Company Quick10K Filing
CPFL Energy
20-F 2019-12-31 Filed 2020-04-24
20-F 2018-12-31 Filed 2019-04-22
20-F 2017-12-31 Filed 2018-04-24
20-F 2016-12-31 Filed 2017-04-17
20-F 2015-12-31 Filed 2016-04-15
20-F 2014-12-31 Filed 2015-04-17
20-F 2013-12-31 Filed 2014-04-04
20-F 2012-12-31 Filed 2013-04-17
20-F 2011-12-31 Filed 2012-03-30
20-F 2010-12-31 Filed 2011-06-06
20-F 2009-12-31 Filed 2010-04-05

CPL 20F Annual Report

Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1.1 exhibit1_1.htm
EX-8.1 exhibit8_1.htm
EX-12.1 exhibit12_1.htm
EX-12.2 exhibit12_2.htm
EX-13.1 exhibit13_1.htm
EX-13.2 exhibit13_2.htm
EX-15.1 exhibit15_1.htm

CPFL Energy Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 cplform20f_2019.htm CPLFORM20F_2019 cplform20f_2019.htm - Generated by SEC Publisher for SEC Filing  
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2019
Commission File Number 1-32297

CPFL ENERGIA S.A.

(Exact name of registrant as specified in its charter)

CPFL ENERGY INCORPORATED

The Federative Republic of Brazil

(Translation of registrant’s name into English)

(Jurisdiction of incorporation or organization)

 

Rua Jorge de Figueiredo Correa, No. 1,632, parte
CEP 13087-397 - Jardim Professora Tarcília, Campinas – SP
Federative Republic of Brazil
(Address of principal executive offices)

Yuehui Pan
+55 19 3756 6211 – panyuehui@cpfl.com.br
Federative Republic of Brazil
(Name, telephone, e-mail and/or facsimile
number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None

Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, without par value

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

As of December 31, 2019, there were 1,152,254,440 Common Shares, without par value, outstanding

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

Yes
No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes
No N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer
Accelerated Filer Non-accelerated Filer Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP

International Financial Reporting Standards as issued by the International Accounting Standards Board 

Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17
Item 18


 
 

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
No


 
 

Table of Contents

Pag

FORWARD-LOOKING STATEMENTS

1

CERTAIN TERMS AND CONVENTIONS

2

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

3

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

3

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

3

ITEM 3.

KEY INFORMATION

3

ITEM 4.

INFORMATION ON THE COMPANY

28

ITEM 4A.

UNRESOLVED STAFF COMMENTS

82

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

82

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

125

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

137

ITEM 8.

FINANCIAL INFORMATION

138

ITEM 9.

THE OFFER AND LISTING

145

ITEM 10.

ADDITIONAL INFORMATION

147

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

166

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

167

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

167

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

167

ITEM 15.

CONTROLS AND PROCEDURES

167

ITEM 16.

[RESERVED]

168

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

168

ITEM 16B.

CODE OF ETHICS

168

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

168

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

169

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

169

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

169

ITEM 16G.

CORPORATE GOVERNANCE

169

ITEM 16H.

MINE SAFETY DISCLOSURE

171

ITEM 17.

FINANCIAL STATEMENTS

171

ITEM 18.

FINANCIAL STATEMENTS

171

ITEM 19.

EXHIBITS

171

GLOSSARY OF TERMS

172

SIGNATURES

178

-i-


 
 

FORWARD-LOOKING STATEMENTS

This annual report contains information that constitutes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words, such as “believe,” “may,” “aim,” “estimate,” “continue,” “anticipate,” “will,” “intend,” “plan,” “expect” and “potential,” among others.  Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition.  Those statements appear in a number of places in this annual report, principally under the captions “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”  We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business.  Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements.  These factors include:

·

government interventions, resulting in changes to the economy, taxes, tariffs, regulatory environment or environmental regulation in Brazil;

·

changes in the general economic, political, demographic and business conditions in Brazil and particularly in the markets we serve, including, without limitation, inflation, interest rates, exchange rates, employment rate, population growth and consumer confidence;

·

our ability to identify, develop, plan and execute new projects;

·

changes in Brazilian electricity prices;

·

our ability to take advantage of all the expected benefits of the acquisitions we make;

·

our ability to acquire wind, hydroelectric or thermoelectric power generation equipment within the time and at prices that make the projects viable;

·

bidding processes for transmission lines;

·

lack of auctions where energy from alternative sources can be commercialized;

·

difficulties in completing our projects under development;

·

unforeseen delays, excess or cost increases in the implementation of our projects and other problems related to construction and development;

·

limitations in our access to adequate financing, or our inability to make investments in line with our business plan in accordance with our initial schedule;

·

increases in costs, including, without limitation, costs relating to: (a) operation and maintenance; (b) regulatory and environmental expenses; (c) contributions, fees and taxes; and (d) tariffs for the transportation of electric energy, in such a way as to affect our profit margins;

·

difficulties in accessing electric power transmission systems;

·

our ability to obtain, keep and renew applicable governmental authorizations and licenses, including environmental authorizations and licenses, that make projects feasible;

·

the availability of average winds in line with the measurements and expectations used for the decision to invest in wind projects;

1


 
 

·

unplanned environmental aspects that overburden projects and cause delays;

·

the impact of climate change, causing prolonged droughts and interference in speed and frequency of winds, among others;

·

factors or trends that may affect our business, market share, financial condition, liquidity or results of our operations;

·

our level of capitalization and indebtedness and our ability to contract new financing and execute our expansion plan;

·

judicial or administrative proceedings to which we are or become a party;

·

changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to regulatory, corporate, environmental, tax and employment matters;

·

actions taken by our controlling shareholder

·

electricity shortages;

·

changes in tariffs;

·

our inability to generate electricity due to water shortages, transmission outages, operational or technical problems or physical damages to our facilities;

·

potential disruption or interruption of our services, including due to outbreaks of communicable diseases such as the coronavirus (COVID-19) and catastrophic events affecting our industry;

·

the early termination of our concessions to operate our facilities;

·

increased competition in the power industry markets in which we operate;

·

our inability to implement our capital expenditure plan, including our inability to arrange financing when required and on reasonable terms;

·

changes in consumer demand;

·

existing and future governmental regulations relating to the power industry; and

·

the risk factors discussed under “Item 3. Key Information—Risk Factors,” beginning on page 6.

 

Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to revise them after we distribute this annual report because of new information, future events or other factors.  In light of these limitations, you should not place undue reliance on forward-looking statements contained in this annual report

CERTAIN TERMS AND CONVENTIONS

A glossary of electricity industry terms is included in this annual report, beginning on page 172.

