MANUAL FOR PARTICIPATION IN THE GENERAL SHAREHOLDERS’ MEETING

ANNUAL AND EXTRAORDINARY GENERAL MEETING OF APRIL 30^th, 2019

Manual for the Annual and Extraordinary General Meeting

of April 30^th, 2019

Manual’s Index

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Manual for the Annual and Extraordinary General Meeting

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1.           Message from the Chairman of the Board of Directors

Dear shareholder,

         On behalf of the Board of Directors of CPFL Energia S.A. (“Company”), I have the honor to invite you to attend the Annual and Extraordinary General Meeting of Shareholders (“GM” or “General Meeting”), to be held on April, 30^th, 2019, at 10:00 a.m., at the Company’s headquarters, located at Rodovia Engenheiro Miguel Noel Nascentes Burnier, 1755 – Km 2,5, in the City of Campinas, State of São Paulo.

         As we anticipated, the year 2018 again proved challenging for the entire Brazilian Electricity Sector and for the Company. Given this scenario, the active participation of the Board of Directors and the Board of Executive Officers, based on the strength of our strategy and our corporate governance system, and the confidence of our shareholders and employees, enabled the Company to achieve significant results.

         Your presence in the Company's Meetings will be an opportunity to know our results and the profile of the people who will be elected - or re-elected - to compose the Board of Directors and Fiscal Council in the next term.

         In the expectation that we will be able to count on your participation in the Meetings, we hope that this Manual for Participation will contribute to the goal of facilitating your participation.

Sincerely,

Bo Wen

Chairman of the Board of Directors

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2.           Message from the CEO

Dear shareholder,

At the Annual and Extraordinary General Meeting (“GM” and “General Meeting”) of CPFL Energia SA ("Company"), scheduled for April 30^th, 2019, in which we expect you to participate, important matters will be discussed, such as the approval of the accounts and allocation of the result for the year of 2018, the election of the Board of Directors’ members, who are responsible for establishing the corporate guidelines and strategies of the Company, and the amendment of the Company’s Bylaws.

As our shareholders will be able to verify, in 2018, the Company maintained intense activity, participating actively and contributing to the improvement of the regulation applicable to the Electric Sector, with a view to strengthening a stable and safe environment for the development of the group's businesses.

As a result of this performance, the group's results proved to be important, reaffirming the confidence of the Company’s Management and CPFL professionals in the country's perspectives, even in the face of political and economic instability.

In the expectation that we can count on your participation in the Meetings, we thank you for your confidence in the Company's Management.

Gustavo Estrella

CEO

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3. Guidelines for Participation in the Meeting

The shareholders may go to the headquarters of CPFL Energia S.A. (“CPFL Energia” or the “Company”) on the date of the Annual and Extraordinary General Meeting (“GM” or “General Meeting”) and cast their votes or, if they are unable to attend, they may appoint an Attorney in Fact, subject to the rules of representation described below, or cast their vote by filling in and submitting a Distance Voting Ballot, pursuant to CVM Instruction No. 481/09, as amended.

3.1.     Shareholders in Attendance:

The shareholder that wishes to participate in the GM shall be present a few minutes before the time mentioned in the Call Notice, that is, 10:00 a.m., with the following documents:

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3.2.     Shareholder Represented by an Attorney in Fact:

The shareholder that is unable to attend the GM may be represented by an Attorney in Fact, whose powers of representation must have been assigned less than one (1) year before, pursuant to the provisions set forth in paragraph 1 of article 126 of Law No. 6.404/1976 (“Brazilian Corporation Law”).

With the exclusive purpose of protecting the interests of its shareholders, and in order to facilitate their representation in the General Meeting, CPFL Energia provides, as a suggestion, at the end of this item, a form of power of attorney granting powers to an Attorney in Fact appointed by CPFL Energia, who may represent the shareholders, at no cost and in strict compliance with the powers granted to such Attorney in Fact.

The powers of attorney, pursuant to paragraph 1 of article 126 of the Corporation Law, can only be granted to parties that meet, at least, one of the following requirements: (i) be a shareholder or officer of the Company, (ii) be an attorney or (iii) be a financial institution. In the case of shareholders that are legal entities, pursuant to the standing adopted by the Full Session of CVM, during a meeting held on November 4, 2014 (CVM Procedure RJ2014/3578), the attorney in fact does not need to be (i) a shareholder or officer of the Company, (ii) attorney or (iii) financial institution.

The shareholder represented by a power of attorney shall follow the procedure described below:

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*Please note that powers of attorney granted in Brazil must have the corresponding signatures certified and that the ones granted abroad must be notarized by a Public Notary duly authorized for this purpose and certified by a Brazilian consulate, or apostilled, and translated to Portuguese by a certified translator and registered with the appropriate registry of titles and deeds.

Please note that the purpose of the request for early delivery of the power of attorney, by those shareholders who intend to be represented by a legally appointed Attorney in Fact, is to facilitate the preparation of the General Meeting, and that it does not represent an obstacle to their participation.

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·          Form of Power of Attorney

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3.3.     Vote by Distance Voting Ballots

According to CVM Instruction No. 481/09, as amended by the CVM Instruction No. 561/15, the Company has adopted a remote voting system, which will enable its shareholders to take part in the GM by means of the filling in and submitting a Distance Voting Ballot, made available by the Company, on the date hereof, on its investor relations website (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), and B3 S.A. – Brasil, Bolsa, Balcão (www.b3.com.br) and that of the U.S. Securities and Exchange Commission – SEC (www.sec.gov).

Thus, shareholders shall be able to fill in and submit, from the date hereof, the Distance Voting Ballot, at their discretion, either (i) directly to the Company; or (ii) through instructions transmitted to their corresponding custodians or to the depositary agent of the Company, depending on whether or not the shares are deposited with a central depositary.

The Company warns that, in either case, the Distance Voting Ballot must be received at least seven (7) days in advance of the date of the GM, i.e., by 11:59 p.m. on April 23, 2019.

3.3.1. Distance Vote Ballots Cast Directly

The shareholder that chooses to submit the Distance Voting Ballot directly to CPFL Energia shall send the following documents to Rodovia Enegenheiro Miguel Noel Nascentes Burnier, 1755 – Km 2,5, part , in the City of Campinas, State of São Paulo – Brazil, c/o the Investor Relations Office:

(i)           hard copy of the Distance Voting Ballot duly filled in, initialed and signed; and

(ii)          certified copy of the documents described in the chart found in item 2.1 above, as the case may be.

If it chooses to do so, the shareholder shall also be able to send the digitalized documents mentioned above to the email address [email protected].

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Upon receipt of the Distance Voting Ballot and of the documents attached to it, the Company shall report such receipt to the shareholder and shall inform whether or not such ballot is acceptable pursuant to the provisions set forth in article 21-U of CVM Instruction No. 481.

During the remote vote term, the shareholder may change its voting instructions as often as it deems necessary and the instruction that is valid on the date closer to the date of the GM shall prevail.

3.3.2. Distance Vote Ballots Cast Through Service Providers

The shareholder who chooses to cast its remote vote through service providers shall transmit its voting instructions to its respective custodian agents or to the depositary agent of the shares issued by the Company, depending on whether or not its shares are deposited with a central depositary, and provided that the rules determined by them are fully observed.

In that regard, the shareholders shall contact their custodian agents or the depositary agent of the shares issued by the Company and verify the procedures they have established for the issuance of voting instructions by Distance Voting Ballot, as well as the documents and information that may be required by them.

The Company states that conflicting voting instructions will be disregarded. Conflicting voting instructions are considered as the ones originating from the same shareholder that, with regard to the same resolution, have voted in different directions, in different Distance Voting Ballots submitted by different service providers.

Nevertheless, voting instructions received from a depositary agent that has issued Depositary Receipts abroad with regard to the underlying shares of such Depositary Receipts shall not be deemed to be conflicting, even if they are rendered in different directions. If there is any divergence between any Distance Voting Ballot received directly by the Company and a voting instruction contained in the voting map sent by the central depositary in relation to the same CPF or CNPJ registration number, the statement contained in the voting map shall prevail, and the ballot received directly by the Company shall be disregarded.

3.3.3. Additional information

Provided that the corresponding Distance Voting Ballot is deemed valid by the Company, the shareholder that decides to cast a remote vote shall be deemed to be exercising its voting right in person, and shall be considered to be in attendance for all effects of the Corporation Law.

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The voting instruction originating from the same shareholder shall be attributed to all shares held by the same CPF or CNPJ, as the case may be, according to the shareholding positions provided by the depositary agent.

In case of divergence between the information included in a Distance Voting Ballot submitted directly to the Company and a voting instruction included in a voting map submitted by the depositary agent with respect to the same shareholder, the voting instruction included in the voting map submitted by the depositary agent shall prevail and the Distance Voting Ballot shall be disregarded by the Company.

Remote voting instructions given by shareholders or representatives of shareholders that attend the General Meeting in person and request to cast a vote shall also be disregarded by the chairman of the General Meeting.

3.4.     Holders of ADRs

The financial institution that is the depositary of the American Depositary Receipts (“ADRs”) in the United States of America is Citibank, N.A.

Citibank shall send the Distance Voting Ballots to the holders of the ADRs, so that they can exercise their voting rights, and shall be represented during the General Meeting by its representative in Brazil, Banco Bradesco S.A.

Any doubts about procedures, deadlines and matters submitted for deliberation can be clarified with the Investor Relations Department team through the following channels of communication:

email address: [email protected]

Phone: + 55 19 3756 6082

3.5.     Conflict of Interests

During the GM, as in the meetings of the Company's board of directors and fiscal council, the Shareholders present shall express their opinion on the existence of a possible conflict of interest in any matters under discussion or resolution, in which their independence will be compromised. Also, any Shareholder present who has

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knowledge of a conflicting situation in relation to another Shareholder and the subject matter of the resolution must also be declared. When the conflict of interest is expressed, the conflicting Shareholder shall refrain from voting on that matter. In case the conflicting Shareholder refuses to abstain from voting, the GM president shall determine the annulment of the disputed votes, even after the conclave.

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4.           Call Notice

CPFL ENERGIA S.A.

Publicly-held Company

CNPJ/ME 02.429.144/0001-93 - NIRE 35.300.186.133

ANNUAL AND EXTRAORDINARY GENERAL MEETING

CALL NOTICE

The shareholders of CPFL Energia S.A. (“Company”) are hereby invited, pursuant to article 124 of Law No. 6,404 of December 15^th, 1976 (“Brazilian Corporation Law”), to attend the Annual and Extraordinary General Meeting (“GM”) to be held on April 30^th, 2019, at 10:00 a.m., at the Company’s headquarters, located at Rodovia Engenheiro Miguel Noel Nascentes Burnier, 1755 – Km 2,5, in the City of Campinas, State of São Paulo, to consider and vote on the following agenda:

I - Annual General Meeting:

a.   To acknowledge the managers’ accounts, examine, discuss and vote on the management’s report and the Company’s Financial Statements, accompanied by the Independent Auditor’s Report and the Fiscal Council’s Report referring to the fiscal year ended on December 31^st, 2018;

b.   To approve the proposal for allocation of net income for the fiscal year ended on December 31^st, 2018 and the distribution of dividends;

c.   To set the number of members for the Board of Directors, pursuant to article 15 of the Company’s Bylaws;

d.   To elect the members of the Board of Directors;

e.   To elect the members of the Fiscal Council;

f.    To establish the overall compensation to be paid to the Company’s management for the period of May 2019 to April 2020; and

g.   To establish the overall compensation to be paid to the members of the Fiscal Council for the period of May 2019 to April 2020.

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II -  Extraordinary General Meeting:

a.    To approve the amendment of the Company’s Bylaws, according to the Management's Proposal, to: (I) change the wording in article 3, in order to update the address of the Company’s headquarters; (II) change items (i), (k), (m), (n) and (s) of article 17, in order to update the threshold amounts, as provided in article 39 of the Bylaws; (III) to adjust the caput and items (a) to (i) of article 18, to adjust the number of members of the Board of Executive Officers and reflect their respective duties, to change the name of the position of “Deputy Chief Executive Officer” and to include the position of “Senior Executive Vice President”; (IV) change item (e) of article 21, in order to update the threshold amounts and to adjust the item number; (V) adjust the wording and number of item (i) of article 21; (VI) exclusion of item (i.1) of article 21, according to the understanding that this is not a Board of Executive Officers’ duty; (VII) change items (i.2), (i.3) and (i.4) of article 21 to update the threshold amounts, as provided in article 39 of the Bylaws and to adjust the item numbers; (VIII) change the wording in article 22, in order to change the quorum for the Board of Executive Officers resolutions; (IX) adjust the wording in item (d) of paragraph 2 of article 27, considering the decision to extinguish the Reserve for Adjustment of the Concession Financial Assets made at the General Shareholders’ Meeting held on April 28^th, 2018; (X) adjust in article 39 to indicate that the threshold amounts have been updated for the year of 2019; (XI) adjust the cross references included in item (c) of the sole paragraph in article 9, in items (j) and (ab) of article 17 and in paragraph 3 of article 26; (XII) adjust the numbers of items (d), (f), (g) and (h) of article 21; and (XIII) adjust all definitions of all provisions in the Bylaws and the cross references in the articles contained therein as a result of the changes proposed above;

b.    To approve the consolidation of the Company’s Bylaws.

General Information:

1.           The shareholders who own the common shares issued by the Company may take part in the GM provided they are registered in the Register of Book–Entry Shares at depository institution for the shares – Banco do Brasil S.A., and bring the following documents: (i) individuals - identification document with photo; (ii) legal entities - certified copy of the latest Bylaws or consolidated Articles of Association and the corporate documentation granting representation powers (minutes of the election of the executive officers and/or power of attorney), as well as an identification document with photo of the legal representative(s); and (iii) for shareholders organized as Investment Funds - certified copy of the latest consolidated Bylaws of the Fund and the Bylaws or Articles of Association of its manager, and the corporate documentation granting representation powers (minutes of the election of the executive officers and/or power of attorney), as well as an identification document with photo of the legal representative(s).

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2.           Any shareholder may appoint an attorney-in-fact to attend the GM and vote on their behalf. In the event of representation by power of attorney, the following documents must be presented: (i) power of attorney granting special powers for representation at the GM; (ii) Bylaws or Articles of Association and the minutes of the election of the executive offices, in case the shareholder is a legal entity; and (iii) identification document with photo of the attorney in fact.

3.           The Company requests that all powers of attorney granted in Brazil have the signature recognized by the registry office and that all those granted abroad are notarized by a Public Notary duly authorized for this purpose, consularized in a Brazilian consulate or apostilled, translated to Portuguese by a certified translator and registered with the appropriate Registry of Deeds and Documents, according to the legislation currently in force.

4.           Pursuant to article 126, paragraph 1 of the Brazilian Corporation Law, powers of attorney may only be granted to a person who meets at least one of the following requirements: (i) is a shareholder or manager of the Company, (ii) is a lawyer, or (iii) to a financial institution. For shareholders who are legal entities in accordance with the understanding of Collegiate Body of the Brazilian Securities Commission (“CVM”), issued in the meeting held on November 4^th, 2014 (CVM Proceeding RJ2014/3578), there is no need for the attorney in fact to be (i) a shareholder or manager of the Company, (ii) a lawyer, or (iii) a financial institution.

5.           In order to expedite the GM proceedings, the Company requests the shareholders to submit their powers of attorney and representation documents up to twenty-four (24) hours prior to the GM, as provided in the main section of article 11 of the Company’s Bylaws. Shareholders who attend the GM with the required documents will be allowed to participate and vote, even if they did not submit said documents in advance.

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6.           Pursuant to CVM Ruling No. 481 of 2009, as amended (“CVM Instruction 481”), the Company has adopted the distance voting system, thus allowing the shareholders to take part in the GM by filling in and handing over the distance voting form to the custodian, to the depository institution or directly to the Company, following the instructions set out in the Management’s Proposal.

7.           Pursuant to CVM Ruling No. 165/91, as amended, the minimum percentage in the voting capital required to request the multiple voting for electing the members of the Board of Directors is five percent (5%), and such right must be exercised by shareholders at least forty-eight (48) hours before the GM, pursuant to article 141, paragraph 1 of the Brazilian Corporation Law.

8.           Pursuant to article 135, paragraph 3 of the Brazilian Corporation Law and in compliance with articles 6 et seq. of CVM Ruling No. 481, all documents pertaining to the matters to be resolved on at the GM are available to shareholders, as of this date, at the Company’s headquarters, on its Investor Relations website (www.cpfl.com.br/ri), and on the websites of CVM (www.cvm.gov.br), B3 S.A. – Brasil, Bolsa, Balcão (www.b3.com.br) and U.S. Securities and Exchange Commission – SEC (www.sec.gov).

Campinas, March 29^th, 2019.

Bo Wen

Chairman of the Board of Directors

Although the first call to general meetings must be made by publicly held companies fifteen (15) days in advance, in accordance with current legislation, the Company must publish its Call Notices at least 30 (thirty) days in advance, pursuant to the provisions set forth in Article 8 of CVM Instruction No. 559/15, ensuring sufficient time for the necessary procedures of manifestation of the holders of American Depositary Receipts (ADRs) traded on the New York Stock Exchange ("NYSE"), in addition to allowing shareholders to participate through the remote voting system.

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5.           Management Proposal

Dear Sirs,

The Board of Directors of CPFL Energia S.A. (“CPFL Energia” or “Company”) submits to the analysis of its shareholders the Management Proposal (“Proposal”) on the matters to be resolved at the Annual and Extraordinary Meetings (“GM” or “General Meetings”) to be held on April 30^th, 2019, as follows:

5.1.     Proposal for Resolution at the General Meeting

I.     To acknowledge the management accounts, examine, discuss and vote on the Company’s Financial Statements, the Independent Auditor’s Report and the Fiscal Council’s Report for the fiscal year ended on December 31^st, 2018.

The Financial Statements and the Management Report of CPFL Energia were approved by the Company's Board of Executive Officers and audited by the Independent Auditors –KPMG Auditores Independentes - prior to the favorable manifestation of the Board of Directors, obtained at the 367^th Board of Directors Meeting, held on March 26^th, 2019, and to the issuance of the opinion of the Fiscal Council rendered on the same date, and were therefore considered fit for submission to the General Meeting.

The Board of Directors recommends to the Company’s Shareholders that they carefully examine the Financial Statements and the Management Report and, if necessary, clarify their doubts in advance, in order to decide on their approval.

The Management proposes to the Shareholders the approval of the Management Report, the managements' accounts, and the Company's Individual and Consolidated Financial Statements, together with the Independent Auditor’s report for the fiscal year ended December 31^st, 2018.

The Financial Statements, the Management Report, the Independent Auditor’s Report and the Fiscal Council's Report for the year 2018 were prepared as provided for in items I to V of article 9 of CVM Instruction No. 481 from 2009, as amended (“CVM Instruction 481”), are available to Shareholders (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), B3 S.A. – Brasil, Bolsa, Balcão (“B3”) (www.b3.com.br) and the U.S. Securities and Exchange Commission - SEC (www.sec.gov) and were published in the "Valor Econômico" newspaper and in the Official Gazette of the State of São Paulo, on March 29, 2019, pursuant to article 133 of Law No. 6,404 of December 15, 1976 ("Brazilian Corporation Law").

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Annex I to this Proposal, as provided for in item III of article 9 of CVM Instruction 481, contains the Officers’ Comments on the Company's financial situation, with the purpose of providing a reflexive analysis, from the perspective of its Managers, so that its evaluation is as consistent as possible and is available, as of this date, at the Company's headquarters, on its website (www.cpfl.com.br/ri), as well as on the websites of the Brazilian Securities and Exchange Commission (www.cvm.gov.br), B3 (www.b3.com.br) and the U.S. Securities and Exchange Commission (SEC) (www.sec.gov).

II. To approve the proposal of allocation of net income for the fiscal year ended December 31^st, 2018 and the distribution of dividends.

In 2018, net income of CPFL Energia Group reached two billion, one hundred sixty-five million, nine hundred and ninety-four thousand, seven hundred and forty-nine reais and seventy-one cents (R$ 2,165,994,749.71¹), from which two billion, fifty-eight million, forty thousand, three hundred and thirteen reais and twenty-seven cents (R$ 2,058,040,313.27) are attributed exclusively to CPFL Energia S.A.. Regarding this number, an increase of 74.4% (R$ 878.289.908,46), mainly due to an increase of 66,7% (R$ 913.192.152,26) in EBITDA² and a reduction of 51,7% (R$ 29.171.040,03) in net financial expenses. This effect was partially offset by the increases of 21,7% (R$ 13.273.339,18) in depreciation and amortization expenses and 71,8% (R$ 50.799.944,65) in the Income Tax and Social Contribution Tax.

