEL divides the costs of distribution companies between (i) costs that are beyond the control of the distributor, or Parcel A costs, and (ii) costs that are under control of distributors, or Parcel B costs. The readjustment of tariffs is based on a formula that takes into account the division of costs between the two categories.
Parcel A8costs include, among others, the following factors:
· costs of electricity purchased from Itaipu;
· costs of electricity purchased pursuant to bilateral agreements that are freely negotiated between the parties;
· costs of electricity purchased pursuant to CCEARs;
· certain other charges for use and connection to the transmission and distribution systems;
· the cost of regulatory charges; and
· the costs associated with research and development and energy efficient consumption.
Parcel B8costs include, among others, the following factors:
· a rate of return on investments in energy distribution assets;
· the depreciation on those assets;
· the operating expenses related to the operation of those assets; and
· non‑recoverable receivables;
each as established and periodically revised by ANEEL.
The tariffs are established taking into consideration Parcel A and Parcel B costs and certain market components used by ANEEL as reference for adjusting the tariffs.
8Pursuant to ANEEL’s Resolution No. 457/2011, for the generating units embedded in our distribution companies, operating and maintenance costs have been allocated to Parcel A, and depreciation has been excluded from Parcel B.
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Electricity distribution concessionaires are entitled to periodic revisions of their tariffs every four or five years. These revisions are aimed at (i) assuring necessary revenues to cover efficient Parcel B operational costs and adequate compensation for investments deemed essential for the services within the scope of each such company’s concession and (ii) determining the “X factor”, which is based on three components: (a) expected gains of productivity from increase in scale, (b) labor costs, and (c) investments. In the current tariff cycle, ANEEL has changed the formula to calculate the X factor. The X factor is now based on the potential increases in productivity, which is based on the level of market growth and increase in number of consumers and service quality. In addition, it takes into account a target of efficient operating expenses. The increases in productivity and the target of efficient operating expenses will be determined at each periodic review. The service quality component will be determined at each annual adjustment following the third periodic revision cycle.
The X factor is used to adjust the proportion of the change in the IGP-M index that is used in the annual adjustments. Accordingly, upon the completion of each periodic revision, application of the X factor requires distribution companies to share their productivity gains with Final Consumers.
Each distribution company’s concession agreement also provides for an annual adjustment. In general, Parcel A costs are fully passed through to consumers. Parcel B costs, however, are mostly restated for inflation in accordance with the IGP-M index.
In addition, electricity distribution concessionaires are entitled to an extraordinary tariff review (revisão extraordinária) on a case-by-case basis, to ensure their financial stability and compensate them for unpredictable costs, including taxes that significantly change their cost structure.
With the introduction of the New Industry Model Law, the MME has acknowledged that the variable costs associated with the purchase of electric energy may be included by means of the Parcel A Account or CVA, an account created to recognize some of our costs when ANEEL adjusts the tariffs of our distribution subsidiaries. See “Item 5—Operating and Financial Review and Prospects—Overview—Recoverable Costs Variations—Parcel A Costs.”
In November 2011, ANEEL established the methodology and procedures applicable to the periodic revisions for 2011 through 2014 for distribution concessionaires, based on the practices developed during a previous round of the periodic tariff reviews. For information on the new methodology applicable to the third periodic revision cycle, see “Item 3. Risk Factors—The tariffs that we charge for sales of electricity to captive consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.”
Government Incentives to the Energy Sector
In 2000, a Federal decree created the Thermoelectric Priority Program,Programa Prioritário de Termeletricidade (“PPT”) for purposes of diversifying the Brazilian energy matrix and decreasing its strong dependency on hydroelectric plants. The incentives granted to the thermoelectric power plants included in the PPT are: (i) guaranty of gas supply for twenty years, pursuant to MME regulations, (ii) an assurance that the costs related to the acquisition of the electric energy produced by thermoelectric power plants will be transferred to tariffs up to the normative value established by ANEEL and (iii) guaranteed access to a special financing program for the electric energy industry from the Brazilian Economic and Social Development Bank (“BNDES”).
In 2002, the Federal Government established the Proinfa Program. Under the Proinfa Program, Eletrobrás purchases the energy generated by alternative energy sources for a period of up to 20 years, and this energy is to be acquired by distribution companies for delivery to Final Consumers. In its initial phase, the Proinfa Program is limited to a total contracted capacity of 3,300 MW. The objective of this initiative is to reach a contracted capacity of up to 10.0% of the total annual consumption of electricity in Brazil within 20 years from 2002. Energy to be sold in the program will not be produced by generation concessionaires, like us, nor by IPPs, but by an autonomous independent producer, which may not be controlled by or affiliated with a generation concessionaire or an IPP, or affiliated with their controlling entities. In its initial phase, which ended on December 31, 2011, the Proinfa Program was limited to a total contracted capacity of 3,300 MW. Although provided for in Law No. 10,438/2002, it is still uncertain whether the Federal Government will regulate and implement the second phase of the Program.
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In order to create incentives for alternative generators, the Federal Government has established that a reduction of not less than 50.0% must be applied to TUSD amounts owed by (i) small hydroelectric power plants with capacity between 1,000 kW and 30,000 kW, (ii) generators with capacity equal to 1,000 kW and (iii) alternative energy generators (solar, eolic and biomass generators) with capacity equal to 30,000 kW. The reduction is applicable to the TUSD due by the generation source and also by its consumer. The amount of the TUSD reduction will be included as “financial components” in the tariff readjustment or tariff revision.
Regulatory Charges
EER
The Reserve Energy Charge,Encargo de Energia de Reserva (“EER”) is a regulatory charge assessed on a monthly basis designed to raise funds for energy reserves contracted by CCEE. These energy reserves will be used to increase the safety of the energy supply in the Interconnected Power System. The EER is collected from Final Consumers of the Interconnected Power System on a monthly basis. Exceptionally, in 2009, the EER was collected in a single installment in March.
RGR Fund and UBP
In certain circumstances, electric energy companies are compensated for certain assets used in connection with a concession if the concession is revoked or is not renewed. In 1971, the Brazilian congress created a reserve fund designed to provide funds for such compensation (“RGR Fund”). Public-industry electric companies must make monthly contributions to the RGR Fund at an annual rate equal to 2.5% of the company’s fixed assets in service, not to exceed 3.0% of total operating revenues in any year. The amount of this fee was most recently revised by ANEEL in February, 1999. In recent years, no concessions have been revoked or have failed to be renewed, and the RGR has been used principally to finance generation and distribution projects. The RGR should have phased out by 2010. However, Law No. 12,431/2011 extended the imposition of this fee until 2035.
The Federal Government has imposed a fee on IPPs similar to the fee levied on public-industry generation companies in connection with the RGR. IPPs are required to make contributions for using a public asset,Uso de Bem Público(“UBP”) according to the rules set out in the relevant concession’s public bidding process. Eletrobrás received the UBP payments until December 31, 2002. All payments related to the UBP since December 31, 2002 have been paid directly to the Federal Government.
CCC Account
Distribution companies (and also some transmission companies responsible for Free Consumers) must contribute to theConta de Consumo de Combustível (“CCC Account”). The CCC Account was created in 1973 to generate financial reserves to cover fossil fuel costs in thermoelectric power plants in the event of a rainfall shortage which would require increased use of thermal plants. The CCC currently subsidizes the distribution systems in isolated areas where distribution costs are higher than in the Interconnected Power System. The annual CCC Account contributions are calculated on the basis of estimates of the cost of fuel needed by the thermoelectric power plants in the succeeding year. The CCC Account is administered by Eletrobrás. The CCC Account, in turn, reimburses electric companies for a substantial portion of the fuel costs of their thermoelectric power plants.
In February 1998, the Federal Government provided for the phasing out of the CCC Account. During the 2003‑2006 period, subsidies from the CCC Account were phased out for thermal power plants constructed prior to February 1998 and belonging to the Interconnected Power System. Thermal power plants constructed after that date were not entitled to subsidies from the CCC Account. In April 2002, the Federal Government established that subsidies from the CCC Account would continue to be paid, for a period of 20 years, to those thermoelectric power plants located in isolated systems. As of January 2010, according to Law No. 12,111/2009, the CCC Account reimburses electric companies not only for fuel costs in the isolated systems but also for costs incurred with power, operational activities, maintenance, social contribution and taxes related to the generation of energy.
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CDE Account
In 2002, the Federal Government instituted the Electric Energy Development Account,Conta de Desenvolvimento Energético (“CDE Account”), which is funded through annual payments made by concessionaires for the use of public assets, penalties and fines imposed by ANEEL and the annual fees paid by agents offering electric energy to Final Consumers, by means of a charge to be added to the tariffs for the use of the transmission and distribution transmission systems. These fees are adjusted annually. The CDE Account was created to support (i) the development of energy production throughout Brazil, (ii) the production of energy by alternative energy sources and (iii) the universalization of electric energy services throughout Brazil. The CDE Account will be in effect for 25 years from 2002 and is regulated by the ANEEL and managed by Eletrobrás.
ESS
Resolution no. 173 of November 28, 2005 established a provision for the System Service Charge,Encargo de Serviço do Sistema (“ESS”), which since January 2006 has been included in price and fee readjustments for distribution concessionaires that are part of the National Interconnected Network, Sistema Interligado Nacional. This charge is based on the annual estimates made by ONS on October 31 of each year.
Fee for the Use of Water Resources
The New Industry Model Law requires that holders of a concession and authorization to use water resources must pay a fee of 6.75% of the value of the energy they generate by using such facilities. This charge must be paid to the federal district, states and municipalities where the plant or the plant’s reservoir is located.
ANEEL Inspection Fee (TFSEE)
The ANEEL Inspection Fee is an annual fee due by the holders of concessions, permissions or authorizations in the proportion of their dimension and activities. Currently, the ANEEL Inspection Fee is deducted from the RGR Fund.
Default on the Payment of Regulatory Charges
The New Industry Model Law provides that failure to pay required contributions to the RGR Fund, Proinfa Program, CDE Account, CCC Account, or certain other payments, such as those due from the purchase of electric energy in the regulated market or from Itaipu, will prevent the defaulting party from proceeding with readjustments or reviews of its tariffs (except for extraordinary reviews) and will also prevent the defaulting party from receiving funds from the RGR Fund, CDE Account or CCC Account.
Energy Reallocation Mechanism
Centrally dispatched hydrogenerators are protected against certain hydrological risks by the MRE, which attempts to mitigate the risks involved in the generation of hydrological energy by mandating that hydrogenerators share the hydrological risks of the Interconnected Power System. Under Brazilian law, each hydroelectric plant is assigned an “assured energy”, which is determined in each relevant concession agreement, irrespective of the volume of electricity generated by the facility. The MRE transfers surplus electricity from those generators that have produced electricity in excess of their assured energy to those generators that have produced less than their assured energy. The effective generation dispatch is determined by ONS, which takes into account nationwide electricity demand and hydrological conditions. The volume of electricity actually generated by the plant, whether less than or in excess of the assured energy, is priced pursuant to a tariff denominated “Energy Optimization Tariff” which covers the operation and maintenance costs of the plant. This revenue or additional expense must be accounted for monthly by each generator.
ITEM 4B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this annual report.
We prepared our consolidated financial statements included in this annual report in accordance with IFRS, as issued by IASB. Our consolidated annual financial statements as of and for the year ended December 31, 2010 are our first financial statements prepared in accordance with IFRS. We have applied IFRS 1 – “First‑time Adoption of International Financial Reporting Standards” in preparing these financial statements, and the comparative figures in respect of 2009 have been restated to reflect the first time adoption.
Overview
We are a holding company and, through subsidiaries, we (i) distribute electricity to consumers in our concession areas, (ii) generate electricity and develop generation projects and (iii) engage in electricity commercialization and the provision of electricity-related services. Two very important drivers of our financial performance are the operating income margin and cash flows from our regulated distribution business. In recent years, this business has produced reasonably stable margins, and its cash flows, while sometimes subject to short‑term variability, have been stable over the medium term.
We account for four of our generation subsidiaries (BAESA, ENERCAN, Foz do Chapecó and Centrais Elétricas da Paraíba – EPASA) using the proportionate consolidation method. Upon adoption of IFRS in 2010, our generation subsidiary CERAN has become fully consolidated. The first generation unit of Foz do Chapecó became operational in October 2010, the second generation unit became operational in November 2010, the third generation unit became operational in December 2010 and the fourth and final generation unit became operational in March 2011. The thermoelectric power plants Termoparaíba and Termonordeste, both powered by fuel oil from the EPASA complex, became operational in December 2010 and January 2011, respectively. Since August 1, 2011, CPFL Energias Renováveis has been fully consolidated in our financial statements.
In September 2009, we acquired seven generation subsidiaries (Santa Clara I, Santa Clara II, Santa Clara III, Santa Clara IV, Santa Clara V, Santa Clara VI and Eurus VI), which are fully consolidated through our investment in CPFL Energias Renováveis. They are scheduled to start operations in the third quarter of 2012. In July 2010, we acquired other six generation subsidiaries (Campo dos Ventos I, II, III, IV, São Domingos and Ventos de São Martinho), which are also fully consolidated through CPFL Energias Renováveis. Campo dos Ventos II is scheduled to start operations in 2013, and the five remaining companies of this complex are scheduled to start operations in 2014. The Macacos I and São Benedito wind farms are scheduled to start operations in 2013 and 2014, respectively.
Additionally, in October 2009, we established CPFL Bio Formosa, which is fully consolidated in our financial statements through CPFL Energias Renováveis. The main purpose of CPFL Bio Formosa is the generation of thermoelectric energy through co‑generation plants powered by sugar-cane bagasse and straw. It began operations in the third quarter of 2011.
Our indirect subsidiaries CPFL Bio Buriti, CPFL Bio Ipê and CPFL Bio Pedra are closely-held companies that were established on January 27, 2010 with the main purpose of generating thermoelectric energy and water stream through co-generation plants powered by sugar-cane bagasse and straw. On August 26, 2010, CPFL Bio Pedra participated in the wind power reserve auction promoted by ANEEL, in which it entered into an agreement for the supply of 24,3 MW medium of electricity for a term of 20 years beginning in 2013. CPFL Bio Pedra and CPFL Bio Ipê are scheduled to start operations in the second quarter of 2012. CPFL Bio Buriti started operations in the second quarter of 2011.
In 2011, we entered into an agreement with ERSA to combine assets and projects relating to renewable energy sources, and established CPFL Energias Renováveis. We have been fully consolidating CPFL Energias Renováveis in our financial statements since August 1, 2011. In December 2011, through CPFL Energias Renováveis, we acquired 100% of the shares of Jantus, a company engaged in generation of energy through renewable sources, especially wind power. By acquuiring Jantus, we added the following projects to our portfolio: (i) four wind farms in operation in the state of Ceará with installed capacity of 210 MW, and (ii) wind farm projectswith total installed capacity of 732 MW in the states of Ceará and Piauí, of which 412 MW has already been certified and eligible for participation in the next electricity auctions.
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On January 12, 2012, through our subsidiary CPFL Energias Renováveis, we entered into a Sale and Purchase Agreement for the acquisition of 100% of the shares of Atlântica I, Atlântica II, Atlântica IV and Atlântica V, companies engaged in generation of energy through wind sources, with an aggregate installed capacity of 120 MW. In February 2012, through our subsidiary CPFL Energias Renováveis, we executed a Sale and Purchase Agreement for the acquisition of 100% of the shares of BVP, the holding company of Bons Ventos, which hold authorizations to explore wind farms with an aggregate installed capacity of 157,5 MW. The acquisition BVP is still subject to certain conditions, including approval by the regulatory authorities.
We have three broad initiatives to improve our financial performance: the expansion of our installed capacity, the acquisition of additional distributors and the development of our commercialization and services business. We have a portfolio of new hydroelectric generation projects that are becoming operational. Of this new generation capacity, approximately 572 MW became operational in 2010 (taking into account our share of jointly-owned projects) and approximately 261 MW (of which our share was 147 MW), became operational in 2011.
We expect a further 885 MW (of which our share will be 558 MW) of new generation capacity to become operational by the end of 2014 through our plants under construction.
There are factors beyond our control that can have a significant impact, positive or adverse, on our financial performance. We face periodic changes in our rate structure, resulting from the periodic revision of our rates. For instance, the second cycle of periodic revisions, which took effect during 2007 and 2008 at each of our distribution companies, resulted in the reduction of our average rates. For information on the new methodology applicable to the third periodic revision cycle (2011 to 2014), see “Item 3. Risk Factors—The tariffs that we charge for sales of electricity to captive consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.”
Background
Regulated Distribution Tariffs
Our results of operations are significantly affected by changes in regulated tariffs for electricity. In particular, most of our revenues are derived from sales of electricity to captive Final Consumers at regulated tariffs. In 2011, sales to captive consumers represented 69.9% of the volume of electricity we delivered and 75.5% of our operating revenues, compared to 71.0% and 76.1%, respectively, in 2010. These proportions may decline if consumers migrate from captive to free status.
Our operating revenues and our margins depend substantially on the tariff-setting process, and our management focuses on maintaining a constructive relationship with ANEEL, the Brazilian government and other market participants so that the tariff-setting process fairly reflects our interests and those of our consumers and shareholders. For a description of tariff regulations, see “Item 4. Information on the Company—The Brazilian Power Industry—Distribution Tariffs.”
Tariffs are determined separately for each of our eight distribution subsidiaries as follows:
· Our concession agreements provide for an annual adjustment to take account of changes in our costs, which for this purpose are divided into costs that are beyond our control (known as Parcel A costs) and costs that we can control (known as Parcel B costs). Parcel A costs include, among other things, increased prices under long‑term supply contracts, and Parcel B costs include, among others, the return on investment related to our concessions and their expansion, as well as maintenance and operational costs. Our ability to fully pass through our electricity acquisition costs to Final Consumers is subject to: (a) our ability to accurately forecast our energy needs and (b) a ceiling linked to a reference value, the Annual Reference Value. The Annual Reference Value is the weighted average of electricity acquisition costs resulting from electricity prices of all public auctions carried out by ANEEL and CCEE in the regulated market for electricity to be delivered five and three years from any such auctionand only applies during the first three years following the commencement of delivery of the acquired electricity. See “Item 4. Information on the Company—The Brazilian Power Industry—The New Industry Model Law” for a more detailed description of all the limitations on the ability of distribution companies to fully pass through their electricity acquisition costs to Final Consumers. Under agreements that were in force before the enactment of these regulatory reforms, we pass through the costs of acquired electricity subject to a ceiling determined by the Brazilian government. The annual adjustment of tariffs occurs every April for CPFL Paulista, every June for RGE, every October for CPFL Piratininga and every February for CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Mococa and CPFL Jaguari. There is no annual adjustment in a year with a periodic revision.
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· Our concession agreements provide for a periodic revision (revisão periódica), every five years for CPFL Paulista and RGE and every four years for CPFL Piratininga, CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Mococa and CPFL Jaguari, to restore the financial equilibrium of our tariffs as contemplated by the concession agreements and to determine a reduction factor (known as the X factor) in the amount of Parcel B cost increases passed on to our consumers. ANEEL’s Resolution No. 457/2011 has established the methodology applicable to the third periodic revision cycle (2011 to 2014). For additional information, see “Item 3. Risk Factors—The tariffs that we charge for sales of electricity to captive consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us” and “Item 4. Information on the Company—The Brazilian Power Industry—Distribution Tariffs.”
· Brazilian law also provides for an extraordinary revision (revisão extraordinária) to take account of unforeseen changes in our cost structure. Since January 2009, our distribution companies no longer collect the extraordinary revision that was instituted as a result of the national energy rationing process that occurred in 2001.
Annual Adjustment
Tariff increases apply differently to different consumer classes, with generally higher increases for consumers using higher voltages, to reduce the effects of historical cross-subsidies in their favor that were mostly eliminated in 2007. The following table sets forth the average percentage increase in our tariffs resulting from each annual adjustment from 2009 through the date of this annual report. Rates of tariff increase should be evaluated in light of the Brazilian inflation rate. See “—Background—Brazilian Economic Conditions.”
| CPFL | CPFL | RGE | CPFL | CPFL | CPFL Leste | CPFL Sul | CPFL |
2009 |
|
|
|
|
|
|
| |
Economic adjustment(1) | 13.58% | 2.81% | 10.44% | 10.69% | 10.52% | 10.58% | 11.80% | 11.01% |
Regulatory adjustment(2) | 7.64% | 3.17% | 8.51% | 13.40% | 0.66% | 2.36% | -0.16% | 0.35% |
Total adjustment | 21.22% | 5.98% | 18.95% | 24.09% | 11.18% | 12.94% | 11.64% | 11.36% |
2010(3) |
|
|
|
|
|
|
| |
Economic adjustment(1) | 1.55% | 8.59% | 1.72% | 1.90% | 4.15% | -6.32% | 4.30% | 5.81% |
Regulatory adjustment(2) | 1.15% | 1.52% | 10.65% | 8.19% | -0.17% | -6.89% | 1.36% | -0.65% |
Total adjustment | 2.70% | 10.11% | 12.37% | 10.09% | 3.98% | -13.21% | 5.66% | 5.16% |
2011 |
|
|
|
|
|
|
|
|
Economic adjustment(1) | 6.11% | (4) | 8.58% | 8.01% | 6.84% | 6.42% | 6.57% | 5.22% |
Regulatory adjustment(2) | 1.27% | (4) | 8.63% | 15.60% | 2.66% | 1.34% | 1.45% | 0.25% |
Total adjustment | 7.38% | (4) | 17.21% | 23.61% | 9.50% | 7.76% | 8.02% | 5.47% |
2012 |
|
|
|
|
|
|
|
|
Economic adjustment(1) | (5) | (5) | (5) | (4) | (4) | (4) | (4) | (4) |
Regulatory adjustment(2) | (5) | (5) | (5) | (4) | (4) | (4) | (4) | (4) |
Total adjustment | (5) | (5) | (5) | (4) | (4) | (4) | (4) | (4) |
(1) This portion of the adjustment primarily reflects the inflation rate for the period and is used as a basis for the following year’s adjustment.
(2) This portion of the adjustment reflects settlement of regulatory assets and liabilities we present in our regulatory financial information, primarily the CVA, and is not considered in the calculation of the following year’s adjustment. See note 36 to our financial statements included in this annual report.
(3) The 2010 annual adjustment is based on the “Addendum to the Concession Contracts”, described below.
(4) ANEEL have postponed the third periodic revision cycle for these distribution companies, as indicated in the “Periodic Revisions” table below.
(5) Annual adjustments for CPFL Paulista, RGE and CPFL Piratininga occur in April, June and October, respectively.
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On February 2, 2010, ANEEL approved a proposal for an addendum to the concession contracts for electric energy distributors (the “Addendum to the Concession Contracts”). The Addendum to the Concession Contracts changes the methodology for calculating the annual tariff adjustment, excluding the effect of market variations resulting from the difference between the projected and actual energy sold (mainly related to regulatory charges) from the calculation base when calculating tariff adjustments. See “Item 4. Information on the Company—The Brazilian Power Industry – Distribution Tariffs” for further information on the calculation of our tariffs. We do not expect the new calculation methodology to materially affect our future results or financial condition.
The new methodology was applied in calculating the tariff adjustments as of February 2010 for our eight distribution subsidiaries.
Periodic Revisions
The following table sets forth the percentage change in our tariffs resulting from the first, second and third cycles of periodic revisions.
| First cycle | Second cycle | Third cycle | |||
|
|
|
|
|
| |
Adjustment | Total | Adjustment | Total | Adjustment | Total | |
date | adjustment | Date | adjustment | date | adjustment | |
|
|
|
|
|
| |
| (%) |
| (%) |
| (%) | |
CPFL Paulista | April 2003 | 20.66 | April 2008 | -14.00 | April 2013 | - |
CPFL Piratininga | October 2003 | 10.14 | October 2007 | -12.77 | October 2011 | (1) |
RGE | April 2003 | 27.96 | April 2008 | 2.34 | June 2013 | - |
CPFL Santa Cruz | February 2004 | 17.14 | February 2008 | -14.41 | February 2012 | (1) |
CPFL Mococa | February 2004 | 21.73 | February 2008 | -7.60 | February 2012 | (1) |
CPFL Leste Paulista | February 2004 | 20.10 | February 2008 | -2.18 | February 2012 | (1) |
CPFL Sul Paulist | February 2004 | 12.29 | February 2008 | -5.19 | February 2012 | (1) |
CPFL Jaguari | February 2004 | - 6.17 | February 2008 | -5.17 | February 2012 | (1) |
(1) As a result of ANEEL’s delay in determining the methodology applicable to the third periodic revision cycle, CPFL Piratininga’s periodic review, originally scheduled for October 23, 2011, was postponed to October 23, 2012. For the same reason, the periodic review process for CPFL Santa Cruz, CPFL Jaguari, CPFL Mococa, CPFL Leste Paulista and CPFL Sul Paulista have been postponed from February 3, 2012 to February 3, 2013.
Sales to Potentially Free Consumers
The Brazilian government has introduced regulatory changes intended to foster the growth of open-market energy transactions by permitting qualifying consumers to opt out of the system of tariff regulation and become “free” consumers entitled to contract freely for electricity. See “Item 4. Information on the Company—The Brazilian Power Industry—The Free Market.” To date, as compared to the total number of our captive consumers, the number of potentially Free Consumers is relatively small, but they account for a significant amount of our electricity sales and revenues. In 2010 and 2011, approximately 22.6% and 17.6%, respectively, of our electricity sales were to supply potentially Free Consumers. Most of our potentially Free Consumers have not elected tobecome Free Consumers. We believe this is because (i) they consider the advantages of negotiating for a long-term contract at rates lower than the regulated tariff are outweighed by the need to bear additional costs (particularly transmission costs) and the long-term price risk and (ii) some of our potentially Free Consumers, who entered into contracts before July 1995, may only change to suppliers that purchase from renewable energy sources, such as small hydroelectric power plants or biomass. Even if a consumer decides to migrate from the regulated tariff system and become a Free Consumer, it still has to pay us network usage charges, and such payments would mitigate the loss in operating income from any such migration. We do not expect to see a substantial number of our consumers become Free Consumers, but the prospects for migration between the different markets (captive and free) over the long term, and its implications for our financial results, are difficult to predict.
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Prices for Purchased Electricity
The prices of electricity purchased by our distribution companies under long‑term contracts executed in the regulated market are (i) approved by ANEEL in the case of agreements entered into before the New Industry Model Law and (ii) determined in auctions for agreements entered into thereafter, while the prices of electricity purchased in the free market are agreed by bilateral negotiation based on prevailing market rates. In 2011, we purchased 50,853 GWh, compared to 52,384 GWh in 2010. Prices under long‑term contracts are adjusted annually to reflect increases in certain generation costs and inflation. Most of our contracts have adjustments linked to the annual adjustment in distribution tariffs, so that the increased costs are passed through to our consumers in increased tariffs. Since an increasing proportion of our energy is purchased at public auctions, the success of our strategies in these auctions affects our margins and our exposure to price and market risk, as our ability to pass through costs of electricity purchases depends on the successful projection of our expected demand.
We also purchase a substantial amount of electricity from Itaipu under take-or-pay obligations at prices that are governed by regulations adopted under an international agreement. Electric utilities operating under concessions in the Midwest, South and Southeast regions of Brazil are required by law to purchase a portion of Brazil’s share of Itaipu’s available capacity. In 2011, we purchased 10,855 GWh of electricity from Itaipu (21.3% of the electricity we purchased in terms of volume), as compared to 10,835 GWh (20.7% of the electricity we purchased) in 2010. See “Item 4. Information of the Company—Purchases of Electricity—Itaipu.” The price of electricity from Itaipu is set in U.S. dollars to reflect the costs of servicing its indebtedness. Accordingly, the price of electricity purchased from Itaipu increases in Brazilianreaiswhen thereal depreciates against the U.S. dollar (and decreases when therealappreciates). The change in our costs for Itaipu electricity in any year is subject to the Parcel A cost recovery mechanism described below.
In 2011, our installed capacity reached 2,644 MW. CPFL Bioenergia, Foz do Chapecó and Termonordeste power plants started operations in August, October and December 2010, respectively. In July 2010, we acquired Campo dos Ventos wind farms in the state of Rio Grande do Norte. Also in 2010, we constituted CPFL Bio Ipê and CPFL Bio Pedra to develop electric energy generation projects from sugar cane bagasse in partnership with Grupo Pedra Agroindustrial. Operations of Bio Ipê and Bio Pedra are expected to commence in 2012. In 2011, Termoparaíba, CPFL Bio Formosa and CPFL Bio Buriti thermoelectric plants, as well as the fourth generating unit of Foz do Chapecó, started operations. In February 2012, the construction of CPFL Bio Alvorada and CPFL Bio Coopcana biomass thermoelectric power plants began, and operations are scheduled to start in 2013. Operations of Macacos I and São Benedito wind farms are scheduled to start in 2013 and 2014, respectively. As a result of our electric energy generation projects in progress, our installed capacity will reach 3,301 MW, which represents an increase of 25% by 2014 (including the wind farms from the Bons Ventos complex).
Most of the electricity we acquired in the free market was purchased by our commercialization subsidiary CPFL Brasil, which resells electricity to Free Consumers and other concessionaries and licensees (including our subsidiaries). See “—The Brazilian Power Industry—The Free Market.”
Recoverable Cost Variations—Parcel A Costs
We use the CVA or the Parcel A account to recognize some of our costs in the distribution tariff, referred to as “Parcel A” costs, that are beyond our control. When these costs are higher than the forecasts used in setting tariffs, we are generally entitled to recover the difference through subsequent annual tariff adjustments.
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Under IFRS, regulatory assets and liabilities cannot be accounted for because they do not comply with assets and liabilities requirements established by the Framework for the Preparation and Presentation of Financial Statements (Estrutura Conceitual para Elaboração e Apresentação das Demonstrações Contábeis) issued by IASB and the Brazilian Securities Commission,Comissão de Valores Mobiliários(“CVM”). Therefore, we only account for rights or compensations when our captive clients effectively pay us.
The costs of electricity purchased from Itaipu are indexed to the U.S. dollar exchange variation. If the U.S. dollar appreciates against thereal, our costs will increase and, consequently, our revenues will decrease in the same period. These losses will be offset in the future, when the next annual tariff adjustments occur.
Operating Segments
As a result of our association with ERSA and the acquisition of Jantus’ shares, we have created a separate operating segment to segregate our activities relating to renewable energy sources. Therefore, since August 1, 2011, we have been operating with four different reportable segments: distribution, conventional generation sources, renewable generation sources and commercialization. See note 30 to our audited consolidated financial statements. Because there is no information on our renewable generation segment for 2010, the discussion below will focus on the distribution, conventional generation sources and commercialization segments.
Our generation and commercialization and services segments currently represent a small percentage of our net revenues: 5.5% and 7.9% in 2011, and 4.5%, and 8.4% in 2010, respectively. However, the contribution of our generation and commercialization and services segments to our net income was higher (23.3%and 10.1% in 2011, respectively).
The profitability of our segments differs. Our distribution segment reflects primarily sales to captive consumers at prices determined by the regulatory authority. The volume sold varies according to external factors such as weather, income level and economic growth. This segment represents 86.6% of our net operating revenue, but its contribution to our net income is smaller. In 2011, 70.2% of our net income was derived from our distribution activities, while 3.6% of our net income consumed within the segment intitled “Other” in the table below.
Our conventional generation sources segment consists in substantial part of new hydroelectric plants, and our renewable generation sources segment consists of wind farms, biomass thermoelectric projects and small hydroelectric power plants. All of our generation sources require a high level of investment in fixed assets, and in the early years there is typically a high level of construction financing. Since these projects became operational, they have resulted in higher margin (operating income as a percentage of revenue) than the distribution segment, but have also contributed to higher interest expenses and other financing costs. For example, in 2011 and 2010 our generation segment provided 29.4% and 22.5%, respectively, of our operating income, but due to the relative significance of the financial expenses incurred to finance these projects, the segment’s contribution to net income was lower. In 2011, 23.3% of our net income was derived from our generation activities.
We have been reporting our renewable generation sources segment according to IFRS rules since August 1, 2011, as a result of our association with ERSA and Jantus. For this reason, we have no individual comparative information for 2010, and discussion of results and operations relating to our renewable generation sources segment have been associated with discussion of results and operations of our conventional generation sources segment. As of December 31, 2011, 30.3% of the property, plant and equipment in the renewable generation sources segment was under construction.
Our commercialization and services segment sells electricity and provides value-added services to Free Consumers and other concessionaries or licensees. In 2011, 10.1% of our net income was derived from our commercialization and services activities.
Our segments also purchase and sell electricity and value-added services to and from one another. In particular, our generation and commercialization segments sell electricity and provide services to our distribution segment. In order to avoid duplication of revenue and expense amounts, the results by segment in our consolidated financial statements eliminate revenues and expenses that relate to sales from one subsidiary to another. However, the analysis of results by segment would be inaccurate if the same eliminations were carried out with respect to salesbetween segments. As a result, sales from one segment to another have not been eliminated in the discussion of results by segment below. See below:
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| Distribution | Generation | Commercialization and Services | Other(*) | Elimination | Total |
2011 |
|
|
|
|
|
|
Net Revenue | 11,048,924 | 706,133 | 1,007,780 | 1,191 | - | 12,764,028 |
(-) Intersegment Revenues | 16,831 | 914,542 | 698,128 | - | (1,629,501) | 0 |
Income from electric energy service | 1,922,194 | 895,429 | 263,977 | (31,053) | - | 3,050,547 |
Financial income | 429,371 | 137,541 | 75,902 | 55,373 | - | 698,188 |
Financial expense | (669,818) | (554,434) | (104,358) | (58,167) | - | (1,386,778) |
Income before taxes | 1,681,747 | 478,537 | 235,520 | (33,847) | - | 2,361,957 |
Income tax and social contribution | 571,204 | 110,584 | 75,689 | 22,096 | - | 779,573 |
Net Income | 1,110,543 | 367,952 | 159,832 | (55,943) | - | 1,582,384 |
Total Assets(**) | 11,651,205 | 13,129,529 | 509,372 | 2,122,951 | - | 27,413,057 |
Capital Expenditures and other intangible assets | 1,065,104 | 822,553 | 16,927 | 189 | - | 1,904,773 |
Depreciation and Amortization | 498,225 | 295,960 | 5,742 | 1,277 | - | 801,203 |
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Net Revenue | 10,471,192 | 538,217 | 1,012,525 | 1,795 | - | 12,023,729 |
(-) Intersegment Revenues | 13,904 | 650,571 | 766,922 | - | (1,431,397) | - |
Income from electric energy service | 1,852,867 | 616,416 | 302,981 | (32,949) | - | 2,739,315 |
Financial income | 316,020 | 53,725 | 22,389 | 90,981 | - | 483,115 |
Financial expense | (394,999) | (323,441) | (22,311) | (96,307) | - | (837,058) |
Income before taxes | 1,773,749 | 345,914 | 302,024 | (36,315) | - | 2,385,372 |
Income tax and social contribution | (604,865) | (88,731) | (95,840) | (35,899) | - | (825,335) |
Net Income | 1,168,884 | 257,183 | 206,184 | (72,214) | - | 1,560,037 |
Total Assets(**) | 11,689,503 | 7,568,600 | 349,047 | 449,655 | - | 20,056,805 |
Capital Expenditures and other intangible assets | 1,127,637 | 645,040 | 27,853 | 10 | - | 1,800,540 |
Depreciation and Amortization | 352,806 | 188,981 | 4,553 | 145,453 | - | 691,793 |
(*) Other – Refers basically to the CPFL Energia figures after eliminations of balances with related parties
(**) The goodwill created in an acquisition and recorded in CPFL Energia was allocated to the respective segments
We present below selected financial information of our four reportable segments as of and for the period from August 1, 2011 to December 31, 2011:
| Distribution | Conventional Generation Sources | Renewable Generation Sources | Commercialization | Other(*) | Elimination | Total |
2011 |
|
|
|
|
|
|
|
Net Revenue | 11,048,924 | 609,755 | 96,378 | 1,007,780 | 1,191 | - | 12,764,028 |
(-) Intersegment Revenues | 16,831 | 839,029 | 75,513 | 698,128 | - | (1,629,501) | - |
Income from electric energy service | 1,922,194 | 848,173 | 47,256 | 263,977 | (31,053) | - | 3,050,547 |
Financial income | 429,371 | 80,617 | 56,924 | 75,902 | 55,373 | - | 698,188 |
Financial expense | (669,818) | (519,758) | (34,676) | (104,358) | (58,167) | - | (1,386,778) |
Income before taxes | 1,681,747 | 409,032 | 69,504 | 235,520 | (33,847) | - | 2,361,957 |
Income tax and social contribution | 571,204 | 112,593 | (2,008) | 75,689 | 22,096 | - | 779,573 |
Net Income | 1,110,543 | 296,440 | 71,513 | 159,832 | (55,943) | - | 1,582,384 |
Total Assets(**) | 11,651,205 | 5,350,193 | 7,779,336 | 509,372 | 2,122,951 | - | 27,413,057 |
Capital Expenditures and other intangible assets. | 1,065,104 | 334,989 | 487,564 | 16,927 | 189 | - | 1,904,773 |
Depreciation and Amortization | 498,225 | 259,514 | 36,446 | 5,742 | 1,277 | - | 801,203 |
(*) Other – Refers basically to the CPFL Energia figures after eliminations of balances with related parties
(**) The goodwill created in an acquisition and recorded in CPFL Energia was allocated to the respective segments
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We also derive non‑material income at parent company level that is not related to or included in the results of our reportable segments. General expenses and overhead are generally allocated to the relevant subsidiary and are reflected in the operating results of our reporting segments. Other expenses incurred by the parent company that can be directly allocated to a specific segment, such as the posting of an intangible asset relating to a concession, and the amortization thereof, are also allocated to our reporting segments.
Brazilian Economic Conditions
All of our operations are in Brazil, and we are affected by general Brazilian economic conditions. In particular, the general performance of the Brazilian economy affects demand for electricity, and inflation affects our costs and our margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates, with very low growth from 2001 through 2003 and an economic recovery since 2004. This trend was interrupted by the international financial crisis in 2009. In 2010, the Brazilian economic environment experienced strong growth as it recovered after the international financial crisis of 2008/2009. In 2011, international economic trouble, specifically in the Euro Zone, was reflected in the reduced growth of the Brazilian economy.
The following table shows inflation, the change in gross domestic product (inreais) and the variation of thereal against the U.S. dollar for the years ended December 31, 2011, 2010, 2009, 2008 and 2007.
| Year ended December 31, | ||||
2011 | 2010 | 2009 | 2008 | 2007 | |
Inflation (IGP-M)(1) | 5.1% | 11.3% | -1.7% | 9.8% | 7.8% |
Inflation (IPCA)(2) | 6.5% | 5.9% | 4.3% | 5.9% | 4.5% |
Growth (contraction) in gross domestic product (inreais) | 2.7% | 7.5% | -0.2% | 5.1% | 5.4% |
Depreciation (appreciation) of thereal vs. U.S. dollar | 12.6% | -4.3% | -25.5% | 31.9% | -17.2% |
Period-end exchange rate–US$1.00 | R$1.876 | R$1.666 | R$1.741 | R$2.337 | R$1.771 |
Average exchange rate–US$1.00(3) | R$1.671 | R$1.759 | R$1.990 | R$1.833 | R$1.930 |
Source: Fundação Getúlio Vargas,the Instituto Brasileiro de Geografia e Estatística and the Central Bank.
(1) Inflation (IGP-M) is the general market price index measured by the Fundação Getúlio Vargas.
(2) Inflation (IPCA) is a broad consumer price index measured by the Instituto Brasileiro de Geografia e Estatística and the reference for inflation targets set forth by the CMN.
(3) Represents the average of the commercial selling exchange rates on the last day of each month during the period.
Inflation primarily affects our business by increasing operating costs and financial expenses to service our inflation-indexed debt instruments. We are able to recover a portion of these increased costs through the Parcel A cost recovery mechanism, but there is a delay in time between when the increased costs are incurred and when the increased revenues are received following our annual tariff adjustments. The amounts owed to us under Parcel A are indexed to the variation of the SELIC rate until they passed through to our tariffs.
Depreciation of thereal increases the cost of servicing our foreign currency denominated debt and the cost of purchasing electricity from the Itaipu power plant, a hydroelectric facility that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs.
Some external factors may significantly affect our businesses depending on the category of consumers:
· Residential and Commercial Consumers. These classes are highly affected by weather conditions and income distribution. Elevated temperatures and increases in income levels cause an increased demand for electricity and, therefore, increase our sales.
· Industrial consumers. Consumption for industrial consumers is related to economic growth, amongst other factors, correlated mostly to GDP. During periods of financial crisis, this class suffers the strongest impact.
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Results of Operations—2011 compared to 2010
In 2011, our performance progressed significantly, specially reflecting the current growth cycle in Brazil; the growth potential of the Brazilian internal market, which is reflected in the increase in the consumption of energy in our distribution concession areas, and the results of our strategy of expanding and diversifying our business.
Net Operating Revenues
Our net operating revenues were R$12,764 million in 2011, a 6.2% increase compared to 2010. Excluding revenues relating to the construction of concession infrastructure (which does not affect the result due to corresponding costs in the same amount), net operating revenues would be R$11,634 million, a 6.0%, or R$654 million, increase. The increase in our net operating revenues primarily reflected higher revenues deriving from our distribution companies, which had increased sales to captive consumers (and, consequently, higher TUSD collections) and tariff adjustments.
The following discussion describes changes in our net operating revenues by destination and by segment, based on the items comprising our gross revenues.
Sales by Destination
Sales to final consumers
Our gross operating revenues from sales to Final Consumers were R$14,907 million in 2011, a 7.0% increase compared to 2010. Tariffs are adjusted each year, and the month in which the tariff adjustment takes effect varies, with the increases in the largest subsidiaries taking effect in April (CPFL Paulista), June (RGE) and October (CPFL Piratininga). Average prices to Final Consumers in 2011 were higher in all consumer categories:
· Industrial and Commercial Consumers. For industrial and commercial consumers that are captive consumers (which represent 81.2% of the total volume sold to these categories), average prices increased by 4.8% and 4.3%, respectively, due to annual tariff adjustments. For those that are Free Consumers, average prices increased by 18.2% and 16.7%, respectively.
· Residential Consumers. Average prices increased by 5.2% mainly due to tariff adjustments.
Our increased sales in 2011 reflected the economic strength of our residential and commercial consumers. Our industrial activities exhibited more modest economic growth, a reflection of the lower growth rate of industrial GDP (1.6%) as compared to total GDP (2.7%). Volumes sold to residential and commercial consumers increased 4.9% and 5.9%, respectively. Volumes sold to industrial consumers decreased 4.5%, reflecting a decrease of 7.5% in sales to captive Final Consumers, which was partially offset by a 8.7% increase in sales in the free market. Industrial customers in our distribution concession areas who purchase from other suppliers in the free market also pay us a fee for the use of our network, and this revenue is reflected in our financial statements under “Other Operating Revenues.”
Sales to wholesalers
Our gross operating revenues from sales to wholesalers were R$1,298 million in 2011 (6.9% of our gross operating revenues), an increase of 8.5% compared to 2010. The increase was due to a 11.0% increase in the volume sold, partially offset by a 2.2% decrease in average prices.
Other operating revenues
Our other gross operating revenues were R$1,572 million in 2011 (12.3% of our net operating revenues), compared to R$1,387 million in 2010. The increase was mainly due to the increase of TUSD collections from Free Consumers.
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Deductions from operating revenues
We deduct certain taxes and regulatory charges from our gross operating revenues to calculate our net revenues. One of these taxes is the value-added tax, or ICMS, levied by Brazilian states, and PIS/COFINS taxes levied by the Brazilian federal government. These deductions amounted to 32.3% of our gross operating revenues in 2011 and 31.5% in 2010. Most of these taxes and charges are based on the amount of gross operating revenues, while others vary depending on regulatory effects reflected in our tariffs. See note 26 to our consolidated financial statements.
Sales by segment
Distribution
Net operating revenues from our distribution segment in 2011 amounted to R$11,066 million, an increase of 5.5% compared to R$10,485 million in 2010. Excluding revenues relating to the construction of concession infrastructure (which was totally offset by construction costs), net operating revenues would be R$9,936 million, a 5.2%, or R$495 million, increase. This increase was mainly due to (i) tariff adjustments, which resulted in an average increase of 6.4% of billed revenues and a 3.1% increase in the volume sold (R$858 million), and (ii) a 17.6% increase, or R$200 million, in TUSD collections from Free Consumers, which were partially offset by (i) an increase of R$295 million in taxes on gross operating revenues, and (ii) an increase of R$197 million in the CCC and CDE contributions.
Generation
Net operating revenues from our generation segment in 2011 amounted to R$1,621 million, an increase of 36.3% (R$432 million) compared to R$1,189 million in 2010. This increase was mainly due to the commencement of commercial operations of Foz do Chapecó hydroelectric power plant in October 2010 and Termonordeste and Termoparaíba thermoelectric power plants in December 2010 and January 2011, respectively, and the consolidation of CPFL Energias Renováveis in August 2011.
Commercialization and Services
Net operating revenues from our commercialization and services segment in 2011 amounted to R$1,706 million, a decrease of 4.1% compared to R$1,779 million in 2010. The decrease was mainly due to the 13.3% decrease in the volume sold, which was partially offset by the 11.9% increase in average prices.
Income from Electric Energy Service
Cost of Electric Energy
Electricity purchased for resale. Our costs to purchase electricity were R$4,907 million in 2011 (50.5% of our total operating costs and operating expenses). The cost was 2.8% (R$143 million) lower than in 2010, primarily due to a 2.9% decrease in the volume of electricity we purchased once Foz do Chapecó and the EPASA plants commenced operations in October 2010 and December 2010, respectively.
The cost of electricity purchased from Itaipu by our distribution companies was 3.6% (R$37 million) lower in 2011 as compared with 2010, due to the stability of the amount purchased and a reduction of prices. The average price for electricity purchased from Itaipu, which represented 21.3% of the total volume we purchased in 2011, was on average 3.8% lower in 2011 than in 2010, mainly due to the 5.0% decrease in the US dollar average exchange rate in 2011.
Costs to purchase electricity from other generation facilities were 2.6% (R$119 million) lower in 2011 as compared to 2010 due to a 1.1% increase in the average prices, which was offset by a 3.7% decrease in the volume of electricity sold at these facilities.
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Electricity network usage charges. Our costs for electricity network usage charges were R$1,314 million in 2011. This was 12.1% (R$141 million) higher than in 2010 mainly due to an increase of R$120 million in the basic network usage charges, resulting from the commencement of operations of Foz do Chapecó and the EPASA plants in October 2010 and December 2010, respectively.
Other costs and operating expenses
Our other costs and operating expenses comprise our operating cost, services rendered to third parties, sales expenses, general and administrative expenses and other operating expenses, excluding costs related to construction of concession infrastructure.
Our other costs and operating expenses were R$2,363 million in 2011, a 17.1% (R$344 million) increase from 2010. This was primarily due to the following nonrecurring events (i) implementation of our early retirement program in 2011, in the aggregate amount of R$51 million, aiming at potential future gains; (ii) reversion of reserves relating to PIS/COFINS taxes on sector charges of CPFL Paulista in 2010, in the amount of R$40 million; (iii) commencement of operations of Foz do Chapecó and the EPASA plants, and consolidation of CPFL Energias Renováveis in October 2010, December 2010 and August 2011, respectively (R$86 million); (iv) non-operating revenues deriving from the sale of real estate in the city of Santos in 2010 (R$11 million); and (v) increase in ENERCAN’s reserves for contingencies relating to taxes on services (ISS) (R$10 million). Excluding these nonrecurring events, the increase in our other operating costs and operating expenses would be R$144 million, or 7.2%, which mainly reflects inflation adjustments.
Income from Electric Energy Service
Our income from electric energy service was R$3,051 million in 2011. This was 11.4% (R$311 million) higher than in 2010 due to a 6.2% (R$740 million) increase in our net revenues, as well as a 4.6% (R$429 million) increase in operating expenses and electric energy service costs.
Income from Electric Energy Service by Segment
Distribution
Operating income from our distribution segment in 2011 amounted to R$1,922 million, an increase of 3.7% compared with 2010. Our operating income from the segment reflected the 5.5% increase in our net revenue, which was partially offset by:
· Electricity costs: Our electricity costs were R$6,290 million, a 4.4% increase compared to 2010. This reflects an increase of 2.1% in the volume of electricity purchased by us in 2011 compared to 2010, and an increase of 2.3% in the average prices due to energy prices adjustments. However, this increase does not significantly affect our operating income since it is reflected in the 2011 tariffs.
· Other costs and operating expenses. Our other costs and operating expenses (other than electricity utility service costs) for the distribution segment amounted to R$973 million, an increase of 20.0% compared to 2010. This increase was primarily due to (i) salary increases resulting from collective bargaining agreements negotiated in 2010 and 2011, (ii) implementation of our early retirement program in 2011, (iii) increase in costs with third-party service providers, and (iv) increase in reserves for contingencies relating to legal procedures.
Generation
Operating income from our generation segment in 2011 amounted to R$895 million, an increase of 45.3% compared to 2010. This increase reflects the 36.3% increase in net revenues and the 26.7% in other costs and operating expenses. The main reason for the increase in operating income from the segment was the commencement of operations of Foz do Chapecó hydroelectric power plant in October 2010 and Termonordeste and Termoparaíba thermoelectric power plants in December 2010 and January 2011, respectively. The commencement of operations of these plants also contributed to an increase of R$107 million in depreciation and amortization expenses, considering the effects of the consolidation of CPFL Energias Renováveis.
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Commercialization and Services
Operating income from our commercialization and services segment in 2011 amounted to R$264 million, a decrease of 12.9% (R$39 million) compared to 2010. This decrease was mainly due to the 4.1% decrease, or R$74 million, in net revenues, and the increase of R$29 million in other operating costs, mainly due to the expansion of our activities relating to services. The decrease in net revenues and the increase in other operating costs was partially offset by a 4.7% (R$63 million) decrease in electricity costs (13.2% decrease in the volume of electricity purchased by us, partially offset by the 9.8% increase in the average price of electricity).
Net Income
Net Financial Expense
Our net financial expense was R$689 million in 2011, compared to R$354 million in 2010. The R$335 million increase is mainly due to (i) an increase in our level of indebtedness and higher financial indexes; (ii) a decrease of capitalized borrowing costs due to the commencement of operations of CPFL Bionergia (in August 2010), Foz do Chapecó hydroelectric power plant (in October 2010) and Termonordeste and Termoparaíba thermoelectric power plants (in December 2010 and January 2011, respectively), through EPASA; and (iii) the consolidation of CPFL Energias Renováveis. These effects were partially offset by a R$200 million increase in our income from financial investments revenues due to higher cash and cash equivalents average balances.
At December 31, 2011, we had R$11,857 million in debt denominated inreais, which accrued both interest and inflation correction based on a variety of Brazilian indexes and money market rates. We also had the equivalent of R$1,751 million of debt denominated in U.S. dollars. In order to reduce the risk of exchange losses with respect to these U.S. dollars-denominated debts, we entered into long‑term currency swaps indexed to the CDI rate for a significant portion of this debt. The average CDI index variation rate posted an increase of 11.6% in 2011 when compared to 9.8% in 2010, and the TJLP remained stable in 6.0% in 2010 and 2011.
Income and Social Contribution Taxes
We recorded a net charge of R$780 million for income and social contribution taxes in 2011, compared to R$825 million in 2010. Our effective tax rate of 33.0% on pretax income in 2011 was approximately equal to the combined statutory rate of 34.0%.
Net Income
Due to the factors mentioned above, our net income was R$1,582 million in 2011, a slight increase of 1.4%, or R$22 million, compared to 2010.
Net Income by Segment
In 2011, 70.2% of our net income was derived from our distribution segment, 23.3% from our generation segment and 10.1% from our commercialization and services segment. Our other non‑reportable segments represented a net loss of 3.6%.
Distribution
Net income from our distribution segment in 2011 amounted to R$1,111 million, a decrease of 5.0%, or R$ 58 million, compared with 2010. The decrease in this segment reflected mainly the R$161 million increase in net financial expenses due to higher indebtedness, which was partially offset by a decrease in income taxes.
Generation
Net income from our generation segment in 2011 amounted to R$368 million, a 43.1% increase compared with 2010, which reflects the commencement of operation of Foz do Chapecó and the EPASA plants, and the consolidation of CPFL Energias Renováveis in October 2010, December 2010 and August 2011, respectively. This increase was mainly due to the 36.3% increase in net revenues, which was partially offset by a R$147 million increase in net financial expenses due to new financings.
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Commercialization and Services
Net income from our commercialization and services segment in 2011 amounted to R$160 million, a decrease of 22.5%, or R$46 million. The decrease in this segment reflected the (i) R$39 million decrease in operating income, (ii) R$29 million increase in net financial expenses due to higher indebtedness, which was partially offset by lower income taxes (R$20 million).
Results of Operations—2010 compared to 2009
In 2010, our performance progressed significantly, reflecting the current growth cycle in Brazil; the growth potential of the Brazilian internal market, which is reflected in the increase in the consumption of energy in our distribution concession areas; the results of our strategy of expanding and diversifying our business; and our undertaking to improve our operating efficiency.
Our net income in 2010 was lower than in 2009 because our revenues in 2009 reflected tariff adjustments following losses we incurred in 2008 due to the global financial crisis.
Net Operating Revenues
Our net operating revenues were R$12,024 million in 2010, a 5.9% increase compared to 2009. Excluding revenues relating to the construction of concession infrastructure (which does not affect the result due to corresponding costs in the same amount), net operating revenues would be R$10,980 million, a 2.2%, or R$238 million, increase. The increase in our net operating revenues primarily reflected higher revenues from our distribution companies attributable to an increase in sales to our captive clients and in revenues from TUSD paid by Free Consumers.
The following discussion describes changes in our net operating revenues by destination and by segment, based on the items comprising our gross revenues.
Sales by Destination
Sales to final consumers
Our gross operating revenues from sales to Final Consumers were R$13,929 million in 2010, a 3.2% increase compared to 2009. Average prices in 2010 varied by consumer category. While average prices increased among residential and rural consumers, they decreased among industrial, commercial, public administration and public services consumers. Tariffs are adjusted each year, and the month in which the tariff adjustment takes effect varies, with the increases in the largest subsidiaries taking effect in April (CPFL Paulista), June (RGE), and October (CPFL Piratininga).
The increase in sales in 2010 reflected the economic recovery. Volumes sold to residential and commercial consumers increased 5.2% and 5.5%, respectively. Volumes sold to industrial consumers increased 3.0%, reflecting an increase of 0.5% in sales to captive Final Consumers and 10% in sales in the free market. Industrial customers in our distribution concession areas who purchase from other suppliers in the free market also pay us a fee for the use of our network, and this revenue is reflected in our financial statements under “Other Operating Revenues.” Average prices to Final Consumers in 2010 varied by the consumer category:
· Industrial and Commercial Consumers. For industrial and commercial consumers that are captive consumers (which represent 82.1% of the total volume sold to this category), average prices decreased by 1.4% and 1.7%, respectively. For those that are Free Consumers, average prices decreased by 4.5% and 2.8%, respectively.
· Residential Consumers. Average prices increased by 1.0% due to tariff adjustments for our eight distribution subsidiaries.
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Sales to wholesalers
Our gross operating revenues from sales to wholesalers were R$1,196 million in 2010 (6.8% of our gross operating revenues), a decrease of 7.9% compared to 2009. The decrease was due to the 1.5% decrease in the volume of electricity sold and the 6.6% decrease in average prices.
Other operating revenues
Our other gross operating revenues were R$1,387 million in 2010 (11.5% of our net operating revenues), compared to R$1,036 million in 2009. The increase was mainly due to the favorable impact of TUSD revenues from our Free Consumers and tariff adjustments.
Deductions from operating revenues
We deduct certain taxes and regulatory charges from our gross operating revenues to calculate our net revenues. One of these taxes is the value-added tax, or ICMS, levied by Brazilian states, and PIS/COFINS taxes levied by the Brazilian federal government. These deductions amounted to 31.5% of our gross operating revenues in 2010 and 31.1% in 2009. Most of these taxes and charges are based on the amount of gross operating revenues, while others vary depending on regulatory effects reflected in our tariffs. See note 27 to our consolidated financial statements.
Sales by segment
Distribution
Net operating revenues from our distribution segment in 2010 amounted to R$10,485 million, an increase of 7.2% compared to R$9,779 million in 2009. Excluding revenues relating to the construction of concession infrastructure (which was totally offset by construction costs), net operating revenues would be R$9,441 million, a 3.0%, or R$278 million, increase. This increase was mainly due to the 42% increase in TUSD revenues collected from Free Consumers and the 2.7% increase in sales in our captive market.
Generation
Net operating revenues from our generation segment in 2010 amounted to R$1,189 million, an increase of 11.6% compared to R$1,065 million in 2009. This increase was mainly due to the fact that the Baldin, Foz do Chapecó and EPASA plants became commercially operational in 2010.
Commercialization and Services
Net operating revenues from our commercialization and services segment in 2010 amounted to R$1,779 million, a slight decrease of 0.3% compared to R$1,784 million in 2009. The decrease was mainly due to a 3.6% decrease in volume sold, partially compensated by the increase in average prices.
Income from Electric Energy Service
Cost of Electric Energy
Electricity purchased for resale. Our costs to purchase electricity were R$5,050 million in 2010 (75.2% of our total operating costs and operating expenses). The cost was 1.4% higher than in 2009, primarily due to (i) a 2.0% increase in the average price for electricity offset by (ii) a reduction of 0.6% due to a decrease in the volume of electricity we purchased.
The average price for electricity purchased from Itaipu by our distribution companies, which represented 20.7% of the total volume we purchased in 2010, was on average 10.7% lower in 2010 than in 2009, because of a 1.6% decrease in the tariffs established by ANEEL and a 11.6% decrease in the average rate of the dollar in 2009.
The average prices of electricity sold from other generation facilities increased 4.8%. The volume of electricity sold at these facilities remained constant.
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Electricity network usage charges. Our costs for electricity network usage charges were R$1,172 million in 2010. This was 13.3% higher than in 2009 due to the increase in the ESS and EER. This increase mainly refers to the apportionment of costs relating to reserve energy and to the commencement of operations of thermoelectric power plants in 2010. These charges are reimbursed to our distribution companies through tariff adjustments when the actual charges are higher than forecasts used in setting tariffs. A large proportion of these charges (97.0% in 2010) is attributable to our distribution segment.
Other costs and operating expenses
Our other costs and operating expenses comprise our operating cost, services rendered to third parties, sales expenses, general and administrative expenses and other operating expenses, excluding costs related to construction of concession infrastructure.
Our other costs and operating expenses were R$2,018 million in 2010, a 3.8% increase from 2009. This was due primarily to: (i) a 7.3%, or R$41 million, increase in personnel costs, mainly due to salary increases resulting from collective bargaining agreements negotiated in 2009 and 2010, and (ii) a 20.2%, or R$78 million, increase in third‑party services costs due to adjustments in contractual prices and an increase in the number of third-party service providers, as well as maintenance costs for our electricity network, telephone services, new personnel hirings and system consultancy. These costs were partially offset by the R$81 million actuarial gain relating to pension plans in 2010. Actuarial gains or losses result from actuarial reports prepared by specialized companies and vary according to macroeconomic premises, particularly returns on assets.
Income from Electric Energy Service
Our income from electric energy service was R$2,739 million in 2010. This was 1.6% lower than in 2009 due to the 8.3% increase in operating expenses and electric utility service costs, although partially offset by the 5.9% increase in our net revenue.