 

2


 
 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Unless the context otherwise requires, all references herein to “we,” “us” or “our company” are references to CPFL Energia S.A., its consolidated subsidiaries and jointly controlled entities.

All references herein to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil.  All references to “U.S. dollars,” “dollar” or “US$” are to U.S. dollars, the official currency of the United States.

We maintain our books and records in reais.  We prepared our audited annual consolidated financial statements included in this annual report in accordance with IFRS, as issued by the IASB.  Certain figures included in this annual report have been rounded; accordingly, figures shown as totals in certain tables may not be an exact arithmetic aggregation of the figures that precede them.

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.                OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.                KEY INFORMATION

Selected Financial and Operating Data

The tables below contain a summary of our financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.  Our financial data as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, 2018 and 2017 was derived from our audited annual consolidated financial statements, which appear elsewhere in this annual report and were prepared in accordance with IFRS, as issued by the IASB.  You should read this selected financial data in conjunction with our audited annual consolidated financial statements and the related notes included in this annual report.  Our financial data as of December 31, 2016 and 2015 and for each of the two years ended December 31, 2016 and 2015 was derived from our audited annual consolidated financial statements that are not included in this annual report.

The following standards became effective on January 1, 2019 and have impacted our financial information as of and for the year ended December 31, 2019:

-               IFRS 16 – Leases

-               IFRIC 23 – Uncertainty Over Tax Treatments

As permitted by these IFRS standards, we adopted these standards as of January 1, 2019, without restating comparative information presented in the audited consolidated financial statements as of and for the year ended December 31, 2019.  Therefore, our financial information as of and for the year ended December 31, 2019 is not comparable with our financial information for previous periods.  For further information about the adoption of these standards with respect to our financial statements as of and for the year ended December 31, 2019, see Note 3.17 of our audited annual consolidated financial statements. The financial information presented in this annual report should be read in conjunction with our consolidated financial statements.

The following tables present our selected financial data as of and for each of the periods indicated.

STATEMENT OF OPERATIONS DATA

 

For the year ended December 31,

 

2019(2)

2019

2018

2017

2016

2015

 

US$

R$

R$

R$

R$

R$

 

(in millions, except per share and per ADS data)

Net operating revenue

7,427

29,932

28,137

26,745

19,112

20,599

Cost of electric energy services:

 

 

 

 

 

 

Cost of electric energy

4,559

18,371

17,838

16,902

11,200

13,312

Cost of operation

718

2,894

2,734

2,771

2,249

1,907

Depreciation and amortization

317

1,278

1,238

1,144

938

870

Other cost of operation

401

1,616

1,496

1,627

132

198

Cost of services rendered to third parties

519

2,090

1,775

2,075

1,357

1,049

Gross profit

1,632

6,578

5,789

4,998

4,306

4,331

Operating expenses:

 

 

 

 

 

 

Selling expenses

174

700

608

590

547

464

Depreciation and amortization

1

5

4

5

4

22

Allowance for doubtful accounts

58

233

169

155

176

127

Other selling expenses

114

461

435

429

367

316

General and administrative expenses

255

1,027

987

947

849

863

Depreciation and amortization

27

109

65

94

95

85

Other general and administrative expenses

228

918

922

853

754

778

Other operating expenses

121

487

485

438

387

358

Depreciation and amortization

72

288

287

286

255

303

Other general and administrative expenses

49

199

199

152

132

55

Income from electric energy services

1,083

4,363

3,708

3,022

2,523

2,645

Equity interests in subsidiaries, associates and joint ventures

87

349

334

312

311

217

Financial income (costs):

 

 

 

 

 

 

Financial income

224

904

762

880

1,201

1,143

Financial expenses

(404)

(1,630)

(1,865)

(2,368)

(2,654)

(2,551)

Net financial income (costs)

(180)

(726)

(1,103)

(1,488)

(1,453)

(1,408)

Profit before taxes

989

3,986

2,940

1,847

1,381

1,454

Social contribution

(84)

(337)

(214)

(169)

(151)

(160)

Income tax

(224)

(901)

(560)

(435)

(351)

(419)

Total taxes

(307)

(1,238)

(774)

(604)

(501)

(579)

Profit for the year

682

2,748

2,166

1,243

879

875

Profit (loss) attributable to owners of the company

671

2,703

2,058

1,180

901

865

Profit (loss) attributable to noncontrolling interests

11

46

108

63

(22)

10

Earnings per share attributable to owners of the company:

 

 

 

 

 

 

Basic

0.62

2.48

2.02

1.16

0.89

0.85

Diluted

0.61

2.47

2.01

1.15

0.87

0.83

Profit for the year per ADS:

 

 

 

 

 

 

Basic

1.23

4.96

4.04

2.32

1.77

1.70

Diluted

1.23

4.94

4.02

2.30

1.74

1.66

Dividends(1)

159

642

489

280

214

205

Weighted average of number of common shares (in millions)

286

1,152

1,018

1,018

1,018

1,018

Dividends per share(1)

0.14

0.56

0.48

0.28

0.21

0.20

Dividends per ADS(1)

0.28

1.11

0.96

0.55

0.42

0.40

______________________

(1)  

“Dividends” represent the total amount of dividends from Profit the year for each period indicated, subject to approval of the shareholders at the general shareholders’ meeting to be held in the following year.

(2)  

Solely for convenience purposes, amounts in reais have been translated into U.S. dollars at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Brazilian Central Bank, as of December 31, 2019 of R$4.030 to US$1.00.