The Company's Management submits to the GM the allocation of the remaining accrued profit, after adjustments, as provided in paragraph 2 of article 27 of the Company's Bylaws, recommending:

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Manual for the Annual and Extraordinary General Meeting

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Thus, the Company’s Management proposes the election of 9 (nine) members to compose the Board of Directors, 2 (two) of them being Independent Board Members.

IV. To elect the members of the Board of Directors and the Fiscal Council

·         Board of Directors

The current members of the Company's Board of Directors were elected at the annual general meeting held on April, 27^th, 2018, and at the extraordinary shareholders’ meeting held on January 31^st, 2109, as the case may be, with the mandate until the Company's annual general meeting that approves the accounts for the fiscal year ended on December 31^st, 2018, pursuant to article 150, §§ 3 and 4 of Brazilian Corporation Law.

Due to the end of the term of office of the members of the Company’s Board of Directors, pursuant to article 140 of Brazilian Corporate Law, the general meeting have the authority to elect the members of the Company’s Board of Directors.

The Company’s Management indicate the following candidates for the mandate of 2019/2020:

The appointed members may be elected by majority vote or by multiple vote. The adoption of multiple vote shall occur if shareholders representing at least 5% (five percent) of the Company's capital stock requires. For the Board composed of 9 (nine) members and considering the presence of shares representing the totality of the share capital in the General Meeting, at least 101.791.476 votes (each share being attributed 9 (nine) votes, pursuant to article 141 of the Brazilian Corporation Law) for the election of a member of the Company's board of directors.

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Please note that since the Company's outstanding shares currently represent less than 10% of the Company's total voting shares, it will not be possible for non-controlling shareholders to use the option of article 141, §5, of the Brazilian Corporate Law to elect a member and its deputy member of the Board of Directors, in a separate vote at the GM.

·         Fiscal Council

Pursuant to article 26 of the Company's bylaws, the Fiscal Council shall be composed of 3 (three) effective members and an equal number of alternates, all of them with a unified term of office of 1 (one) year, reelection being permitted.

The Company's Management indicates the following candidates for the 2019/2020 term:

It should be noted that since the Company's outstanding shares currently represents less than 10% (ten per cent) of the Company's total voting shares, it will not be possible for non-controlling shareholders to use the option of article 161, paragraph 4^th, of the Brazilian Corporate Law to elect a member and its alternate member of the Fiscal Council, in a separate vote at the General Meeting.

Pursuant to CVM Instruction 481, candidates may be nominated for the positions of representatives of minority shareholders of the Company's Fiscal Council, by means of a public proxy request. Information on potential candidates will be made available at the Company's headquarters, on its website (www.cpfl.com.br/ri), and on the CVM website (www.cvm.gov.br).

Please note that the information required in article 10 of CVM Instruction 481, regarding the candidates nominated to compose the Board of Directors and the Fiscal Council are in Annex III of the Proposal, also being available, from this date, at the Company´s headquarters, on its website (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), B3 (www.b3.com.br) e da U.S. Securities and Exchange Commission – SEC (www.sec.gov).

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V. To establish the overall compensation to be paid to the Company’s management and to the members of the Fiscal Council for the period of May 2019 to April 2020

The Company's Management proposes to the General Meeting’s approval the overall compensation of the members of the Board of Directors and of the Executive Board, for the period from May 2019 to April 2020, in the amount of up to R$ 33,700,163.11 (thirty-three million, seven hundred thousand, one hundred and sixty-three reais and eleven cents), including benefits and charges.

Of the total amount of remuneration proposed to the Company's Managers, R$ 645,766.16 (six hundred and forty-five thousand, seven hundred and sixty-six reais and sixteen cents) is allocated to the fixed remuneration of the Board of Directors and the maximum amount of R$ 33,054,396.95 (thirty-three million, fifty-four thousand, three hundred and ninety-six reais and ninety-five cents) to the fixed and variable remuneration of the Board of Executive Officers.

The proposal of the total amount of remuneration for the members of the Board of Directors at approximately 4,2% (four point two hundredths percent) above the amount approved for the fiscal year of 2018, which was in the total amount of  R$ 619,915.94 (six hundred and nineteen thousand, nine hundred and fifteen reais and ninety-four cents) is justified by the inflation rate. It is important to mention that only the independent member will be remunerated.

The members of the Board of Directors receive fixed monthly fees, regardless of the number of meetings they participate in the month and do not receive any additional remuneration for their participation in Committees or Advisory Commissions of the Board of Directors.

The proposal of the overall compensation of the members of the Board of Executive Officers at approximately 0,3% (three hundredths percent) above the amount approved for the fiscal year of 2018, which was in the total amount of R$ 32,952,989.52 (thirty-two million, nine hundred fifty-two thousand, nine hundred and eighty-nine reais and fifty-two cents) is justified by the inflation rate and the creation of new Executive Officers positions.

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The fees of the Board of Executive Officers are in line with the values practiced in the market and are defined based on market research done by specialized consultancies.

The Company's Management also proposes that the General Meeting approves the annual amount of the remuneration of the members of the Fiscal Council in the amount of R$ 337,191.89 (three hundred and thirty-seven thousand, one hundred and ninety one reais and eighty-nine cents), for the period from May 2019 to April 2020.

Pursuant to paragraph 3 of article 162 of the Brazilian Corporation Law, the GM shall fix the fees of the Fiscal Council in an amount not lower than ten percent (10%) of the remuneration that, on average, is attributed to each Executive Officer, not considering for this purpose the benefits, the representation funds and the profit sharing.

The proposal of the overall compensation of the members of the Fiscal Council at approximately 4,2% (four point two hundredths percent) above the amount approved for the fiscal year of 2018, which was in the total amount of R$ 323,693.86 (three hundred and twenty-three thousand, six hundred and ninety-three reais and eighty-six cents) is justified by the inflation rate.

It should be noted that only the acting members of the Fiscal Council are remunerated, the alternate does not receive any fees, except when it replaces the member to which it is entailed.

Please note that the proposal for the remuneration of the Managers and the Fiscal Council was prepared based on market values and was previously submitted to the appreciation of the Company's Human Resources Management Committee.

The information related to the remuneration of the Company's Management and Fiscal Council, in compliance with the provisions of article 12 of CVM Instruction 481, are included in Annex IV of this Proposal and are available at the Company's headquarters on its website (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), B3 (www.b3.com.br) and the U.S. Securities and Exchange Commission (SEC) (www.sec.gov).

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5.2.     Proposal for Resolution at the Extraordinary General Meeting

      I.      To approve the amendment and the consolidation of the Company’s Bylaws

The Company’s Board of Directors proposes to amend the Company’s Bylaws, in order to:

(I) change the wording in article 3, in order to update the address of the Company’s headquarters; (II) change items (i), (k), (m), (n) and (s) of article 17, in order to update the threshold amounts, as provided in article 39 of the Bylaws; (III) to adjust the caput and items (a) to (i) of article 18, to adjust the number of members of the Board of Executive Officers and reflect their respective duties, to change the name of the position of “Deputy Chief Executive Officer” and to include the position of “Senior Executive Vice President”; (IV) change item (e) of article 21, in order to update the threshold amounts and to adjust the item number; (V) adjust the wording and number of item (i) of article 21; (VI) exclusion of item (i.1) of article 21, as this provision is only applicable to the Company’s subsidiaries; (VII) change items (i.2), (i.3) and (i.4) of article 21 to update the threshold amounts, as provided in article 39 of the Bylaws and to adjust the item numbers; (VIII) change the wording in article 22, in order to change the quorum for the Board of Executive Officers resolutions; (IX) adjust the wording in item (d) of paragraph 2 of article 27, considering the decision to extinguish the Reserve for Adjustment of the Concession Financial Assets made at the General Shareholders’ Meeting held on April 28^th, 2018; (X) adjust in article 39 to indicate that the threshold amounts have been updated for the year of 2019; (XI) adjust the cross references included in item (c) of the sole paragraph in article 9, in items (j) and (ab) of article 17 and in paragraph 3 of article 26; (XII) adjust the numbers of items (d), (f), (g) and (h) of article 21; and (XIII) adjust all definitions of all provisions in the Bylaws and the cross references in the articles contained therein as a result of the changes proposed above.

The Board of Directors proposes to consolidate the Company's Bylaws, in accordance with the changes proposed above.

In compliance with article 11 of CVM Instruction 481, Annex V of this Proposal contains a comparative table, including the current wording, proposed wording and justification of the amendment. In addition, for the easy reference and better visualization and contextualization of the proposed amendments, Annex V also contains the marked and clean versions of the Bylaws consolidating all the proposed changes. This attachment is available for consultation by Shareholders, as of this date, at the Company's headquarters, on its website (www.cpfl.com.br/ri), as well as on the websites of the CVM (www.cvm.gov.br), B3 (www.b3.com.br) and the U.S. Securities and Exchange Commission (SEC) (www.sec.gov).

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6. Clarifications

All documents related to the proposals for resolution of the General Meetings are available at the Company's headquarters, on its website (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), B3 (www.b3.com.br) and the U.S. SEC (www.sec.gov).

In view of the Company's adoption of the distance voting procedure, the Company hereby informs that the related Distance Voting Ballots for the General Meeting and the Extraordinary General Meeting referred in articles 21-H and following of CVM Instruction 481 are available for the Shareholders consultation, as of this date, at the Company's headquarters, on its website (www.cpfl.com.br/ri), as well as on the websites of CVM (www.cvm.gov.br), B3 (www.b3.com.br) and the U.S. Securities and Exchange Commission (SEC) (www.sec.gov).

In addition to the information contained in this Proposal and the Annex hereto, the shareholders of CPFL Energia may resolve any doubts by means of a direct contact with the Investors Relations area, via e-mail ([email protected]) or telephone (+55 19 3756 6082), which are already at your disposal to promptly serve you when required.

Yours faithfully,

Bo Wen

Chairman of the Board of Directors

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ANNEX I TO THE MANAGEMENT’S PROPOSAL

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The consolidated financial statements for the years of 2018, 2017 e 2016 are in accordance with the IFRS (International Financial Reporting Standards), as issued by the International Accounting Standards Board – IASB and in accordance with the accounting practices adopted in Brazil, following the standards issued by the Committee of Accounting Pronouncements (Comitê de Pronunciamentos Contábeis - “CPC”).

a)   General Financial and Asset conditions

• 2018

The CPFL group continued to be very active in 2018, promoting improvements in its operations and management, as well as following the unfolding of the political and economic scenarios of Brazil in its markets.

The 2018 results reflected the growth of energy sales in all consumption classes, our discipline in cost and expense management, as well as the drop in interest rates in Brazil.

Electricity sales to final consumers (quantity of electricity billed to final consumers) totaled 53,091 GWh, a reduction of 0.5%. Industrial and commercial classes registered reductions of 5.6% and 0.1%, respectively, reflecting the slow recovery of economy activity, while residencial class increased by 2.6%. Electricity sales to wholesaler’s, through other concessionaires, licensees and authorized reached 17,757 GWh, an increase of 8.7%.

CPFL Energia group’s operating cash generation, measured by EBITDA, reached R$ 5,637 million in 2018, an increase of 15.9%, reflecting the positive results of all business segments. We highlight the distribution segment, whose EBITDA reached R$ 3,004 million in 2018, an increase of 34.5%, mainly reflecting the results coming from the conclusion of the tariff revision process (4th cycle) of CPFL Paulista, RGE Sul (both in April 2018) and RGE (in June 2018). In addition, the Company is promoting organizational reviews in order to simplify its processes and structure, aiming at greater efficiency and focus on business.

The Company continued to work on value initiatives and in its investment plan in 2018, with financial discipline, efforts and commitment of its teams. The Company invested R$ 2,060 million in this period.

Among the value initiatives, it is worth mentioning the participation of CPFL Geração in the following transmission auctions: (i) in June 2018, the company won Lot 9 (Maracanaú II substation), in Ceará, and (ii) in December 2018, the company won Lot 5 (Itá substation), in Santa Catarina, and Lot 11 (Osório 3, Porto Alegre 1 and Vila Maria substations), in Rio Grande do Sul.

Furthermore, the company CPFL Soluções was created, which brings together services and products previously offered under the brands CPFL Brasil, CPFL Serviços and CPFL Eficiência. In this way, CPFL has an integrated platform for interaction with customers seeking solutions for energy trading, energy efficiency, distributed generation, energy infrastructure and consulting services.

It should also be noted that CPFL promoted the merger of the distribution company RGE (“Merged Company”) into RGE Sul (“Mergee Company”). The grouping of the concessions of the two companies was carried out through the merger of the assets held by the Merged Company by the Mergee Company on December 31, 2018.

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We also had the startup of the Boa Vista II SHPP (installed capacity of 29.9 MW), in November 2018, and the participation of CPFL Renováveis in the A-6 Auction of August 2018. The company won with the following projects: (i) Cherobim SHPP, with 28.0 MW of installed capacity, located in Paraná state, and (ii) Gameleira Wind Complex, with 69.3 MW of installed capacity, located in Rio Grande do Norte state.

Still in relation to CPFL Renováveis, we had the Mandatory Tender Offer of the company on November 26. As a result of the auction, State Grid acquired 243,771,824 common shares issued by the company, representing 48.39% of its capital stock. The common shares were acquired at the price of R$ 16.85, totaling the amount of R$ 4.1 billion. State Grid and CPFL Geração (indirectly controlled by State Grid) jointly held 503,520,623 common shares issued by the company, equivalent to 99.94% of the total share capital of the company.

CPFL Energia’s capital structure and consolidated leverage remained at adequate levels. The Company’s net debt reached 3.05 times the EBITDA at the end of the quarter, under the criteria to measure our financial covenants, lower than in the previous year. It is worth mentioning that the reductions in interest rates benefited the Company.

Finally, CPFL’s management remains optimistic about the advances of the Brazilian electricity sector and remains confident in its business platform, which is increasingly prepared and well positioned to face the challenges and opportunities in the country.

• 2017

The year 2017 was marked by new prospects and possibilities for the CPFL group, after the conclusion of the acquisition of the controlling interest in the Company by the Chinese State Grid, the largest global player in the electricity sector. Its long-term strategic vision and technological development make a great contribution to CPFL’s next steps. The CPFL group also continued to be very active in this year, promoting improvements in its operations and management, actively participating in the discussions on improving the regulatory framework of the electricity sector and following the unfolding of the political and economic scenarios of Brazil in its markets.

The 2017 results reflected such gains and market conditions in the period. Electricity sales to final consumers (quantity of electricity billed to final consumers) totaled 53,376 GWh, an increase of 14.6%. Disregarding the positive effect of the acquisition of RGE Sul, the increase is of 2.7%. Residential and industrial classes registered growths of 2.6% and 7.1%, respectively, reflecting the low comparison base of 2016 and the resumption of economy activity, while commercial class decreased by 4.5%. Electricity sales to wholesaler’s, through other concessionaires, licensees and authorized reached 16,337 GWh, an increase of 33.3%.

In the financial sphere, CPFL Energia group’s operating cash generation, measured by EBITDA, reached R$ 4,864 million in 2017, an increase of 17.9%, mainly reflecting the contribution from the full consolidation of RGE Sul and improved results from the Conventional Generation, Renewable Generation, Commercialization and Services segments. Consolidated leverage of CPFL Energia, as measured by the ratio of net debt to EBITDA under the criteria to measure our financial covenants, stood at 3.20 at the end of the year, remaining stable in relation to previous year. It is also important to note that the continuous decline in interest rates throughout the year are benefiting the Company, which has around three-fourths of its debt pegged to the CDI interbank rate.

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In addition to the corporate movements, the Company presented numerous advances and achievements throughout the year. We promote organizational reviews in order to simplify our processes and structure, aiming at greater focus on business. It is also worth highlighting the creation of Envo, focused on the solar distributed generation market for households, and small commercial clients, the delivery of the Morro Agudo project (transmission), the inauguration of the Pedra Cheirosa wind complex (installed capacity of 48 MW), the heavy investment in the asset base of CPFL Paulista, RGE and RGE Sul distributors, which will undergo the tariff review process in 2018, the ABRADEE award won by CPFL Santa Cruz as the best domestic distributor in its category and by RGE as the best distributor in the Southern region, the integration of RGE Sul, the launch of "CPFL Inova", an open innovation program created by CPFL in partnership with Endeavor Brasil, among others.

It should also be noted that CPFL promoted the merger of the distribution companies CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista and CPFL Mococa (together, the “Merged Companies”) into CPFL Jaguari (“Mergee Company”). The grouping of the concessions of the five companies was carried out through the merger of the assets held by the Merged Companies by the Mergee Company on December 31, 2017.

The disposal of the Company's control was completed on January 23, 2017, when State Grid became the controlling shareholder of CPFL Energia, with a 54.64% stake. As a result of the closing of the transaction that resulted in the direct change of control of CPFL Energia and in accordance with applicable regulation, State Grid performed a tender offer for the remaining outstanding common shares of CPFL Energia on November 30, 2017. According to the Material Fact and the Announcement to the Market released on November 30 and December 5, 2017, respectively, as a result of the auction, State Grid acquired 408,357,085 common shares issued by the Company, representing 88.44% of all the shares subject to the Tender Offer and 40.12% of the capital stock of the Company. The common shares were acquired at the price of R$ 27.69, totaling the amount of R$ 11,307,407,683.65. State Grid holds, jointly with ESC Energia, 964,521,902 common shares issued by the Company, raising its jointly interest from 54.64% to 94.75% of the total share capital of the Company.

We continue working on value initiatives for our shareholders and our investment plan (around R$ 2.1 billion for 2018 and over R$ 11.4 billion for the next 5 years), with financial discipline, efforts and commitment of our teams and the trust of our new controlling shareholders, reinforcing CPFL's commitment to its long-term development strategy.

• 2016

The year 2016 was marked by great changes to CPFL Energia. After a three-month transition period, Andre Dorf took over as the Group´s CEO on July 1st, replacing Wilson Ferreira Junior, with the challenge of leading the new growth phase and make sure that processes and systems are increasingly simpler and more efficient, in order to make the Company more agile, so that we continue to face the challenges and seize the opportunities for growth and value creation.

On October 31, CPFL Energia resumed the process of consolidation of the sector with the conclusion of the acquisition of AES Sul Distribuidora Gaúcha de Energia S.A. (“AES Sul”), which is now called RGE Sul Distribuidora de Energia S.A. (“RGE Sul”), a distribution company that serves approximately 1.3 million clients in 118 cities in the state of Rio Grande do Sul. With this step, CPFL Energia increased its scale and footprint in the state of Rio Grande do Sul, serving 382 cities and reaching a market share of 65%. In Brazil, CPFL Energia now enjoy a market share of over 14% of the distribution segment, serving around 9 million clients through 9 concessionaires in the Southern and Southeastern regions. CPFL took charge of the RGE Sul’s management on November 1^st, and its plans include investments of around R$ 1 billion in the period 2017-2019, aiming to implement CPFL standards in services and to comply with the improvement plan set by ANEEL.

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Still in 2016, in early July, CPFL Energia was informed by one of its controlling shareholders, Camargo Corrêa S.A., that the latter had received and accepted a proposal from the State Grid Corporation of China (“State Grid”) to acquire its interest in the Company´s controlling block for R$25.00 per share. On September 2, the final share purchase agreement (SPA) was entered into between State Grid and Camargo Corrêa. In sequence, the proposal was extended to other controlling shareholders, which decided, over the course of September, to join Camargo Corrêa and sell their interest.

The transaction had all applicable approvals and was concluded in January 23, 2017, when State Grid Brazil became the controlling shareholder of CPFL Energia, with a 54.64% stake. As a result of the closing of the transaction that resulted in the direct change of control of CPFL Energia and in the indirect change of the control of CPFL Energias Renováveis S.A. (“CPFL Renováveis”), and in accordance with applicable regulation, State Grid Brazil will perform tender offers for the remaining outstanding common shares of CPFL Energia and CPFL Renováveis. According to the Material Facts released by both companies on February 23, 2017, State Grid has filed the Unified Offer documentation with CVM, on February 22, 2017; the registration is now under analysis by CVM.