Income from Electric Energy Service by Segment
Distribution
Operating income from our distribution segment in 2010 amounted to R$1,853 million, a slight decrease of 0.4% compared with 2009. Our operating income from the segment reflected the 7.2% increase in our net revenue, which was more than offset by:
· Electricity costs: Our electricity costs were R$6,023 million, a 4.6% increase compared to 2009. This reflects an increase of 2.4% in the volume of electricity purchased by us in 2010 compared to 2009 and an increase of 2.1% in the average prices due to energy prices adjustments. However, this increase does not significantly affect our operating income since it is included in the 2010 tariffs.
· Other costs and operating expenses. Our other costs and operating expenses (other than electricity utility service costs) for the distribution segment amounted to R$811 million, an increase of 3.1% compared to 2009. This increase was primarily due to salary increases resulting from collective bargaining agreements negotiated in 2009 and 2010 and increase in costs with third-party service providers.
Generation
Operating income from our generation segment in 2010 amounted to R$616 million, a decrease of 5.1% compared to 2009. The main reason for the decrease in operating income from the segment was the increase in costs relating to the purchase of electricity in the market to comply with contractual obligations assumed by EPASA and Chapecoense before they started operations.
Commercialization and Services
Operating income from our commercialization and services segment in 2010 amounted to R$303 million, an increase of 3.6% compared to 2009. This increase was mainly due to the 3.4% decrease in electricity costs,resulting from a 3.8% decrease in the volume of electricity purchased by us. This decrease was partially offset by the 0.5% increase in the average price of electricity.
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Net Income
Net Financial Expense
Our net financial expense was R$354 million in 2010, compared to R$310 million in 2009. The R$44 million increase is mainly due to: (i) the increase in the level of our indebtedness and (ii) the commencement of operations of Foz do Chapecó, which started accounting for the monetary restatement of the debt and charge for the use of public utilities as financial expenses. The increase in revenues from financial investments resulted from the cash margins and equivalents in 2010 as compared with 2009.
At December 31, 2010, we had R$8,937 million in debt denominated inreais, which accrued both interest and monetary correction based on a variety of Brazilian indexes and money market rates. We also had the equivalent of R$470 million of debt denominated in foreign currencies (U.S. dollars and Japanese yen). In order to reduce the risk of exchange losses with respect to these foreign-denominated debts, we entered into long‑term currency swaps for a significant portion of this debt. The rates of index variation posted a slight decrease in 2010 when compared to 2009, with the average CDI rate for the year at 9.8% in 2010 compared to 9.9% in 2009 and the TJLP decreasing by 6.0% in 2010 compared to 6.1% in 2009.
Income and Social Contribution Taxes
We recorded a net charge of R$825 million for income and social contribution taxes in 2010, compared to R$784 million in 2009. Our effective tax rate of 34.6% on pretax income in 2010 was approximately equal to the combined statutory rate of 34.0%.
Net Income
Due to the factors mentioned above, our net income was R$1,560 million in 2010, a decrease of 7.6%, or R$129 million, compared to 2009.
Net Income by Segment
In 2010, 74.9% of our net income was derived from our distribution segment, 16.5% from our generation segment and 13.2% from our commercialization and services segment. Our other non‑reportable segments represented a net loss of 4.6%.
Distribution
Net income from our distribution segment in 2010 amounted to R$1,169 million, a slight increase of 0.8% compared with 2009. The increase in this segment reflected mainly the R$20 million decrease in net financial expenses, which were partially offset by the R$8 million decrease in our operating income and the R$2 million increase in expenses for income tax and social contributions.
Generation
Net income from our generation segment in 2010 amounted to R$257 million, a decrease of 22.5% compared with 2009. This decrease was mainly due to: (i) a 5.1% decrease in our operating income due to an increase in purchases of electricity to comply with supply agreements entered into by our subsidiaries that had not yet started operations, (ii) an increase in our indebtedness due to new financings and (iii) the monetary restatement of the public utilities.
Commercialization and Services
Net income from our commercialization and services segment in 2010 amounted to R$207 million, a decrease of 1.5%. The decrease in this segment reflected the compensation of the increase of 3.6% of operating income by our net financial expenses.
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Capital Expenditures
Our principal capital expenditures in the past several years have been for the maintenance and upgrading of our distribution network and for our generation projects. The following table sets forth our capital expenditures for the years ended December 31, 2011, 2010 and 2009:
Year ended December 31, | ||||||
2011 | 2010 | 2009 | ||||
(in millions ofreais) | ||||||
|
|
|
| |||
Distribution | 1,065 | 1,128 | 746 | |||
Generation | 823 | 645 | 570 | |||
Commercialization and other investments | 17 | 29 | 40 | |||
|
|
|
| |||
Total | R$1,905 | R$1,802 | R$ 1,356 |
We plan to make capital expenditures aggregating approximately R$2,944 million in 2012 and approximately R$2,370 million in 2013. Of total budgeted capital expenditures over this period, R$2,309 million are expected to be invested in our distribution segment and R$2,898 million in our generation segment. Part of these expenditures, particularly in generation projects, is already contractually committed. See “—Liquidity and Capital Resources—Funding Requirements and Contractual Commitments.” Planned capital expenditures for development of our generation capacity, and the related financing arrangements, are discussed in more detail under “Item 4. Information on the Company—Generation of Electricity.”
Liquidity and Capital Resources
Funding Requirements and Contractual Commitments
Our capital requirements are primarily for the following purposes:
· We make capital expenditures to continue improving and expanding our distribution system and to complete our generation projects. See “—Capital Expenditures” above for a discussion of our historical and planned capital expenditures;
· Repayment or refinancing maturing debt. At December 31, 2011 we had outstanding debt maturing during the following 12 months aggregating R$1,428 million (excluding derivatives and interest);
· Dividends on a semiannual basis. We paid R$1,230 million in 2011 and R$1,424 million in 2010. See “Item 10. Additional Information—Interest Attributable to Shareholders’ Equity;” and
· Funding for acquisitions. In 2011, we paid R$863 million for the acquisition of Jantus and Santa Luzia.
On December 31, 2011, our working capital reflected a superavit (excess of current assets over current liabilities) of R$864 million. The main cause of this superavit was the refinancing of our current debt in 2010 and the higher level of cash and cash equivalents in 2011.
The following table summarizes our contractual obligations determined in accordance with IFRS as of December 31, 2011. The table does not include accounts payable reported on our balance sheet.
| Payments due by period | |||||||||
| Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||
| (in millions ofreais) | |||||||||
Contractual obligations as of December 31, 2011: |
|
|
|
|
| |||||
Debt obligations(1) | 13,359 | 1,428 | 3,469 | 3,671 | 4,791 | |||||
Purchase obligations: |
|
|
|
|
| |||||
Electricity purchase agreements(2) | 127,107 | 8,205 | 15,283 | 15,200 | 88,418 | |||||
Generation projects | 3,426 | 819 | 698 | 287 | 1,622 | |||||
Supplies | 1,686 | 1,243 | 387 | 57 | - | |||||
Pension funding(3) | 589 | 40 | 77 | 77 | 395 | |||||
|
|
|
|
|
| |||||
Total | 146,167 | 11,734 | 19,914 | 19,292 | 95,227 |
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(1) Not including interest payments on debt or payments under swap agreements. For the year ended December 31, 2012, we expect that the interest payments on debt and debentures will amount to R$218 million and we do not expect payments under swap agreements. This is the contractual amount and is presented net of Fair Value adjustments and borrowing costs. We expect to pay approximately R$1,039 million in interest payments in 2012. Interest payments on debt for years following 2012 have not been estimated. We are not able to determine such future interest payments because we cannot accurately predict future interest rates, our future cash generation, or future business decisions that could significantly affect our debt levels and consequently this estimate. For an understanding of the impact of a change in interest rates applicable to our long‑term debt obligations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Risk of Index Variation.” For additional information on the terms of our outstanding debt, see “—Terms of Outstanding Debt.”
(2) Amounts payable under long‑term energy purchase agreements, which are subject to changing prices and provide for renegotiation under certain circumstances. The table represents the amounts payable for the contracted volumes applying the year-end 2011 price. See “—Background—Prices for Purchased Electricity” and note 27 to our consolidated financial statements.
(3) Amounts due under a contract with the pension plan administrator (see note 18 to our consolidated financial statements).
Sources of Funds
Our main sources of funds derive from our operating cash generation and financings.
Cash Flow
Net cash provided by operating activities was R$2,489 million in 2011, as compared to R$2,029 million in 2010. The increase mainly reflected an increase in net income and an increase in the adjustment to reconcile income to cash, mainly related to interest and monetary restatement, which was partially offset by an increase in deposits in escrow.
Net cash used for investment was R$2,488 million in 2011, as compared to R$1,802 million in 2010. This R$686 million increase mainly reflects a capital increase of R$863 million for the acquisition of Jantus, which was partially offset by cash provided from ERSA subsidiaries.
Net cash generated by financing activities was R$1,136 million in 2011 compared to net cash of R$152 million disbursed in 2010. This increase is mainly due to new fund raisings, net of payment of maturing debts and issuance of debentures, especially by our subsidiary CPFL Brasil to finance the acquisition of Jantus (through our subsidiary CPFL Energias Renováveis).
Indebtedness
The following table sets forth our current and noncurrent liabilities in IFRS for the year ended December 31, 2011:
| 2011 | |||
| Current | Noncurrent | ||
|
|
| ||
Secured debt | 414,473 | 2,616,571 | ||
Unsecured debt | 4,084,964 | 11,744,538 | ||
Total | 4,499,437 | 14,361,110 |
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Our total indebtedness increased R$4,189 million, or 44.5%, from December 31, 2010 to December 31, 2011, mainly as result of:
· issuance of debentures in a total amount of R$1,320 million by our subsidiary CPFL Brasil to finance the acquisition of Jantus through our subsidiary CPFL Energias Renováveis;
· the consolidation of CPFL Energias Renováveis, Santa Luzia and Jantus in our financial statements, resulting in additional indebtedness of R$492 million (CPFL Energias Renováveis), R$136 million (Santa Luzia), R$152 (loans to the acquisition of Jantus) and R$517 million (debentures relating to the acquisition of Jantus).
· additional financings of R$349 million for the expansion and improvements in our distribution subsidiaries and for working capital through Banco do Brasil, and fund raisings in the amount of R$1,162 million in U.S. dollar-denominated debt (net of prepaid settlements of yen-denominated debts).
During 2012 and 2013, we expect to raise funding mainly to finance our scheduled investments in our distribution companies and new generation projects.
We expect our main source of new financing in 2012 to be loans from BNDES as FINEM/FINAME credits for our distribution companies, loans for working capital from financial institutions and issuance of debentures.
In June, 2011, our Board of Directors approved the issuance of debentures by certain of our subsidiaries in the total amount of R$2,909 million. Of this total amount, R$484 million was issued by CPFL Paulista, R$680 million by CPFL Geração, R$160 million by CPFL Piratininga, R$70 million by RGE, R$65 million by CPFL Santa Cruz and R$130 million by EPASA. We used the proceeds from these offerings for working capital, investment plans and to repay part of our indebtedness. On June 2011, CPFL Brasil issued debentures in the total amount of R$1,320 million.
These financings will have the purpose of (i) funding capital expenditures of our distribution subsidiaries, (ii) raising capital for investments in our new renewable generation sources segment, and (iii) raising capital for operations of EPASA’s thermoelectric power plants.
Terms of Outstanding Debt
Total debt outstanding at December 31, 2011 (including accrued interest and derivative transactions) was R$13,608 million. Of the total amount, approximately R$1,751 million, or 12.9%, was denominated in U.S. dollar. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations. R$1,653 million of our total outstanding debt is due in 12 months.
Our major categories of indebtedness are as follows:
· BNDES. At December 31, 2011, we had R$4,803 million outstanding under a number of facilities provided through BNDES. These loans are denominated inreais. The most significant part of these loans relates to (a) loans to our generation projects, especially Foz do Chapecó, BAESA, CERAN, ENERCAN and CPFL Energias Renováveis (R$3,452 million), and (b) financing of investment programs of our distribution subsidiaries, primarily CPFL Paulista, CPFL Piratininga and RGE, through lines of credit under the BNDES – FINEM loan facility (R$1,190 million). We also had financings relating to working capital in the amount of R$149 million.
· Debentures. At December 31, 2011, we had indebtedness of R$5,163 million outstanding under several series of debentures issued by CPFL Energia, CPFL Paulista, CPFL Piratininga, EPASA, CPFL Geração, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Jaguari, CPFL Brasil, BAESA, ENERCAN and RGE. The terms of these debentures are summarized in note 17 to our audited consolidated financial statements.
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· Working capital. At December 31, 2011, we had R$857 million outstanding under a number of loan agreements indexed to the CDI relating to working capital for our distribution companies.
· Otherreal-denominated debt. As of December 31, 2011, we had R$1,034 million outstanding under a number of otherreal-denominated facilities (R$174 million through our distribution companies and R$860 million through our generation companies). The majority of these loans are restated based on CDI or IGP-M, and bear interest at various rates.
· U.S. dollar-denominated debt. CPFL Paulista entered into bilateral loans denominated in U.S. dollars. As of December 31, 2011, the total outstanding principal amounts for these loans were R$46 million.
· Other U.S. dollar-denominateddebt. At December 31, 2011, we had R$1,704 million outstanding under other loans denominated in U.S. dollars. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations. In addition, we have U.S. dollar- denominated long‑term receivables, which amounted to R$24 million at December 31, 2011, which also mitigate our exposure to exchange rates. For more details on our loans, debentures and derivatives, please see notes 16, 17 and 33 to our audited consolidated financial statements.
In addition, as a result of our association with ERSA and our acquisition of Jantus and Santa Luzia, we recorded R$1,295 million in consolidated assumption of debt.
Financial and Operating Covenants
We are subject to financial and operating covenants under our financial instruments and those of our subsidiaries. These covenants include the following:
· We have limitations on our ability to sell or pledge assets or to make investments in third parties.
· Under the BNDES credit facilities:
· CERAN, ENERCAN, BAESA, Foz do Chapecó, CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Mococa, CPFL Jaguari, CPFL Leste Paulista and CPFL Sul Paulista must first pay the amounts due under the loans before paying dividends to their respective holding company (CPFL Geração or CPFL Energia) in an amount higher than the mandatory dividends under Brazilian law. In addition, before making these dividend payments and before paying interest on shareholders’ equity, BNDES must give its prior approval, and the respective subsidiary must be in compliance with all of its financial covenants.
· CPFL Energias Renováveis must maintain a debt coverage ratio equal to or higher than 1.2 during the amortization period and an own capitalization ratio equal to or higher than 25% during the amortization period.
· CPFL Paulista, CPFL Piratininga and RGE must maintain a net indebtedness to EBITDA ratio of less than 3.0, 2.5 and 2.5, respectively, and an indebtedness to the sum of net indebtedness and net equity equal to or lower than 0.9, 0.8 and 0.5, respectively.
· Under our U.S. dollar-denominated debts, we must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) ratio equal to or higher than 2.25.
· Under the third issuance of debentures of CPFL Energia, we must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) ratio equal to or higher than 2.25.
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· Under the third issuance of debentures of CPFL Paulista, CPFL Paulista must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.0 and an EBITDA to financial income (expense) ratio equal to or higher than 2.25, with the ratios calculated as defined in the CPFL Paulista debentures. Under the fifth issuance of debentures of CPFL Paulista, CPFL Paulista must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) equal to or higher than 2.25.
· Under fifth issuance of debentures of RGE, RGE must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial expenses ratio equal to or higher than 2.25, with the ratios calculated as defined in the RGE debentures.
· Under the third issuance of debentures of CPFL Piratininga, CPFL Piratininga must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.0, and an EBITDA to financial income (expense) ratio equal to or higher than 2.25, with the ratios calculated as defined in the CPFL Piratininga’s debentures. Under the fifth issuance of debentures of CPFL Piratininga, CPFL Piratininga must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) ratio equal to or higher than 2.25.
· Under the third issuance of debentures of CPFL Geração, CPFL Geração must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial expenses equal to or higher than 2.0, with the ratios calculated as defined in the CPFL Geração’s debentures. Under the fourth issuance of debentures of CPFL Geração, CPFL Geração must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) equal to or higher than 2.25.
· Under the second issuance of debentures of CPFL Brasil, CPFL Brasil must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) equal to or higher than 2.25.
· Under the first issuance of debentures of CPFL Santa Cruz, CPFL Santa Cruz must maintain a net indebtedness to EBITDA ratio equal to or lower than 3.75, and an EBITDA to financial income (expense) equal to or higher than 2.25.
· Under the first issuance of debentures of BAESA (first and second series), BAESA must maintain a total indebtedness ratio of less than 75% of its assets.
We are currently in compliance with our financial and operating covenants. A breach of any of these covenants would give our lenders the right to accelerate our repayment obligations.
In addition, a number of the financing instruments of our subsidiaries are subject to acceleration if, as a result of changes in our structure or in the structure of our subsidiaries, our current shareholders cease to own a majority of CPFL Energia’s voting equity or control over management.
For more information on our financial covenants, see notes 16 and 17 to our audited consolidated financial statements.
Research and Development and Electricity Efficiency Programs
In accordance with applicable Brazilian law, since June 2000 companies holding concessions, permissions and authorizations for distribution, generation and transmission of electricity have been required to dedicate a minimum of 1.0% of their net operating revenue each year to research and development and electricity efficiency programs. Small hydroelectric power plants and wind, sun and biomass energy projects are not subject to this requirement. Beginning in April 2007, our distribution concessionaires dedicated 0.5% of their net operating revenue to research and development and 0.5% to electricity efficiency programs, while our generation concessionaries dedicated 1.0% of their net operating revenue to research and development.
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Our electricity efficiency program is designed to foster the efficient use of electricity by our consumers, to reduce technical and commercial losses and offer products and services that improve satisfaction and loyalty and enhance our corporate image. Our research and development programs utilize technological research to develop products, which may be used internally, as well as sold to the public. We carry out certain of these programs through strategic partnerships with national universities and research centers, and the vast majority of our resources are dedicated to innovation and development in new technologies applicable to our business.
Our disbursements on research and development projects in 2009, 2010 and 2011 totaled R$156 million, R$179 million and R$213 million, respectively.
Off-Balance Sheet Arrangements
None.
Trend Information
We intend to invest in innovation and technology to increase the quality of our operations and our operational efficiency, which are our perennial goals. The new technologies we plan to use in our Tauron projects may increase our operational efficiency in the future.
Additionally, we seek to promote growth in each of our business segments: distribution, conventional generation sources, renewable generation sources and commercialization and services.
We intend to continue to expand our distribution segment, either through market growth or through the acquisition of energy distribution companies (if there are companies in the market with characteristics and at a price that will be beneficial to us).
Market growth is heavily influenced by economic growth, in particular, an increase in employment, income, retail sector sales and industrial production. In addition, the market is also influenced by the entry of new clients and changes in weather and rainfall volume.
The market shows positive signs of growth for 2012. According to projections from the FOCUS report, published onMarch 16, 2012 by the Central Bank, GDP is expected to grow 3.3% in 2012 and 4.2% in 2013, which will impact energy consumption. This growth should be sustained not only by individual and commercial economic growth (the increase in salaries, consumer purchasing power and credit availability), but also by the recovery of the Brazilian power industry, which had a modest growth in 2011 as a result of appreciated exchange rates and high interest rates.
Our generation segment has shown high levels of growth in the last few years, with the acquisition and construction of new plants. In 2011, the creation of CPFL Energias Renováveis marked an important moment for us. We plan to continue to expand our generation activities, both in the conventional energy and the renewable energy (wind farms, small hydroelectric plants and biomass thermoelectric plants) sectors. We are currently pursuing this strategy through CPFL Energias Renováveis, with an installed capacity of 652 MW (of which our share is 411 MW), as well as seeking out new projects.
As of December 31, 2011, we had an installed capacity of 2,644 MW, which should reach 2,922 MW9by the end of 2012 after the Bio Ipê and Bio Pedra thermoelectric power plants and the Santa Clara wind farms begin operations. In 2013 and 2014, we expect to reach an installed capacity of 3,141 MW and 3,301 MW, respectively, when the Santa Góes small hydroelectric power plant, the Alvorada and Coopcana thermoelectric power plants, the Campo dos Ventos II wind farm and the wind farms of the Macacos I, Atlântica (2013), Campo dos Ventos and São Benedito (2014) complexes begin commercial operations. We also have a 2,743 MW (of which our share is 1,728 MW) portfolio to develop over the coming years through CPFL Energias Renováveis. In addition, we will continue to seek out new projects in the conventional energy sector.
9This number includes four wind farms from the Bons Ventos complex which acquisition is still subject to the approval of ANEEL and other contractual conditions.
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In the commercialization and services segment, our main objective is to maintain our leading position, in terms of market share in order to guarantee our above-average profitability. In addition, we expect to expand our portfolio of services, retain the loyalty of our customers and expand our services to new markets.
Since our founding, we have employed a growth strategy based on operational excellence through innovation and technology, synergy, financial discipline and the accumulation of value. We plan to continue this in the future in order to consolidate our strong position in the energy industry.
Use of Estimates in Certain Accounting Policies
In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and our estimates involve judgments we make based on the information available to us. In the discussion below, we have identified several other matters that would materially affect our financial presentation if either (i) we used different estimates that we could reasonably have used or (ii) in the future we change our estimates in response to changes that are reasonably likely to occur.
The discussion addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation. Please see the notes to our audited consolidated financial statements included herein for a more detailed discussion of the application of these and other accounting policies.
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment, purchased intangible assets and investments, comprise a significant amount of our total assets and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We carry balances on our balance sheet that are based on historical costs net of accumulated depreciation and amortization. We are required under IFRS to periodically evaluate whether these assets are impaired, that is, whether their future capacity to generate cash does not justify maintaining them at their carrying values. The methods used to assess impairment include tests based on the asset's value in use. In such cases, the assets (e.g. goodwill and intangible assets of concession) are segregated and grouped together at the lowest level that generates identifiable cash flows (the "cash generating unit", or CGU). If they are impaired, we are required to recognize a loss by writing off part of their value to expense in the current period. The analysis we perform requires that we estimate the future cash flows attributable to these assets, and these estimates require us to make a variety of judgments about our future operations, including judgments concerning market growth and other macroeconomic factors as well as the demand for electricity. Changes in these judgments could require us to recognize impairment losses in future periods. Our evaluations in 2011, 2010 and 2009 did not result in any significant impairment of our property, plant and equipment or intangible assets and investments.
Pension Liabilities
We sponsor pension plans and disability and death benefit plans covering substantially all of our employees. The determination of the amount of our obligations for pension benefits depends on certain actuarial assumptions,, including discount rate, inflation etc. For further information about the actuarial assumptions see note 18 to our audited consolidated financial statements.
Deferred Tax Assets and Liabilities
We account for income taxes in accordance with IFRS, which requires an asset and liability approach to recording current and deferred taxes. Accordingly, the effects of differences between the tax basis of assets and liabilities and the amounts recognized in our financial statements have been treated as temporary differences for the purpose of recording deferred income tax.
We regularly review our deferred tax assets for recoverability. If evidences are not enough to prove that is more likely than not that the Company will generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable ordeductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
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Reserves for Contingencies
We and our subsidiaries are party to certain legal proceedings in Brazil arising in the normal course of business regarding tax, labor, civil and other issues.
Accruals for contingencies are estimated based on historical experience, the nature of the claims, and the current status of the claims. The evaluation of these contingencies is performed by various specialists, inside and outside of the company. Accounting for contingencies requires significant judgment by management concerning the estimated probabilities and ranges of exposure to potential liability. Management’s assessment of our exposure to contingencies could change as new developments occur or more information becomes available. The outcome of the contingencies could vary significantly and could materially impact our consolidated results of operations, cash flows and financial position.
Financial instruments
Financial instruments can be measured at fair values or at recognized costs, depending on certain factors. Those measured at fair value were recognized based on quoted prices in an active market, or assessed using pricing models, applied individually for each transaction, taking into consideration the future payment flows, based on the conditions contracted, discounted to present value at market interest rate curves, based on information obtained from the BM&FBOVESPA and the National Association of Financial Market Institutions,Associação Nacional das Instituições do Mercado Financeiro – ANDIMA websites, when available. Accordingly, the market value of a security corresponds to its maturity value (redemption value) marked to present value by the discount factor (relating to the maturity date of the security) obtained from the market interest graph in Brazilianreais.
Financial assets classified as available-for-sale refer to the right to compensation to be paid by the Federal Government on reversion of the assets of the distribution concessionaires (financial asset of concession). The methodology adopted for marking these assets to market is based on the tariff review process for distributors. This review, conducted every four or five years according to the concessionaire, consists of revaluation at market price of the distribution infrastructure. This valuation basis is used for pricing the tariff, which is increased annually up to the next tariff review, based on the parameter of the main inflation indexes.
Although the Federal Government has not yet defined the methodology and criteria for valuation of the compensation on reversion of the assets, our management believes that it will be based at least on the tariff pricing model. Accordingly, at the time of the tariff review, each concessionaire adjusts the position of the financial asset base for compensation at the amounts ratified by the regulatory authority and uses the IGP-M as best estimate for adjusting the original base to the fair value at subsequent dates, in conformity with the tariff review process.
However, because the methodology and criteria for valuation of the compensation are still uncertain, we have prepared an analysis of sensitivity of our results to a potential change in our assumption regarding the adoption of the tariff pricing model, which includes adjustment based on the IGP-M. The sensitivity analysis describes the impact of payment of financial assets based on its historical cost. The sensitivity analysis is described in note 33.e.3 to our financial statements included in this annual report.
Depreciation and Amortization of Intangible Assets
We account for depreciation using the straight-line method, at annual rates based on the estimated useful life of assets, as established by ANEEL, in accordance with practices adopted in Brazil. Amortization of intangible assets varies according to the way they are acquired:
· Intangible assets acquired in a business combination: We account for the amortization of the premium corresponding to the concession rights using the concessionaire’s projected net profit curve for the remaining concession term.
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· Investments in infrastructure (application of IFRIC 12 – Service Concession Arrangements): Since the concession term is contractually defined, intangible assets acquired as investment in infrastructure have a pre‑determined useful life. We account for the amortization of these assets using a curve that reflects the consumption standard as compared to the expected profits.
· Public utilities: We account for the amortization of intangible assets relating to our use of a public asset using the straight-line method for the remaining term of the concession.
ITEM 6. Directors, Senior Management and Employees
Directors and Senior Management
Board of Directors
Our Board of Directors is responsible for determining our overall strategic guidelines and, among other things, for establishing our general business policies and for electing our executive officers and supervising their management. According to our bylaws, our Board of Directors consists of a minimum of seven members and a maximum of nine members. Currently, our Board of Directors consists of seven members, of which one is independent (in accordance with the listing regulations of the New Market of the BM&FBOVESPA, or theNovo Mercado, and our bylaws). In the event of a tie, the chairman will have the deciding vote. The Board of Directors meets at least once a month, or whenever requested by the chairman in accordance with our bylaws.
Under our bylaws, the board members are elected by the holders of our common shares at the annual general meeting of shareholders. Board members serve one-year terms, re-election being permitted provided that they may be removed at any time by our shareholders at an extraordinary general meeting of shareholders. Our current directors were elected at our shareholders’ meeting held on April 28, 2011. Their terms will expire at our next annual shareholders’ meeting, scheduled to take place in April, 2012. Our bylaws do not provide for a mandatory retirement age for our directors.
Under Brazilian Corporate Law, if a director or an executive officer has a conflict of interest with the company in connection with any proposed transaction, the director or executive officer may not vote in any decision of the Board of Directors, or of the board of executive officers, regarding such transaction, and must disclose the nature and extent of the conflicting interest for transcription in the minutes of the meeting. A director or an executive officer may not transact any business with the company, including accepting any loans, except on reasonable or fair terms and conditions that are identical to the terms and conditions prevailing in the market or offered by third parties. As of December 31, 2011, any transaction entered into between our shareholders or related parties and us that exceeds R$8.1 million, as adjusted annually by the IGP-M index, must be previously approved by our Board of Directors. As of this date, there are no relevant agreements or other obligations between us and our directors.
Under Brazilian Corporate Law, combined with a decision by CVM, noncontrolling shareholders have the right to designate at least one member of our board of directors for election to the board, provided that they hold at least 10.0% of the outstanding voting shares. Noncontrolling shareholders that own greater than 5.0% of voting shares may requestvoto múltiplo (multiple voting).
The following table sets forth the name, age and position of each current member of our Board of Directors. A brief biographical description of each of our directors follows the table.
Name | Age | Position | ||
Murilo Cesar Lemos dos Santos Passos | 64 | Chairman | ||
Claudio Borin Guedes Palaia | 37 | Director | ||
Francisco Caprino Neto | 51 | Director | ||
Renê Sanda | 48 | Director | ||
Ivan de Souza Monteiro | 51 | Director | ||
Carlos Alberto Cardoso Moreira | 51 | Director | ||
Ana Dolores Moura Carneiro de Novaes | 50 | Independent Director |
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Murilo Cesar Lemos dos Santos Passos - Mr. Passos graduated in Chemical Engineering from the Federal University of Rio de Janeiro (UFRJ) in 1971. Between 1970 and 1977, he held positions at the Ministry of Industry and Commerce – Industrial Development Council (CDI). Between 1977 and 1992, he worked at Companhia Vale do Rio Doce and subsequently became the CEO and Head of Forestry Products, Environment and Metallurgy Area of Celulose Nipo-Brasileira S.A (CENIBRA) and Florestas Rio Doce S.A.. Between 1993 and 2006, he was an executive officer of Bahia Sul Celulose S.A. and Suzano Papel e Celulose S.A. He was a member of the Board of Directors of Brasil Agro Cia. Brasileira de Propriedades Agrícolas between 2007 and 2010. Currently, he is a member of the Management Committee of the Board of Directors of Suzano Papel e Celulose S.A., Vice President of the Trustee Council of the Foundation for the National Quality Award (FNPQ), a member of the Superior Council of Ecofuturo Institute and a member of the Advisory Council of the Pulp and Paper Producers’ Association - BRACELPA. He is also a member of the Board of Directors of São Martinho S.A., Odontoprev S.A. and Tegma Gestão Logística S.A. Since 2010, he has been the Chairman of the Board of Directors of CPFL Energia.
Claudio Borin Guedes Palaia - Mr. Palaia graduated in Business Administration from Fundação Getúlio Vargas Business School of São Paulo in 1997. He obtained an MBA degree from The Wharton School of the University of Pennsylvania in 2002. He worked as an analyst of mergers and acquisitions at JP Morgan Bank in São Paulo and in New York from 1997 to 1998. From 2002 to 2005, he was project leader in Camargo Corrêa Energia S.A., Camargo Corrêa S.A. (CCSA) and São Paulo Alpargatas. From 2005 to 2007, he was an executive officer of Hormigón da Loma Negra C.I.A.S.A in Buenos Aires, Argentina. Since 2008, he has been an executive officer of Camargo Corrêa Cimentos. He is also a sitting member of the Board of Directors of São Paulo Alpargatas. In 2009, he was an alternate member of the Board of Directors of CPFL Energia. Since 2010, he has been a sitting member of the Board of Directors of CPFL Energia.
Francisco Caprino Neto - Mr. Caprino Neto graduated in Metallurgical Engineering from the Polytechnic School of the University of São Paulo (USP) in 1983 and completed a master’s degree program in the same area at the same institution in 1992. He was the chairman of the Processes Engineering Department and advisor for the Control and Planning Department of Siderúrgica J.L. Aliperti S.A., as well as the coordinator of metallurgical process of Aços Villares S.A. He was a sitting member of the Board of Directors of CPFL Paulista, CPFL Piratininga, CPFL Geração and RGE from 2005 to 2006. Currently, he holds the position of executive officer and member of the Board of Directors of Camargo Corrêa Energia S.A. and Camargo Corrêa Investimentos em Infraestrutura (CCII). He is also member of the Board of Directors of VBC Energia S.A., Companhia de Concessões Rodoviárias (CCR) and A-Port S.A. Since April 2000, he has been a member of the Board of Directors of CPFL Energia.
Renê Sanda – Mr. Sanda graduated in Statistics from University of São Paulo (USP) in 1989 and completed a master’s degree program in Statistics at the same institution in 1989. In 1992, he completed an MBA program in Finance from the Brazilian Institute of Capital Markets (IBMEC) and participated in the Commercial and Investment Banking Program Professional Development Center at Citibank, in Fort Lauderdale. He was an assistant manager at BB New York between 2002 and 2006 and at Banco do Brasil Securities between 2005 and 2006. From 2006 to 2010, he was the Risk Management Officer of Banco do Brasil. He was a member of the Fiscal Council of Tele Amazônia Celular Participações, Telemig Celular Participações, CPFL Paulista and CPFL Geração. He was a member of the Board of Directors of Petroflex S.A. Indústria e Comércio, Banco do Brasil Securities LLC – New York (USA), BB Securities Ltd. – London (UK) and Fundição Tupy. He is an associate at Instituto Brasileiro de Governança Corporativa – IBGC. Since 2010, he has been the Investment Officer of Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI. Mr. Sanda became a member of our Board of Directors in 2011.
Ivan de Souza Monteiro – Mr. Monteiro graduated in Electronic Engineering and Telecommunications from INATEL - MG in 1986. He completed an MBA program in Finance from the Brazilian Institute of Capital Markets (IBMEC) in 1995 and an MBA program in Business Administration from Pontifical Catholic University of Rio de Janeiro (PUC‑RJ) in 2000. Since 1983, he works at Banco do Brasil, where he was a local superintendent between 1996 and 1998, a state superintendent between 1998 and 1999, a commercial manager between 1999 and 2004, a commercial superintendent between 2004 and 2007 and the officer in charge of branches outside of Brazil between 2007 and 2009. In May 2009, he was the Commercial Officer of Banco do Brasil and, since June 2009, he has been the Vice-President of Finance, Capital Markets and Investor Relations of Banco do Brasil. Since 2009, hehas been a member of the Decision Making Council of Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI. He is also a member of the Board of Directors of Banco Votorantim and BV Participações. He has been an alternate member of the Board of Directors of Brasil Veículos since January 2011. Mr. Monteiro became a member of our Board of Directors in 2011.
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Carlos Alberto Cardoso Moreira – Mr. Moreira graduated in Business Administration from Pontifical Catholic University of São Paulo (PUC-SP) in 1984. He completed several courses, seminars and workshops in Private Pension Plan and Capital Markets at IBMEC, IBC, Abrapp and Wharton School. Since June 2000, he has been the Investment and Finance Officer of the Sistel de Seguridade Social Foundation - SISTEL. From 1984 to 1988, he was an Senior Investment Analyst of Credibanco, São Paulo. Between 1988 and 1992, he was Vice President of Citibank N.A in São Paulo. He was the Institutional Clients Officer of Banco BMC S.A. in São Paulo from 1992 to 1999. He was also a member of the National Investment Technical Commission (Comissão Técnica Nacional de Investimentos–CNTI) of Abrapp, an alternate member of the Board of Directors of EMBRAER, and a sitting member of the Board of Directors of GTD and BR Foods. From 2001 to 2002, 2004 to 2005 and 2008 to 2009, he was a permanent member of the Board of Directors of CPFL Energia S.A, and from 2007 to 2008 and 2010 to 2011, he was an alternate member of that Board. He has been an executive officer of Bonaire Participações S.A. since April 2008. In April 2011, he was once more elected as a permanent member of Board of Directors of CPFL Energia S.A.
Ana Dolores Moura Carneiro de Novaes - Mrs. Novaes earned a Ph.D. in Economics from the University of California in 1990 and graduated in Law from the Pontifical Catholic University of Rio de Janeiro (PUC-RJ) in 2008. In 1999, she obtained a CFA – Chartered Financial Analyst qualification awarded by the US Association for Investment and Management Research (AIMR). She was an analyst of Equity Research at Banco de Investimentos Garantia between 1995 and 1997, and the Investment Officer at Pictet Modal Asset Management between 1998 and 2003. She worked at the World Bank in Washington, D.C. from 1991 to 1994. She was also macroeconomics professor at the Federal University of Pernambuco in the first half of 1991 and at the Pontifical Catholic University of Rio de Janeiro in 2003. Since 2008, she has been a partner at Galanto Consultoria of Rio de Janeiro, for services and consulting in corporate governance. She has been a member of the Board of Directors of Companhia de Concessões Rodoviárias (CCR) since May 2002, and of Metalfrio since May 2009. She has also been a Consultant to the Auditing Committee of Companhia Siderúrgica Nacional since August 2006. Since April 2007, she has been a member of the Board of Directors of CPFL Energia.
Executive Officers
Our executive officers are responsible for our day-to-day management. Under our bylaws, our board of executive officers is comprised of six members that are appointed by our Board of Directors for a two-year term, with the possibility of re-election. Our current executive officers were elected at the Board of Directors’ meeting held on May 25, 2011, except for Carlos Márcio Ferreira and Carlos da Costa Parcias Junior, who were elected at the Board of Directors’ meeting held on August 31, 2011 and March 1, 2012, respectively.
At the special shareholders’ meeting held on December 19, 2011, our shareholders approved our Board of Directors’ proposal for reorganizing positions within our management structure. The proposal contemplated the suppression of the positions of Vice President of Distribution, Vice President of Generation and Vice President of Energy Management. The duties associated with these positions were assigned to the Vice President of Operations in order to increase efficiency and reduce costs.
The following table sets forth the name, age and position of each current executive officer. A brief biographical description of each of our executive officers follows the table.
Name | Age | Position | ||
Wilson Ferreira Júnior | 52 | Chief Executive Officer | ||
Lorival Nogueira Luz Júnior | 40 | Chief Financial Officer and Head of Investor Relations | ||
Carlos Márcio Ferreira | 52 | Vice President of Operations | ||
José Marcos Chaves de Melo | 48 | Vice President Administrative | ||
Carlos da Costa Parcias Junior | 51 | Vice President of Business Development | ||
Vacant | - | Vice President of Institutional Relations |
Wilson Ferreira Junior - Mr. Ferreira Junior graduated from Mackenzie University in Electrical Engineering in 1981, and in Business Administration in 1983. He attended a master’s degree program in Energy at the University of São Paulo (USP), for which he did not complete the thesis requirements, and several specialization programs, including: Occupational Safety and Health Engineering (Mackenzie University, 1982), Marketing (Getúlio Vargas Foundation – FGV, 1988), and Electricity Distribution Management (Swedish Power Co., 1992). At Companhia Energética de São Paulo (CESP), he held several senior positions and served as the Distribution Officer from 1995 to 1998. He served as the CEO of RGE from 1998 to 2000, Chairman of the Board of Directors of Bandeirante Energia S.A. from 2000 to 2001, and President of the Brazilian Association of Electric Power Distributors (ABRADEE) from 2009 to 2010. Mr. Ferreira Junior is currently the Vice President of the Brazilian Association of Infrastructure and Basic Industry (ABDIB) and a member of the Board of Directors of the National Electrical System Operator (ONS). From 2002 to 2011, he was a member of the Board of Directors of CPFL Paulista, CPFL Piratininga, CPFL Geração and RGE. From 2000 to 2011, he was the CEO of CPFL Paulista, and from 2001 to 2011, he was the CEO of CPFL Piratininga, CPFL Geração and CPFL Brasil. He has also been the CEO of RGE, CPFL Santa Cruz, CPFL Jaguariúna, CPFL Bioenergia, and other subsidiaries of CPFL Energia. Since 2002, he has been the CEO of CPFL Energia. Mr. Ferreira Junior is currently the chairman of the Board of Directors of CPFL Energias Renováveis.
Lorival Nogueira Luz Júnior - Mr. Luz Júnior graduated in Business Administration from Armando Álvares Penteado Foundation (FAAP) in 1993. He has completed several specialization programs in Brazil and abroad. Mr. Luz Júnior has 20 year experience in the financial industry. For almost 17 years, he has worked at Citibank as Corporate Bank Officer, Senior Relationship Manager, Senior Treasurer and Loan Products Manager, and as an analyst of the financial controlling department in Brazil. He was also the Treasury Executive Officer at Credicard, the leading credit card company in Brazil, where he played an important role in the conversion of Credicard to a retail bank. He had the same position at Banco Citicard until 2008. From 2008 to 2009, he was the CFO and Investor Relations Officer of Estácio Participações, a holding company based in Brazil, belonging to the GP Investimentos’ group, active in the educational services sector, where he was responsible for the project planning, controllership, investor relations, treasury, mergers and acquisitions and law departments. Between 2010 and 2011, he was the Treasury Executive Officer and Investor Relations’ Officer of Votorantim Industrial, one of the largest Brazilian industrial conglomerates. Since 2011, he has been the Financial Vice President Officer and Investor Relations Officer of CPFL Energia, CPFL Paulista, CPFL Piratininga, CPFL Geração and RGE and CFO of other subsidiaries of the CPFL Energia group.
Carlos Márcio Ferreira– In 1987, Mr. Ferreira graduated from the Business and Economics University of São João da Boa Vista, São Paulo with a degree in Business Administration and Accounting. In 1993, he received a graduate degree from Fundação Getúlio Vargas in São Paulo (FGV/SP) in Controlling and Finance. Since 1991, he has participated every year in Executive Training Seminars, including the following programs: the Senior Finance Executive Development Program at Champion International Corporation Corporate University, administered by professors from Harvard Business School and Dartmouth Tuck Business School, and Leader Development (CEOs) at UC Berkeley Executive Education. From 1973 to 2004, he worked in the administrative and finance departments of International Paper do Brasil Ltda., a company in the paper and packaging industry. During his time at International Paper do Brasil Ltda., Mr. Ferreira held the following positions: Manager of the Controlling Department (1991 to 1993); Strategic Planning Manager (1995 to 1996); Business Manager (1996 to 1998); Business Development Officer (1999 to 2000); and Vice-President of Controlling and Finance (2000 to 2004), during which he was responsible for information technology, legal, accounting, strategic planning and mergers and acquisitions. At International Paper do Brasil Ltda, he has worked for three years in factories in the USA and in the main office in Stamford, Connecticut. In November 2004, he began working for Elektro (in Campinas, SP) as Executive Officer responsible for strategy coordination and implementation in the operations, distribution, commercial, finance, regulatory, legal, human resources and infrastructure areas. In April 2007, he became the CEO of Elektro, a position which he held until 2011. Mr. Ferreira is currently the Operations Vice President Officer at CPFL Energia, the Chairman of the Board of Directors of RGE, CPFL Paulista and CPFL Piratininga.
José Marcos Chaves de Melo - In 1980, Mr. Melo graduated as an electronics technician from the Federal Center for Technological Education of Rio de Janeiro (CEFET-RJ). In 1986, he graduated in Engineering from the University of Kansas. Among his academic achievements, the following stand out: Fulbright scholarship, American National Engineering Honor Society (Tau Beta Pi), the 2005 SAP Diamond Circle Award for OutstandingBusiness Contributions, and the 2006 Accenture World Innovation Award. Mr. Melo worked at Accenture do Brasil from 1987 to 2008, serving as senior executive from 1998 to 2008. He was responsible for the execution of several projects with companies of the electricity sector for 12 years, oil and gas sectors for five years, steel sector for two years, and in the manufacturing sector for one year. He has experience in several functional areas, such as information technology, supply chain, field work and assets management. During his career he has worked for companies such as Neoenergia, Light, CEMIG, Duke Energy, Petrobrás, Repsol-YPF and CSN, the Electric Power Trade Board (CCEE) and ONS. Mr. Melo is currently the Administrative Officer of CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Jaguariúna, CPFL Geração, CPFL Bioenergia, and other subsidiaries of CPFL Energia. Since 2008, he has been the Administrative Vice President Officer of CPFL Energia.
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Carlos da Costa Parcias Junior – Mr. Parcias Junior graduated in Economics from the Federal University of Rio de Janeiro (UFRJ) in 1984, and completed a master’s degree program in the same area at the Pontifical Catholic University of Rio de Janeiro (PUC-RJ) in 1988. Since 2004, he has been an independent financial advisor, focusing in mergers and acquisitions and private equity transactions. From 2001 to 2003, he worked as an executive officer at Icatu Gestão de Participações, which principal business is investment management. He was an executive officer at Banco de Investimentos Fleming Graphus from 1998 to 2000; the CEO at BBA-Capital Asset Management (currently Itaú BBA) from 1993 to 1998; an executive officer at JP Morgan from 1992 to 1993; and advisor to the presidency at BNDES from 1990 to 1992. He was an executive officer at Camargo Corrêa Investimentos em Infraestrutura (CCII), the Camargo Corrêa group holding company, in 2011. Since March 2012, he has been the Business Development Vice President Officer of CPFL Energia.
Fiscal Council
Under Brazilian Corporate Law, theConselho Fiscal, or fiscal council, is a corporate body independent of the management and the company’s external auditors. Our fiscal council is permanent, although Brazilian Corporate Law allows fiscal councils to be either permanent or non‑permanent and may be composed of a minimum of three and a maximum of five members. The primary responsibility of the fiscal council is to review management’s activities and the company’s financial statements, and to report its findings to the company’s shareholders. Brazilian Corporate Law requires fiscal council members to receive as remuneration at least 10.0% of the average annual amount paid to the company’s executive officers, excluding benefits and profit sharing. Noncontrolling holders of common shares owning in aggregate at least 10.0% of the common shares outstanding may also elect one member of the fiscal council.
Under Brazilian Corporate Law, our fiscal council may not include members who are on our Board of Directors, are on the board of executive officers, are employed by us or a controlled company or a company of the same group, or are spouses or relatives of any member of our management or Board of Directors. Our fiscal council elected at our shareholders’ meeting held on April 28, 2011, with a mandate of one year, is composed of five members: José Reinaldo Magalhães (Chairman), Daniela Corci Cardoso (Financial Expert), Adalgiso Fragoso de Faria, Wilton de Medeiros Daher and Martin Roberto Glogowsky.
In accordance with the listed company audit committee rules of the NYSE and the SEC, on June 8, 2005 our Board of Directors designated and empowered our fiscal council to perform the role of the audit committee in reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3).
Advisory Committees
The chairperson of each of the following committees reports on activities at the Board of Directors’ monthly meetings. However, the committees do not have decision-making authority and their recommendations are not binding upon the Board of Directors.
Management Processes Committee. Our Management Processes Committee is responsible for assisting the Board of Directors by: (i) evaluating the validity of the information disclosed to the Board of the Directors, (ii) preparing proposals to improve business management procedures, (iii) evaluating our risk profile and (iv) coordinating internal audits and preparing improvement proposals. The members of this committee are Francisco Caprino Neto, Luiz Cláudio da Silva Barros and Martin Roberto Glogowsky.
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Human Resources Management Committee. Our Human Resources Management Committee is responsible for assisting the Board of Directors by: (i) coordinating the CEO selection process, (ii) defining criteria for compensation of the executive officers, including long and short‑term incentive plans, (iii) defining performance goals of the executive officers, (iv) coordinating evaluation procedures of the executive officers, (v) preparation of the plan of succession for members of the executive officers and (vi) monitoring the execution of human resources policies and practices and preparing improvement proposals when necessary. The members of this committee are Ivan de Souza Monteiro, Francisco Caprino Neto and Carlos Alberto Cardoso Moreira.
Related Parties Committee. Our Related Parties Committee is responsible for assisting the Board of Directors by: (i) evaluating the selection procedures of suppliers and third-party construction and other services from related parties and ensuring these transactions are conducted fairly and consistent with market practice and (ii) evaluating energy purchase or sale agreements with related parties ensuring these transactions are conducted fairly and consistent with market practice. The members of this committee are Susana Hanna Stiphan Jabra, Daniela Corci Cardoso and Luiz Cláudio da Silva Barros.
In addition to the advisory committees, our Board of Directors has created sevenad hoc commissions since 2006 (Corporate Governance Commission, Strategy Commission, Budget Commission, Financial Services Commission, Energy Acquisition Commission, Projects Evaluation Commission and IFRS Commission) and may create others, if necessary.
Strategy Commission. Our Strategy Commission is responsible for assisting the Board of Directors with evaluating and improving our business strategy in order to meet our growth targets and long‑term objectives.
Financial Services Commission. Our Financial Activities Commission is responsible for ensuring compliance and efficiency in our existing financial practices, as well as evaluating new opportunities for financial transactions that could benefit the company.
Corporate Governance Commission. Our Corporate Governance Commission is responsible for monitoring the implementation of our new corporate governance model and for suggesting potential improvements to the Board.
Budget Commission. Our Budget Commission is responsible for advising the Board of Directors on analyzing and setting our annual and long‑term budgets.
Energy Acquisition Commission. Our Energy Acquisition Commission is responsible for advising the Board of Directors on analyzing the acquisition of energy originated from alternative and competitive sources by the subsidiaries of commercialization.
Projects Evaluation Commission. Our Project Commission is responsible for assisting the Board of Directors with evaluating new opportunities for distribution and generation of energy assets forecasted in the strategic planning.
IFRS Commission. Our IFRS Commission is responsible for advising the Board of Directors on validating its decisions in relation to the implementation of new accounting rules applicable to our financial statements as from 2010.
Compensation
Under Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount we pay to the members of our Board of Directors and our executive officers. Once our shareholders establish an aggregate amount of compensation for our Board of Directors and executive officers, the Human Resources Management Committee of our Board of Directors is then responsible for setting individual compensation levels.
For the year ended December 31, 2011, the aggregate compensation, including cash and benefits-in-kind, that we paid to the members of our Board of Directors, our executive officers and members of our fiscal council was approximately R$30 million, including R$13 million in variable compensation. For the same period, the totalamount set aside or accrued by the company to provide pension, retirement or similar benefits was approximately R$784,000.
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The approved compensation for our board of directors, board of executive officers and fiscal council for 2012 is R$35 million.
The following tables set forth the compensation from CPFL Energia on a non‑consolidated basis of our management for the year ended December 31, 2011 and the approved compensation for 2012. Our directors and officers receive additional compensation from our subsidiaries which is not reflected in these tables.
| Compensation for the year ended December 31, 2011 | |||||||
Management Bodies | Board of Directors | Fiscal Council | Executive Officers | Total | ||||
Number of members | 7 members(1) | 5.08 members(1) | 5.58 members(1) |
| ||||
Fixed annual compensation: | (in thousands ofreais) | |||||||
Wage | 983 | 575 | 2,130 | 3,688 | ||||
Direct or indirect benefits | - | - | 6 | 6 | ||||
Compensation for participation in committees | - | - | - | - | ||||
Others | 197 | 115 | 1,573 | 1,885 | ||||
Variable compensation: |
|
|
|
| ||||
Bonus | - | - | 845 | 845 | ||||
Profit sharing plan | - | - | - | - | ||||
Compensation for participation in meetings | - | - | - | - | ||||
Commissions | - | - | - | - | ||||
Others | - | - | 882 | 882 | ||||
Post-employment benefits | - | - | 208 | 208 | ||||
Compensation based on stock options | - | - | - | - | ||||
Compensation for each body(2) | 1,180 | 690 | 5,644 | - | ||||
Total compensation |
|
|
| 7,514 |
| |
(1) Represents the weighted average number of members. (2) Compensation amounts include charges and accruals. |
| Approved compensation for the year ended on December 31, 2012 | |||||||
Management Bodies | Board of Directors | Fiscal Council | Executive Officers | Total | ||||
Number of members | 7 members | 5 members | 6 members |
| ||||
Fixed annual compensation: | (in thousands ofreais) | |||||||
Wage | 1,131 | 596 | 4,255 | 5,982 | ||||
Direct or indirect benefits | - | - | 47 | 47 | ||||
Compensation for participation in committees. | - | - | - | - | ||||
Others | 226 | 119 | 1,265 | 1,610 | ||||
Variable compensation: |
|
|
|
| ||||
Bonus | - | - | 4,199 | 4,199 | ||||
Profit sharing plan | - | - | - | - | ||||
Compensation for participation in meetings | - | - | - | - | ||||
Commissions | - | - | - | - | ||||
Others | - | - | 3,032 | 3,032 | ||||
Post-employment benefits | - | - | 385 | 385 | ||||
Compensation based on stock options | - | - | - | - | ||||
Compensation for each body(1 | 1,357 | 715 | 13,183 | - | ||||
Total compensation |
|
|
| 15,255 |
| |
(1) Compensation amounts include charges and accruals. |
The table below sets forth the compensation of our management received from our subsidiaries for the year ended December 31, 2011.
| Year ended December 31, 2011 | |||||
| Board of Directors | Fiscal Council | Executive Officers | |||
| Fixed | Fixed | Total (fixed and variable) | |||
| (in thousands ofreais) | |||||
|
|
| ||||
Subsidiaries(1) | - | - | 15,953 |
| |
(1) Compensation amounts include charges and accruals. |
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Share Ownership
The total number of common shares owned by our directors and executive officers as of February 29, 2012 was 50,211. None of our directors or executive officers beneficially owns one percent or more of our common shares.
Indemnification of Officers and Directors
Neither the laws of Brazil nor our bylaws provide for specific indemnification of directors or officers. We have held directors’ and officers’ liability insurance since February 2006.
Employees
As of December 31, 2011, we had 7,913 full time employees (including the employees of our jointly‑controlled subsidiaries). The following table sets forth the number of our employees and a breakdown of employees by category of activity as of the dates indicated in each area of our operations.
| As of December 31, | |||||
| 2011 | 2010 | 2009 | |||
Distribution | 6,043 | 6,040 | 5,653 | |||
Generation | 527 | 351 | 275 | |||
Commercialization and Services | 493 | 616 | 662 | |||
Corporate staff | 850 | 917 | 860 | |||
Total | 7,913 | 7,924 | 7,450 |
Part of our employees are members of unions, with which we have collective bargaining agreements. We renegotiate these agreements annually with the 17 principal unions that represent our various employee groups. Salary increases are generally provided for on an annual basis. We believe that we have good relationships with these unions, as evidenced by the fact that we have not had any labor strikes during the last 23 years that materially affected our operations.
We provide a number of benefits to our employees. The most significant is the sponsorship of Fundação CESP, in partnership with ten other electrical companies, which supplements the Brazilian government retirement and health benefits available to the employees of our subsidiaries CPFL Paulista, CPFL Piratininga, CPFL Geração and CPFL Brasil.
In accordance with Brazilian law and our compensation policy, our employees are eligible for our profit sharing program. This amount is set in the collective bargaining agreements of each company, which are adjusted annually. In 2011, we reserved R$47 million (R$42 million of which are booked in current liabilities) for our employee profit sharing program.
In addition, part of each employee’s compensation is linked to performance goals. Employees are evaluated based on criteria such as quality of work product, adherence to safety protocols and productivity. Our performance evaluation system is designed to evaluate required skill as well, and enables us to evaluate the development of our employees.
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ITEM 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table sets forth information relating to the beneficial ownership of our common shares by our major shareholders (beneficial owners of 5.0% or more of our common shares) as of February 29, 2012. Percentages in the following table are based on 962,274,260 outstanding common shares.
| Common Shares | (%) | ||
BB Carteira Livre I FIA(1) | 298,467,458 | 31.02 | ||
VBC Energia S.A.(2) | 245,897,455 | 25.55 | ||
Energia São Paulo FIP(3) | 115,118,250 | 11.96 | ||
Bonaire Participações S.A.(4) | 6,308,788 | 0.66 | ||
Bradespar S.A.(5) | 50,541,820 | 5.25 | ||
BNDES Participações S.A.(6) | 81,053,460 | 8.42 | ||
Executive officers and directors as a group | 50,211 | 0.00 | ||
Total | 797,437,442 | 82.87 |
(1) BB Carteira Livre I – Fundo de Investimentos em Ações is an investment fund that belongs to PREVI, a pension fund sponsored by Banco do Brasil S.A. The Brazilian government owns a majority of the voting capital of Banco do Brasil. During 2009, the shareholder 521 Participações S.A., in compliance with the decision of its final controlling shareholder (Caixa de Previdência dos Funcionários do Banco do Brasil – “PREVI”), restructured its equity interests in order to reduce the administrative and financial costs on its indirect investments and transferred all its shares in the Company to its controlling shareholder, Fundo BB Carteira Livre I – Fundo de Investimento em Ações.
(2) VBC Energia S.A. is controlled by the Brazilian group Camargo Corrêa through several companies: (i) Atila Holdings S.A., controlled by Construções e Comércio Camargo Corrêa S.A. and Camargo Corrêa Energia S.A.; (ii) Camargo Corrêa Energia S.A.; and (iii) Camargo Corrêa S.A. VBC Energia S.A. was also controlled by Votorantim Energia S.A. until January 2009.
(3) Energia São Paulo Fundo de Investimento em Participações is an investment fund whose ownership interest is controlled by four pension funds: (i) Fundação CESP, primarily for employees of CPFL Energia, Companhia Energética de São Paulo (CESP), Eletropaulo Metropolitana Eletricidade de São Paulo S.A., Bandeirante Energia S.A. and Elektro Eletricidade e Serviços S.A., among other Brazilian electricity companies; (ii) Fundação SISTEL de Seguridade Social, primarily for employees of CPqD (Centro de Pesquisa e Desenvolvimento), Telecomunicações Brasileiras S.A. – Telebrás, Telemig Celular S.A., Tele Norte Celular Participações S.A., Amazônia Celular S.A.; among others telecommunications companies; (iii) Fundação Petrobras de Seguridade Social - PETROS, primarily for employees of Petróleo Brasileiro S.A.; and (iv) Fundação SABESP de Seguridade Social — SABESPREV, primarily for employees of Companhia de Saneamento Básico do Estado de São Paulo — SABESP.
(4) Bonaire Participações S.A. is a holding company controlled by Energia São Paulo Fundo de Investimento em Participações.
(5) Bradespar S.A. is a beneficial owner of our common shares, which it indirectly holds through Antares Holdings Ltda. and Brumado Holdings S.A.
(6) BNDES Participações S.A. is a subsidiary of BNDES, a federal public bank linked to the Brazilian Ministry of Development, Industry and External Trade.
Shareholders’ Agreement
Voting Rights. Our shareholders’ agreement, among VBC, PREVI (through BB Carteira Livre I FIA), Energia São Paulo FIP, Bonaire and us, as intervening and consenting party, governs control of CPFL and our subsidiaries. Under the shareholders’ agreement, certain actions require the approval of at least VBC and PREVI (at least 80.0% of the shares subject to the shareholders’ agreement), including:
· election of the CEO and removal of any executive officer (including the CEO);
· definition of the dividend policy;
· creation and dissolution of controlled companies;
· acquisition and sale of investments in other entities;
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· approval of our budget;
· approval of our business plan;
· capital increase within our pre‑approved authorized capital and determination of the issuance price of shares;
· incurrence of indebtedness – including guarantees and collaterals in favor of controlled entities and invested companies – beyond the thresholds established in our budget or our business plan;
· execution of any agreement with a global amount in excess of R$34 million, if not included in our annual budget;
· granting of any kind of collateral or guarantee in favor of third parties;
· execution of agreements with related parties in an amount in excess of R$8.1 million;
· appointment of our independent auditors in certain specified cases;
· authorization for the acquisition of our own shares for cancellation or for treasury;
· amendment of concession agreements of any controlled entity;
· approval of stock option plans; and
· acquisition, sale or encumbrance of any fixed assets in an amount equal or over R$34 million.
The terms of our shareholders’ agreement relating to voting rights apply to our controlled companies and, to the fullest extent possible, to our investee companies.
Corporate Governance. Our Board of Directors consists of seven members, appointed as follows:
· three appointed by VBC;
· two appointed by PREVI;
· one appointed by Energia São Paulo FIP/Bonaire; and
· one independent, in accordance with the listing regulations of theNovo Mercado.