 

3


 
 

 

BALANCE SHEET DATA

 

For the year ended December 31,

 

2019(2)

2019

2018

2017

2016

2015

 

US$

R$

R$

R$

R$

R$

 

(in millions)

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

481

1,937

1,891

3,250

6,165

5,683

Consumers, concessionaires and licensees

1,237

4,986

4,548

4,301

3,766

3,175

Securities

211

851

-

-

-

24

Derivatives

70

281

309

444

163

627

Sector financial assets

271

1,094

1,331

211

-

1,464

Other current assets

296

1,192

1,322

1,375

1,285

1,536

Total current assets

2,566

10,341

9,402

9,581

11,379

12,509

Noncurrent assets:

 

 

 

 

 

 

Consumers, concessionaires and licensees

177

713

753

237

203

129

Sector financial assets

1

3

224

355

-

490

Derivatives

92

370

348

204

641

1,651

Concession financial assets

2,179

8,780

7,430

6,546

5,363

3,597

Investments

248

998

980

1,002

1,494

1,248

Property, plant and equipment

2,254

9,084

9,457

9,787

9,713

9,173

Contract assets

328

1,323

1,046

-

-

-

Intangible Assets

2,313

9,321

9,463

10,590

10,776

9,210

Other noncurrent assets

781

3,147

3,109

2,982

2,602

2,525

Total noncurrent assets

8,371

33,738

32,810

31,702

30,792

28,024

Total assets

10,937

44,078

42,212

41,283

42,171

40,532

Current liabilities:

 

 

 

 

 

 

Short-term debt(1)

858

3,459

3,363

5,293

3,429

3,641

Sector financial liabilities

-

-

-

40

598

-

Other current liabilities

1,639

6,607

5,052

6,046

4,992

5,884

Total current liabilities

2,498

10,066

8,415

11,379

9,018

9,525

Noncurrent liabilities:

 

 

 

 

 

 

Long-term debt(1)

3,834

15,451

17,013

14,876

18,733

18,126

Sector financial liabilities

25

103

47

8

317

-

Other long-term liabilities

1,284

5,176

4,204

3,834

3,729

2,751

Noncurrent liabilities

5,144

20,729

21,264

18,718

22,780

20,877

Non-controlling interest

72

289

2,270

2,225

2,403

2,456

Net equity attributable to controlling shareholders

3,224

12,994

10,263

8,962

7,970

7,674

Total liabilities and shareholders’ equity

10,937

44,078

42,212

41,283

42,171

40,532

______________________

(1)  

Short-term debt and long-term debt include loans and financing, debentures, accrued interest on loans, financing and debentures and derivatives.

(2)  

Solely for convenience purposes, amounts in reais have been translated into U.S. dollars at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Brazilian Central Bank, as of December 31, 2019 of R$4.030 to US$1.00. The average of the month-end commercial selling rates during the year 2019 was R$3.946 to US$1.00.

4


 
 

OPERATING DATA

 

For the year ended December 31,

 

2019

2018

2017

2016

2015

Energy sold (in GWh):

 

 

 

 

 

Residential

20,355

19,618

19,122

16,473

16,164

Industrial

13,198

13,834

14,661

13,022

12,748

Commercial

10,700

10,211

10,220

9,720

9,259

Rural

3,231

3,583

3,762

2,474

2,152

Public administration

1,468

1,459

1,456

1,271

1,278

Public lighting

2,039

2,003

1,964

1,746

1,649

Public services

2,348

2,348

2,157

1,840

1,797

Own consumption

36

34

34

32

33

Total energy sold to Final Consumers

53,375

53,091

53,376

46,578

45,082

Electricity sales to wholesalers (in GWh)

25,435

24,459

27,557

21,459

17,971

Total consumers (in thousands)(1)

9,756

9,580

9,375

9,222

7,751

Installed Capacity (in MW)(3)

4,304

3,272

3,284

3,259

3,164

Assured Energy (in GWh)(2)(3)

17,223

13,420

13,682

14,188

13,550

Energy generated (in GWh)(3)

13,611

10,648

10,137

12,568

14,310

______________________

(1)  

Represents active consumers (meaning consumers who are connected to the Distribution Network), rather than consumers invoiced at period-end.

(2)  

Refers to Assured Energy in GW available at the end-period, multiplied by the number of hours per year. Due to the cancellation of daylight savings time in 2019, there were 8,761 hours in 2019.  See “Item 4. Information on the Company” for more information about commencement of operations of each power plant.

(3)  

Refers solely to the total amount of energy (GWh) produced by conventional management companies and the equivalent participation percentage of renewable energy generation companies (99.94% in 2019, 51.56% in 2018, 51.60% in 2017 and 2016 and 51.61% in 2015).

5


 
 

Convenience Translations into U.S. Dollars

Solely for the investor’s convenience, we have translated certain amounts included in this annual report from reais into U.S. dollars at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Brazilian Central Bank, as of December 31, 2019 of R$4.030 to US$1.00.  The translated amounts have been rounded.  These translations should not be considered as a representation that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate, as of those dates or any other date.  In addition, the translations should not be construed as a representation that the amounts translated into U.S. dollars are in accordance with generally accepted accounting principles.

RISK FACTORS

Risks Relating to Our Operations and the Brazilian Power Industry

We are subject to comprehensive regulation of our business, which fundamentally affects our financial performance.

Our business is subject to extensive regulation by various Brazilian regulatory authorities, particularly ANEEL.  ANEEL regulates and oversees various aspects of our business and establishes our tariffs.  If we make additional and unexpected capital investments that are not considered prudent by ANEEL, ANEEL may not authorize the recovery of all costs, not allowing our tariffs to be adjusted accordingly, or if ANEEL modifies the regulations related to tariff adjustments, we may be adversely affected.

In addition, both the implementation of our strategy for growth and our ordinary business may be adversely affected by governmental actions such as changes to current legislation, the termination of federal and state concession programs, creation of more rigid criteria for qualification in public energy auctions, or a delay in the revision and implementation of new annual tariffs.

If regulatory changes require us to conduct our business in a manner substantially different from our current operations, our operations, financial results and our capacity to fulfill our contractual obligations may be adversely affected.

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The regulatory framework under which we operate is subject to legal challenge.

The Brazilian government implemented fundamental changes in the regulation of the power industry in legislation passed in 2004 known as the Lei do Novo Modelo do Setor Elétrico, or New Regulatory Framework.  Challenges to the constitutionality of the New Regulatory Framework are still pending before the Brazilian Federal Supreme Court (Supremo Tribunal Federal).  It is not possible to estimate when these proceedings will be finally decided.  If all or part of the New Regulatory Framework were held to be unconstitutional, there would be uncertain consequences for the validity of existing regulation and the further development of the regulatory framework.  The outcome of the legal proceedings could have an adverse impact on the entire energy sector, including our business and results of operations.

If the regulatory framework under which we operate is revised in a way that results in us being required to conduct our business in a manner substantially different from our current operations, our operations, financial results and our capacity to fulfill our contractual obligations may be adversely affected.

We cannot ensure the renewal of our concessions and authorizations.