In the midst of these changes, CPFL Energia followed its growth path. In 2016, new renewable energy projects went into operation: in May, it was the turn of SHPP Mata Velha, with 24 MW of installed capacity, while the Campo dos Ventos and São Benedito Wind Complexes had a gradual start-up during the year, being concluded in December, totaling 231 MW of installed capacity.

Still in generation segment, with regard to the hydrological risk (GSF), renegotiation of the Baesa power plant (Energética Barra Grande Energia) was concluded, protecting the plant from 100% of the effects of GSF until the end of its regulated agreements. This generated a gain of R$ 5 million in interest in subsidiaries, associates and joint ventures in 2016. The remaining power plants had already renegotiated in 2015. The strategy of renegotiating this risk is aimed at returning the predictability and stability of cash flows to hydroelectric generators.

In the distribution segment, the Company continued to suffer from the economic recession, which affected the power consumption in the concession area. Despite the acqusition of RGE Sul as of November, sales in Group CPFL´s concession area contracted 1.0%. Disregarding the effect of the acquisition of RGE Sul, it would be a 3.5% drop, with 0.7%, 3.7% and 7.6% decreases respectively for residential, commercial and industrial segments. Unfavorable macroeconomic scenario also influenced delinquency levels, leading the Company to intensify its collections actions, increasing by more than 50% the number of disconnections, collections efforts and reporting to credit bureaus, among other actions.

In the financial sphere, it is important to notice that the decrease in leverage, which reached the level of 3.21x net debt/EBITDA by the end of 2016, reflecting not only the improved results, but also the consistent monetization of sectoral financial assets throughout the year. In December, group´s distribution companies, including RGE Sul, had accumulated a sectoral financial liability of R$ 891 million, due to tariff adjustments and lower costs with energy purchase and sector charges observed throughout 2016. On the other hand, the acquisition of RGE Sul pressed this indicator.

It should also be noted that six of the nine distribution companies - CPFL Piratininga, CPFL Santa Cruz, CPFL Leste Paulista, CPFL Sul Paulista, CPFL Mococa and CPFL Jaguari – are already in the 4^th cycle of Tariff Revision, benefiting from the investments made in the previous cycle and the better conditions offered by the new cycle. Regarding tariffs, the green flag was applied during most of the year 2016, which contributed to lower tariffs, after the strong adjustments of 2015.

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The overcontracted position of Brazilian distribution companies, a regulatory theme of great importance, was widely discussed among agents in 2016 and many advances have already been obtained. Several measures have been taken in order to mitigate the surpluses and define their involuntary character, such as the treatment of involuntary surplus from quotas, the feasibility of bilateral agreements between generation and distribution companies, the New Energy MCSD (Surplus and Deficit Compensation Mechanism) and changes in the rules for auctions.

Law 13,360/2016 also implemented important changes to the power sector, creating impacts and opportunities for its various business segments. The safety of a solid regulatory framework is essential for the power sector to resume investments and deliver sustainable growth in the long term.

b) capital structure:

As of December 31, 2018, a capital structure of the Company was represented by 38% of own capital and 62% of third party capital. There is no significant variation in the last 3 fiscal years in this structure.

c) ability to pay in relation to financial commitments

Liquidity and Capital Resources

• 2018

On December 31, 2018, the Company’s working capital was positive, reflecting an excess of current assets over current liabilities of R$987 million, an increase of R$2,785 million compared to a negative working capital balance of R$1,797 million at December 31, 2017, representing an excess of current assets over current liabilities. The main causes of this increase in working capital were:

• decrease of R$1,929 million in our short term debt balance, which includes loans and financing, debentures and related accrued interest;
• increase of R$1,160 million in net Sector Financial Assets and Liabilities balances, from an assets positions of R$171 million in 2017 to R$1,331 million in 2018;
• decrease of R$899 million in our Trade Payables balance;
• decrease of R$431 million in our Regulatory Charges balance; and
• increase of R$247 million in our Consumers Receivables balance.

Partially offset by:

• decrease of R$1,358 million in our cash and cash and equivalents, due to net cash generation of R$857 million in operating activities, offset by cash usage of R$364 million in financing activities and cash usage of R$1,851 million in investing activities;
• increase of R$235 million in dividends balance; and
• decrease of R$132 million in derivative financial instruments, net.

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The following table presents a summary of pending contractual obligations and commitments as of December 31, 2018 (including other long-term contractual obligations):

______________________________________

⁽¹⁾           Includes interest payments, including future interest projected cash flow based on undiscounted, through index projections. These future interests are not recorded on our Balance Sheet.

⁽²⁾           Estimated future contributions to the post-employment benefit.

⁽³⁾           Amounts payable under long term energy purchase agreements, which are subject to changing prices and provide for renegotiation under certain circumstances. The table represents the amounts payable for the contracted volumes applying the year end 2018 price. See item 10.2.b of this form and note 33 of our consolidated financial statements.

⁽⁴⁾           Estimated expenses related to distribution and transmission system services charges, until the end of the concession periods.

⁽⁵⁾           Estimated expenses related to the payment of the risk premiums for the coverage of the hydrological risk.

⁽⁶⁾           The power plant construction projects include commitments made basically to make funds available for construction and acquisition of concession related to the subsidiaries in the Renewable Energy segment.

Our capital requirements are primarily for the following purposes:

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•     We make capital expenditures to continue improving and expanding our distribution system and to complete our renewable generation projects.

•     Repayment or refinancing of maturing debt. At December 31, 2018 we had outstanding debt maturing during the following 12 months in the total amount of R$3,363 million;

•     Dividends on an annual basis. We paid R$279 million in dividends in 2018. Such payment excludes dividends paid by our subsidiaries to non-controlling shareholders.

The Company and our subsidiaries have financial capacity to afford its non-current liabilities. One of the main strategies to manage noncurrent liabilities is called pre-funding, that is, Company anticipate its cash needs in a forecast between 18 and 24 months and prioritize its cash liquidity.

Company’s Overall Liquidity ratio was 0.717 in 2018 and 0.661 in 2017, which represents an increase of 8.5% when compared to 2017 ratio.

• 2017

On December 31, 2017, our working capital reflected an excess of current labilities over current assets of R$1,797 million, a decrease of R$4,158 million compared to an excess of current assets over current liabilities of R$2,361 million at December 31, 2016. The main causes of this decrease in working capital were:

This decrease was mainly due to the decrease of cash and cash equivalents of R$ 2,915 million (with the reasons described in item 10.1.h have below), with an increase in loan installments and short-term financing and debentures of R$ 1,870 million.

Other transactions that contributed to the decrease of working capital:

• Increase in Trade Payables balance of R$ 569 million, basically due to the electricity purchased (R$ 380 million), electricity network usage charge (R$ 130 million), free market (R$ 13 million), materials and services (R$ 105 million), offset by the decrease in charges for use of distribution and transmission system (R$ 60 million);

• Increase of regulatory charges balance of R$ 216 million; and

• Increase in other accounts payable of R$ 164 million, net.

Partially offset by:

• Increase of accounts receivable from consumers, concessionaires and licensee of R$ 535 million;

• Increase in derivatives assets of R$ 281 million; and

• Increase of R$ 768 million in Sector Financial Assets (net of decrease in Sector Financial Liabilities).

Our capital requirements are primarily for the following purposes:

•     We make capital expenditures to continue improving and expanding our distribution system and to complete our renewable generation projects;

•     Repayment or refinancing of maturing debt. At December 31, 2017 we had outstanding debt maturing during the following 12 months in the total amount of R$5,293 million; e

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•     Dividends on an annual basis. We paid R$221 million in dividends in 2017. Such payment excludes dividends paid by our subsidiaries to non-controlling shareholders.

The Company and our subsidiaries have financial capacity to afford its non-current liabilities. One of the main strategies to manage noncurrent liabilities is called pre-funding, that is, Company anticipate its cash needs in a forecast between 18 and 24 months and prioritize its cash liquidity.

Company’s Overall Liquidity ratio was 0.661 in 2017, which represents an increase of 4.2% when compared to 2016 ratio.

• 2016

On December 31, 2016, our working capital reflected an excess of current assets over current liabilities of R$2,361 million, a decrease of R$623 million compared to R$2,984 million at December 31, 2015.

The main causes of this decrease were:

• a decrease of R$2,062 million in Sectorial Financial Assets and Liabilities balances, from an asset position of R$1,464 million in 2015 to a liability position of R$598 million in 2016 (see note 8 to our consolidated financial statements);
• a net decrease of R$ 469 million in derivative financial instruments; e
• a net increase of R$ 302 million in other payables/receivables.

Those decreases were partially offset by:

• an increase of R$ 482 million in our cash and cash and equivalents, as explained in item 10.1.h below;
• an increase of R$ 591 million in Consumers, Concessionaires and Licensees;
• a decrease in our Trade Payables of (i) R$433 million of Suppliers, due mainly to energy acquired (R$ 405 million); and (ii) R$486 million in Regulatory Charges, mainly CED Account (R$217 million) and Tariff Flags (R$268 million); e
• a decrease of R$218 million in our short‑term debt balance, which includes loans and financing, debentures and related accrued interest.

Our capital requirements are primarily for the following purposes:

•     We make capital expenditures to continue improving and expanding our distribution system and to complete our renewable generation projects;

•     Repayment or refinancing of maturing debt. At December 31, 2016 we had outstanding debt maturing during the following 12 months in the total amount of R$3,423 million; and

•     Dividends on a semiannual basis. We paid R$205 million in dividends in 2016. Such payment exclude dividends paid by our subsidiaries to non-controlling shareholders.

Company and its subsidiaries have financial capacity to afford its current liabilities. One of the main strategies to manage noncurrent liabilities is called pre-funding, that is, Company anticipate its cash needs in a forecast between 18 and 24 months and prioritize its cash liquidity. The increase in gross debt has the objective to support Group’s business expansion strategy, such as financing of CPFL Renovaveis’ greenfield projects and afford acquisition of RGE Sul.

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Despite the increase in our gross debt, Company’s Overall Liquidity ratio has been improved over the past three years. Such ratio was 0.687 in 2016, which represents an increase of 10.9% when compared to 2015 ratio.

d) sources used for financing working capital and investments in non-current assets

The main sources of resources come from operating cash generation and financing.

During 2018, subsidiaries of CPFL Energia brought in funding mainly for financing investments in our generation and distribution segment, as well as to reinforce the working capital of the companies.

It has been contracted new financing for investment with the Brazilian Economic and Social Development Bank (“BNDES”), new funding with financial institutions under foreign borrowing lines and new debenture issues.

The CPFL Energia Group’s liquidity policy is based on holding funds to cover the short-term obligations set forth in the base scenario, considering the execution of the funding plan for cash requirements for the current year. If there is an additional need for cash, CPFL has easy access to the capital market to raise funds to cover these additional needs.

By applying this strategy, we aim to reduce CPFL Energia’s future cash flow exposure and its exposure to interest rate risk, as well as to maintain its liquidity level and its debt profile trough debt refinancing actions and decrease of costs.

For more information on financing sources utilized by the Company, see line (f) of this item 10.1.

Indebtedness

2018 compared to 2017

Our total indebtedness increased R$208 million, or 1.0%, from December 31, 2017 to December 31, 2018, as result of new debentures issued and other debt incurred, with amortization in the principal of loans and debentures in the amount of R$ 10,204 million offset by the raising of R$ 9,611 million in loans and debentures. The main fundings are described below:

•    Issuances of debentures principally in the amount of R$1,590 million by CPFL Geração; R$1,380 million by CPFL Paulista; R$520 million by RGE; R$412 million by CPFL Piratininga and R$220 million by Rio Grande Energia S.A., to improve working capital, finance debt payments, refinance maturing debt and fulfill required investments;

•    Incurrence of new debt denominated in U.S. dollars, principally in the amount of R$801 million by CPFL Paulista; R$1,129 million by RGE; R$627 million by Rio Grande Energia S.A. and R$394 million by CPFL Piratininga. This debt was incurred in order to improve working capital, finance debt payments, refinance maturing debt and fulfill required investments;

•    Issuance of debentures by the subsidiary of CPFL Renováveis in the amount of R$ 150 million and raising of funds in the amount of R$ 324 million to the subsidiary's investment plan; and

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•    Funding in the amount of R$ 16 million in local currency by our subsidiary CPFL Renováveis for working capital.

When we include derivatives (assets and liabilities) in indebtedness analysis, there is an increase of R$ 136 million to R$19,752 million in total indebtedness instead R$19,615 million.

2017 compared to 2016

Our total indebtedness decreased R$1,875 million, or 8.5%, from December 31, 2016 to December 31, 2017, to R$20,169 million (excluding derivatives), with amortization of loan principal and debentures in the amount of R$ 5,273 million offset by the fund-raising of R$ 3,398 million of loans and debentures.

The mainly additions in the year:

·         Issuances of debentures in the total amount of R$ 1,606 million of which, R$700 million by CPFL Paulista; R$380 million by RGE; R$306 million by CPFL Piratininga and R$220 million by RGE Sul.

• Issuances of debentures by CPFL Renováveis in the amount of R$350 million in order to generation projects investments;
• Issuances of debentures by CERAN in the amount of R$530 million in order to transfer funds to shareholders;
• New borrowings from BNDES through the Fund for the Financing and Acquisition of Machinery and Equipment, FINAME, in the total amount of R$ 167 million primarily to fulfill the investment plan for our renewable generation subsidiaries (R$ 150 million), as well as to fulfill required investments for our other services subsidiaries (R$11 million);
• New borrowings for reinforce our working capital in the amount of R$180,000 million in national amount at most of our renewable generation subsidiaries (R$ 135,000 million) and CPFL Serviços (R$ 45 million).
• New borrowings for reinforce our working capital in the amount of R$ 569 million, denominated in foreign currency - U.S. dollars by our subsidiary CPFL Brasil (R$ 400 million) and our subsidiary RGE (R$ 169 million).

When we include derivatives (assets and liabilities) in indebtedness analysis, there is a decrease of R$ 1,742 million in total indebtedness instead R$19,615 million.

e) sources of financing for working capital and investments in non-current assets to cover liquidity shortfalls

In 2019 and 2020, we expect to continue to take advantage of the financing opportunities offered by the market through issuing debentures and debt for working capital, both in the domestic and overseas markets, and those offered by the government through lines of financing provided by BNDES, in order to expand and modernize the electricity system of the distribution companies, to undertake new investments in the Generation segment.

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f) indebtedness levels and characteristics of such debts, also describing:

2018

Total debt outstanding at December 31, 2018 (including accrued interest and excluding derivatives) was R$20,377 million. Approximately R$5,631 million of our total outstanding debt, or 27.6%, was denominated in foreign currency, principally U.S. dollars. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations. The amount of R$3,363 million of our total outstanding debt is due in 12 months.

2017

Total debt outstanding at December 31, 2017 (including accrued interest and excluding derivatives) was R$20,169 million. Approximately R$4,858 million of our total outstanding debt, or 24.1%, was denominated in foreign currency, principally U.S. dollars. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations. The amount of R$5,293 million of our total outstanding debt is due in 12 months.

2016

Total debt outstanding at December 31, 2016 (including accrued interest and excluding derivatives) was R$22,044 million. Approximately R$5,502 million of our total outstanding debt, or 25.0%, was denominated in foreign currency, principally U.S. dollars. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations. The amount of R$3,422 million of our total outstanding debt is due in 12 months.

i. relevant loan and financing contracts

Main Financing Contracts in 2018 (including accrued interest):

·         Floating rate. At December 31, 2018, we had R$4,969 million outstanding under a number of loan agreements post fixed indexed based on the TJLP and TLP (R$4,348 million) and CDI and Selic (R$500 million) and other loan agreements (R$121 million). These loans are denominated in reais. The most significant part of these loans relates to: (i) loans indexed by TJLP and TLP to our indirect generation subsidiary CPFL Renováveis (R$2,894 million) and to our distribution subsidiaries, CPFL Paulista, CPFL Piratininga, CPFL Santa Cruz, and Rio Grande Energia S.A. (R$1,439 million); and (ii) loans indexed by CDI to our indirect generation subsidiary CPFL Renováveis (R$268 million).

•     Fixed rate. At December 31, 2018, we had R$893 million outstanding under a number of loan agreements based on the fixed rate. These loans are denominated in reais. The most significant part of these loans relates to our indirect generation subsidiary CPFL Renováveis (R$543 million).

•     Debentures. At December 31, 2018, we had indebtedness of R$8,941 million outstanding under several series of debentures issued by CPFL Energia, CPFL Paulista, CPFL Piratininga, RGE, CPFL Santa Cruz, CPFL Brasil, CPFL Geração and CPFL Renováveis. The terms of these debentures are summarized in note 17 to our audited annual consolidated financial statements.

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•     Foreign currency-denominated debt. At December 31, 2018, we had the equivalent of R$5,631 million outstanding under other loans denominated in foreign currency, principally U.S. dollars (US$1,232 million or R$4,776 million). We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations.

Furthermore, the contracts of loan and financial mentioned above also consider working capital contracts at December 31, 2018, is equivalent of R$639 million and the BNDES contracts is equivalent of R$ 4,931 million.

For further details on our borrowings, debentures and derivatives, see notes 16, 17 and 33 to our consolidated financial statements.

Main Financing Contracts in 2017 (including accrued interest):

·                     BNDES. At December 31, 2017, we had R$4,549 million outstanding under a number of facilities provided through BNDES. These loans are denominated in reais. The most significant part of these loans relates to: (i) loans to our indirect generation subsidiaries, CPFL Renováveis (R$3,543 million); (ii) financing of investment programs for our distribution subsidiaries, primarily CPFL Paulista, CPFL Piratininga and RGE (R$ 944 million); and (iii) loans to our subsidiaries CPFL Serviços, CPFL Brasil, CPFL Eficiência Energética and CPFL Transmissão Piracicaba (R$62 million).

·         Debentures. At December 31, 2017, we had indebtedness of R$9,177 million outstanding under several series of debentures issued by CPFL Paulista, CPFL Piratininga, RGE, RGE Sul, CPFL Santa Cruz, CPFL Brasil, CPFL Geração, CPFL Renováveis and CERAN. The terms of these debentures are summarized in note 17 to our audited annual consolidated financial statements.

·         Working capital. At December 31, 2017, we had R$859 million outstanding under a number of loan agreements indexed to the CDI relating to working capital for our subsidiaries CPFL Santa Cruz, CPFL Geração and CPFL Serviços.

·         Other real‑denominated debt. As of December 31, 2017, we had R$757 million outstanding under a number of other real‑denominated facilities. These real-denominated facilities relate to our renewable energy subsidiaries (R$682 million) and our distribution subsidiaries (R$25 million). They are indexed based on the CDI or TJLP and bear interest at different rates.

·         Other foreign currency‑denominated debt. At December 31, 2017, we had the equivalent of R$4,858 million outstanding under other loans denominated in foreign currency, principally U.S. dollars. We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations.

For further details on our borrowings, debentures and derivatives, see notes 16, 17 and 33 to our consolidated financial statements.

Main Financing Contracts in 2016 (including accrued interest):

·                     BNDES. At December 31, 2016, we had R$5,471 million outstanding under a number of facilities provided through BNDES. These loans are denominated in reais. The most significant part of these loans relates to: (i) loans to our indirect generation subsidiaries, CPFL Renováveis and CERAN (R$3,987 million); (ii) financing of investment programs for our distribution subsidiaries, primarily CPFL Paulista, CPFL Piratininga and RGE (R$1,387 million); and (iii) loans to our subsidiaries CPFL Serviços, CPFL Brasil, CPFL Esco, CPFL Telecom and CPFL Transmissão (R$97 million).

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·         Debentures. At December 31, 2016, we had indebtedness of R$9,000 million outstanding under several series of debentures issued by CPFL Energia, CPFL Paulista, CPFL Piratininga, RGE, RGE Sul, CPFL Santa Cruz, CPFL Brasil, CPFL Geração and CPFL Renováveis. The terms of these debentures are summarized in note 18 to our audited annual consolidated financial statements.

·         Working capital. At December 31, 2016, we had R$1,354 million outstanding under a number of loan agreements indexed to the CDI relating to working capital for our distribution, generation and services subsidiaries.

·         Other real‑denominated debt. As of December 31, 2016, we had R$755 million outstanding under a number of other real‑denominated facilities. These real-denominated facilities relate to our renewable energy subsidiaries (R$653 million) and our distribution subsidiaries (R$102 million). They are indexed based on the CDI or TJLP and bear interest at different rates.