Our Fiscal Council consists of five members, appointed as follows:
· two appointed by VBC;
· two appointed by PREVI; and
· one appointed by Energia São Paulo FIP/Bonaire.
The number of members of the Board of Directors and the Fiscal Council nominated by each party to the shareholders’ agreement is related to the current stakes of the parties in the controlling shareholder block. If a change in the stakes of any party in the enjoined shares occurs, the number of members for which such party has the right to nominate shall be adapted to reflect such modification so as to maintain unchanged the number of members nominated by the parties whose stakes relative to the total of enjoined shares have not been altered.
If the noncontrolling shareholders, exercising their rights under the corporate law, elect the independent director required by the BM&FBOVESPA’sNovo Mercado Regulations, VBC, PREVI and Energia São Paulo FIP/Bonaire must abstain from proposing a nominee for the position. If the noncontrolling shareholders do not electthe independent director, VBC, PREVI and Energia São Paulo FIP/Bonaire shall by joint accord nominate such an independent director.
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The shareholders’ agreement also establishes the framework of the Board of Directors and Board of Executive Officers of our subsidiaries. According to the agreement, the executive officers of the Company must be part of the Board of Directors of our subsidiaries.
Transfer of Shares. Our shareholders’ agreement provides for certain rights and obligations in the event of transfer of shares subject to the shareholders’ agreement, or subject shares, including:
· Right of First Refusal. The parties to the shareholders agreement have a right of first refusal to acquire subject shares in the event one of them decides to sell its shares to a third party.
· Tag-along Rights. A party that decides not to exercise its right of first refusal has the option to sell (pro rata), together with the selling party, its subject shares to the acquiring third party. Tag‑along provisions do not apply to the disposition of subject shares by Energia São Paulo FIP/Bonaire while its stake within the controlling block is lower than 20.0%.
· Preemptive Rights. The parties have pro rata preemptive rights to subscribe for shares in the event of a capital increase.
· Tag-along Rights of Energia São Paulo FIP/Bonaire. In the event of a sale, assignment or transfer of subject shares by PREVI and VBC that results in an equity percentage lower than 20.0% and 30.0%, respectively, of the aggregate subject shares and, as long as Energia São Paulo FIP/Bonaire has not exercised its right of first refusal, it will have the right to sell its entire stake of subject shares together with PREVI or VBC, under the same terms and conditions.
Change of Control. In the event of direct or indirect change of control of any of the parties subject to the shareholders’ agreement, the remaining parties have the right to acquire all subject shares held, directly or indirectly, by the party undergoing the change of control, paying for such shares an amount to be determined by a recognized financial institution.
Option Agreement
Our controlling shareholders are also party to an agreement pursuant to which they have granted to each other options to purchase their respective shares in us. In addition, this agreement provides for (i) certain notification requirements for secondary offerings of shares by such shareholders and (ii) priority to certain shareholders in the sale of shares in a secondary offering, if more than one shareholder participates in the offering and demand is less than the size of the offering.
Related Party Transactions
One of our principal shareholders is VBC. The controlling shareholder of VBC currently is the Camargo Corrêa Group and prior to January 2009 both Camargo Corrêa and the Votorantim Group were controlling shareholders. Camargo Corrêa Group is one of the largest privately-held industrial conglomerates in Brazil, with controlling equity interests in leading Brazilian engineering and construction, cement, footwear, and textiles companies. Camargo Corrêa Group also shares equity control of important Brazilian steel and highway concession companies, and it has equity participations in a significant Brazilian financial conglomerate and in a global aluminum company.
We acquired our interest in Semesa from VBC in December 2001 for R$496 million. The Semesa acquisition price is subject to adjustment, based on the assessment of Semesa’s assured energy. According to MME, the earliest that this assessment will take place is 2015.
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We also conduct transactions with the shareholders of VBC and their affiliates, including the following:
· Our distribution subsidiaries have entered into agreements for the supply of electricity with several entities affiliated with our shareholders. All of these electricity supply agreements are regulated by ANEEL.
· Our commercialization subsidiaries have entered into agreements for the supply of electricity with several entities affiliated with our shareholders.
· CPFL Geração, through its subsidiaries BAESA, ENERCAN, CERAN and Foz do Chapecó, has entered into transactions with Construção e Comércio Camargo Corrêa S.A., a member of the Camargo Corrêa Group, for the provision and financing of construction services to our generation subsidiaries.
Our subsidiaries CPFL Paulista, CPFL Piratininga, CPFL Geração and CPFL Brasil are sponsors of a pension fund administered by Fundação CESP, a pension fund services company that has an indirect ownership interest in one of our shareholders, Energia São Paulo FIP. See note 31 to our Financial Statements concerning “Transactions with Related Parties.”
ITEM 8. Financial Information
Consolidated Statements and Other Financial Information
See Item “Financial Statements.”
Legal Proceedings
CPFL Paulista and CPFL Piratininga are parties to numerous lawsuits brought by industrial consumers alleging that certain tariff increases in the past were illegal in view of then prevailing economic regulations that had established a price freeze that included electricity tariffs. The aggregate potential liability was approximately R$103.7 million as of December 31, 2011. Superior courts have already decided many of these lawsuits partially against us, and as a result, we have provisioned the aggregate potential liability (approximately R$7.0 million) in respect of these suits.
CPFL Paulista is a defendant in a civil public action filed by the Campinas Consumer Protection Office (Promotoria de Defesa do Consumidor). The purpose of this civil public action is to suspend the effects of the tariff readjustment authorized by ANEEL for the year ended December 31, 2009. CPFL Paulista obtained a preliminary suspension of the effects. The civil public action still awaits final decision and, until then, the effects from the tariff readjustment authorized by ANEEL remain in force. We believe that the risk of loss is remote.
CPFL Piratininga received a tax infraction notice regarding improper tax deductions from payments made to the Fundação CESP’s pension fund. These payments originated from an agreement executed to pay a debt from Fundação CESP’s pension fund. An appeal still awaits decision. We believe that the possibility of loss is possible.
CPFL Piratininga filed an annulment action concerning an ICMS fiscal debt against a notice of infraction and fee drawn by the state of São Paulo questioning the company’s tax calculation method regarding the energy supply to two cities in the state. An appeal still awaits decision. The risk of loss is possible and the aggregate amount of the claim was of approximately R$193 million at December 31, 2011.
We are also subject to legal proceedings relating to the authorization of certain of our hydroelectric plants, including a class action proposed by the federal public attorney’s office of the Municipality of Caxias do Sul challenging the validity of the environmental licensing of the Rio das Antas Hydroelectric Complex, and requesting injunctive relief against the construction of these plants. The federal public attorney’s injunction request was denied in the lower courts and the district attorney moved against the denial, requesting a new injunction from the higher courts. The higher courts denied the injunction relief. The claim was deemed groundless by the lower courts. An appeal from the federal public attorney’s office still awaits final decision. We believe that the possibility of a loss is remote.
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Semesa and Furnas were named defendants in a legal proceeding that sought remedial measures and the establishment of a nature reserve because of alleged harm caused by the construction and operation of the Serra da Mesa plant. The amount sought from Semesa totaled R$101.4 million. CPFL Geração assumed all of the outstanding obligations and potential liabilities of Semesa in March 2007. We believe that the risk of an adverse judgment with respect to this claim is possible. We have not established a provision with regard to this claim. If adverse judgment were entered against us, requiring us to purchase additional land and establish a preserve in the area surrounding our generation activities, the costs would be reflected in our property, plant and equipment.
CPFL Paulista is involved in a lawsuit challenging the deductibility of expenses recognized in 1997 related to a deficit from Fundação CESP’s pension fund. Based on a favorable opinion that we received from the Brazilian Internal Revenue Office, CPFL Paulista deducted those expenses for purposes of income tax payments. In 2007, we made a judicial deposit in the amount of R$360 million (adjusted to R$582 million in 2011), which allows CPFL Paulista to proceed with the lawsuit without assuming the risk of any asset seizure by the tax authority. This deductibility also resulted in other lawsuits, and CPFL Paulista to raise defenses also entered into an agreement with a Brazilian bank to provide letters of credit through which the bank will guarantee an amount of R$265 million. We believe that the possibility of loss is remote.
CPFL Paulista commenced a lawsuit against ANEEL seeking annulment of the methodology applied in the periodic tariff adjustment process since the first periodic adjustment cycle (2003). The court expert investigation is to be concluded. In addition, CPFL Paulista, CPFL Piratininga and RGE, as well as other Brazilian distribution companies, through ABRADEE, are plaintiffs in a lawsuit against ANEEL discussing the basis for remunerating the concession assets since the first periodic adjustment cycle. We are still waiting for the production of evidence from a court expert in connection with this lawsuit. If we succeed in any of these lawsuits, the tariffs that these distribution companies charge will increase and, as a consequence, our results of operations will be positively affected.
We establish reserves in our balance sheets relating to potential losses from litigation based on estimates of such losses. For this purpose, we classify such losses as remote, possible or probable. IFRS practices and Brazilian law require us to establish reserves in connection with probable losses and therefore, it is our policy to establish reserves only in connection with those claims. As of December 31, 2011, our reserves for contingencies were approximately R$338 million. Our management believes that these proceedings will not have a material adverse effect on our financial condition, either individually or in the aggregate. See note 21 to our audited consolidated financial statements for more information on the status of our litigation.
Dividend Policy
For our policy on dividend distributions, see “Item 10. Additional Information—Allocation of Net Income and Distribution of Dividends.”
Significant Changes
None
ITEM 9. The Offer and Listing
Trading Markets
Our common shares are listed on the BM&FBOVESPA, and our ADSs are listed on the New York Stock Exchange. Each ADS represents two shares. The ADSs commenced trading on the NYSE on September 29, 2004. As of December 31, 2011, the ADSs represented 8.1% of our shares and 26.4% of our current global public float.
On February 23, 2011, our Board of Directors: (i) approved a change in the ratio of our ADSs, so that each ADS would represent two common shares of CPFL Energia and (ii) submitted a proposal for a simultaneous reverse stock split and forward stock split of our common shares to our shareholders. Our shareholders approved this proposal on our shareholders’ meeting of April 28, 2011. Through the reverse stock split, 10 of our common shares became one common share and, simultaneously, through the forward stock split, each common share resulting from the reverse stock split became 20 common shares.
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The purpose of the change in the ADS ratio, as well as the reverse and forward stock splits, is to (a) adjust the share base, and consequently decrease the administrative and operational costs of CPFL Energia; (b) improve the efficiency of our systems for recording, controlling and disclosing information to shareholders; (c) adjust the price of our common shares and ADSs, allowing access to our stock by new investors; and (d) increase the liquidity of our shares and ADSs through a decrease in their individual value.
The shares resulting from the reverse and forward stock splits were credited on July 4, 2011, based on our shareholding position on June 28, 2011. The new ADSs resulting from the change of our ADSs’ ratio were credited on July 5, 2011, based on our ADS holding position on July 1, 2011, resulting in the issuance of two additional ADSs for each existing ADS on July 1, 2011.
Price Information
The table below sets forth reported high and low closing sale prices inreais per common share for the periods indicated. The table also sets forth prices in U.S. dollars per ADS based on information available from the New York Stock Exchange. See “Item 3. Key Information—Exchange Rates” for information with respect to exchange rates applicable during the periods indicated below.
| Reais per Common share | U.S. dollars per ADS | ||||||
| High | Low | High | Low | ||||
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2007 | 40.44 | 27.80 | 67.28 | 38.70 | ||||
2008 | 41.95 | 26.83 | 76.40 | 35.27 | ||||
2009 | 37.50 | 28.50 | 66.29 | 35.42 | ||||
2010: |
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First Quarter | 38.48 | 35.36 | 65.55 | 58.30 | ||||
Second Quarter | 40.10 | 34.84 | 68.90 | 57.31 | ||||
Third Quarter | 44.00 | 38.66 | 76.70 | 67.07 | ||||
Fourth Quarter | 41.35 | 39.30 | 76.91 | 70.15 | ||||
2011: |
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First Quarter | 46.39 | 39.70 | 87.41 | 73.35 | ||||
Second Quarter | 47.60 | 43.50 | 91.69 | 83.26 | ||||
Third Quarter(*) | 22.79 | 19.43 | 29.24 | 22.15 | ||||
September(*) | 21.75 | 20.44 | 26.49 | 22.15 | ||||
October(*) | 21.97 | 19.98 | 26.15 | 22.19 | ||||
November(*) | 23.45 | 21.48 | 26.75 | 24.44 | ||||
December(*) | 26.50 | 22.65 | 28.68 | 25.57 | ||||
2012: |
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January(*) | 26.04 | 25.11 | 29.65 | 28.01 | ||||
February(*) | 27.67 | 25.60 | 32.69 | 30.03 | ||||
March(*) (up to March 27) | 29.30 | 27.82 | 32.94 | 30.86 |
(*) Prices after the change in the ratio of our ADSs and the simultaneous reverse stock split and forward stock split of our common shares.
Corporate Governance Practices
In 2000, the BM&FBOVESPA introduced three special listing segments, known as Level 1, Level 2 and theNovo Mercado, aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BM&FBOVESPA, by prompting such companies to follow good practices of corporate governance. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders and stakeholders. In order to maintain high standards of corporate governance, we have signed an agreement with the BM&FBOVESPA to list our securities on theNovo Mercado.
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Our corporate governance guidelines apply to us and all of our subsidiaries and affiliated companies. They aim at promoting interaction among our shareholders, Board of Directors, Fiscal Council and Board of Executive Officers. Our managers have committed to focus on:
1. Disclosure (prompt and voluntary communication with market participants and our shareholders with respect to factors that guide our business and lead to the creation of value)
2. Fairness (fair treatment to our shareholders, our customers, suppliers, employees, creditors, government bodies, regulatory agencies, etc.)
3. Accountability (accountability of our management to our shareholders, and responsibility for their acts while in office)
4. Compliance (commitment to the sustainability and continuity of our business in the long run, compliance with the legislation in force and observance of social and environmental matters)
We implemented this model in 2003 and redesigned it in 2006 in order to adjust our corporate governance structure to the current making-business scenario and decision-making process.
Our Board of Directors is our decision-making body, responsible for determining our overall guidelines. Our Board of Directors can request advice on strategic matters from three of our committees, such as executive remuneration, related party transactions, corporate risk management, follow-up on internal audits and business management processes. Whenever necessary,ad hoc commissions are installed to advise the Board of Directors on specific issues, such as corporate governance, strategies, budget, purchase of energy, new operations and financial policies.
A revision of these rules was under discussion between the companies listed in each segment and the BM&FBOVESPA, and it was approved during the second half of 2010 to provide for a further enhancement of the special corporate governance and disclosure rules. The revised rules entered in force and effect on May 10, 2011, including those related to theNovo Mercado segment. The main changes to the rules in the segment that we are listed include, among others: (i) prohibition to include dispositions that restrict or create obligations to the shareholders which vote favorably to a suppression or amendment of dispositions of the bylaws; (ii) prohibition of the same individual to hold the positions of president of the board of directors and chief executive officer (or equivalent position as the main executive of the company); and (iii) obligation of the board of directors to issue a justified opinion on any tender offers for the acquisition of the shares representative of the corporate capital of the company. On December 19, 2011, we amended our bylaws to incorporate these rules, among other changes.
In accordance with Section 303A.11 of the NYSE Listed Company Manual, we have posted a summary of significant differences between the NYSE corporate governance standards and our corporate governance practices on our website, athttp://www.cpfl.com.br/ir.
ITEM 10. Additional Information
Memorandum and Articles of Incorporation
Corporate Purpose
Our corporate purpose, as defined by our bylaws, includes:
· developing and fostering enterprises in the electricity generation, distribution, transmission, sale industry and related activities;
· providing services in the electricity, telecommunications and data transmission industries, as well as providing technical, operating, administrative and financial support services, especially to affiliated or subsidiary companies; and
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· holding interest in the capital of other companies engaged in activities similar to those that we perform or which have as corporate purpose developing, fostering, building, and/or operating projects concerning electricity generation, distribution, transmission and related services.
Qualification of Directors
Members of our board of executive officers must be Brazilian nationals and resident in Brazil, but such requirement does not apply to members of our Board of Directors. Our directors and executive officers are prevented from voting on any transaction involving companies in which they hold more than 10.0% of the total capital stock or of which they have held a management position in the period immediately prior to their taking office.
Allocation of Net Income and Distribution of Dividends
The discussion below summarizes the provisions of Brazilian law regarding the establishment of reserves by corporations and the distribution of dividends, including interest attributed to shareholders’ equity.
Mandatory Distribution
Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distribution.
The mandatory distribution is based on a percentage of adjusted net income, not lower than 25.0%, rather than a fixed monetary amount per share. Under our bylaws, at least 25.0% of our adjusted net income, as calculated under Brazilian Accounting Principles and adjusted under Brazilian Corporate Law, for the preceding fiscal year must be distributed as a mandatory annual dividend. Adjusted net income means the distributable amount after any deductions for statutory reserves and reserves for investment projects.
Brazilian Corporate Law permits the suspension of the mandatory distribution of dividends in any fiscal year in which the management bodies report to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. The suspension is subject to approval by the shareholders meeting and review by members of the fiscal council. The law does not establish the circumstances in which payment of the mandatory dividend would be “inadvisable” based on the company’s financial condition. In the case of publicly-held corporations, the board of directors must file a justification for such suspension with the CVM within five days of the relevant general meeting. If the mandatory distribution is not paid, the unpaid amount must be attributed to a special reserve account. If not absorbed by subsequent losses, those funds must be paid out as dividends as soon as the financial condition of the company permits. Under Brazilian Corporate Law, the shareholders of a publicly-held company may also decide to distribute dividends in an amount lower than the mandatory distribution.
Payment of Dividends
We are required by Brazilian Corporate Law to hold an annual general shareholders’ meeting by no later than April 30 of each year, at which the shareholders have to decide on the payment of an annual dividend. Additionally, interim dividends may be declared by our Board of Directors. Pursuant to our charter, we are required to pay a mandatory annual dividend of at least 25.0% of our adjusted net income. Any holder of record of shares at the time of a dividend declaration is entitled to receive dividends. Dividends on shares held through a depositary are paid to the depositary for further distribution to the shareholders. Under Brazilian Corporate Law, dividends are generally required to be paid to the holder of record on a dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which such dividend was declared. Pursuant to our bylaws, unclaimed dividends do not bear interest, are not monetarily adjusted and revert to us three years after the date when we begin to pay such declared dividends.
In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying the ADSs are held in Brazil by Banco Bradesco S.A., as thecustodian for the depositary, that is the registered owner on the records of the registrar for our shares. The current registrar (since January 1, 2011) is Banco do Brasil S.A. The depositary registers the common shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to the common shares remitted outside Brazil.
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Payments of cash dividends and distributions, if any, are made inreais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars for distribution to holders of ADSs. In the event that the custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by depreciations of the Brazilian currency that occur before the dividends are converted. Dividends paid to persons who are not Brazilian residents, including holders of ADSs, are not subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which are subject to Brazilian withholding income tax at varying tax rates. See “Taxation—Brazilian Tax Considerations.”
Holders of ADSs have the benefit of the electronic registration obtained from the Central Bank, which permits the depositary and the custodian to convert dividends and other distributions or sales proceeds with respect to the common shares represented by ADSs into foreign currency and remits the proceeds outside of Brazil. In the event the holder exchanges the ADSs for common shares, the holder will be entitled to continue to rely on the depositary’s certificate of registration for five business days after the exchange. Thereafter, in order to convert foreign currency and remit outside Brazil the sales proceeds or distributions with respect to the common shares, the holder must obtain a new certificate of registration in its own name that will permit the conversion and remittance of such payments through the foreign exchange market.
If the holder is not a duly qualified investor and does not obtain an electronic certificate of foreign capital registration, a special authorization from the Central Bank must be obtained in order to remit from Brazil any payments with respect to the common shares through the foreign exchange market. Without this special authorization, the holder may currently remit payments with respect to the common shares through the floating rate exchange market, although no assurance can be given that the floating rate exchange market will be accessible for these purposes in the future.
In addition, a holder who is not a duly qualified investor and who has not obtained an electronic certificate of foreign capital registration or a special authorization from the Central Bank may remit these payments by international transfer of Brazilian currency pursuant to CMN Resolution No. 3,568, dated May 29, 2008, and Central Bank Circular No. 3,280, dated March 9, 2005, as amended. In order to effect the international transfer of Brazilian currency the holder must have a special non‑resident bank account in Brazil, through which the subsequent conversion of such Brazilian currency into U.S. dollars is effected.
Under current Brazilian legislation, the Brazilian government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments (see “Item 3. Key Information—Risk Factors—Risks Relating to the ADSs and Our Common Shares”).
Interest Attributable to Shareholders’ Equity
Under Brazilian tax legislation, Brazilian companies are permitted to pay “interest” to holders of equity securities and treat such payments as an expense for Brazilian income tax purposes and for social contribution purposes. Payment of such interest may be made at the discretion of our Board of Directors, subject to the approval of the shareholders at a general shareholders’ meeting. In order to calculate this interest on shareholders’ equity, the TJLP is applied to shareholders’ equity for the applicable period. The amount of any such notional “interest” payment to holders of equity securities is generally limited in respect of any particular year to the greater of:
· 50.0% of net income (after the deduction of the provisions for social contribution on net profits but before taking into account the provision for corporate income tax and the interest attributable to shareholders’ equity) for the period in respect of which the payment is made; or
· 50.0% of the sum of retained earnings and profit reserves as of the beginning of the year in respect of which such payment is made.
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For accounting purposes, although the interest charge must be reflected in the statement of operations to be tax‑deductible, the charge is reversed before calculating net income in the statutory financial statements and deducted from shareholders’ equity in a manner similar to a dividend. Any payment of interest in respect of common shares (including the holders of the ADSs) is subject to Brazilian withholding tax at the rate of 15.0%, or 25.0% in the case of a shareholder domiciled in a tax haven. See “Taxation—Brazilian Tax Considerations.” If such payments are accounted for, at their net value, as part of any mandatory dividend, the tax is paid by the company on behalf of its shareholders, upon distribution of the interest. If we distribute interest attributed to shareholder’s equity in any year, and that distribution is not accounted for as part of mandatory distribution, Brazilian income tax would be borne by the shareholders. For IFRS accounting purposes, interest attributable to shareholders’ equity is reflected as a dividend payment.
Under our bylaws, interest attributable to shareholders’ equity may be treated as a dividend for purposes of the mandatory dividend.
We will distribute R$1,506 million to our shareholders from our 2011 net income. Of this amount, R$748 million, or R$ 0,777023176 per common share, was paid as an interim dividend on September 30, 2011 and R$758 million, or R$0.788205126 per common share is expected to be paid as supplemental dividend in the first half of 2012.
Dividend Policy
We intend to declare and pay dividends and/or interest attributed to shareholders’ equity in amounts of at least 50.0% of our adjusted net income, in semi-annual installments. The amount of any of our distributions of dividends and/or interest attributed to shareholders’ equity will depend on a series of factors, such as our financial conditions, prospects, macroeconomic conditions, tariff adjustments, regulatory changes, growth strategies and other matters our Board of Directors and our shareholders may consider relevant. In addition, covenants contained in our debt instruments may limit the amount of dividends and/or interest attributable to shareholders’ equity that we may make. Within the context of our tax planning, we may in the future determine that it is to our benefit to distribute interest attributable to shareholders’ equity in lieu of dividends.
Our Board of Directors may approve the distribution of dividends and/or interest attributed to shareholders’ equity, calculated based on our annual or semi-annual financial statements or on financial statements relating to shorter periods, or also based on accrued profits recorded or on profits allocated to non‑profits reserve accounts in the annual or semi-annual financial statements. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of the majority of the holders of our common shares.
Shareholder Meetings
Actions to be taken at our shareholders’ meetings
At our shareholder meetings, shareholders are generally empowered to take any action relating to our corporate purpose and to pass such resolutions as they deem necessary. The approval of our financial statements and the determination of the allocation of our net profits with respect to each fiscal year takes place at the annual shareholder meeting immediately following such fiscal year. The election of our directors and members of our fiscal council, if the requisite shareholders request its establishment, typically takes place at the annual shareholders’ meeting, although under Brazilian law it may also occur at a special shareholders’ meeting.
A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting. The following actions may only be taken at a special shareholders’ meeting:
· amendment of our bylaws;
· cancellation of registration with the CVM as a publicly-held company;
· authorization of the issuance of non-convertible debentures;
· suspension of the rights of a shareholder who has violated Brazilian Corporate Law or our bylaws;
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· acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in consideration for shares of our capital stock;
· approval of our transformation into a limited liability company (sociedade limitada) or any other corporate form;
· delisting of our common shares from theNovo Mercado;
· appointment of a financial institution responsible for our valuation, in the event that a tender offer for our common shares is carried out in connection with a corporate transformation or delisting of our common shares from theNovo Mercado;
· approval of any merger (fusão) or consolidation (incorporação) with another company or a spin-off (cisão);
· approval of any dissolution or liquidation, the appointment and dismissal of the respective liquidator and the official review of the reports prepared by him or her;
· authorization to petition for bankruptcy or judicial or extrajudicial restructuring (recuperação judicial or extrajudicial); and
· approval of stock option plans to managers or employees of the Company and its subsidiaries.
According to Brazilian Corporate Law, neither a company’s bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of some specific rights, such as:
· the right to participate in the distribution of profits;
· the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company;
· the right to preemptive rights in the event of subscription of shares, convertible debentures or subscription warrants (bônus de subscrição), except in some specific circumstances under Brazilian law described in “—Preemptive Rights;” and
· the right to withdraw from the company in the cases specified in Brazilian Corporate Law, described in “Withdrawal Rights.”
Quorum
As a general rule, Brazilian Corporate Law provides that a quorum at a shareholders’ meeting consists of shareholders representing at least 25.0% of a company’s issued and outstanding voting capital on the first call and, if that quorum is not reached, any percentage on the second call. A quorum for the purposes of amending our bylaws consists of shareholders representing at least two-thirds of our issued and outstanding voting capital on the first call and any percentage on the second call.
As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and outstanding common shares present in person or represented by proxy at a shareholders’ meeting is required to ratify any proposed action, with abstentions not taken into account. However, the affirmative vote of shareholders representing one-half of our issued and outstanding voting capital is required to:
· reduce the percentage of mandatory dividends;
· change our corporate purpose;
· merge us with another company, if we are not the surviving company, or of our consolidation with another company;
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· spin off a portion of our assets or liabilities;
· approve our participation in a group of companies (as defined in Brazilian Corporate Law);
· apply for cancellation of any voluntary liquidation; and
· approve our dissolution.
According to our bylaws and for so long as we are listed on theNovo Mercado, we may not issue preferred shares or founders’ shares and, to delist ourselves from theNovo Mercado, we will have to conduct a tender offer.
Notice of our Shareholders’ Meetings
Notice of our shareholders’ meetings must be published at least three times in theDiário Oficial do Estado de São Paulo, the official newspaper of the state of São Paulo, and in the newspaperValor Econômico. The first notice must be published no later than 15 days before the date of the meeting on the first call, and no later than eight days before the date of the meeting on the second call. However, in certain circumstances, the CVM may require that the first notice be published 30 days in advance of the meeting.
Documents and Information
The specific documents and information requested for the exercise of the voting rights of our shareholders shall be made available by electronic means at the Brazilian Securities Exchange Commission and the U.S. Securities and Exchange Commission websites, as well as at our investor relationship website. The following matters require specific documents and information:
· matters with Interest of Related Parties;
· ordinary Shareholders’ Meeting;
· election of members of the Board of Directors;
· compensation of the Management of the Company;
· amendment to the Company’s Bylaws;
· capital Increase or Capital Reduction;
· issuance of Debentures or Subscription Bonuses;
· issuance of preferred Shares;
· change of the mandatory dividend distribution;
· acquisition of the control of another company;
· appointment of Evaluators; and/or
· any matter which entitles the shareholders to exercise their withdrawal right.
Location of our Shareholders’ Meetings
Our shareholders’ meetings take place at our head offices in the city of São Paulo, state of São Paulo. Brazilian Corporate Law allows our shareholders to hold meetings outside our head offices in the event of force majeure, provided that the meetings are held in the City of São Paulo and the relevant notice contains a clear indication of the place where the meeting will occur.
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Who May Call our Shareholders’ Meetings
In addition to our Board of Directors, shareholders’ meetings may also be called by:
· any shareholder, if our directors fail to call a shareholders’ meeting within 60 days after the date they were required to do so under applicable laws and our bylaws;
· shareholders holding at least five percent of our capital stock, if our directors fail to call a meeting within eight days after receipt of a request to call the meeting by those shareholders indicating the proposed agenda; and
· our fiscal council, if one is in place, if the Board of Directors delays calling an annual shareholders’ meeting for more than one month. The fiscal council may also call a special shareholders’ meeting any time if it believes that there are important or urgent matters to be addressed.
Conditions of Admission
Shareholders attending our shareholders’ meeting must provide their identification cards and produce proof of ownership of the shares they intend to vote.
A shareholder may be represented at a shareholders’ meeting by a proxy, as long as the proxy is appointed less than a year before the shareholders’ meeting. The proxy must be a shareholder, an officer of the corporation, a lawyer or a financial institution. An investment fund must be represented by its investment fund officer. The Company and/or its shareholders may also carry out a public proxy request directed to all shareholders with voting rights.
Since 2008, the Company has been adopting a Manual for Participation in General Shareholders’ Meetings to provide, in a clear and summarized form, information relating to the Company’s Shareholders General Meeting and to encourage and facilitate the participation of all shareholders. This manual includes a standard power of attorney, which may be used by shareholders who are unable to be present at the meetings to appoint an attorney-in-fact to exercise their voting rights with regard to issues on the agenda.
Voting Rights of ADS Holders
ADS holders may instruct the depositary to vote the number of common shares that their ADSs represent. The depositary will notify those holders of shareholders’ meetings and arrange to deliver our voting materials to them upon our request. Those materials will describe the matters to be voted on and explain how the ADS holders may instruct the depositary how to vote. For instructions to be valid, they must reach the depositary by a date set by the depositary.
We cannot assure ADS holders that they will receive the voting materials or otherwise learn of an upcoming shareholders’ meeting in time to ensure that they can instruct the depositary to vote their common shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that ADS holders may not be able to exercise their right to vote and there may be nothing that they can do if their shares are not voted as they requested.
Preemptive Rights
Our shareholders have a general preemptive right to subscribe for shares in any capital increase according to the proportion of their shareholdings. Our shareholders also have a general preemptive right to subscribe for any convertible debentures, rights to acquire our shares and subscription warrants that we may issue. In accordance with our bylaws, in the case of a private placement, a period of at least 30 days following the publication of notice of the capital increase is allowed for the exercise of the preemptive right. In the case of a public offering, the issuance may occur with or without the exercise of preemptive rights or with a reduced term for the exercise of preemptive rights. Under Brazilian Corporate Law, holders are permitted to transfer or dispose of their preemptive right for consideration.
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In addition, Brazilian Corporate Law allows for companies’ bylaws to give the board of directors the power to exclude preemptive rights or reduce the exercise period of such rights with respect to the issuance of new shares, debentures convertible into shares and subscription warrants up to the limit of the authorized share capital if the distribution of those shares is effected through a stock exchange, through a public offering or through an exchange of shares in a public offering the purpose of which is to acquire control of another company.
Withdrawal Rights
Brazilian Corporate Law grants our shareholders the right to withdraw from the company in case they disagree with decisions taken in shareholder’s meetings concerning the following matters: (i) the reduction of mandatory dividends; (ii) the merger of the company; (iii) the change of the corporate purpose of the company; or (iv) a spinoff of the company (if such spin-off changes the company’s corporate purpose, reduces mandatory dividends or results in the company joining a group of entities). Even shareholders who did not vote or were not present at the relevant meeting may exercise this withdrawal right.
If our shareholders wish to withdraw from the company due to a merger, such right may only be exercised provided that the company’s shares have no liquidity in the market.
The withdrawal right entitles the shareholder to the reimbursement of the value of its shares, upon request within 30 days of the publication of notice of the shareholders meeting. After such term, the company’s management bodies may choose to call a general meeting to ratify or reconsider the decision which triggered the withdrawal rights, should the payment of such rights threaten the financial stability of the company.
Material Contracts
For information concerning our material contracts, see “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”
Exchange Controls and Other Limitations Affecting Security Holders
There are no restrictions on ownership of our capital stock by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment be registered with the Central Bank. These restrictions on the remittance of foreign capital abroad could hinder or prevent the custodian for the common shares represented by American Depositary Shares, or holders who have exchanged American Depositary Shares for common shares, from converting dividends, distributions or the proceeds from any sale of common shares into U.S. dollars and remitting such U.S. dollars abroad. Delays in, or refusal to grant any required government approval for conversions of Brazilian currency payments and remittances abroad of amounts owed to holders of American Depositary Shares could adversely affect holders of American depositary receipts – ADRs.
Resolution No. 1,927/1992 of the National Monetary Council, which is the restated and amended Annex V to Resolution No. 1,289/1997, which we call the Annex V Regulations, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It provides that the proceeds from the sale of American Depositary Shares by holders of American depositary receipts outside Brazil are free of Brazilian foreign investment controls and holders of American Depositary Shares who are not resident in a tax haven jurisdiction (i.e. a country or location that does not impose taxes on income or where the maximum income tax rate is lower than 20.0%, or where the legislation imposes restrictions on disclosure of the shareholding composition or the ownership of the investment) will be entitled to favorable tax treatment.
An electronic registration has been issued by the custodian in the name of Deutsche Bank, the depositary, with respect to the American Depositary Shares. Pursuant to this electronic registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the common shares represented by American Depositary Shares into foreign currency and to remit the proceeds outside Brazil. If a holder exchanges American Depositary Shares for common shares, the holder may continue to rely on the custodian’s electronic registration for only five business days after the exchange. After that, the holder must seek to obtain its own electronic registration with the Central Bank under Law No. 4,131/1962 or Resolution No. 2,689/2000. Thereafter,unless the holder has registered its investment with the Central Bank, such holder may not convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such common shares. A holder that obtains an electronic registration generally will be subject to less favorable Brazilian tax treatment than a holder of American Depositary Shares. See “—Taxation—Brazilian Tax Considerations.”
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Under Brazilian law, whenever there is a serious imbalance in Brazil’s balance of payments or reasons to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil, and on the conversion of Brazilian currency into foreign currencies. Such restrictions may hinder or prevent the custodian or holders who have exchanged American Depositary Shares for underlying common shares from converting distributions or the proceeds from any sale of such shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad.
Taxation
The following discussion summarizes the material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of common shares or ADSs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change (possibly on a retroactive basis) and different interpretations. Holders of common shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders (as defined below) of common shares or ADSs. Prospective holders of common shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs in their particular circumstances.
Brazilian Tax Considerations
The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of our common shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation, or a Non‑Brazilian Holder.
Pursuant to Brazilian law, foreign investors may invest in the common shares under Resolution No. 2,689 of the National Monetary Council, or Resolution No. 2,689.
Resolution No. 2,689 allows foreign investors to invest in almost all financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that some requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.
Pursuant to Resolution No. 2,689, foreign investors must: (i) appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; (ii) complete the appropriate foreign investor registration form; (iii) register as a foreign investor with the CVM; and (iv) register the foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over‑the-counter markets licensed by the CVM, except for transfers resulting from a corporate reorganization, occurring upon the death of an investor by operation of law or will or as a consequence of the delisting of the relevant shares from a stock exchange and the cancellation of the registration with the CVM.
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Taxation of Dividends
Dividends, including dividends in kind, paid by us to the depositary in respect of the common shares underlying the ADSs or to a Non‑Brazilian Holder in respect of common shares generally will not be subject to Brazilian withholding income tax provided that they are paid out of profits generated as of or after January 1, 1996. Dividends relating to profits generated prior to December 31, 1995 are subject to Brazilian withholding tax from 15.0% to 25.0% according to the tax legislation applicable to each corresponding year in which the profits have been earned.
Taxation of Gains
ADSs. According to applicable Brazilian law (Law No. 10,833/2003), capital gains arising from transactions between two non‑resident parties, involving assets situated in Brazil, are subject to Brazilian withholding income tax, at a rate of 15.0% (25.0% in case the seller is situated in a tax haven jurisdiction). Arguably, the gains realized by a Non‑Brazilian Holder on the disposition of ADSs to another non‑Brazilian resident should not be taxed in Brazil, based on the idea that ADSs would not constitute assets located in Brazil for purposes of Law No. 10,833/2003. However, we cannot assure you of how Brazilian courts would interpret the definition of assets located in Brazil in connection with the taxation of gains realized by a Non‑Brazilian Holder on the disposition of ADSs to another non‑Brazilian resident. Thus, the gain on a disposition of ADSs by a Non‑Brazilian Holder to a resident in Brazil (or possibly to a Non‑Brazilian Holder), in the event that courts determine that ADSs constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules described below for the common shares. Non‑Brazilian Holders should consult their own tax advisor concerning the tax consequences of a sale of ADSs in Brazil.
Although there are grounds to sustain otherwise, the deposit of common shares in exchange for ADSs may be subject to Brazilian withholding income tax, if the acquisition cost of the common shares is lower than (i) the average price per common share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or (ii) if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of common shares were sold in the 15 trading sessions immediately preceding such deposit. In such case, the difference between the acquisition cost and the average price of the common shares calculated as above will be considered to be a capital gain subject to income tax at a rate of 15.0% or 25.0% in the case of investors located in a tax haven jurisdiction (if the common shares are held by an investor registered under Resolution No. 2,689 that is not resident in a tax haven jurisdiction, and the sale is performed at the stock exchange, however, any gain will be tax exempt from income tax in such transaction).
The withdrawal of common shares upon cancellation of ADSs is not subject to Brazilian income tax, as long as the regulatory rules are appropriately observed with respect to the registration of the investment before the Central Bank.
Common Shares. As a general rule, gains realized by Non‑Brazilian Holders on any disposition of common shares are subject to income tax at a rate of 15.0%, regardless of whether the sale or the disposition is made by the Non‑Brazilian Holder to a resident or non‑resident in Brazil, or if the transaction is conducted in Brazil or abroad, except for the specific cases described below.
Gains realized on any disposition of common shares by Non‑Brazilian Holders who are resident in a jurisdiction that is deemed to be a “tax haven jurisdiction” under Brazilian law (i.e., a country that does not impose any income tax or that imposes tax at a maximum rate of less than 20.0%, or which laws impose restrictions on disclosure of ownership composition or securities ownership such that the identification of the beneficial owner of income is not permitted) are subject to income tax at a rate of 25.0%.
Gains realized on sales or disposition of common shares carried out on the Brazilian stock exchange by Non‑Brazilian Holders who are not resident in a tax haven jurisdiction are exempt from income tax, if such Non‑Brazilian Holder is registered under Resolution No. 2,689. If the Non‑Brazilian Holder is a resident of a tax haven or is not registered under Resolution No. 2,689, the gain realized on such sale or disposition of common shares is subject to income tax at a rate of 15.0%. In these cases, a withholding income tax of 0.005% on the sale value shall be applicable and can be offset with the eventual income tax due on the capital gain.
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Gains on the disposition of common shares are measured by the difference between the amount in Brazilian currency obtained from the sale or exchange of the shares and their acquisition cost in Brazilian currency, without any monetary adjustment. However, for Non‑Brazilian Holders with a direct investment in common shares registered as foreign capital with the Central Bank, the acquisition cost should be measured in foreign currency, converted intoreais at the date of the sale.10
Exercise of Preemptive Rights. Any exercise of preemptive rights relating to the common shares or ADSs will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to common shares by the depositary on behalf of holders of ADSs will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of common shares.
Interest Attributable to Shareholders’ Equity. Payments of interest on shareholders’ equity to shareholders who are either Brazilian residents or non‑Brazilian residents, including holders of ADSs, are subject to Brazilian income withholding tax at the rate of 15.0%, or 25.0% for shareholders domiciled in a low tax jurisdiction. The amounts paid as interest on equity (net of the withholding income tax) may be considered as payment of mandatory dividends.
The payment of interest on shareholders’ equity may be recommended by our Board of Directors and needs to be approved by our general shareholders’ meeting. We cannot assure you that our Board of Directors will not recommend that future distributions of profits may be made by means of interest on shareholders’ equity instead of by means of dividends.
Tax on foreign exchange transactions
The conversion of foreign currency into Brazilianreais as well as the conversion of Brazilianreais into foreign currency are subject to a tax on foreign exchange transactions (“IOF/Exchange”). The rate of such tax varies according to the nature of the transaction, such as:
· Inflow of funds from foreign investors for investment in the Brazilian financial and capital markets: 6%; except that the rate will be 0% for the following transactions: (i) investments carried out on Brazilian stock, futures or commodities exchanges, as regulated by the National Monetary Council, except in case of derivative transactions with pre‑established earnings; (ii) purchase of shares in public offerings or subscription of shares of publicly-traded companies; (iii) purchase of quotas of private equity funds, emerging company funds or funds investing in emerging company funds; (iv) cancellation of depositary receipts for investment in shares traded on Brazilian stock exchanges; and (v) change in the foreign investment regime from direct investment to investment in shares traded on Brazilian stock exchanges, as regulated by the National Monetary Council.
· Outflow of funds to foreign investors of the funds invested in the Brazilian financial and capital markets regarding the above-mentioned transaction: 0%;
· Remittances of dividends and interest on equity to foreign investors related to the above-mentioned transactions: 0%;
· Inflow of funds regarding loans contracted as from March 12, 2012, with an average maturity term equal or lower than 1,800 days (five years): 6%; and
· Other foreign exchange transactions (subject to exceptions provided in the applicable legislation): 0.38%.
The IOF/Exchange may be changed at any time, up to 25.0%, upon the discretion of the President. Any such increase, although immediately applicable, would only apply to future exchange transactions.
10This is our interpretation of the legislation in force. This matter is still controversial, as there are recent rulings from the tax authorities providing that direct foreign investments registered with the Central Bank as RDE-IED (Registro Declaratório Eletrônico de Investimentos Estrangeiros Diretos) be converted into Brazilian currency at the date of the original investment.
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Tax on transactions involving bonds and securities
Brazilian law imposes a tax on transactions involving bonds and securities (the “IOF/Bonds Tax”), including those carried out on Brazilian stock, futures or commodities exchanges. The IOF/Bonds Tax is currently reduced to zero in almost all transactions, except redemption of fixed yield investments lasting less than 30 days. However, this rate may be increased at any time to up to 1.5% per day by the President, but only with respect to future transactions. Currently, this tax is reduced to zero on all transactions involving stocks, except for shares underlying depositary receipts, in which case the IOF/Bonds Tax will apply at a 1.5% rate.
The transaction value to be considered for purposes of the IOF/Bonds Tax basis will be calculated by multiplying the number of shares by its closing quotation on the date prior to the transaction or, if no trades occurred on such date, by the last closing quotation available. In the case of public offerings, the quotation to be considered for purposes of IOF/Bonds Tax basis will be the price established on the bookbuilding procedure or, if applicable, the price established by the seller on the documents of the public offering.
As of July 26, 2011, the IOF/Bonds Tax applies at a 1.0% rate per day on the adjusted notional value of transactions involving derivatives linked to the exchange variation risk, when the purchase, sale or maturity of the derivatives results in an increase of the net short position of the holder as compared to its net short position at the end of the previous business day, pursuant to agreements registered with the BM&FBOVESPA and/or over-the-counter market.
Other Relevant Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADSs by a Non‑Brazilian Holder except for gift and inheritance taxes levied by certain Brazilian states on gifts or inheritance bestowed by individuals or entities not resident or domiciled in Brazil or not domiciled within that state, to individuals or entities resident or domiciled within in that Brazilian state. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares or ADSs.
U.S. Federal Income Tax Consequences
This discussion is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing final, temporary and proposed Treasury regulations, administrative pronouncements by the U.S. Internal Revenue Service (the “IRS”) and judicial decisions, in each case as of the date hereof, all of which are subject to change (possibly on a retroactive basis) and to different interpretations.
This discussion does not purport to be a comprehensive description of all of the U.S. federal income tax consequences that may be relevant to a particular holder (including tax considerations that arise from rules of general application to all taxpayers or to certain classes of investors or that are generally assumed to be known by investors) and holders are urged to consult their own tax advisors regarding their specific tax situations. This discussion applies only to holders of common shares or ADSs who hold the common shares or ADSs as “capital assets” (generally, property held for investment) under the Code and does not address the tax consequences that may be relevant to holders in special tax situations, including, for example:
· brokers or dealers in securities or currencies;
· U.S. holders whose functional currency is not the U.S. dollar;
· holders that own or have owned stock constituting 10.0% or more of our total combined voting power (whether such stock is directly, indirectly or constructively owned);
· tax-exempt organizations;
· regulated investment companies;
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· real estate investment trusts;
· grantor trusts;
· common trust funds;
· banks or other financial institutions;
· persons liable for the alternative minimum tax;
· securities traders who elect to use the mark-to-market method of accounting for their securities holdings;
· insurance companies;
· persons that acquired common shares or ADSs as compensation for the performance of services;
· U.S. expatriates; and
· persons holding common shares or ADSs as part of a straddle, hedge or conversion transaction or as part of a synthetic security, constructive sale or other integrated transaction.
Except where specifically described below, this discussion assumes that we are not a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. In addition, this discussion does not address tax considerations applicable to persons that hold an interest in a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) that holds common shares or ADSs, or any U.S. federal estate and gift, state, local or non‑U.S. tax consequences of the acquisition, ownership and disposition of common shares or ADSs. Each holder should consult such holder’s own tax advisor concerning the overall tax consequences to it, including the consequences under laws other than U.S. federal income tax laws, of an investment in common shares or ADSs.
As used herein, the term “U.S. holder” means a beneficial owner of common shares or ADSs that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (A) it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all of the substantial decisions of the trust or (B) it has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. As used herein, the term “non‑U.S. holder” means a beneficial owner of common shares or ADSs that is neither a U.S. holder nor a partnership (or an entity treated as a partnership for U.S. federal income tax purposes).
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) owns common shares or ADSs, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership holding common shares or ADSs. Partnerships that are beneficial owners of common shares or ADSs, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal, state, local and non‑U.S. tax considerations applicable to them with respect to the acquisition, ownership and disposition of common shares or ADSs.
For U.S. federal income tax purposes, a holder of an ADS will generally be treated as the beneficial owner of the common shares represented by the ADS. However, see the discussion below under “Taxation of Distributions” regarding certain statements made by the U.S. Treasury Department concerning depositary arrangements.
Taxation of Distributions
The gross amount of any distributions of cash or property made with respect to common shares or ADSs (including distributions characterized as interest on shareholders’ equity for Brazilian law purposes and any amountswithheld to reflect Brazilian withholding taxes) generally will be taxable as dividends for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
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A U.S. holder will generally include such dividends in gross income as ordinary income on the day such dividends are actually or constructively received. Distributions in excess of our current and accumulated earnings and profits will be treated first as a non‑taxable return of capital, thereby reducing the U.S. holder’s adjusted tax basis (but not below zero) in common shares or ADSs, as applicable, and thereafter as either long‑term or short‑term capital gain (depending on whether the U.S. holder has held common shares or ADSs, as applicable, for more than one year as of the time such distribution is actually or constructively received).
If any cash dividends are paid inreais, the amount of a distribution paid inreais will be the U.S. dollar value of thereais received, calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of whether the payment inreais is in fact converted into U.S. dollars at that time. If thereais received as a dividend are converted into U.S. dollars on the date of actual or constructive receipt, a U.S. holder should not recognize foreign currency gain or loss in respect of such dividend. If thereais received as a dividend are not converted into U.S. dollars on the date of actual or constructive receipt, a U.S. holder will have a tax basis in thereais equal to their U.S. dollar value on the date of receipt. If anyreais actually or constructively received by a U.S. holder are later converted into U.S. dollars, such U.S. holder may recognize foreign currency gain or loss, which would be treated as ordinary gain or loss. Such gain or loss generally will be treated as gain or loss from sources within the United States for U.S. foreign tax credit purposes. U.S. holders should consult their own tax advisors concerning the possibility of foreign currency gain or loss if any suchreais are not converted into U.S. dollars on the date of actual or constructive receipt.
Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations under the Code. Subject to the below-mentioned concerns by the U.S. Treasury Department regarding certain inconsistent actions taken by intermediaries and certain exceptions for short‑term and hedged positions, the U.S. dollar amount of dividends received by certain U.S. holders (including individuals) in a taxable year beginning on or before December 31, 2012 with respect to the ADSs will be subject to taxation at a maximum rate of 15.0% if the dividends represent “qualified dividend income.” Dividends paid on the ADSs will be treated as qualified dividend income if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC. The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. However, no assurances can be given that the ADSs will be or will remain readily tradable. See below for a discussion regarding our PFIC determination.
Based on existing guidance, it is not entirely clear whether dividends received with respect to the common shares will be treated as qualified dividend income, because the common shares are not themselves listed on a U.S. exchange. In addition, the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which holders of common shares or ADSs and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. U.S. holders of common shares or ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.
Subject to certain limitations (including a minimum holding period requirement), a U.S. holder may be entitled to claim a U.S. foreign tax credit in respect of any Brazilian income taxes withheld on dividends received with respect to the common shares or ADSs. A U.S. holder that does not elect to claim a credit for any foreign income taxes paid or accrued during a taxable year may instead claim a deduction in respect of such Brazilian income taxes, provided that the U.S. holder elects to deduct (rather than credit) all foreign income taxes paid or accrued for the taxable year. Dividends received with respect to the common shares or ADSs generally will be treated as dividend income from sources outside of the United States and generally will constitute “passive category income” for U.S. foreign tax credit limitation purposes for most U.S. holders. The rules governing foreign tax credits are complex and U.S. holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances. The U.S. Treasury Department has expressed concern that intermediaries in connection with depositary arrangements may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. persons who are holding depositary shares. Accordingly, U.S. holders should be aware that thediscussion above regarding the ability to credit Brazilian withholding tax on dividends and the availability of the reduced tax rate for dividends received by certain non-corporate holders above could be affected by actions taken by parties to whom the ADSs are released and the IRS.
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Distributions of additional shares to holders with respect to their common shares or ADSs that are made as part of a pro rata distribution to all our shareholders generally will not be subject to U.S. federal income tax.
Non‑U.S. holders generally will not be subject to U.S. federal income tax or withholding tax on distributions with respect to common shares or ADSs that are treated as dividend income for U.S. federal income tax purposes unless such dividends are effectively connected with the conduct by such holders of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment or fixed base).
Taxation of Sales, Exchanges or Other Taxable Dispositions
Deposits and withdrawals of common shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Upon the sale, exchange or other taxable disposition of common shares or ADSs, a U.S. holder will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized in consideration for the disposition of the common shares or ADSs (including the gross amount of the proceeds before the deduction of any Brazilian tax) and the U.S. holder’s adjusted tax basis in the common shares or ADSs. The initial tax basis of common shares or ADSs held by a U.S. holder will be the U.S. dollar value of thereais-denominated purchase price determined on the date of purchase. Such gain or loss generally will be treated as capital gain or loss and will be long‑term capital gain or loss if the common shares or ADSs have been held for more than one year at the time of the sale, exchange or other taxable disposition. Although we do not believe that U.S. holders will be entitled to a credit or deduction with respect to any IOF/Exchange paid on common shares or ADSs (as discussed in “—Brazilian Tax Considerations—Taxation of Gains—Tax on foreign exchange transactions”), U.S. holders should be entitled to include the amount of the IOF/Exchange paid as part of their initial basis in such common shares or ADSs. Under current law, certain non‑corporate U.S. holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long‑term capital gains. The deductibility of capital losses is subject to limitations under the Code.
If Brazilian income tax is withheld on the sale, exchange or other taxable disposition of common shares or ADSs, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale, exchange or other taxable disposition before deduction of the Brazilian income tax withheld. Capital gain or loss, if any, realized by a U.S. holder on the sale, exchange or other taxable disposition of common shares or ADSs generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes. Consequently, in the case of a gain from the disposition of common shares or ADSs that is subject to Brazilian income tax (see “—Brazilian Tax Considerations—Taxation of Gains”), the U.S. holder may not be able to benefit from the foreign tax credit for that Brazilian income tax (i.e., because the gain from the disposition would be U.S. source), unless the U.S. holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. Alternatively, the U.S. holder may take a deduction for the Brazilian income tax, provided that the U.S. holder elects to deduct all foreign income taxes paid or accrued for the taxable year.
A non‑U.S. holder will not be subject to U.S. federal income tax or withholding tax on gain realized on the sale or other taxable disposition of common shares or ADSs unless (i) such non‑U.S. holder is an individual who is present in the United States of America for 183 days or more in the taxable year of the sale and certain other conditions are met or (ii) such gain is effectively connected with the conduct by the non‑U.S. holder of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment or fixed base). If the first exception (i) applies, the non‑U.S. holder generally will be subject to tax at a rate of 30% on the amount by which the gains derived from the sales that are from U.S. sources exceed capital losses allocable to U.S. sources. If the second exception (ii) applies, the non‑U.S. holder generally will be subject to U.S. federal income tax with respect to the gain in the same manner as U.S. holders, as described above. In addition, in the case of (ii), if such non‑U.S. holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable treaty) upon the actual or deemed repatriation of its effectively connected earnings and profits for the taxable year, subject to certain adjustments.
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Passive Foreign Investment Company Rules
Special U.S. federal income tax rules apply to U.S. persons owning shares of a PFIC. In general, a non‑U.S. corporation will be classified as a PFIC for any taxable year during which, after applying relevant look through rules with respect to the income and assets of subsidiaries, either (i) 75.0% or more of the non‑U.S. corporation’s gross income is “passive income” or (ii) on average 50.0% or more of the gross value of the non‑U.S. corporation’s assets produce passive income or are held for the production of passive income. For these purposes, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets and gains from commodities and securities transactions, other than certain active business gains from the sale of commodities (subject to various exceptions). In determining whether a non‑U.S. corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least 25.0% interest (by value) is taken into account.
The determination as to whether a non‑U.S. corporation is a PFIC is based on the composition of the income, expenses and assets of the non‑U.S. corporation from time to time and the application of complex U.S. federal income tax rules, which are subject to different interpretationsand involves uncertainty. Based on our audited financial statements, the nature ofour business, and relevant market and shareholder data,we believe thatwe would not be classified as a PFIC forour last taxable year orour current taxable year (although the determination cannot be made until the end of such taxable year), andwe do not expect to be classified as a PFIC in the foreseeable future, based onour current business plans andour current interpretation of the Code and Treasury regulations that are currently in effect. However, because the application of the Code and Treasury regulations are not entirely clear and because PFIC status depends on the composition of a non-U.S. corporation’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be treated as a PFIC for any taxable year.
If, contrary to the discussion above, we are treated as a PFIC, a U.S. holder would be subject to special rules (and may be subject to increased U.S. federal income tax liability and filing requirements) with respect to (a) any gain realized on the sale, exchange or other taxable disposition of common shares or ADSs and (b) any “excess distribution” made by us to the U.S. holder (generally, any distribution during a taxable year in which distributions to the U.S. holder on the common shares or ADSs exceed 125% of the average annual distributions the U.S. holder received on the common shares or ADSs during the preceding three taxable years or, if shorter, the U.S. holder’s holding period for the common shares or ADSs). Under those rules, (a) the gain or excess distribution would be allocated ratably over the U.S. holder’s holding period for the common shares or ADSs, (b) the amount allocated to the taxable year in which the gain or excess distribution is realized and to taxable years before the first day on which the Company became a PFIC would be taxable as ordinary income, (c) the amount allocated to each prior year in which the Company was a PFIC would be subject to U.S. federal income tax at the highest tax rate in effect for that year and (d) the interest charge generally applicable to underpayments of U.S. federal income tax would be imposed in respect of the tax attributable to each prior year in which the Company was a PFIC.
If we are treated as a PFIC and, at any time, we invest in non‑U.S. corporations that are classified as PFICs (each, a “lower-tier PFIC”), U.S. holders generally will be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interest in that lower-tier PFIC. If we are treated as a PFIC, a U.S. holder could incur liability for the deferred tax and interest charge described above if either (i) we receive a distribution from, or disposes of all or part of its interest in, the lower-tier PFIC or (ii) the U.S. holder disposes of all or part of its common shares or ADSs.
In general, if we are treated as a PFIC, the rules described above can be avoided by a U.S. holder that elects to be subject to a mark-to-market regime for stock in a PFIC. A U.S. holder may elect mark-to-market treatment for its common shares or ADSs, provided the common shares or ADSs, for purposes of the rules, constitute “marketable stock” as defined in Treasury regulations. The ADSs will be “marketable stock” for this purpose if they are regularly traded on the New York Stock Exchange, other than in de minimis quantities on at least 15 days during each calendar quarter. A U.S. holder electing the mark-to-market regime generally would compute gain or loss at the end of each taxable year as if the common shares or ADSs had been sold at fair market value. Any gain recognized by the U.S. holder under mark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. holder would be allowed an ordinary deduction for any decrease in the value of common shares or ADSs as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases invalue. Any loss on an actual sale of common shares or ADSs would be a capital loss to the extent in excess of previously included mark-to-market income not offset by previously deducted decreases in value. A U.S. holder’s adjusted tax basis in common shares or ADSs would increase or decrease by gain or loss taken into account under the mark-to-market regime. A mark-to-market election is generally irrevocable. In addition, a mark-to-market election with respect to common shares or ADSs would not apply to any lower-tier PFIC, and a U.S. holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, the PFIC rules could apply with respect to income of a lower-tier PFIC, the value of which would already have been taken into account indirectly via mark-to-market adjustments in respect of common shares or ADSs.
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A U.S. holder that owns common shares or ADSs during any taxable year that we are treated as a PFIC generally would be required to file IRS Form 8621. U.S. holders should also be aware that recently enacted legislation may broaden the current IRS Form 8621 filing requirement or impose an additional annual filing requirement for U.S. persons owning shares of a PFIC. The legislation does not describe what information would be required to be included in either situation, but grants the Secretary of the U.S. Treasury Department power to make this determination. U.S. holders should consult their independent tax advisors regarding the application of the PFIC rules to common shares or ADSs, the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should we be considered a PFIC for any taxable year and the application of the recently-enacted legislation to their particular situation.
Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale, exchange or other taxable disposition of, common shares or ADSs to a U.S. holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding of U.S. federal income tax (currently at a rate of 28.0%) unless the U.S. holder (i) provides an accurate taxpayer identification number and certifies that it is a U.S. person and that no loss of exemption from backup withholding has occurred or (ii) establishes that it is an exempt recipient. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that certain required information is timely furnished to the IRS.
In addition, U.S. holders should be aware that recently-enacted legislation imposes new reporting requirements with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by certain financial institutions, if the aggregate value of all such assets exceeds US$50,000. U.S. holders should consult their own tax advisors regarding the application of the information reporting rules to common shares or ADSs and the application of the recently-enacted legislation to their particular situations.
Non‑U.S. holders generally will not be subject to information reporting and backup withholding tax, but may be required to comply with certain certification and identification procedures in order to establish their eligibility for such exemption.
Documents on Display
Statements contained in this annual report regarding the contents of any contract or other document are not necessarily complete, and, where the contract or other document is an exhibit to the annual report, each of these statements is qualified in all respects by the provisions of the actual contract or other documents.
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended, applicable to a foreign private issuer, and accordingly, we file or furnish reports, information statements and other information with the SEC. Reports and other information filed by us with the SEC can be inspected at, and subject to the payment of any required fees, copies may be obtained from, the public reference facilities of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Our filings will also be available at the SEC’s website at http://www.sec.gov.