We carry out our generation, transmission and distribution activities pursuant to concession agreements entered into with the Brazilian government.  Our concessions range in duration from 20 to 35 years.  The Brazilian Federal constitution requires all concessions relating to public services to be awarded through public tender.  Under laws and regulations specific to the electric energy sector, the Brazilian government may renew existing concessions for an additional period of up to 20 or 30 years, depending on the nature of the concession, without public tender, provided that the concessionaire has met minimum performance, financial and other relevant standards, and provided that the terms and conditions of the renewal are otherwise acceptable to the Brazilian government.  The Brazilian government has considerable discretion under the Concession Law, Law No. 9,074/95, Decree No. 7,805/12, Law No. 12,783/13, Decree No. 8,461/15, Law No. 13,360/16, Decree No. 9,158/17, Decree No. 9,187/17 and under concession contracts regarding renewal of concessions.  Furthermore, we may also be subject to new regulations enacted by the Brazilian government that could retroactively affect the rules for renewal of our concessions and authorizations.

The non-renewal of any of our concessions and authorizations, as well as the non-renewal of our energy supply contracts, could have a material adverse effect on our financial condition, results of operations and our capacity to fulfill our contractual obligations.

The tariffs that we charge for sales of electricity to Captive Consumers and the tariffs for using the distribution system that we charge to Special Free Consumers are determined by ANEEL pursuant to concession agreements with the Brazilian government, so our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.

Our tariffs are determined under concession agreements with the Brazilian government, and in accordance with ANEEL’s regulations and decisions. Our tariff rates are established discretionarily by ANEEL pursuant to the provisions of the concession contract and the legislation in effect.

Our concession agreements and Brazilian law establish a mechanism that allows for three types of tariff adjustments: (i) annual adjustment (RTA), (ii) periodic revision (RTP), and (iii) extraordinary revision (RTE).  We are entitled to apply each year for the annual adjustment, which is designed to offset some effects of inflation on tariffs and pass through to consumers certain changes in our cost structure that are beyond our control, such as the cost of the electricity we purchase and certain regulatory charges, including charges for the use of transmission and distribution facilities.  ANEEL generally carries out the RTP every four or five years (according to the terms of each concession agreement).  As such, it aims to identify variations in our costs and set a reduction factor based on our operational efficiency that will be applied against the index of our ongoing annual tariff adjustments.  Extraordinary revisions of our tariffs may occur at any time, or may be requested by us.  Extraordinary revisions may have a negative effect on our results of operations or financial position.  Previously, all revisions in methodologies were addressed in set cycles such as in 2008-2010 and 2010-2014.  In 2015, ANEEL changed this procedure to allow for the review of the underlying methodologies applicable to the electricity sector from time to time on an item by item basis.  Periodic tariff reviews were held for Companhia Piratininga de Força e Luz, or CPFL Piratininga, in October 2019, resulting in average adjustment of -7.80%, for Companhia Paulista de Força e Luz, or CPFL Paulista, and RGE Sul, in April 2018 and for RGE in June 2018, resulting in average adjustments of 16.90% (CPFL Paulista), 22.47% (RGE Sul) and 20.58% (RGE).

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We cannot predict whether ANEEL will establish tariffs or methodologies that are favorable to us. Additionally, we currently have ongoing judicial proceedings disputing the tariff review. A future unfavorable result in these proceedings may result in changes in the current tariffs, which may adversely impact our businesses and results of operations. See “Item 5. Operating and Financial Review and Prospects—Background—Periodic Revisions—RTP” for more information.

We are a holding company and a significant part of our cash flow comes from the distribution of profits of our subsidiaries. Certain financial agreements entered into by our subsidiaries impose restrictions on the distribution of dividends.

We are a publicly-held corporation with the main purpose of acting as a holding company, holding equity interests in other companies engaged in distribution, transmission, generation, commercialization activities as well as the provision of services, all in the energy segment.

A significant part of our cash flow comes from the distribution of dividends and interest attributable to shareholders’ equity by our subsidiaries. Events causing a reduction in the profits of such companies or suspensions in the payment of dividends may affect our financial condition. Our subsidiaries have financing agreements that prevent them from distributing dividends above the legal and statutory minimum dividends and, upon the occurrence of an event of default, from paying any dividends or interest attributable to shareholders’ equity. Our decision to distribute dividends will depend, among other factors, on our ability to generate profits, profitability, financial condition, investment plans, contractual limitations and restrictions imposed by applicable legislation and regulations.

Our distribution business may be required to reimburse consumers for up to ten years in the event of inaccurate billings.

The regulations applicable to inaccurate billings, in particular those regarding time barring periods, as established by Article 113, II, of ANEEL Normative Resolution No. 414, of September 9, 2010, were suspended by a preliminary injunction granted on December 18, 2018, and given effect by ANEEL on January 4, 2019.  The original language of Article 113, II, limited the period during which distribution companies were required by ANEEL to reimburse consumers in the event of inaccurate billings to 36 months.  The new time barring period to be applied by ANEEL is ten years.  If the preliminary injunction remains in place, we will be required to reimburse customers in the event of inaccurate billings for a ten-year period, which could represent a significant cost and adversely affect our financial results.

We may not be able to comply with the terms of our concession agreements and authorizations, which could result in fines, other penalties and, depending on the gravity of the non-compliance, in our concessions or authorizations being terminated. We cannot ensure that we will obtain, keep or renew all installation and operating permits necessary to conduct our business.

ANEEL may impose penalties on us in the event that we fail to comply with any provision of our concession agreements or authorizations.  Depending on the gravity of the non-compliance, these penalties could include the following:

·

fines per breach of up to 2.0% of the net operating revenue generated by the concession or authorization in the 12 months prior to the infraction notice related to the breach, or (if the relevant concession or authorization is non-operational) up to 2.0% of the estimated value of the energy that would have been produced for the 12 months prior to the infraction notice related to the breach;

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·

injunctions related to construction activities;

·

restrictions on the operation of existing facilities and equipment;

·

requiring the concessionaire’s controlling shareholders to carry out further capital expenditures (not applicable to authorizations);

·

temporary suspension from participating in new tenders, which may also be extended to controlling shareholders of the entity subject to the penalty;

·

intervention by ANEEL in the management of the concessionaire; and

·

termination of the concession or authorization.

In addition, the Brazilian government may terminate any of our concession agreements or authorizations by means of expropriation if it deems this to be in the public interest. We may also be a party in judicial lawsuits that may result in the future in restrictions in contracting with public authorities, which may adversely affect us financially and reputationally.

We cannot assure you that we will not be penalized by ANEEL for breaching our concession agreements or authorizations or that our concessions or authorizations will not be terminated in the future.  The compensation to which we are entitled upon expiration or early termination of our concessions or authorizations may not be sufficient for us to realize the full value of certain assets.  In addition, if any of our concession agreements or authorizations is terminated for reasons attributable to us, the effective amount of compensation by the granting authorities could be materially reduced through the imposition of fines or other penalties.  Accordingly, the imposition of fines or penalties on us or the termination of any of our concessions or authorizations could have a material adverse effect on our financial condition, results of operations and our capacity to fulfill our contractual obligations.