·         Other foreign currency‑denominated debt. At December 31, 2016, we had the equivalent of R$5,502 million outstanding under other loans denominated in foreign currency, principally U.S. dollars (US$1,688 million). We have entered into swap agreements in order to reduce our exposure to exchange rates that arises from these obligations.

For further details on our borrowings, debentures and derivatives, see notes 16, 17 and 33 to our consolidated financial statements.

ii. other long-term relationships with financial institutions

On the date of this document, the Group had no other long-term relationships with financial institutions, aside from those described in item (i) above.

iii. level of subordination among debt

There is no subordination of the Company’s debt, observing, however, that certain debts were contracted with real guarantees and, therefore, have preference over other debt if the Company were to reach bankruptcy within the limit of the real guarantee.

iv. restrictions imposed by the issuer, particularly, regarding indebtedness limits and the hiring of new debt, the distribution of dividends, sale of assets, issue of new securities and the sale of shareholding control, as well as if the issue has been in compliance with such restrictions.

Covenants

Borrowings raised by Group companies require the compliance with certain restrictive financial clauses, under penalty of restriction in the distribution of dividends and/or advance maturity of the related debts. Furthermore, failure to comply with the obligations or restrictions mentioned may result in default in relation to other contractual obligations (cross default), depending on each borrowing agreement.

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The calculations are made on an annual or semiannual basis, as appropriate. As the maximum and minimum ratios vary among the contracts, we present below the most critical parameters of each ratio, considering all contracts in effect at December 31, 2018.

Ratios required for the individual financial statements of its subsidiaries CPFL Paulista, CPFL Piratininga, CPFL Santa Cruz and RGE, which own contracts:

• Debt indebtedness divided by EBITDA maximum between 3.50 and 3.75; and
• Debt indebtedness divided by the sum of Equity and Debt indebtedness maximum of 0.9.

Ratios required for the individual of subsidiaries financial statements of CPFL Renováveis owners of the contract:

• Debt Service Coverage Ratio (DCSR) minimum between 1 and 1.3.
• Company capitalization ratio minimum between 25% and 39.5%.
• General Indebtedness Ratio maximum of 80%.

Ratios required for the consolidated statements of CPFL Renováveis

• Debt indebtedness divided by EBITDA maximum of 3.75; and
• Net Debt divided by the sum of Equity and Net Debt maximum of 0.55.

Ratios required for the consolidated financial statements of CPFL Energia

• Debt indebtedness divided by EBITDA maximum of 3.75;
• Debt indebtedness divided by the sum of Equity and Debt indebtedness maximum of 0.72; and
• EBITDA divided by the finance income/expense results minimum of 2.25.

Ratio required in the consolidated financial statements of State Grid Brazil Power Participações S.A.

• Equity divided by Total Assets (disregarding the effects of IFRIC 12/OCPC 01) minimum of to 0.3.

For purposes of determining covenants, the definition of EBITDA at the Company takes into consideration mainly the consolidation of subsidiaries, associates and joint ventures based on the Company’s direct or indirect interests in those companies (for both EBITDA and assets and liabilities).

In 2018, CPFL Renováveis obtained from BNDES a waiver from the acceleration of maturity for non-compliance with the DCSR in the financial statements of its subsidiary Bio Ester and with the financial ratios DCSR, Debt indebtedness divided by EBITDA and Equity divided by the sum of Equity and Debt indebtedness in the financial statements of its subsidiaries Bio Coopcana and Bio Alvorada. On the same occasion CPFL Renováveis also obtained a waiver from the requirement of compliance with the mentioned ratios as from 2019.

In 2018, the subsidiary CPFL Piratininga obtained from BNDES and onlending banks authorization for waiver from the obligation to comply with the financial ratio Net Debt to EBITDA contained in the financing agreements for the year ended December 31, 2018.

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The Group’s management monitors these ratios on a systematic and constant basis, so that all conditions are met. The Group’s management believes that all covenants and financial and non-financial clauses whose indicators are properly complied at December 31, 2018, except by the mentioned above about the non direct subsidiary CPFL Renováveis for which the holding had the proper approvals from the finance institutions.

Debentures

The debentures issued by the Group companies require the compliance with certain financial covenants.

The calculations are made on an annual or semiannual basis, as appropriate. As the maximum and minimum ratios vary among the contracts, we present below the most critical parameters of each ratio, considering all contracts in effect at December 31, 2018.

Ratios required in the individual financial statements of the subsidiaries of CPFL Renováveis, issuers of debentures:

• Debt Service Coverage Ratio (DSCR) minimum of 1.2.
• Net Debt divided by Dividends Received maximum 3.5.

Ratios required in the consolidated financial statements of CPFL Renováveis for debentures issued by CPFL Renováveis and its subsidiaries

• Debt indebtness divided by EBITDA maximum of 4.0.
• EBITDA divided by Finance Income (Costs) minimum of 1.75.

Ratios required in the consolidated financial statements of CPFL Energia

• Net indebtness divided by EBITDA maximum between 3 and 3.75.
• EBITDA divided by Finance Income (Costs) minimum of 2.25.

On June 19, 2018, CPFL Renováveis obtained from debenture holders a waiver from the requirement of compliance with the Debt Service Coverage Ratio and the Debt Service Coverage Ratio of the Transaction related to the 1st issue of debentures of CPFL Renováveis.

The Group’s management monitors these ratios on a systematic and constant basis, so that all conditions are met. The Group’s management believes that all covenants and financial clauses are properly complied at December 31, 2018, except by the mentioned above about the non-direct subsidiary CPFL Renováveis is for which the holding had the proper approvals from the finance institutions.

g) limits of the funds already contracted and ratio of the portions already used

The percentages utilized for our previously contracted financing, referring to the last three fiscal years, are presented below:

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 h) significant changes in each item of the financial statements

Management has presented consolidated balance sheets and financial statements of income for the fiscal years ended December 31, 2018, 2017 e 2016 with demonstrations of all variations and comments on the most relevant.

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Comments on the most relevant variations in Assets:

Cash and cash equivalents:

The balance of R$ 1,891 million in 2018, which represents 4.5% of total assets, decreased 41.8% (or R$1,359 million) compared to 2017, due to:

(i) cash generation of R$ 857 million from operating activities, basically from adjusted net income (R$ 5,920 million); the decreases of: i) on accounts receivable from consumers, concessionaires and licensees (R$1,006 million); ii) of net financial sector assets (R$ 911 million); iii) accounts payable with suppliers (R$849 million) and regulatory fees (R$ 431 million); the payments : i) of debt charges and debentures (R$1,353 million) and ii) income tax and social contribution (R$ 816 million) and the decrease in other accounts receivable and or payable (R$ 8 million) ; partially offset by the dividends received from jointly controlled companies (R$ 311 million);

(ii) cash consumption of R$ 1,851 million cash used in investing activities primarily for the acquisition of intangible and fixed assets (R$ 1,786 million) mainly by investments in distribution infrastructure;

(iii) cash consumption of R$ 364 million arising from financing activities cash, due to: a) the repayment of loans and debentures net of borrowings and settlement of derivative transactions (R$ 50 million); b) dividends paid (R$ 322 million); c) the right to purchase shares and alteration of the participation exercised by minority shareholders of CPFL Renováveis ​​(R$ 8 million);

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Balance of R$ 3,250 million in 2017, corresponding to 7.9% of total assets, which correspond a decrease of 47.3% (R$2,915 million) from 2016, due to:

(i) Cash usage of R$ 2,509 million in in investing activities due to intangible assets and Property, plant and equipment acquisition (R$ 2,570 million) mainly due to investments in distribution and renewable energy generation infrastructure;

(ii) Cash consumption of R$ 2,440 million arising from financing activities, due to: a) amortization of loans and debentures net of funding and settlement of derivative operations (R$ 1,977 million); b) dividends paid (R$ 337 million); c) decrease of capital by non-controlling shareholders in our subsidiary CERAN (R$ 123 million);

(iii) offset by the cash generation of R$ 2,034 million from operating activities, mainly due to:

a)    Net income adjusted (R$ 5,507 million);

b)    Dividends received from our subsidiaries to non-controlling shareholders (R$ 730 million);

c)    An increase in our Trade Payables balance suppliers (R$ 566 million), basically due to the increase in charges and wholesaler’s electricity sales (R$ 450 million), materials and services (R$ 105 million) and free energy (R$ 13 million);

d)    An increase of R$ 216 million in our Regulatory Charges balance from tariff flag;

e)    Off set by payments of:

a) debt and debentures charges (R$ 1,846 million);

b) income tax and social contribution (R$ 338 million); and

c) tax, civil and labor risks paid (R$ 207 million); decreased of:

d) financial assets and liabilities (R$ 1,515 million);

e) escrow deposits (R$ 248 million);

f) tax and social contributions (R$ 261 million); Increased in other operating assets and liabilities net (R$ 153 million).

Balance of R$ 6,165 million in 2016, corresponding to 14.6% of total assets, up 8.5% (R$482 million) from 2015, due to:

(i)         cash generation of R$4,634 million from operational activities, which is basically adjusted net income (R$5,016 million); the decreases of (i) sector financial assets and liabilities (R$2,782 million); (ii) escrow deposits (R$756 million); (iii) receivables from Eletrobrás (R$ 186 million); (iv) taxes recoverable (R$128 millions); partially offset by increase in consumers, concessionaires and licensees (R$206 million) and by decrease in operational liabilities, mainly: (i) trade payables (R$783 million); (ii) regulatory charges (R$515 million); (iii) tax, civil and labor risks paid (R$217 million); payment of: (i) debt and debentures charges (R$1,571 million) and; (ii) income tax and social contribution (R$876 million); and decrease of other receivables and other payables (R$361 million).

(ii)        cash consumption of R$ 3,815 million in investments activities, mainly due to fixed assets and intangibles assets acquisitions (R$ 2,238 million), in connection with infrastructure investments in distribution and renewable generation segments; and control acquisition of AES Sul through our integral subsidiary CPFL Jaguariúna (R$ 1,497 million, net of acquired cash).

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(iii)       cash consumption of R$ 337 million from financing activities, due mainly to i) paid dividends (R$ 232 million); (ii) repayment of borrowing and debentures (R$ 242 million); and iii) payment of business combination obligations (R$21 million); partially offset by net cash generation in financial derivatives operations (R$158 million).

Consumers, concessionaires and licensees:

Consumers, concessionaires and licensees amounted to R$ 5,301 million in 2018 in current and non-current assets, which represents 12.6% of total assets, increased by 16.8% (R$ 763 million) compared to 2017, basically due to amounts related to CCEE (R$ 271 million) and the general increase in tariffs, offset by the reduction of amounts related to the sale of electricity to other concessionaires, permission and licensees (R$ 111 million) by the subsidiary CPFL Brasil.

Consumers, concessionaires and licensees amounted to R$ 4,538 million in 2017 in current and non-current assets, which corresponds to 11.0% of total assets, was 14.3% (or R$ 569 million) higher than in 2016, due mainly to Sales energy on regulated market – CCEE (R$ 123 million) and the increase in the sale of electricity to other concessionaires and licensees (R$ 176 million), by the our subsidiary CPFL Brasil and general increase of tariffs.

Consumers, concessionaires and licensees amounted to R$3,969 million in 2016, which corresponds to 9.4% of total assets, was 20.1% higher than in 2015, due mainly to the receivables of R$767 million of RGE Sul, which was acquired and consolidated in 2016.

Deferred tax assets and liabilities:

Net deferred tax liabilities amount to R$ 180 million in 2018, a decrease of R$ 127 million compared to a net deferred tax liabilities of R$ 306 million in 2017, due mainly to decrease in net deferred tax liabilities arising from temporary differences that are not deductible from income tax and social contribution (R$ 48 million) and tax losses (R$ 79 million).

Net deferred tax liabilities amount to R$ 306 million in 2017, a decrease of R$ 95 million compared to a net deferred tax liabilities of R$ 401 million in 2016, due mainly to decrease in net deferred tax liabilities arising from temporary differences that are not deductible from income tax and social contribution (R$ 105 million).

Net deferred tax liabilities amount to R$ 401 million in 2016, a decrease of R$696 million compared to a net deferred tax liabilities of R$ 1,098 million in 2015, due mainly to decrease in net deferred tax liabilities arising from temporary differences that are not deductible from income tax (R$ 596 million) and social contribution (R$ 214 million); and PIS and COFINS in the amount of R$ 9 million. Such decreases were partially offset by a decrease in net deferred tax credits arising from tax benefit of merged intangible assets (R$ 35 million); decrease in tax credits from the tax loss on the income tax of R$ 59 million and negative social contribution basis of R$ 29 million.

Sector financial assets and liabilities:

The positive balance of net financial sector assets and liabilities of R$ 1,508 million in 2018 increased by R$ 991 million, compared to the balance of R$ 517 million recorded in 2017, due to:

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•The items of the CVA (compensation account for the variation of the values of items in parcel "A") in the amount of R$ 1,070 million, mainly due to the increase in the energy development account (CDE) (R$ 700 million) and pass-through from Itaipu (R$ 521 million) offset by the reduction in electricity costs (R$ 387 million).

• Overcontracting (R$ 334 million).

·  Off set by decrease in the neutrality of sectoral charges (R$ 194 million) and other financial components (R$ 219 million).

The positive balance of sector financial assets and liabilities of R$ 517 million in 2017 increased by R$ 1,432 million, compared to the negative balance of R$ 915 million in financial assets and liabilities recorded in 2016, due to:

• CVA items amounting of R$ 2,065 million, mainly due to the increase in the cost of electricity (R$ 2,354 million) and pass-through from Itaipu (R$ 495 million) and the decrease of energy service charge (“ESS”) and reserve energy charge (“EER”) (R$ 610 million);
• Other financial components (R$ 171 million);
• Offset by the decrease of the neutrality of industry charges of (R$ 162 million) and over-contracting (R$ 642 million).

The negative balance of net sector financial assets and liabilities amount to R$ 915 million in 2016, a decrease of R$ 2,869 million compared to a positive balance of R$ 1,954 million in 2015, mainly due to: (i) CVA items amounting R$ 1,759 million, due mainly to: a) cost of electricity purchased (R$ 752 million); b) energy service charge (“ESS”) and reserve energy charge (“EER”) (R$ 257 million); c) pass-through from Itaipu (R$ 731 million); (ii) overcontracting (R$ 11 million); partially offset by (iii) neutrality of industry charges in the amount of R$ 286 million (see note 8 of our consolidated financial statements).

Concession Financial Assets:

The balance of R$ 7,430 million in 2018 in current and non-current assets, which represented 17.6% of total assets, increased by 13.1% when compared to 2017 (R$ 6,569 million), mainly due to: i) investments for the expansion, maintenance, improvement, modernization and strengthening of the electric system (R$ 784 million); ii) adjustment of cash flow expectation of distributors (R$ 362 million); (iii) the effects of the adoption of IFRS 15 / CPC 47 in the cases of transmission subsidiaries (R$ 239 million) and (iv) the write-offs of the distributors' infrastructure (R$ 46 million), due to the lower costs of the distributors' infrastructure.

The balance of R$ 6,569 million in 2017 in current and non-current assets, which represented 15.9% of total assets, increased by 22.2% when compared to 2016 (R$ 1,196 million), due mainly to: i) investments in infrastructure of electricity distribution and transmission activities (R$ 1,019 million), in order to expand, maintain, improve, modernize and reinforce the electrical system; ii) adjustment of cash flow expectation of distribution segment (R$ 212 million); iii) of the update - asset measured at amortized cost in the cases of transmission subsidiaries (R$ 28 million); offset by write-off of items from distributors' infrastructure (R$ 35 million); v) Receives of items from regulatory basis assets transmission (or “RAB”) of (R$ 16 million), and vi) by the adjustment of the business combination finalization for the acquisition of RGE Sul (R$ 12 million).        

Concession Financial Assets amounted to R$ 5,374 million in 2016, equivalent to 12.7% of total assets, an increase of 49.0% (R$ 1,767 million), due mainly to: i) infrastructure investments in distribution and transmission activities (R$ 706 million) in order to expand, maintain, improve, modernize and reinforce the electrical system; (ii) adjustment of cash flow expectation (R$203 million); (iii) restatement of concession financial assets, which is measured at amortized cost for transmission activities (R$ 16 million); iv) acquisition of RGE Sul (R$ 876 million), offset by: v) write-off of items from regulatory basis assets (or “RAB”) in the amount of R$ 25 million, as well as for payments received by our transmission subsidiaries (R$ 10 million).

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Property, Plant and Equipment:

Property, plant and equipment amounted to R$ 9,457 million in 2018, which represents 22.4% of total assets, decreased 3.4% (R$ 331 million) compared to R$ 9,787 million in 2017, R$ 296 million, mainly in projects of CPFL Renováveis, offset by the effect of the depreciation of assets of R$ 598 million.

Property, plant and equipment amounted to R$ 9,787 million in 2017, which corresponds to 23.7% total assets, an increase of 0.8% (R$ 74 million) compared to R$ 9,713 million in 2016, due mainly to CPFL Renováveis project investments of R$ 757 million, offset by the effect of the depreciation of assets of R$ 598 million.

Property, plant and equipment amounted to R$ 9,713 million in 2016, which corresponds to 23.0% total assets, an increase of 5.9% (R$ 540 million) compared to R$ 9,173 million in 2015, due mainly to: (i) investments of R$ 1,085 million, substantially in construction projects from CPFL Renováveis; (ii) acquisition of RGE Sul (R$ 30 million), offset by: (iii) depreciation for the year amounting to R$ 525 million; (iv) write-offs of R$30 million; (v) R$15 million related to reclassification and transferring to other group of assets; and (vi) impairment losses amounting R$ 5 million (for further information, see note 14 of our consolidated financial statements).

Intangible Assets:

Intangible Assets amounted to R$ 9,463 million in 2018, which represents 22.4% of total assets, decreased by 10.6% (R$ 825 million) compared to 2017, mainly due to decreased of R$ 1,046 million due to application of CPC 47 / IFRS 15 that changed the classification of the infrastructure assets of the concessionaires' ongoing concession during the construction or improvement period for contract assets, and due to the recognition of the amortization of R$ 1,001 million, partially offset by the investments for expansion, maintenance, improvement, modernization and reinforcement of the electric system in the amount of R$ 742 million.

The balance of R$ 10,590 million in 2017, representing 25.7% of total assets, showed a slight decrease of 1.7% (R$ 186 million), compared to 2016, due to the amortization of the year (R$ 936 million) and transferring from Intangible Assets to Concession Financial Assets in the amount of R$ 972 million due to additions in the period partially offset by the investments for expansion, maintenance, improvement, modernization and reinforcement of the electric system in the amount of R$ 1,908 million .

Intangible Assets amounted to R$ 10,776 million in 2016 (25.6% of total assets), compared to R$ 9,210 million in 2015, an increase of 17.0% (R$ 1,565 million), due mainly to: (i) infrastructure investments in distribution and transmission activities in order to expand, maintain, improve, modernize and reinforce the electrical system (R$ 1,224 million); (ii) acquisition of RGE Sul (R$ 1,870 million); partially offset by (iii) amortization of the year (R$ 768 million); (iv) transferring from Intangible Assets to Concession Financial Assets in the amount of R$ 655 million due to acquisitions occurred in the period; (v) due to write-off and transferring to other group of assets amounting to R$ 63 million and (vi) impairment losses recognition amounting to R$ 43 million.

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Comments on the most relevant variations in Liabilities:

Trades payable:

The balance of R$ 2,731 million in 2018, current and non-current, representing 8.3% of total liabilities and shareholders' equity, decreased by 27.3% (R$ 694 million) compared to 2017, mainly due to the reduction of electricity supply (R$ 437 million) and materials and services (R$ 283 million); (R$ 62 million) and free energy (R$ 9 million).

The balance of R$ 3,425 million in 2017, current and non-current, representing 8.3% of total liabilities and shareholders' equity, increased by 19.9% (R$ 567 million) compared to 2016, mainly due to the increase in systems service charges and electricity supply by (R$ 451 million), materials and services suppliers (R$ 105 million) and trade payables from purchase of energy in the spot market (R $ 13 million).