Reports and other information may also be inspected and copied at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. As a foreign private issuer, however, we are exempt fromthe proxy requirements of Section 14 of the Exchange Act and from the short-swing profit recovery rules of Section 16 of the Exchange Act.
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Our website is located at http://www.cpfl.com.br and our investor relations website is located at http://www.cpfl.com.br/ir. (These URLs are intended to be an inactive textual reference only. They are not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL is not, and shall not be deemed to be, incorporated into this annual report.)
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in both foreign currency exchange rates and rates of interest and indexation. We have foreign exchange rate risk with respect to our debt denominated in U.S. dollars. We are subject to market risk deriving from changes in rates which affect the cost of our financing.
Exchange Rate Risk
At December 31, 2011, approximately 12.9% of our indebtedness were denominated in U.S. dollars. Also at December 31, 2011, we had swap agreements that offset the exchange rate risk with respect to R$1,789 million of those amounts. The potential loss to us that would result from a hypothetical unfavorable 50.0% change in foreign currency exchange rates, after giving effect to the swaps, would be approximately R$13.5 million, primarily due to the increase, in Brazilianreais, in the principal amount of our foreign currency indebtedness. The total increase in our foreign currency indebtedness would be reflected as an expense in our income statement.
Risk of Index Variation
We have indebtedness and financial assets that are denominated inreais and that bear interest at variable rates or, in some cases, are fixed. We also have swaps that convert some U.S. dollar-denominated indebtedness toreais at variable interest rates. The interest or indexation rates include several different Brazilian money-market rates and inflation rates. At December 31, 2011, the amount of such liabilities, net of such assets and after giving effect to swaps, was R$9,649 million.
A hypothetical, instantaneous and unfavorable change of 100 basis points in rates applicable to floating rate financial assets and liabilities held at December 31, 2011, would result in a net additional cash outflow of approximately R$96 million. This sensitivity analysis is based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial assets and liabilities. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous category (e.g., U.S. dollars). As a result, our interest rate risk sensitivity model may overstate the impact of interest rate fluctuations for such financial instruments asconsistently unfavorable movements of all interest rates are unlikely.
ITEM 12. Description of Securities Other than Equity Securities
American Depositary Shares
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADSs:
Persons depositing common shares or ADS holders must pay: | For: |
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | Issuance of ADSs, including issuances resulting from a distribution of common shares or rights or other property Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
US$2.00 (or less) per 100 ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading) | Any cash distribution to you |
US$2.00 (or less) per 100 ADS (to the extent the depositary has not collected a cash distribution fee of US$2.00 per 100 ADS during the year) | Depositary services |
Registration or transfer fees | Transfer and registration of common shares on our common share register to or from the name of the depositary or its agent when you deposit or withdraw common shares. |
Expenses of the depositary | Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or common share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary |
Any charges incurred by the depositary or its agents for servicing the deposited securities | No charges of this type are currently made in the Brazilian market |
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Reimbursement of Fees and Direct and Indirect Payments by the Depositary
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
In 2011, we received the following payments from the depositary: US$14,200 and US$750,000 (or US$525,000 net of withholding income tax) for expenses incurred by us relating to the ADR program, including global shareholder identification and expenses relating to the third year of the agreement between the depositary and us, respectively.
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14. Material Modifications to the Rights of Security Holders and Use Of Proceeds
None.
ITEM 15. Controls and Procedures
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such assessment and criteria, our management has concluded that our internal control over financial reporting was effective as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by KPMG Auditores Independentes, an independent registered public accounting firm, as stated in their report included on page 117 of this report.
In January 2011, we implemented a new version of the ERP system, the SAP ECC 6.0. We have rigorously tested the new system before its implementation. Our management believes the new system will generate productivity gains and improve our internal processes. The changes in our business processes and internal control over financial reporting have been dully recorded and assessed by our management for the year ended December 31, 2011.
In August 2011, CPFL Energia associated with ERSA. Pursuant to SEC’s instructions, management may exclude an acquired business from its report on internal control over financial reporting if a registrant consummates a material purchase business combination during the relevant fiscal year. On that basis, our management has not assessed the effectiveness of ERSA’s internal control over financial reporting as of December 31, 2011. ERSA (currently CPFL Energias Renováveis)’s total assets, in the amount of R$6,544,169, and total net revenues, in the amount of R$162,234, are included in our consolidated financial statements included in this annual report, representing 1% of net revenues of CPFL Energia.
ITEM 16.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
As described in Item 16D below, we have given our fiscal council the necessary powers to qualify for the exemption from the audit committee requirements set forth in Exchange Act Rule 10A-3(c)(3). Our Board of Directors recognizes that one member of our fiscal council, Daniela Corci Cardoso, qualifies as an audit committee financial expert and meets the applicable independence requirements for fiscal council membership under Brazilian law. She also meets the New York Stock Exchange independence requirements that would apply to audit committee members in the absence of our reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3). Some of the members of our fiscal council are currently employed by some of our principal shareholders or their affiliates.
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ITEM 16B. CODE OF ETHICS
We have adopted a Code of Ethics applicable to our employees and our directors and executive officers, which addresses such matters as conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets, compliance with laws, rules and regulations (including insider trading laws) and encouraging the reporting of any illegal or unethical behavior. Our Code of Ethics is available on our website at: http://www.b2i.cc/Document/986/CPFL_CodEtica_20061227_eng.pdf. (This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be, incorporated into this annual report). If we amend the provisions of our code of ethics that apply to our chief executive officer, our chief financial officer, our principal accounting officer and persons performing similar functions, or if we furnish a waiver to any such persons, we will disclose such amendment or waiver on our website at the same address.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non‑Audit Fees
The following table sets forth the fees billed to us by our independent registered and public accounting firm during the years ended December 31, 2011 and 2010. Our independent accounting firm is KPMG Auditores Independentes beginning in June 2007.
| Year ended December 31, | |||
| 2011 | 2010 | ||
| (in thousands ofreais) | |||
Audit fees | R$3,628 | R$3,092 | ||
Audit-related fees | 659 | 491 | ||
Tax fees | 166 | 143 | ||
All other fees | - | - | ||
Total | R$4,453 | R$3,726 |
“Audit Fees” are the aggregated fees billed by KPMG Auditores Independentes for the audit of our consolidated and annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements for the fiscal years of 2011 and 2010, respectively.
“Audit-related fees” are fees charged by KPMG Auditores Independentes for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.
“Tax fees” in the above table are for services related to tax compliance.
Audit Committee Approval Policies and Procedures
Our fiscal council currently serves as our audit committee for purposes of the Sarbanes-Oxley Act of 2002. Our fiscal council has not established pre‑approval policies or procedures for recommending the engagement of our independent auditors for services to our Board of Directors. Pursuant to Brazilian law, our Board of Directors is responsible for the engagement of independent auditors. Brazilian law prohibits our independent auditors from providing any consulting services to our subsidiaries, or to us, that may impair their independence.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Under the listed company audit committee rules of the NYSE and the SEC, we must comply with Exchange Act Rule 10A-3, which requires that we establish an audit committee composed of members of the Board of Directors that meets specified requirements. We have designated and empowered our fiscal council to perform the role of the audit committee in reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3). In our assessment, our fiscal council acts independently in performing the responsibilities of an audit committee under the Sarbanes-Oxley Act and satisfies the other requirements of Exchange Act Rule 10A-3.
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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
The following chart summarizes the ways that our corporate governance practices differ from those followed by domestic companies under the listing standards under the New York Stock Exchange:
Section of the New York Stock Exchange Listed Company Manual | New York Stock Exchange Listing Standard | Ways that CPFL’s Corporate Governance Practices Differ from Those Followed by Domestic Companies Listed on the New York Stock Exchange | ||
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303A.01 | A company listed on the New York Stock Exchange (a “listed company”) must have a majority of independent directors on its Board of Directors. “Controlled companies” are not required to comply with this requirement. | CPFL is a controlled company, because more than a majority of its voting power is controlled by VBC Energia, PREVI (through BB Carteira Livre I Fundo de Investimento em Ações) andEnergia São Paulo FIP (including through Bonaire Participações S.A.). As a controlled company, CPFL would not be required to comply with the majority of independent directors requirements if it were a U.S. domestic issuer. CPFL has one independent director, as defined by BM&FBOVESPA rules. | ||
303A.03 | The non-management directors of a listed company must meet at regularly scheduled executive sessions without management. | The non-management directors of CPFL do not meet at regularly scheduled executive sessions without management. | ||
303A.04 | A listed company must have a Nominating/Corporate Governance Committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. “Controlled companies” are not required to comply with this requirement. | As a controlled company, CPFL would not be required to comply with the Nominating/Corporate Governance Committee requirements if it were a U.S. domestic issuer. Nonetheless, in order to improve its corporate governance practices, CPFL constituted thead hoc Corporate Governance Commission, composed of four members: the CEO and three members of the Board of Directors. This Commission is responsible for evaluating the effectiveness of CPFL’s corporate governance practices whenever necessary, proposing improvements to CPFL’s governance practices, and monitoring the implementation of CPFL’s corporate governance practices. | ||
303A.05 | A listed company must have a compensation committee composed entirely of independent directors, with a written charter that covers certain minimum specified duties. “Controlled companies” are not required to comply with this requirement. | As a controlled company, CPFL would not be required to comply with the compensation committee requirements. The Human Resources Management Committee of CPFL is an advisory committee of the Board of Directors. It has three members who are all Directors, none of whom is independent. According to its charter, this committee is responsible for assisting the Board of Directors by: (i) coordinating the CEO selection process, (ii) defining criteria for compensation of the executive officers, including long and short-term incentive plans, (iii) defining performance goals of the executive officers, (iv) coordinating evaluation procedures of the executive officers, (v) preparation of the plan of succession for executive officers and (vi) monitoring the execution of human resources policies and practices and preparing improvement proposals when necessary. | ||
303A.06 and 303A.07 | A listed company must have an audit committee with a minimum of three independent directors that satisfy the independence requirements of Rule 10A-3 under the Exchange Act, with a written charter that covers certain minimum specified duties. | In lieu of appointing an audit committee composed of independent members of the Board of Directors, CPFL has a permanent Conselho Fiscal, or fiscal council, in accordance with the applicable provisions of the Brazilian Corporate Law, and CPFL has granted the fiscal council with additional powers that meet the requirements of Exchange Act Rule 10A-3(c)(3). Under Brazilian Corporate Law, which enumerates standards for the independence of the fiscal council from CPFL and its management, none of the members of the fiscal council may be: (i) members of the Board of Directors; (ii) members of the board of executive officers; (iii) employed by CPFL or an affiliate or company controlled by CPFL or (iv) a spouse or relative of any member of the company’s management or Board of Directors. Members of the fiscal council are elected at the company’s general shareholders meeting for a one-year term of office. The fiscal council of CPFL currently has five members, all of whom comply with standards (i) to (iv) above. The responsibilities of the fiscal council, which are set forth in its charter, includes reviewing management’s activities and the company’s financial statements, and reporting findings to the company’s shareholders. | ||
303A.08 | Shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with limited exemptions set forth in the NYSE rules. | Under Brazilian Corporate Law, shareholder pre-approval is required for the adoption of any equity compensation plans. | ||
303A.09 | A listed company must adopt and disclose corporate governance guidelines that cover certain minimum specified subjects. | CPFL has formal corporate governance guidelines that address the matters specified in the NYSE rules. CPFL’s corporate governance guidelines are available on http://www.cpfl.com.br/ir. | ||
303A.10 | A listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. | CPFL has a formal Code of Ethics that applies to its directors, officers, employees and controlling shareholders. CPFL’s Code of Ethics has a scope that is similar, but not identical, to that required for a U.S. domestic company under the NYSE rules. CPFL reports each year under Item 16B of our annual report on Form 20-F any waivers of the code of ethics in favor of our chief executive officer, our chief financial officer, our principal accounting officer and persons performing similar functions. We will disclose such amendment or waiver on our website. | ||
303A.12 | Each listed company CEO must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. | CPFL’s CEO provides to the NYSE a Foreign Private Issuer Annual Written Affirmation, and he will promptly notify the NYSE in writing after any executive officer of CPFL becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance rules. |
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ITEM 17. Financial Statements
Not applicable.
ITEM 18. Financial Statements
See pages F-1 through F-85, incorporated herein by reference.
ITEM 19. Exhibits
The amount of long‑term debt securities of CPFL Energia or its subsidiaries authorized under any outstanding agreement does not exceed 10.0% of CPFL Energia’s total assets on a consolidated basis. CPFL Energia hereby agrees to furnish the SEC, upon its request, a copy of any instruments defining the rights of holders of its long‑term debt or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed.
GLOSSARY OF TERMS
ABRADEE: Brazilian Association of Electric Energy Distributors (Associação Brasileira de Distribuidores de Energia Elétrica).
ANEEL: National Electric Energy Agency (Agência Nacional de Energia Elétrica).
Annual Reference Value: Mechanism which limits the amounts of costs that can be passed through to Final Consumers. The Annual Reference Value corresponds to the weighted average of electricity acquisition costs resulting from electricity prices of all public auctions carried out by ANEEL and CCEE in the regulated market for electricity to be delivered five and three years from any such auction and only applies during the first three years following the commencement of delivery of the acquired electricity.
Assured energy: Amount of energy that generators are allowed to sell in long‑term contracts.
Basic Network: Interconnected transmission lines, dams, energy transformers and equipment with voltage equal to or higher than 230 kV, or installations with lower voltage as determined by ANEEL.
Capacity Agreement: Agreement under which a generator commits to make a certain amount of capacity available to the Regulated Market. In such case, the generator’s revenue is guaranteed and the distributors must bear the risk of a supply shortage.
CCC: Fuel Usage Quota.
CCEAR: Regulated Market (Contratos de Comercialização de Energia no Ambiente Regulado).
CCEE: Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica). The short‑term electricity market, established in 1998 through the Power Industry Law, which replaced the prior system of regulated generation prices and supply contracts, formerly known as the Wholesale Energy Market.
CMCE: Energy Industry Monitoring Committee (Comitê de Monitoramento do Setor Elétrico).
CNPE: National Energy Policy Council (Conselho Nacional de Política Energética).
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DistributionNetwork: Electric network system that distributes energy to end consumers within a concession area.
Distributor: An entity supplying electric energy to a group of consumers by means of a distribution network.
EnergyAgreement: Agreement under which a generator commits to supply a certain amount of electricity and assumes the risk that its electricity supply could be adversely affected by hydrological conditions and low reservoir levels, which could interrupt the supply of electricity. In such a case, the generator would be required to purchase electricity elsewhere in order to comply with its supply commitments.
FinalConsumer: A party that uses electricity for its own needs.
FreeConsumers: (i) Existing consumers with demand of at least 10 MW and supplied at voltage level equal to or greater than 69 kV; (ii) new consumers with demand of at least 3 MW at any voltage; (iii) groups of consumers subject to agreement with the local distribution concessionaire; (iv) consumers who do not receive supply for more than 180 days from a local distribution concessionaire; and (v) certain others.
FreeMarket: Market segment that permits a certain degree of competition. The free market specifically contemplates purchase of electricity by non‑regulated entities such as Free Consumers and energy traders.
Gigawatt (GW): One billion watts.
Gigawatthour (GWh): One gigawatt of power supplied or demanded for one hour, or one billion watt hours.
Highvoltage: A class of nominal system voltages equal to or greater than 100,000 volts (100 kVs) and less than 230,000 volts (230 kVs).
Hydroelectricplant or hydroelectric facility: A generator that uses water power to drive the electric generator.
InitialSupply Contracts: Initial energy supply agreements at prices and volumes approved by ANEEL, that distribution and generation companies are required to enter into per the 1998 Power Industry Law.
Installed capacity: The level of electricity which can be delivered from a particular generator on a full-load continuous basis under specified conditions as designated by the manufacturer.
Interconnected Power System: Systems or networks for the transmission of energy, connected together by means of one or more links (lines and/or transformers).
Independent Power Producer: A legal entity or consortium holding a concession or authorization for power generation for sale for its own account to public utility concessionaires.
Kilovolt (kV): One thousand volts.
Kilowatt (kW): One thousand watts.
Kilowatthour (kWh): One kilowatt of power supplied or demanded for one hour, or one thousand watt hours.
Megawatt (MW): One million watts.
Megawatthour (MWh): One megawatt of power supplied or demanded for one hour, or one million watt hours.
Micro hydroelectric power plants: Power projects with capacity lower than 1 MW.
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MME: Ministry of Mines and Energy (Ministério de Minas e Energia).
MRE: Energy Reallocation Mechanism (Mecanismo de Realocação de Energia).
ONS: National System Operator (Operador Nacional do Sistema), an entity responsible for operational planning, administration of generation and transmission and planning of transmission investments in the power industry.
Parcel A costs: Costs that include, among others, the following: (i) costs of electricity purchased for resale pursuant to Initial Supply Contracts; (ii) costs of electricity purchased from Itaipu; (iii) costs of electricity purchased pursuant to bilateral agreements that are freely negotiated between parties; and (iv) certain other charges for the transmission and distribution systems.
Parcel B costs: Costs that are under control of distributors. Such costs are determined by subtracting all of the Parcel A costs from the distribution company’s revenues, excluding ICMS and PIS/COFINS, a state and federal tax levied on sales. Parcel B costs include, among others, the return on investment related to concessions and their expansion, as well as maintenance and operational costs.
Rationing Program: The Brazilian government program to reduce electricity consumption that was in effect from June 1, 2001 to February 28, 2002 as a result of poor hydrological conditions that threatened the country’s electricity supply.
Regulated market: Market segment in which distribution companies purchase all the electricity needed to supply customers through public auctions. The auction process is administered by ANEEL, either directly or through CCEE, under certain guidelines provided by the MME. The regulated market is generally considered to be more stable in terms of supply of electricity.
Retail Distribution Tariff: Revenue charged by distribution companies to its customers. Each customer falls within a certain tariff level defined by law and based on the customer’s classification, although some flexibility is available according to the nature of each customer’s demand. Retails tariffs are subject to annual readjustments by ANEEL.
RTE: Extraordinary Tariff Adjustment (reajuste tarifário extraordinário).
Small hydroelectric power plants: Power projects with capacity from 1 MW to 30 MW.
Special consumer: A group of consumers that uses at least 500 kV. Special Consumers may only purchase energy from (i) small hydroelectric power plants with capacity between 1,000 kW and 30,000 kW, (ii) generators with capacity limited to 1,000 kW, and (iii) alternative energy generators (solar, wind and biomass enterprises) with capacity injected in the system not greater than 30,000 kW. A Special Consumer may terminate its contract with the local distributor with 180 days prior notice for contracts with indefinite terms.
Substation: An assemblage of equipment which switches and/or changes or regulates the voltage of electricity in a transmission and distribution system.
Thermoelectric power plant: A generator which uses combustible fuel, such as coal, oil, diesel natural gas or other hydrocarbon as the source of energy to drive the electric generator.
Transmission: The bulk transfer of electricity from generating facilities to the distribution system at load center station by means of the transmission network (in lines with capacity between 69 kV and 525 kV).
Transmission Tariff: Revenue charged by a transmission concessionaire based on the transmission network it owns and operates. Transmission tariffs are subject to periodic revisions by ANEEL.
Volt: The basic unit of electric force analogous to water pressure in pounds per square inch.
Watt: The basic unit of electrical power.
115
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant, CPFL Energia S.A., hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Campinas, state of São Paulo, Brazil, onMarch 30, 2012.
CPFL ENERGIA S.A. | |||
By: | /s/ Wilson Ferreira, Junior | ||
Name: | Wilson Ferreira, Junior | ||
Title: | Chief Executive Officer | ||
(principal executive officer) | |||
By: | /s/ Lorival Nogueira Luz Júnior | ||
Name: | Lorival Nogueira Luz Júnior | ||
Title: | Chief Financial Officer | ||
(principal financial officer) |
116
![]() | KPMG Auditores Independentes | Central Tel | 55 (19) 2129-8700 | |
Av. Barão de Itapura, 950 - 6º andar | Fax | 55 (19) 2129-8728 | ||
13020-431 - Campinas, SP - Brasil | Internet | www.kpmg.com.br | ||
Caixa Postal 737 | ||||
13012-970 - Campinas, SP – Brasil |
Report of independent registered Public Accounting Firm
The Board of Directors and Shareholders
CPFL Energia S.A.
We have audited the accompanying consolidated balance sheets of CPFL Energia S.A.and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
117
![]() | CPFL Energia S.A. Report of independent registered public accounting firm |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the CPFL Energia S.A. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations, cash flows, changes in their shareholders’ equity and comprehensive income for each of the years in the three-year period ended December 31, 2011, in conformity with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
CPFL Energia S.A. acquired ERSA Energias Renováveis S.A. (ERSA) during 2011, and management excluded from its assessment of the effectiveness of Company’s internal control over financial reporting as of December 31, 2011, ERSA’s internal control over financial reporting associated with total assets of R$ 6,544.2 million and total net revenues of R$ 162.2 million included in the consolidated financial statements of CPFL Energia S.A. and subsidiaries as of and for the year ended December 31, 2011. Our audit of internal control over financial reporting of Company also excluded an evaluation of the internal control over financial reporting of ERSA Energias Renováveis S.A.
/s/ KPMG Auditores Independentes
São Paulo, Brazil
March 29, 2012
118
CPFL ENERGIA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais – R$)
|
|
|
|
|
ASSETS |
| Dec 31, 2011 |
| Dec 31,2010 |
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
Cash and cash equivalents (note 5) |
| 2,699,837 |
| 1,562,897 |
Consumers, Concessionaires and Licensees (note 6) |
| 1,874,280 |
| 1,816,073 |
Financial Investments (note 7) |
| 47,521 |
| 42,533 |
Recoverable Taxes (note 8) |
| 277,463 |
| 193,020 |
Derivatives (note 33) |
| 3,733 |
| 244 |
Materials and Supplies |
| 44,872 |
| 25,223 |
Leases (note 10) |
| 4,581 |
| 4,754 |
Other credits (note 12) |
| 410,768 |
| 253,445 |
TOTAL CURRENT ASSETS |
| 5,363,054 |
| 3,898,190 |
|
|
|
|
|
NONCURRENT ASSETS |
|
|
|
|
Consumers, Concessionaires and Licensees (note 6) |
| 182,300 |
| 195,738 |
Escrow Deposits (note 21) |
| 1,128,616 |
| 890,685 |
Financial Investments (note 7) |
| 109,965 |
| 72,823 |
Recoverable Taxes (note 8) |
| 216,715 |
| 138,966 |
Derivatives (note 33) |
| 215,642 |
| 82 |
Deferred Tax Credits (note 9) |
| 1,176,535 |
| 1,183,460 |
Leases (note 10) |
| 24,521 |
| 26,315 |
Financial asset of concession (note 11) |
| 1,376,664 |
| 934,646 |
Private pension fund (note 18) |
| 3,416 |
| 5,800 |
Investment at cost |
| 116,654 |
| 116,654 |
Other credits (note 12) |
| 279,461 |
| 222,100 |
Property, Plant and Equipment (note 13) |
| 8,292,076 |
| 5,786,465 |
Intangible assets (note 14) |
| 8,927,439 |
| 6,584,874 |
TOTAL NONCURRENT ASSETS |
| 22,050,004 |
| 16,158,607 |
|
|
|
|
|
TOTAL ASSETS |
| 27,413,057 |
| 20,056,797 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 1
CPFL ENERGIA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010 (In thousands of Brazilian reais – R$)
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Dec 31,2011 |
| Dec 31,2010 |
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
Suppliers (note 15) |
| 1,240,143 |
| 1,047,385 |
Accrued Interest on Debts (note 16) |
| 141,902 |
| 40,516 |
Accrued Interest on Debentures (note 17) |
| 83,552 |
| 118,066 |
Loans and Financing (note 16) |
| 896,414 |
| 578,867 |
Debentures (note 17) |
| 531,185 |
| 1,509,958 |
Private pension fund (note 18) |
| 40,695 |
| 40,103 |
Regulatory charges (note 19) |
| 145,146 |
| 123,541 |
Taxes and Social Contributions Payable (note 20) |
| 483,028 |
| 455,248 |
Dividends and Interest on Equity |
| 24,524 |
| 23,813 |
Accrued liabilities |
| 70,771 |
| 58,688 |
Derivatives (note 33) |
| - |
| 3,982 |
Charge for the use of public utilities (note 22) |
| 28,738 |
| 17,287 |
Other accounts payable (note 23) |
| 813,338 |
| 410,869 |
TOTAL CURRENT LIABILITIES |
| 4,499,437 |
| 4,428,323 |
|
|
|
|
|
NONCURRENT LIABILITIES |
|
|
|
|
Accrued Interest on Debts (note 16) |
| 23,627 |
| 29,155 |
Loans and Financing (note 16) |
| 7,382,455 |
| 4,917,843 |
Debentures (note 17) |
| 4,548.651 |
| 2,212,314 |
Private pension fund (note 18) |
| 414,629 |
| 570,877 |
Taxes and Social Contributions Payable (note 20) |
| 165 |
| 960 |
Deferred tax debits (note 9) |
| 1,038,101 |
| 277,767 |
Reserve for contingencies (note 21) |
| 338,121 |
| 291,265 |
Derivatives (note 33) |
| 24 |
| 7,883 |
Charge for the use of public utilities (note 22) |
| 440,926 |
| 429,632 |
Other accounts payable (note 23) |
| 174,410 |
| 141,124 |
TOTAL NONCURRENT LIABILITIES |
| 14,361,110 |
| 8,878,819 |
|
|
|
|
|
SHAREHOLDERS’ EQUITY (note 24) |
|
|
|
|
Capital |
| 4,793,424 |
| 4,793,424 |
Capital Reserves |
| 229,956 |
| 16 |
Profit Reserves |
| 495,185 |
| 418,665 |
Additional dividend proposed |
| 758,470 |
| 486,040 |
Other comprehensive income |
| 790,123 |
| 795,563 |
|
| 7,067,157 |
| 6,493,708 |
Net equity attributable to noncontrolling shareholders |
| 1,485,352 |
| 255,948 |
TOTAL SHAREHOLDERS' EQUITY |
| 8,552,510 |
| 6,749,656 |
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| 27,413,057 |
| 20,056,797 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 2
CPFL ENERGIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED DECEMBER 31, 2011, 2010 and 2009
(In thousands of Brazilian reais – R$, except for share and per share amounts)
|
|
|
| |||
|
| 2011 |
| 2010 |
| 2009 |
|
|
|
|
|
|
|
NET OPERATING REVENUE (note 26) |
| 12,764,028 |
| 12,023,729 |
| 11,358,006 |
|
|
|
|
|
|
|
COST OF ELECTRIC ENERGY SERVICES |
|
|
|
|
|
|
Cost of Electric Energy (note 27) |
| (6,220,970) |
| (6,222,490) |
| (6,014,509) |
Operating Cost (note 28) |
| (1,157,970) |
| (1,067,493) |
| (1,053,938) |
Services Rendered to Third Parties (note 28) |
| (1,138,626) |
| (1,050,980) |
| (620,944) |
|
|
|
|
|
|
|
GROSS OPERATING INCOME |
| 4,246,463 |
| 3,682,766 |
| 3,668,615 |
|
|
|
|
|
|
|
Operating expenses (note 28) |
|
|
|
|
|
|
Sales expenses |
| (364,352) |
| (300,435) |
| (255,199) |
General and administrative expenses |
| (615,171) |
| (443,212) |
| (403,390) |
Other Operating Expense |
| (216,392) |
| (199,804) |
| (227,343) |
|
| (1,195,916) |
| (943,451) |
| (885,932) |
|
|
|
|
|
|
|
INCOME FROM ELECTRIC ENERGY SERVICE |
| 3,050,547 |
| 2,739,315 |
| 2,782,683 |
|
|
|
|
|
|
|
FINANCIAL INCOME (EXPENSE) (note 29) |
|
|
|
|
|
|
Income |
| 698,188 |
| 483,115 |
| 351,360 |
Expense |
| (1,386,778) |
| (837,058) |
| (661,066) |
|
| (688,590) |
| (353,943) |
| (309,706) |
|
|
|
|
|
|
|
INCOME BEFORE TAXES |
| 2,361,957 |
| 2,385,372 |
| 2,472,977 |
|
|
|
|
|
|
|
Social contribution (note 10) |
| (209,872) |
| (221,235) |
| (208,348) |
Income tax (note 10) |
| (569,701) |
| (604,100) |
| (575,761) |
|
| (779,573) |
| (825,335) |
| (784,109) |
|
|
|
|
|
|
|
NET INCOME |
| 1,582,384 |
| 1,560,037 |
| 1,688,868 |
|
|
|
|
|
|
|
Net income attributable to controlling shareholders |
| 1,530,403 |
| 1,538,281 |
| 1,657,297 |
Net income attributable to noncontrolling shareholders |
| 51,981 |
| 21,756 |
| 31,571 |
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES*. ……. |
| 962,274,260 |
| 961,494,872 |
| 959,827,876 |
EARNINGS PER SHARE.................................. ……. |
| 1.59 |
| 1.60 |
| 1.73 |
The accompanying notes are an integral part of these consolidated financial statements.
* Earnings per share are based on the number of shares resulting from the reverse and forward stock split of our common shares as if they had occurred at the beginning of 2009.
F - 3
CPFL ENERGIA S.A. AND SUBSIDIARIES
STATEMENT OF COMPREHENSIVE INCOME FOR THE PERIOD ENDED IN DECEMBER 31, 2011, 2010 AND 2009
(In thousands of Brazilian reais – R$)
|
| 2011 |
| 2010 |
| 2009 |
|
|
|
|
|
|
|
NET INCOME |
| 1,582,384 |
| 1,560,037 |
| 1,688,868 |
Other comprehensive income |
|
|
|
|
|
|
- Gain / (Loss) in financial instruments |
| 63,212 |
| 82,636 |
| (11,382) |
- Tax on financial instruments |
| (21,322) |
| (28,096) |
| 3,870 |
Comprehensive income for the year |
| 1,624,274 |
| 1,614,577 |
| 1,681,356 |
Comprehensive income attributable to controlling shareholders |
| 1,572,291 |
| 1,595,151 |
| 1,649,900 |
Comprehensive income attributable to non controlling shareholders |
| 51,981 |
| 19,426 |
| 31,456 |
|
|
|
|
|
|
|
F - 4
CPFL ENERGIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, 2009
(In thousands of Brazilian reais – R$, except for share)
|
|
|
|
|
|
|
|
|
| ||||||||||||
| Capital | Capitalreserve | Legal reserve | Additional dividend proposed | Other comprehensive income |
| Noncontrolling shareholders´ interest | Total Shareholders' equity | |||||||||||||
Deemed cost | Financial instruments | Retained earnings | Total | Other comprehensive income | Other equity | ||||||||||||||||
Balance at Januaray 1, 2009 | 4,741,175 | 16 | 277,428 | 606,105 | 661,975 | 137,895 | (631,911) | 5,792,683 | 2,445 | 255,718 | 6,050,846 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income for the period | - | - | - | - | - | - | 1,657,297 | 1,657,297 | - | 31,571 | 1,688,868 | ||||||||||
Prescribed dividend | - | - | - | - | - | - | 4,541 | 4,541 | - | - | 4,541 | ||||||||||
Additional dividend aproved | - | - | - | (606,105) | - | - | - | (606,105) | - | (14,244) | (620,349) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
- Gain (Loss) in financial instruments | - | - | - | - | - | (11,208) | - | (11,208) | (174) | - | (11,382) | ||||||||||
- Tax on financial instruments | - | - | - | - | - | 3,811 | - | 3,811 | 59 | - | 3,870 | ||||||||||
- Realization of financial instruments | - |
|
|
| - | (702) | 702 | - | - | - | - | ||||||||||
- Realization of deemed cost of fixed assets | - | - | - | - | (39,552) | - | 39,552 | - | - | - | - | ||||||||||
- Tax on deemed cost realization | - | - | - | - | 13,448 | - | (13,448) | - | - | - | - | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Allocation of income |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
-Statutory reserve | - | - | 64,323 | - | - | - | (64,323) | - | - | - | - | ||||||||||
- Interim dividend | - | - | - | - | - | - | (571,671) | (571,671) | - | (6,767) | (578,438) | ||||||||||
- Dividend proposed | - | - | - | 655,017 | - | - | (655,017) | - | - | - | - | ||||||||||
Other changes in noncontrolling shareholders | - | - | - | - | - | - | - | - | - | (1,177) | (1,177) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance at December 31, 2009 | 4,741,175 | 16 | 341,751 | 655,017 | 635,871 | 129,796 | (234,278) | 6,269,348 | 2,330 | 265,101 | 6,536,779 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Capital Increase | 52,249 | - | - | - | - | - | - | 52,249 | - |
| 52,249 | ||||||||||
Net income for the period | - | - | - | - | - | - | 1,538,281 | 1,538,281 | - | 21,756 | 1,560,037 | ||||||||||
Prescribed dividend | - | - | - | - | - | - | 6,406 | 6,406 | - |
| 6,406 | ||||||||||
Additional dividend aproved | - | - | - | (655,017) | - | - | - | (655,017) | - | (10,967) | (665,984) | ||||||||||
|
|
|
|
|
|
|
|
|
|
| - | ||||||||||
- Gain (Loss) in financial instruments | - | - | - | - | - | 86,167 | - | 86,167 | (3,531) |
| 82,636 | ||||||||||
- Tax on financial instruments | - | - | - | - | - | (29,297) | - | (29,297) | 1,201 |
| (28,096) | ||||||||||
- Realization of financial instruments | - | - | - | - | - | (835) | 835 | - | - | - | - | ||||||||||
- Realization of deemed cost of fixed assets | - | - | - | - | (39,605) | - | 39,605 | - | - | - | - | ||||||||||
- Tax on deemed cost realization | - | - | - | - | 13,466 | - | (13,466) | - | - | - | - | ||||||||||
|
|
|
|
|
|
|
|
|
|
| - | ||||||||||
Allocation of income |
|
|
|
|
|
|
|
|
|
| - | ||||||||||
-S tatutory reserve | - | - | 76,914 | - | - | - | (76,914) | - | - | - | - | ||||||||||
- Interim dividend | - | - | - | - | - | - | (774,429) | (774,429) | - | (6,181) | (780,610) | ||||||||||
- Dividend proposed | - | - | - | 486,040 | - | - | (486,040) | - | - | - | - | ||||||||||
Other changes in noncontrolling shareholders | - | - | - | - | - | - | - | - | - | (13,761) | (13,761) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance at December 31, 2010 | 4,793,424 | 16 | 418,665 | 486,040 | 609,732 | 185,831 | 0 | 6,493,708 | - | 255,948 | 6,749,656 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income for the period | - | - | - | - | - | - | 1,530,403 | 1,530,403 | - | 51,981 | 1,582,384 | ||||||||||
Prescribed dividend | - | - | - | - | - | - | 4,967 | 4,967 | - | - | 4,967 | ||||||||||
Additional dividend aproved | - | - | - | (486,040) | - | - | - | (486,040) | - | (3,596) | (489,636) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
- Gain in financial instruments | - | - | - | - | - | 63,212 | - | 63,212 | - | - | 63,212 | ||||||||||
- Tax on financial instruments | - | - | - | - | - | (21,323) | - | (21,323) | - | - | (21,323) | ||||||||||
- Realization of financial instruments | - | - | - | - |
| (602) | 602 | - | - | - | - | ||||||||||
- Realization of deemed cost of fixed assets | - | - | - | - | (39,098) | - | 39,098 | - | - | - | - | ||||||||||
- Tax on deemed cost realization | - | - | - | - | 13,293 | - | (13,293) | - | - | - | - | ||||||||||
- Business Combination - CPFL Renováveis | - | 229,940 | - | - | (20,922) | - | 20,922 | 229,940 | - | 1,184,531 | 1,414,471 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Allocation of income |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
-Statutory reserve | - | - | 76,520 | - | - | - | (76,520) | - | - | - | - | ||||||||||
- Interim dividend | - | - | - | - | - | - | (747,709) | (747,709) | - | (3,498) | (751,207) | ||||||||||
- Dividend proposed | - | - | - | 758,470 | - | - | (758,470) | - | - | - | - | ||||||||||
Other changes in noncontrolling shareholders | - | - | - | - | - | - | - | - | - | (13) | (13) | ||||||||||
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| - |
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Balance at December 31, 2011 | 4,793,424 | 229,956 | 495,185 | 758,470 | 563,005 | 227,118 | 0 | 7,067,157 | - | 1,485,352 | 8,552,510 | ||||||||||
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The accompanying notes are an integral part of these financial statements |
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F - 5
Table of Contents
CPFL ENERGIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands of Brazilian reais – R$)
|
| 2011 |
|
2010 |
|
2009 |
OPERATING CASH FLOW |
|
|
|
|
|
|
Income (Loss) for the period, before income tax and social contribution |
| 2,361,957 |
| 2,385,372 |
| 2,472,977 |
|
|
|
|
|
|
|
ADJUSTMENT TO RECONCILE INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
|
|
|
|
Depreciation and amortization |
| 801,203 |
| 691,793 |
| 673,073 |
Reserve for contingencies |
| 35,219 |
| (29,598) |
| (13,623) |
Interest and monetary restatement |
| 1,168,617 |
| 613,946 |
| 572,470 |
Pension plan costs |
| (82,953) |
| (80,629) |
| (3,066) |
Losses on the write-off of noncurrent assets |
| 3,688 |
| 1,142 |
| (686) |
Deferred taxes (PIS and COFINS) |
| 6,429 |
| 2,153 |
| 75,649 |
Other |
| - |
| 536 |
| - |
|
|
|
|
|
|
|
REDUCTION (INCREASE) IN OPERATING ASSETS |
|
|
|
|
|
|
Consumers, concessionaires and licensees |
| (9,184) |
| (34,085) |
| (96,260) |
Recoverable taxes |
| (12,971) |
| 3,146 |
| 9,265 |
Lease |
| (6,347) |
| (2,945) |
| (2,276) |
Escrow deposits |
| (164,165) |
| (52,109) |
| 948 |
Other operating assets |
| (61,086) |
| (78,202) |
| 1,165 |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN OPERATING LIABILITIES |
|
|
|
|
|
|
Suppliers |
| 122,783 |
| (16,714) |
| (7,853) |
Taxes and social contributions paid |
| (764,195) |
| (705,366) |
| (524,248) |
Other taxes and social contributions |
| 54,230 |
| (88,996) |
| 47,212 |
Other liabilities with employee pension plans |
| (70,318) |
| (72,235) |
| (86,110) |
Interestondebts – paid |
| (981,682) |
| (573,170) |
| (546,705) |
Regulatory charges |
| 21,596 |
| 59,792 |
| (30,780) |
Other operating liabilities |
| 65,832 |
| 5,382 |
| (101,891) |
CASH FLOWS PROVIDED BY OPERATIONS |
| 2,488,653 |
| 2,029,213 |
| 2,439,261 |
|
|
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|
|
|
|
INVESTMENT ACTIVITIES |
|
|
|
|
|
|
Acquisition of subsidiaries net of cash acquired |
| (862,938) |
| - |
| - |
Increase in investments on subsidiaries |
| - |
| (5,752) |
| (31,922) |
Increase in cash from corporate restructuring |
| 253,178 |
| - |
| - |
Acquisition of property, plant and equipment |
| (829,701) |
| (634,931) |
| (549,045) |
Financial investments |
| 18,688 |
| 17,777 |
| 65,527 |
Additions to intangible assets |
| (1,075,072) |
| (1,165,609) |
| (679,054) |
Lease |
| 8,314 |
| (3,931) |
| (15,527) |
Sale of noncurrent assets |
| - |
| 828 |
| 1,092 |
Other |
| - |
| (10,269) |
| (29,972) |
|
|
|
|
|
|
|
GENERATION (UTILIZATION) OF CASH IN INVESTMENTS |
| (2,487,531) |
| (1,801,887) |
| (1,238,901) |
F - 6
FINANCING ACTIVITIES |
|
|
|
|
|
|
Loans, financing and debentures obtained |
| 5,536,932 |
| 2,571,002 |
| 2,552,433 |
Increment of cash due to increase of interest in subsidiary |
| 1,118 |
| - |
| - |
Payments of Loans, financing and debentures, and derivatives |
| (3,157,839) |
| (1,280,290) |
| (1,843,792) |
Dividend and interest on equity paid |
| (1,240,590) |
| (1,440,094) |
| (1,178,365) |
Other |
| (3,802) |
| (2,292) |
| (1,847) |
GENERATION (UTILIZATION) OF CASH IN FINANCING |
| 1,135,819 |
| (151,674) |
| (471,571) |
INCREASE IN CASH AND CASH EQUIVALENTS |
| 1,136,940 |
| 75,652 |
| 728,790 |
OPENING BALANCE OF CASH AND CASH EQUIVALENTS |
| 1,562,897 |
| 1,487,245 |
| 758,455 |
CLOSING BALANCE OF CASH AND CASH EQUIVALENTS |
| 2,699,837 |
| 1,562,897 |
| 1,487,245 |
|
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|
|
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|
|
The accompanying notes are an integral part of these consolidated financial statements
F - 7
CPFL ENERGIA S.A.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED ON DECEMBER 31, 2011, 2010 AND 2009
(Amounts stated in thousands of Brazilian reais, except where otherwise indicated)
( 1 )OPERATIONS
CPFL Energia S.A. (“CPFL Energia” or “Company”) is a publicly quoted corporation incorporated for the principal purpose of acting as a holding company, participating in the capital of other companies primarily dedicated to electric energy distribution, generation and sales activities in Brazil.
The Company’s headquarters are located at Rua Gomes de Carvalho, 1510 - 14º floor- Room 142 - Vila Olímpia - São Paulo - SP - Brasil.
The Company has direct and indirect interests in the following operational subsidiaries (information on the concession area, number of consumers, energy production capacity and associated data not examined by the independent auditors):
Energy distribution |
| Company Type |
| Equity Interest |
| Location (State) |
| Number of municipalities |
| Approximate number of consumers (in thousands) | Concession term |
| End of the concession | |
|
|
|
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|
|
|
Companhia Paulista de Força e Luz ("CPFL Paulista") |
| Publicly-quoted corporation |
| Direct 100% |
| Interior of S. Paulo |
| 234 |
| 3,768 |
| 30 years |
| November 2027 |
Companhia Piratininga de Força e Luz ("CPFL Piratininga") |
| Publicly-quoted corporation |
| Direct 100% |
| Interior of S. Paulo |
| 27 |
| 1,483 |
| 30 years |
| October 2028 |
Rio Grande Energia S.A. ("RGE") |
| Publicly-quoted corporation |
| Direct 100% |
| Interior of Rio Grande do Sul |
| 253 |
| 1,314 |
| 30 years |
| November 2027 |
Companhia Luz e Força Santa Cruz ("CPFL Santa Cruz") |
| Private corporation |
| Direct 100% |
| Interior of São Paulo and Paraná |
| 27 |
| 186 |
| 16 years |
| July 2015 |
Companhia Leste Paulista de Energia ("CPFL Leste Paulista") |
| Private corporation |
| Direct 100% |
| Interior of S. Paulo |
| 7 |
| 52 |
| 16 years |
| July 2015 |
Companhia Jaguari de Energia ("CPFL Jaguari") |
| Private corporation |
| Direct 100% |
| Interior of S. Paulo |
| 2 |
| 34 |
| 16 years |
| July 2015 |
Companhia Sul Paulista de Energia ("CPFL Sul Paulista") |
| Private corporation |
| Direct 100% |
| Interior of S. Paulo |
| 5 |
| 75 |
| 16 years |
| July 2015 |
Companhia Luz e Força de Mococa ("CPFL Mococa") |
| Private corporation |
| Direct 100% |
| Interior of São Paulo and Minas Gerais |
| 4 |
| 42 |
| 16 years |
| July 2015 |
|
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|
| Installed power |
|
|
Energy generation - operational |
| Company Type |
| Equity Interest |
| Location (State) |
| Number of plants / type of energy | Total |
| CPFL participation | |
|
|
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|
CPFL Geração de Energia S.A.("CPFL Geração") |
| Publicly-quoted corporation |
| Direct 100% |
| São Paulo, Goiás and Minas Gerais |
| 1 Hydroelectric, 2SHPs e 1 Thermal* | 695 MW |
| 695 MW | |
Foz do Chapecó Energia S.A.("Foz do Chapecó") |
| Private corporation |
| Indirect 51% |
| Santa Catarina and Rio Grande do Sul | 1 Hydroelectric |
| 855 MW |
| 436 MW | |
Campos Novos Energia S.A.("ENERCAN") |
| Private corporation |
| Indirect 48,72% |
| Santa Catarina |
| 1 Hydroelectric |
| 880 MW |
| 429 MW |
CERAN - Companhia Energética Rio das Antas ("CERAN") |
| Private corporation |
| Indirect 65% |
| Rio Grande do Sul |
| 3 Hydroelectric |
| 360 MW |
| 234 MW |
BAESA - Energética Barra Grande S.A.("BAESA") |
| Publicly-quoted corporation |
| Indirect 25,01% |
| Santa Catarina and Rio Grande do Sul | 1 Hydroelectric |
| 690 MW |
| 173 MW | |
Centrais Elétricas da Paraíba S.A. ("EPASA") |
| Private corporation |
| Indirect 52.75% |
| Paraíba |
| 2 Thermals |
| 342 MW |
| 180 MW |
Paulista Lajeado Energia S.A.("Paulista Lajeado") |
| Private corporation |
| Indirect 59,93%** |
| São Paulo |
| 1 Hydroelectric |
| 903 MW |
| 63 MW |
CPFL Renováveis Energias S.A .("CPFL Renováveis") |
| Publicly-quoted corporation |
| Indirect 63% |
| (***) |
| (***) |
| (***) |
| (***) |
|
|
|
|
|
|
|
|
|
|
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|
|
(*) SHP - Small Hydroelectric Power Plant (**) Paulista Lajeado has a 7% participation in the installed power of Investco S.A. (***) Further details about corporate reestructuring and CPFL Renováveis activities are described in note 1.1. | ||||||||||||
F - 8
Commercialization and Services |
| Company Type |
| Core activity |
| Equity Interest |
CPFL Comercialização Brasil S.A. ("CPFL Brasil") |
| Private corporation |
| Energy commercialization, consultancy and advisory services to agents in the energy sector | Direct 100% | |
Clion Assessoria e Comercialização de Energia Elétrica Ltda. ("CPFL Meridional") |
| Limited company |
| Commercialization and provision of energy services |
| Indirect 100% |
CPFL Comercialização Cone Sul S.A. ("CPFL Cone Sul") |
| Private corporation |
| Energy commercialization |
| Indirect 100% |
CPFL Planalto Ltda. ("CPFL Planalto") |
| Limited company |
| Energy commercialization |
| Direct 100% |
CPFL Serviços, Equipamentos, Industria e Comércio S.A. ("CPFL Serviços") |
| Private corporation |
| Manufacturing, commercialization, rental and maintenance of electro-mechanical equipment and service provision | Direct 100% | |
Chumpitaz Serviços S.A. ("Chumpitaz") |
| Private corporation |
| Provision of administrative services |
| Direct 100% |
CPFL Atende Centro de Contatos e Atendimento Ltda. ("CPFL Atende") |
| Limited company |
| Provision of telephone answering services |
| Direct 100% |
Other |
| Company Type |
| Core activity |
| Equity Interest |
CPFL Jaguariuna S.A. ("CPFL Jaguariuna") |
| Private corporation |
| Venture capital company |
| Direct 100% |
Companhia Jaguari de Geração de Energia ("Jaguari Geração") |
| Private corporation |
| Venture capital company |
| Direct 100% |
Chapecoense Geração S.A. ("Chapecoense") |
| Private corporation |
| Venture capital company |
| Indirect 51% |
CPFL Bio Anicuns S.A. ("Anicuns") |
| Private corporation |
| Energy generation studies and projects |
| Indirect 100% |
CPFL Bio Itapaci S.A ("Itapaci") |
| Private corporation |
| Energy generation studies and projects |
| Indirect 100% |
Sul Geradora Participações S.A. ("Sul Geradora") |
| Private corporation |
| Venture capital company |
| Indirect 99.95% |
1.1 Corporate restructuring
CPFL Energia Renováveis S.A. (CPFL Renováveis)
On April 19, 2011,the Company signed an agreement with the shareholders of ERSA Energias Renováveis S.A. (Ersa) to merge renewable energy assets and projects held in its subsidiaries (in the case of CPFL, the assets of the subsidiaries CPFL Geração and CPFL Brasil) including wind farms, biomass and small hydroelectric power plants. After a series of planned restructurings, CPFL Geração and CPFL Brasil have joined the shareholders of ERSA, as majority shareholders, resulting in the creation of CPFL Energias Renováveis S.A.
The objective of the association was to consolidate the experience of both groups in the renewable generation sources sector, thereby obtaining synergies by combining their operations and an improved structure for developing their business.
On June 21 and November 1st, 2011, in Resolution 2,967/2011 and 3,182/2011, published in the Official Gazette of the Federal Executive – DOU, ANEEL authorized the restructuring which involved the following four stages for the CPFL Group companies involved in the project:
Stage 1: Transfer of CPFL Geração's small hydroelectric power plants - SHPs to the following SPCs (Special Purpose Companies) controlled by CPFL Geração: MOHINI Empreendimentos e Participações Ltda. – “Mohini”; JAYADITYA Empreendimentos e Participações Ltda – “Jayaditya”; and CHIMAY Empreendimentos e Participações Ltda. – “Chimay”. This stage was approved on July 18, 2011 by the subsidiaries CPFL Geração, CPFL Brasil and SMITA;
Stage 2: Increase of the capital of Smita Empreendimentos e Participações S.A. (SMITA) through the contribution by CPFL Geração and CPFL Brasil of their interests in renewable generation sources SPCs, including the Mohini, Jayaditya and Chimay SPCs, which received theCPFL Geração`s small hydroelectric power plantsat stage 1. This stage was alsoapproved on July 18, 2011 by the subsidiaries CPFL Geração, CPFL Brasil and SMITA;
Stage 3: Merger of SMITA by ERSA, whereby CPFLGeração and CPFL Brasil became shareholders in that company, which took the name of CPFL Energias Renováveis S.A. This stage wasapproved on August 24, 2011 and CPFL Energia now indirectly holds 54.50% of CPFL Renováveis, through its subsidiaries CPFL Geração (43.65%) and CPFL Brasil (10.85%). Consequently, CPFL Renováveis has been consolidated in the CPFL Energia’s consolidated financial statements since August 1, 2011.
F - 9
Stage 4: The acquisition of Jantus SL (“Jantus”) by the subsidiary CPFL Renováveis was completed on December 19, 2011; CPFL Renováveis received a capital contribution of R$ 823 million from the subsidiary CPFL Brasil to close the transaction. As from that date, CPFL Energia indirectly holds a 63.00% interest in the subsidiary CPFL Renováveis, through CPFL Geração (35.49%) and CPFL Brasil (27.51%). For further details of the accounting effects, see Note 14.4).
CPFL Renováveis is an independent energy producerfocused exclusively on the Brazilian market for electric energy generated from electric from renewable sources, through the development, construction and operation of small (up to 30 MW) and medium (up to 200 MW) plants, such as small hydropower plants (SHPs), wind and biomass plants.
At December 31, 2011, CPFL Renováveis was comprised of a portfolio of projects for installed capacity of 1,416.9 MW, as follows:
· Hydropower generation: 34 SHP’s operational (306.7 MW) and 1 SHP under construction (20 MW);
· Wind power energy generation: 4 projects operational (210 MW) and 21 projects under construction (550.2 MW);
· Biomass energy generation: 3 plants operations (135 MW) and 4 under construction (195 MW).
( 2 )PRESENTATION OF THE FINANCIAL STATEMENTS
2.1 Basis of preparation
The consolidated financial statements were prepared and are presented in full conformity with the International Financial Reporting Standards– IFRS, issued by the International Accounting Standard Board – IASB.
The consolidated financial statements were authorized for issue by the Board of Directors on March 29, 2012.
2.2 Basis of measurement
The financial statements have been prepared on the historic cost basis except for the following material items recorded in the balance sheets: i) derivative financial instruments measured at fair value, ii) financial instruments at fair value through profit or loss, iii) available-for-sale financial assets measured at fair value, iv) property, plant and equipment adjusted to reflect the “deemed cost” on the transition date, and v) actuarial assets, recognition of which is limited to the present value of the economic benefits available in the form of reimbursements or future reductions in contributions to the plan.
2.3 Use of estimates and judgments
The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.
By definition, the resulting accounting estimates are rarely the same as the actual results. Accordingly, Company Management reviews the estimates and assumptions on an ongoing basis. Adjustments derived from revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Information about assumptions and estimate that are subject to a greater degree of uncertainty andinvolve the risk of resulting in a material adjustment if these assumptions and estimates suffer significant changes during the next financial year is included in the following notes:
F - 10
· Note 9 – Deferred tax credits and debits;
· Note 11 – Financial concession asset;
· Note 14 – Intangible assets;
· Note 18 – Private Pension Fund;
· Note 21 – Provisions for contingencies, and
· Note 33 – Financial instruments and operating risks.
2.4 Functional currency and presentation currency
The Company’s functional currency is the Brazilian Real, and the individual and consolidated financial statements are presented in thousands of reais. Figures are rounded only after addition of the amounts. Consequently, when added, the amounts shown in thousands of reais may not match with the rounded totals.
2.5 Basis of consolidation:
(i) Business combinations
The Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. If the excess is negative, a gain arising from the purchase agreement is recognized immediately in profit or loss for the period.
(ii) Subsidiaries and jointly-owned entities:
The financial statements of subsidiaries and jointly-owned entities (joint ventures) are included in the consolidated financial statements from the date that total or shared control commences until the date that control ceases.
A jointly controlled operation is a venture directly or indirectly controlled together with other investors, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions.
The accounting policies of subsidiaries and jointly controlled entities taken into consideration in consolidation are aligned with the Company's accounting policies.
The consolidated financial statements include the balances and transactions of the Company and its subsidiaries. The balances and transactions of assets, liabilities, income and expenses have been fully consolidated for fully owned subsidiaries and proportionately consolidated for the jointly-owned entities.
Intra-group balances and transactions, and any income and expenses derived from these transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
Observing the conditions described above, the amount related to non-controlling interests is shown in shareholders' equity after the statement of income for the year in each year presented.
The combined balances of the jointly-controlled entities at December 31, 2011, 2010 and 2009 are as follows:
F - 11
December 31, 2011 | December 31, 2010 | December 31, 2009 | |||
Current assets | 130,850 |
| 140,701 |
| |
Non current assets | 3,190,591 |
| 3,086,595 |
| |
Current liabilities | 270,721 |
| 162,333 |
| |
Non current liabilities | 2,056,144 |
| 2,224,208 |
| |
Shareholders equity | 994,577 |
| 840,755 |
| |
|
|
|
| ||
Gross operating revenues | 656,527 |
| 397,462 | 260,630 | |
Net operating revenues | 603,745 |
| 365,394 | 240,275 | |
Net income | 83,069 |
| 36,363 | 83,240 |
(iii) Acquisition of non-controlling interest
Accounted for as transactions within equity holders and therefore no goodwill is recognized as a result of such transactions.
2.6 Segment information:
An operating segment is a component of the Company (i) that engages in operating activities from which it may earn revenues and incur expenses, (ii) whose operating results are regularly reviewed by Management to make decisions about resources to be allocated and assess the segment's performance, and (iii) for which discrete financial information is available.
Company Management bases strategic decisions on reports, segmenting the business into:
· Until 2010, into electric energy distribution activities (“Distribution”); (ii) electric energy generation activities (“Generation”); (iii) energy commercialization and service provision activities (“Commercialization”); and (iv) other, basically corresponding to corporate services and other activities not listed in the previous items.
· A new operating segment was created in 2011, from August 1, as a result of the association with ERSA and the acquisition of Jantus shares, to segregate the activities related to renewable generation sources (see notes 1 and 14.4).
Presentation of the operating segments includes items directly attributable to them, such as allocations required, including intangible assets.
2.7 Information on Corporate Interests
The interests directly or indirectly held by the Company in the subsidiaries and jointly-owned entities are described in Note 1. Except for the (i) jointly-owned entities ENERCAN, BAESA, Foz do Chapecó and EPASA, which are consolidated proportionately, and (ii) the investment in Investco recorded at cost by the subsidiary Paulista Lajeado, the other units are fully consolidated.
As of December 31, 2011, 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.
2.8 Value added statements:
The Company prepared individual and consolidated value added statements (“DVA”) as additional financial information.
( 3 ) SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
F - 12
3.1 Service concession arrangements:
IFRIC 12 “Concession Agreements” establishes general guidelines for the recognition and measurement of obligations and rights related to concession arrangements and applies to situations in which the granting power controls or regulates which services the concessionaire should provide with the infrastructure, to whom the services should be provided and at what price, and controls any significant residual interest in the infrastructure at the end of the concession period.
These definitions having been attended to, the infrastructure of distribution concessionaires is segregated and moved forward from the time of construction, complying with the provisions of the of the IFRS standards, so that the financial statements record (i) an intangible asset corresponding to the right to operate the concession and collect from the users of public utilities, and (ii) a financial asset corresponding to the unconditional contractual right to receive cash (compensation) by transferring control of the assets to the grantor at the end of the concession.
The value of the concession financial assets is determined at fair value, based on the remuneration of the assets established by the regulatory authority. The financial asset is classified as available-for-sale and is restated and amortized annually in accordance with the adjustment of its fair value, against Other Comprehensive Income – Financial Instruments in equity.
The remaining amount is registered in intangible assets and corresponds to the right to charge consumers for electric energy distribution services, amortized in accordance with the consumption pattern that reflects the estimated economic benefit to the end of the concession.
Provision of infrastructure construction services is registered in accordance with IAS 11 – Construction Contracts, against a financial asset corresponding to the amount subject to compensation. Residual amounts are classified as intangible assets and will be amortized over the concession period in accordance with the economic pattern against which the revenue from consumption of electric energy is collected.
Because (i) the tariff model that does not provide for a profit margin for the infrastructure construction activity, (ii) the way in which the subsidiaries manage the building by using a high level of outsourcing, and (iii) there is no provision for gains on construction in the Company‘s business plans, management is of the opinion that the margins on this operation are irrelevant, and therefore no additional value to the cost is considered in the composition of the revenue. The revenue and construction costs are therefore presented in profit or loss for the year at the same amounts.
3.2 Financial instruments:
- Financial assets:
Financial assets are recognized initially on the date that they are originated or on trade date at which the Company or its subsidiaries become one of the parties to the contractual provisions of the instrument. Derecognition of a financial asset occurs when the contractual rights to the cash flows from the asset expire or when the risks and rewards of ownership of the financial asset are transferred. The Company and its subsidiaries hold the following main financial assets:
i. Classified at fair value through profit or loss: these assets held for trading or designated as such upon initial recognition. The Company and its subsidiaries manage such assets and make purchase and sale decisions based on their fair value in accordance with their documented risk management or investment strategy. These financial assets are measured at fair value, and changes therein are recognized in profit or loss for the year.
The main financial assets classified by the Company and its subsidiaries in this category are: (i) bank balances and financial investments (Note 5), (ii) marketable securities (Note 7) and (iii) derivatives (Note 34.d).
ii. Held-to-maturity: these are assets that the Company and its subsidiaries have the positive intent and ability to hold to maturity. Held-to-maturity financial assets are recognized initially at fair value and subsequent to initial recognition are measured at recognized cost using the effective interest method, less any impairment losses.