The distribution concessions held by our previous distribution subsidiaries CPFL Santa Cruz, CPFL Jaguari, CPFL Mococa, CPFL Leste Paulista and CPFL Sul Paulista (merged into CPFL Santa Cruz in 2018) were originally granted in 1999 for a 16-year term and have recently been extended to July 2045.  The extensions were granted under the new laws and regulations regarding distribution concessions, in particular Decree No. 7,805/12, Law No. 12,783/13 and Decree No. 8,461/15, so the concessions are now subject to the new targets and standards established by the Brazilian authorities.  Such new targets and standards are included in the amendments to the concession agreements.  There is as yet no precedent regarding how the authorities will act under these new laws and regulations, which include certain variables that are beyond our control and which may therefore impair our ability to fully achieve the relevant goals.  If we do not achieve the applicable goals, our distribution concessions and, therefore, our revenues and our capacity to fulfill our contractual obligations could be adversely affected.  See “Item 4—Information on the Company—Our Concessions and Authorizations—Concessions” for more information.

The licenses, permits and authorizations required and applicable to our activities are issued by public bodies such as mayor offices and environmental agencies and must be kept valid. When necessary, such licenses, permits and authorizations must be renewed with the competent public authorities.

We cannot ensure that we will obtain or keep valid or timely renew all permits, authorizations and real estate and environmental licenses necessary for the development of our activities. The delay in or rejection to the issuance or renewal of such documents by licensing agencies, as well as any possible inability of ours to comply with the requirements set forth by such agencies during the licensing process, may adversely affect our results of operations. Failure to obtain, keep or renew these licenses or authorizations may result in the imposition of fines and the interdiction of our irregular establishments, with a total or partial interruption of our activities. In the event of closing or temporary interruption of any of our businesses, our businesses and results may be adversely affected.

In our distribution business, we are required to forecast demand for electricity in the market.  If actual demand is different from our forecast, we could be forced to purchase or sell electricity in the spot market at prices that could lead to additional costs for us, which we may not be able to fully pass on to customers.

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Under the New Regulatory Framework, an electricity distributor must contract in advance, through public bids, for 100% of the required electricity that it has forecast for its Captive Consumers in its distribution concession areas, and is authorized to pass through the cost of up to 105% of this electricity purchase to consumers.  Over- or under-forecasting demand can have adverse consequences.  If we under-forecast the electricity demand and purchase in advance less electricity than we need, in a manner for which we are considered liable under the New Regulatory Framework and applicable regulation, we may be required to purchase the additional electricity in the spot market at volatile prices that can be substantially higher than under our long-term purchase agreements.  We may be prevented from passing through this additional cost in full to consumers; and we would also be subject to penalties under applicable regulation.  On the other hand, if we over-forecast demand and purchase in advance more electricity than we need (for example, if a significant portion of our Potential Free Consumers migrate to purchasing electricity in the Free Market or if events in Brazil or abroad which are not under our control, such as natural disasters or pandemics, create volatility in energy consumption), we may be required to sell the surplus energy at prices substantially lower than under our concessions.  In either circumstance, if there are significant differences between our forecast electricity needs and actual demand, our results of operations may be adversely affected.  Since August 2017, Decree No. 9,143/17 has allowed distribution companies to negotiate the energy surplus with Free Consumers and other agents of the Free Market (generators, traders and self-producers).  See “Item 4. Information on the Company—The Brazilian Power Industry—The New Regulatory Framework—Restricted Activities of Distributors” and “Item 4. Information on the Company—Distribution—Purchases of Electricity” for more information. For more information about risks relating to natural disasters or pandemics, see “—An occurrence of a natural disaster, widespread health epidemic or pandemic or other outbreaks could significantly harm our business, financial condition and results of operations. Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in sporadic volatility in global markets. As a result, the Brazilian economy and outlook may be affected, and consequently, our business, financial condition and trading price of our common shares may be adversely affected.”

ANEEL is revising the regulation on net metering and distribution tariffs and such revisions could adversely affect our distribution business.

Established by ANEEL Normative Resolution No. 482, of April 17, 2012, net metering regulations enable Captive Consumers to generate power and to inject any surplus of energy into the distribution system, in exchange for energy credits that can be used to offset future consumption in the following 60 months.  This resolution was amended in 2015 to enable shared generation of energy according to which a group of consumers can generate power in a remote location within the same distribution concession area and divide the energy credits between its constituents.  ANEEL has conducted a public consultation and a public hearing and is currently conducting another public consultation to review ANEEL Normative Resolution No. 482, of April 17, 2012, in particular with regard to the distribution fees to be paid to distribution concessionaires over the netted amounts of energy.  The revised regulation should come into effect in 2020.  If ANEEL revises the regulation in a way that is unfavorable to us, our results of operations could be adversely affected.

Furthermore, Captive Consumers classified as Group B are currently subject to pay monomial distribution tariffs that include energy consumption and as well as the use of the distribution system.  ANEEL is conducting public hearings to assess the regulatory impacts of a possible change in the tariffs structure of these consumers to a binomial structure, which would segregate the tariffs paid for the energy consumption and the tariffs paid for the use of the distribution system.  If this binomial structure is implemented in a way that is unfavorable to us, our results of operations could be adversely affected.

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Commercialization activity is subject to potential losses due to short-term variations in energy prices on the spot market.  In addition, we may not be able to buy electricity in the amount we need to meet the requirements in our sales agreements, which may expose us to the spot market at prices substantially higher than under our long-term agreements.

In our energy commercialization activities, we may not be able to buy electricity in the amount we need to meet the requirements in our sales agreements, which may expose us to the spot market at prices substantially higher than the prices under our mid- and long-term agreements. In general, all agents of the Free Market are subject to potential differences between the volumes of energy generated or purchased (supply) and the volumes of energy sold or consumed (demand). These differences in volume are settled by the CCEE at the spot price, or the PLD.  The PLD is calculated for each submarket and load level on a weekly basis and is based on the marginal cost of the operation, limited to minimum and maximum values determined by ANEEL.  The maximum and minimum values of the PLD are reviewed and set each year by ANEEL.  Variations in energy prices on the spot market may lead to potential losses in our commercialization activity.  Factors that may affect the PLD include: (i) expected and identified load variations; (ii) variations in the reservoir levels of hydroelectric plants; (iii) decreases or increases of expected and verified affluence; (iv) anticipations or delays in the commencement of operations of new generation or transmission companies; and (v) variations in predicted and verified generation of small power plants. The occurrence of any of these factors may lead to a substantial variation in the PLD, which may result in increased costs or reduced revenues in the short-term energy commercialization, and may still adversely affect our cash flow. For more information about a series of recent developments in regulations with respect to registration with the CCEE of expected consumption volume by participants in the Free Market, see “Item 4. Information on the Company—The New Regulatory Framework—Recent Developments in the Free Market.”