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Trade payables amounted to R$ 2,858 million in 2016 (6.8% of total liabilities and equity), a decrease of R$ 9.6% (or R$ 304 million) compared to R$ 3,162 million in 2015, due mainly to: (i) decrease of R$ 405 million related to electricity supply; (ii) decrease of R$ 144 million in systems service charges; partially offset by: (iii) an increase of R$ 214 million related to materials and services suppliers; (iv) an increase of R$ 15 million in electricity network charges and; (v) an increase of R$ 16 million in trade payables from purchase of energy in the spot market. Those changes are explained due mainly to energy purchase bills renegotiation with joint-ventures, which maturity date was extended from 2015 to 2016, as well as consolidation of RGE Sul as from 2016.

Borrowings and debentures:

Borrowing and debentures (which comprises related accrued interest) amounted R$ 20,376 million in 2018, which represented 48.3% of total liabilities and shareholders' equity, increased by 1.03% (R$ 208 million) compared to R$ 20,168 million in 2017, mainly due to the amortization of principal of loans and debentures of R$ 10,204 million and payment of charges in the amount of R$ 1,353 million, offset by borrowings and debentures in the amount of R$ 9,611 million and for recognition of charges and monetary restatements of R$ 2,155 million.

Borrowing and debentures (which comprises related accrued interest) amounted R$ 20,169 million in 2017, which correspond to 48.9% of total liabilities and equity, a decrease of 8.51% (R$ 1,875 million) compared to R$ 22,044 million in 2016. Such increase was due mainly to amortization of borrowing and debentures principal amounting R$ 5,273 million and payment of interests amounting R$ 1,846 million; offset by iii) fund raising amounting R$ 3,398 million and the charges, net of payments, and inflation adjustments of R$ 1,936 million.

Borrowing and debentures (which comprises related accrued interest) amounted R$ 22,044 million in 2016, which correspond to 52.3% of total liabilities and equity, an increase of 1.4% (R$ 311 million) compared to R$ 21,733 million in 2015. Such increase was due mainly to: i) fund raising amounting R$ 3,774 million, in connection with strategic plan for expansion of generation and distribution segments; (ii) acquisition of RGE Sul, which led to the consolidation of R$ 1,156 million of debt; partially offset by iii) repayments of borrowing and debentures principal amounting R$ 4,017 million and; iv) payment of interests amounting R$ 602 million.

Main funding in 2018, 2017 and 2016 is disclosed in the Financial Statements.

Capital reserves:

The 2018 balance of R$469 million, equal to 1.1% of total liabilities and shareholders’ equity, was accrued due to: (i) the business combination of DESA by the subsidiary CPFL Renováveis in 2014, of R$180 million; (ii) the public offering of CPFL Renováveis, in 2013, of R$60 million; and (iii) the business combination of CPFL Renováveis in 2011, of R$228 million.

Legal Reserve:

This variation refers to the accrual of the Legal Reserve, equal to 5% of Net Income in each of fiscal years.

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Statutory reserve – financial asset of concession:

At the Extraordinary Shareholders' Meeting held on April 27, 2018, the Company approved the extinction of the statutory reserve of the financial asset of the concession and the transfer of the respective balance of R$ 827 million to the Retained Earnings account.

Statutory reserve – working capital improvement:

In 2018, considering the current macro scenario with an incipient economic recovery, and considering the uncertainties regarding hydrology, the Company's Management proposed the allocation of R$ 2,235 million to the statutory reserve - working capital reinforcement. The balance of the statutory reserve - working capital reinforcement on December 31, 2018 is R$ 3,528 million.

Comments on the most relevant variations in the Statement of Income:

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Net operating revenue:

Net operating revenue is the sum of revenue from electric energy operations, other operating revenue and deductions from operating revenue (taxes and sector contributions). Below is a comparative table of revenue from 2018, 2017 and 2016:

Main variations in Net Operating Revenue between 2018 and 2017:

Gross Operating Revenue in 2018 was R$ 42,625 million, an increase of 6.4% (R$ 2,572 million) when compared to 2017.

The main factors of this variation were:

I.          Compared to the year ended December 31, 2017, our gross operating revenues from sales to Final Consumers (which includes TUSD revenue from Captive Consumers) increased 12.9% (or R$3,325 million) in the year ended December 31, 2018, to R$29,022 million. Our gross operating revenues primarily reflect sales to Captive Consumers in concession areas from our distribution subsidiaries, as well as TUSD revenue from the use of our network by Captive Consumers, both of which are subject to tariff adjustment as described below. In the year ended December 31, 2018, overall average energy prices increased by 12.4%, mainly due to the result of the RTP for CPFL Paulista and RGE Sul and the RTA for CPFL Piratininga and CPFL Santa Cruz. In 2018, our tariff adjustments were of 21.27%, 20.01%, 18.45%, 5.71% and 12.68% for RGE, CPFL Piratininga, RGE Sul, CPFL Santa Cruz and CPFL Paulista, respectively. Furthermore, the red tariff flag was in effect for the most part of 2018.

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II.        Compared to the year ended December 31, 2017, our gross operating revenues from sales to wholesalers in the year ended December 31, 2018 decreased 12.1% (or R$734 million) to R$5,356 million (12.6% of gross operating revenues), due mainly to a decrease of 53.7% (or R$1,258 million) in sales of energy in the spot market, which was mainly driven by (i) a decrease of 53.3% (or 4,366 GWh) in the volume of energy sold and (ii) a decrease of 1.0% in the average price of sales to wholesalers as compared to 2017. These decreases were partially offset by an increase of 18.0% (or R$585 million) in sales of electricity to other concessionaires and licensees.

III.     Compared to the year ended December 31, 2017, our other gross operating revenues (which excludes TUSD revenue from Captive Consumers) decreased 0.7% (or R$58 million) to R$8,152 million in the year ended December 31, 2018 (19.1% of our gross operating revenues), mainly due to: (i) a decrease of R$693 million in revenue from sector financial assets and liabilities, which posted revenue of R$1,208 million in 2018 compared to R$1,901 million in 2017. This revenue reflects timing differences between our budgeted costs included in the tariff at the beginning of the tariff period, and those actually incurred while such tariff is in effect, creating a contractual obligation to pay (or right to receive) cash to or from consumers through subsequent tariffs or to pay to or receive from the granting authority any remaining amounts at the expiration of the concession. This leads to an adjustment in order to recognize the future decrease (or increase) in tariffs to account for lower (or additional) costs in the current year, such adjustment being recognized as a positive (or negative) item of revenue. The decrease in this item in 2018 was driven mainly by (a) a decrease of R$2,954 million related to electric energy cost, (b) a decrease of R$22 million related to neutrality of sector charges; and (c) a decrease of R$11 million related to the pass-through costs from Itaipu, partially offset by (a) an increase of R$993 million in overcontracting, (b) an increase of R$760 million in the CDE Account and (c) an increase of R$744 million in the ESS and the EER; (ii) a decrease of R$301 million in revenue from construction of concession infraestructure; (iii) a decrease of R$58 million in compensation paid for failure to comply with the limits of continuity (performance indicators, such as individual interruption duration per consumer unit, individual interruption frequency per consumer unit and maximum continuous interruption duration per consumer unit or connection point); (iv) an increase of R$513 million in revenue due to TUSD relating to Free Consumers; (v) an increase of R$202 million in other revenues and income; (vi) an increase of R$141 million in concession financial assets adjustments; (vii) an increase of 8.3% (or R$117 million) in revenue related to the low income subsidy and discounts on tariffs reimbursed by funds from the CDE Account; and (viii) an increase of R$22 million in adjustment of revenues from excess demand and excess reactive power.

Deductions from Operating Revenue:

Compared to the year ended December 31, 2017, these deductions increased by 8.9% (or R$1,181 million) to R$14,490 million in 2018, mainly due to: (i) an increase of 9.34% (or R$316 million) in PIS and COFINS taxes, mainly due to the increase in our gross operating revenues (the basis for calculation of these taxes); (ii) an increase of 13.43% (or R$733 million) in ICMS taxes; and (iii) an increase of R$831 million in contributions made to the CDE Account as a result of the new quotas established by ANEEL in 2018. These increases were partially offset by a decrease of R$700 million in recognized tariff flag revenues, which are required to be paid into the CCRBT administered by the CCEE.

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Main variations in Net Operating Revenue between 2017 and 2016:

Gross Operating Revenue:

Compared to the year ended December 31, 2016, gross operating revenue increased 30.1% (R$9,269 million) in the year ended December 31, 2017, to R$40,053 million. Excluding the effects of the RGE Sul consolidation, acquired in October 2016, operating income to R$ 34,596 million, an increase of R$ 15.7% (R$ 4,685 million) when compared to 2016. The consolidated balance sheet includes the 12-month RGE Sul result in 2017 versus 2 months in 2016.

The main factors of this variation were:

Increase of 7.5% (R$ 1,788 million) in the electric energy billed, due to: (i) an increase of 14.6% (or R$ 3,285 million) in the total volume of energy sold to Final Consumers, mainly impacted by the acquisition of RGE Sul on October 31, 2016 (R$ 3,232 million), partially offset by (ii) overall average energy prices decreased by 6.2% (or R$ 1,497 million), mainly due to the negative tariff adjustment of 10.50% for CPFL Paulista, the negative tariff adjustment of 6.43% for RGE SUL, the positive tariff adjustment of 5.00% for RGE and the positive tariff adjustment of 17.28% for CPFL Piratininga. As a result, although the red tariff rate was in effect for the majority of 2017, when compared to 2016, the effects of tariff adjustments (Annual Adjustment – RTA or Periodic Revision – RTP, since there is no Annual Adjustment in the year of Periodic Revisions) exceeded the other tariff effects.

An increase of 74.2% (or R$2,594 million) in our gross operating revenues from sales to wholesalers due to: (i) an increase of 264.7% (or R$1,699 million) in sales of energy in the spot market (mainly driven by higher average prices of 2.75% and effects of the RGE SUL acquisition); (ii) an increase of 36.7% (or R$869 million) in other concessionaries and licensees driven by the 1.1% increase in the average price practiced presented a small decrease of 0.3% in the amount of energy sold.

An increase of R$ 5,021 million in other operating revenues (excluding TUSD revenues from captive consumers) mainly due to the increase (i) of R$ 3,996 million in revenue from Sector Financial Assets and Liabilities, representing a revenue of R$ 1,901 million in 2017 compared to an expense of R$ 2,095 million in 2016. This revenue reflects timing differences between our budgeted costs included in the tariff at the beginning of the tariff period, and those actually incurred while it is in effect, creating a contractual right to pay (or receive) cash to or from consumers through subsequent tariffs or to pay to or receive from the granting authority any remaining amounts at the expiration of the concession (see note 8 to our financial statements); (ii) 53.1% (R$ 719 million) of concession infrastructure construction revenue; (iii) 12.1% (R $ 153 million) in low income subsidy and tariff discounts with CDE funds (see note 25.3 of our financial statements).

Deductions from Operating Revenue:

The Operating Income Deductions in 2017 amounted to R$ 13,309 million, an increase of 14.0% (R$ 1,637 million) compared to 2016. Excluding the effects of RGE SUL of R$ 1,719 million, as a result of its acquisition in October of 2016, the deductions from operating revenue had a small decrease of R$ 83 million.

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The increase in deductions from operating revenues was mainly due to the increase (i) of R$ 736 million (27.8%) related to PIS and COFINS mainly due to the increase in our gross operating revenues (basis for calculation of these taxes); (ii) 104.3% (R$ 448 million) in tariff flag revenues recognized, which are required to be paid into the Tariff Flag Resources Centralizing Account administered by the CCEE (see note 25.4 to our financial statements); (iii) 10.6% (R $ 521 million) with ICMS, as a result of the increase in our electric energy billed. These increases were partially offset the decrease of 5.2% (or R$ 175 million) in the Energy Development Account (CDE) as a result of the new quotas established by ANEEL for 2017 (see notes 25.5 to our financial statements).

Main variations in the Cost of Electric Energy in 2018 compared to 2017:

The Cost of Electric Energy in 2018 amounted to R$17,838 million, an increase of 5.5% (R$937 million) compared to 2017.

·     Electric Energy Purchased for Resale:

Our costs for the purchase of energy for resale decreased 1.0% (or R$151 million) in the year ended December 31, 2018, to R$15,466 million (representing 63.3% of our total operating costs and operating expenses) compared with R$15,617 million for the year ended December 31, 2017 (representing 65.8% of our total operating costs and operating expenses), mainly due to a decrease of 5.5% (or 4,285 GW) in the volume of energy purchased, reflecting:

(i) a decrease of 3.9% (or R$566 million) in the cost of energy purchased in the Regulated Market; and

(ii) a decrease of 5.6% (or 662 GWh) in the volume and of 20.13% in the average price of energy purchased from Itaipu.

These decreases were partially offset by (i) an increase of just R$317 million in purchases of energy from Itaipu, reflecting an increase of 4.8% in the total average price of energy purchased, itself caused by a short decrease of 3.0% in the applicable Itaipu tariff and a 5.6% decrease in the volume of energy purchased; (ii) an increase of R$37 million (or 12.8%) in the cost of energy purchased in the Proinfa Program; and (iii) a decrease of R$60 million in PIS and COFINS tax credits (representing a decrease of 3.8% compared to 2017) related to purchases of energy, which represents an increase in the cost of energy.

·     Electricity network usage charges:

Our charges for the use of our transmission and distribution system increased 84.7% (or R$1,088 million) to R$2,372 million in the year ended December 31, 2018, mainly as a result of: (i) an increase of R$573 million in Basic Network Charges; (ii) an increase of R$347 million in System Service Charges, net of transfers from CCEE’s energy reserve account (conta de energia de reserva – CONER); (iii) an increase of R$135 million in Reserve Energy Charges; (iv) an increase of R$106 million in transmission from Itaipu. These increases were partially offset by an increase of R$123 million in PIS and COFINS tax credits.

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Main variations in the Cost of Electric Energy in 2017 compared to 2016:

The Cost of Electric Energy in 2017 amounted to R$16,902 million, an increase of 50.9% (R$5,701 million) compared to 2016. Excluding the effects of RGE SUL, the cost of electricity in 2017 was R$ 14,667 million, an increase of 34.9% (R$ 3,792 million).The increase in electricity costs is due to:

·     Electric Energy Purchased for Resale:

Increase of 58.6% (R$ 5,768 million), mainly due to: (i) an increase of 67.1% (R$ 5,728 million) in energy purchased in the spot market, reflecting an increase of 36.7% (R$ 3,135 million) in the average purchase price and 22.2% (R$ 2,593 million) in the volume of energy purchased; (ii) an increase of 16.0% (R$ 325 million) in energy purchased from Itaipu, reflecting the 3.4% increase in the average price of electricity purchased due to an 11.4% tariff increase (which is established annually by ANEEL in US$/kW) and a decrease of 8.1% in the average real against the US dollar in 2017 compared to 2016, offset by an increase of 12.2% in the volume of energy purchased; (iii) an increase of 107.6% (or R$ 290 million) in the cost of energy purchased in the short-term market, mainly driven by a 59.6% increase in the volume of electricity purchased. These increases were partially offset by the increase in PIS and COFINS credits in the amount of R$ 575 million related to energy purchases, which represents a decrease in the cost of energy.

·     Electricity network usage charges:

A decrease of 4.9% (R $ 67 million), mainly due to the decrease (i) of 224.9% (R$ 816 million) with the System Service Charges (ESS) referring to the PLD surplus on the transferred reserve energy to consumers by reducing costs with ESS; (ii) 100.3% (R$ 107 million) with Reserve Energy Charges (ERR). These decrease were partially offset by increases (iii) of 84.8% (R$ 707 million) with Basic Network Charges; (iv) 200.3% (R$ 107 million) with transportation charges of Itaipu and (v) 44.3% (R$ 38 million) with connection charges.

Operating Costs and Expenses:

Main variations in Operating Costs and Expenses in 2018 compared to 2017:

Compared to the year ended December 31, 2017, our other costs and operating expenses decreased 3.4% (or R$232 million), to R$6,590 million in the year ended December 31, 2018, mainly driven by the following variations:

·       a decrease of 14.5% (or R$300 million) in expenses related to the construction of concession infrastructure;

·       a decrease of 4.9% (or R$35 million) in expenses related to outsourced services;

·       a decrease of 21.1% (or R$24 million) in private pension plans; and

·       a decrease of R$20 million in impairment.

·       These decreases were partially offset by:

·       an increase of 59.5% (or R$79 million) in gain (loss) on disposal, retirement and other noncurrent assets;

·       an increase of 5.2% (or R$64 million) in depreciation and amortization expenses; and

·       an increase of 2.7% (or R$37 million) in our personnel expenses, reflecting increased costs under our collective bargaining agreements.

Main variations in Operating Costs and Expenses in 2017 compared to 2016:

Operating Costs and Expenses in 2017 amounted to R$ 6,822 million, an increase of 26.6% (R$ 1,432 million) compared to 2016. Excluding the effects of RGE SUL, operating costs and expenses in 2017 would be R$ 5,714 million, represented an increase of 10.5% (R$ 542 million).

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The increase in operating costs and expenses driven by the following variations:

·         an increase of 53.2% (or R$719 million) in expenses related to the construction of concession infrastructure, arising from investments in improvement and expansion of the distribution and transmission system;

·         an increase of 25.9% (or R$283 million) in our personnel expenses, reflecting in addition to the effects of the acquisition of RGE Sul, increased costs under our collective bargaining agreements;

·         an increase of 19.9% (or R$207 million) in depreciation and amortization expenses due to the start-up of the Pedra Cheirosa plant;

·         an increase of 11.7% (or R$76 million) in expenses related to outsourced services;

·         an increase of 31.6% (or R$60 million) in inventory consumption;

·         an increase of 48.9% (or R$ 37 million) with private pension plan;

·         an increase of R$ 31 million in amortization expenses of Intangible Assets of Concession;

·         an increase of 2.5% (or R$ 18 million) with other operating expenses.

Net finance costs:

Main variations in net finance costs in 2018 compared to 2017:

Compared with the year ended December 31, 2017, our net financial expense decreased 25.8% (or R$385 million), from R$1,488 million in 2017 to R$1,103 million in the year ended December 31, 2018, mainly due to a decrease of R$503 million in our financial expenses, offset by a decrease of R$118 million in our financial income.

The reasons for the decrease in financial expenses are: (i) a decrease of 31.8% (or R$172 million) in financial expenses from monetary and exchange adjustments because of lower average interest rates; (ii) a decrease of 20.0% (or R$332 million) in debt charges; (iii) a decrease of R$82 million in financial expenses from monetary adjustments of sector financial liabilities; and (iv) a decrease of 43.4% (or R$22 million) in capitalized borrowing costs, which is accounted for as a decrease in financial expenses.

The decrease in financial income is mainly due to the following reasons: (i) a decrease of 51.3% (or R$234 million) in income from financial investments due to the reduction of the cash and cash equivalents balance; (ii) a decrease of 24.6% (or R$12 million) in income from adjustments of escrow deposits; and (iii) a decrease of R$5 million in adjustments of tax credits. These decreases were partially offset by (i) an increase of 100% (or R$80 million) in income from monetary adjustments of sector financial assets (see Note 8 to our audited annual consolidated financial statements); (ii) an increase of 29.0% (or R$25 million) in other revenues; and (iii) an increase of 4.1% (or R$11 million) in interest and fine payments.

At December 31, 2018, we had R$14,746 million (compared with R$15,310 million at December 31, 2017) in debt denominated in reais, which accrued both interest and inflation adjustments based on a variety of Brazilian indices and money market rates. The average CDI interbank rate during the year decreased to 6.47% in 2018, compared to 10.06% in 2017; and the average TJLP (which was replaced by the TLP (Long-Term Rate) in financing contracts executed on or after January 1, 2018) decreased to 6.72% in 2018, compared to 7.12% in 2017. We also had the equivalent of R$5,631 million (compared with R$4,858 million at December 31, 2017) of debt denominated in foreign currency, principally U.S. dollars. In order to reduce the exchange rate risk with respect to this foreign currency-denominated debt and variations in interest rates, we implemented a policy of using exchange and interest rate derivatives.

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Main variations in net finance costs in 2017 compared to 2016:

Net Finance Costs amounted to R$ 1,488 million in 2017, an increase of R$ 34 million (2.3%) compared to 2016, due mainly to:

The decrease in financial income of 26.7% (or (R$ 320 million) is mainly due to following reasons: (i) 31.5% (or R$210 million) in income from financial investments, due to the decrease of the cash and cash equivalents balances; (ii) 58.7% (or R$87 million) in income from monetary and exchange adjustments; (iii) 100% (or R$33 million) in income from adjustment of Sector Financial Assets and Liabilities (see note 8 to our audited annual consolidated financial statements); and (iv) 39.4% (or R$13 million) in adjustments of tax credits; and (v) 99.2% (or R$9 million) in interest on loan agreements.

