Company Quick10K Filing
CPFL Energy
20-F 2019-12-31 Filed 2020-04-24
20-F 2018-12-31 Filed 2019-04-22
20-F 2017-12-31 Filed 2018-04-24
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20-F 2011-12-31 Filed 2012-03-30
20-F 2010-12-31 Filed 2011-06-06
20-F 2009-12-31 Filed 2010-04-05

CPL 20F Annual Report

Item 17 £ Item 18 £
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information Selected Financial and Operating Data
Item 4. Information on The Company Overview
Item 4B. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees Directors and Senior Management Board of Directors
Item 7. Major Shareholders and Related Party Transactions Major Shareholders
Item 8. Financial Information Consolidated Statements and Other Financial Information
Item 9. The Offer and Listing Trading Markets
Item 10. Additional Information Memorandum and Articles of Incorporation Corporate Purpose
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities American Depositary Shares Fees and Expenses
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services Audit and Non‑Audit Fees
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1.1 exhibit11.htm
EX-3.1 exhibit31.htm
EX-8.1 exhibit81.htm
EX-12.1 exhibit121.htm
EX-12.2 exhibit122.htm
EX-13.1 exhibit131.htm
EX-13.2 exhibit132.htm

CPFL Energy Earnings 2011-12-31

Balance SheetIncome StatementCash Flow

20-F 1 cplform20f_2011.htm FORM 20-F cplform20f_2011.htm - Generated by SEC Publisher for SEC Filing
 

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*
American Depositary Shares (as evidenced by American Depositary Receipts), each representing 2 Common Shares

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    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 

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    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 

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    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    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 

 ii


 

 

Table of Contents

Page

 

Forward-looking Statements

1

Certain Terms and Conventions

1

Presentation of Financial Information

2

ITEM 1.

Identity of Directors, Senior Management and Advisers

2

ITEM 2.

Offer Statistics and Expected Timetable

2

ITEM 3.

Key Information

2

 

Selected Financial and Operating Data

2

 

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

 

Our Service Territor y

2 0

 

Distributio n

2 0

 

Purchases of Electricity

23

 

Consumers and Tariffs

24

 

Generation of Electricity

26

 

Electricity Commercialization and Services

35

 

Competition

36

 

Our Concessions and Authorizations

36

 

Properties

40

 

Environmental

40

 

The Brazilian Power Industry

40

 

Principal Regulatory Authorities

41

 

Concessions and Authorizations

42

 

The New Industry Model Law

44

 

Tariffs for the Use of the Distribution and Transmission Systems

48

 

Distribution Tariffs

49

 

Government Incentives to the Energy Sector

50

 

Regulatory Charges

51

 

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.

Quantitative and Qualitative Disclosures about Market Risk

108

ITEM 12.

Description of Securities Other than Equity Securities

108

 

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

 

ITEM 16A.

Audit Committee Financial Expert

110

ITEM 16B.

Code of Ethics

111

 

 

 iii


 
 
  Table of Contents

 

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


 
Table of Contents

 

PRESENTATION OF FINANCIAL INFORMATION

We maintain our books and records in reais.  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 the real  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 the real  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 between reais  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


 
Table of Contents

 

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)

 

 

 

 

 

Net operating revenue

6,805

12,764

12,024

11,358

Cost of electric energy services:

 

 

 

 

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

 

 

 

 

 

Operating expenses:

 

 

 

 

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):

 

 

 

 

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


 
Table of Contents

 

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)

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

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

 

 

 

 

 

Noncurrent assets:

 

 

 

 

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

 

 

 

 

 

Current liabilities:

 

 

 

 

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

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

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


 
Table of Contents

 

 

OPERATING DATA(*)

 

For the year ended December 31,

 

2011

2010

2009

2008

2007

Energy sold (in GWh):

 

 

 

 

 

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


 
Table of Contents

 

Exchange Rates

The Central Bank allows the real/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 the real  float freely or will intervene in the exchange rate market through a currency band system or otherwise.  The real  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 in reais  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:

 

 

 

 

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


(1)           Year-end figures represent the average of the month-end selling exchange rates during the relevant period.
 

 

Month-end

Average for period(1)

Low

High

 

(reais  per U.S. dollar)

Month ended:

 

 

 

 

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


 
Table of Contents

 

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 the Lei 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


 
Table of Contents

 

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.

 

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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 recurrence of 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.

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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.  We cannot 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 in reais  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 into reais.  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, the real  depreciated against the U.S. dollar during 2008 and reaching R$2.337 per US$1.00 at year end 2008.  During 2009, the real  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 the real  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 the real  will not depreciate against the U.S. dollar in the future.

Depreciation of the real  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 the real  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 the real  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 the real  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 the real  could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

Depreciation of the real  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 highest real  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 to developments 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 the BM&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 25 wind farms, through which we expect to increase our installed capacity to 3,301 MW1 once 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 financial statements since August 1, 2011. The transaction was ratified by our shareholders on December 19, 2011.


1This 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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·         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 installed capacity 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) eight3 are operational, with aggregate installed capacity of 367.5 MW, located in the state of Ceará, and (ii) 25 are 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 and Santa 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.


3This 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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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.


3This 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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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 175,2374 square 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 245 municipalities in the northwest part of the state of São Paulo and three5 municipalities 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 two5 municipalities 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 one5 municipality of the state of São Paulo and three5 municipalities 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 seven5 municipalities 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 five5 municipalities of the state of São 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. 

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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

 

 

 

CPFL Paulista

CPFL Piratininga

RGE

CPFL Santa Cruz

CPFL Jaguari

CPFL Mococa

CPFL Leste Paulista

CPFL Sul Paulista

 

 

 

 

 

 

 

 

 

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).

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Year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

CPFL Paulista

CPFL Piratininga

RGE

CPFL Santa Cruz

CPFL
Jaguari

CPFL Mococa

CPFL Leste Paulista

CPFL Sul Paulista

 

 

 

 

 

 

 

 

 

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 of US$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.

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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.

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·         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 in reais  per kW, is based on the higher of (i) contracted firm capacity or (ii) power capacity actually used.  The energy charge, expressed in reais  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

 

 

 

 

 

 

 

 

 

 

CPFL Paulista

CPFL Piratininga

RGE

CPFL Santa Cruz

CPFL Leste Paulista

CPFL Sul Paulista

CPFL Jaguari

CPFL Mococa

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

 

 

 

 

 

 

 

CPFL Paulista

CPFL Piratininga

RGE

CPFL Santa Cruz

CPFL Leste Paulista

CPFL Sul Paulista

CPFL Jaguari

CPFL Mococa

 

 

 

 

 

 

 

 

 

 

(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

                 

 

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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 concession agreement.  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.

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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) eight are operational, with total installed capacity of 367.5 MW, located in the state of Ceará, and (ii) 25 are 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.

 

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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

 

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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