Our operating results depend on prevailing hydrological conditions.  Poor hydrological conditions may affect our results of operations.

We are dependent on the prevailing hydrological conditions in Brazil.  In 2019, according to data from the ONS, 70.5% (71.8% in 2018) of Brazil’s electricity supply came from Hydroelectric Power Plants.

Brazil is subject to unpredictable hydrological conditions, with non-cyclical deviations from the average rainfall index.  When hydrological conditions are poor, the ONS may dispatch Thermoelectric Power Plants, including those that we operate, to top up hydroelectric generation and maintain security levels in reservoirs and the electricity supply level. In cases when the Hydroelectric Power Plants, including those we operate, generate a volume of energy lower than the volume of energy assured under the MRE, these plants may be exposed to the PLD.  In the context of the MRE, when the amount of energy generated is lower than the assured energy, the “Generation Scaling Factor,” or GSF, takes place, which results in exposure of the hydroelectric generator to the PLD in the spot market. From 2015 to 2018, there was a shortage of energy under the MRE, which resulted in higher disbursements from hydroelectric generation. We remain exposed to GSF risk and disburse PLD-based amounts to provide energy to our consumers in the Free Market.

In the distribution segment, there may be extraordinary costs in acquiring energy when the ONS dispatches Thermoelectric Power Plants out of the merit order, such as ESS, related to energy security.  These additional costs may be passed on by distributors to consumers through periodic tariff readjustment or revision, in accordance with the applicable legislation. However, there will be a cash flow mismatch in the intervening period, since these costs must be covered immediately, while the tariffs are only readjusted annually.  See “Item 4. Information on the Company—The Brazilian Power Industry—Regulatory Charges—ESS” for more information.

In January 2015, the electricity sector began to implement a mechanism of monthly “tariff flags” under which consumer invoices may be subject to tariff additions on a monthly basis when energy supply costs reach certain levels, enabling consumers to adapt their consumption to energy costs.  Revenues collected under the tariff flag system are repaid to distribution companies on the basis of their relative energy cost for the period.  Due to the poor hydrological conditions that were observed from 2013 through 2015, red tariff flags were applied throughout 2015 since introduction of the system in January 2015.  In 2016, due to an improvement in hydrological conditions, green tariff flags were applied in most months of the year, but 2017 consisted principally of yellow and red tariff flags.  In November 2017, ANEEL held a public hearing in order to review the tariff flags methodology.  In accordance with the new methodology, red tariff flags were applied in November and December 2017.  In 2018, green tariff flags were applied from January to April and again in December, yellow tariff flags were applied in May and November, and red tariff flags were applied from June to October.  In April 2018, the methodology to calculate the additional rates due to the tariff flags was revised in order to consider the lack of hydropower generation (GSF factor).  From June to October 2018, the tariff flag reached its highest level, collecting an additional R$50 per MWh consumed due to poor hydrological conditions and higher market prices.

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In May 2019, through ANEEL Homologating Resolution No. 2,551, ANEEL revised the methodology used to calculate additional tariffs arising from tariff flag applications to consider the MRE’s total hydraulic generation forecast, as defined by the Monthly Operation Program (PMO), adjusted by the CCEE reduction factors and the average physical guarantee volume designed for the tariff flags and applied to the monthly average of the PLD for the tariff flag level, which is determined by the CCEE following price ranges triggers. The tariffs values valid from June 2019 to November 2019 were R$15 per MWh on yellow tariff flags, R$40 per MWh on the red tariff flags stage 1 and R$60 per MWh on the red tariff flags stage 2. In October 2019, ANEEL opened public consultation No. 27 to revise the tariff flag values, removing, as of November 2019, the rounding system that was applied to the values until then. As of November 2019, the current tariff flag values are: R$13.43 per MWh on yellow tariff flags, R$41.69 per MWh on the red tariff flags stage 1 and R$62.43 per MWh on the red tariff flags stage 2. In 2019, green tariff flags were applied from January to April and again in June, yellow tariff flags were applied in May, July, October and December, and red tariff flags level 1 were applied in August, September and November.

This mechanism may be insufficient to cover the thermoelectric energy supply costs and the exposure in the spot market due to poor hydrological conditions (GSF factor), and distributors still bear the risk of cash flow mismatches in the short term.  See “Item 4. Information on the Company—Basis for Calculation of Distribution Tariffs” for more information.

If the hydrological conditions are not satisfactory or the tariff flags system is altered, our operations and financial results may be adversely affected, as well as our ability to fulfill our contractual obligations.

The impact of an electricity shortage and related electricity rationing, as in 2001 and 2002, may have a material adverse effect on our business and results of operations.

The operational capacity of the Hydroelectric Power Plants in Brazil is strongly dependent on reservoir levels and, therefore, on rain. Periods of severe or sustained below-average rainfall resulting in an electricity shortage may adversely affect our financial condition and results of operations.  Hydrological conditions may be challenging both during the wet season, from December to April, and the dry season, from May to November.  For example, during the low rainfall period of 2000 and 2001, the Brazilian government instituted the Rationing Program, a program to reduce electricity consumption that was in effect from June 1, 2001 to February 28, 2002.  The Rationing Program established limits for energy consumption for industrial, commercial and residential consumers, with reductions in consumption ranging from 15% to 25%.  The Rationing Program may result in the decrease of demand for electric energy in Brazil, reducing gross operational profits.  If Brazil experiences another electricity shortage (a condition which might happen and we are not able to control or anticipate), the Brazilian government may implement similar or other policies in the future to address the shortage.  For example, electricity conservation programs, including mandatory reductions in electricity consumption, could be implemented if poor hydrological conditions cannot be offset in practice by other energy sources, such as Thermoelectric Power Plants, thereby resulting in a low supply of electricity to the Brazilian market.

In the event of a shortage of electricity, with a lower supply of electricity in the Brazilian market, our operations, financial results and our capacity to fulfill our contractual obligations may be adversely affected.