These decreases were partially offset by an increase of (i) 7.9% (or R$19 million) in interest and fine payments mainly due to the receipt of overdue electricity bills by the distribution subsidiaries; (ii) 40.5% (or R$14 million) in income from adjustments of escrow deposits; (iii) R$ 18 million with guarantees, mainly due to the write-off of the loan guarantee granted to the joint venture Foz do Chapeco; and (iv) an increase of 16.1% (or R$11 million) in PIS and COFINS on other finance income.

The decrease in financial expenses of 10.8% (or R$286 million) is mainly due to following reasons: (i) a decrease of (i) 8.3% (or R$ 150 million) of debt charges; (ii) 14.5% (R$ 106 million) in monetary and exchange rate adjustments; (iii) 46.2% (R$ 7 million) with the amortization of the use of public asset - UBP. These decrease in financial expenses were partially offset by a decrease of R$ 18 million (25.8%) with capitalized loan interest, which represents an increase in financial expenses.

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a) operational results of the issuer, in particular:

The Company’s operational segments are separated in accordance with the internal structure of financial information and Management, segmented by type of business: distribution activities, conventional sources for generation, renewable sources for generation, commercialization and services.

The profitability of each of our segments differs. Our Distribution segment primarily reflects sales to Captive Consumers and TUSD charges paid by Free Consumers at prices determined by the regulatory authority. The volume sold varies according to external factors such as weather, income level and economic growth. This segment represented 79.9% of our net operating revenue in 2018 (compared with 78.8% in 2017 and 78.7% in 2016); its contribution to our net income was larger at 64.3% of our net income for the year (53.5% of our net income in 2017 and 46.3% in 2016).

The contributions of our Distribution, Conventional Generation, Renewable Generation, Commercialization and Services segments to the net operating revenues and net income for the years ended December 31, 2018, 2017 and 2016 are presented in the following table:

Our Conventional Generation sources segment consists in substantial part of Hydroelectric Power Plants, and our Renewable Generation sources segment consists of wind farms, Biomass Thermoelectric Power Plants, Small Hydroelectric Power Plants and a solar power plant. All of our generation sources require a high level of investment in fixed assets, and in the early years there is typically a high level of construction financing. Once these projects become operational, they generally result in a higher margin (operating income as a percentage of revenue) than the Distribution segment, but will also contribute to higher interest expenses and other financing costs. As a result, in the year ended December 31, 2018, our Renewable Generation Sources segment provided 15.5% of our operating income, but due to the significant financing costs incurred to finance these projects, the segment’s contribution to net income was 5.3%. As of December 31, 2018, 1.9% of the property, plant and equipment in our Renewable Generation Sources segment was under construction, compared to 2.6% as of December 31, 2017.

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Our Commercialization segment sells electricity to Free Consumers and other concessionaries or licensees.

Our Services segment offers our consumers a wide range of electricity-related services. These services are designed to help consumers improve the efficiency, cost-electiveness and reliability of the electric equipment they use.

Our segments also purchase and sell electricity and value-added services from and to one another. In particular, our Generation (from both conventional and renewable sources), Commercialization and Services segments sell electricity and provide services to our Distribution segment. Our consolidated financial statements eliminate revenues and expenses that relate to sales from one subsidiary to another, which is reflected in the column entitled “Elimination” in the table below. However, the analysis of results by segment would be inaccurate if the same set-offs were carried through with respect to sales between segments. As a result, sales from one segment to another have not been eliminated or set-off in the discussion of results by segment below.

Beginning in 2018, due to the way that our new management monitors the segments’ results, intangible assets acquired in business combination transactions that were previously allocated to their respective segments are allocated to the segment “Others.” For comparison purposes, the information disclosed for 2017 and 2016 is being restated following the same criteria used for 2018.

i. description of any important components of the revenue;

Our operating revenue is from distribution, generation (conventional and renewable sources), commercialization and services activities related to energy, as explained below:

·       Distribution: consists, in large part, of the supply of electric energy to captive customers, as well as the receipt of a tariff for use of the distribution network;

·       Generation: consists of the sale of energy generated by conventional sources (hydroelectric plants and thermoelectric plants) and alternative and renewable sources, such as small hydroelectric plants, wind farms and thermoelectric plants run on sugarcane biomass and transmission assets (starts in 2017);

·       Commercialization: consists of supply and sale to wholesalers of electric energy to free customers, and sale to other concessionaires and licensees;

·       Services: consist of the rendering of value-added services related to electric energy, such as self-production systems, distribution systems, transmission systems, electric maintenance, equipment recovery and energy efficiency, among other services provided.

In addition, to our four operating segments above, we consolidate a number of activities known as “Others”. The activities consolidated under Other consist of (i) CPFL Telecom and (ii) our holding company expenses other than the amortization of intangible assets related to our concessions, which is allocated to our operational segments. It is important to mention that in 2017, we began consolidating the activities of our two transmission assets held through CPFL Geração within the conventional generation.

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ii. factors which materially affected the operational results

Operating Results - 2018 versus 2017

Compared to the year ended December 31, 2017, our net operating revenues increased 5.2% (or R$1,392 million) to R$28,137 million in the year ended December 31, 2018.

This increase in operating revenue was primarily due to the combined effect of: (i) an increase of R$1,503 million in electricity sales to final consumers, as discussed in the section “Sales by Destination” below; (ii) an increase of R$584 million in other concessionaires and licensees; (iii) an increase of R$513 million in revenue due to TUSD for captive and free consumers; (iv) an increase of R$202 million in other revenues and income; and (v) an increase of R$117 million in judicial injunctions and other tariff discounts of the CDE Account. These increases were partially offset by (i) an increase of R$1,181 million in deductions from operating revenues, as discussed in the section “Deductions from operating revenues” below, which represents a decrease in net operating revenues, and (ii) a decrease of R$693 million in sector financial asset and liability.

The following discussion describes changes in our net operating revenues by destination and by segment, based on the items comprising our gross revenues.

Sales by Destination

Sales to Final Consumers

Compared to the year ended December 31, 2017, our gross operating revenues from sales to Final Consumers (which includes TUSD revenue from captive consumers) increased 12.9% (or R$3,325 million) in the year ended December 31, 2018, to R$29,022 million. Our gross operating revenues primarily reflect sales to Captive Consumers in concession areas from our distribution subsidiaries, as well as TUSD revenue from the use of our network by Captive Consumers, both of which are subject to tariff adjustment as described below. Our gross operating revenue also reflects sales to Free Consumers in commercial and industrial categories.

Distribution companies’ tariffs are adjusted every year, in percentages specific to each category of consumer. The month in which the annual tariff adjustment becomes effective by subsidiary, impacting both the year in which the tariff adjustment occurs as well as the following year. The adjustments for our largest subsidiaries occur in April (CPFL Paulista), June (RGE Sul) and October (CPFL Piratininga).

In the year ended December 31, 2018, overall average energy prices increased by 12.4%, mainly due to the result of the RTP for CPFL Paulista and RGE Sul and the RTA for CPFL Piratininga and CPFL Santa Cruz. In 2018, our largest tariff adjustments were of 21.27%, 20.01%, 18.45%, 5.71% and 12.68% for RGE, CPFL Piratininga, RGE SUL, CPFL Santa Cruz and CPFL Paulista, respectively. Furthermore, the red tariff flag was in effect for the most part of 2018. For further information, see Note 25.2 of our audited annual consolidated financial statements. Overall average prices for Final Consumers in 2018 were higher for all consumer classes:

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•          Residential and commercial consumers. With respect to Captive Consumers (which represent 98.2% of the total amount sold to this category in our consolidated statements), average prices increased 13.2% for residential consumers and 11.8% for commercial consumers, due to the RTP described above. With respect to Free Consumers, the average price for the commercial consumers increased 5.9%.

•          Industrial consumers. Average prices increased 11.2%, mainly due to the tariff adjustments described above. With respect to Free Consumers, the average price for industrial consumers increased 1.7% due to the tariff adjustments, which resulted from new negotiations of tariffs in contracts with Free Consumers.

The total volume of energy sold to Final Consumers in the year ended December 31, 2018 decreased 0.5% compared to the year ended December 31, 2017. This decrease represents the effect of a decrease of 1.1% (or 106 GW) in the volume of energy sold to Conventional Free Consumers, mainly due to a decrease of 413 GW in the volume of energy sold to industrial consumers, an increase of 261 GW in the volume of energy sold to commercial consumers and an increase of 46 GW to other consumers by our commercialization subsidiaries as a result of the migration of these consumers from the captive to the free consumer categories.

The volume sold to residential and commercial categories, which accounts for 56.2% for our sales to Final Consumers, increased by 2.6% (or 496 GW) and decreased 0.1% (or 10 GW), respectively. These changes were due to the combined effect of:

•          Residential: an increase of 2.6% (or 496 GW) of the volume sold by our distribution subsidiaries to the residential category due to our residential consumers’ greater economic strength in 2018, which was driven by the GDP growth of 1.1% in 2018 as compared to the GDP of 1.0% in 2017.

•          Commercial: an increase of 21.24% (or 261 GW) in the volume sold by our commercialization subsidiaries due to the migration of consumers from the captive to the free consumer category, which was partially offset by a decrease of (i) 43.80% (or 73 GW) in the volume of energy from renewable sources sold to commercial consumers who elected to become Special Free Consumers, and (ii) 2.24% (or 198 GW) in the volume of energy sold to Captive Consumers in the commercial category.

The volume sold to industrial consumers, which represented 26.1% of our sales to Final Consumers in 2018 (compared with 27.5% in 2017), decreased by 1.4% in the year ended December 31, 2018 compared to the year ended December 31, 2017. Volumes to Captive Consumers in this category decreased 6.2%, (or 405 GW) in our distribution subsidiaries and a decrease of 5.1% (or 413 GW) in the migration of industrial consumers from the Captive to the Free Market. Regarding Free Consumers, volumes sold increased by 4.3% (or 261 GW), reflecting the same migration of industrial consumers mentioned above, as well as improvements in Brazil’s economic conditions during 2018.

Sales to wholesalers

Compared to the year ended December 31, 2017, our gross operating revenues from sales to wholesalers in the year ended December 31, 2018 decreased 12.1% (or R$734 million) to R$5,356 million (12.6% of gross operating revenues), due mainly to a decrease of 53.7% (or R$1,258 million) in sales of energy in the spot market, which was mainly driven by (i) a decrease of 53.3% (or 4,366 GWh) in the volume of energy sold and (ii) a decrease of 1.0% in the average price of sales to wholesalers as compared to 2017. These decreases were partially offset by an increase of 18.0% (or R$585 million) in sales of electricity to other concessionaires and licensees. For more information on net operating revenues from our segments, see “—Sales by Segment”.

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Other operating revenues

Compared to the year ended December 31, 2017, our other gross operating revenues (which excludes TUSD revenue from captive consumers) decreased 0.7% (or R$58 million) to R$8,152 million in the year ended December 31, 2018 (19.1% of our gross operating revenues), mainly due to:

(i)         a decrease of R$693 million in revenue from Sector Financial Assets and Liabilities, which posted revenue of R$1,208 million in 2018 compared to R$1,901 million in 2017. This revenue reflects timing differences between our budgeted costs included in the tariff at the beginning of the tariff period, and those actually incurred while such tarriff is in effect, creating a contractual obligation to pay (or right to receive) cash to or from consumers through subsequent tariffs or to pay to or receive from the granting authority any remaining amounts at the expiration of the concession. This leads to an adjustment in order to recognize the future decrease (or increase) in tariffs to account for lower (or additional) costs in the current year, such adjustment being recognized as a positive (or negative) item of revenue. The decrease in this item in 2018 was driven mainly by (a) a decrease of R$2,954 million related to electric energy cost, (b) a decrease of R$22 million related to neutrality of sector charges; (c) a decrease of R$11 million related to the pass-through costs from Itaipu; partially offset by (a) an increase of R$993 million in overcontracting, (b) an increase of R$760 million in the CDE Account and (c) an increase of R$744 million in the System Service Charge and the Reserve Energy Charge.;

(ii)        a decrease of R$301 million in revenue from construction of concession infraestructure;

(iii)       a decrease of R$58 million in compensation paid for failure to comply with the limits of continuity (performance indicators, such as Individual interruption duration per consumer unit "DIC", Individual interruption frequency per consumer unit ("FIC") and maximum continuous interruption duration per consumer unit or connection point (DMIC));

(iv)       an increase of R$513 million in revenue due to TUSD relating to Free Consumers;

(v)        an increase of R$202 million in other revenues and income;

(vi)       an increase of R$141 million in concession financial assets adjustments;

(vii)      an increase of 8.3% (or R$117 million) in revenue related to the low income subsidy and discounts on tariffs reimbursed by funds from the CDE Account; and

(viii)     an increase of R$22 million in adjustment of revenues from excess demand and excess reactive power.

Deductions from operating revenues

We deduct certain taxes and industry charges from our gross operating revenue to calculate net revenue. The state-level value-added tax (ICMS) is calculated based on gross operating revenue from final consumers (billed), while federal PIS and COFINS taxes are calculated based on total gross operating revenue. The research and development and energy efficiency programs (regulatory charges) are calculated based on net operating revenue. Other regulatory charges vary depending on the regulatory effect reflected in our tariffs. These deductions represented 34.0% of our gross operating revenue in the year ended December 31, 2018 and 33.2% in the year ended December 31, 2017. Compared to the year ended December 31, 2017, these deductions increased by 8.9% (or R$1,181 million) to R$14,490 million in 2018, mainly due to: (i) an increase of 9.34% (or R$316 million) in PIS and COFINS taxes, mainly due to the increase in our gross operating revenues (the basis for calculation of these taxes); (ii) an increase of 13.43% (or R$733 million) in ICMS taxes; and (iii) an increase of R$831 million in contributions made to the CDE Account as a result of the new quotas established by ANEEL in 2018. These increases were partially offset by a decrease of R$700 million in recognized tariff flag revenues, which are required to be paid into the Tariff Flag Resources Centralizing Account administered by the CCEE.

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Sales by segment

Distribution

Compared to the year ended December 31, 2017, net operating revenues from our Distribution segment increased 6.6% (or R$1,391 million) to R$22,467 million in the year ended December 31, 2018. This increase primarily reflected the increase of R$2,542 million in gross operating revenue due to the following fluctuations:

(i)         an increase of 20.7% (or R$2,377 million) in revenue due to TUSD for Captive and Free Consumers;

(ii)        an increase of 224.4% (or R$202 million) in unbilled revenue ;

(iii)       an increase of 8.3% (or R$117 million) in low-income subsidy;

(iv)       an increase of R$203 million in other revenues and income;

(v)        an increase of R$117 million in revenue related to discounts on tariffs reimbursed by funds from the CDE Account (see Note 25.5 to our audited annual consolidated financial statements and “Other Operating Revenues” above).

These increases were partially offset by a decrease of R$693 million in revenue from Sector Financial Assets and Liabilities, which represented a revenue of R$1,208 million in 2018 compared with R$1,901 million in 2017 (see “Other Operating Revenues” above).

The deductions from our Distribution segments operating revenues increased by 9.1% (or R$1,151 million) to R$13,845 million in 2018, mainly due to: (i) an increase of 12.3% (or R$1,017 million) in deductions related to PIS, COFINS and ICMS taxes, driven by the increase in our gross operating revenues (the basis for calculation of these taxes) and (ii) an increase of 26.1% (or R$831 million) in contributions made to the CDE Account due to new quotas established by ANEEL in 2018 (see Note 25.4 to our audited annual consolidated financial statements). These increases were partially offset by a decrease of R$700 million in deductions related to recognized tariff flag revenues, which are required to be paid into the Tariff Flag Resources Centralizing Account administered by the CCEE..

Generation (conventional sources)

Net operating revenues from our Generation from Conventional Sources segment in the year ended December 31, 2018 amounted to R$1,144 million, a decrease of 3.9% (or R$46 million) compared to R$1,190 million in the year ended December 31, 2017, due mainly to: (i) a decrease of R$46 million of revenue from construction related to CPFL Morro Agudo; (ii) the price-driven decrease of 3.8% (R$21 million) in revenue from sales from our facility Serra da Mesa to Furnas; (iii) an increase of 10.3% (R$21 million) in PIS and COFINS tax deductions from revenue due to the increase in gross operating revenues from the segment (the basis for calculation of these taxes); and (iv) a decrease of R$14 million in other revenues and income. These decreases were partially offset by (i) an increase of 6.5% (or R$38 million) in other concessionaries and licensees; and (ii) an increase of R$16 million in spot market energy; and (iii) an increase of R$7 million in revenue from sales to our distribution subsidiaries.

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Generation (renewable sources)

Net operating revenues from our Generation from Renewable Sources segment in the year ended December 31, 2018 amounted to R$1,936 million, a decrease of 1.2% (or R$23 million) compared to R$1,959 million in the year ended December 31, 2017. This decrease was due mainly to: (i) a decrease of R$55 million in revenue from energy sales on the spot market; (ii) a decrease of R$18 million in revenue from Free Consumers in the commercial sector driven mainly by Special Free Consumers migrating from the Captive Market to the Free Market and (iii) a decrease of 100% (or R$3 million) in global reversion reserve charges (RGR) used to finance improvement and expansion projects for companies in the energy sector. These decreases were partially offset by (i) an increase of R$53 million in revenue from other concessionaires and licensees; and (ii) an increase of 2.0% (or R$2 million) in PIS and COFINS tax deductions from revenue.

Commercialization

Net operating revenues from our Commercialization segment in the year ended December 31, 2018 amounted to R$3,496 million, an increase of 2.4% (or R$82 million) compared to R$3,414 million in the year ended December 31, 2017. This increase was mainly due to: (i) an increase of 22.2% (or R$343 million) in revenue from sales to other concessionaires and licensees, driven by an increase of 8.7% (or 830 GW) in sales volume; and (ii) an increase of 28.4% (or R$73 million) in revenue from commercial Free Consumers, driven by an increase of 21.2% in sales volume. These increases were partially offset by: (i) a decrease of 68.1% (or R$276 million) in revenue from sales in the spot market, driven by a 62.2% (or 639 GW) decrease in sales volume; (ii) a decrease of 3.5% (or R$56 million) in revenue from industrial Free Consumers, driven by a decrease of 5.1% in sales volume; and (iii) an increase of 1.8% (or R$8 million) in ICMS, PIS and COFINS tax deductions from operating revenues, mainly due to the increase in gross operating revenues for the segment (the basis for calculation of these taxes).

Services

Net operating revenues from our Services segment in the year ended December 31, 2018 amounted to R$533 million, an increase of 9.7% (or R$47 million) compared to R$486 million in the year ended December 31, 2017. This increase was due mainly to: (i) an increase of R$23 million in revenues from construction and maintenance services; (ii) an increase of R$14 million in revenues from administrative and call center and information technology outsourcing; and (iii) an increase of R$7 million in scrap sales of used equipment. These increases were partially offset by an increase of 9.4% (or R$3 million) in PIS and COFINS tax deductions from operating revenues, mainly due to the increase in our gross operating revenues (the basis for calculation of these taxes).

Income from Electric Energy Service by Destination

Cost of Electric Energy

Electricity purchased for resale. Our costs for the purchase of energy for resale decreased 1.0% (or R$151 million) in the year ended December 31, 2018, to R$15,466 million (63.3% of our total operating costs and operating expenses) compared with R$15,617 million for the year ended December 31, 2017 (representing 65.8% of our total operating costs and operating expenses), mainly due to a decrease of 4.7% (or 3,638 GW) in the volume of energy purchased, reflecting:

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(i)         a decrease of 3.9% (or R$566 million) in the cost of energy purchased in the Regulated Market;

(ii)        a decrease of 5.6% (or 662 GWh) in the volume of energy purchased from Itaipu;

These decreases were partially offset by (i) an increase of R$317 million in purchases of energy from Itaipu and an increase of 20.3% in the average prices of energy purchased from Itaipu, reflecting an increase of 4.8% in the total average price of energy purchased, itself caused by a short decrease of 3.0% in the applicable Itaipu tariff and a 5.6% decrease in the volume of energy purchased; (ii) an increase of R$37 million (or 12.8%) in the cost of energy purchased in the Proinfa Program; and (iii) a decrease of R$60 million in PIS and COFINS tax credits (representing a decrease of 3.8% compared to 2017) related to purchases of energy, which represents an increase in the cost of energy.