F - 13
The Company and its subsidiaries classified in this category: (i) the security receivable from CESP and (ii) the short-term financial investments required by financing contracts of the indirect subsidiary CPFL Renováveis (Note 7).
iii. Loans and receivables: these are assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value and, subsequent to initial recognition, measured at recognized cost using the effective interest method, less any impairment losses.
The main financial assets of the Company and its subsidiaries classified in this category are: (i) consumers, concessionaires and licensees (Note 6), and (ii) other credits (Note 12).
iv. Available-for-sale: these are non-derivative financial assets that are designated as available-for-sale or that are not classified in any of the previous categories. Subsequent to initial recognition, interest calculated by the effective rate method is recognized in profit or loss as part of the net operating income. Changes for recognition at fair value are recognized in the revaluation reserve in equity. The accumulated result in other comprehensive income is transferred to profit or loss when the asset is realized.
The main asset of the Company and its subsidiaries classified in this category is the right to compensation at the end of the concession. The designation of this instrument as available-for-sale is due to its non-classification in the previous categories described. Since Management believes that the compensation will be made at least in accordance with the current tariff pricing model, this instrument cannot be recorded as loans and receivables as the compensation is not fixed or determinable, due to the uncertainty in relation to impairment for reasons other than deterioration of the credit. The main uncertainties relate to the risk of non-recognition of part of these assets by the regulatory authority and their replacement values at the end of the concession.
- Financial liabilities:
Financial liabilities are initially recognized on the date that they are originated or on the trade date at which the Company or its subsidiaries become a party to the contractual provisions of the instrument. The Company and its subsidiaries have the following main financial liabilities:
i. Measured at fair value through profit or loss: these are financial liabilities that are: (i) held for short-term trading, (ii) designated at fair value in order to evaluate the effects of recognition of income and expenses to obtain more relevant and consistent accounting information, or (iii) derivatives. These liabilities are registered at fair value and for any change in the subsequent measurement of the fair value, set through profit or loss.
The Company and its subsidiaries classified the following financial liabilities in this category: (i) certain foreign currency debts (Note 17) and (ii) derivatives (Note 34).
ii. Not measured at fair value through profit or loss: these other financial liabilities that are not classified in any of the previous categories. They are measured initially at fair value less any attributable transaction cost and subsequently measured at recognized cost by the effective interest method.
The main financial liabilities classified in this category are: (i) suppliers (Note 16), (ii) loans and financing (Note 17), (iii) debt charges (Note 17); (iv) debenture charges (Note 18); (v) debentures (Note 18); (vi) public utilities (Note 23); and (vii) other accounts payable (Note 24).
The Company accounts for warranties when issued to non-controlled entities or when the warranty is granted at a percentage higher than the Company's interest to cover commitments of jointly-controlled subsidiaries. Such warranties are initially measured at fair value, by (i) a liability corresponding to the risk assumed of non-payment of the debt, which is amortized against financial income simultaneously and in proportion with amortization of the debt, and (ii) an asset equivalent to the right to compensation by the guaranteed party or a prepaid expense under the warranties, which is amortized by receipt of cash from other shareholders or on a straight-line basis against financial expense over the term of the warranty. After initial recognition, the warranties are assessedperiodically in terms of the probability of default of the counterparties guaranteed, in accordance with IAS 37.
F - 14
Financial assets and liabilities are offset and the net amount presented when, and only when, there is a legal right to offset the amounts and the intent to settle on a net basis or to realize the asset and settle the liability simultaneously.
- Capital
Common shares are classified as equity. Additional costs directly attributable to and share options are recognized as a deduction from equity, net of any tax effects.
3.3 Lease agreements:
The Company establishes at the inception of an agreement whether such arrangement is or contains a lease. A specific asset is the subject of a lease if fulfillment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the lessor the right to control the use of the underlying asset.
Leases in which substantially all the risks and rewards are with thelessor are classified as operating leases. Payments/receipts made under operating leases are recognized as expense/revenue in profit or loss on a straight-line basis, over the term of the lease.
Leases which involve not only the right to use assets, but also substantially transfer the risks and rewards to the lessee, are classified as finance leases.
In finance leases in which the Company or its subsidiaries act as lessee, the assets are capitalized to property, plant and equipment at the inception of the agreement against a liability measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. The property, plant and equipment is depreciated in accordance with the accounting policy applicable to that asset.
If the Company or its subsidiaries are the lessor in a finance lease, the investment is initially recognized at the construction/acquisition cost of the asset.
In both cases, the financial income/expense is recognized in profit or loss over the term of the lease so as to produce a constant rate of interest on the remaining balance of the investment/liability.
3.4 Property, plant and equipment:
Items of property, plant and equipment are measured at acquisition, construction or formation cost less accumulated depreciation and, if applicable, accumulated impairment losses. Cost also includes any other costs attributable to bringing the assets to the place and in a condition to operate as intended by management, the cost of dismantling and removing the items and restoring the site on which they are located and capitalized borrowing costs on qualifying assets.
The assets were measured at the transition date (January 1, 2009) in accordance with the IFRS rules by segregation into two groups:
- Assets measured at deemed cost at the transition date: model adopted for assets built and put into long-term service when it is not possible to reconstruct the cost formation or where the cost of the survey is of no benefit in presentation of the financial statements. The cost of these items at the transition date was therefore determined in accordance with market prices (“deemed cost”) and the revalued amounts are presented for both cost and accumulated depreciation. The effects of the deemed cost increased property, plant and equipment against equity, net of related tax effects.
- Assets measured at historic cost: model adopted by the Company for recently built assets where the basis for cost formation can be easily confirmed and the values at historic cost approximate the respective market values. In such cases, the subsidiaries performed an analysis to ensure that the cost formation is in accordance with current accounting practices.
F - 15
The replacement cost of items of property, plant and equipment is recognized if it is probable that it will involve economic rewards for the subsidiaries and if the cost can be reliably measured, and the value of the replaced item is written off. Maintenance costs are recognized in profit or loss as they are incurred.
Depreciation is calculated on a straight-line basis, at annual rates of 2% to 20%, taking into consideration the estimated useful life of the assets, as instructed and defined by the regulatory authority. In the case of generators subject to regulation by Decree 2003, of 1996 (the subsidiary CERAN and the jointly-controlled subsidiaries ENERCAN, BAESA and Foz do Chapecó), the assets are depreciated at the rates established by the regulatory authority, provided they do not exceed the term of the concession.
Gains and losses derived from disposal of an item of property, plant and equipment are determined by comparing the resources produced by disposal with carrying amount of the asset, and are recognized net together with other operating income/expense.
Assets and facilities used in the regulated activities are tied to these services and may not be removed, disposed of, assigned or pledged in mortgage without the prior and express authorization of ANEEL. ANEEL regulates the release of Public Electric Energy Utility concession assets, granting prior authorization for release of assets of no use to the concession, intended for disposal and determines that the proceeds of the disposal be deposited in a tied bank account for use in theconcession.
3.5 Intangible assets:
Includes rights related to non-physical assets such as goodwill, concession exploration rights, software and rights-of-way.
Goodwill that arises the acquisition of subsidiaries is measured at the difference between the amount paid and/or payable for acquisition of a business and the net fair value of the assets and liabilities of the subsidiary acquired.
Goodwill is measured at cost less accumulated impairment losses. Goodwill and other intangible assets with indefinite useful lives are not subject to amortization and tested annually for impairment.
Negative goodwill are registered as gains in profit or loss at the time of the acquisition.
Intangible assets corresponding to the right to operate concessions can have three separate origins, based on the following arguments:
i. Acquisitions through business combinations: the portion of goodwill arising from business combinations that corresponded to the right to operate the concession is stated as an intangible asset. Such amounts are amortized based on the net income curves projected for the concessionaires for the remaining term of the concession.
ii. Investments in infrastructure (Application of IFRIC 12 – Service concession arrangements): Under the electric energy distribution concession arrangements with the subsidiaries, the intangible asset registered corresponds to the concessionaires' right to collection uses for use of the concession infrastructure. Since the exploration term is defined in the agreement, intangible assets with defined useful lives are amortized over the term of the concession in proportion to a curve that reflects the consumption pattern in relation to the anticipated economic rewards. For further information see Note 3.1.
Components of the infrastructure are directly tied to the Company’s operations and may not be removed, disposed of, assigned or pledged in mortgage without the prior and express authorization of ANEEL. ANEEL regulates the release of Public Electric Energy Utility concession assets, granting prior authorization for release of assets of no use to the concession, intended for disposal and determines that the proceeds of the disposal be deposited in a tied bank account for use in the concession.
F - 16
iii. Public utilities: certain generation concessions were granted against payment to the federal government for use of a public utility. This obligation was registered on the date of signing the respective agreements, at present value, against the intangible assets account. These amounts, capitalized by interest incurred on the obligation to the start-update, are amortized on a straight-line basis over the remaining term of the concession.
3.6 Impairment
- Financial assets:
A financial asset not measured at fair value through profit or loss is reassessed at each reporting date to determine whether there is objective evidence that it is impaired. Impairment can occur after the initial recognition of the asset and have a negative effect on the estimated future cash flows.
The Company and its subsidiaries consider evidence of impairment of receivables and held-to-maturity investment securities for both specific assets and at a collective level for all significant securities. Receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together the securities with similar risk characteristics.
In assessing collective impairment the Company uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management's judgment as to whether the assumptions and current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historic trends.
An impairment loss of a financial asset is recognized as follows:
· Amortized cost: as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the assets original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event indicates the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
· Available-for-sale: by the difference between the acquisition cost, net of any principal repayment and amortization of the principal, and the current fair value, less any impairment loss previously recognized in profit or loss. Losses are recognized in profit or loss.
If an increase (gain) is identified in periods subsequent to recognition of the loss, then the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale financial asset is recognized in Other Comprehensive Income in equity.
- Non-financial assets:
Non-financial assets that have indefinite useful lives, such as goodwill, are tested annually to check that the asset's carrying amount does not exceed the recoverable value. Other assets subject to amortization are tested for impairment whenever events or changes in circumstance indicate that the carrying amount may be impaired.
An impairment loss is recognized if the carrying amount of an asset exceeds its estimated recoverable amount, which is the greater of its value in use and its fair value less costs to sell.
The methods used to assess impairment include tests based on the asset's value in use. In such cases, the assets (e.g. goodwill and intangible assets of concession) are segregated and grouped together at the lowest level that generates identifiable cash flows (the "cash generating unit", or CGU). If there is an indication of impairment, the loss is recognized in profit or loss. Except in the case of goodwill, where the loss cannot be reversed in the subsequent period, impairment losses are assessed annually for any possibility to reverse the impairment.
Goodwill included in the carrying amount of an investment in an associate, as it is not recognized individually, is tested with the investment, as if it were a single asset.
F - 17
3.7 Provisions
A provision is recognized if, as a result of a past event, there is a legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If applicable, provisions are determined by discounting the expected future cash flows at a rate that reflects current market assessment and the risks specific to the liability.
3.8 Employee benefits
The subsidiaries have post-employment benefits and pension plans, recognized by the accrual method in accordance with IAS 19 “Employee benefits”, and are regarded as sponsors of these plans. Although the plans have particularities, they have the following characteristics:
i. Defined distribution plan: a post-employment benefit plan under which the Company pays fixed contributions into a separate entity and will have no liability for the actuarial deficits of this plan. The obligations are recognized as an expense in profit or loss in the periods during which the services are rendered.
ii. Defined benefit plan: The net obligation is calculated as the difference between the present value of the actuarial obligation based on assumptions, biometric studies and interest rates in line with market rates, and the fair value of the plan assets of the reporting date. The actuarial liability is calculated annually by independent actuaries using the projected unit credit method. The subsidiaries use the corridor method to avoid fluctuations in the macroeconomic conditions distorting the profit or loss for the period. The accumulated differences between the actuarial estimates and the actual results are therefore not recognized in the financial statements unless they are in excess of 10% of the greater of the plan liabilities and assets. Unrecognized gains and losses in excess of this limit are recognized in profit or loss for the year over the estimated remaining service time of the employees. If the plan records a surplus and it becomes necessary to recognize an asset, recognition is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of reimbursements or future reductions in contributions to the plan.
3.9 Dividends and Interest on shareholders’ equity
Under Brazilian law, the Company is required to distribute a mandatory minimum annual dividend of 25% of net income adjusted in accordance with the Company´s bylaws. According to international accounting practices, IAS 10, a provision may only be made for the minimum mandatory dividend, and dividends declared but not yet approved are only recognized as a liability in the financial statements after approval by the competent body. They will therefore be held in equity, in the “additional dividend proposed” account, as they do not meet the criteria of present liability at the reporting date.
As established in the Company's bylaws and in accordance with current Corporate law, the Board of Directors is responsible for declaring interim dividends and interest on shareholders’ equity determined in a half-yearly balance sheet. Interim dividends declared and interest on shareholders´ equity at the base date of June 30 are only recognized as a liability in the Company's financial statement after the date of the Board's decision.
In accordance with this accounting practice, interest on shareholders’ equity is no longer shown in the statement of income and the effects are only stated in changes in equity and in the effective income tax and social contribution rates.
3.10 Revenue recognition
Operating income in the course of ordinary activities of the subsidiaries is measured at the fair value of the consideration received or receivable. Operating revenue is recognized when persuasive evidence exists that the most significant risks and rewards have been transferred to the buyer, when it is probable that the financial and economic rewards will flow to the entity that the associated costs can be reliably estimated, and the amount of the operating income can be reliably measured.
F - 18
Revenue from distribution of electric energy is recognized when the energy is billed. Unbilled income related to the monthly billing cycle is appropriated based on the actual amount of energy provided in the month and the annualized loss rate. Historically, the difference between the unbilled revenue and the actual consumption, which is recognized in the subsequent month, has not been material. Revenue from energy generation sales is accounted for based on the assured energy and at tariffs specified in the terms of the contract or the current market price, as applicable. Energy commercialization revenue is accounted for based on bilateral contracts with market agents and duly registered with the Electric Energy Commercialization Chamber - CCEE. No single consumer represents 10% or more of the total billing.
Service revenue is recognized when the service is effectively provided, under a service agreement between the parties.
Revenue from construction contracts is recognized by the percentage of completion method (“fixed-price”), and losses are recognized in profit or loss as incurred.
3.11 Income tax and Social contribution
Income tax and Social contribution expense is calculated and recognized in accordance with the legislation in force and comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to an item recognized directly in equity or in the Other Comprehensive Income in equity, which is recognized net of tax effects.
Current tax is the expected tax payable or receivable/to be offset on the taxable income or loss for the year. Deferred tax is recognized for temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the equivalent amounts used for tax purposes.
The Company and certain subsidiaries recorded in their financial statements the effects of tax loss carry forwards and temporary non-deductible differences, based on projections of future taxable profits, approved by the Boards of Directors and examined by the Fiscal Council. The subsidiaries also recognized tax credits on merged goodwill, which is amortized in proportion to the individual projected net incomes for the remaining term of each concession agreement.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.
Deferred income tax and social contribution assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
3.12 Earnings per share
Basic earnings per share is calculated by dividing the profit or loss attributable to the Company`s controlling shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by the above-mentioned weighted average number of shares outstanding, adjusted for the effects of all dilutive potential convertible notes for the reporting periods, in accordance with IAS 33.
3.13 Regulatory assets and liabilities
In accordance with the interpretation of IASB/IFRIC, regulatory assets and liabilities cannot be recognized in the financial statements of the distribution subsidiaries, as they do not meet the requirements for assets and liabilities described in the Framework for the Preparation and Presentation of Financial Statements. The rights or offsetting are therefore only reflected in the financial statements to the extent that the electric energy is consumed by the captive customers.
3.14 New standards and interpretations not yet adopted
Certain standards, amendments to the IFRS standards and interpretations issued by the IASB not yet effective for the year ended December 31, 2011, are listed below:
F - 19
· IAS 1 Financial Statement Presentation
· IAS 12 – Income Taxes
· IAS 19 Employee Benefits
· IAS 27 – Consolidated and Separate Financial Statements
· IAS 28 – Investments in Associates
· IFRS 7 – Financial Instruments: Disclosures
· IFRS 9 Financial Instruments
· IFRS 10 Consolidated Financial Statements
· IFRS 11 Joint Arrangements
· IFRS 12 Disclosure of Interests in Other Entities
· IFRS 13 Fair Value Measurement
The Company is analyzing the impact of these new standards on its financial statements.
( 4 ) DETERMINATION OF FAIR VALUES
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
- Property, plant and equipment and intangible assets
The fair value of property, plant and equipment and intangible assets recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between knowledgeable and willing parties under normal market conditions. The fair value of items of property, plant and equipment is based on the market approach and cost approaches using quoted market prices for similar items when available and replacement cost when appropriate.
- Financial instruments
Financial instruments measured at fair values were recognized based on quoted prices in an active market, or assessed using pricing models, applied individually for each transaction, taking into consideration the future payment flows, based on the conditions contracted, discounted to present value at market interest rate curves, based on information obtained from the BM&F, BOVESPA and ANDIMA websites, when available.
Financial assets classified as available-for-sale refer to the right to compensation to be paid by the Federal Government regarding the assets of the distribution concessionaires when the concession contract is over. The methodology adopted for marking these assets to market is based on the tariff review process for distributors. This review, conducted every four or five years according to each concessionaire, consists of revaluation at market price of the distribution infrastructure. This valuation basis is used for pricing the tariff, which is increased annually up to the next tariff review, based on the parameter of the main inflation indices.
Although the methodology and criteria for valuation of the compensation to the Shareholders´Company when the concession contract will get ended has not yet been defined by the Federal Government, company management believes that it will be based at least on the tariff pricing model. Accordingly, at the time of the tariff review, each concessionaire adjusts the position of the financial asset base for compensation at the amounts ratified by the regulatory authority and uses the General Market Price Index - IGP-M as best estimate for adjusting the original base to the fairvalue at subsequent dates, in conformity with the Tariff Review process.
F - 20
( 5 ) CASH AND CASH EQUIVALENTS
|
| December 31, 2 | December 31, | |
|
|
|
|
|
Bank balances |
| 147,126 |
| 361,749 |
|
|
|
|
|
Short-term financial investments | 2,552,710 |
| 1,201,148 | |
|
|
|
|
|
Total |
| 2,699,837 |
| 1,562,897 |
|
|
|
|
|
Short-term financial investments are short-term transactions with institutions operating in the Brazilian financial market, with daily liquidity, low credit risk and average interest of 100% of the Interbank deposit rate (CDI).
F - 21
( 6 ) CONSUMERS, CONCESSIONAIRES AND LICENSEES
In the consolidated financial statements, the balance derives mainly from the supply of electric energy. The following table shows the breakdown at December 31, 2011 and 2010:
|
| Amounts |
| Past due |
| Total | ||||
|
| coming due |
| until 90 days |
| > 90 days |
| December 31, 2011 | December 31, 2010 | |
Current |
|
|
|
|
|
|
|
|
|
|
Consumer classes |
|
|
|
|
|
|
|
|
|
|
Residential |
| 333,396 |
| 216,223 |
| 24,317 |
| 573,936 |
| 502,539 |
Industrial |
| 142,520 |
| 52,821 |
| 32,133 |
| 227,474 |
| 232,943 |
Commercial |
| 133,522 |
| 45,758 |
| 15,990 |
| 195,270 |
| 169,955 |
Rural |
| 33,898 |
| 8,240 |
| 1,474 |
| 43,612 |
| 39,094 |
Public administration |
| 28,758 |
| 4,954 |
| 889 |
| 34,601 |
| 32,614 |
Public lighting |
| 27,988 |
| 1,957 |
| 12,325 |
| 42,270 |
| 41,749 |
Public utilities |
| 36,275 |
| 4,456 |
| 829 |
| 41,560 |
| 40,055 |
Billed |
| 736,357 |
| 334,409 |
| 87,957 |
| 1,158,723 |
| 1,058,949 |
Unbilled |
| 427,661 |
| - |
| - |
| 427,661 |
| 465,077 |
Financing of Consumers' Debts |
| 89,174 |
| 9,857 |
| 37,851 |
| 136,882 |
| 112,141 |
Free energy |
| 3,674 |
| - |
| - |
| 3,674 |
| 3,727 |
CCEE transactions |
| 17,961 |
| - |
| - |
| 17,961 |
| 23,932 |
Concessionaires and Licensees |
| 207,204 |
| - |
| - |
| 207,204 |
| 193,852 |
Provision for doubtful accounts |
| - |
| - |
| (85,318) |
| (85,318) |
| (80,692) |
Other |
| 7,493 |
| - |
| - |
| 7,493 |
| 39,086 |
Total |
| 1,489,523 |
| 344,266 |
| 40,490 |
| 1,874,280 |
| 1,816,073 |
|
|
|
|
|
|
|
|
|
|
|
Non current |
|
|
|
|
|
|
|
|
|
|
Financing of Consumers' Debts |
| 140,999 |
| - |
| - |
| 140,999 |
| 154,436 |
CCEE transactions |
| 41,301 |
| - |
| - |
| 41,301 |
| 41,301 |
Total |
| 182,300 |
| - |
| - |
| 182,300 |
| 195,738 |
|
|
|
|
|
|
|
|
|
|
|
Financing of Consumers' Debts -Refers to the negotiation of overdue receivables from consumers, principally public organizations. Payment of some of these credits is guaranteed by the debtors, in the case of public entities, by pledging the bank accounts through which their ICMS (VAT) revenue is received. Allowances for doubtful accounts are based on best estimates of the subsidiaries' management for unsecured amounts and losses regarded as probable.
Electric Energy Trading Chamber (CCEE) transactions -The amounts refer to the sale of electric energy on the short-term market. The noncurrent amount receivable mainly comprises: (i) legal adjustments, established as a result of suits brought by agents in the sector; (ii) lawsuits challenging the CCEE accounting for the period from September 2000 to December 2002; and (iii) provisional accounting entries established by the CCEE. The subsidiaries consider that there is no significant risk on the realization of these assets and consequently no provision was posted in the accounts.
Concessionaires and licensees- Refers basically to receivables in respect of the supply of electric energy to other concessionaires and licensees, mainly through our subsidiaries CPFL Geração and CPFL Brasil.
Allowance for doubtful accounts
Changes in the allowance for doubtful accounts are shown below:
F - 22
At December 31, 2009 | (81,974) |
Provision recognized | (108,663) |
Recovery of revenue | 56,995 |
Write-off of accounts receivable provisioned | 52,951 |
At December 31, 2010 | (80,692) |
Provision recognized | (116,722) |
Recovery of revenue | 46,049 |
Write-off of accounts receivable provisioned | 66,047 |
At December 31, 2011 | (85,318) |
|
|
( 7 )FINANCIAL INVESTMENTS
In 2005, through a Private Credit Agreement, the Company acquired the credit arising from the Purchase and Sale of Electric Energy Agreement between Companhia Energética de São Paulo (“CESP”) (seller) and CPFL Brasil (purchaser), referring to the supply of energy for a period of 8 years. The amounts handed over by the Company to CESP will be settled by CPFL Brasil using the funds derived from the acquisition of energy produced by that company.
At December 31, 2011, from the current balance of R$47,521, R$ 45,668 is related to parent company (R$42,533 at December 31, 2010), and noncurrent is R$ 2,854 (R$ 39,216 at December 31, 2010). The operation is subject to interest of 17.5% p.a., plus the annual variation of the IGP-M, and is amortized in monthly installments of amounts corresponding to the purchase of energy.
The amounts of R$ 72,056, R$8,272 and R$26,783 in non-current refer to financial investments required by financing contracts of the indirect subsidiaries CPFL Renováveis, BAESA and ENERCAN, respectively, and they are supposed to be maintained until such loans have been fully amortized.
F - 23
( 8 )RECOVERABLE TAXES
| December 31, 2011 | December 31, 2010 | |
Current |
|
|
|
Prepayments of social contribution - CSLL | 7,347 |
| 1,425 |
Prepayments of income tax - IRPJ | 1,349 |
| 2,791 |
Income tax and social contribution to be offset | 16,810 |
| 11,449 |
Withholding tax - IRRF | 120,390 |
| 40,804 |
IRRF on interest on equity | 31,345 |
| 30,347 |
ICMS to be offset | 69,329 |
| 72,999 |
Social integration program - PIS | 5,793 |
| 3,801 |
Contribution for Social Security financing- COFINS | 22,103 |
| 13,437 |
National Social Security Institute - INSS | 2,123 |
| 2,230 |
Other | 874 |
| 13,736 |
Total | 277,463 |
| 193,020 |
|
|
|
|
Noncurrent |
|
|
|
Social contribution to be offset - CSLL | 36,277 |
| 32,390 |
Income tax to be offset - IRPJ | 1,001 |
| 1,001 |
Social integration program - PIS | 3,299 |
| 2,855 |
Contribution for Social Security financing- COFINS | 62,302 |
| - |
National Social Security Institute - INSS | 1,339 |
| - |
ICMS to be offset | 112,423 |
| 101,380 |
Other | 74 |
| 1,340 |
Total | 216,715 |
| 138,966 |
|
|
|
|
Social contribution to be offset – In noncurrent, the balance refers to the final favorable decision in a lawsuit filed by the subsidiary CPFL Paulista. The subsidiary CPFL Paulista is awaiting the outcome of the administrative procedures for ratification of the credit with the Federal Revenue Office, in order to offset the credit.
ICMS to be offset - mainly refers to the credit recorded on acquisition of a permanent asset.
PIS and Cofins - In noncurrent, the balance refers primarily to credits recognized by the indirect subsidiaries EPASA and CPFL Renováveis in relation to the acquisition of equipment, which will be realized by depreciation of the equipment.
( 9 )DEFERRED TAXES
9.1- Breakdown of tax credits and debits:
F - 24
|
| December 31, 2011 | December 31, 2010 | |
|
|
|
|
|
Social contribution credit |
|
|
|
|
Tax loss carryforwards |
| 56,436 |
| 51,806 |
Tax benefit of merged goodwill |
| 169,062 |
| 172,256 |
Temporarily non-deductible differences |
| (112,086) |
| (12,416) |
Subtotal |
| 113,413 |
| 211,646 |
|
|
|
|
|
Income tax credit |
|
|
|
|
Tax losses |
| 165,736 |
| 143,866 |
Tax benefit of merged goodwill |
| 565,106 |
| 583,724 |
Temporarily non-deductible differences |
| (699,549) |
| (33,620) |
Subtotal |
| 31,293 |
| 693,969 |
|
|
|
|
|
PIS and COFINS credit |
|
|
|
|
Temporary non-deductible differences |
| (6,272) |
| 78 |
|
|
|
|
|
Total |
| 138,434 |
| 905,693 |
|
|
|
|
|
Total tax credit |
| 1,176,535 |
| 1,183,460 |
Total tax debit |
| (1,038,101) |
| (277,767) |
9.2 - Tax benefit of merged goodwill:
Refers to the tax credit calculated on the merged goodwill on acquisition and is recorded in accordance with CVM Instructions nº 319/99 and nº 349/01. The benefit is realized in proportion to amortization of the merged definite life intangible asset that gave rise to it, in accordance with the projected net income of the subsidiaries during the remaining term of the concession, as shown in Note 14.
|
| December 31, 2011 |
| December 31, 2010 | ||||
|
| CSLL |
| IRPJ |
| CSLL |
| IRPJ |
CPFL Paulista |
| 85,709 |
| 238,079 |
| 94,584 |
| 262,734 |
CPFL Piratininga |
| 19,404 |
| 66,584 |
| 21,274 |
| 73,002 |
RGE |
| 37,714 |
| 155,750 |
| 41,117 |
| 169,805 |
CPFL Santa Cruz |
| 3,545 |
| 11,148 |
| 4,705 |
| 14,794 |
CPFL Leste Paulista |
| 2,024 |
| 6,155 |
| 2,622 |
| 7,986 |
CPFL Sul Paulista |
| 2,944 |
| 9,183 |
| 3,767 |
| 11,758 |
CPFL Jaguari |
| 1,745 |
| 5,289 |
| 2,305 |
| 7,002 |
CPFL Mococa |
| 1,121 |
| 3,483 |
| 1,456 |
| 4,527 |
CPFL Geração |
| - |
| 28,167 |
| - |
| 30,877 |
CPFL Serviços |
| 306 |
| 847 |
| 425 |
| 1,239 |
CPFL Renováveis |
| 14,552 |
| 40,421 |
| - |
| - |
Total |
| 169,062 |
| 565,106 |
| 172,256 |
| 583,724 |
F - 25
9.3 - Accumulated balances on temporary nondeductible differences:
|
| December 31, 2011 |
| December 31, 2010 | ||||||||
|
| CSLL |
| IRPJ |
| PIS/COFINS |
| CSLL |
| IRPJ |
| PIS/COFINS |
Temporary non-deductible differences: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for contingencies |
| 19,246 |
| 54,009 |
| - |
| 18,908 |
| 52,809 |
| - |
Tariff review - remuneration base |
| 2,628 |
| 7,301 |
| 2,977 |
| - |
| - |
| - |
Private pension fund |
| 2,218 |
| 7,159 |
| - |
| 3,051 |
| 9,473 |
| - |
Allowance for doubtful accounts |
| 7,656 |
| 21,306 |
| - |
| 6,895 |
| 19,155 |
| - |
Free energy provision |
| 4,365 |
| 12,128 |
| - |
| 3,730 |
| 10,362 |
| - |
Research and Development and Energy Efficiency Programs |
| 12,642 |
| 35,118 |
| - |
| 14,611 |
| 40,579 |
| - |
Profit-sharing |
| 2,842 |
| 7,886 |
| - |
| 2,338 |
| 7,160 |
| - |
Depreciation rate difference - Revaluation |
| 8,315 |
| 23,096 |
| - |
| 9,305 |
| 25,846 |
| - |
Losses in financial investments |
| 804 |
| 2,235 |
| - |
| - |
| - |
| - |
Financial instruments |
| 376 |
| 1,045 |
| - |
| 448 |
| 1,245 |
| - |
Recognition of the concession - adjustment of intangible assets |
| (2,248) |
| (6,244) |
| - |
| (2,475) |
| (6,878) |
| - |
Reversal of regulatory assets and liabilities |
| (9,789) |
| (27,191) |
| (11,086) |
| (1,077) |
| (3,030) |
| (1,399) |
Actuarial losses on the transition of accounting practices |
| 26,162 |
| 72,964 |
| - |
| 26,718 |
| 74,215 |
| - |
Other adjustments changes in practices |
| 18,595 |
| 51,652 |
| - |
| 9,673 |
| 26,868 |
| - |
Business combination - CPFL Renováveis |
| (98,160) |
| (660,498) |
| - |
| - |
| - |
| - |
Accelerated depreciation |
| (807) |
| (2,243) |
| - |
| - |
| - |
| - |
Other |
| 3,595 |
| 7,749 |
| 1,838 |
| 3,941 |
| 9,903 |
| 1,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporarily non-deductible differences - comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of the concession - financial adjustment |
| (30,938) |
| (85,938) |
| - |
| (25,337) |
| (70,388) |
| - |
Property, plant and equipment - deemed cost adjustments |
| (79,590) |
| (221,082) |
| - |
| (83,145) |
| (230,939) |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| (112,086) |
| (699,549) |
| (6,272) |
| (12,416) |
| (33,620) |
| 78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The line “business combination” refers to the effectsof deferred tax debts on the intangible assets acquired in the CPFL Renováveis business combination. In August 2011, at the time of initial recognition of the business combination, R$ 378,606 was recorded for deferred income tax and social contribution on the appreciation of the net assets acquired at that date. Additionally, as a result of the acquisition of Jantus and Santa Luzia, the amounts of R$ 349,400 and R$ 29,977, respectively, were recorded in December 2011. The details of this transaction are provided in Note 14.4.
Expected recovery estimates
The estimate of recovery of the deferred tax credits recorded in noncurrent assets, derived from temporary non-deductible differences and tax benefit of the merged goodwill, is based on the projections of future profit or loss, approved by the Board of Directors and reviewed by the Audit Committee, in accordance with the following table:
|
|
|
2012 |
| 142,764 |
2013 |
| 110,881 |
2014 |
| 105,473 |
2015 |
| 88,505 |
2016 |
| 78,724 |
2017 A 2019 |
| 195,601 |
2020 A 2022 |
| 158,691 |
2023 A 2025 |
| 121,563 |
2026 A 2028 |
| 94,836 |
2029 A 2031 |
| 79,497 |
Total |
| 1,176,535 |
F - 26
9.4 - Reconciliation of the amounts of income tax and social contribution reported in the income statements for 2011, 2010 and 2009:
|
| |||||||||||
|
| 2011 |
| 2010 |
| 2009 | ||||||
|
| CSLL |
| IRPJ |
| CSLL |
| IRPJ |
| CSLL |
| IRPJ |
Income before taxes |
| 2,361,957 |
| 2,361,957 |
| 2,385,372 |
| 2,385,372 |
| 2,472,977 |
| 2,472,977 |
Adjustments to reflect effective rate: |
|
|
|
|
|
|
|
|
|
|
|
|
- Amortization of intangible asset acquired |
| 115,947 |
| 147,784 |
| 115,782 |
| 146,194 |
| 121,319 |
| 149,623 |
- Realization CMC |
| - |
| - |
| - |
| - |
| 13,549 |
| - |
- Tax incentives - PIIT |
| (13,480) |
| (13,480) |
| (6,058) |
| (22,380) |
| (483) |
| (483) |
- Effect of presumed profit system |
| (94,579) |
| (143,977) |
| (17,622) |
| (20,448) |
| (34,090) |
| (39,790) |
- Other permanent additions/(eliminations), net |
| 65,674 |
| 30,485 |
| 28,427 |
| (19,008) |
| 2,256 |
| (20,876) |
- Elimination Law 11.941/09 art. 4 |
| 135 |
| 541 |
| - |
| - |
| (32,143) |
| (32,143) |
Calculation base |
| 2,435,654 |
| 2,383,311 |
| 2,505,901 |
| 2,469,730 |
| 2,543,385 |
| 2,529,308 |
Statutory rate |
| 9% |
| 25% |
| 9% |
| 25% |
| 9% |
| 25% |
Tax credit result |
| (219,209) |
| (595,828) |
| (225,531) |
| (617,433) |
| (228,905) |
| (632,327) |
- Tax credit allocated |
| 9,337 |
| 26,127 |
| 4,296 |
| 13,333 |
| 20,557 |
| 56,566 |
Total |
| (209,872) |
| (569,701) |
| (221,235) |
| (604,100) |
| (208,348) |
| (575,761) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
| (197,365) |
| (538,543) |
| (200,878) |
| (554,443) |
| (138,771) |
| (366,432) |
Deferred |
| (12,507) |
| (31,157) |
| (20,357) |
| (49,657) |
| (69,577) |
| (209,329) |
Amortization of Intangible asset acquired – business combinations -Refers to the non-deductible portion of amortization of intangible assets derived from the acquisition of investees.
Tax Credit Allocated– Credit recorded by the Company on tax loss carry forwards in the light of a revision of projections, which resulted in a margin recorded to complete the accounting entries.
9.5 Unrecognized tax credits
The parent company has tax loss carryforwards of R$ 122,371 that could be recognized in the future, in accordance with reviews of the annual projections of taxable income.
The subsidiaries CPFL Renováveis and Sul Geradora have income tax and social contribution assets on tax loss carryforwards of R$ 72,158 and R$ 72,511, respectively, that were not recognized as it could not be reliable estimated whether future taxable profit will be available against which they can be utilized. There is also no prescriptive period for use of the tax loss carryforwards.
( 10 ) LEASES
The subsidiary CPFL Brasil provides services and leases equipment relating to own power production, in which it is the lessor, and the main risks and rewards of ownership of the assets are transferred to the lessees.
The essence is to lease equipment of own power production in order to attend the customers who require higher consumption of electricity at peak hours (when tariffs are higher). In addition, the company offers maintenance and operation services.
The subsidiary constructs the power generation plant with own sources at the customer’s place. Since the equipment is operating, the customer makes monthly fixed payments.
These investments are recorded at the present value of the minimum payments receivable. These payments are registered as amortization of investment and the financial revenue is recorded in the profit or loss by the terms of the contracts.
The investments produced financial revenue during 2011 were R$ 5,625 (R$ 5,363 in 2010).
F - 27
| December 31, 2011 | December 31, 2010 |
|
| ||||
Present value of the minimum payments receivable | 101,153 |
| 102,769 |
|
|
|
| |
Unrealized financial income | (72,051) |
| (71,701) |
|
|
|
| |
Gross investment | 29,102 |
| 31,068 |
|
|
|
| |
|
|
|
|
|
|
|
| |
Current | 4,581 |
| 4,754 |
|
|
|
| |
Noncurrent | 24,521 |
| 26,315 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
| Within 1 year |
| 1 to 5 years |
| Over 5 years |
| Total | |
Present value of the minimum payments receivable | 4,581 |
| 14,821 |
| 9,700 |
| 29,102 |
At December 31, 2011, there are no (i) unsecured residual amounts that benefit the lessor; (ii) provisions for uncollectible minimum lease payments receivable; or (iii) contingent payments recognized as revenue during the period.
( 11 ) FINANCIAL ASSET OF CONCESSION
At December 31, 2009 | 674,029 |
Additions | 179,501 |
Marked to market | 82,637 |
Disposal | (1,521) |
At December 31, 2010 | 934,646 |
Additions | 381,027 |
Marked to market | 63,064 |
Disposal | (2,073) |
At December 31, 2011 | 1,376,664 |
The balance refers to the fair value of the financial asset in relation to the right established in the concession arrangements of the energy distributors to receive payment on reversal of the assets at the end of the concession.
Under the current tariff model, interest on the asset is recognized in profit or loss on billing of the consumers and realized on receipt of the electric energy bills. The difference in relation to the adjustment to market value is recognized against the Other comprehensive income – Financial Instruments in equity.
( 12 ) OTHER CREDITS
F - 28
|
| Current |
|
|
| Noncurrent | ||
|
| December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||
Receivables from venturers | 27 |
| 17,155 |
| - |
| - | |
Advances - Fundação CESP | 15,518 |
| 7,995 |
| - |
| - | |
Advances to suppliers |
| 37,951 |
| 16,677 |
| - |
| - |
Pledges, funds and tied deposits | 1,548 |
| 2,107 |
| 115,517 |
| 89,050 | |
Fund tied to foreign currency loans | - |
| - |
| 29,774 |
| 21,222 | |
Orders in progress |
| 156,524 |
| 50,860 |
| - |
| - |
Reimbursement RGR |
| 4,590 |
| 5,683 |
| 1,909 |
| 1,909 |
Advance energy purchase agreements | 44,399 |
| 15,817 |
| 58,620 |
| 65,786 | |
Prepaid expenses |
| 5,695 |
| 29,550 |
| 1,355 |
| 2,722 |
Collection agreements |
| 57,377 |
| 66,882 |
| - |
| - |
Other |
| 87,139 |
| 40,719 |
| 72,287 |
| 41,412 |
Total |
| 410,768 |
| 253,445 |
| 279,461 |
| 222,100 |
|
|
|
|
|
|
|
|
|
Advances - Fundação CESP –Refers to advances to employee for welfare programs and operational maintenance of the entity.
Pledges, Funds and Tied Deposits:collateral offered to guarantee CCEE operations and guarantees granted to jointly-owned subsidiaries.
Fund Tied to Foreign Currency Loans: These are guarantees offered when negotiating or renegotiating loans.
Orders in progress: Refers primarily to amount related to the (i) Research and Development Program (P&D) and (ii) Energy Efficiency Program (PEE), both established by ANEEL.
Refund of RGR: Refers to amounts to be offset in relation to the difference between the RGR - Global Reversal Reserve approved by ANEEL and the amount actually incurred, based on property, plant and equipment in use.
Advance Energy Purchase Agreements:Refers to prepayments of energy purchases by the subsidiaries, which will be liquidated on delivery of the energy to be supplied.
Collection agreements -Refers to (i) agreements between the distributors and city halls and companies for collection through the electric energy bills and subsequent pass-through of amounts related to public lighting, newspapers, healthcare, residential insurance, etc.; and (ii) receipts by CPFL Brasil, through the CPFL Total division, to be passed on subsequently to the customers who use the collection services provided by that division.
F - 29
( 13 ) PROPERTY, PLANT AND EQUIPMENT
|
| Consolidated | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Land |
| Reservoirs, dams and water mains | Buildings, construction and improvements | Machinery and equipment | Vehicles |
| Furniture and fixtures | In progress |
| Total | ||||
At December 31, 2009 |
| 53,346 |
| 949,598 |
| 1,265,088 |
| 1,633,723 |
| 2,038 |
| 5,792 |
| 1,303,454 |
| 5,213,039 |
Historic cost |
| 54,541 |
| 1,192,883 |
| 1,537,339 |
| 2,298,439 |
| 4,927 |
| 8,174 |
| 1,303,454 |
| 6,399,757 |
Accumulated depreciation/amortization |
| (1,195) |
| (243,285) |
| (272,251) |
| (664,715) |
| (2,889) |
| (2,382) |
| - |
| (1,186,717) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
| - |
| 3,851 |
| 3,471 |
| (13,181) |
| 1,457 |
| 2,044 |
| 754,298 |
| 751,940 |
Disposals |
| (48) |
| - |
| - |
| (15,508) |
| (355) |
| (37) |
| (417) |
| (16,365) |
Transfers |
| 128,279 |
| 617,401 |
| 133,578 |
| 385,307 |
| 1,859 |
| 6,261 |
| (1,272,685) |
| - |
Depreciation |
| (1,195) |
| (37,154) |
| (47,255) |
| (74,123) |
| (1,304) |
| (1,120) |
| - |
| (162,151) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
| 180,382 |
| 1,533,696 |
| 1,354,882 |
| 1,916,219 |
| 3,695 |
| 12,940 |
| 784,650 |
| 5,786,465 |
Historic cost |
| 182,772 |
| 1,814,135 |
| 1,674,388 |
| 2,655,057 |
| 7,888 |
| 16,442 |
| 784,650 |
| 7,135,333 |
Accumulated depreciation/amortization |
| (2,390) |
| (280,439) |
| (319,506) |
| (738,838) |
| (4,193) |
| (3,502) |
| - |
| (1,348,868) |
Additions |
| 2,214 |
| 3,712 |
| 19,892 |
| 7,333 |
| 705 |
| 382 |
| 802,376 |
| 836,614 |
Disposals |
| (247) |
| (200) |
| (640) |
| (8,023) |
| (341) |
| (173) |
| (174) |
| (9,799) |
Transfers |
| 8,837 |
| 109,030 |
| 33,497 |
| 394,508 |
| 374 |
| 3,667 |
| (549,914) |
| - |
Transfers - other assets |
| - |
| - |
| - |
| 10,341 |
| - |
| - |
| (17,525) |
| (7,184) |
Depreciation |
| (1,513) |
| (68,346) |
| (65,628) |
| (96,051) |
| (1,092) |
| (1,980) |
| - |
| (234,610) |
Business combination |
| 57,180 |
| - |
| 973,636 |
| 831,749 |
| 165 |
| 949 |
| 45,938 |
| 1,909,617 |
Changes in interests |
| - |
| - |
| 510 |
| 10,159 |
| 3 |
| 36 |
| 265 |
| 10,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011 |
| 246,853 |
| 1,577,892 |
| 2,316,149 |
| 3,066,235 |
| 3,509 |
| 15,823 |
| 1,065,615 |
| 8,292,076 |
Historic cost |
| 250,757 |
| 1,926,695 |
| 2,757,021 |
| 4,006,925 |
| 8,798 |
| 21,695 |
| 1,065,615 |
| 10,037,506 |
Accumulated depreciation |
| (3,903) |
| (348,802) |
| (440,873) |
| (940,691) |
| (5,289) |
| (5,872) |
| - |
| (1,745,430) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average depreciation rate |
| - |
| 2.33% |
| 4.23% |
| 5.10% |
| 20.00% |
| 10.00% |
| - |
|
|
F - 30
In the consolidated statements, the figure for construction in progress refers mainly to works in progress of theoperating subsidiaries and/or those under development, in particular, the projects of CPFL Renováveis, which has construction in progress of R$ 943,831.
The following are allocated in business combinations: i) the property, plant and equipment of ERSA, amounting to R$ 956,447, which has been consolidated in CPFL Renováveis since August 2011; and ii) the assets of Jantus and Santa Luzia, amounting to R$ 715,864 and R$ 237,307, respectively, which have been consolidated since December 2011.
As mentioned in item 3.4, assets not acquired recently were measured at deemed cost at the transition date, while the assets of recently-built plants are recognized at cost, which in Management’s opinion, approximates market value. Property, plant and equipment were valued at their market valuesbased on an appraisal carried out by an independent engineering company specializing in equity valuation. Added value of R$ 1,002,991 was determined at January 1, 2009 and recognized in the revaluation reserve in equity. The amortization of the value-added with an impact on the profit or loss for the years ended December 31, 2011, 2010 and 2009, determined based on the remaining useful life of the assets, was R$ 37,481, R$ 39,605 and R$39,552.
In conformity with IAS 23, the interest on the loans taken out by the projects to finance the construction is capitalized during the construction phase. During 2011, R$ 6,861 was capitalized in the consolidated financial statements (R$ 84,839 in 2010 and R$56,106 in 2009). For further details of construction assets and fund raising costs, see notes 1, 16 and 17.
Impairment testing: The Company evaluated in respect of all the reporting periods for indications of devaluation of its assets that might involve the need for impairment tests. The evaluation was based on external and internal information sources, taking into account variations in interest rates, changes in market conditions and other factors.
The result of the assessment indicated no signs of impairment of these assets in any of the reporting periods and therefore no impairment losses were recognized.
( 14 ) INTANGIBLE ASSETS
|
| December 31, 2011 |
| December 31, 2010 | ||||
|
| Historic cost |
| Accumulated amortization | Net value |
| Net value | |
Goodwill |
| 6,152 |
| (37) |
| 6,115 |
| 6,115 |
Intangible assets - Concession rights: |
|
|
|
|
|
|
|
|
Acquired in business combinations |
| 6,016,243 |
| (1,895,854) |
| 4,120,388 |
| 2,041,944 |
Distribution infrastructure - operational |
| 8,975,287 |
| (5,390,879) |
| 3,584,408 |
| 3,335,775 |
Distribution infrastructure - in progress |
| 730,807 |
| - |
| 730,807 |
| 694,139 |
Public utility |
| 407,286 |
| (24,716) |
| 382,570 |
| 397,984 |
Other intangible assets |
| 174,390 |
| (71,239) |
| 103,150 |
| 108,917 |
Total intangible assets |
| 16,310,165 |
| (7,382,725) |
| 8,927,439 |
| 6,584,874 |
|
|
|
|
|
|
|
|
|
Historic cost |
|
|
|
|
| 16,310,165 |
| 13,228,307 |
Accumulated amortization |
|
|
|
|
| (7,382,725) |
| (6,643,433) |
|
|
|
|
|
| 8,927,439 |
| 6,584,874 |
14.1 Intangible asset acquired in business combinations
The following table shows the breakdown of the intangible asset of the right to exploit the concession acquired in business combinations:
F - 31
|
| December 31, 2011 |
| December 31, 2010 |
| Annual amortization rate | ||||||||
|
| Historic cost |
| Accumulated amortization | Net value |
| Net value |
| 2011 |
| 2010 |
| 2009 | |
Intangible asset - acquired in business combinations |
|
|
|
|
|
|
|
|
|
|
|
| ||
Intangible asset acquired, not merged |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
| 304,861 |
| (120,118) |
| 184,743 |
| 204,045 |
| 6.33% |
| 6.53% |
| 5.93% |
CPFL Piratininga |
| 39,065 |
| (14,801) |
| 24,264 |
| 26,603 |
| 5.99% |
| 6.19% |
| 6.19% |
CPFL Geração |
| 54,555 |
| (20,895) |
| 33,659 |
| 36,733 |
| 5.63% |
| 5.80% |
| 5.83% |
RGE |
| 3,150 |
| (805) |
| 2,345 |
| 2,560 |
| 6.81% |
| 6.53% |
| 6.53% |
CPFL Santa Cruz |
| 9 |
| (3) |
| 6 |
| 8 |
| 21.17% |
| 14.10% |
| - |
CPFL Leste Paulista |
| 3,333 |
| (1,121) |
| 2,212 |
| 2,887 |
| 20.30% |
| 13.39% |
| - |
CPFL Sul Paulista |
| 7,288 |
| (2,315) |
| 4,973 |
| 6,356 |
| 18.98% |
| 12.79% |
| - |
CPFL Jaguari |
| 5,213 |
| (1,893) |
| 3,320 |
| 4,503 |
| 22.68% |
| 13.62% |
| - |
CPFL Mococa |
| 9,110 |
| (3,079) |
| 6,031 |
| 7,841 |
| 19.87% |
| 13.92% |
| - |
CPFL Jaguari Geração |
| 7,896 |
| (1,119) |
| 6,777 |
| 7,422 |
| 8.17% |
| 6.00% |
| - |
|
| 434,480 |
| (166,149) |
| 268,331 |
| 298,957 |
|
|
|
|
|
|
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ENERCAN |
| 10,233 |
| (3,023) |
| 7,210 |
| 7,916 |
| 6.90% |
| 6.93% |
| 6.93% |
Barra Grande |
| 3,081 |
| (1,196) |
| 1,884 |
| 2,069 |
| 5.98% |
| 5.93% |
| 5.93% |
Chapecoense |
| 7,376 |
| (301) |
| 7,075 |
| 7,376 |
| 4.08% |
| - |
| - |
EPASA |
| 499 |
| (19) |
| 479 |
| 499 |
| 3.85% |
| - |
| - |
Santa Clara Wind Farms |
| - |
| - |
| - |
| 31,737 |
| - |
| - |
| - |
Campo do Ventos Wind Farms |
| - |
| - |
| - |
| 5,576 |
| - |
| - |
| - |
CPFL Renováveis |
| 2,318,580 |
| (18,773) |
| 2,299,807 |
| - |
| 3.82% |
| - |
| - |
Other |
| 14,478 |
| (11,952) |
| 2,527 |
| 3,248 |
| 4.99% |
| 6.22% |
| 6.22% |
|
| 2,354,246 |
| (35,263) |
| 2,318,983 |
| 58,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
| 2,788,726 |
| (201,412) |
| 2,587,314 |
| 357,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset acquired and merged – Deductible |
|
|
|
|
|
|
|
|
|
|
|
| ||
Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RGE |
| 1,120,266 |
| (758,359) |
| 361,908 |
| 380,711 |
| 1.68% |
| 1.69% |
| 3.76% |
CPFL Geração |
| 426,450 |
| (238,083) |
| 188,367 |
| 206,491 |
| 4.25% |
| 3.92% |
| 6.22% |
Subtotal |
| 1,546,716 |
| (996,442) |
| 550,274 |
| 587,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset acquired and merged – Reassessed |
|
|
|
|
|
|
|
|
|
|
|
| ||
Parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
| 1,074,026 |
| (477,318) |
| 596,709 |
| 658,503 |
| 5.75% |
| 5.93% |
| 5.93% |
CPFL Piratininga |
| 115,762 |
| (43,859) |
| 71,903 |
| 78,834 |
| 5.99% |
| 6.19% |
| 6.19% |
RGE |
| 310,128 |
| (87,234) |
| 222,894 |
| 243,296 |
| 6.58% |
| 6.30% |
| 6.33% |
CPFL Santa Cruz |
| 61,685 |
| (36,987) |
| 24,698 |
| 32,778 |
| 13.10% |
| 13.07% |
| 13.07% |
CPFL Leste Paulista |
| 27,034 |
| (12,745) |
| 14,289 |
| 18,507 |
| 15.59% |
| 15.46% |
| 15.48% |
CPFL Sul Paulista |
| 38,168 |
| (17,611) |
| 20,557 |
| 26,312 |
| 15.16% |
| 15.17% |
| 15.14% |
CPFL Jaguari |
| 23,600 |
| (11,246) |
| 12,354 |
| 16,300 |
| 16.72% |
| 15.75% |
| 15.76% |
CPFL Mococa |
| 15,124 |
| (7,286) |
| 7,838 |
| 10,174 |
| 15.34% |
| 15.87% |
| 15.96% |
CPFL Jaguari Geração |
| 15,275 |
| (3,716) |
| 11,559 |
| 12,659 |
| 7.20% |
| 7.94% |
| 7.94% |
|
| 1,680,801 |
| (698,000) |
| 982,800 |
| 1,097,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 6,016,243 |
| (1,895,854) |
| 4,120,388 |
| 2,041,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible asset acquired in business combinations comprises:
- Intangible asset acquired, not merged
Refers mainly to the remaining goodwill on acquisition of the shares held by the noncontrolling shareholders.
- Intangible asset acquired and merged - Deductible
F - 32
Goodwill on the acquisition of the subsidiaries that was merged with the respective net equities, without application of CVM Instructions nº 319/99 and nº 349/01, that is, without segregation of the amount of the tax benefit.
- Intangible asset acquired and merged – Reassessed
In order to comply with ANEEL instructions and avoid the goodwill amortization resulting from the merger of a parent company causing a negative impact on dividends paid to the shareholders, the subsidiaries applied the concepts of CVM Instructions nº 319/99 and nº 349/01 on the acquisition goodwill. A reserve was therefore recorded to adjust the goodwill, set against the equity reserves of the subsidiaries, so that the effect on the equity reflects the tax benefit of the merged goodwill. These changes affected the Company's investment in the subsidiaries, and in order to adjust this, non-deductible goodwill was recorded for tax.
14.2 Changes in intangible assets:
The changes in intangible assets as of December 31, 2011 and 2010, are as follows:
|
| Concession Rights | ||||||||||||
|
| Goodwill |
| Acquired in business combinations | Distribution infrastructure - operational | Distribution infrastructure - in progress | Public utility |
| Other intangible assets | TOTAL | ||||
Intangible asset at December 31, 2009 |
| 4,048 |
| 2,185,780 |
| 2,879,341 |
| 521,147 |
| 392,221 |
| 80,564 |
| 6,063,101 |
Additions |
| 2,007 |
| 38,286 |
| 5,133 |
| 1,159,601 |
| 11,395 |
| 41,146 |
| 1,257,568 |
Amortization |
| - |
| (182,615) |
| (351,690) |
| - |
| (5,633) |
| (12,878) |
| (552,816) |
Transfer - intangible assets |
| - |
| - |
| 806,904 |
| (806,904) |
| - |
| - |
| - |
Transfer - financial asset |
| - |
| - |
| - |
| (179,501) |
| - |
| - |
| (179,501) |
Transfer - other assets |
| - |
| 681 |
| (3,919) |
| - |
| - |
| (237) |
| (3,475) |
Other |
| 60 |
| (188) |
| 6 |
| (204) |
| 1 |
| 322 |
| (3) |
Intangible asset at December 31, 2010 |
| 6,115 |
| 2,041,944 |
| 3,335,775 |
| 694,139 |
| 397,984 |
| 108,917 |
| 6,584,874 |
Additions |
| - |
| - |
| 3,259 |
| 1,094,929 |
| - |
| 8,673 |
| 1,106,861 |
Amortization |
| - |
| (196,513) |
| (389,740) |
| - |
| (15,413) |
| (17,279) |
| (618,945) |
Transfer - intangible assets |
| - |
| (27,164) |
| 636,009 |
| (621,500) |
| - |
| 12,655 |
| - |
Transfer - financial asset |
| - |
| - |
| - |
| (381,027) |
| - |
| - |
| (381,027) |
Transfer - other assets |
| - |
| - |
| (895) |
| (55,734) |
| - |
| (10,341) |
| (66,971) |
Corporate reestructuring |
| - |
| 2,302,122 |
| - |
| - |
| - |
| - |
| 2,302,122 |
Other |
| - |
| - |
| - |
| - |
| - |
| 526 |
| 526 |
Intangible asset at December 31, 2011 |
| 6,115 |
| 4,120,388 |
| 3,584,408 |
| 730,807 |
| 382,570 |
| 103,150 |
| 8,927,439 |
At December 31, 2011, the total intangible assets acquired by business combinations relate to the corporate restructuring of CPFL Renováveis (Note 14.4), as follows: (i) R$ 912,363 generated as a result of the reverse acquisition; (ii) R$ 1,153,443 refers to business acquisitions by CPFL Renováveis since August 1, mainly in relation to the acquisition of Jantus and Santa Luzia (R$ 1,115,815); and (iii) R$ 232,013 refers to existing balances of the acquiree at July 31, 2011. The subsidiary recognized the respective deferred tax effects on the intangible assets acquired in the line temporarily non-deductible differences (Note 9).
In conformity with IAS 23, the interest on the loans taken out by the subsidiaries is capitalized to qualifying intangible assets. During 2011, R$ 32,281 was capitalized in the consolidated financial statements (R$ 48,099 in 2010 and R$28,825 in 2009) at a rate of 9.95% p.a. (7.9% p.a. in 2010 and 6.3% p.a. in 2009).
14.3 Impairment test
The Company checked in respect of all the reporting periods for indications of devaluation of its assets that might involve the need for impairment tests. The evaluation was based on external and internal information sources, taking into account variations in interest rates, changes in market conditions and other factors.
In analysis of impairment of intangible assets with an indefinite useful life (including goodwill), the Company used the value in use method to assess the recoverable value of each CGU. The cash flows were prepared in accordance with management's assessment of future trends in the electricity sector, based on external sources and historical data.
F - 33
The result of the assessment indicated no signs of impairment of these assets in any of the reporting periods and there is no impairment loss to be recognized.
14.4 Business combination (CPFL Renováveis)
CPFL Renováveis was created by the merger of the former indirect subsidiary SMITA by ERSA, through the corporate restructuring described in Note 1.1, in accordance with the terms and conditions established in the Merger Protocol signed by both companies and described in the Relevant Fact disclosed on August 23, 2011.
As a result of this merger, the equity ofCPFLRenováveis increased by R$ 980,827, of which R$ 596,631 corresponds to the net equity of SMITA, determined at carrying value at July 31, 2011, and R$ 384,196 to the capital contribution made by the subsidiaries CPFL Geração and CPFL Brasil.
The ratio of substitution of ERSA shares to SMITA shares, for merger purposes, was based on the economic value of the business of ERSA and SMITA and was freely negotiated, agreed and confirmed between independent parties and adequately reflects the best assessment of both the entities.
ERSA issued 913,475,299 new common shares in the name of CPFL Geração and CPFL Brasil, which grant equal rights to those conferred by the common shares issued by ERSA in the past.
CPFL Energia began to hold indirectly 54.50% of CPFL Renováveis, having assumed control on August 1, 2011, since which date it has fully consolidated the subsidiary.
The association resulted in a business combination, as per IFRS 3, since the Company now controls CPFL Renováveis. The amount of the consideration transferred in this transaction was R$ 773,413. From an essentially accounting viewpoint, as it was the Company that acquired the control, although ERSA (accouting acquiree) is the merged company, this operation represented a reverse acquisition, and ERSA's net assets were therefore assessed at fair value. The evaluation report issued by specialists resulted in recording of value added in CPFL Renováveis attributed to the intangible concession asset of R$ 533,757 (note 14.1), net of deferred income tax and social contribution of R$ 378,606 (Note 9), set against the capital reserve in equity (Note 24).
On account of its corporate interest, the Company registered the amount of R$ 290,898 in Investments, set against the capital reserve in equity. The effects registered in the investments of the subsidiaries CPFL Geração and CPFL Brasil were R$ 232,975 and R$ 57,922, respectively, Also as a result of the business combination, considering the ratio of exchange of interests of the subsidiaries CPFL Geração and CPFL Brasil in CPFL Renováveis (taking into account the acquisition of the indirect subsidiary Jantus, Note 14.4.1), a decrease of R$60,957 was recognized in the capital reserve recorded by the Company (an increase of R$ 179,384 for the subsidiary CPFL Geração and a reduction of R$ 240,341 for the subsidiary CPFL Brasil). The net amount registered in the reserve as of December 31, 2011 as a result of the business combination was therefore R$229,940 (Note 24).