We are uncertain as to the review of the Assured Energy of our Generation Power Plants.

Decree No. 2,655 of July 2, 1998 established that the Assured Energy of generation power plants would be revised every five years.  As part of these revisions, the MME can revise a company’s Assured Energy, limited to a maximum change of 5% per revision or 10% over the entire period of the concession agreement.  According to Ordinance No. 515/2015 issued by the MME, the first revision of Assured Energy under this process was originally expected to be implemented for Hydroelectric Power Plants (other than SHPPs) in January 2017.  Since the application of the methodology of this new revision to each power plant is not yet available; however, the MME issued Ordinance No. 714/2016, pursuant to which the current Assured Energy for each Hydroelectric Power Plant would remain in effect until December 2017.  The first revision of Assured Energy was implemented in January 2018 under MME Ordinance No. 178/2017 and led to a reduction in the Assured Energy of our Hydroelectric Power Plants by an average of 2.4%.  SHPPs, unlike other Hydroelectric Power Plants, have been subject to annual revisions of their Assured Energy since 2010 in accordance with MME Ordinance No. 463/2009.  These annual revisions have not resulted in reductions in the Assured Energy levels of CPFL Geração’s SHPPs, but have resulted in reductions for CPFL Renováveis’ SHPPs, which is subject to judicial discussion. Beginning in 2017, Decree No. 564/2014 extended such revision to biomass plants, which led to a decrease in the Assured Energy of CPFL Renováveis’ biomass plants by an average of 1.1% in 2019 and an increase by an average of 4.3% in 2018.

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We cannot be certain of how and when future revisions will affect the Assured Energy of each of our individual power plants, whether the renewable energy producers will succeed in their appeal against the revision process, or whether the overall effect of revisions will increase or decrease our Assured Energy.  When the Assured Energy of a power plant is decreased, our ability to supply electricity under that plant’s PPAs is adversely affected, which can lead to a decrease in our revenues and increase our costs if our generation subsidiaries are required to purchase power elsewhere.  We expect revisions of Assured Energy under Decree No. 2,655/98 to continue to take place every five years for our power plants other than SHPPs.  See “Item 4Principal Regulatory AuthoritiesMinistry of Mines and Energy – MME” for more information.

Construction, expansion and operation of our electricity generation, transmission and distribution facilities and equipment involve significant risks that could lead to lost revenues or increased expenses.

The construction, expansion and operation of facilities and equipment for the generation, transmission and distribution of electricity involve many risks, including:

·

the inability to obtain or renew required governmental permits and approvals;

·

the unavailability of equipment;

·

supply interruptions;

·

work stoppages;

·

labor unrest, including strikes;

·

social unrest;

·

weather and hydrological interferences;

·

unforeseen engineering, regulatory and/or environmental problems;

·

increases in electricity losses, including technical and commercial losses;

·

construction and operational delays, or unanticipated cost overruns;

·

the inability to win electricity auctions held by ANEEL; and

·

unavailability of adequate funding.

If we experience these or other problems, we may not be able to generate or distribute electricity in amounts consistent with our projections, which may have an adverse effect on our financial condition, results of operations and our capacity to fulfill our contractual obligations.

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Dams are part of the Brazilian energy sector’s critical and essential infrastructure. Failures in dams under our responsibility can have serious impacts on affected communities, our results and our reputation.

Dams are important infrastructure for our business, representing most of our power generation capacity. However, dams have an intrinsic risk of rupture, either by factors internal or external to their structure (such as the rupture of an upstream dam). The gravity and nature of the risk are not entirely predictable. Thus, we are subject to the risk of a dam failure that could have much greater repercussions than the loss of hydroelectric generation capacity. Failure of a dam can result in economic, social, regulatory, environmental and potential loss of human lives in existing downstream communities. This could result in a significant adverse effect on our image, business, results of operations and financial condition.

We are subject to environmental and health regulations that may become more stringent in the future and may result in increased liabilities and increased capital expenditures.

Our activities are subject to comprehensive federal, state and municipal legislation, obtaining and maintaining licenses, as well as regulation and oversight by Brazilian governmental agencies responsible for implementing environmental and health laws and policies. Such measures may include, among others, criminal and administrative penalties, such as the imposition of fines and the revocation of licenses. These agencies may take action against us if we do not comply with applicable regulations, or fail to obtain or maintain our respective licenses.  The penalties depend on the intensity of the offense or the extent of the damage caused, as well as on any aggravating or mitigating circumstances applicable to the violator.  It is possible that an increase in the strictness of environmental and health regulations will force us to increase or direct our investments to comply with such regulation and, consequently, to divert resources from planned investments, which may adversely affect our financial situation and result of our operations.

Companies in the electricity sector are subject to strict environmental legislation at the federal, state and local levels regarding vegetation suppression, solid waste management, interventions in specially protected areas, and the operation of potentially polluting activities, among others. Such companies require licenses and authorizations from governmental agencies for the installation of their businesses and the operation of their activities.

In the event of violation or non-compliance with such laws, regulations, licenses and authorizations, companies may be subject to administrative sanctions, such as fines, prohibition of activities, cancellation of licenses and revocation of authorizations, or criminal sanctions (including their management), without prejudice to the obligation to repair the environmental damage caused in the civil sector. The Public Prosecutor’s Office may initiate a civil investigation or immediately initiate public civil action seeking compensation for possible damage to the environment and affected third parties.

Federal legislation imposes strict liability on all those who directly or indirectly cause environmental degradation and, therefore, the duty to repair or indemnify for damages caused to the environment and to affected third parties, regardless of intent or fault. Federal legislation also provides for piercing the corporate veil of the polluting company, subjecting management and shareholders to personal responsibility, to enable compensation for damages caused to environmental quality. As a result, we may be required to bear the cost of environmental repair. Payment of substantial environmental indemnities or material expenses incurred to fund environmental recovery may prevent, or cause us to delay or redirect investment plans to other areas, which may adversely affect our business, reputation, operations and image.

Governmental agencies or other authorities may also edit new, stricter rules or seek more restrictive interpretations of existing laws and regulations, which may require companies in the electric power sector, including us, to spend additional resources on environmental suitability, including obtaining environmental licenses for installations and equipment that did not previously require these environmental licenses.

If environmental and health regulations become more stringent in the future, our operations and financial results may be adversely affected, as well as our ability to meet our contractual obligations.

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Changes in Brazilian tax legislation, tax incentives and benefits, or different interpretations of tax legislation or case law may negatively affect our results of operations.