Electricity network usage charges.  Our charges for the use of our transmission and distribution system increased 84.7% (or R$1,088 million) to R$2,372 million in the year ended December 31, 2018, mainly as a result of: (i) an increase of R$573 million in Basic Network Charges; (ii) an increase of R$347 million in System Service Charges, net of transfers from CONER (Conta de energia de reserva); (iii) an increase of R$135 million in Reserve Energy Charges; (iv) an increase of R$106 million in transmission from Itaipu. These increases were partially offset by an increase of R$123 million in PIS and COFINS tax credits.

Other costs and operating expenses

Our other costs and operating expenses comprise our operating cost, services rendered to third parties, costs related to construction of concession infrastructure, sales expenses, general and administrative expenses and other operating expenses.

Compared to the year ended December 31, 2017, our other costs and operating expenses decreased 3.4% (or R$232 million) to R$6,590 million in the year ended December 31, 2018, mainly due to the following events: (i) a decrease of 14.5% (or R$300 million) in expenses related to the construction of concession infrastructure; (ii) a decrease of 4.9% (or R$35 million) in expenses related to outsourced services; (iii) a decrease of 21.1% (or R$24 million) in private pension plans; and (iv) a decrease of R$20 million in impairment. These decreases were partially offset by (i) an increase of 59.5% (or R$79 million) in gain (loss) on disposal, retirement and other noncurrent assets; (ii) an increase of 5.2% (or R$64 million) in depreciation and amortization expenses; and (iii) an increase of 2.7% (or R$37 million) in our personnel expenses, reflecting increased costs under our collective bargaining agreements.

Income from Electric Energy Service

Compared to the year ended December 31, 2017, our income from electric energy service increased 22.7% (or R$687 million) to R$3,709 million in the year ended December 31, 2018, since our net operating revenue increased by more in absolute terms (R$1,392 million) than the increase in our cost of generating and distributing electric energy and other operating costs and expenses (R$705 million).

Income from Electric Energy Service by Segment

Distribution

Compared to the year ended December 31, 2017, income from electric energy service from our Distribution segment increased R$707 million to R$2,237 million in the year ended December 31, 2018. As discussed above, net operating revenues from the segment increased by 6.6% (or R$1,391 million) while costs and operational expenses related to the segment increased by 3.5% (or R$684 million). The main contributing factors to the changes in costs and operational expenses were as follows:

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Electricity costs. Compared to the year ended December 31, 2017, electricity costs increased 6.2% (or R$876 million), to R$15,022 million in the year ended December 31, 2018.

The cost of energy purchased for resale decreased 1.8% (or R$231 million), reflecting: (i) a decrease of 15.5% (or R$1,785 million) in the cost of energy purchased in the Regulated Market; (ii) a decrease of 12.8% in the volume of energy purchased; and (iii) an increase of 4.8% in average energy purchase prices. The decrease in the cost of energy purchased for resale was partially offset by (i) an increase of 703.8% (or R$1,1219 million) in the cost of purchases in the spot market, reflecting an increase of 421.9% in the volume of energy purchased and an increase of 54.4% in average purchase prices; (ii) an increase of R$317 million in purchases of energy from Itaipu, reflecting a decrease of 5.6% in the volume of energy purchased, itself caused by a 3.0% decrease in the tariff, reflecting the net effects by an increase of 20.3% in the average price of energy purchased and a 14.9% increase in the average rate of the real against the U.S. dollar during 2018 as compared to 2017; (iii) an increase of 12.8% (or R$37 million) in the Proinfa Program costs; and (iv) a decrease of 5.9% (or R$78 million) in PIS and COFINS tax credits related to purchases of energy.

In addition, as mentioned above, charges for the use of the transmission and distribution system increased 94.1% (or R$1,107 million) to R$2,284 million in the year ended December 31, 2018, mainly due to: (i) an increase of R$576 million in Basic Network Charges; (ii) an increase of R$347 million of System Service Charges; and (iii) an increase of R$135 million in Reserve Energy Charges and an increase of R$9 million in charges for use of the distribution system.

Other costs and operating expenses. Compared to the year ended December 31, 2017, our other costs and operating expenses for the Distribution segment decreased 3.5% (or R$192 million) to R$5,207 million in the year ended December 31, 2018. This decrease was mainly due to (i) a decrease of 12.6% (or R$254 million) in expenses related to the construction of concession infrastructure; and (ii) a decrease of 21.4% (or R$24 million) in private pension plans. These decreases were partially offset by (i) an increase in the third party services expenses of 1.6% (or R$14 million); and (ii) an increase of 8.6% (or R$13 million) in allowance for doubtful accounts.

Generation (conventional sources)

Compared to the year ended December 31, 2017, income from electric energy service from our Conventional Generation segment increased 7.2% (or R$55 million) to R$821 million in the year ended December 31, 2018. This increase was mainly due to (i) an increase of 6.25% (or R$368 million) related to sales to other concessionaries and licensees; and (ii) an increase of R$16 million in purchases in the spot market energy; and (iii) an increase of R$7 million in revenue from sales to our distribution subsidiaries. These increases were partially offset by (i) a decrease of 18.8% (R$20 million) in PIS and COFINS tax deductions from revenue due to the increase in gross operating revenues from the segment (the basis for calculation of these taxes); (ii) a decrease of 4.5% (R$5 million) in depreciation and amortization expenses; (iii) a decrease of 10.7% (R$8.0 million) in personnel expenses; and (iv) a decrease of 11.5% (R$3 million) in expenses related to outsourced services.

Generation (renewable sources)

Compared to the year ended December 31, 2017, income from electric energy service from our Renewable Generation segment decreased 3.1% (or R$19 million) to R$586 million in the year ended December 31, 2018.  This decrease was the net effect of the decrease of 1.2% (or R$23 million) in net operating revenue (as discussed in the section “—Sales by Segment” above); by the increase of R$22 million (or 41.3%) in costs and operational expenses and a decrease of 4.6% (or R$25 million) in costs of electric energy. The increase in operational expenses was mainly due to (i) an increase of 8.4% (or R$15 million) in general and administrative expenses; and (ii) an increase of R$6 million in depreciation and amortization expenses.

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Commercialization

Compared to the year ended December 31, 2017, income from electric energy service from our Commercialization segment decreased 43.9% (or R$74 million) to R$94 million in the year ended December 31, 2018.  This decrease was due to the net effect of the increase of 4.9% (or R$157 million) in costs and operational expenses, which exceeded the increase of 2.4% (or R$82 million) in net operating revenues of the segment, as discussed in the section “Sales by Segment” above.  The increase in costs and expenses was mainly due to an increase of R$173 million in the cost of energy purchased in the Regulated Market, bilateral contracts and spot market, driven by an increase of 0.5% in the volume of energy purchased and 1.34% in purchase prices.

Services

Compared to the year ended December 31, 2017, income from electric energy service from our Services segment increased 7.4% (or R$5 million) to R$73 million in the year ended December 31, 2018. This increase was due to the net effect of the increase of 9.7% (or R$47 million) in net operating revenues as discussed in the section “Sales by Segment” above, which exceeded the increase of 10.1% (or R$42 million) in costs and operational expenses.

Net Income

Net Financial Expense

Compared with the year ended December 31, 2017, our net financial expense decreased 25.8% (or R$385 million), from R$1,488 million in 2017 to R$1,103 million in the year ended December 31, 2018, mainly due a decrease of R$503 million in our financial expenses, offset by a decrease of R$118 million in our financial income.

The reasons for the decrease in financial expenses are: (i) a decrease of 31.8% (or R$172 million) in financial expenses from monetary and exchange adjustments because of lower average interest rates; and (ii) a decrease of 20.0% (or R$332 million) in debt charges; (iii) a decrease of R$82 million in financial expenses from monetary adjustments of Sector Financial Liabilities; and (iv) a decrease of 43.4% (or R$22 million) in capitalized borrowing costs, which is accounted for as a decrease in financial expenses.

The decrease in financial income is mainly due to following reasons: (i) a decrease of 51.3% (or R$234 million) in income from financial investments due to the reduction of the cash and cash equivalents balance; (ii) a decrease of 24.6% (or R$12 million) in income from adjustments of escrow deposits; and (iii) a decrease of R$5 million in adjustments of tax credits. These decreases were partially offset by (i) an increase of 100% (or R$80 million) in income from monetary adjustments of Sector Financial Assets (see Note 8 to our audited annual consolidated financial statements); (ii) an increase of 29.0% (or R$25 million) in other revenues; and (iii) an increase of 4.1% (or R$11 million) in interest and fine payments.

At December 31, 2018, we had R$14,746 million (compared with R$15,310 million at December 31, 2017) in debt denominated in reais, which accrued both interest and inflation adjustments based on a variety of Brazilian indices and money market rates. The average CDI interbank rate during the year decreased to 6.47% in 2018, compared to 10.06% in 2017; and the average TJLP (which was replaced by the TLP (Long-Term Rate) in financing contracts executed on or after January 1, 2018) decreased to 6.72% in 2018, compared to 7.12% in 2017. We also had the equivalent of R$5,631 million (compared with R$4,858 million at December 31, 2017) of debt denominated in foreign currency, principally U.S. dollars. In order to reduce the exchange rate risk with respect to this foreign currency-denominated debt and variations in interest rates, we implement a policy of using exchange and interest rate derivatives.

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Income and Social Contribution Taxes

Our net charge for income and social contribution taxes increased to R$774 million in the year ended December 31, 2018 compared with R$604 million in the year ended December 31, 2017. Our effective rate of 26.3% on pretax income in the year ended December 31, 2018 was lower than the official rate of 34%, principally due to our ability to recognize further prior year tax loss carryforwards. Our unrecorded tax credits relate to losses generated for which there is no currently reasonable certainty that future taxable income will be sufficient to absorb such losses (see Note 9.5 to our audited annual consolidated financial statements).

Net Income

Compared to the year ended December 31, 2017, and due to the factors discussed above, net income increased 74.2% (or R$923 million), to R$2,166 million in the year ended December 31, 2018.

Net Income by Segment

In the year ended December 31, 2018, 64.3% of our net income derived from our Distribution segment, 34.5% from our Generation from Conventional Sources segment, 5.3% from our Generation from Renewable Sources segment, 2.4% from our Commercialization segment, 1.9% from our Services segment and negative 8.5% from Others. See the table under “Background – Operating Segments” earlier in this Item 5 for the equivalent contributions from our segments in 2017 and 2016.

Distribution

Compared to the year ended December 31, 2017, net income from our Distribution segment increased 115.5% (or R$768 million), to R$1,432 million in the year ended December 31, 2018, as a result of: (i) an increase of 46.2% (or R$707 million) in income from electric energy service; and (ii) a decrease of 45.3% (or R$257 million) in net financial expense partially offset by an increase of 65.3% (or R$196 million) in income and social contribution taxes expenses.

The decrease in the segment’s net financial expense was mainly due to:

(i)         a decrease of 24.0% (or R$279 million) in financial expenses, mainly due to: (a) a decrease of R$580 million in derivatives expenses; (b) a decrease of R$41 million in financial expenses from debt charges as a result of lower indebtedness; and (c) an increase of R$469 million in expenses from monetary and exchange rate variations; and

(ii)        a decrease of R$23 million in financial income, mainly due to: (a) a decrease of 66.0% (or R$144 million) in income from financial investments; and (b) a decrease of 26.6% (or R$13 million) in income from interest of escrow deposits.

These decreases were partially offset by: (i) an increase of 100% (or R$163 million) in income from the adjustment of Sector Financial Assets and Liabilities (see Note 8 to our audited annual consolidated financial statements); (ii) an increase of 72.5% (or R$29 million) in income from monetary and exchange rate variations; (iii) an increase of 112.5% (or R$18 million) in discounts on the purchase of ICMS credit; and (iv) an increase of 4.3% (or R$11 million) in interests and fines.

Generation (conventional sources)

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Net income from our Generation from Conventional Sources segment increased by 17.7% (or R$116 million), to R$770 million during the year ended December 31, 2018 from R$654 million for the year ended December 31, 2017. This increase was mainly due to: (i) an increase of 7.2% (or R$55 million) in income from electric energy service; and (ii) a decrease of 24.4% (or R$80 million) in net financial expense.

The decrease in net financial expense was due mainly to: (i) a decrease of R$214 million of expenses from derivatives; and (ii) a decrease of 29.4% (or R$104 million) in interest on debts. These decreases were partially offset by: (i) an increase of R$163 million in monetary and exchange rate variations expenses; and (ii) a decrease of 50.6% (or R$41 million) in income from financial investments.

Generation (renewable sources)

The net income from our Generation from Renewable Sources segment increased by 504.2% (or R$99 million), to R$119 million in the year ended December 31, 2018 compared to net income of R$20 million in 2017, mainly due to the combined effect of: (i) a decrease of R$111 million in income tax and social contribution tax expenses, (ii) the decrease of 3.1% (or R$19 million) in income from electric energy service; and (iii) a decrease of 1.3% (or R$7 million) in net financial expense.

The decrease in net financial expense was driven by (i) a decrease of R$109 million in debt expenses and monetary and exchange rate variations expenses; (ii) a decrease of R$19 million in capitalized borrowing costs, which is accounted for as a decrease in financial expenses; and (iii) an increase of R$26 million in other financial revenue from CCEE financial settlements, offset by (i) an increase of R$64 million in other financial expenses driven by an increase of R$15 million in the monetary rate of GSF and an increase of R$10 million in financial settlement expenses; (ii) a decrease of R$33 million in income from financial investments; and (iii) an increase of R$12 million in intercompany agreement interest.

Commercialization

Compared to the year ended December 31, 2017, net income from our Commercialization segment decreased 41.2% (or R$37 million), to R$53 million in the year ended December 31, 2018, reflecting the combined effect of: (i) a decrease of R$20 million in net financial income mainly related to the impact in monetary and exchange rate variations and derivatives; and (ii) a decrease of R$17 million in income and social contribution tax expenses.

Services

Compared to the year ended December 31, 2017, net income from our Services segment decreased 21.7% (or R$12 million), to R$43 million in the year ended December 31, 2018, reflecting the combined effects of: (i) an increase of R$20 million in personnel and third services; (ii) a decrease of R$4 million of net financial income; (iii) a decrease of R$13 million in income and social contribution tax expenses; (iv) an increase of 7.4% (or R$5 million) in the income from electric energy service.

Operating Results - 2017 versus 2016

Net Operating Revenues 

Compared to the year ended December 31, 2016, our net operating revenues increased 39.9% (or R$7,633 million) to R$26,745 million in the year ended December 31, 2017. Excluding the effects of the consolidation of RGE Sul, acquired in October 2016, net operating revenue increased to R$ 23,375 million, an increase of R$ 25.6% (R$ 4,768 million) when compared to 2016.

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This increase in operating revenue was primarily due to the combined effect of: (i) a positive variation of R$3,996 million in the Sector Financial Assets and Liabilities, as discussed in the section “Other Operating Revenue” below; (ii) an increase of R$1,699 million in energy sales in the spot market, as discussed in the section “Sales by Destination” below; (iii) an increase of R$1,430 million in electricity sales to final consumers, as discussed in the section “Sales by Destination” below; and (iv) an increase of R$869 million in other concessionaries and licenses, partially offset by an increase of R$1,637 million in deductions from operating revenues, discussed in the section “Deductions from operating revenues” below.

The following discussion describes changes in our net operating revenues by destination and by segment, based on the items comprising our gross revenues.

Sales by Destination

Sales to Final Consumers

Compared to the year ended December 31, 2016, our gross operating revenues from sales to Final Consumers (which includes TUSD revenue from captive consumers) increased 7.5% (or R$1,788 million) in the year ended December 31, 2017, to R$25,787 million. Our gross operating revenues primarily reflect sales to Captive Consumers in concession areas from our five distribution subsidiaries, as well as TUSD revenue from the use of our network by Captive Consumers, both of which are subject to tariff adjustment as described below. Our gross operating revenue also reflects sales to Free Consumers in commercial and industrial classes.

Distribution companies’ tariffs are adjusted every year, in percentages specific to each classes of consumer. The month in which the annual tariff adjustment becomes effective varies, impacting both the year in which the tariff adjustment occurs as well as the following year. The adjustments for our largest subsidiaries occur in April (CPFL Paulista), June (RGE Sul and RGE) and October (CPFL Piratininga).

In the year ended December 31, 2017, overall average energy prices decreased by 6.2%, mainly due to the negative tariff adjustment of 10.50% for CPFL Paulista, the negative tariff adjustment of 6.43% for RGE Sul, the positive tariff adjustment of 5.00% for RGE and the positive tariff adjustment of 17.28% for CPFL Piratininga. As a result, although the red tariff rate was in effect for the majority of 2017, when compared to 2016, the effects of tariff adjustments (Annual Adjustment – RTA or Periodic Revision – RTP, since there is no Annual Adjustment in the year of Periodic Revisions) exceeded the other tariff effects. For more information, see note 25.2 to our audited annual consolidated financial statements. Overall average prices for Final Consumers in 2017 were lower for all consumer classes:

• Residential and commercial consumers. With respect to Captive Consumers (which represent 95.3% of the total amount sold to this class in our consolidated statements), average prices decreased 5.3% for residential consumers and 3.6% for commercial consumers, due to the annual tariff adjustment described above. With respect to Free Consumers, the average price only for the commercial consumers decreased 25.7%.
• Industrial consumers. Average prices decreased 5.6%, mainly due to the tariff adjustments described above. With respect to Free Consumers, the average price for industrial consumers decreased 31.4%. The decrease in the average price for the industrial consumers was due to the tariff applied to the contracts governing the use of our TUSD by Free Consumers.

The total volume of energy sold to Final Consumers in the year ended December 31, 2017 increased 14.6% compared to the year ended December 31, 2016. This increase represents the effect of an increase of 86% (or 4,427 GWh) in the volume of energy sold to Conventional Free Consumers (driven by increases of (i) 3,512 GW to industrial, (ii) 725 GW to commercial consumers and (iii) 190 GW to other consumers by our commercialization subsidiaries as a result of the migration of these consumers from captive to the free consumer category) and the inclusion of RGE Sul’s distribution operations in our consolidated results for the full year in 2017, which led to an increase of 5,563 GW (compared to RGE Sul’s 1,141 GW consolidation during the last two months of 2016).

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The volume sold to residential and commercial classes, which accounts for 66.6% for our sales to Final Consumers, increased by 16.1% (or 2,649 GW) and 5.2% (or 501 GW), respectively. These increases were due to the combined effect of:

• Residential: (i) the inclusion of RGE Sul’s distribution operations in our consolidated results for the full year in 2017 (compared to inclusion in only the last two months of 2016), which led to an increase of 2,230 GW sold to residential consumers, compared to 426 GW in 2016; and (ii) an increase of 2.6% of the volume sold by our distribution subsidiaries (excluding RGE Sul) to the residential classes; due to our residential consumers’ greater economic strength in 2017, driven by the GDP growth of 1.0% in 2017 compared to the GDP contraction of 3.5% in 2016.
• Commercial: (i) an increase of 142 GW in the volume of energy sold to Captive Consumers in the commercial category; and (ii) an increase of 617 GW in the volume sold by our commercialization subsidiaries due to the migration of consumers from captive to the free consumer class. This increase was partly offset by a decrease of 60.9% (or 258 GW) in the volume of energy from renewable sources sold to commercial consumers who elected to become Special Free Consumers, whose contracted energy demand is between 500 kV and 3 MW, and who are allowed to purchase energy only from renewable sources.

The volume sold to industrial consumers, which represented 19.8% of our sales to Final Consumers in 2017 (compared with 22.0% in 2016), decreased by 2.2% compared to the year ended December 31, 2016. Volumes to Captive Consumers in this category decreased 6.6%, which represents the net effect of a decrease of 463 GW related to our distribution subsidiaries and the increase in migration of industrial consumers from the captive to the free market. Regarding Free Consumers, volumes sold increased by 5.1% (or 725 GW), reflecting the same migration of consumers, as well as improvements in Brazilian economic conditions during 2017.