In relation to recognition of acquisition of CPFL Renováveis in the accounts of the subsidiaries CPFL Geração and CPFL Brasil, as these subsidiaries do not have operational control over CPFL Renováveis, and are therefore regarded as associated companies, the following treatment was given for individual purposes in their respective financial statements: (i) in the case of CPFL Geração, a gain of R$ 412,359 was recognized in profit or loss, and (ii) CPFL Brasil recognized a gain of R$ 7,881 in profit or loss and goodwill of R$ 190,300. In the consolidated statements, since this operation refers to a transaction between owners (in their capacity as owners), these effects were adjusted for purposes of consolidation in CPFL Energia and recorded in equity.
The impacts of the reverse acquisition described above, based on the balance sheets at August 1, 2011, are as follows:
F - 34
| SMITA |
| ERSA |
| Subtotal |
| Fair value - ERSA | CPFL Renováveis | |
ASSETS |
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | 182,270 |
| 668,707 |
| 850,977 |
| - |
| 850,977 |
Other | 21,305 |
| 34,298 |
| 55,603 |
| - |
| 55,603 |
Total current assets | 203,575 |
| 703,005 |
| 906,580 |
| - |
| 906,580 |
Noncurrent assets |
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment | 760,260 |
| 956,444 |
| 1,716,704 |
| - |
| 1,716,704 |
IntangibleofConcession | 44,600 |
| 32,916 |
| 77,516 |
| 1,113,544 |
| 1,191,060 |
Intangible - goodwill | - |
| 200,052 |
| 200,052 |
| (200,052) |
| - |
Other | 70,830 |
| 12 |
| 70,842 |
| - |
| 70,842 |
Total noncurrent assets | 875,690 |
| 1,189,424 |
| 2,065,114 |
| 913,492 |
| 2,978,606 |
Total assets | 1,079,265 |
| 1,892,429 |
| 2,971,694 |
| 913,492 |
| 3,885,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Loans and Financing | 53,964 |
| 22,020 |
| 75,984 |
| - |
| 75,984 |
Other | 28,502 |
| 57,185 |
| 85,687 |
| 1,129 |
| 86,816 |
Total current liabilities | 82,466 |
| 79,205 |
| 161,671 |
| 1,129 |
| 162,800 |
Noncurrent liabilities |
|
|
|
|
|
|
|
|
|
Loans and Financing | 367,380 |
| 467,170 |
| 834,551 |
| - |
| 834,551 |
Deferred tax debits | 32,785 |
| - |
| 32,785 |
| 378,606 |
| 411,391 |
Other | 3 |
| 76,508 |
| 76,511 |
| - |
| 76,511 |
Total noncurrent liabilities | 400,168 |
| 543,678 |
| 943,846 |
| 378,606 |
| 1,322,453 |
SHAREHOLDERS' EQUITY | 596,631 |
| 1,269,546 |
| 1,866,177 |
| 533,757 |
| 2,399,933 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 1,079,265 |
| 1,892,429 |
| 2,971,694 |
| 913,492 |
| 3,885,186 |
The net operating revenue, the income from the electric energy service(negative) and net profit of the acquiree (Ersa) from the acquisition date were fully consolidated in CPFL Renováveis and correspond to R$ 85,042, (R$ 7,679) and R$ 11,062, respectively.
If the acquisition date had been January 1, 2011, the net operating revenue, the income from the electric energy service and net profit of CPFL Renováveis would have beenR$ 306,894, R$ 103,684 and R$ 103,716 respectively.
The minority interests in CPFL Renováveis at the acquisition datewas R$ 1,091,969 in accordance with the participation of 45.5% in the shareholders’ equity of CPFL Renováveis at August 1, 2011.
14.4.1 Acquisition of the indirect subsidiary Jantus
On April 7, 2011, through the subsidiary CPFL Brasil, the Company signed a Purchase and Sale Agreement to acquire all the capital quotas of Jantus SL (“Jantus”), a company based in Spain. On September 21, 2011, CPFL Brasil assigned the Purchase Agreement to the subsidiary CPFL Renováveis. On December 20, 2011, CPFL Renováveis completed the acquisition of Jantus, which held 100% of the capital of SIIF Energies do Brasil Ltda.(“SIIF”) and SIIF Desenvolvimento de Projeto de Energia Eólica Ltda.(“SIIF Desenvolvimento”).
Accordingly, by acquisition of the quotas, completed on December 21, 2011, CPFL Renováveis indirectly acquired all the capital of SIIF and SIIF Desenvolvimento, with a total of four wind power plants operating in the State of Ceará, with total installed capacity of 210 MW, as well as a portfolio of 412 MW in certified projects eligible for participation in the next energy auctions and 320 MW in uncertified projects.
To put this transaction into effect, the subsidiary CPFL Brasil paid R$ 820,803 in cash to CPFL Renováveis in December 2011, which has issued new shares to CPFL Brasil; consequently, CPFL Energia now indirectly holds 63.00% of CPFL Renováveis, through its subsidiaries CPFL Geração (35.49%) and CPFL Brasil (27.51%) at December 2011, in accordance with the association agreement with Ersa shareholders.
F - 35
CPFL Renováveis issued 385,268,687 new common shares in the name of CPFL Brasil, which grant equal rights to those conferred by the common shares issued by CPFL Renováveis in the past.
14.4.2 Acquisition of the indirect subsidiary Santa Luzia Energética S.A.
On August 17, 2011, the Company and the indirect subsidiary CPFL Renováveis disclosed in Notices to the Market the acquisition of quotas representing 100% of the voting and total capital of Santa Luzia Energética S.A. (“Santa Luzia”), which had an SHP operating in the State of Santa Catarina, with installed power of 28.5 MW and mean assured energy of 18.4 MW.
The Company completed the acquisition of Santa Luzia on December 29, 2011, and the transaction was settled on January 4, 2012.
a) Additional information about the acquisition of the indirect subsidiaries Jantus and Santa Luzia:
| Jantus |
| Santa Luzia | |
| December 19. 2011 |
| December 29. 2011 | |
|
|
| ||
Cash and cash equivalents transferred as consideration by the acquirers: |
|
|
| |
Cash transferred or to be transferred to shareholders | 468,916 |
| - | |
Accounts payable to shareholders | - |
| 151,534 | |
Cash transferred to Jantus for settling debts and expenses of sellers responsibility | 354,420 |
| - | |
Estimated of price adjustment to be paid to acquirees as contractually established, recorded as accounts payable at December 31, 2011 | 16,316 |
| 908 | |
Total transfered consideration (paid) | 839,652 |
| 152,442 | |
|
|
|
|
b) Assets acquired and passives recognized on the acquisition date
In relation to the acquisition of Jantus and Santa Luzia, all the considerations transferred (paid) were allocated to the assets acquired and liabilities assumed at fair values, including the intangible assets associated with the exploitation rights of each authorization, and these will be amortized over the remaining terms of the authorizations linked to exploitation of the wind farms and SHPs acquired. Consequently, as the whole amount paid was allocated to identified assets and liabilities, no residual amount was allocated to goodwill in these transactions.
Allocation of the amount paid was based on the economic and financial report issued by specialists contracted by Management of the parent company, and analyses by CPFL Renováveis itself.
The subsidiary CPFL Renováveis does not expect the amount allocated as the right to operate these acquisitions to be deductible for tax purposes at the acquisition date, and therefore recorded deferred income tax and social contribution in relation to the temporary difference between the amounts allocated and the tax bases for these assets.
The initial accounting for the acquisition of Jantus and Santa Luzia was provisionally determined at December 31, 2011. The necessary market assessments and other calculations had not been finalized at the date on which the financial statements were completed, and were therefore based on management’s best estimates of these amounts, as permitted by IFRS 3.
F - 36
| Jantus |
| Santa Luzia | |
| December 19. 2011 |
| December 29. 2011 | |
|
|
| ||
Current assets |
|
|
| |
Cash and cash equivalents | 6,781 |
| 45 | |
Recoverable taxes | 49,241 |
| - | |
Other | 22,956 |
| 3,921 | |
|
|
|
| |
Noncurrent assets: |
|
|
| |
Recoverable taxes | 103,725 |
| - | |
Fixed Assets | 715,864 |
| 237,307 | |
intangible assets | 4,403 |
| - | |
Other | 50,544 |
| 2,930 | |
|
|
|
| |
Liabilities: |
|
|
| |
Suppliers | 47,425 |
| 4,114 | |
Loans and debentures | 80,731 |
| 11,413 | |
Other | 63,248 |
| 2,252 | |
|
|
|
| |
Noncurrent liabilities: |
|
|
| |
Loans and debentures | 565,158 |
| 124,590 | |
Deferred taxes | 15,141 |
| - | |
Other | 20,407 |
| 7,582 | |
|
|
|
| |
Acquired net assets | 161,404 |
| 94,252 | |
|
|
|
|
c) Net cash outflow on the acquisition of the subsidiaries:
| Jantus |
| Santa Luzia | |
Consideration transferred (paid) | 839,652 |
| 152,442 | |
Less: Fair value of identifiable acquired net assets | (161,404) |
| (94,252) | |
Amount allocated as a right of exploitation | 678,248 |
| 58,190 | |
Tax effects | 349,400 |
| 29,977 | |
Amount allocated to right of exploitation after tax effects | 1,027,648 |
| 88,167 | |
|
|
|
|
The deferred tax effects on the line temporarily non-deductible differences (Note 9), amounting to R$ 379,377, were recorded on the total intangible assets of R$ 1,115,815 acquired.
d) Impact of the acquisition of the subsidiaries Jantus and Santa Luzia on the profit and loss of the Company and of the subsidiary CPFL Renováveis
The consolidated result for the year and the result of the subsidiary CPFL Renováveis includes R$ 24,738 (R$ 15,585 in proportion to the Company’s interest) in relation to the additional business generated by Jantus. The consolidated net income for the year includes R$24,016 in relation to Jantus. Since Santa Luzia was acquired on December 29, 2011, it did not have a significant impact on profit or loss for the year.
( 15 ) SUPPLIERS
F - 37
Current |
| December 31, 2011 | December 31, 2010 | |
|
|
|
|
|
System Service Charges |
| 33,794 |
| 32,406 |
Energy purchased |
| 730,790 |
| 584,018 |
Electricity Network Usage Charges |
| 150,013 |
| 160,099 |
Materials and Services |
| 233,560 |
| 199,264 |
Free Energy |
| 78,432 |
| 70,262 |
Other |
| 13,555 |
| 1,335 |
Total |
| 1,240,143 |
| 1,047,385 |
|
|
|
|
|
( 16 ) INTEREST ON DEBTS, LOANS AND FINANCING
|
| December 31, 2011 |
| December 31, 2010 | ||||||||||||
|
| Interest - Current and Noncurrent | Principal |
| Total |
| Interest - Current and Noncurrent | Principal |
| Total | ||||||
|
|
|
| Current |
| Noncurrent |
|
|
|
|
| Current |
| Noncurrent |
|
|
Measured at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazilian currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BNDES - Power increases |
| 34 |
| 3,690 |
| 4,802 |
| 8,526 |
| 55 |
| 5,040 |
| 8,498 |
| 13,593 |
BNDES - Investment |
| 25,032 |
| 542,153 |
| 4,071,103 |
| 4,638,287 |
| 8,494 |
| 330,220 |
| 3,019,812 |
| 3,358,526 |
BNDES - Purchase of assets |
| 49 |
| 2,039 |
| 5,042 |
| 7,130 |
| 46 |
| 2,002 |
| 4,737 |
| 6,785 |
BNDES - Working capital |
| 687 |
| 111,129 |
| 36,928 |
| 148,744 |
| 983 |
| 70,121 |
| 141,677 |
| 212,781 |
Furnas Centrais Elétricas S.A. |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Financial Institutions |
| 119,804 |
| 221,142 |
| 1,507,927 |
| 1,848,874 |
| 50,269 |
| 144,397 |
| 1,251,864 |
| 1,446,530 |
Other |
| 782 |
| 13,154 |
| 28,327 |
| 42,263 |
| 594 |
| 23,337 |
| 34,477 |
| 58,408 |
Subtotal |
| 146,388 |
| 893,307 |
| 5,654,129 |
| 6,693,824 |
| 60,440 |
| 575,116 |
| 4,461,066 |
| 5,096,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BID |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Financial Institutions |
| 444 |
| 3,107 |
| 42,769 |
| 46,320 |
| 432 |
| 3,751 |
| 40,750 |
| 44,932 |
Subtotal |
| 444 |
| 3,107 |
| 42,769 |
| 46,320 |
| 432 |
| 3,751 |
| 40,750 |
| 44,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at Cost |
| 146,832 |
| 896,414 |
| 5,696,898 |
| 6,740,144 |
| 60,872 |
| 578,867 |
| 4,501,815 |
| 5,141,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions |
| 18,697 |
| - |
| 1,685,557 |
| 1,704,254 |
| 8,799 |
| - |
| 416,027 |
| 424,827 |
Total |
| 18,697 |
| - |
| 1,685,557 |
| 1,704,254 |
| 8,799 |
| - |
| 416,027 |
| 424,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| 165,529 |
| 896,414 |
| 7,382,455 |
| 8,444,398 |
| 69,671 |
| 578,867 |
| 4,917,843 |
| 5,566,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 38
Measured at cost |
| December 31, 2011 |
| December 31, 2010 |
| Annual interest |
| Amortization |
| Collateral |
Brazilian currency |
|
|
|
|
|
|
|
|
|
|
BNDES - Power increases |
|
|
|
|
|
|
|
|
|
|
CPFL Geração |
| - |
| 13,593 |
| TJLP + 3.1% to 4.3% |
| 36 to 84 monthly installments from February 2003 to December 2008 |
| CPFL Energia and Paulista guarantee |
CPFL Renováveis |
| 8,526 |
| - |
| TJLP + 3.1% to 4.3% |
| 72 to 75 monthly installments from September 2007 to July 2008 |
| CPFL Energia guarantee and promissory notes |
|
|
|
|
|
|
|
|
|
|
|
BNDES/BNB - Investment |
|
|
|
|
|
|
|
|
|
|
CPFL Paulista - FINEM III |
| 53,807 |
| 80,711 |
| TJLP + 3.3% |
| 72 monthly installments from January 2008 |
| CPFL Energia guarantee and receivables |
CPFL Paulista - FINEM IV |
| 192,429 |
| 256,572 |
| TJLP + 3.28% to 3.4% |
| 60 monthly installments from January 2010 |
| CPFL Energia guarantee and receivables |
CPFL Paulista - FINEM V |
| 199,692 |
| 98,051 |
| TJLP + 2.12% to 3.3% |
| 72 monthly installments from February 2012 |
| CPFL Energia guarantee and receivables |
CPFL Paulista - FINEM V |
| 64,873 |
| 35,135 |
| Fixed rate 5.5% to 8.0% |
| 114 monthly installments from August 2011 |
| CPFL Energia guarantee and receivables |
CPFL Paulista - FINAME |
| 67,613 |
| 36,067 |
| Fixed rate 4.5% |
| 96 monthly installments from January 2012 |
| CPFL Energia guarantee |
CPFL Piratininga - FINEM II |
| 31,963 |
| 47,945 |
| TJLP + 3.3% |
| 72 monthly installments from January 2008 |
| CPFL Energia guarantee and receivables |
CPFL Piratininga - FINEM III |
| 80,207 |
| 106,944 |
| TJLP + 3.28% to 3.4% |
| 60 monthly installments from January 2010 |
| CPFL Energia guarantee and receivables |
CPFL Piratininga - FINEM IV |
| 109,734 |
| 55,099 |
| TJLP + 2.12% to 3.3% |
| 72 monthly installments from February 2012 |
| CPFL Energia guarantee and receivables |
CPFL Piratininga - FINEM IV |
| 35,611 |
| 13,081 |
| Fixed rate 5.5% to 8.0% |
| 114 monthly installments from August 2011 |
| CPFL Energia guarantee and receivables |
CPFL Piratininga - FINAME |
| 32,062 |
| 22,905 |
| Fixed rate 4.5% |
| 96 monthly installments from January 2012 |
| CPFL Energia guarantee |
RGE - FINEM III |
| 22,429 |
| 44,858 |
| TJLP + 5.0% |
| 60 monthly installments from January 2008 to December 2012 |
| Receivables / Reserve account |
RGE - FINEM IV |
| 122,492 |
| 163,321 |
| TJLP + 3.28 to 3.4% |
| 60 monthly installments from January 2010 to December 2014 |
| Receivables / CPFL Energia guarantee |
RGE - FINEM V |
| 109,962 |
| 59,967 |
| TJLP + 2.12 to 3.3% a.a. |
| 72 monthly installments from February 2012 to January 2018 |
| Receivables / CPFL Energia guarantee |
RGE - FINEM V |
| 23,308 |
| 9,710 |
| 5.5% a.a. Fixed rate |
| 96 monthly installments from February 2013 to January 2021 |
| Receivables / CPFL Energia guarantee |
RGE - FINAME |
| 16,089 |
| 4,857 |
| Fixed rate 4.5% |
| 96 monthly installments from January 2012 to December 2019 |
| CPFL Energia guarantee |
CPFL Santa Cruz |
| 8,007 |
| 10,483 |
| TJLP + 2.90% |
| 54 monthly installments from December 2010 |
| CPFL Energia guarantee |
CPFL Mococa |
| 4,258 |
| 5,475 |
| TJLP + 2.9% |
| 54 monthly installments from January 2011 |
| CPFL Energia guarantee and receivables |
CPFL Jaguari |
| 3,732 |
| 4,825 |
| TJLP + 2.9% |
| 54 monthly installments from December 2010 |
| CPFL Energia guarantee and receivables |
CPFL Leste Paulista |
| 5,497 |
| 3,261 |
| TJLP + 2.9% |
| 54 monthly installments from June 2011 |
| CPFL Energia guarantee and receivables |
CPFL Sul Paulista |
| 5,952 |
| 4,735 |
| TJLP + 2.9% |
| 54 monthly installments from June 2011 |
| CPFL Energia guarantee and receivables |
CPFL Geração |
| - |
| 74,531 |
| TJLP + 1.72% |
| 192 monthly installments from May 2013 |
| CPFL Energia guarantee |
BAESA |
| 104,649 |
| 120,347 |
| TJLP + 3.125% to 4.125% |
| 144 monthly installments from September 2006 |
| Pledge of shares, credit rights and revenue |
BAESA |
| 23,356 |
| 24,244 |
| UMBND + 3.125% (1) |
| 144 monthly installments from November 2006 |
| Pledge of shares, credit rights and revenue |
ENERCAN |
| 240,780 |
| 273,992 |
| TJLP + 4% |
| 144 monthly installments from April 2007 |
| Letters of guarantee |
ENERCAN |
| 15,685 |
| 15,932 |
| UMBND + 4% |
| 144 monthly installments from April 2007 |
| Letters of guarantee |
CERAN |
| 55,288 |
| 53,845 |
| UMBND + 5% (1) |
| 168 monthly installments from December 2005 |
| CPFL Energia guarantee |
CERAN |
| 508,179 |
| 557,451 |
| TJLP + 3.69% (Average of percentage) |
| 168 monthly installments from February 2006 |
| CPFL Energia guarantee |
Foz do Chapecó |
| 1,044,312 |
| 996,013 |
| TJLP + 2.49% to 2.95% |
| 192 monthly installments from October 2011 |
| Pledge of shares, credit and concession rights and revenue and CPFL Energia guarantee |
CPFL Bioenergia - FINEM |
| - |
| 39,512 |
| TJLP + 1.9% |
| 144 monthly installments from June 2011 |
| Mortgage, credit rights and CPFL Energia guarantee |
CPFL Bioenergia - FINAME |
| - |
| 39,369 |
| Fixed rate 4.5% |
| 102 monthly installments from June 2011 |
| Mortgage, credit rights and CPFL Energia guarantee |
CPFL Renovaveis - FINEM II |
| 38,818 |
| - |
| TJLP + 1.9% |
| 144 monthly installments from June 2011 |
| Guarantee of CPFL Energia, assets subject to fiduciary sale and fiduciary assignment of credit rights arrangements. |
CPFL Renovaveis - FINAME III |
| 37,356 |
| - |
| Fixed rate 4.5% |
| 102 monthly installments from June 2011 |
| Guarantee of CPFL Energia, assets subject to fiduciary sale and fiduciary assignment of credit rights arrangements. |
CPFL Renováveis - FINEM I |
| 416,677 |
| - |
| TJLP 1.95% |
| 168 monthly installments from October 2009 to July 2011 |
| PCH Holding debtor solidarity, letter of guarantee |
CPFL Renováveis - FINEM III |
| 426,119 |
| - |
| TJLP + 1.72% a 1.9% |
| 156 to 192 monthly installments from January 2012 to May 2013 |
| Guarantee of CPFL Energia, assets subject to fiduciary sale and fiduciary assignment of credit rights arrangements. |
CPFL Renovaveis - FINEM IV |
| 5,374 |
| - |
| TJLP + 3.5% |
| 46 monthly installments from April 2011 |
| Guarantee of CPFL Energia, assets subject to fiduciary sale and fiduciary assignment of credit rights arrangements. |
CPFL Renovaveis - FINEM V (Santa Luzia) |
| 136,002 |
| - |
| TJLP + 2.8% a 3.4% |
| 143 months from December 2011 |
| PCH Holding 2 and CPFL Renováveis debtor solidarity |
CPFL Renováveis - FINAME I |
| 179,188 |
| - |
| Fixed rate 5.5% |
| 102 to 108 monthly installments from January 2012 to August 2020 |
| Guarantee of CPFL Energia, assets subject to fiduciary sale and joint fiduciary assignment of credit rights arrangements. |
Epasa - FINEM |
| 102,782 |
| - |
| TJLP + 1.82% |
| 152 monthly installments from January 2012 |
| CPFL Energia guarantee |
EPASA - BNB |
| 109,137 |
| 95,613 |
| Fixed rate 10% |
| 132 monthly installments from January 2013 |
| Bank guarantee |
CPFL Brasil - FINEP |
| 4,868 |
| 3,675 |
| 5% Fixed rate |
| 81 monthly installments from August 2011 |
| Receivables |
F - 39
BNDES - Other |
|
|
|
|
|
|
|
|
|
|
CPFL Brasil - Purchase of assets |
| 3,624 |
| 6,785 |
| TJLP + from 1.94% to 2.5% |
| 36 monthly installments from May 2009 |
| Tied to the asset acquired |
CPFL Brasil - Purchase of assets |
| 3,508 |
| - |
| Fixed rate de 4.5% to 8.70% |
| 96 monthly installments from March 2012 |
| CPFL Energia guarantee |
CPFL Piratininga - Working capital |
| 78,276 |
| 105,652 |
| TJLP + 5.0% (2) |
| 24 monthly installments from February 2011 to October 2011
|
| No guarantee |
CPFL Geração - FINEM - Working capital |
| 42,077 |
| 53,232 |
| TJLP + 4.95% |
| 24 monthly installments from July 2011 |
| CPFL Energia guarantee |
CPFL Geração - FINAME - Working capital |
| 28,389 |
| 53,896 |
| TJLP + 4.95% (3) |
| 23 monthly installments from February 2011 |
| CPFL Energia guarantee |
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions |
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Law 8727 |
| 26,589 |
| 34,874 |
| IGP-M + 7.42% |
| 240 monthly installments from May 1994 |
| Receivables |
Banco do Brasil |
| 105,435 |
| 104,890 |
| 107% of CDI |
| 1 installment in April 2015 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (*) |
| 224,124 |
| 199,622 |
| 98.50% of CDI |
| 4 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 160,528 |
| - |
| 99.00% of CDI |
| 2 annual installments from March 2013 |
| CPFL Energia guarantee |
CPFL Piratininga |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 20,613 |
| 18,360 |
| 98.5% of CDI |
| 4 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 20,671 |
| - |
| 99% of CDI |
| 2 annual installments from March 2013 |
| CPFL Energia guarantee |
RGE |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 266,046 |
| 236,830 |
| 98.5% of CDI |
| 4 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 59,438 |
| - |
| 99% of CDI |
| 2 annual installments from March 2013 |
| CPFL Energia guarantee |
CPFL Santa Cruz |
|
|
|
|
|
|
|
|
|
|
HSBC |
| - |
| 45,206 |
| CDI + 1.10% |
| 1 installment in June 2011 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (*) |
| 18,551 |
| 16,337 |
| 98.5% of CDI |
| 2 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 7,113 |
| - |
| 99% of CDI |
| 2 annual installments from March 2013 |
| CPFL Energia guarantee |
CPFL Sul Paulista |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 11,479 |
| 10,109 |
| 98.5% of CDI |
| 2 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 9,948 |
| - |
| 99% of CDI |
| 2 annual installments from march 2013 |
| CPFL Energia guarantee |
CPFL Leste Paulista |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 19,073 |
| 16,798 |
| 98.5% of CDI |
| 2 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 18,576 |
| - |
| 99% of CDI |
| 2 annual installments from march 2013 |
| CPFL Energia guarantee |
CPFL Mococa |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 9,623 |
| 8,476 |
| 98.5% of CDI |
| 2 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 3,114 |
| - |
| 99% of CDI |
| 2 annual installments from march 2013 |
| CPFL Energia guarantee |
CPFL Jaguari |
|
|
|
|
|
|
|
|
|
|
Banco do Brasil - Working capital (*) |
| 2,029 |
| 1,786 |
| 98.5% of CDI |
| 2 annual installments from July 2012 |
| CPFL Energia guarantee |
Banco do Brasil - Working capital (**) |
| 6,298 |
| - |
| 99% of CDI |
| 2 annual installments from march 2013 |
| CPFL Energia guarantee |
CPFL Geração |
|
|
|
|
|
|
|
|
|
|
Banco Itaú BBA |
| - |
| 103,371 |
| 106.0% of CDI |
| 1 installment in February 2014 |
| CPFL Energia guarantee |
Banco do Brasil |
| 628,632 |
| 627,432 |
| 107.0% of CDI |
| 1 installment in April 2015 |
| CPFL Energia guarantee |
CERAN |
|
|
|
|
|
|
|
|
|
|
Banco Bradesco |
| - |
| 22,439 |
| CDI + 1.75% |
| 1 installment in April 2012 |
| No guarantee |
Foz do Chapecó |
|
|
|
|
|
|
|
|
|
|
Banco Alfa |
| 3,911 |
| - |
| 111.45% of CDI |
| 1 installment in January 2012 |
| No guarantee |
CPFL Renovaveis |
|
|
|
|
|
|
|
|
|
|
Banco Safra |
| 42,925 |
| - |
| CDI+ 0.4% |
| Annual installment up to 2014 |
| No guarantee |
Banco Safra |
| 32,022 |
| - |
| CDI+ 0.4% |
| Annual installment up to 2014 |
| No guarantee |
BNB |
| 152,136 |
| - |
| TJLP+8.08% |
| 168 monthly installments from January 2009 |
| Fiduciary sale |
Other |
|
|
|
|
|
|
|
|
|
|
Eletrobrás |
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
| 9,046 |
| 10,358 |
| RGR + 6.0% to 6.5% |
| Monthly installments up to December 2022 |
| Receivables and promissory notes |
CPFL Piratininga |
| 707 |
| 925 |
| RGR + 6% |
| Monthly installments up to July 2016 |
| Receivables and promissory notes |
RGE |
| 16,264 |
| 18,097 |
| RGR + 6% |
| Monthly installments up to July 2016 |
| Receivables and promissory notes |
CPFL Santa Cruz |
| 3,381 |
| 3,947 |
| RGR + 6% |
| Monthly installments up to April 2018 |
| Receivables and promissory notes |
CPFL Leste Paulista |
| 986 |
| 1,096 |
| RGR + 6% |
| Monthly installments up to February 2022 |
| Receivables and promissory notes |
CPFL Sul Paulista |
| 1,629 |
| 1,837 |
| RGR + 6% |
| Monthly installments up to July 2018 |
| Receivables and promissory notes |
CPFL Jaguari |
| 93 |
| 109 |
| RGR + 6% |
| Monthly installments up to May 2017 |
| Receivables and promissory notes |
CPFL Mococa |
| 383 |
| 415 |
| RGR + 6% |
| Monthly installments up to February 2022 |
| Receivables and promissory notes |
Other |
| 9,774 |
| 21,624 |
|
|
|
|
|
|
Subtotal Brazilian Currency - Cost |
| 6,693,824 |
| 5,096,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPFL Paulista (6) |
|
|
|
|
|
|
|
|
|
|
Debt Conversion Bond |
| 1,119 |
| 2,982 |
| US$ + Libor 6 months + 0.875% |
| 17 semiannual installments from April 2004 |
| Revenue/Government SP guaranteed |
C-Bond |
| 5,064 |
| 6,298 |
| US$ + 8% |
| 21 semiannual installments from April 2004 |
| Revenue/Government SP guaranteed |
Discount Bond |
| 16,403 |
| 14,570 |
| US$ + Libor 6 months + 0.8125% |
| 1 installment in April 2024 |
| Escrow deposits and revenue/ Gov.SP guarantee |
PAR-Bond |
| 23,734 |
| 21,082 |
| US$ + 6% |
| 1 installment in April 2024 |
| Escrow deposits and revenue/ Gov.SP guarantee |
Subtotal Foreign Currency - Cost |
| 46,320 |
| 44,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Measured at cost |
| 6,740,144 |
| 5,141,554 |
|
|
|
|
|
|
F - 40
Foreign Currency |
|
|
|
|
|
|
|
|
|
|
Measured at fair value |
|
|
|
|
|
|
|
|
|
|
Financial Institutions |
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
|
|
|
|
|
|
|
|
|
|
Banco ABN AMRO Real |
| - |
| 424,827 |
| Yen +1.49% (4) |
| 1 installment in January 2012 |
| No guarantee |
BNP Paribas |
| 195,602 |
| - |
| US$ + 2.78% (3) |
| 1 installment in June 2014 |
| Promissory notes and CPFL Energia guarantee |
J.P.Morgan |
| 95,259 |
| - |
| US$ + 2.74% (3) |
| 1 installment in July 2014 |
| Promissory notes and CPFL Energia guarantee |
J.P.Morgan |
| 94,364 |
| - |
| US$ + 2.55% (3) |
| 1 installment in August 2014 |
| Promissory notes and CPFL Energia guarantee |
Morgan Stanley |
| 95,086 |
| - |
| US$ + Libor 6 months + 1.75% (3) |
| 1 installment in September 2016 |
| Promissory notes and CPFL Energia guarantee |
Bank of America |
| 196,645 |
| - |
| US$ + 3.69 % (3) |
| 1 installment in July 2016 |
| Promissory notes and CPFL Energia guarantee |
Bank of America |
| 282,012 |
| - |
| US$ + 2.33% (3) |
| 1 installment in July 2014 |
| Promissory notes and CPFL Energia guarantee |
Societe Generale |
| 42,106 |
| - |
| US$ + 3.55% (3) |
| 1 installment in August 2016 |
| Promissory notes and CPFL Energia guarantee |
Citibank |
| 95,165 |
| - |
| US$ + Libor 6 months + 1.77% (3) |
| 1 installment in September 2016 |
| Promissory notes and CPFL Energia guarantee |
HSBC |
| 44,782 |
| - |
| US$ + Libor 6 months + 2.37% (3) |
| 1 installment in September 2014 |
| Promissory notes and CPFL Energia guarantee |
CPFL Piratininga |
|
|
|
|
|
|
|
|
|
|
Banco BNP Paribas |
| 56,862 |
| - |
| USD + 2.62% (3) |
| 1 installment in July 2014 |
| Promissory notes and CPFL Energia guarantee |
J.P.Morgan |
| 188,538 |
| - |
| USD + 2.52% (3) |
| 1 installment in August 2014 |
| Promissory notes and CPFL Energia guarantee |
Societe Generale |
| 55,249 |
| - |
| USD + 3.55% (3) |
| 1 installment in August 2016 |
| Promissory notes and CPFL Energia guarantee |
Citibank |
| 15,190 |
| - |
| US$ + Libor 6 months + 1.69% (3) |
| 1 installment in August 2016 |
| Promissory notes and CPFL Energia guarantee |
Sumitomo |
| 94,845 |
| - |
| US$ + Libor 6 months + 1.75% (3)(***) |
| 1 installment in August 2016 |
| Promissory notes and CPFL Energia guarantee |
CPFL Geração |
|
|
|
|
|
|
|
|
|
|
Citibank |
| 118,524 |
| - |
| US$ + Libor 6 months + 1.69% (3) |
| 1 installment in August 2016 |
| Promissory notes and CPFL Energia guarantee |
CPFL Leste Paulista |
|
|
| - |
|
|
|
|
|
|
Citibank - Law 4131 |
| 8,972 |
| - |
| US$ + Libor 6 months + 1.52% (3) |
| 1 installment in September 2014 |
| Promissory notes and CPFL Energia guarantee |
CPFL Sul Paulista |
|
|
| - |
|
|
|
|
|
|
Citibank - Law 4131 |
| 8,972 |
| - |
| US$ + Libor 6 months + 1.52% (3) |
| 1 installment in September 2014 |
| Promissory notes and CPFL Energia guarantee |
CPFL Jaguari |
|
|
| - |
|
|
|
|
|
|
Citibank - Law 4131 |
| 8,233 |
| - |
| US$ + Libor 6 months + 1.52% (3) |
| 1 installment in August 2014 |
| Promissory notes and CPFL Energia guarantee |
CPFL Mococa |
|
|
| - |
|
|
|
|
|
|
Citibank - Law 4131 |
| 7,849 |
| - |
| US$ + Libor 6 months + 1.52% (3) |
| 1 installment in September 2014 |
| Promissory notes and CPFL Energia guarantee |
Total Foreign Currency - fair value |
| 1,704,254 |
| 424,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - Consolidated |
| 8,444,398 |
| 5,566,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The subsdiaries hold swaps converting the operating cost of currency variation to interest tax variation in reais, corresponding to : (1) 143,9% of the CDI (3) 95,50% to 106,50% of the CDI (2) 106.3% of the CDI (6) Since there are dollar assets indexed (note 10), the subsidiary has a partial swap of R$24.268 to convert exchange variation into 105.95% of CDI (*) Efective rate: CPFL Paulista and CPFL Piratininga - 98.5% CDI + 2.88% RGE - 98.5% of CDI + 2,5%p.a. CPFL Santa Cruz, CPFL Sul Paulista, CPFL Leste Paulista, CPFL Mococa, CPFL Jaguari - 98.5% CDI + 2.,28% (**) Efective rate: CPFL Paulista - 99.0% of CDI + 0.5% and CPFL Piratininga - 99.0% of CDI + 2.4% RGE - 99,0% of CDI + 2.38% p.a. CPFL Santa Cruz, CPFL Sul Paulista, CPFL Leste Paulista, CPFL Mococa, CPFL Jaguari - 99.0% CDI + 2.88% (***)Efective rate CPFL Pitatininga - 98.65% of CDI + 0.10% | ||||||||||
In conformity with IAS 39 and 32, the Company and its subsidiaries classified their debts, as segregated in the tables above, as (i) financial liabilities not measured at fair value (or measured at cost), and (ii) financial liabilities measured at fair value through profit or loss.
In 2011, the subsidiaries CPFL Paulista, CPFL Piratininga, CPFL Geração, CPFL Sul Paulista, CPFL Leste Paulista, CPFL Mococa and CPFL Jaguari raised funds in foreign currency for working capital and recorded them as financial liabilities measured at fair value.
The objective of classification of financial liabilities measured at fair value is to compare the effects of recognition of income and expense derived from marking hedge derivatives to market, tied to the debts, in order to obtain more relevant and consistent accounting information. At December 31, 2011, the total balance of the debt measured at fair value was R$ 1,704,256 (R$ 424,827 and R$1,095,103 at December 31, 2010 and 2009 respectively), and the amounts corresponding to the amortized cost are as follows:
F - 41
|
| Measured at cost |
| Measured at | ||||||
Foreign Currency |
| Interest - Current and | Principal |
| Total |
| ||||
Measured at fair value |
|
| Current |
| Noncurrent |
|
| |||
CPFL Paulista |
|
|
|
|
|
|
|
|
|
|
BNP Paribas |
| 2,610 |
| - |
| 192,020 |
| 194,630 |
| 195,602 |
J.P.Morgan |
| 1,235 |
| - |
| 93,790 |
| 95,025 |
| 95,259 |
J.P.Morgan |
| 990 |
| - |
| 93,790 |
| 94,780 |
| 94,364 |
Morgan Stanley |
| 610 |
| - |
| 93,790 |
| 94,400 |
| 95,086 |
Bank of America |
| 3,288 |
| - |
| 187,580 |
| 190,868 |
| 196,645 |
Bank of America |
| 3,114 |
| - |
| 281,370 |
| 284,484 |
| 282,012 |
Societe Generale |
| 608 |
| - |
| 40,564 |
| 41,172 |
| 42,106 |
Citibank |
| 604 |
| - |
| 93,790 |
| 94,394 |
| 95,165 |
HSBC |
| 299 |
| - |
| 45,019 |
| 45,319 |
| 44,782 |
|
| 13,357 |
| - |
| 1,121,714 |
| 1,135,071 |
| 1,141,020 |
CPFL Piratininga |
|
|
|
|
|
|
|
|
|
|
Banco BNP Paribas |
| 639 |
| - |
| 56,274 |
| 56,913 |
| 56,862 |
J.P.Morgan |
| 1,957 |
| - |
| 187,580 |
| 189,537 |
| 188,538 |
Societe Generale |
| 798 |
| - |
| 53,226 |
| 54,024 |
| 55,249 |
Citibank |
| 115 |
| - |
| 15,007 |
| 15,122 |
| 15,190 |
Sumitomo |
| 715 |
| - |
| 93,415 |
| 94,130 |
| 94,845 |
|
| 4,224 |
| - |
| 405,502 |
| 409,726 |
| 410,684 |
CPFL Geração |
|
|
|
|
|
|
|
|
|
|
Citibank |
| 903 |
| - |
| 117,237 |
| 118,140 |
| 118,526 |
CPFL Leste Paulista |
|
|
|
|
|
|
|
|
|
|
Citibank - Law 4131 |
| 54 |
| - |
| 8,939 |
| 8,993 |
| 8,972 |
CPFL Sul Paulista |
|
|
|
|
|
|
|
|
|
|
Citibank - Law 4131 |
| 54 |
| - |
| 8,939 |
| 8,993 |
| 8,972 |
CPFL Jaguari |
|
|
|
|
|
|
|
|
|
|
Citibank - Law 4131 |
| 47 |
| - |
| 7,821 |
| 7,868 |
| 7,849 |
CPFL Mococa |
|
|
|
|
|
|
|
|
|
|
Citibank - Law 4131 |
| 59 |
| - |
| 8,178 |
| 8,237 |
| 8,233 |
|
| 18,698 |
| - |
| 1,678,330 |
| 1,697,028 |
| 1,704,256 |
|
|
|
|
|
|
|
|
|
|
|
The changes in the fair values of these debts are recognized in the financial income (expense) of the Company and its subsidiaries. The losses of R$ 7,359 (gain of R$ 4,965 at December 31, 2010) obtained by marking the debts to market and derivatives of R$ 1,241 (loss of R$ 7,607 at December 31, 2010) of marking to market the derivative financial instruments contracted as a hedge against exchange variations (Note 32), resulting in a total loss of R$ 8,600 (R$ 2,642 at December 31, 2010).
Main fund-raising in the period:
Brazilian currency
BNDES – Investment:
FINEM V (CPFL Paulista) – The subsidiary received approval for financing of R$ 291,043 from the BNDES in 2010, part of a FINEM credit line, to be invested in implementation of the investment plan for the second half-year of 2010 and for 2011. R$ 129,030 was released in 2011. There will be a final release in the first quarter of 2012 (at the time of the proof of adequate investments relating to fourth quarter of 2011) and any outstanding balance will be cancelled.
FINAME (CPFL Paulista) – The subsidiary obtained approval for financing of R$ 92,183 from the BNDES in 2009, part of a FINAME credit line, to be invested in acquisition of equipment for the Electricity System in 2010and 2011. In 2011, the subsidiary received the amount of R$ 31,468 and the outstanding balance of R$ 24,123 was cancelled. The interest will be paid quarterly, and amortized monthly from January 15, 2012.
F - 42
FINEM IV (CPFL Piratininga) –The subsidiary received approval for financing from the BNDES in 2010, of R$ 165,621 part of a FINEM credit line, to be used for the implementation of the investment plan for the second half-year of 2010 and for 2011. R$ 75,596 was released in 2011. There will be a final release in the first quarter of 2012 (at the time of the proof of adequate investments relating to fourth quarter of 2011) and any outstanding balance will be cancelled.
FINAME (CPFL Piratininga) -The subsidiary obtained approval for financing of R$ 48,116 from the BNDES in 2009, part of a FINAME credit line, to be invested in acquisition of equipment for the Electricity System in 2010 and 2011. In 2011, the subsidiary received the amount of R$ 9,133 and the outstanding balance of R$ 16,116 was cancelled. The interest will be paid quarterly, and amortized monthly from January 15, 2012.
FINEM V (RGE) – The subsidiary received approval for financing of R$ 167,861 from the BNDES in 2010, part of a FINEM credit line, to be invested in implementation of the investment plan for the second half-year of 2010 and for 2011. The subsidiary received the amount of R$ 62,132 during the year. There will be a final release in the first quarter of 2012 (at the time of the proof of adequate investments relating to fourth quarter of 2011) and any outstanding balance will be cancelled.
FINAME (RGE) -The subsidiary received approval for financing of R$ 32,419 from the BNDES in 2009, part of a FINAME credit line, to be invested in acquisition of equipment for the Electricity System in 2010 and 2011. The amount of R$ 11,211 was received in 2010 and the outstanding balance will be cancelled. The interest is paid quarterly, and amortized monthly from January 15, 2012.
FINEM I (CPFL Renováveis) – CPFL Renováveis had these financing transactions with the BNDES, consolidated in the Company’s financial statements as from August 1, 2011 (Notes 1 and 14.4).
FINEM III / FINAME I (CPFL Renováveis) – In 2010, the subsidiaries CPFL Geração and CPFL Brasil obtained approval for financing from the BNDES of R$ 574,098 and R$ 398,547, respectively, which will be used for the indirect subsidiaries Santa Clara I to VI and Eurus VI and CPFL Bio Formosa, CPFL Bio Pedra, CPFL Bio Ipê and CPFL Bio Buriti. The amount of R$ 587,894 was released in 2011 and the outstanding amount of R$384,751 is scheduled for release by April 2013. As a result of the corporate restructuring described in Notes 1 and 14.4, these debts have been recorded in the subsidiary CPFL Renováveis since August 1, 2011.
FINEM V (CPFL Renováveis)- The indirect subsidiary Santa Luzia, acquired in the context of the business combination described in Note 14.4, had these transactions with the BNDES, which have been consolidated in the Company`s financial statements since December 2011.
FINEM (Epasa)–In August 2011, the indirect subsidiary EPASA signed a financing agreement of R$ 203,343 (R$ 107,263 in proportion to the Company’s participation) with the BNDES for the construction of the Termoparaíba and Termonordeste thermoelectric power plants. The amount of R$ 194,400 (R$ 102,546 in proportion to the Company’s participation) was released in 2011. The principal and interest will be paid monthly until August 2024.
BNB – (EPASA) – In December 2009, the indirect subsidiary EPASA contracted a loan of R$ 214,278 (R$ 113,032 in proportion to the Company's participation) from Banco Nordeste do Brasil – BNB, tobe invested in the construction of the Termoparaíba and Termonordeste thermoelectric power plants.The amount ofR$ 19,163 was released in 2011 (R$ 10,109 in proportion to the Company’s participation). The outstanding balance of R$ 4,676 was cancelled. The interest will be paid quarterly to December 2012 and monthly from January 2013. There are no restrictive covenants for this financing agreement.
Financial institutions:
-Banco do Brasil – Working capital (CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Sul Paulista, CPFL Leste Paulista, CPFL Mococa and CPFL Jaguari) - these subsidiaries obtained approval for financing of working capital, of which a total amount of R$ 267,870 was available (R$ 261,504 net of costs) in 2011. The interest will be capitalized monthly and amortized together with the installments of the principal.
F - 43
Banco Alfa (Foz do Chapecó)–a credit line of R$ 50,000 (R$ 25,500 in proportion to the Company’s participation) was obtained from Banco Alfa in 2011, to reinforce working capital.
Bank of América Merrill Lynch, Banco BNP Paribás, Banco J.P Morgan, Banco Societe Generale, Banco Citibank, Banco Morgan Stanley, Banco HSBC e Banco Sumitomo–Working capital (CPFL Paulista, CPFL Piratininga, CPFL Geração, CPFL Sul Paulista, CPFL Leste Paulista, CPFL Mococa and CPFL Jaguari)– These subsidiaries obtained approval for foreign currency working capital financing, of which R$ 1,418,155 (R$ 1,338,306 net of costs) wasavailable in 2011, to cover working capital. The interest will be paid half-yearly and the principal will be paid by September 2016.
The maturities of the principal long-term balances of loans and financing, taking into consideration only the amounts recorded at cost, are scheduled as follows:
2013 |
| 955,186 |
2014 |
| 1,759,874 |
2015 |
| 1,232,762 |
2016 |
| 1,097,396 |
2017 |
| 401,302 |
After 2017 |
| 1,928,708 |
Subtotal |
| 7,375,228 |
Mark to market |
| 7,227 |
Total |
| 7,382,455 |
|
|
|
The main financial rates used for restatement of Loans and Financing and the breakdown of the indebtedness in local and foreign currency, taking into consideration the effects of translation of the derivative instruments, are shown below:
|
| Accumulated variation - % |
| % of debt | ||||
Index |
| December 31, 2011 | December 31, 2010 |
| December 31, 2011 |
| December 31, 2010 | |
IGP-M |
| 5.10 |
| 11.32 |
| 0.31 |
| 0.77 |
UMBND |
| 12.86 |
| 3.76 |
| 1.12 |
| 1.69 |
TJLP |
| 6.00 |
| 6.00 |
| 52.87 |
| 58.23 |
CDI |
| 11.59 |
| 9.75 |
| 19.78 |
| 33.80 |
Dollar |
| 1.88 |
| 1.67 |
| 20.74 |
| - |
Other |
| - |
| - |
| 5.19 |
| 5.53 |
|
|
|
|
|
| 100 |
| 100 |
|
|
|
|
|
|
|
|
|
RESTRICTIVE COVENANTS
BNDES:
Financing from the BNDES restricts the subsidiaries CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Mococa, CPFL Jaguari, CPFL Leste Paulista and CPFL Sul Paulista to: (i) not paying dividends and interest on shareholders’ equity totaling more than the minimum mandatory dividend laid down by law without complying with all the contractual obligations; (ii) full compliance with the restrictive conditions established in the agreement; and (iii) maintaining certain financial ratios within pre-established parameters, as follows:
CPFL Paulista
F - 44
· Net indebtedness divided by EBITDA – maximum of 3.0;
· Net indebtedness divided by the sum of net indebtedness and net equity – maximum of 0.90.
CPFL Piratininga
· Net indebtedness divided by EBITDA – maximum of 2.5;
· Net indebtedness divided by the sum of net indebtedness and net equity – maximum of 0.80.
RGE
· Net indebtedness divided by EBITDA – maximum of 2.5;
· Net indebtedness divided by the sum of net indebtedness and net equity – maximum of 0.5.
CPFL Geração
The loans from theBNDES raised by the subsidiary CERAN and the jointly-owned subsidiaries ENERCAN, BAESA and Foz do Chapecóestablish restrictions on the payment of dividends to the subsidiary CPFL Geraçãohigher than the minimum mandatory dividend of 25% without the prior agreement of the BNDES.
Additionally, for the loan from BNDES raised for the subsidiary EPASA (FINEM), there is a covenant to debt coverage ratio in 1.1 times, during the period of depreciation. In case of failure of the ratio the distribution of dividends above the minimum required is prohibited until the index is re-established.
CPFL Renováveis
The main restrictive clauses of the FINEM I loans from the BNDES are:
i) Debt coverage ratio of 1.2 during the amortization period;
ii) Own capitalization ratio of 25% or more during the amortization period.
Banco do Brasil – Working capital
· Net indebtedness divided by EBITDA – maximum of3.0.
Foreign currency fund raisings - Bank of América, BNP Paribás, J.P Morgan, Societe Generale, Citibank, Morgan Stanley, HSBC and Sumitomo
The foreign currency loans from the Bank of America, BNP Paribás, J.P Morgan, Société Générale, Citibank, Morgan Stanley, HSBC and Sumitomo banks are subject to certain restrictive conditions,and include clauses that require the subsidiaries that obtained the loans to maintain certain financial ratios within pre-established parameters.
The ratios required are as follows: (i)Net indebtedness divided by EBITDA – maximum of3.75 and (ii)EBITDA divided by Financial Income (Expense) – minimum of2.25.
Other loan and financing agreements of the direct and indirect subsidiaries are subject to early settlement in the event of changes in the Company’s structure or in the corporate structure of the subsidiaries that result in the loss of the share control or of control over management of the Company by the Company’s current shareholders.
Furthermore, failure to comply with the obligations or restrictions mentioned could result in default in relation to other contractual obligations (cross default).
The Management of the Company and its subsidiaries monitor these ratios systematically and constantly to ensure that the contractual conditions are complied with. In the opinion of the management, these restrictive covenants and clauses are being adequately complied with.
F - 45
| December 31, 2011 |
|
| December 31, 2010 |
|
| ||||||||||
| Interest |
| Current |
| Noncurrent | Total | Interest |
| Current |
| Noncurrent | Total | ||||
Parent Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 16,403 |
| 150,000 |
| 300,000 |
| 466,403 | 15,529 |
| - |
| 450,000 |
| 465,529 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Paulista |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | 3,846 |
| 213,333 |
| 213,333 |
| 430,513 | 5,925 |
| 213,333 |
| 426,667 |
| 645,925 | ||
4th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 6,323 |
| 109,601 |
| - |
| 115,924 | ||
5th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 4,704 |
| - |
| 482,363 |
| 487,067 | - |
| - |
| - |
| - | ||
| 8,551 |
| 213,333 |
| 695,696 |
| 917,580 | 12,248 |
| 322,934 |
| 426,667 |
| 761,849 | ||
CPFL Piratininga |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | - |
| - |
| - |
| - | 10,733 |
| 200,000 |
| - |
| 210,733 | ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 7,310 |
| - |
| 259,129 |
| 266,439 | 7,013 |
| - |
| 258,868 |
| 265,881 | ||
4th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 1,845 |
| - |
| 278,043 |
| 279,888 | ||
5th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 1,555 |
| - |
| 159,405 |
| 160,960 | - |
| - |
| - |
| - | ||
| 8,865 |
| - |
| 418,534 |
| 427,399 | 19,591 |
| 200,000 |
| 536,911 |
| 756,502 | ||
RGE |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
2nd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | - |
| - |
| - |
| - | 2,019 |
| 28,370 |
| - |
| 30,389 | ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | 609 |
| 33,333 |
| 33,333 |
| 67,275 | 939 |
| 33,333 |
| 66,667 |
| 100,939 | ||
2nd Series | 7,950 |
| 46,667 |
| 46,667 |
| 101,284 | 7,721 |
| 46,667 |
| 93,333 |
| 147,721 | ||
3rd Series | 1,848 |
| 13,333 |
| 13,333 |
| 28,514 | 1,824 |
| 13,333 |
| 26,667 |
| 41,824 | ||
4th Series | 1,226 |
| 16,667 |
| 16,667 |
| 34,560 | 1,335 |
| 16,667 |
| 33,333 |
| 51,335 | ||
5ª Series | 1,226 |
| 16,667 |
| 16,667 |
| 34,560 | 1,335 |
| 16,667 |
| 33,333 |
| 51,335 | ||
4th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 10,633 |
| 184,623 |
| - |
| 195,256 | ||
5th Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 680 |
| - |
| 69,699 |
| 70,379 | - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Santa Cruz | 13,539 |
| 126,667 |
| 196,366 |
| 336,572 | 25,806 |
| 339,660 |
| 253,333 |
| 618,799 | ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 454 |
| - |
| 64,694 |
| 65,148 | - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Leste Paulista |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 1,400 |
| 23,965 |
| - |
| 25,365 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Sul Paulista |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 926 |
| 15,979 |
| - |
| 16,905 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Jaguari |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 583 |
| 9,983 |
| - |
| 10,566 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Brasil |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series |
|
|
|
|
|
| 9,545 |
| 164,728 |
| - |
| 174,273 | |||
2st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 12,940 |
| - |
| 1,315,580 |
| 1,328,520 |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CPFL Geração |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
2nd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | 24,327 |
| 424,266 |
| - |
| 448,593 | ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 7,423 |
| - |
| 263,137 |
| 270,560 | 7,121 |
| - |
| 263,137 |
| 270,258 | ||
4rd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 6,666 |
| - |
| 677,527 |
| 684,193 | - |
| - |
| - |
| - | ||
| 14,089 |
| - |
| 940,664 |
| 954,753 | 31,448 |
| 424,266 |
| 263,137 |
| 718,851 | ||
EPASA |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
2nd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | - |
| - |
| - |
| - | - |
| - |
| 204,406 |
| 204,406 | ||
3nd Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 3,670 |
| 5,480 |
| 62,364 |
| 71,514 | - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
BAESA |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | 299 |
| 3,150 |
| 11,812 |
| 15,261 | 357 |
| 3,165 |
| 15,030 |
| 18,552 | ||
2nd Series | 245 |
| 2,584 |
| 9,691 |
| 12,520 | 294 |
| 2,569 |
| 12,207 |
| 15,070 | ||
| 544 |
| 5,734 |
| 21,503 |
| 27,781 | 651 |
| 5,734 |
| 27,237 |
| 33,622 | ||
Enercan |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Series | 281 |
| 3,616 |
| 47,009 |
| 50,906 | 339 |
| 2,709 |
| 50,623 |
| 53,671 | ||
CPFL Renováveis |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Single series | 4,214 |
| 26,355 |
| 486,241 |
| 516,810 | - |
| - |
| - |
| - | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| 83,552 |
| 531,186 |
| 4,548,651 |
| 5,163,388 | 118,066 |
| 1,509,958 |
| 2,212,314 |
| 3,840,338 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsdiaries hold swap converting the local cost of currency variation to interest tax variation in reais, corresponding to (1) 104.4% of CDI (2) 105.07% of CDI |
F - 47
|
|
|
|
|
|
|
|
|
|
|
|
| Issued |
| Annual Remuneration | Annual Effective rate | Amortization Conditions |
| Collateral | ||
Parent Company |
|
|
|
|
|
|
|
| ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 45,000 |
| CDI + 0.45% (1) | CDI + 0.53% |
| 3 annual installments from September 2012 | Unsecured | |||
|
|
|
|
|
|
|
|
|
|
|
CPFL Paulista |
|
|
|
|
|
|
|
| ||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
1st Series | 64,000 |
| 104.4% of CDI | 104.4% CDI + 0.05% | 3 annual installments from December 2011 | CPFL Energia guarantee | ||||
4th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 175,000 |
| 110.3% of CDI | 110.3% CDI + 0.79% | 2 annual installments from July 2010 | CPFL Energia guarantee | ||||
5th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 4,840 |
| CDI +1.30% |
| CDI + 1.40% |
| 1 installment in June 2016 |
| CPFL Energia guarantee | |
|
|
|
|
|
|
|
|
|
|
|
CPFL Piratininga |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
1st Series | 40,000 |
| 104.0% of CDI | 104.0% CDI + 0.16% | 2 annual installments from January 2010 | CPFL Energia guarantee | ||||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 260 |
| 107.0% of CDI | 107.0% CDI + 0.67% | April 1st, 2015 |
| CPFL Energia guarantee | |||
4th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 280 |
| 109.09% of CDI | 109.09% CDI +0.83% | December 10, 2013 |
| CPFL Energia guarantee | |||
5th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 1,600 |
| CDI + 1.30% |
| CDI + 1.41% |
| June 1st, 2016 |
| CPFL Energia guarantee | |
|
|
|
|
|
|
|
|
|
|
|
RGE |
|
|
|
|
|
|
|
|
|
|
2nd Issue |
|
|
|
|
|
|
|
|
|
|
1st Series | 2,620 |
| IGP-M + 9.6% | IGP-M + 9.73% | April 1st, 2011 |
| Unsecured | |||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
1st Series | 1 |
| CDI + 0.60% (2) | CDI + 0.71% |
| 3 annual installments from December 2011 | CPFL Energia guarantee | |||
2nd Series | 1 |
| CDI + 0.60% (3) | CDI + 0.71% |
| 3 annual installments from December 2011 | CPFL Energia guarantee | |||
3rd Series | 1 |
| CDI + 0.60% (4) | CDI + 0.71% |
| 3 annual installments from December 2011 | CPFL Energia guarantee | |||
4th Series | 1 |
| CDI + 0.60% (5) | CDI + 0.84% |
| 3 annual installments from December 2011 | CPFL Energia guarantee | |||
5ª Series |
| 1 |
| CDI + 0.60% (5) | CDI + 0.84% |
| 3 annual installments from December 2011 | CPFL Energia guarantee | ||
4th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 185,000 |
| 110.30% of CDI | 110.3% CDI + 0.82% | July 1st, 2011 |
| Unsecured | |||
5th Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 700 |
| CDI + 1.30% |
| CDI + 1.43% |
| June 1st, 2016 |
| CPFL Energia guarantee | |
|
|
|
|
|
|
|
|
|
|
|
CPFL Santa Cruz |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 650 |
| CDI + 1.40% |
| CDI + 1.52% |
| June 11, 2018 |
| CPFL Energia guarantee | |
|
|
|
|
|
|
|
|
|
|
|
CPFL Leste Paulista |
|
|
|
|
|
| ||||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 2,400 |
| 111.90% of CDI | 111.9% CDI + 0.65% | 1 installment in July 1st, 2011 | CPFL Energia guarantee | ||||
|
|
|
|
|
|
|
|
|
|
|
CPFL Sul Paulista |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 1,600 |
| 111.00% of CDI | 111% CDI + 0.6% | 1 installment in July 1st, 2011 | CPFL Energia guarantee | ||||
|
|
|
|
|
|
|
|
|
|
|
CPFL Jaguari |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 1,000 |
| 111.90% of CDI | 111.9% CDI + 0.79% | 1 installment in July 1st, 2011 | CPFL Energia guarantee | ||||
|
|
|
|
|
|
|
|
|
|
|
CPFL Brasil |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 16,500 |
| 111% of CDI | 111% CDI + 0.57% | 1 installment in July 1st, 2011 | CPFL Energia guarantee | ||||
2st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 13,200 |
| CDI + 1.40% |
| CDI + 1.48% |
| 2 annual installments from June 2017 | CPFL Energia guarantee | ||
|
|
|
|
|
|
|
|
|
|
|
CPFL Geração |
|
|
|
|
|
|
|
| ||
2nd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 425,250 |
| 109.8% of CDI | 109.8% CDI + 0.58% | July 1st, 2011 |
| CPFL Energia guarantee | |||
3rd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 264 |
| 107.0% of CDI | 107.0% of CDI + 0.67% | 1 installment in April 2015 |
| CPFL Energia guarantee | |||
4rd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 6,800 |
| 100% do CDI + 1.40% p.a. | CDI + 1.49% |
| 2 annual installments from June 2017 | CPFL Energia guarantee | |||
|
|
|
|
|
|
|
|
|
|
|
EPASA |
|
|
|
|
|
|
|
|
|
|
2nd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 270 |
| 111% of CDI | 111% of CDI + 0.49% | 12 monthly installments from January 2012 | CPFL Energia guarantee | ||||
3nd Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 130 |
| 113.5% do CDI | 113.5% + 0.189% | 48 monthly installments from Setember 2012 | CPFL Energia guarantee | ||||
|
|
|
|
|
|
|
|
|
|
|
BAESA |
|
|
|
|
|
|
|
|
|
|
1st Series | 9,000 |
| CDI + 0.3% |
| CDI + 0.43% |
| Quarterly with settlement in August 2016 | Letters of Guarantee | ||
2nd Series | 8,100 |
| CDI + 0.4% |
| 106% CDI + 0.12% | Annual with settlement in August 2016 | Letters of Guarantee | |||
|
|
|
|
|
|
|
|
|
|
|
Enercan |
|
|
|
|
|
|
|
|
|
|
1st Series |
| 110 |
| 100% of CDI + 1.25% p.a | 111.10% do CDI | Quarterly with settlement in December 2025 | No guarantees | |||
CPFL Renováveis |
|
|
|
|
|
|
|
| ||
1st Issue |
|
|
|
|
|
|
|
|
|
|
Single series | 528,649,076 |
| TJLP + 1.00% | TJLP + 1.00% + 0.22% | 39 monthly installments from 2009 | Fiduciary sale | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsdiaries hold swap converting the local cost of currency variation to interest tax variation in reais, corresponding to | ||||||||||
(1) 104.4% of CDI |
| (3) 104.85% of CDI |
| (5) 104.87% of CDI |
|
| ||||
(2) 105.07% of CDI |
| (4) 104.9% of CDI |
|
|
|
| ||||
F - 48
Interest
Interest on the debentures will be paid half yearly, except for the 1st series of the jointly-owned subsidiary BAESA, which will be paid quarterly.
The maturities of the long-term balance of debentures are scheduled as follow:
2013 |
| 546,961 |
2014 |
| 207,154 |
2015 |
| 579,420 |
2016 |
| 761,716 |
2017 |
| 1,063,313 |
After 2017 |
| 1,390,087 |
Total |
| 4,548,651 |
Fund raising during the year
In 2011, the subsidiaries CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Brasil, CPFL Geração and EPASA subscribed and paid up registered, book entry, single series, unsecured debentures not convertible into shares, with an additional fidejussory guarantee. The funds will be used to refinance the debts maturing in 2011, to reinforce working capital and for investment plans. Interest is payable on the debentures half-yearly from the issue date. Details of the issue are provided below:
Company |
| Issued |
| Nominal value per unit (R$ Thousand) | Total (R$ Thousand) | Net total of issuance costs (R$ Thousand) | ||
CPFL Paulista |
| 4,840 |
| 100 |
| 484,000 |
| 482,165 |
CPFL Piratininga |
| 1,600 |
| 100 |
| 160,000 |
| 159,324 |
RGE |
| 700 |
| 100 |
| 70,000 |
| 69,666 |
CPFL Santa Cruz |
| 650 |
| 100 |
| 65,000 |
| 64,670 |
CPFL Geração |
| 6,800 |
| 100 |
| 680,000 |
| 677,305 |
CPFL Brasil |
| 13,200 |
| 100 |
| 1,320,000 |
| 1,315,301 |
Epasa |
| 130 |
| 100 |
| 130,000 |
| 129,524 |
Total |
|
|
|
|
| 2,909,000 |
| 2,897,955 |
|
|
|
|
|
|
|
|
|
RESTRICTIVE COVENANTS
The debentures are subject to certain restrictive covenants and include clauses that require the Company and its subsidiaries to maintain certain financial ratios within pre-established parameters. The main ratios are as follows:
CPFL Energia
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25;
CPFL Paulista
Third issuance
· Net indebtedness divided by EBITDA – maximum of 3.0;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
F - 49
Fifth issuance
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
CPFL Piratininga
Third issuance
· Net indebtedness divided by EBITDA – maximum of 3.0;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25;
Fifth issuance
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
RGE
Third issuance
· There are no restrictive covenants.
Fifth issuance
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
CPFL Geração
Third issuance
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.0.
Forth issuance
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
CPFL Brasil
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
CPFL Santa Cruz
· Net indebtedness divided by EBITDA – maximum of 3.75;
· EBITDA divided by Financial Income (Expense) – minimum of 2.25.
BAESA
· Total indebtedness– restricted to 75% of their total assets.
CPFL Renováveis
The debentures of the indirect subsidiary Jantus are subject to restrictive clauses in respect of establishing liens and additional indebtedness, distribution of dividends and changes to their shareholding structure.
F - 50
Certain debentures of subsidiaries and jointly-owned subsidiaries are subject to early settlement in the event of changes in the Company’s structure or in the corporate structure of the subsidiaries that result in the loss of the share control or of control over management of the Company by theCompany’s current shareholders.
Failure to comply with the restrictions mentioned could result in default in relation to other contractual obligations (cross default).
In the opinion of the management of the Company and its subsidiaries and jointly-owned subsidiaries, these restrictive covenants and clauses are being adequately complied with.
( 18 ) PRIVATE PENSION FUND
The subsidiaries CPFL Paulista, CPFL Piratininga and CPFL Geração, through Fundação CESP, the subsidiary RGE, through Fundação CEEE de Seguridade Social – ELETROCEEE and Bradesco Vida e Previdência, the subsidiary CPFL Santa Cruz through BB Previdência – Fundo de Pensão Banco do Brasil and the subsidiary CPFL Jaguariúna through IHPREV Fundo de Pensão, sponsor supplementary retirement and pension plans for their employees.
18.1 – Characteristics
- CPFL Paulista
The plan currently in force for the employees of the subsidiary CPFL Paulista is a Mixed Benefit Plan, with the following characteristics:
a) Defined Benefit Plan (“BD”) – in force until October 31, 1997 – a defined benefit plan, which grants a Proportional Supplementary Defined Benefit (“BSPS”), in the form of a lifetime income convertible into a pension, to participants enrolled prior to October 31, 1997, the amount being defined in proportion to the accumulated past service time up to that date, based on compliance with the regulatory requirements for granting. The total responsibility for coverage of actuarial deficits of this plan falls to the subsidiary.
b) Mixed model, as from November 1, 1997, which covers:
· benefits for risk (disability and death), under a defined benefit plan, in which the subsidiary assumes responsibility for Plan’s actuarial deficit, and
· scheduled retirement, under a defined contribution plan, consisting of a benefit plan, which is a defined contribution plan up to the granting of the income, and does not generate any actuarial liability for the subsidiary CPFL Paulista. The benefit plan only becomes a defined benefit plan, consequently generating actuarial responsibility for the subsidiary, after the granting of a lifetime income, convertible or not into a pension.
As a result of modification of the Retirement Plan in October 1997, a liability was recognized as payable by the subsidiary CPFL Paulista in relation to the plan deficit calculated by the external actuaries of Fundação CESP. The liability, to be settled in 260 installments (240 monthly and 20 annually) plus interest of 6% p.a. and restatement at the IGP-DI rate (FGV), is amortized on a monthly basis. Under the Contractual Amendment signed with Fundação CESP on January 17, 2008, the payment terms were amended to 238 monthly installments and 19 annual installments, as of the base date of December 31, 2007, with final maturity on October 31, 2027. The balance of the obligation at December 31, 2011 is R$ 452,756 (R$479,877 in 2010 and R$ R$508,706 in 2009). The contract amount differs from the carrying amount recorded by the subsidiary, which is in conformity with IAS 19.
Managers may opt for a Free Benefit Generator Plan – PGBL (defined contribution), operated by either Banco do Brasil or Bradesco.
- CPFL Piratininga
As a result of the spin-off of Bandeirante Energia S.A. (the subsidiary’s predecessor), the subsidiary CPFL Piratininga assumed the responsibility for the actuarial liabilities for its retired and discharged employees up to the date of the spin-off, as well as the responsibilities relating to the active employees transferred to CPFL Piratininga.
F - 51
On April 2, 1998, the Supplementary Welfare Office – “SPC”, approved the restructuring of the retirement plan previously maintained by Bandeirante, creating a "Proportional Supplementary Defined Benefit Plan – BSPS”, and a "Mixed Benefit Plan", with the following characteristics:
a) Defined Benefit Plan (“BD”) - in force until March 31, 1998 – a defined-benefit plan, which concedes a Proportional Supplementary Defined Benefit (BSPS), in the form of a lifetime income convertible into a pension to participants registered up to March 31, 1998, to an amount calculated in proportion to the accumulated past service time up to that date, based on compliance with the regulatory requirements for granting. In the event of death while working or the onset of a disability, the benefits incorporate the entire past service time. CPFL Piratininga has full responsibility for covering the actuarial deficits of this Plan.
b) Defined Benefit Plan - in force after March 31, 1998 – defined-benefit type plan, which concedes a lifetime income convertible into a pension based on the past service time accumulated after March 31, 1998, based on 70% of the average actual monthly salary for the last 36 months of active service. In the event of death while working or the onset of a disability, the benefits incorporate the entire past service time (including the accumulated time up to March 31, 1998). The responsibility for covering the actuarial deficits of this Plan is equally divided between CPFL Piratininga and the participants.
c) Defined Contribution Plan – implemented together with the Defined Benefit plan effective after March 31, 1998. This is a defined-benefit type pension plan up to the granting of the income, and generates no actuarial liability for CPFL Piratininga. The pension plan only becomes a Defined Benefit type plan after the concession of the lifetime income, convertible (or not) into a pension, and accordingly starts to generate actuarial liabilities for the subsidiary.
In September 1997, through a contractual instrument of adjustment of reserves to be amortized, Eletropaulo Metropolitana El. São Paulo S.A. (the predecessor of Bandeirante) recognized an obligation to pay referring to the plan deficit determined at the time by the external actuaries of the Fundação CESP, to be liquidated in 260 installments (240 monthly and 20 annually), amortized monthly, plus interest of 6% p.a. and restatement at the IGP-DI rate (FGV). Under the Contractual Amendment, signed with Fundação CESP on January 17, 2008, the payment terms were amended to 221 monthly payments and 18 annual installments, as of December 31, 2007, with final maturity on May 31, 2026. The balance of the obligation at December 31, 2011 is R$126.669 (R$133.170 in 2010 and R$ 150,444 in 2009). The contract amount differs from the carrying amount recorded by the subsidiary, which is in conformity with IAS 19.
Managers may opt for a Free Benefit Generator Plan – PGBL (defined contribution), operated by either Banco do Brasil or Bradesco.
- RGE
A defined benefit type plan with a benefit level, equal to 100% of the adjusted average of the most recent salaries less the presumed Social Security benefit, with a Segregated Net Asset administered by ELETROCEEE. Only those whose work contracts were transferred from CEEE to RGE are entitled to this benefit. A private pension plan was set up in January 2006 with Bradesco Vida e Previdência for employees admitted from 1997.
- CPFL Santa Cruz
The benefits plan of the subsidiary CPFL Santa Cruz, administered by BB Previdência - Fundo de Pensão do Banco do Brasil, is a defined contribution plan.
- CPFL Jaguariúna
In December 2005, the companies joined the CMSPREV private pension plan, administered by IHPREV Pension Fund. The plan is structured as a defined contribution plan.
- CPFL Geração
The employees of the subsidiary CPFL Geração belong to the same pension plan as CPFL Paulista.
With the modification of the Retirement Plan, at that point maintained by CPFL Paulista, in October 1997, a liability was recognized as payable by the subsidiary CPFL Geração, in relation to the plan deficit calculated by the external actuaries of Fundação CESP, to be amortized in 260 installments (240 monthly and 20 annually), plus interest of 6% p.a. and restatement at the IGP-DI rate (FGV). Under the Contractual Amendment, signedwith Fundação CESP on January 17, 2008, the payment terms were amended to 238 monthly installments and 19 annual installments, as of December 31, 2007, with final maturity on October 31, 2027. The balance of the obligation at December 31, 2011 is R$ 8,972 (R$ 9,571 in 2010 and R$10,174 in 2009). The contract amount differs from the carrying amount recorded by the subsidiary, which is in conformity with IAS 19.
F - 52
Managers may opt for a Free Benefit Generator Plan – PGBL (defined contribution), operated by either Banco do Brasil or Bradesco.
18.2 – Changes in the defined benefit plans
| December 31, 2011 | |||||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | Total liability | RGE | Total asset | |||||||
Present value of actuarial liabilities | 3,505,727 | 884,091 | 76,649 | 4,466,467 | 234,457 | 234,457 | ||||||
Fair value of plan's assets | (3,236,676) | (839,877) | (80,058) | (4,156,611) | (218,799) | (218,799) | ||||||
Present value of liabilities (fair value of assets), net | 269,051 | 44,214 | (3,409) | 309,856 | 15,658 | 15,658 | ||||||
|
|
|
|
|
|
| ||||||
Adjustments due to deferments allowed |
|
|
|
|
| |||||||
Unrecognized actuarial gains | 83,371 | 33,768 | 11,308 | 128,447 | (19,074) | (19,074) | ||||||
Net actuarial Liabilities (assets) recognized on balance sheet | 352,422 | 77,982 | 7,899 | 438,303 | (3,416) | (3,416) | ||||||
|
|
|
|
|
|
| ||||||
| December 31, 2010 | |||||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | Total liability | RGE | Total asset | |||||||
Present value of actuarial liabilities | 3,088,723 | 784,933 | 67,543 | 3,941,199 | 207,759 | 207,759 | ||||||
Fair value of plan's assets | (2,987,448) | (785,231) | (70,177) | (3,842,856) | (245,537) | (245,537) | ||||||
Present value of liabilities (fair value of assets), net | 101,275 | (298) | (2,634) | 98,343 | (37,778) | (37,778) | ||||||
|
|
|
|
|
|
| ||||||
Adjustments due to deferments allowed |
|
|
|
|
| |||||||
Unrecognized actuarial gains | 368,348 | 111,872 | 14,086 | 494,306 | 31,978 | 31,978 | ||||||
Net actuarial Liabilities (assets) recognized on balance sheet | 469,623 | 111,574 | 11,452 | 592,649 | (5,800) | (5,800) |
The changes in present value of the actuarial obligations and the fair values of the plan assets are as follows:
CPFL Paulista | CPFL Piratininga | CPFL Geração | RGE | Total liability | ||||||
Present value of actuarial liabilities at December 31, 2010 | 3,088,723 | 784,933 | 67,543 | 207,759 | 4,148,958 | |||||
Gross current service cost | 1,043 | 3,781 | 136 | 1,221 | 6,181 | |||||
Interest on actuarial obligation | 304,730 | 77,929 | 6,673 | 20,742 | 410,074 | |||||
Participants' contributions transferred during the year | 65 | 1,472 | 13 | 701 | 2,251 | |||||
Actuarial (Gain)/loss | 358,544 | 67,610 | 7,474 | 14,784 | 448,412 | |||||
Benefits paid during the year | (247,378) | (51,634) | (5,190) | (10,750) | (314,952) | |||||
Present value of actuarial liabilities at December 31, 2011 | 3,505,727 | 884,091 | 76,649 | 234,457 | 4,700,924 |
CPFL Paulista | CPFL Piratininga | CPFL Geração | RGE | Total asset | ||||||
Current value of actuarial assets at December 31, 2010 | (2,987,448) | (785,231) | (70,177) | (245,537) | (4,088,393) | |||||
Expected return during the year | (369,344) | (97,889) | (8,706) | (22,423) | (498,362) | |||||
Participants' contributions transferred during the year | (65) | (1,472) | (13) | (701) | (2,251) | |||||
Sponsors' contributions | (48,900) | (14,965) | (1,071) | (4,072) | (69,008) | |||||
Actuarial (gain)/loss | (78,297) | 8,046 | (5,281) | 43,184 | (32,348) | |||||
Benefits paid during the year | 247,378 | 51,634 | 5,190 | 10,750 | 314,952 | |||||
Current value of actuarial assets at December 31, 2011 | (3,236,676) | (839,877) | (80,058) | (218,799) | (4,375,410) | |||||
18.3 Changes in the assets and liabilities recognized:
F - 53
The changes in net liabilities are as follows:
| December 31, 2011 | |||||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | Total liability | RGE | Total asset | |||||||
Actuarial liabilities /(assets) at the beginning of the year | 469,623 | 111,574 | 11,452 | 592,649 | (5,800) | (5,800) | ||||||
Expense (Income) recognized in income statement | (68,301) | (18,627) | (2,482) | (89,410) | 6,456 | 6,456 | ||||||
Sponsors' contributions transferred during the year | (48,900) | (14,965) | (1,071) | (64,936) | (4,072) | (4,072) | ||||||
Actuarial liabilities /(assets) at the end of the year | 352,422 | 77,982 | 7,899 | 438,304 | (3,416) | (3,416) | ||||||
Other contributions | 14,090 | 318 | 77 | 14,484 | - | - | ||||||
Subtotal | 366,512 | 78,300 | 7,976 | 452,788 | (3,416) | (3,416) | ||||||
Other contributions RGE | - | - | - | 2,536 |
|
| ||||||
Total liabilities | 366,512 | 78,300 | 7,976 | 455,324 |
|
| ||||||
|
|
|
|
|
|
| ||||||
Current |
|
|
| 40,695 |
| - | ||||||
Noncurrent |
|
|
| 414,629 |
| 3,416 |
| December 31, 2010 | |||||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | Total liability | RGE | Total asset | |||||||
Actuarial liabilities /(assets) at the beginning of the year | 591,712 | 141,964 | 13,774 | 747,450 | (9,725) | (9,725) | ||||||
Expense (Income) recognized in income statement | (70,769) | (14,068) | (1,192) | (86,029) | 5,400 | 5,400 | ||||||
Sponsors' contributions transferred during the year | (51,320) | (16,322) | (1,130) | (68,772) | (1,475) | (1,475) | ||||||
Actuarial liabilities /(assets) at the end of the year | 469,623 | 111,574 | 11,452 | 592,649 | (5,800) | (5,800) | ||||||
Other contributions | 13,875 | 375 | 177 | 14,427 | - | - | ||||||
Subtotal | 483,498 | 111,949 | 11,629 | 607,076 | (5,800) | (5,800) | ||||||
Other contributions RGE | - | - | - | 3,905 |
|
| ||||||
Total liabilities | 483,498 | 111,949 | 11,629 | 610,980 |
|
| ||||||
|
|
|
|
|
|
| ||||||
Current |
|
|
| 40,103 |
| - | ||||||
Noncurrent |
|
|
| 570,877 |
| 5,800 |
18.4 Recognition of income and expense of private pension fund:
The external actuary’s estimate of the expense and/or revenue to be recognized in 2012 and the income recognized in 2011 and 2010 are as follows:
| 2012 Estimated | |||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | RGE | Consolidated | ||||||
Cost of service | 1,186 | 4,349 | 144 | 1,176 | 6,855 | |||||
Interest on actuarial obligations | 350,009 | 88,813 | 7,663 | 23,599 | 470,084 | |||||
Expected return on plan assets | (361,169) | (96,434) | (8,978) | (26,429) | (493,010) | |||||
Amortization of unrecognized actuarial gains | - | - | (268) | - | (268) | |||||
Total income | (9,974) | (3,272) | (1,439) | (1,654) | (16,339) |
F - 54
| 2011 Realized | |||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | RGE | Consolidated | ||||||
Cost of service | 1,044 | 3,781 | 136 | 1,221 | 6,182 | |||||
Interest on actuarial obligations | 304,732 | 77,929 | 6,673 | 20,742 | 410,076 | |||||
Expected return on plan assets | (369,344) | (97,889) | (8,706) | (22,423) | (498,362) | |||||
Amortization of unrecognized actuarial gains | (4,733) | (2,448) | (585) | - | (7,766) | |||||
Recognition of the asset (limited to paragraph 58-b of CPC 33) | - | - | - | 6,916 | 6,916 | |||||
Total Expense (Income) | (68,301) | (18,627) | (2,482) | 6,456 | (82,954) | |||||
|
|
|
|
|
| |||||
| 2010 Realized | |||||||||
CPFL Paulista | CPFL Piratininga | CPFL Geração | RGE | Consolidated | ||||||
Cost of service | 1,061 | 3,550 | 142 | 1,153 | 5,906 | |||||
Interest on actuarial obligations | 292,456 | 75,534 | 6,345 | 18,349 | 392,684 | |||||
Expected return on plan assets | (364,286) | (93,152) | (7,679) | (23,717) | (488,834) | |||||
Recognition of the asset (limited to paragraph 58-b of CPC 33) | - | - | - | 9,615 | 9,615 | |||||
Total Expense (Income) | (70,769) | (14,068) | (1,192) | 5,400 | (80,629) |
Since the changes in the RGE plan indicate the need to recognize an asset, and the amount to be recognized is restricted to the present value of the economic rewards available at the time, recognition in 2012 will require analysis of the possibility of recovery of the asset at the end of the year.
The principal assumptions taken into consideration in the actuarial calculations at the balance sheet date were:
| CPFL Paulista, CPFL Piratininga and CPFL Geração |
| RGE | |||||||||
| December 31, 2011 |
| December 31, 2010 |
| December 31, 2009 |
| December 31, 2011 |
| December 31, 2010 |
| December 31, 2009 | |
|
|
|
|
|
|
|
|
|
|
|
| |
Nominal discount rate for actuarial liabilities: | 10.35% p.a. |
| 10.24% p.a. |
| 10.24% p.a. |
| 10,35% p.a. |
| 10.24% p.a. |
| 10.24% p.a. | |
Nominal Return Rate on Assets: | (*) |
| (**) |
| (**) |
| 10,24% p.a. |
| 11.28% p.a. |
| 11.28% p.a. | |
Estimated Rate of nominal salary increase: | 6.69% p.a. |
| 6.08% p.a. |
| 6.08% p.a. |
| 6,69% p.a. |
| 6.08% p.a. |
| 6.08% p.a. | |
Estimated Rate of nominal benefits increase: | 0.0% p.a. |
| 0.0% p.a. |
| 0.0% p.a. |
| 0,0% p.a. |
| 0.0% p.a. |
| 0.0% p.a. | |
Estimated long-term inflation rate (basis for establishing |
|
|
|
|
|
|
|
|
|
|
| |
nominal rates above) | 4.60% p.a. |
| 4.0% p.a. |
| 4.0% p.a. |
| 4,6% p.a. |
| 4.0% p.a. |
| 4.0% p.a. | |
General biometric mortality table: | AT-83 |
| AT-83 |
| AT-83 |
| AT-83 |
| AT-83 |
| AT-83 | |
Biometric table for the onset of disability: | MERCER TABLE |
| MERCER TABLE |
| MERCER TABLE |
| Light-Average |
| Light-Average |
| Light-Average | |
Expected turnover rate: | 0.30 / (Service time + 1) | 0.30 / (Service time + 1) | 0.30 / (Service time + 1) | 0.30 / (Service time + 1) | 0.30 / (Service time + 1) | null | ||||||
|
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|
|
|
|
|
|
|
|
|
| |
Likelihood of reaching retirement age: | 100% when a beneficiary of the Plan first becomes eligible | 100% when a beneficiary of the Plan first becomes eligible | 100% when a beneficiary of the Plan first becomes eligible | 100% when a beneficiary of the Plan first becomes eligible | 100% when a beneficiary of the Plan first becomes eligible | |||||||
|
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|
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|
|
|
|
|
|
| |
| ||||||||||||
(*) CPFL Paulista and CPFL Geração 11,51% p.a, and CPFL Piratininga 11,72% p.a (**) CPFL Paulista and CPFL Geração 12,73% p.a, and CPFL Piratininga 12,71% p.a | ||||||||||||
18.5 Plan assets
The following table shows the allocation (by asset segment) of the assets of the CPFL group pension plans, managed by Fundação CESP, at December 31, 2011 and 2010. It also shows the distribution of the collateral resources established as a target for 2012, in the light of the macroeconomic scenario in December 2011.
|
|
|
|
|
|
|
|
| At December 31 |
| Target | ||
|
| 2011 |
| 2010 |
| 2012 |
Fixed rate |
| 68% |
| 69% |
| 68% |
Shares |
| 27% |
| 27% |
| 27% |
Real state |
| 3% |
| 2% |
| 3% |
Other |
| 2% |
| 2% |
| 2% |
Total |
| 100% |
| 100% |
| 100% |
F - 55
The allocation target for 2012 was based on the recommendations for allocation of assets made at the end of 2011 by Fundação CESP, in its Investment Policy. This target may change at any time during 2012, in the light of changes in the macroeconomic situation or in the return on assets, among other factors.
Fundação CESP’s asset management aims to maximize the return on investments, while seeking to minimize the risks of an actuarial deficit. Investments are therefore always made bearing in mind the liabilities that have to be honored. One of the main tools used by Fundação CESP to achieve its management objectives is ALM (Asset Liability Management – Joint Management of Assets and Liabilities), performed at least once a year, for a horizon of more than 10 years. ALM also assists in studying the liquidity of the pension plans, taking into consideration the benefit payment flow in relation to liquid assets.
The basis for determining the assumptions of estimated general return on the assets is supported by ALM. The main assumptions are macroeconomic projections for calculating the anticipated long-term profitability, taking into account the current benefit plan portfolios. ALM processes the ideal average long-term allocation of the plan’s assets and the estimated profitability in the long term is based on this allocation and on the assumptions of the assets’ profitability.
Investment risk
Brazilian pension funds are subject to restrictions on investments in foreign assets. The major part of the resources of the Company’s benefit plans is invested in the fixed income segment and, within this segment, the greater part of the funds is invested in federal government bonds, indexed to the IGP, which is the index for adjustment of the actuarial liabilities of the Company’s plans (defined benefit plans).
Management of the Company’s benefit plans is monitored by the Investment and Pension Management Committee, which includes representatives of active and retired employees, as well as members appointed by the Company. Among the duties of the Committee are the analysis and approval of investment recommendations made by the Fundação CESP investment managers.
In addition to controlling market risks by the unplanned divergence methodology,as required by law, Fundação CESP uses the following tools to control market risks in the fixed income and variable income segments: VaR, Tracking Risk, Tracking Error and Stress Test.
Fundação CESP's Investment Policy imposes additional restrictions (beyond those established by law) which define the percentage of ‘diversification for investments in assets issued or underwritten by the same legal entity, internally.
( 19 ) REGULATORY CHARGES
|
| December 31, 2011 | December 31, 2010 | |
Fee for the Use of Water Resources |
| 3,591 |
| 4,452 |
Global Reverse Fund - RGR |
| 28,060 |
| 16,484 |
ANEEL Inspection Fee |
| 2,495 |
| 2,285 |
Fuel Consumption Account - CCC |
| 65,121 |
| 58,288 |
Energy Development Account - CDE |
| 45,879 |
| 42,033 |
Total |
| 145,146 |
| 123,541 |
|
|
|
|
|
( 20 ) TAXES AND SOCIAL CONTRIBUTIONS PAYABLE
F - 56
|
| Current |
| Noncurrent | ||||
|
| December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||
ICMS (State VAT) |
| 300,518 |
| 247,891 |
| - |
| - |
PIS (Tax on Revenue) |
| 12,446 |
| 13,563 |
| - |
| - |
COFINS (Tax on Revenue) |
| 59,429 |
| 63,668 |
| 165 |
| 960 |
IRPJ (Corporate Income Tax) |
| 71,531 |
| 86,853 |
| - |
| - |
CSLL (Social Contribution Tax) |
| 18,589 |
| 22,280 |
| - |
| - |
Other |
| 20,515 |
| 20,993 |
| - |
| - |
Total |
| 483,028 |
| 455,248 |
| 165 |
| 960 |
( 21 ) PROVISION FOR CONTINGENCIES AND ESCROW DEPOSITS
| December 31, 2011 | December 31, 2010 | ||||||
| Reserve for contingencies | Escrow Deposits | Reserve for contingencies | Escrow Deposits | ||||
Labor |
|
|
|
| ||||
Various | 43,850 | 191,221 | 39,136 | 147,056 | ||||
|
|
|
|
| ||||
Civil |
|
|
|
| ||||
General Damages | 13,114 | 122,252 | 11,126 | 75,033 | ||||
Tariff Increase | 8,948 | 4,419 | 10,813 | 9,200 | ||||
Other | 6,423 | 448 | 5,904 | 1,516 | ||||
| 28,485 | 127,119 | 27,843 | 85,750 | ||||
Tax |
|
|
|
| ||||
FINSOCIAL | 18,930 | 53,964 | 18,714 | 53,322 | ||||
Interest on Shareholders’ Equity - PIS and COFINS | 11,713 | 11,713 | 10,666 | 10,666 | ||||
PIS and COFINS - Non-Cumulative Method | 91,477 | - | 87,672 | - | ||||
Income Tax | 82,061 | 660,222 | 73,401 | 539,601 | ||||
Other | 44,580 | 68,370 | 29,059 | 39,143 | ||||
| 248,761 | 794,268 | 219,513 | 642,732 | ||||
|
|
|
|
| ||||
Other | 17,027 | 16,008 | 4,773 | 15,148 | ||||
Total | 338,121 | 1,128,616 | 291,265 | 890,685 | ||||
|
|
|
|
|
The changes in the provisions for contingencies and escrow deposits are shown below:
F - 57
| December 31, 2009 | Addition | Reversal | Payment | Monetary Restatement | Business combination | Other | December 31, 2010 | ||||||||
Labor | 42,752 | 28,769 | (2,866) | (29,504) | - | - | (15) | 39,136 | ||||||||
Civil | 27,974 | 9,402 | (5,512) | (4,019) | - | - | (1) | 27,843 | ||||||||
Tax | 223,779 | 31,393 | (40,098) | (22) | 4,445 | - | 16 | 219,513 | ||||||||
Others | 6,139 | - | - | (1,659) | 293 | - | - | 4,773 | ||||||||
Reserve for Contingencies | 300,644 | 69,564 | (48,476) | (35,204) | 4,738 | - | - | 291,265 | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Escrow Deposits | 794,177 | 80,226 | (13,737) | (14,380) | 44,398 | - | - | 890,685 | ||||||||
|
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| ||||||||
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| ||||||||
| December 31, 2010 | Addition | Reversal | Payment | Monetary Restatement | Business combination | Other | December 31, 2011 | ||||||||
Labor | 39,136 | 17,868 | (3,586) | (9,940) | - | 372 | - | 43,850 | ||||||||
Civil | 27,843 | 16,653 | (6,438) | (9,574) | - | - | - | 28,485 | ||||||||
Tax | 219,513 | 18,284 | (269) | - | 10,444 | 93 | 695 | 248,761 | ||||||||
Others | 4,773 | 13,950 | - | (1,743) | 47 | - | - | 17,027 | ||||||||
Reserve for Contingencies | 291,265 | 66,755 | (10,293) | (21,257) | 10,491 | 465 | 695 | 338,121 | ||||||||
|
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|
|
|
|
|
|
| ||||||||
Escrow Deposits | 890,685 | 192,881 | (8,064) | (12,113) | 64,516 | 12 | 699 | 1,128,616 | ||||||||
|
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|
|
|
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|
|
The provisions for contingencies were based on appraisal of the risks of losing litigation to which the Company and its subsidiaries are parties, where a loss is more likely than not in the opinion of the legal advisers and the management of the Company and its subsidiaries.
The principal pending issues relating to litigation, legal cases and tax assessments are summarized below:
a) Labor:The main labor suits relate to claims filed by former employees or unions for additional salary payments (overtime, salary parity, severance payments and other claims).
b) Civil:
Bodily injury –mainly refer to claims for indemnities relating to accidents in the subsidiaries' electrical grids, damage to consumers, vehicle accidents, etc.
Tariff increase: Corresponds to various claims by industrial consumers as a result of increases imposed by DNAEE Ordinances 38 and 45, dated February 27 and March 4, 1986, when the “Plano Cruzado” economic plan price freeze was in effect.
c) Tax
FINSOCIAL- relates to legal challenges of the rate increase and collection of FINSOCIAL during the period June 1989 to October 1991.
Income tax -The provision of R$61,852 (R$53,356 in 2010) recognized by the subsidiary CPFL Piratininga, refers to the lawsuit in relation to the tax deductibility of CSLL in determination of IRPJ.
PIS and COFINS - JCP -in 2009, the Company dropped its suit disputing PIS and COFINS charged on Interest on shareholders’ equity received, and paid the amounts in question, taking advantage of the benefit granted in Law n° 11,941/09 (REFIS IV), that is, a reduction in the fine, interest and legal charges. The Company is awaiting finalization of the legal procedures in order to offset the escrow deposits of the amounts.
PIS and COFINS – Non-cumulative method –refers to the tax disputes in relation to the non-cumulative levying of PIS and COFINS on certain sector charges.
Other - tax- Refers to other suits in progress at the judicial and administrative levels resulting from of the subsidiaries' operations, in relation to INSS, FGTS and SAT tax issues.
d) Possible losses- the Company and its subsidiaries are parties to other suits in which management, supported by its legal advisers, believes that the chances of a successful outcome are possible, due to a solid defensive position in these cases. It is not yet possible to predict the outcome of the courts’ decisions or any other decisions in similar proceedings considered probable or remote. Consequently, no provision has been established for these. The claims relating to possible losses, at December 31, 2011 were as follows: (i) R$ 340,833 labor (R$ 341,608 in 2010); (ii) R$ 553,648 civil cases related mainly to bodilyinjury, environmental impact and tariff increases (R$ 604,603 in 2010); and (iii) R$967,952 in tax claims, principally Income tax, ICMS, FINSOCIAL and PIS and COFINS (R$ 823.872 in 2010).
F - 58
Based on the opinion of their legal advisers, Management of the Company and its subsidiaries consider that there are no significant contingent risks that are not covered by adequate provisions in the Financial Statements, or that might result in a significant impact on future earnings.
Escrow deposits –income tax: of the total amount of R$ 660,222, R$ 581,721 (R$ 483,355 at December 31, 2010) refers to the dispute on the deductibility for federal tax purposes of expense recognized in 1997 in respect of the welfare deficit of the subsidiary CPFL Paulista's employees’ pension plan in relation to Fundação CESP, due to the renegotiation and renewal of debt in that year. On consulting the Brazilian Federal Revenue Office, the subsidiary obtained a favorable reply in Note MF/SRF/COSIT/GAB nº 157, of April 9, 1998, and took advantage of the tax deductibility of the expense, thereby generating a tax loss for that year. As a result of this measure, the subsidiary was assessed by the tax inspectors and, as a condition for continuing the discussions in two cases, court decisions required deposits in guarantee. In 2011, the subsidiary made an additional deposit of R$53,933. The deductibility resulted in other assessments and in order to be able to continue the discussions, the subsidiary offered collateral in the form of bank guarantees amounting to R$ 272,026. Based on the updated position of the legal counsel in charge of the case, the risk of loss continues to be classified as remote.
( 22 ) CHARGES FOR THE USE OF PUBLIC UTILITIES
Companies | December 31, 2011 | December 31, 2010 | Number of remaining installments | Interest rates | ||||
CERAN | 75,472 | 71,987 | 290 | IGP-M + 9.6% p.a. | ||||
ENERCAN | 10,782 | 9,884 | 281 | IGP-M + 8% p.a. | ||||
BAESA | 57,734 | 52,865 | 293 | IGP-M + 8% p.a. | ||||
Foz do Chapecó | 325,676 | 312,183 | 301 | IGP-M / IPC-A + 5.3% p.a. | ||||
TOTAL | 469,664 | 446,919 |
|
| ||||
|
|
|
|
| ||||
Current | 28,738 | 17,287 |
|
| ||||
Noncurrent | 440,926 | 429,632 |
|
| ||||
|
|
|
|
|
( 23 ) OTHER ACCOUNTS PAYABLE
F - 59
|
| Current |
| Noncurrent | ||||
|
| December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||
|
|
|
|
|
|
|
|
|
Consumers and Concessionaires |
| 66,284 |
| 63,635 |
| - |
| - |
Energy Efficiency Program - PEE |
| 122,601 |
| 63,698 |
| 4,369 |
| 32,039 |
Research & Development - P&D |
| 139,247 |
| 110,418 |
| 22,370 |
| 29,680 |
National Scientific and Technological Development Fund - FNDCT | 4,014 |
| 3,077 |
| - |
| - | |
Energy Research Company - EPE |
| 1,648 |
| 1,206 |
| - |
| - |
Fund for Reversal |
| - |
| - |
| 17,750 |
| 17,750 |
Advances |
| 74,292 |
| 11,030 |
| 2,812 |
| 7,418 |
Provision for environmental expenditure | 35,617 |
| 11,685 |
| 80,272 |
| 2,455 | |
Payroll |
| 14,609 |
| 6,722 |
| - |
| - |
Profit sharing |
| 42,058 |
| 36,296 |
| 5,366 |
| - |
Collections agreement |
| 70,096 |
| 56,260 |
| - |
| - |
Guarantees |
| - |
| - |
| 26,605 |
| 45,831 |
Accounts payable - business combination | 174,136 |
| - |
| - |
| - | |
Other |
| 68,736 |
| 46,843 |
| 14,866 |
| 5,950 |
Total |
| 813,338 |
| 410,869 |
| 174,410 |
| 141,124 |
|
|
|
|
|
|
|
|
|
Consumers and concessionaires:refers to liabilities in connection with bills paid twice and adjustments to billing to be offset or returned to consumers as well the participation of consumers in the “Programa de Universalização” program. Liabilities to concessionaires refer principally to transactions relating to the partial spin-off of Bandeirante by the subsidiary CPFL Piratininga.
Research and Development and Energy Efficiency Programs: the subsidiaries recognized liabilities relating to amounts already billed in tariffs (1% of the Net Operating Income), but not yet invested in the Research and Development and Energy Efficiency Programs. These amounts are subject to monthly restatement, at the SELIC rates, to realization.
Advances:the balance included the amount of R$ 62,293 in relation to advance billing by the subsidiaries of CPFL Renováveis.
Provision for environmental expense: in noncurrent, the amount of R$ 79,281 refers to provisions recorded by the indirect subsidiary CPFL Renováveis in relation to socio-environmental licenses and as a result of events that have already occurred. Such costs are provisioned against fixed assets while the projects are under construction, and recognized directly in profit or loss after start-up.
Profit-sharing:in conformity with a collective labor agreement, the Company and its subsidiaries introduced an employee profit-sharing program, based on achievement of operating and financial targets established in advance.
Accounts payable business combinations: The amount of R$ 174,136 is registered in the consolidated statements by the indirect subsidiary CPFL Renováveis in relation to the purchase of wind generation projects and the Santa Luzia SHP.
( 24 ) SHAREHOLDER’S EQUITY
The shareholders’ participations in the Company’s equity as of December 31, 2011 and 2010 are shown below:
F - 60
|
| Number of shares | ||||||
|
| December 31, 2011 |
| December 31, 2010 | ||||
Shareholders |
| Common Shares | Interest % |
| Common Shares | Interest % | ||
VBC Energia S.A. |
| 245,897,454 |
| 25.55 |
| 122,948,720 |
| 25.55 |
BB Carteira Livre I FIA |
| 298,467,458 |
| 31.02 |
| 149,233,727 |
| 31.02 |
Energia São Paulo FIP |
| 102,756,048 |
| 10.68 |
| - |
| - |
Bonaire Participações S.A. |
| 18,670,990 |
| 1.94 |
| 60,713,511 |
| 12.62 |
BNDES Participações S.A. |
| 81,053,460 |
| 8.42 |
| 40,526,739 |
| 8.42 |
Brumado Holdings S.A. |
| 34,502,100 |
| 3.59 |
| 17,251,048 |
| 3.59 |
Antares Holding LTDA |
| 16,039,720 |
| 1.67 |
| 8,019,852 |
| 1.67 |
Board Members |
| 212 |
| - |
| 112 |
| 0.00 |
Executive Officers |
| 49,980 |
| - |
| 2,824 |
| 0.00 |
Other Shareholders |
| 164,836,838 |
| 17.13 |
| 82,440,597 |
| 17.13 |
Total |
| 962,274,260 |
| 100.00 |
| 481,137,130 |
| 100.00 |
|
|
|
|
|
|
|
|
|
24.1 - Share reverse split and split
As disclosed in the Relevant Facts of March 28 and April 28, 2011, and Notice to the Shareholders of May 10, 2011, the common shares in the Company were grouped, at a proportion of 10 (ten) to 1 (one), with simultaneous splitting of each grouped share, at a proportion of 1 (one) to 20 (twenty), allowing a period of 60 days for the shareholders to adjust their stock positions on the BM&FBovespa S.A.
The resulting shares were allocated and distributed to the holders of the shares on July 4, 2011.
The share grouping and split did not involve changes to financial resources.
The fractions of shares of the shareholders who opted not to adjust their positions were identified, separated and grouped by whole numbers, and sold by auction on the BM&FBovespa.
24.2 Corporate restructuring of the shareholder Bonaire Participações S.A.
· On August 17, 2011, in an Announcement to the Market, Energia São Paulo Fundo de Investimento em Participações (“Fund”) advised that, as a result of a capital decrease of the company Bonaire Participações S.A., by delivery of assets of its majority shareholder, the Fund now holds 102,756,048 common shares issued by the Company. The Fund and Bonaire, in which it is the majority shareholder, now jointly hold 121,427,038 of the Company’s common shares.
Accordingly, Bonaire and the Fund now jointly exercise the rights and obligations arising therefrom, and should accordingly be regarded as a single shareholder of the Company.
· On November 25, 2011, a Notice to the Shareholders communicated the decrease of R$ 86,412 in the capital of Bonaire, without cancellation of shares. On January 26, 2012, the period for opposition from creditors having elapsed, the capital was decreased by handing over 12,362,202 of the Company’s shares to the Fund. The Fund therefore now holds the total of 115,118,250 of the company’s common shares as of that date.
24.3 - Capital Reserve
Refers to:
(i) profits on the sale of treasury shares, resulting from shareholders exercising their right to withdraw at the time of the incorporation of the shares of minority shareholders in November 2005.
(ii) as mentioned in Note 14.4, the amount of R$ 229,940 was recorded as a result of the business combination of CPFL Renováveis.
F - 61
24.4 - Profit Reserve
Comprises the amount of R$ 495,185.
24.5 – Other comprehensive income – deemed cost
Refers to recognition of the added value of the deemed cost attributed of the generators’ property, plant and equipment.
In 2011, due to the change in the participation of the assets transferred to CPFL Renováveis, CPFL Geração realized, proportionally, the amount of R$ 36,480 of the revaluation reserve previously recognized as deemed cost, set against retained earnings. Similarly, the subsidiary CPFL Brasil recorded a deemed cost revaluation reserve of R$15,558, in proportion to its interest in CPFL Renováveis, set against retained earnings.
At December 31, 2011, the effect of these changes in Other Comprehensive Income in these subsidiaries resulted in net realization of R$ 20,922.
24.6 - Dividends
The AGM/EGM held on April 28, 2011 approved the allocation of net income for 2010, by declaring a dividend of R$ 1,260,469 for 2010, of which R$ 774,429 corresponds to the interim dividend declared in June 2010, and R$ 486,040 to an additional dividend.
Additionally, on August 10, 2011, in accordance with the Bylaws and based on the income for the first half-year of 2011, the Company’s Board of Directors approved the declaration of an interim dividend of R$ 747,709, attributing the value of R$ 0.777023176 to each share.
During the year, the Company paid R$ 1,229,568 in respect of the dividends declared at December 31, 2010 and June 30, 2011.
F - 62
24.7 - Allocation of Net Income for the Year
The Company’s by-laws assure shareholders of a minimum dividend of 25% of net income, adjusted in accordance with the law.
For this year, Company management is proposing distribution of the balance of the net income, by declaration of R$ 758,470 in the form of dividends, corresponding to R$ 0.788205126 per share, as shown below:
Net income - Parent company |
| 1,530,403 |
Prescribed Dividend |
| 4,967 |
Constitution of Legal Reserve |
| (76,520) |
Realization of comprehensive income |
| 47,329 |
Net Income Base for Allocation |
| 1,506,179 |
Interim Dividend |
| (747,709) |
Additional proposed dividend |
| 758,470 |
( 25 ) EARNINGS PER SHARE
Basic earnings per share
Calculation of the basic earnings per share at December 31, 2011 was based on the profit of R$1,530,403 attributable to CPFL Energia (R$1,538,281 at December 31, 2010 and R$1,657,297 at December 31, 2009) and the average weighted number of common shares outstanding during the year ended December 31, 2011, as shown below:
|
| December 31, 2011 |
| December 31, 2010 |
| December 31, 2009 |
|
|
|
|
|
|
|
Net income attributable to CPFL Energia |
| 1,530,403 |
| 1,538,281 |
| 1,657,297 |
|
|
|
|
|
|
|
Weighted average number of common shares |
| December 31, 2011 |
| December 31, 2010 |
| December 31, 2009 |
|
|
|
|
|
|
|
Shares issued on January 1 |
| 481,137,130 |
| 479,910,938 |
| 479,910,938 |
Shares issued on April 26, 2010 |
| - |
| 1,226,192 |
| - |
Share grouping ans split, without resources changes, in June 2011 |
| 481,137,130 |
| - |
| - |
Number of outstanding shares at December 31 |
| 962,274,260 |
| 481,137,130 |
| 479,910,938 |
|
|
|
|
|
|
|
Weighted average number of common shares as of December 31 |
| 962,274,260 |
| 961,494,872 |
| 959,821,876 |
|
|
|
|
|
|
|
Earnings per share - attributable to CPFL Energia |
| 1.59 |
| 1.60 |
| 1.73 |
In accordance with IAS 33, calculation of the average weighted number of shares for 2010 took into account the share grouping and split that occurred in 2011 (note 24), as there was no change in financial resources.
Diluted earnings per share
In 2011, 2010 and 2009, the Company held no notes convertible into shares to be taken into account in calculating the earnings per share. Therefore, basic and diluted earnings per share for each of the periods presented are the same.
F - 63
( 26 ) OPERATING REVENUE
|
| Number of Consumers (*) |
| GWh (*) |
| R$ Thousand | |||||||||||
Revenue from Eletric Energy Operations |
| 2011 |
| 2010 |
| 2009 |
| 2011 | 2010 |
| 2009 |
| 2011 |
| 2010 |
| 2009 |
Consumer class |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
| 6,086,847 |
| 5,880,204 |
| 5,695,689 |
| 13,626 | 12,983 |
| 12,346 |
| 5,978,836 |
| 5,416,581 |
| 5,098,424 |
Industrial |
| 59,485 |
| 78,261 |
| 77,166 |
| 14,718 | 15,413 |
| 14,970 |
| 4,128,340 |
| 4,123,723 |
| 4,127,319 |
Commercial |
| 500,131 |
| 490,554 |
| 496,377 |
| 8,140 | 7,695 |
| 7,297 |
| 3,086,196 |
| 2,795,127 |
| 2,700,025 |
Rural |
| 242,554 |
| 237,903 |
| 238,566 |
| 1,991 | 2,100 |
| 2,257 |
| 452,467 |
| 434,519 |
| 438,666 |
Public Administration |
| 46,771 |
| 45,386 |
| 44,051 |
| 1,154 | 1,112 |
| 1,074 |
| 420,474 |
| 384,742 |
| 376,735 |
Public Lighting |
| 8,616 |
| 8,096 |
| 7,933 |
| 1,495 | 1,444 |
| 1,408 |
| 328,882 |
| 303,862 |
| 293,463 |
Public Services |
| 7,413 |
| 7,239 |
| 6,738 |
| 1,823 | 1,742 |
| 1,664 |
| 511,560 |
| 470,323 |
| 462,431 |
Billed |
| 6,951,817 |
| 6,747,643 |
| 6,566,520 |
| 42,946 | 42,489 |
| 41,016 |
| 14,906,755 |
| 13,928,877 |
| 13,497,063 |
Own Consumption |
|
|
|
|
| 768 |
| 33 | 33 |
| 33 |
| - |
| - |
| - |
Unbilled (Net) |
|
|
|
|
|
|
| - | - |
| - |
| (40,671) |
| 1,304 |
| 43,217 |
Emergency Charges - ECE/EAEE |
|
|
|
|
|
|
| - | - |
| - |
| 18 |
| 7 |
| (5) |
Reclassification to Network Usage Charge - TUSD - Captive Consumers |
| - | - |
| - |
| (7,213,990) |
| (5,843,561) |
| (6,025,716) | ||||||
Electricity sales to final consumers |
|
|
|
|
|
|
| 42,979 | 42,522 |
| 41,049 |
| 7,652,112 |
| 8,086,627 |
| 7,514,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furnas Centrais Elétricas S.A. |
|
|
|
|
|
|
| 3,026 | 3,026 |
| 3,026 |
| 386,776 |
| 347,472 |
| 353,554 |
Other Concessionaires and Licensees |
|
|
|
|
|
|
| 6,832 | 7,217 |
| 7,016 |
| 820,652 |
| 731,493 |
| 854,852 |
Current Electric Energy |
|
|
|
|
|
|
| 4,279 | 2,495 |
| 2,883 |
| 90,419 |
| 117,156 |
| 90,732 |
Electricity sales to wholesaler |
|
|
|
|
|
|
| 14,137 | 12,738 |
| 12,925 |
| 1,297,846 |
| 1,196,121 |
| 1,299,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue due to Network Usage Charge - TUSD - Captive Consumers |
|
|
|
|
|
| 7,213,990 |
| 5,843,561 |
| 6,025,716 | ||||||
Revenue due to Network Usage Charge - TUSD - Free Consumers |
|
|
|
|
|
|
|
| 1,321,111 |
| 1,127,795 |
| 789,357 | ||||
Revenue from construction of concession infrastructure |
|
|
|
|
|
|
|
| 1,129,826 |
| 1,043,678 |
| 615,557 | ||||
Other Revenue and Income |
|
|
|
|
|
|
|
|
|
|
|
| 251,097 |
| 258,896 |
| 246,983 |
Other operating revenues |
|
|
|
|
|
|
|
|
|
|
|
| 9,916,025 |
| 8,273,930 |
| 7,677,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross revenues |
|
|
|
|
|
|
|
|
|
|
|
| 18,865,982 |
| 17,556,678 |
| 16,491,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions from operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICMS |
|
|
|
|
|
|
|
|
|
|
|
| (2,967,625) |
| (2,728,416) |
| (2,613,276) |
PIS |
|
|
|
|
|
|
|
|
|
|
|
| (282,915) |
| (265,444) |
| (263,951) |
COFINS |
|
|
|
|
|
|
|
|
|
|
|
| (1,303,411) |
| (1,224,934) |
| (1,216,563) |
ISS |
|
|
|
|
|
|
|
|
|
|
|
| (5,031) |
| (3,847) |
| (3,617) |
Global Reversal Reserve - RGR |
|
|
|
|
|
|
|
|
|
|
|
| (72,027) |
| (53,985) |
| (61,407) |
Fuel Consumption Account - CCC |
|
|
|
|
|
|
|
|
|
|
|
| (737,017) |
| (593,630) |
| (386,949) |
Energy Development Account - CDE |
|
|
|
|
|
|
|
|
|
|
|
| (524,844) |
| (470,981) |
| (449,417) |
Research and Development and Energy Efficiency Programs |
|
|
|
|
|
|
|
| (143,916) |
| (134,772) |
| (102,175) | ||||
PROINFA |
|
|
|
|
|
|
|
|
|
|
|
| (65,125) |
| (56,933) |
| (35,954) |
Emergency charges (ECE/EAEE) |
|
|
|
|
|
|
|
|
|
|
|
| (19) |
| (7) |
| 5 |
IPI |
|
|
|
|
|
|
|
|
|
|
|
| (24) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| (6,101,954) |
| (5,532,949) |
| (5,133,304) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
| 12,764,028 |
| 12,023,729 |
| 11,358,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Information not examined by the independent auditors. |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
The details of the tariff adjustments for the distributors are as follows:
|
|
|
| 2011 |
| 2010 |
| 2009 | |||||
Company |
| Month |
| Total adjustment | Effect perceived by consumers (*) | Total adjustment | Effect perceived by consumers (*) | Total adjustment | Effect perceived by consumers (*) | ||||
CPFL Paulista |
| April(**) |
| 7.38% |
| 7.23% |
| 2.70% |
| -5.69% |
| 21.22% | 21.56% |
CPFL Piratininga |
| October |
| (**) |
| (**) |
| 10.11% |
| 5.66% |
| 5.98% | -2.12% |
RGE |
| June/April |
| 17.21% |
| 6.74% |
| 12.37% |
| 3.96% |
| 18.95% | 3.43% |
CPFL Santa Cruz |
| February |
| 23.61% |
| 15.38% |
| 10.09% |
| -2.53% |
| 24.09% | 11.85% |
CPFL Leste Paulista |
| February |
| 7.76% |
| 16.44% |
| -13.21% |
| -8.47% |
| 12.94% | 10.61% |
CPFL Jaguari |
| February |
| 5.47% |
| 6.62% |
| 5.16% |
| 3.67% |
| 11.36% | 9.40% |
CPFL Sul Paulista |
| February |
| 8.02% |
| 7.11% |
| 5.66% |
| 4.94% |
| 11.64% | 10.23% |
CPFL Mococa |
| February |
| 9.50% |
| 9.77% |
| 3.98% |
| 3.24% |
| 11.18% | 5.59% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Represents the average effect perceived by consumers, as a result of the elimination from the tariff base of financial components added in the annual adjustment for the previous year. | |||||||||||||
F - 64
( 27 ) COST OF ELECTRIC ENERGY
Cost of Electric Energy | GWh (*) | R$ thousand | ||||||||||
Electricity Purchased for Resale | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||
Itaipu Binacional | 10,855 | 10,835 | 11,084 | 973,487 | 1,010,132 | 1,157,306 | ||||||
Current electric energy | 5,002 | 3,373 | 3,101 | 142,450 | 198,789 | 57,748 | ||||||
PROINFA | 1,032 | 1,133 | 958 | 169,144 | 182,674 | 169,706 | ||||||
Energy purchased in restricted framework | 33,964 | 37,043 | 37,531 | 4,117,550 | 4,166,943 | 4,116,274 | ||||||
Credit of PIS and COFINS | (495,495) | (508,463) | (521,366) | |||||||||
Subtotal | 50,853 | 52,384 | 52,674 | 4,907,136 | 5,050,075 | 4,979,668 | ||||||
Electricity Network Usage Charge | ||||||||||||
Basic Network Charges | 1,019,116 | 899,112 | 901,589 | |||||||||
Transmission from Itaipu | 90,140 | 88,568 | 84,281 | |||||||||
Connection Charges | 71,601 | 68,985 | 59,475 | |||||||||
Charges of Use of the Distribution System | 42,052 | 30,217 | 25,657 | |||||||||
System Service Charges - ESS | 187,056 | 174,230 | 80,727 | |||||||||
Reserve Energy charges - EER | 34,547 | 32,281 | 3,220 | |||||||||
Credit of PIS and COFINS | (130,679) | (120,978) | (120,108) | |||||||||
Subtotal | 1,313,834 | 1,172,415 | 1,034,841 | |||||||||
Total | 6,220,970 | 6,222,490 | 6,014,509 | |||||||||
(*) Information not examined by the independent auditors. |
F - 65
( 28 ) OPERATING COSTS AND EXPENSES
|
|
|
| Operating expenses |
|
|
|
|
|
| |||||||||||||||||||||||||
| Operating costs |
| Services Rendered to Third Parties |
| Sales |
| General |
| Other |
| Total | ||||||||||||||||||||||||
| 2011 |
| 2010 |
| 2009 |
| 2011 |
| 2010 |
| 2009 |
| 2011 |
| 2010 |
| 2009 |
| 2011 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | 2009 |
| 2011 |
| 2010 | 2009 | ||
Personnel | 413,587 |
| 351,447 |
| 332,033 |
| (2) |
| 279 |
| 640 |
| 99,988 |
| 80,013 |
| 69,253 |
| 190,423 |
| 161,878 |
| 151,186 |
| - |
| - |
| - |
| 703,997 |
| 593,617 |
| 553,112 |
Employee Pension Plans | (82,953) |
| (80,629) |
| (3,066) |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (82,953) |
| (80,629) |
| (3,066) |
Materials | 62,213 |
| 62,175 |
| 58,787 |
| 4,741 |
| 2,368 |
| 1,246 |
| 4,799 |
| 4,402 |
| 4,277 |
| 23,056 |
| 11,678 |
| 8,048 |
| - |
| - |
| - |
| 94,807 |
| 80,623 |
| 72,358 |
Outside Services | 167,170 |
| 199,065 |
| 160,887 |
| 4,069 |
| 2,358 |
| 1,742 |
| 107,748 |
| 84,488 |
| 72,648 |
| 252,033 |
| 181,493 |
| 153,642 |
| - |
| - |
| - |
| 531,020 |
| 467,404 |
| 388,919 |
Depreciation and Amortization | 534,763 |
| 475,647 |
| 451,712 |
| - |
| - |
| - |
| 34,139 |
| 9,212 |
| 10,944 |
| 46,867 |
| 24,167 |
| 23,518 |
| - |
| 152 |
| - |
| 615,769 |
| 509,178 |
| 486,174 |
Costs related to infrastructure construction | - |
| - |
| - |
| 1,129,826 |
| 1,043,678 |
| 615,557 |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 1,129,826 |
| 1,043,678 |
| 615,557 |
Other: | 63,190 |
| 59,788 |
| 53,585 |
| (7) |
| 2,297 |
| 1,759 |
| 117,678 |
| 122,320 |
| 98,077 |
| 102,792 |
| 63,996 |
| 66,996 |
| 216,392 |
| 199,652 |
| 227,343 |
| 500,045 |
| 448,053 |
| 447,760 |
Collection charges | - |
| - |
| - |
| - |
| - |
| - |
| 39,499 |
| 55,910 |
| 50,367 |
| - |
| - |
| - |
| - |
| - |
| - |
| 39,499 |
| 55,910 |
| 50,367 |
Allowance for doubtful accounts | - |
| - |
| - |
| - |
| - |
| - |
| 70,673 |
| 51,668 |
| 36,250 |
| - |
| - |
| - |
| - |
| - |
| - |
| 70,673 |
| 51,668 |
| 36,250 |
Leases and Rentals | 15,878 |
| 15,068 |
| 15,633 |
| - |
| - |
| - |
| 147 |
| 1,676 |
| 65 |
| 9,597 |
| 9,764 |
| 4,866 |
| - |
| 13 |
| - |
| 25,623 |
| 26,521 |
| 20,564 |
Publicity and Advertising | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 10,926 |
| 21,894 |
| 7,970 |
| - |
| - |
| - |
| 10,926 |
| 21,894 |
| 7,970 |
Legal, Judicial and Indemnities | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 59,167 |
| 5,416 |
| 25,209 |
| - |
| - |
| - |
| 59,167 |
| 5,416 |
| 25,209 |
Donations, Contributions and Subsidies | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 4,865 |
| 6,216 |
| 7,095 |
| - |
| 27 |
| - |
| 4,865 |
| 6,243 |
| 7,095 |
Inspection fee | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 28,974 |
| 24,769 |
| 23,563 |
| 28,974 |
| 24,769 |
| 23,563 |
Free energy adjustment | - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 2,782 |
| 19,378 |
| - |
| 2,782 |
| 19,378 |
Intangible of concession amortization | - | - | - | - | - | - | - | - | - | - | - | - | 185,434 | 182,615 | 186,899 | 185,434 | 182,615 | 186,899 | |||||||||||||||||
Financial compensation for water resources utilization | 23,782 | 24,045 | - | - | - | - | - | - | - | - | - | - | - | 23,782 | 24,045 | - |
Other: | 23,529 |
| 20,675 |
| 37,952 |
| (7) |
| 2,297 |
| 1,759 |
| 7,359 |
| 13,066 |
| 11,395 |
| 18,237 |
| 20,706 |
| 21,856 |
| 1,984 |
| (10,554) |
| (2,497) |
| 51,102 |
| 46,190 |
| 70,465 |
Total | 1,157,970 |
| 1,067,493 |
| 1,053,938 |
| 1,138,626 |
| 1,050,980 |
| 620,944 |
| 364,352 |
| 300,435 |
| 255,199 |
| 615,171 |
| 443,212 |
| 403,390 |
| 216,392 |
| 199,804 |
| 227,343 |
| 3,492,512 |
| 3,061,924 |
| 2,560,814 |
F - 66
( 29 ) FINANCIAL INCOME AND EXPENSES
2011 | 2010 | 2009 | ||||
Financial Income | ||||||
Income from Financial Investments | 356,413 | 156,420 | 94,356 | |||
Arrears of interest and fines | 159,277 | 136,181 | 124,713 | |||
Restatement of tax credits | 8,649 | 7,789 | 3,860 | |||
Restatement of Escrow Deposits | 64,516 | 44,366 | 45,154 | |||
Monetary and Exchange Variations | 57,139 | 42,548 | 22,171 | |||
Discount on purchase of ICMS credit | 14,588 | 7,806 | 7,803 | |||
Interest on intercompany loans | 407 | 5,894 | 2,460 | |||
PIS and COFINS of Interest on Shareholders' Equity | (18,926) | (18,253) | (18,476) | |||
Other | 56,125 | 100,364 | 69,319 | |||
Total | 698,188 | 483,115 | 351,360 | |||
Financial Expense | ||||||
Debt Charges | (1,102,329) | (740,973) | (619,582) | |||
Monetary and Exchange Variations | (150,820) | (90,381) | (37,107) | |||
(-) Capitalized borrowing costs | 39,143 | 132,938 | 84,931 | |||
Public utilities | (57,319) | (31,578) | (8,651) | |||
Other | (115,453) | (107,064) | (80,657) | |||
Total | (1,386,778) | (837,058) | (661,066) | |||
Net financial income (expense) | (688,590) | (353,943) | (309,706) |
Interest is capitalized at a rate of 9.95% p.a. for qualifying intangible assets and property, plant and equipment, in accordance with IAS 23. In 2010, R$ 84,839 of the total amount referred to energy generation projects that were in the process of development, especially Foz do Chapecó, EPASA and CPFL Bioenergia.