Sales to wholesalers

Compared to the year ended December 31, 2016, our gross operating revenues from sales to wholesalers in the year ended December 31, 2017 increased 74.2% (or R$2,594 million) to R$6,090 million (15.2% of gross operating revenues), due mainly to (i) an increase of 264.7% (or R$1,699 million) in sales of energy in the spot market (mainly driven by higher average prices), and (ii) an increase of 36.7% (or R$869 million) in sales of electricity to other concessionaires and licensees. These increases reflect the combined effect of an increase of 28.4% in energy volumes sold and an increase of 35.7% in the average price of sales to wholesalers compared to 2016.

Other operating revenues

Compared to the year ended December 31, 2016, our other gross operating revenues (which excludes TUSD revenue from captive consumers) increased 157.4% (or R$5,021 million) to R$8,210 million in the year ended December 31, 2017 (20.5% of our gross operating revenues), mainly due to:

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(i)         a positive variation of R$3,996 million in revenue from Sector Financial Assets and Liabilities, which represented a revenue of R$1,901 million in 2017 compared with an expense of R$2,095 million in 2016. This revenue reflects timing differences between our budgeted costs included in the tariff at the beginning of the tariff period, and those actually incurred while it is in effect, creating a contractual right to pay (or receive) cash to or from consumers through subsequent tariffs or to pay to or receive from the granting authority any remaining amounts at the expiration of the concession. This leads to an adjustment in order to recognize the future decrease (or increase) in tariffs to take account of lower (or additional) costs in the current year, such adjustment being recognized as a positive (or negative) item of revenue. The increase in this item in 2017 was driven mainly by an increase of R$2,353 million related to electric energy cost, an increase of R$642 million related to the pass-through from Itaipu and an increase of R$610 million in contributions to the ESS and EER. For further information, see note 8 to our audited annual consolidated financial statements;

(ii)        an increase of R$719 million in revenue from construction of concession infrastructure; and

(iii)       the increase of 12.1% (or R$153 million) in revenue related to the low income subsidy and discounts on tariffs reimbursed by funds from the CDE Account (see note 25.3 to our audited annual consolidated financial statements).

Deductions from operating revenues

We deduct certain taxes and industry charges from our gross operating revenue to calculate net revenue. The state-level value-added tax (ICMS) is calculated based on gross operating revenue from final consumers (billed), while federal PIS and COFINS taxes are calculated based on total gross operating revenue. The research and development and energy efficiency programs (regulatory charges) are calculated based on net operating revenue. Other regulatory charges vary depending on the regulatory effect reflected in our tariffs. These deductions represented 33.2% of our gross operating revenue in the year ended December 31, 2017 and 37.9% in the year ended December 31, 2016. Compared to the year ended December 31, 2016, these deductions increased by 14.0% (or R$1,637 million) to R$13,309 million in 2017, mainly due to: (i) an increase of 27.9% (or R$736 million) in PIS and COFINS taxes, mainly due to the increase in our gross operating revenues (the calculation basis for these taxes); (ii) an increase of 10.6% (or R$521 million) in ICMS taxes; (iii) an increase of R$448 million in tariff flag revenues recognized, which are required to be paid into the Tariff Flag Resources Centralizing Account administered by the CCEE; and (iv) a decrease of R$175 million in contributions made to the CDE Account as a result of the new quotas defined by ANEEL in 2017.

Sales by segment

Distribution

Compared to the year ended December 31, 2016, net operating revenues from our Distribution segment increased 40.1% (or R$6,037 million) to R$21,077 million in the year ended December 31, 2017. This increase primarily reflected the increase of R$7,476 million in gross operating revenue, due to the following fluctuations:

(i)         a positive variation of R$3,996 million in revenue from Sector Financial Assets and Liabilities, which represented a revenue of R$1,901 million in 2017 compared with an expense of R$2,095 million in 2016 (see “Other Operating Revenues” above);

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(ii)        an increase of R$1,215 million in electricity sales to wholesalers, driven by significant increases in the energy prices we were able to obtain on the Spot Market;

(iii)       an increase of R$722 million in revenue from construction of concession infrastructure; and

(iv)       the increase of 12.1% (or R$153 million) in revenue related to the low income subsidy and discounts on tariffs reimbursed by funds from the CDE Account (see note 25.5 to our audited annual consolidated financial statements and “Other Operating Revenues” above).

The deductions from our Distribution segments operating revenues increased by 13% (or R$1,460 million) to R$12,692 million in 2017, mainly due to: (i) an increase of 15.1% (or R$1,084 million) in deductions related to PIS, COFINS and ICMS taxes, driven by the increase in our gross operating revenues (the basis for calculation for these taxes); (ii) an increase of R$448 million in deductions related to tariff flag revenues recognized, which are required to be paid into the Tariff Flag Resources Centralizing Account administered by the CCEE; and partially offset by (iii) a decrease of 5.2% (or R$175 million) in contributions made to the CDE Account due to new quotas defined by ANEEL in 2017 (see note 25.5 to our audited annual consolidated financial statements). For more information, see “Deduction from operating revenues” above).

                        Generation (conventional sources)

Net operating revenues from our Generation from Conventional Sources segment in the year ended December 31, 2017 amounted to R$1,190 million, an increase of 18.6% (or R$187 million) compared to R$1,003 million in the year ended December 31, 2016, due mainly to (i) an increase of R$72 million in other revenues and income; (ii) an increase of R$47 million of revenue from construction related to CPFL Morro Agudo; (iii) an increase of 6.6% (R$36 million) in revenue from sales to our distribution subsidiaries; (iv) the price-driven increase of 6.0% (R$32 million) in revenue from sales from our facility Serra da Mesa to Furnas; and (v) an increase of 183.3% (or R$11 million) in spot market energy.  This increase was partially offset by an increase of 9.6% (R$9 million) in PIS and COFINS tax deductions from revenue due to the increase in gross operating revenues from the segment (the basis for calculation for these taxes). 

Generation (renewable sources)

Net operating revenues from our Generation from Renewable Sources segment in the year ended December 31, 2017 amounted to R$1,959 million, an increase of 17.1% (or R$286 million) compared to R$1,673 million in the year ended December 31, 2016. This increase was due mainly to: (i) an increase of R$210 million in revenue from Other concessionaries and licensees, driven by new volumes; and (ii) an increase of R$148 million in revenue from energy sales on the Spot Market. These increases were partially offset by a decrease of 60.9% (or R$58 million) in revenue from Free Consumers in the Commercial sector, driven principally from Special Free Consumers migrating from the captive market and an increase of 7.5% (or R$7 million) in PIS and COFINS tax deductions from revenue due to the increase in gross operating revenues from the segment (the basis for calculation for these taxes).

                        Commercialization

Net operating revenues from our Commercialization segment in the year ended December 31, 2017 amounted to R$3,414 million, an increase of 63.6% (or R$1,327 million) compared to R$2,087 million in the year ended December 31, 2016. This increase was mainly due to: (i) an increase of 102.5% (or R$782 million) in revenue from sales for Other concessionaries and licenses, driven by a 76.2% (or R$4,121 million) increase in volume; (ii) an increase of 598.3% (or R$347 million) in revenue from sales in the spot market, driven by a 130.6% (or R$582 million) increase in volume; (iii) an increase of 21.3% (or R$281 million) in revenue from Industrial Free Consumers, driven by an increase of 38.9% in volumes; and (iv) an increase of 81.5% (or R$116 million) in revenue from Commercial Free Consumers, driven by an increase of 101.3% in volumes. 

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These increases were partially offset by: (i) an increase of 63.6% (or R$136 million) in PIS and COFINS tax deductions from operating revenues, mainly due to the increase in gross operating revenues for the segment (the basis for calculation for these taxes); (ii) a decrease of 91.8% (or R$56 million) in other revenues and income; and (iii) a decrease of 100% (or R$12 million) of Electricity sales to Furnas (Wholesalers).

Services

Net operating revenues from our Services segment in the year ended December 31, 2017 amounted to R$486 million, an increase of 21.3% (or R$85 million) compared to R$400 million in the year ended December 31, 2016. This increase was mainly due to: (i) an increase of R$75 million in revenues from construction and maintenance services: (ii) an increase of R$27 million in revenues from administrative, call center and IT outsourcing. These increases were partially offset by: (i) a decrease of 23.5% (R$25 million) in revenue from our self-generation energy efficiency business; and (ii) an increase of 30.6% (or R$11 million) in PIS, COFINS and ISS tax deductions from revenues, mainly due to the increase in our gross operating revenues (the basis for calculation for these taxes).

Income from Electric Energy Service by Destination

            Cost of Electric Energy

Electricity purchased for resale. Our costs for the purchase of energy for resale increased 58.6% (or R$5,768 million) in the year ended December 31, 2017, to R$15,617 million (65.8% of our total operating costs and operating expenses) compared with R$9,849 million for the year ended December 31, 2016 (representing 59.4% of our total operating costs and operating expenses), mainly due to an increase of 30.1% in average prices, reflecting:

(i) an increase of 67.1% (or R$5,728 million) in the cost of energy purchased in the Regulated Market, reflecting an increase of 22.2% in the volume of energy purchased and a 36.7% increase in average purchase prices;

(ii) an increase of R$325 million in purchases of energy from Itaipu, reflecting an increase of 3.4% in the average price of energy purchased (in reais), itself caused by a 11.4% increase in the tariff (which is established on an annual basis by ANEEL in US$/kW), a 8.3% depreciation in the average rate of the real against the U.S. dollar during 2017 compared with 2016 and a 12.2% increase in the volume of energy purchased; and

(iii) an increase of 107.6% (or R$290 million) in cost of energy purchased in the spot market, driven mainly by an increase of 59.6% in volume purchased.

 These increases were partly offset by an additional R$575 million in PIS and COFINS tax credits (representing an increase of 58.2% compared to 2016) related to purchases of energy, which represents a decrease in the cost of energy.

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Electricity network usage charges. Our charges for the use of our transmission and distribution system decreased 5.0% (or R$67 million) to R$1,284 million in the year ended December 31, 2017, mainly as a result of: (i) a decrease of R$816 million of System Service Charges; and (ii) a decrease of R$107 million in Reserve Energy Charges (EER). These decreases were partially offset by (i) an increase of R$707 million in Basic Network Charges; (ii) an increase of R$107 million in transmission from Itaipu charges; and (iii) an increase of R$38 million in Connection Charges.

For further information about electricity network usage charges, see note 26 to our audited annual consolidated financial statements.

Other costs and operating expenses

Our other costs and operating expenses comprise our operating cost, services rendered to third parties, costs related to construction of concession infrastructure, sales expenses, general and administrative expenses and other operating expenses.

Compared to the year ended December 31, 2016, our other costs and operating expenses increased 26.6% (or R$1,432 million) to R$6,822 million in the year ended December 31, 2017, mainly due to the following events: (i) an increase of 53.2% (or R$719 million) in expenses related to the construction of concession infrastructure; (ii) an increase of 25.9% (or R$283 million) in our personnel expenses, reflecting increased costs under our collective bargaining agreements; (iii) an increase of 19.9% (or R$207 million) in depreciation and amortization expenses; (iv) an increase of 11.7% (or R$76 million) in expenses related to outsourced services; (v) an increase of R$49 million in expenses related to disposal of assets; (vi) an increase of 31.6% (or R$60 million) in inventory consumption; and (vii) a decrease of 12.1% (or R$21 million) in allowance for doubtful accounts.

            Income from Electric Energy Service

Compared to the year ended December 31, 2016, our income from electric energy service increased 19.8% (or R$499 million) to R$3,022 million in the year ended December 31, 2017, since our net operating revenue increased by more in absolute terms (R$7,633 million) than the increase in our cost of generating and distributing electric energy and other operating costs and expenses (R$7,134 million).

Income from Electric Energy Service by Segment

Distribution

Compared to the year ended December 31, 2016, income from electric energy service from our Distribution segment increased R$277 million to R$1,531 million in the year ended December 31, 2017. As discussed above, net operating revenues from the segment increased by R$6,037 million while costs and operational expenses related to the segment increased by R$5,647 million. The main contributing factors to the changes in costs and operational expenses were as follows:

Electricity costs. Compared to the year ended December 31, 2016, electricity costs increased 45.1% (or R$4,399 million), to R$14,147 million in the year ended December 31, 2017.

The cost of energy purchased for resale increased 52.6% (or R$4,473 million), reflecting: (i) an increase of 61.3% (or R$4,365 million) in the cost of energy purchased in the Regulated Market, reflecting an increase of 9.8% in the volume of energy purchased and an increase of 46.9% in average purchase prices; (ii) an increase of R$325 million in purchases of energy from Itaipu, reflecting an increase of 3.4% in the average price of energy purchased (in reais), itself caused by a 11.4% increase in the tariff (which is established on an annual basis by ANEEL in US$/kW) and 8.3% depreciation in the average rate of the real against the U.S. dollar during 2017 compared with 2016, offset by a 12.2% increase in the volume of energy purchased; and (iii) an increase of 109% (or R$236 million) in PROINFA and spot market costs. This increase in the cost of energy purchased for resale was partially offset by an increase of 52.3% (or R$452 million) in PIS and COFINS tax credits related to purchases of energy.

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In addition, as mentioned above, charges for the use of the transmission and distribution system decreased 5.9% (or R$75 million) to R$1,177 million in the year ended December 31, 2017, mainly as a result of: (i) a decrease of R$816 million of System Service Charges; and (ii) a decrease of R$107 million in Reserve Energy Charges. These decreases in charges were partially offset by (i) an increase of R$702 million in Basic Network Charges; and (ii) an increase of R$30 million in Connection Charges.

Other costs and operating expenses. Compared to the year ended December 31, 2016, our other costs and operating expenses for the Distribution segment increased 36.2% (or R$1,248 million), to R$4,695 million in the year ended December 31, 2017, mainly due to (i) an increase of 55.3% (or R$722 million) in expenses related to the construction of concession infrastructure; (ii) an increase of 29.7% (or R$195 million) in expenses related to outsourced services; (iii) an increase of 26.3% (or R$192 million) in our personnel expenses principally due to the acquisition of RGE Sul as well as salary increases under our collective bargaining agreement; and (iv) an increase of 28.7% (or R$144 million) in depreciation and amortization expenses. These increases were partially offset by a decrease of 8.4% (or R$15 million) in allowance for doubtful accounts.

Generation (conventional sources)

Compared to the year ended December 31, 2016, income from electric energy service from our Conventional Generation segment increased 14.0% (or R$94 million) to R$766 million for the year ended December 31, 2017. This increase was mainly due to an increase of 18.6% (or R$187 million) in net operating revenue as discussed in the section “Sales by Segment” above, partly offset by an increase of 47.0% (or R$50 million) in costs and operational expenses.

The increase in costs and operational expenses was mainly due to (i) an increase of 100% (or R$45 million) in expenses related to the construction of concession infrastructure; (ii) an increase of 23.8% (or R$  million) in expenses related to outsourced services; (iii) an increase of R$49 million in the cost of electric energy driven by a 19.3% increase in volume and a 35.9% increase in average prices.

In 2017, in order to minimize the impacts of the GSF and PLD increases due to hydroelectric generation, there was a strategy of acquiring energy in the spot market, since the decrease of hydroelectric generation was due to lack of rainfall and consequent low level in the reservoirs, an increase in thermal generation, making the PLD more expensive. In 2017, the recognition in expense related to amortization of GSF costs was of R$7 million.

This increase was partially offset by the recognition of R$7 million expense related to amortization of GSF costs

Generation (renewable sources)

Compared to the year ended December 31, 2016, income from electric energy service from our Renewable Generation segment increased 37.4% (or R$165 million) to R$605 million for the year ended December 31, 2017. This increase was mainly due to the increase of 17.1% (or R$286 million) in net operating revenue (as discussed in the section “Sales by Segment” above) partially offset by the increase of 8.5% (or R$58 million) in costs of eletric energy and operational expenses.

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The increase in costs and operational expenses mainly reflects:  (i) an increase of 15.2% (or R$61 million) in depreciation and amortization expenses related to the entry into operation of Pedra Cheirosa; (ii) an increase of R$16 million in purchases of operating materials and equipment; (iii) an increase of R$12 million in expenses for outsourced services. These increases in costs were partially offset by a decrease of (i) R$20 million in expenses related to impairment provision; and (ii) an increase of 11.1% (or R$10 million) in charges for use of the transmission and distribution system.

Commercialization

Compared to the year ended December 31, 2016, income from electric energy service from our Commercialization segment increased 5.6% (or R$9 million), to R$168 million in the year ended December 31, 2017. This increase was due to the net effect of the increase of 63.6% (or R$1,327 million) in net operating revenues of the segment, as discussed in the section “Sales by Segment” above, which exceeded the increase of 68.5% (or R$1,319 million) in costs of electric energy and operational expenses. The increase in costs and expenses was mainly due to an increase of 70.3% (or R$1,318 million) in the cost of energy purchased in the Regulated Market, driven by an increase of 86% in the volume of energy purchased partly offset by lower purchase prices.

Services

Compared to the year ended December 31, 2016, income from electric energy service from our Services segment increased 3.4% (or R$2 million), to R$68 million in the year ended December 31, 2017. This increase was due to the net effect of the increase of 21.3% (or R$85 million) in net operating revenues as discussed in the section “Sales by Segment” above, which exceeded the increase of 23.6% (or R$76 million) in costs and operational expenses.

Net Income

Net Financial Expense

Compared with the year ended December 31, 2016, our net financial expense increased 2.3% (or R$34 million), from R$1,453 million in 2016 to R$1,488 in the year ended December 31, 2017, mainly due a decrease of R$286 million in our financial expenses, more than offset by a decrease of R$320 million in our financial income.

The reasons for the decrease in financial expenses are: (i) a decrease of 24.4% (or R$171 million) in financial expenses from monetary and exchange adjustments, because of lower average interest rates ; and (ii) a decrease of 8.0% (or R$144 million) in debt charges. These decreases in financial expenses were partially offset by (i) an increase of R$57 million in financial expenses from monetary adjustments of Sector Financial Liabilities; and (ii) a decrease of 25.8% (or R$18 million) in capitalized borrowing costs, which is accounted for as a decrease in financial expenses.

The decrease in financial income is mainly due to following reasons: (i) a decrease of 31.5% (or R$210 million) in income from financial investments, due to the decrease of the cash and cash equivalents balances; (ii) a decrease of 58.7% (or R$87 million) in income from monetary and exchange adjustments; (iii) a decrease of 100% (or R$33 million) in income from adjustment of Sector Financial Assets and Liabilities (see note 8 to our audited annual consolidated financial statements); and (iv) a decrease of R$13 million in adjustments of tax credits. These decreases were partially offset by (i) an increase of 7.9% (or R$19 million) in interest and fine payments; (ii) a decrease of 23.6% (or R$15 million) in PIS and COFINS on other finance income; and (iii) an increase of 40.5% (or R$14 million) in income from adjustments of escrow deposits.

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At December 31, 2017, we had R$15,310 million (compared with R$16,452 million at December 31, 2016) in debt denominated in reais, which accrued both interest and inflation adjustments based on a variety of Brazilian indices and money market rates. The average CDI interbank rate during the year decreased to 9.93% in 2017, compared to 14% in 2016; and the average TJLP decreased to 7.1% in 2017, compared to 7.5% in 2016. We also had the equivalent of R$4,858 million (compared with R$5,502 million at December 31, 2016) of debt denominated in foreign currency, principally U.S. dollars. In order to reduce the exchange rate risk with respect to this foreign currency denominated debt and variations in interest rates, we implement a policy of using exchange and interest rate derivatives.

Income and Social Contribution Taxes

Our net charge for income and social contribution taxes increased to R$604 million in the year ended December 31, 2017 compared with R$501 million in the year ended December 31, 2016. Our effective rate of 32.7% on pretax income in the year ended December 31, 2017 was lower than the official rate of 34%, principally due to our ability to use certain tax loss carryforwards. Our unrecorded tax credits relate to losses generated for which there is no currently reasonable certainty that future taxable income will be sufficient to absorb such losses (see note 9.5 to our audited annual consolidated financial statements).

Net Income

Compared to the year ended December 31, 2016, and due to the factors discussed above, net income increased 41.4% (or R$364 million), to R$1,243 million in the year ended December 31, 2017.

Net Income by Segment

In the year ended December 31, 2017, 53.5% of our net income derived from our Distribution segment, 52.6% from our Generation from Conventional Sources segment, 1.6% from our Generation from Renewable Sources segment, 7.3% from our Commercialization segment, 4.4% from our Services segment and negative 14.3% from Other.