( 30 ) SEGMENT INFORMATION
The Company’s operating segments are separated by business segment (electric energy distribution,generation, renewable generation sourcesand commercialization), based on the internal financial information and management structure.
Profit or loss, assets and liabilities per segment include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis, if applicable. Note 1 shows the subsidiaries in accordance with their areas of operation and provides further information about each subsidiary and its business area.
The segregated information by segment of activity is shown below, in accordance with the criteria established by Company management:
F - 67
Distribution | Generation | Commercialization | Other (*) | Elimination | Total | ||||||
2011 | |||||||||||
Net revenue | 11,048,924 | 706,133 | 1,007,780 | 1,191 | - | 12,764,028 | |||||
(-) Intersegment revenues | 16,831 | 914,542 | 698,128 | - | (1,629,501) | 0 | |||||
Income from electric energy service | 1,922,194 | 895,429 | 263,977 | (31,053) | - | 3,050,547 | |||||
Financial income | 429,371 | 137,541 | 75,902 | 55,373 | - | 698,188 | |||||
Financial expense | (669,818) | (554,434) | (104,358) | (58,167) | - | (1,386,778) | |||||
Income before taxes | 1,681,747 | 478,537 | 235,520 | (33,847) | - | 2,361,957 | |||||
Income tax and social contribution | 571,204 | 110,584 | 75,689 | 22,096 | - | 779,573 | |||||
Net Income | 1,110,543 | 367,952 | 159,832 | (55,943) | - | 1,582,384 | |||||
Total Assets (**) | 11,651,205 | 13,129,529 | 509,372 | 2,122,951 | - | 27,413,057 | |||||
Capital Expenditures and other intangible assets | 1,065,104 | 822,553 | 16,927 | 189 | - | 1,904,773 | |||||
Depreciation and Amortization | 498,225 | 295,960 | 5,742 | 1,277 | - | 801,203 | |||||
2010 | |||||||||||
Net revenue | 10,471,192 | 538,217 | 1,012,525 | 1,795 | - | 12,023,729 | |||||
(-) Intersegment revenues | 13,904 | 650,571 | 766,922 | - | (1,431,397) | - | |||||
Income from electric energy service | 1,852,867 | 616,416 | 302,981 | (32,949) | - | 2,739,315 | |||||
Financial income | 316,020 | 53,725 | 22,389 | 90,981 | - | 483,115 | |||||
Financial expense | (394,999) | (323,441) | (22,311) | (96,307) | - | (837,058) | |||||
Income before taxes | 1,773,749 | 345,914 | 302,024 | (36,315) | - | 2,385,372 | |||||
Income tax and social contribution | (604,865) | (88,731) | (95,840) | (35,899) | - | (825,335) | |||||
Net Income | 1,168,884 | 257,183 | 206,184 | (72,214) | - | 1,560,037 | |||||
Total Assets (**) | 11,689,503 | 7,568,600 | 349,047 | 449,647 | - | 20,056,797 | |||||
Capital Expenditures and other intangible assets | 1,127,637 | 645,040 | 27,853 | 10 | - | 1,800,540 | |||||
Depreciation and Amortization | 352,806 | 188,981 | 4,553 | 145,453 | - | 691,793 | |||||
2009 | |||||||||||
Net revenue | 9,764,670 | 453,711 | 1,139,621 | 4 | - | 11,358,006 | |||||
(-) Intersegment revenues | 14,127 | 611,335 | 644,620 | - | (1,270,082) | - | |||||
Income from electric energy service | 1,860,801 | 649,561 | 292,543 | (20,222) | - | 2,782,683 | |||||
Financial income | 262,914 | 30,884 | 20,113 | 37,449 | - | 351,360 | |||||
Financial expense | (361,852) | (222,990) | (9,764) | (66,460) | - | (661,066) | |||||
Income before taxes | 1,761,863 | 457,455 | 302,892 | (49,233) | - | 2,472,977 | |||||
Income tax and social contribution | (602,761) | (125,711) | (93,300) | 37,663 | - | (784,109) | |||||
Net Income | 1,159,102 | 331,744 | 209,592 | (11,570) | - | 1,688,868 | |||||
Total Assets (**) | 10,696,228 | 6,761,330 | 422,816 | 610,385 | - | 18,490,759 | |||||
Capital Expenditures and other intangible assets | 667,614 | 550,565 | 9,789 | 131 | - | 1,228,099 | |||||
Depreciation and Amortization | 344,499 | 175,825 | 3,882 | 148,867 | - | 673,073 | |||||
(*) Other - Refers basically to the CPFL Energia figures after eliminations of balances with related parties | |||||||||||
(**) The goodwill created in an acquisition and recorded in CPFL Energia was allocated to the respective segments |
Since August 1, 2011, as a result of the association with ERSA and acquisition of the shares of Jantus, described in Notes 1 and 14.4, Management has analyzed these operations separately, and a new operating segment was therefore created to segregate the activities related to renewable energies:
2011 | Distribution | Generation | Renewables | Commercialization | Other (*) | Elimination | Total | ||||||
Net revenue | 11,048,924 | 609,755 | 96,378 | 1,007,780 | 1,191 | - | 12,764,028 | ||||||
(-) Intersegment revenues | 16,831 | 839,029 | 75,513 | 698,128 | - | (1,629,501) | - | ||||||
Income from electric energy service | 1,922,194 | 848,173 | 47,256 | 263,977 | (31,053) | - | 3,050,547 | ||||||
Financial income | 429,371 | 80,617 | 56,924 | 75,902 | 55,373 | - | 698,188 | ||||||
Financial expense | (669,818) | (519,758) | (34,676) | (104,358) | (58,167) | - | (1,386,778) | ||||||
Income before taxes | 1,681,747 | 409,032 | 69,504 | 235,520 | (33,847) | - | 2,361,957 | ||||||
Income tax and social contribution | 571,204 | 112,593 | (2,008) | 75,689 | 22,096 | - | 779,573 | ||||||
Net Income | 1,110,543 | 296,440 | 71,513 | 159,832 | (55,943) | - | 1,582,384 | ||||||
Total Assets (**) | 11,651,205 | 5,350,193 | 7,779,336 | 509,372 | 2,122,951 | - | 27,413,057 | ||||||
Capital Expenditures and other intangible assets | 1,065,104 |
| 334,989 |
| 487,564 |
| 16,927 |
| 189 |
| - |
| 1,904,773 |
Depreciation and Amortization | 498,225 | 259,514 | 36,446 | 5,742 | 1,277 | - | 801,203 | ||||||
(*) Other - Refers basically to the CPFL Energia figures after eliminations of balances with related parties | |||||||||||||
(**) The goodwill created in an acquisition and recorded in CPFL Energia was allocated to the respective segments |
F - 68
( 31 ) TRANSACTIONS WITH RELATED PARTIES
The Company is controlled by the following Companies:
· VBC Energia S.A.
Controlled by the Camargo Corrêa group, with operations in a number of segments, such as construction, cement, footwear, textiles, aluminum and highway concessions, among others.
· Energia São Paulo Fundo de Investimento em Participações, controlled by the following pension funds: (a) Fundação CESP, (b) Fundação SISTEL de Seguridade Social, (c) Fundação Petrobras de Seguridade Social - PETROS, and (d) Fundação SABESP de Seguridade Social - SABESPREV.
· Bonaire Participações S.A.
Company controlled by Energia São Paulo Fundo de Investimento em Participações.
· Fundo BB Carteira Livre I - Fundo de Investimento em Ações (“Fund")
Fund controlled by PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil.
The direct and indirect participations in operating subsidiaries are described in Note 1.
Controlling shareholders, subsidiaries and associated companies, jointly controlled corporations and entities under common control and that in some way exercise significant influence over the Company are regarded as related parties. Balances and transactions involving related parties are shown in tables 31.1 and 31.2.
31.1) Transactions between related parties involving controlling shareholders, entities under common control or with significant influence:
F - 69
ASSETS | LIABILITIES | REVENUE | EXPENSE | ||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||
Bank deposits and short-term investments | |||||||||||||||||||
Banco do Brasil S.A. | 91,025 | 141,372 | - | - | 5,385 | 13,147 | 7,030 | 6 | 494 | 4 | |||||||||
Banco Nossa Caixa S.A. | - | - | - | - | - | - | - | - | - | 10 | |||||||||
Loans and Financing, Debentures and Derivatives contracts (*) | |||||||||||||||||||
Banco do Brasil S.A. | - | - | 1,644,812 | 1,409,587 | - | 3,612 | - | 181,110 | 110,671 | 78,832 | |||||||||
Other financial transactions | |||||||||||||||||||
Banco do Brasil S.A. | - | - | 3,184 | 4,012 | 1,819 | 1,458 | 1,819 | 4,867 | 4,005 | 3,215 | |||||||||
Banco Nossa Caixa S.A. | - | - | - | - | - | - | - | - | - | 1,469 | |||||||||
Energy sales in the free market | |||||||||||||||||||
Camargo Corrêa Cimentos S.A. | - | 656 | - | - | - | 7,737 | - | - | - | - | |||||||||
Companhia Energetica do Ceara - Coelce | - | - | - | - | 39 | - | - | - | - | - | |||||||||
Companhia de Eletricidade do Estado da Bahia - Coelba | 1,471 | - | - | - | 57 | - | - | - | - | - | |||||||||
Companhia Energética de Pernambuco - Celpe | 890 | - | - | - | 52 | - | - | - | - | - | |||||||||
Companhia Energética do Rio Grande do Norte - Cosern | 324 | - | - | - | 30 | - | - | - | - | - | |||||||||
Fras-le S.A | 104 | - | - | - | 367 | - | - | - | - | - | |||||||||
Tavex Brasil S.A. | - | - | - | - | 22,458 | 19,983 | 18,549 | - | - | - | |||||||||
InterCement Brasil S/A | 931 | - | - | - | 6,339 | - | - | - | - | - | |||||||||
Vale Energia S.A | 7 | - | - | - | 30,548 | - | - | - | - | - | |||||||||
Energy purchases in the free market | |||||||||||||||||||
Afluente Transmissão de Energia Elétrica S.A. | - | - | - | - | - | - | - | 8 | - | - | |||||||||
NC Energia S.A. | 1,784 | 42 | - | - | 19,091 | 18,745 | 24,961 | - | - | 1,146 | |||||||||
Vale Energia S.A. | - | - | - | - | - | - | - | 523 | 20,277 | 26,613 | |||||||||
Petrobras | - | - | - | - | 4,371 | - | - | 7,967 | - | - | |||||||||
Companhia Energética de Pernambuco - Celpe | - | 52 | - | - | - | - | - | - | - | - | |||||||||
Companhia de Eletricidade do Estado da Bahia - Coelba | 360 | 342 | - | - | 3,002 | 2,834 | - | - | - | - | |||||||||
Companhia Energética do Rio Grande do Norte - Cosern | - | - | 183 | - | - | - | - | - | - | - | |||||||||
Vale S.A | - | - | - | - | 30,304 | - | - | 1,406 | - | 8,994 | |||||||||
InterCement Brasil S/A | - | - | - | - | - | - | - | 319 | - | - | |||||||||
Concessionárias de Rodovias do Oeste de São Paulo | - | - | - | - | - | - | - | 9 | - | - | |||||||||
Materials and service provision | |||||||||||||||||||
Brasil Telecom S.A. | - | - | 15 | 19 | - | - | - | 944 | 834 | 831 | |||||||||
Camargo Corrêa Cimentos S.A. | - | - | - | - | 327 | - | - | - | - | 20 | |||||||||
Camargo Corrêa Geração de Energia S.A. | - | - | - | - | 21 | - | 42 | - | - | - | |||||||||
Banco do Brasil S.A. | - | - | - | - | - | - | - | 144 | 220 | - | |||||||||
Totvs S.A (**) | - | - | 128 | - | - | - | - | 719 | - | - | |||||||||
Construções e Comércio Camargo Corrêa S.A. | - | - | 12 | - | - | - | - | - | - | - | |||||||||
Ferrovia Centro-Atlântica S.A. – FCA | - | - | - | - | - | - | - | 5 | - | - | |||||||||
Camargo Corrêa Geração de Energia S.A. | - | - | - | - | 2 | - | - | - | - | - | |||||||||
BNY Mellon Serviços Financeiros Distribuidora de T | - | - | - | - | - | - | - | 3 | - | - | |||||||||
ThyssenKrupp Companhia Siderúrgica do Atlântico | - | - | - | - | - | - | - | 628 | - | - | |||||||||
Intercement Brasil S.A | 758 | - | - | - | 3,162 | - | - | - | - | - | |||||||||
Industrias Romi S.A | - | - | - | - | 19 | - | - | - | - | - | |||||||||
Lupatech S.A | - | - | - | - | - | - | - | 9 | - | - | |||||||||
Petrobras | 33 | - | - | - | 311 | - | - | - | - | - | |||||||||
Vale Fertilizantes S.A. | - | - | - | - | 19 | - | - | - | - | - | |||||||||
Telemar Norte Leste S.A | 5 | - | - | - | 18 | - | - | 19 | - | - | |||||||||
Concessionárias de Rodovias do Oeste de São Paulo | - | - | - | - | - | - | - | 9 | - | - | |||||||||
Other revenue | |||||||||||||||||||
Brasil Telecom S.A. | 1,886 | 2,671 | - | - | 11,316 | 10,684 | 9,794 | - | - | - | |||||||||
Property, plant and equipment acquisition | |||||||||||||||||||
Construções e Comércio Camargo Correa S.A. | 69,902 | 55,986 | - | 1,957 | - | - | - | - | - | - | |||||||||
Centrais Elétricas de Santa Catarina S.A - Celesc | 519 | - | 1 | - | - | - | - | 28 | - | - | |||||||||
MRS Logística S.A. | - | - | 82 | - | - | - | - | - | - | - | |||||||||
Camargo Corrêa Cimentos S.A. | 16,809 | - | - | - | - | - | - | - | - | - | |||||||||
Industrias Romi S.A. | - | - | 1,276 | - | - | - | - | - | - | - | |||||||||
(*) Cost value, both for loans and for derivatives | |||||||||||||||||||
(**) At December 31, 2010, it does not classify as a related party. |
31.2)Transactions between related parties involving subsidiaries and jointly-owned subsidiaries:
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ASSETS | LIABILITIES | REVENUE | EXPENSE | |||||||||||||||||
Companies | December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||
Intercompany allocation of expense | ||||||||||||||||||||
Companhia Paulista de Força e Luz | - | - | 2,034 | - | - | - | - | 2,034 | 1,598 | 1,440 | ||||||||||
Companhia Piratininga de Força e Luz | - | - | 501 | - | - | - | - | 501 | 314 | 219 | ||||||||||
CPFL Comercialização Brasil S.A | - | - | - | - | - | - | - | - | 239 | 182 | ||||||||||
CPFL Geração de Energia S.A. | - | - | - | - | - | - | - | - | - | (30) | ||||||||||
Leasing and rental | ||||||||||||||||||||
Companhia Paulista de Força e Luz | - | - | - | - | - | - | - | 13 | 70 | 77 | ||||||||||
Intercompany loans | ||||||||||||||||||||
CPFL Leste Paulista | 2,610 | - | - | - | 26 | - | - | - | - | - | ||||||||||
CPFL Jaguari | 9 | - | - | - | - | - | ||||||||||||||
Centrais Elétricas da Paraiba S.A. | - | - | - | - | 831 | - | 165 | - | - | - | ||||||||||
CPFL Atende Centro de Cont. e Aten. Ltda | - | 12,384 | - | - | 1,620 | 799 | 465 | - | - | - | ||||||||||
CPFL Bioenergia S.A. | - | - | - | - | - | 786 | 391 | - | - | - | ||||||||||
CPFL Serv. Equip. Ind. e Com. S.A. | - | 2,491 | - | - | 285 | 211 | 13 | - | - | - | ||||||||||
Companhia Luz e Força de Mococa | - | - | - | - | - | 139 | - | - | - | - | ||||||||||
Chumpitaz Serviços S.A. | - | - | - | - | 175 | - | - | - | - | - | ||||||||||
Dividend / Interest on shareholders' equity | ||||||||||||||||||||
Companhia Sul Paulista de Energia | 8,126 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Jaguari de Energia | 7,682 | - | - | - | - | - | - | - | - | - | ||||||||||
Rio Grande Energia S/A | 106,457 | - | - | - | - | - | - | - | - | - | ||||||||||
CPFL Serv. Equip. Ind. e Com. S.A. | 3,648 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Luz e Força de Mococa | - | 3,648 | - | - | - | - | - | - | - | - | ||||||||||
Companhia Luz e Força Santa Cruz | - | 12,000 | - | - | - | - | - | - | - | - | ||||||||||
Companhia Paulista de Força e Luz | - | 237,000 | - | - | - | - | - | - | - | - | ||||||||||
CPFL Comercialização Brasil S.A | - | 75,000 | - | - | - | - | - | - | - | - | ||||||||||
CPFL Geração de Energia S.A. | - | 85,000 | - | - | - | - | - | - | - | - | ||||||||||
Materials and service provision | ||||||||||||||||||||
CPFL Comercialização Brasil S/A | 190 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Luz e Força Santa Cruz | 341 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Leste Paulista de Energia | 7 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Jaguari de Energia | 29 | - | - | - | - | - | - | - | - | - | ||||||||||
Companhia Luz e Força de Mococa | 28 | - | - | - | - | - | - | - | - | - | ||||||||||
Rio Grande Energia S/A | 532 | - | - | - | - | - | - | - | - | - | ||||||||||
CPFL Geração Energia S/A | 17 | - | - | - | - | - | - | - | - | - | ||||||||||
Advance to future capital increase | ||||||||||||||||||||
CPFL Jaguariúna S.A. | - | 445 | - | - | - | - | - | - | - | - |
31.3)The main transactions are described below:
a) Bank deposits and short-term investments –refer mainly to bank deposits and short-term financial investments with Banco do Brasil, as mentioned in Note 5.
b) Loans and Financing, Debentures and Derivatives– relate to funds raised from the Banco do Brasil in accordance with Notes 16 and 17, contracted under the normal market conditions at the time. The Company also guarantees certain loans raised by its subsidiaries, as mentioned in Notes 16 and 17.
c) Other Financial Transactions – the amounts in relation to Banco do Brasil are bank costs and collection expenses. The balance recorded in liabilities comprises basically the rights over the payroll processing of certain subsidiaries, negotiated with Banco do Brasil, which are appropriated as an income in the statement of operations over the term of the contract. The Company also has an Exclusive Investment Fund managed by BB DTVM, which charges management fees under normal market conditions for such management.
d) Intangible, property, plant and equipment, materials and service provision– refers to the acquisition of equipment, cables and other materials for use in distribution and generation, andcontracting of services such as construction and information technology consultancy. These operations were contracted under normal market conditions.
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e) Energy sales to the free market– refers basically to energy sales to free consumers, through short or long-term contracts made under conditions regarded by the Company as being market conditions at the time of the negotiation, in accordance with internal policies established in advance by Company management.
f) Energy purchased in the free market – refers basically to energy purchased by the trading companies in accordance with short or long-term agreements made under conditions regarded by the Company as being market conditions at the time of the negotiation, in accordance with policies established in advance by Company management.
g) Other revenue – refers basically to revenue from rental of use of the distribution system for telephony services.
h) Purchase and sale of energy in the regulated market - The subsidiaries that are public distribution service concessionaires charge tariffs for the use of the distribution system (TUSD) and sell energy to related parties in their respective concession areas (captive consumers). The amounts charged are established in accordance with prices regulated by the regulatory agency. These distributors also purchase energy from related parties, mainly involving long-term agreements, in conformity with the rules established by the sector (principally by auction); these prices are also regulated and approved by ANEEL.
Certain subsidiaries have supplementary retirement plan maintained with Fundação CESP and offered to the employees of the subsidiaries, as mentioned in Note 18.
To ensure that commercial transactions with related parties are conducted under normal market conditions, the Company set up a “Related Parties Committee”, comprising representatives of the controlling shareholders, responsible for analyzing the main transactions with related parties.
The Company guarantees certain loans raised by its subsidiaries, as mentioned in Notes 16 and 17.
The total remuneration of key management personnel in2011, in accordance with CVM Decision nº 560/2008, was R$ 29,694.This amount comprisesR$ 20,935in respect of short-term benefits, R$ 784for post-employment benefitsand R$ 7,975for other long-term benefits, and refers to the amount recorded by the accrual method.
( 32 ) INSURANCE
The insurance cover maintained by the subsidiaries is based on specialized advice and takes into account the nature and degree of risk. The amounts are considered sufficient to cover any significant losses on assets and/or responsibilities. The principal insurance policies in the financial statements are:
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DESCRIPTION | TYPE OF COVER | 2011 | 2010 | |||
Non current assets | Fire, Lightning, Explosion, Machinery breakdown, Electrical Damage and Engeneering Risk | 5,990,210 | 4,605,688 | |||
Transport | National Transport | 260,617 | 197,712 | |||
Stored Materials | Fire, Lightning, Explosion and Robbery | 50,922 | 18,729 | |||
Automobiles | Comprehensive Cover | 4,394 | 3,531 | |||
Civil Liability | Electric Energy Distributors | 300,163 | 20,134 | |||
Personnel | Group Life and Personal Accidents | 155,265 | 68,532 | |||
Other | Operational risks and other | 188,866 | 31,598 | |||
Total | 6,950,436 | 4,945,924 | ||||
Information not examined by the independent auditors. |
( 33 ) FINANCIAL INSTRUMENTS
The main financial instruments, classified in accordance with the group’s accounting practices, are:
a) Financial assets
a.1) Measured at amortized cost
Loans and receivables | December 31, 2011 | December 31, 2010 | |
Consumers, Concessionaires and Licensees (note 6) | 2,056,580 | 2,011,811 | |
Leases (note 10) | 29,102 | 31,069 | |
Other (note 12) | |||
Receivables from BAESA's shareholders | 27 | 17,155 | |
Pledges, Funds and Tied Deposits | 117,065 | 91,157 | |
Fund Tied to Foreign Currency Loans | 29,774 | 21,222 | |
Services Rendered to Third Parties | 10,962 | 12,641 | |
Reimbursement RGR | 6,499 | 7,592 | |
Collection Agreements | 41,297 | 48,228 | |
2,291,305 | 2,240,873 | ||
Held to maturity | December 31, 2011 | December 31, 2010 | |
Financial investments (note 7) | 120,578 | 81,750 | |
120,578 | 81,750 |
a.2) Measured at fair value
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Measured at fair value through profit or loss | December 31, 2011 | December 31, 2010 | |
Cash and cash equivalent (note 5) | 2,699,837 | 1,562,897 | |
Derivatives (note 33) | 219,375 | 327 | |
Financial investments (note 7) | 36,908 | 33,607 | |
2,956,119 | 1,596,830 | ||
Available for sale | December 31, 2011 | December 31, 2010 | |
Financial asset of concession (note 11) | 1,376,664 | 934,646 |
b) Financial liabilities
b.1) Measured at amortized cost
Consolidated | |||
December 31, 2011 | December 31, 2010 | ||
Suppliers (note 15) | (1,240,143) | (1,047,385) | |
Loans and financing - Principal and interest (note 16) | (6,740,144) | (5,991,208) | |
Debentures - Principal and interest (note 17) | (5,163,388) | (3,840,338) | |
Payables Dividends (Note 24) | (24,524) | (23,813) | |
Regulatory Charges (note 19) | (145,146) | (123,541) | |
Other (note 23) | |||
Consumers, Concessionaires and Licensees | (66,284) | (63,635) | |
National Scientific and Technological Development Fund - FNDCT | (4,014) | (3,077) | |
Energy Research Company - EPE | (1,648) | (1,206) | |
Collection Agreements | (70,096) | (56,260) | |
Reversal Fund | (17,750) | (17,750) | |
Business combination | (174,136) | - | |
(13,647,274) | (11,168,212) |
b.2) Measured at fair value through profit or loss
F - 74
Measured at fair value through profit or loss | December 31, 2011 | December 31, 2010 | |
Held for trade | |||
Derivatives (note 33) | (24) | (11,865) | |
Initial recognition (1) | |||
Loans and financing - certain debts (note 16) | (1,704,254) | (424,827) | |
(1,704,279) | (436,692) | ||
(1) Due to the initial recognition at fair value of the above financial liability, the consolidated result was a loss of R$14.350 in 2011 (a loss of R$ 52 and R$ 56,609 in 2010 and 2009 respectively). |
c) Valuation of financial instruments
IFRS 7 requires classification at three levels of hierarchy for measurement of the fair value of financial instruments, based on observable and unobservable information in relation to valuation of a financial instrument at the measurement date.
IFRS 7 also defines observable information as market data obtained from independent sources and unobservable information that reflects market assumptions.
The three levels of fair value are:
· Level 1: quoted prices in an active market for identical instruments;
· Level 2: observable information other than quoted prices in an active market that are observable for the asset or liability, directly (i.e. as prices) or indirectly (i.e. derived from prices);
· Level 3: inputs for the instruments that are not based on observable market data (unobservable inputs).
The classification in accordance with the fair value hierarchy of the Company’s financial instruments, measured at fair value, is as follows:
December 31, 2011 | December 31, 2010 | |||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||
Cash and cash equivalents (note 5) | 2,699,837 | - | - | 1,562,897 | - | - | ||||||
Derivatives | - | 219,350 | - | - | (11,538) | - | ||||||
Loans and financing (note 16) | - | (1,704,254) | - | - | (424,827) | - | ||||||
Financial investments (note 7) | 36,908 | - | - | 33,607 | - | - | ||||||
Financial asset of concession (note 11) | - | - | 1,376,664 | - | - | 934,646 | ||||||
2,736,745 | (1,484,904) | 1,376,664 | 1,596,504 | (436,365) | 934,646 |
Since the distribution subsidiaries have classified their financial concession assets as available-for-sale, as mentioned in Note 3.2, the relevant factors for measurement at fair value are not publicly observable. The fair value hierarchy classification is therefore level 3. The changes between years and the respective gains (losses) in Other comprehensive income are disclosed in Note 11.
The comparative information on marking to market the other financial instruments measured at amortized cost is described below:
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· It is assumed that financial instruments such as accounts receivable from consumers, concessionaires and licensees and accounts payable to suppliers are already close to the respective market values.
· At December 31, 2011 and 2010, the market values of the financial instruments obtained by the methodology described in Note 4, are as follows:
December 31, 2011 | December 31, 2010 | |||||||
Accounting balance | Fair value | Accounting balance | Fair value | |||||
Loans and financing (note 16) | (6,740,144) | (6,554,672) | (5,141,554) | (4,870,909) | ||||
Debentures (note 17) | (5,163,388) | (5,350,263) | (3,840,338) | (3,891,397) | ||||
Total | (11,903,532) | (11,904,935) | (8,981,892) | (8,762,306) |
In the case of specific electricity sector operations, where there are no similar transactions in the market and with low liquidity, mainly related to the regulatory aspects and credits receivable from CESP, the subsidiaries assumed that the market value is represented by the respective carrying amount. This is due to the uncertainties reflected in the variables which have to be taken into consideration in creating a pricing model.
The Company recognized in “Investments at cost” in the consolidated financial statements the 5.93% interest held by the indirect subsidiary Paulista Lajeado Energia S.A. in the total capital of Investco S/A, in the form of 28,154 common shares and 18.593 preferred shares.As the shares of that company are not quoted on the stock exchange and the main objective of it operations is to generate electric energy for commercialization by the shareholders who hold the concession, the Company opted to recognize the investment at cost.
d) Derivatives
The Company and its subsidiaries have a policy of using derivatives as a hedge against the risks of variations in exchange and interest rates, without any speculative purposes. The Company and its subsidiaries have an exchange hedge compatible with the net exposure to exchange risks, including all the assets and liabilities tied to exchange variation.
The hedge instruments contracted by the Company and its subsidiaries are currency or interest rate swaps with no leverage component, margin call requirements or daily or periodical adjustments. As terms of the majority of the derivatives contracted by the Company and its subsidiaries are fully aligned with the debts protected, and in order to obtain more relevant and consistent accounting information through the recognition of income and expenses, certain debts were designated at fair value, for accounting purposes. Other debts with different terms from the derivatives contracted as a hedge continue to be recorded at amortized cost. Furthermore, the Company and its subsidiaries do not adopt hedge accounting for derivative operations.
At December 31, 2011, the Company and its subsidiaries had the following swap operations:
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Market values (book values) | ||||||||||||||||||
Company / strategy / counterparts | Asset | (Liability) | Market values, net | Values at cost, net | Gain (Loss) on marking to market | Currency / index | Maturity range | Notional | Negotiation market | |||||||||
Derivatives for protection of debts designated at fair value | ||||||||||||||||||
Exchange variation hedge | ||||||||||||||||||
CPFL Paulista | ||||||||||||||||||
BNP Paribas | 27,073 | - | 27,073 | 26,380 | 693 | dollar | June 2014 | 160,000 | Over the counter | |||||||||
J.P.Morgan | 13,064 | - | 13,064 | 12,768 | 296 | dollar | July 2014 | 78,250 | Over the counter | |||||||||
J.P.Morgan | 14,497 | - | 14,497 | 14,723 | (225) | dollar | August 2014 | 76,700 | Over the counter | |||||||||
Morgan Stanley | 5,683 | - | 5,683 | 6,303 | (620) | dollar | September 2016 | 85,475 | Over the counter | |||||||||
Bank of America | 36,568 | - | 36,568 | 37,863 | (1,295) | dollar | July 2014 | 235,050 | Over the counter | |||||||||
Bank of America | 26,841 | - | 26,841 | 25,810 | 1,031 | dollar | July 2016 | 156,700 | Over the counter | |||||||||
Societe Generale | 6,374 | - | 6,374 | 6,438 | (64) | dollar | August 2016 | 33,173 | Over the counter | |||||||||
Citibank | 5,628 | - | 5,628 | 6,099 | (471) | dollar | September 2016 | 85,750 | Over the counter | |||||||||
HSBC | 3,024 | - | 3,024 | 3,150 | (126) | dollar | September 2014 | 41,050 | Over the counter | |||||||||
Subtotal | 138,753 | - | 138,753 | 139,534 | (781) | |||||||||||||
CPFL Piratinga | ||||||||||||||||||
BNP Paribas | 8,731 | - | 8,731 | 8,840 | (109) | dollar | July 2014 | 45,990 | Over the counter | |||||||||
J.P.Morgan | 28,848 | - | 28,848 | 29,426 | (578) | dollar | August 2014 | 153,400 | Over the counter | |||||||||
Bank of America | 12,482 | - | 12,482 | 11,463 | 1,019 | dollar | August 2016 | 80,250 | Over the counter | |||||||||
Societe Generale | 8,364 | - | 8,364 | 8,448 | (84) | dollar | August 2016 | 43,527 | Over the counter | |||||||||
Citibank | 1,668 | - | 1,668 | 1,798 | (130) | dollar | August 2016 | 12,840 | Over the counter | |||||||||
Subtotal | 60,093 | - | 60,093 | 59,975 | 118 | |||||||||||||
CPFL Sul Paulista | ||||||||||||||||||
Citibank | 726 | - | 726 | 749 | (23) | dollar | September 2014 | 8,000 | Over the counter | |||||||||
CPFL Leste Paulista | ||||||||||||||||||
Citibank | 726 | - | 726 | 749 | (23) | dollar | September 2014 | 8,000 | Over the counter | |||||||||
CPFL Mococa | ||||||||||||||||||
Citibank | 635 | - | 635 | 656 | (21) | dollar | September 2014 | 7,000 | Over the counter | |||||||||
CPFL Jaguari | ||||||||||||||||||
Citibank | 979 | - | 979 | 985 | (6) | dollar | August 2014 | 7,000 | Over the counter | |||||||||
CPFL Geração | ||||||||||||||||||
Citibank | 13,876 | - | 13,876 | 14,381 | (505) | dollar | August 2016 | 100,000 | Over the counter | |||||||||
Subtotal | 215,788 | - | 215,788 | 217,029 | (1,241) | |||||||||||||
Derivatives for protection of debts not designated at fair value | ||||||||||||||||||
Exchange variation hedge | ||||||||||||||||||
CPFL Paulista | ||||||||||||||||||
Itaú | 45 | - | 45 | 48 | (3) | dollar | April 2012 | 908 | Over the counter | |||||||||
Itaú | 811 | - | 811 | 1,047 | (236) | dollar | October 2012 | 19,783 | Over the counter | |||||||||
CPFL Geração | ||||||||||||||||||
HSBC | 2,790 | - | 2,790 | 2,567 | 223 | dollar | January 2012 to December 2012 | 56,143 | Over the counter | |||||||||
Interest rate variation hedge(1) | ||||||||||||||||||
CPFL Energia | ||||||||||||||||||
Citibank | 2 | (24) | (22) | (41) | 19 | CDI + spread | Sep 2011 to Sep 2014 | 450,000 | Over the counter | |||||||||
RGE | ||||||||||||||||||
Santander | 317 | - | 317 | 15 | 302 | CDI + spread | Dec 2011 to Dec 2013 | 186,667 | Over the counter | |||||||||
Citibank | 93 | - | 93 | 4 | 89 | CDI + spread | Dec 2011 to Dec 2013 | 66,667 | Over the counter | |||||||||
Hedge interest rate variation(2) | ||||||||||||||||||
CPFL Piratininga | ||||||||||||||||||
HSBC | (118) | - | (117) | 5 | (122) | TJLP | Jan 2013 | 14,817 | Over the counter | |||||||||
Santander | (127) | - | (128) | (1) | (127) | TJLP | Jan 2013 | 14,822 | Over the counter | |||||||||
CPFL Geração | ||||||||||||||||||
HSBC | (226) | - | (227) | (2) | (225) | TJLP | Dec 2012 | 28,257 | Over the counter | |||||||||
Subtotal | 3,587 | (24) | 3,562 | 3,642 | (81) | |||||||||||||
Total | 219,375 | (24) | 219,350 | 220,672 | (1,322) | |||||||||||||
Current | 3,733 | - | ||||||||||||||||
Non current | 215,642 | (24) | ||||||||||||||||
Total | 219,375 | (24) | ||||||||||||||||
* For further details of terms and information about debts and debentures, see Notes 16 and 17 | ||||||||||||||||||
(1) The interest rate hedge swaps have half-yearly validity, so the notional value reduces in accordance with amortization of the debt. | ||||||||||||||||||
(2) The interest rate hedge swaps have monthly validity, so the notional value reduces in accordance with amortization of the debt. |
F - 77
As mentioned above, certain subsidiaries opted to mark to market debts for which they have fully tied hedge instruments, resulting in a loss of R$ 7,359 at December 31, 2011 (Note 16).
The Company and its subsidiaries have recorded gains and losses on their derivatives. However, as these derivatives are used as a hedge, these gains and losses minimized the impact of variations in exchange and interest rates on the protected indebtedness. For the years 2011, 2010 and 2009, the derivatives resulted in the following impacts on the consolidated result:
Gain (loss) | ||||||||||
Company | Hedged risk / Operation | Account | 2011 | 2010 | 2009 | |||||
CPFL Energia | Interest rate variation | Swap transactions | 161 | (14) | 136 | |||||
CPFL Energia | Marking to market | Adjustment to fair value | (608) | 20 | 228 | |||||
CPFL Paulista | Exchange variation | Swap transactions | 169,033 | (3,269) | (230,440) | |||||
CPFL Paulista | Marking to market | Adjustment to fair value | 8,611 | 392 | 49,810 | |||||
CPFL Piratininga | Interest rate variation | Swap transactions | 6 | 3 | - | |||||
CPFL Piratininga | Marking to market | Adjustment to fair value | 118 | (254) | - | |||||
CPFL Piratininga | Exchange variation | Swap transactions | 59,514 | - | - | |||||
CPFL Geração | Exchange variation | Swap transactions | 13,630 | (16,094) | (274,350) | |||||
CPFL Geração | Interest rate variation | Swap transactions | (468) | 567 | (1,305) | |||||
CPFL Geração | Marking to market | Adjustment to fair value | 2,495 | 1,710 | 11,157 | |||||
RGE | Exchange variation | Other financial exp | - | - | (11,743) | |||||
RGE | Interest rate variation | �� | Other financial exp | 217 | 553 | 514 | ||||
RGE | Marking to market | Derivative adjustment to fair value | 168 | (71) | 198 | |||||
CPFL Sul Paulista | Marking to market | Adjustment to fair value | (23) | - | - | |||||
CPFL Sul Paulista | Exchange variation | Swap transactions | 749 | - | - | |||||
CPFL Leste Paulista | Marking to market | Adjustment to fair value | (23) | - | - | |||||
CPFL Leste Paulista | Exchange variation | Swap transactions | 749 | - | - | |||||
CPFL Mococa | Marking to market | Adjustment to fair value | (21) | - | - | |||||
CPFL Mococa | Exchange variation | Swap transactions | 656 | - | - | |||||
CPFL Jaguari | Marking to market | Adjustment to fair value | (6) | - | - | |||||
CPFL Jaguari | Exchange variation | Swap transactions | 985 | - | - | |||||
255,942 | (16,457) | (455,795) | ||||||||
e) Sensitivity Analysis
In compliance with CVM Instruction n° 475/08, the Company and its subsidiaries performed sensitivity analyses of the main risks to which their financial instruments (including derivatives) are exposed, mainly comprising variations in exchange and interest rates, as shown below:
e.1) Exchange variation
If the level of exchange exposure at December 31, 2011 is maintained, the simulation of the consolidated effects by type of financial instrument for three different scenarios would be:
Instruments | Exposure | Risk | Exchange depreciation of 8%* | Exchange depreciation of 25%** | Exchange depreciation of 50%** | |||||
Financial asset instruments | 29,774 | apprec. dollar | 2,387 | 7,443 | 14,887 | |||||
Financial liability instruments | (1,845,277) | apprec. dollar | (147,953) | (461,319) | (922,639) | |||||
Derivatives - Plain Vanilla Swap | 1,788,567 | apprec. dollar | 143,406 | 447,142 | 894,283 | |||||
(26,937) | (2,160) | (6,734) | (13,469) | |||||||
* In accordance with exchange graphs contained in information provided by the BM&F | ||||||||||
**In compliance with CVM Instruction 475/08 |
e.2) Variation in interest rates
If (i) the scenario of exposure of the financial instruments indexed to variable interest rates at December 31,2011 were to be maintained, and (ii) the respective accumulated annual indexes as of that date were to remain stable (CDI 11,59% a.a; IGP-M 5,1% a.a.; TJLP 6,0% a.a.) the effects on the consolidated financial statements for the next company year would be a net financial expense R$ 847,331. In the event of fluctuations in the indexes in accordance with the three scenarios described, the effect on the net financial expense would as follows:
F - 78
Instruments |
| Exposure |
| Risk |
| Scenario I* | Raising index by 25%** |
| Raising index by 50%** | |
Financial asset instruments | 3,243,396 | CDI variation | (51,246) | 93,977 | 187,955 | |||||
Financial liability instruments | (6,345,113) | CDI variation | 100,253 | (183,850) | (367,699) | |||||
Derivatives - Plain Vanilla Swap | (1,627,092) | CDI variation | 25,708 | (47,145) | (94,290) | |||||
(4,728,809) | 74,715 | (137,017) | (274,034) | |||||||
Financial assets instruments | 48,522 | IGP-M variation | (378) | 619 | 1,237 | |||||
Financial liability instruments | (26,589) | IGP-M variation | 207 | (339) | (678) | |||||
21,933 | (171) | 280 | 559 | |||||||
Financial liability instruments | (4,999,714) | TJLP variation | (50,997) | (74,996) | (149,991) | |||||
Derivatives - Plain Vanilla Swap | 57,874 | TJLP variation | 590 | 868 | 1,736 | |||||
(4,941,840) | (50,407) | (74,128) | (148,255) | |||||||
Total increase | (9,648,715) | 24,137 | (210,865) | (421,730) | ||||||
(*) The CDI, IGP-M and TJLP indexes considered of 10.01%, 4.32% and 7.02%, respectively, were obtained from information available in the market. | ||||||||||
(**) In compliance with CVM Instruction 475/08 |
e.3) Financial asset of concession
As mentioned in Note 3.1, the Company adopts the premise that thevalue of thefinancial concession assetis determined at fair value, based on the remuneration of the assets as established byANEEL.
Since the Federal Government has not yet defined the methodology and criteria for valuation of the financial asset, the Company estimates that, under remote circumstances, indemnification for the not amortized portion of the assets could be based on the historic cost and not at the amount based on the respective fair value.
Accordingly, if this remote scenario were to occur, it would involve derecognition of the portion of the financial concession asset (portion relating to the fair value recognized), entered against Other comprehensive Income – Financial Instruments in the amount of R$ 227,118 (net of tax effects).
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( 34 ) RISK MANAGEMENT
The business of the Company and its subsidiaries comprises principally generation, commercialization and distribution of electric energy. As public service concessionaires, the operations and/or tariffs of its principal subsidiaries are regulated by ANEEL.
Risk management structure:
The Board of Directors is responsible for allocating priorities in respect of the risks to be monitored by the Company, confirming the tolerance levels approved by the Executive Board and being aware of the corporate risk management model adopted by the Company. The Executive Board is responsible for developing and implementing action and risk monitoring plans. The Risk Management and Internal Controls Department and the Corporate Risk Management Committee were set up to assist it in this process. Since its creation, the Risk Management and Internal Controls Departmenthas drawn up theCorporate Risk Management Policy, approved by the Executive Board and the Board of Directors, set up the Corporative Risk Management Committee, comprising directors appointed to represent each Management Unit, and the internal rules, and is implementing the Corporate Risk Management model for the Group with regard to Strategy (guidelines, risk map and treatment), Processes (planning, execution, monitoring and reports), Systems, Organization and Governance.
The risk management policies are establishedto identify, analyze and treats the risks faced by the Company and its subsidiaries,and includes reviewing the model adopted wherever necessary to reflect changes in market conditions and in the Group's activities, with a view to developing an environment of disciplined and constructive control.
The Group's Board of Directors is assisted in its supervisory role by the Internal Audit department. The Internal audit department conducts both the regular reviews and the ad hoc reviews of risk management controls and procedures, the results of which are reported to theBoard of Directors and the Fiscal Council.
The main market risk factors affecting the businesses are as follows:
Exchange rate risk:This risk derives from the possibility of the subsidiaries incurring losses and cash constraints on account of fluctuations in currency exchange rates, increasing the balances of foreign currency denominated liabilities.The exposure in relation to raising funds in foreign currency is largely covered by contracting swap operations, which allow the Company and its subsidiaries to exchange the original risks of the operation for the cost of the variation in the CDI. The operations of the Company’s subsidiaries are also exposed to exchange variations on the purchase of electric energy from Itaipu. The compensation mechanism - CVA protects the companies against possible losses. However, the compensation only comes into effect through consumption and the consequent billing of energy after the next tariff adjustment in which such losses have been considered. The quantification of this risk is measured in Note 33 (e).
Interest Rate Risk:This risk derives from the possibility of the Company and its subsidiaries incurring losses due to fluctuations in interest rates that increase financial expenses on loans, financing and debentures. The subsidiaries have tried to increase the proportion of pre-indexed loans or loans tied to indexes with lower rates and little fluctuation in the short and long term. The quantification of this risk is measured in Note 33 (e).
Credit Risk:This risk arises from the possibility of the subsidiaries incurring losses resulting from difficulties in collecting amounts billed to customers. This risk is evaluated by the subsidiaries as low, as it is spread over the number of customers and in view of the collection policy and cancellation of supply to defaulting consumers.
Risk of Energy Shortages:The energy sold by the Company is primarily generated by hydropower plants. A prolonged period of low rainfall, together with an unforeseen increase in demand, could result in a reduction in the volume of water in the power plants’ reservoirs, compromising the recovery of their volume, and resulting in losses due to the increase in the cost of purchasing energy or a reduction in revenue due to the introduction of another rationing program, as in 2001. According to the Annual Energy Operation Plan – PEN of July 2011, drawn up by the Operador Nacional do Sistema Elétrico (National Electricity SystemOperator), the risk of any energy deficit is very low for 2012, and the likelihood of another energy rationing program is remote.
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Risk of Acceleration of Debts:The subsidiaries have loan agreements, financing and debentures with restrictive clauses (covenants) normally applicable to these kinds of arrangements, involving compliance with economic and financial ratios, cash generation, etc. These covenants are monitored appropriately and do not restrict the capacity to operate normally.
Regulatory risk: The tariffs charged to captive consumers by the distribution subsidiaries are fixed by ANEEL, at intervals established in the Concession Arrangements entered into with the Federal Government and in conformity with the periodic tariff review methodology established for the tariff cycle. Once the methodology has been ratified, ANEEL establishes tariffs to be charged by the distributor to the end consumers. In accordance with Law 8.987/1995, the fixed tariffs should insure the economic and financial balance of the concession contract at the time of the tariff review, however, the risk of application of the tariffs falls to the electric energy distributors.
Risk Management for Financial instruments:The Company and its subsidiaries maintain operating and financial policies and strategies to protect the liquidity, safety and profitability of their assets. Accordingly, control and follow-up procedures are in place to monitor the transactions and balances of financial instruments for risks and current rates in relation to market conditions.
Risk management controls: In order to manage the risks inherent to the financial instruments and to monitor the procedures established by management, the Company and its subsidiaries use the MAPS software system to calculate the mark to market, stress testing and duration of the instruments, and assess the risks to which the Company and its subsidiaries are exposed. Historically, the financial instruments contracted by the Company and its subsidiaries supported by these tools have produced adequate risk mitigation results. It must be stressed that the Company and its subsidiaries have a formal policy of contracting derivatives, always with the appropriate levels of approval, only in the event of exposure that management regards as a risk. The Company and its subsidiaries do not enter into transactions involving exotic or speculative derivatives. Furthermore, the Company and its subsidiaries meet the requirements of the Sarbanes-Oxley Law, and accordingly have internal control policies that aim for a strict control environment to minimize the exposure to risks.
( 35 ) COMMITTMENTS
The Company’s commitments in relation to long-term energy purchase agreements and plant construction projects are as follows:
Commitments as of December 31, 2011 | Duration | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||
Energy purchase contracts (except Itaipu) | 2 to 20 years | 7,173,331 | 6,533,066 | 6,475,342 | 6,204,172 | 79,893,621 | 106,279,532 | |||||
Itaipu | 20 years | 1,031,450 | 1,106,930 | 1,168,110 | 1,225,400 | 16,295,450 | 20,827,340 | |||||
Power plant construction projects (a) | 2 to 31 years | 818,697 | 506,758 | 191,276 | 139,861 | 1,769,610 | 3,426,202 | |||||
TOTAL | 9,023,478 | 8,146,753 | 7,834,728 | 7,569,434 | 97,958,681 | 130,533,074 | ||||||
(a) Power plant construction projects include commitments made by the Company corresponding to its proportional share on construction, concession acquisition and bank guarantees relating to the jointly-controlled under development companies. |
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( 36 ) REGULATORY ASSETS AND LIABILITIES
The Company accounts for the following assets and liabilities for regulatory purposes, which are not recognized in the consolidated financial statements, as mentioned in Note 3.13.
December 31, 2011 | December 31, 2010 | December 31, 2009 | ||||
Assets | ||||||
Consumers, Concessionaires and Licensees | ||||||
Discounts TUSD (*) and Irrigation | 67,244 | 54,407 | 12,753 | |||
Other financial components | - | - | 199 | |||
67,244 | 54,407 | 12,952 | ||||
Deferred Costs Variations | ||||||
Parcel "A" | - | 333 | 1,290 | |||
CVA (**) | 404,148 | 333,622 | 374,336 | |||
404,148 | 333,954 | 375,626 | ||||
Prepaid Expenses | ||||||
Overcontracting | 27,364 | 23,860 | 100,326 | |||
Low income consumers' subsidy - Losses | 17,922 | 34,994 | 55,506 | |||
Neutrality of the sector charges | 224 | - | - | |||
Other financial components | 53,647 | 67,205 | 11,557 | |||
99,157 | 126,059 | 167,389 | ||||
Liabilities | ||||||
Deferred Gains Variations | ||||||
Parcel "A" | (1,337) | (11,472) | (44,419) | |||
CVA (**) | (488,500) | (364,365) | (377,735) | |||
(489,838) | (375,837) | (422,154) | ||||
Other Accounts Payable | ||||||
Tariff review | - | - | (89,261) | |||
Discounts TUSD (*) and Irrigation | (127) | (1,923) | (991) | |||
Overcontracting | (48,367) | (61,391) | (17,541) | |||
Low income consumers' subsidy - Gains | (17,010) | (6,280) | (6,011) | |||
Neutrality of the sector charges | (97,138) | (63,905) | - | |||
Tariff Review – Provisional Procedure | (32,181) | - | - | |||
Other financial components | (5,739) | (29,666) | (12,138) | |||
(200,562) | (163,165) | (125,942) | ||||
Total net | (119,851) | (24,581) | 7,871 | |||
(*) Network Usage Charge - TUSD | ||||||
(**) Deferred Tariff Costs and Gains Variations from Parcel "A" itens - ("CVA") |
The main characteristics of the regulatory assets and liabilities are:
a) TUSD Discounts and Irrigation
The distribution subsidiaries recognize regulatory assets and liabilities in relation to the special discounts applied on the TUSD to the free consumers, in respect of electric energy supplied from alternative sources and on the tariffs for energy supplied for irrigation and aquaculture.
b) Parcel “A”
Corresponds to the variation in the non-manageable costs representing Parcel "A" of the concession arrangement between January 1 and October 25, 2001, during the rationing period.
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c) CVA
Refers to the mechanism for offsetting the variations in unmanageable costs incurred by the electric energy distribution concessionaires. These variations are calculated in accordance with the difference between the expenses effectively incurred and the expenses estimated at the time of establishing the tariffs in the annual tariff adjustments. The amounts taken into consideration in the CVA are restated at the SELIC rate.
d) Overcontracting
Electric energy distribution concessionaires are obliged to guarantee 100% of their energy and power market through contracts approved, registered and ratified by ANEEL, and are also assured that costs or income derived from overcontracting will be passed on to the tariffs, restricted to 3% of the energy load requirement.
e) Subsidy - Low Income
Refers to the subsidies granted to consumers entitled to the Social Electric Energy Tariff (Low Income) if they are enrolled in the Sole Register for Federal Government Social, irrespective of their energy consumption.
f) Neutrality of the Sector Charges
Refers to the neutrality of the sector charges in the tariff, calculating the monthly differences between the amounts billed and the amounts considered in the tariff.
g) CPFL Piratininga Tariff Review – Provisional Procedure
The tariff review for the subsidiary CPFL Piratininga was scheduled for October 23, 2011. ANEEL’s Order nº 4.991, of December 29, 2011, concerning the basic procedures for preparation of the financial statements, requested recognition of the best estimate of the accounting impact of the tariff review for 2011.
h) Other Financial Components
Mainly refers to CCEAR exposure, financial guarantees, subsidies to cooperatives and licensees and TUSD G financial adjustment.
Additionally, tariff adjustments of the distribution subsidiaries have been impacted by regulatory adjustments due to fit the current and previous tariff reviews.
( 37 ) SUBSEQUENT EVENTS
37.1 Acquisition of Atlântica I Parque Eólico S.A., Atlântica II Parque Eólico S.A., Atlântica IV Parque Eólico S.A. and Atlântica V Parque Eólico S.A.
In an announcement to the market dated January 13, 2012, the Company advised that the indirect subsidiary CPFL Renováveis had signed a purchase agreement with the company Cobra Instalaciones Y Servicios S.A., with the objective of acquiring 100% of the shares of Atlântica I Parque Eólico S.A., Atlântica II Parque Eólico S.A., Atlântica IV Parque Eólico S.A. and Atlântica V Parque Eólico S.A. (“companies”).
The companies hold authorizations to generate electric energy from wind sources under the independent production system, for a period of 35 years, by installation of their respective wind power plants, with joint installed power of 120 MW. The purchase agreement is subject to approval by ANEEL and other conditions inherent to this type of negotiation. Once the conditions have been fulfilled, the subsidiary CPFL Renováveis will hold all the companies’ shares.
F - 83
The other additional information required by IFRS 3 cannot be disclosed, as the transaction is in the process of finalization.
37.2 Acquisition of Bons Ventos Geradora de Energia S.A.
On February 24, 2012, CPFL Renováveis disclosed in a Relevant Fact the signing of an agreement to purchase shares in the company BVP S.A., which holds 100% of the shares of Bons Ventos Geradora de Energia S.A.. Bons Ventos has an authorization from ANEEL to operate the wind power plants Taíba Albatroz, Bons Ventos, Enacel and Canoa Quebrada, with total installed capacity of 157.5 MW.
The total acquisition cost is R$ 1,062 million, as follows: (i) R$ 600 million to be paid to the vendors (consideration transferred); and (ii) assumption of a net debt of R$ 462 million, which may be restated by the closing date of the acquisition, in accordance with the share purchase contract.
These wind power plants are located in the State of Ceará and are in full commercial operation. The total energy is contracted to Eletrobrás for 20 years, through PROINFA.
Finalizing the acquisition and paying the price are subject to meeting pre-conditions established in the share purchase agreement and obtaining the pertinent prior authorizations, including the agreement of ANEEL, the financing banks and the antitrust organizations, including the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica – CADE).
The other additional information required by IFRS 3 cannot be disclosed, once the transaction is in the process of finalization.
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( 38 ) ADDITIONAL INFORMATION
CONSOLIDATED STATEMENTS OF ADDED VALUE
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands of Brazilian reais – R$)
| 2011 |
| 2010 |
| 2009 |
|
|
|
|
|
|
|
|
1- Revenues | 19,267,606 |
| 18,421,036 |
| 16,963,483 |
|
1.1 Operating revenues | 17,736,155 |
| 16,513,001 |
| 15,875,755 |
|
1.2 Revenue from infrastructure construction | 1,129,826 |
| 1,043,678 |
| 615,557 |
|
1.3 Revenues related to the construction of own assets | 472,298 |
| 916,026 |
| 508,421 |
|
1.4 Provision for doubtful accounts | (70,673) |
| (51,669) |
| (36,250) |
|
|
|
|
|
|
|
|
2 - (-) Inputs | (9,375,269) |
| (9,535,417) |
| (8,461,851) |
|
2.1Electricity Purchased for Resale | (6,926,552) |
| (6,914,197) |
| (6,695,256) |
|
2.2Material | (892,429) |
| (1,095,907) |
| (590,704) |
|
2.3Outsourced Services | (1,095,227) |
| (1,185,662) |
| (825,670) |
|
2.4Other | (461,061) |
| (339,651) |
| (350,221) |
|
|
|
|
|
|
|
|
3 - Gross Added Value (1 + 2) | 9,892,338 |
| 8,885,619 |
| 8,501,632 |
|
|
|
|
|
|
|
|
4 – Retentions | (845,819) |
| (720,528) |
| (697,869) |
|
4.1Depreciation and Amortization | (661,770) |
| (537,913) |
| (510,970) |
|
4.2Amortization of intangible assets | (184,049) |
| (182,615) |
| (186,899) |
|
|
|
|
|
|
|
|
5 – Net Added Value Generated (3 + 4) | 9,046,518 |
| 8,165,091 |
| 7,803,763 |
|
|
|
|
|
|
|
|
6 - Added Value Received in Transfer | 722,754 |
| 521,084 |
| 378,423 |
|
6.1Financial Income | 722,754 |
| 521,084 |
| 378,423 |
|
6.2Equity in Subsidiaries | - |
| - |
| - |
|
|
|
|
|
|
|
|
7 - Added Value to be Distributed (5 + 6) | 9,769,273 |
| 8,686,175 |
| 8,182,186 |
|
|
|
|
|
|
|
|
8 – Distribution of Added Value |
|
|
|
|
|
|
8.1Personnel and Charges | 595,432 |
| 498,110 |
| 533,508 |
|
8.1.1 Direct Remuneration | 417,847 |
| 379,198 |
| 357,309 |
|
8.1.2 Benefits | 146,586 |
| 89,235 |
| 147,277 |
|
8.1.3 Government severance indemnity fund for employees - F.G.T.S. | 30,999 |
| 29,677 |
| 28,922 |
|
8.2Taxes, Fees and Contributions | 6,162,977 |
| 5,681,647 |
| 5,251,649 |
|
8.2.1 Federal | 3,183,133 |
| 2,940,759 |
| 2,628,151 |
|
8.2.2 State | 2,970,299 |
| 2,731,991 |
| 2,615,272 |
|
8.2.3 Municipal | 9,545 |
| 8,897 |
| 8,226 |
|
8.3Interest and Rentals | 1,428,479 |
| 946,381 |
| 708,161 |
|
8.3.1 Interest | 1,401,429 |
| 931,649 |
| 698,622 |
|
8.3.2 Rental | 27,051 |
| 14,732 |
| 9,539 |
|
8.4Interest on capital | 1,582,384 |
| 1,560,037 |
| 1,688,868 |
|
8.4.1 Dividends (including additional proposed) | 1,504,710 |
| 1,260,244 |
| 1,228,914 |
|
8.4.2 Retained profits | 77,674 |
| 299,793 |
| 459,954 |
|
|
|
|
|
|
|
|
| 9,769,273 |
| 8,686,175 |
| 8.182,186 |
|
F - 85