Changes in Brazilian tax laws, interpretations of tax authorities, administrative or judicial jurisprudence and tax rules in Brazil may result in an increase in the tax burden on our financial results, which may significantly reduce our operating profits and cash flows. Our distribution subsidiaries and commercialization subsidiary, CPFL Brasil, are parties to judicial proceedings that address the exclusion of ICMS from the tax assessment basis of PIS and COFINS paid by such entities. If we are successful in such proceedings, we expect to obtain a tax credit of part of the amounts of PIS and COFINS overpaid, while the remaining amounts may have to be returned to consumers. If the administrative or judicial authorities have a different understanding than ours as to the use of the tax credit, we may have to return the total amount of the overpayments to consumers, which will not give rise to the benefits we expect. In addition, our results of operations and our financial condition may be negatively affected if certain tax incentives are not maintained or renewed. We may fail to collect applicable taxes and fees or to comply with tax laws, which may result in additional tax assessments and penalties.

If we are unable to complete our proposed capital expenditure program in a timely manner, the operation and development of our business may be adversely affected.

We plan to invest R$1,158 million in our generation activities (R$1,085 million in renewable sources and R$73 million in conventional sources), R$11,587 million in our distribution activities, R$233 million in our commercialization and services activities and R$564 million in our transmission activities during the period from 2020 through 2024.  Our ability to carry out this capital expenditure program depends on a variety of factors, including our ability to charge adequate tariffs for our services, our access to domestic and international capital markets and a variety of operating, regulatory and other contingencies.  We cannot be certain that we will have the financial resources to complete our proposed capital expenditure program, and failure to do so could have a material adverse effect on the operation and development of our business.

We plan to make capital expenditures aggregating R$3,069 million in 2020, R$2,924 million in 2021, R$2,906 million in 2022, R$2,334 million in 2023 and R$2,306 million in 2024.  We have already contractually committed to part of these expenditures, particularly in generation projects.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Funding Requirements and Contractual Commitments” for more information.  Planned capital expenditures for development of our generation capacity, and the related financing arrangements, are discussed in more detail under “Item 4. Information on the Company—Generation of Electricity.”  Our ability to complete the proposed capital expenditure program described above depends on a series of factors, including our ability to charge adequate tariffs for our services, our access to Brazilian and foreign securities markets and several operational and regulatory contingencies, among others.  There is no certainty regarding whether we will have the financial resources available to conclude our proposed capital expenditure program.  Any inability to complete this program may have a material adverse effect on us, our operations, the development of our business and our capacity to fulfill our contractual obligations.

We are liable for any losses and damages resulting from not providing or inadequately providing electricity services, and our contracted insurance policies may not fully cover such losses and damages.

Under Brazilian law, we are strictly liable for direct and indirect losses and damages resulting from the inadequate provision of electricity distribution services.  In addition, our distribution facilities may, together with our transmission and generation utilities, be held liable for losses and damages caused to others as a result of interruptions or disturbances arising from the generation, transmission or distribution systems, whenever these interruptions or disturbances are not attributed to an identifiable member of the ONS.  We may have to pay for damages resulting from not rendering or inadequately rendering electricity services, which may have an adverse effect on us and our capacity to fulfill our contractual obligations.

We may not be able to create the expected benefits and return on investments from our renewable energy generation businesses.

Through our subsidiary CPFL Renováveis, we have made substantial capital investments (amounting to R$972 million for the last three fiscal years) in generation businesses other than hydroelectric power, principally wind generation.  Some of these business lines depend on favorable regulatory incentives to support continued investing and there is significant uncertainty as to the extent to which these favorable regulatory incentives will be available in the future.  These renewable generation businesses are dependent on certain factors that are not within our control and may significantly affect these businesses.  In the biomass business, we may suffer from market shortages of sugar cane, a necessary input for biomass generation.  In addition, we depend to a certain extent on the performance of our partners in the operation of biomass plants.  The operation of wind farms involves significant uncertainties and risks, including financial risk associated with the difference between the energy we generate and the energy contracted through the public energy auctions or in the Free Market.  These financial risks are principally: (i) lower wind intensity and duration than that contemplated in the study phase of the project; (ii) any delay in commencement of a wind farm’s operations; and (iii) unavailability of wind turbines at levels above the expected benchmarks.

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Production levels of wind projects depend on adequate wind, resulting in volatility in production levels and profitability. For example, estimates of natural resources for our wind projects are based on historical experience, when available, and on wind resources studies conducted by an independent certifier, and do not necessarily reflect actual wind power production in a given year.

As a result, these types of renewable energy projects face considerable risks in relation to our core business, including the risk that favorable regulatory regimes will expire or be adversely modified. Additionally, at the development or acquisition stage, due to the incipient nature of these industries or limited experience with relevant technologies, our ability to predict actual performance results may be impaired and projects may not perform as expected. If these generation plants are not able to generate the energy we have contracted to supply, we may be obliged to buy the shortfall in the spot market or be subject to the penalties set forth in the agreements, which would increase our costs and lead to losses in this segment.  These projects are capital intensive and generally require third-party financing, which can be difficult to obtain at attractive rates. As a result, capital constraints may reduce our ability to develop such projects or develop them based on an efficient capital structure. See “Item 4. Information on the Company—The Brazilian Power Industry—The New Regulatory Framework” for more information.

Our controlling shareholder’s interests could conflict with yours.

On January 23, 2017, State Grid Brazil Power Participações S.A., or State Grid, consummated the acquisition of common shares representing 54.6% of our voting capital, pursuant to which it has gained control over us.  State Grid Brazil Power Participações S.A. is an indirect subsidiary of State Grid Corporation of China, a state-owned enterprise of the People’s Republic of China.  In November 2017, State Grid launched a mandatory tender offer for our shares.  Following the closing of this tender offer on December 5, 2017, State Grid directly and indirectly through ESC Energia S.A. (a wholly-owned subsidiary of State Grid) held 964,521,902 of our common shares, equivalent to 94.75% of our total share capital. On May 30, 2019, we announced the launch of our follow-on primary equity offering, or the Follow-on Offering, which closed on June 14, 2019. Following the closing of the Follow-on Offering, State Grid’s direct and indirect equity interest in our capital stock decreased to 83.71%.

On December 18, 2019, our board of directors approved our intention to (i) terminate our Second Amended and Restated Deposit Agreement, or the Deposit Agreement, with Citibank, N.A. regarding our ADSs, (ii) delist our ADSs from the New York Stock Exchange, or the NYSE, and (iii) terminate our registration with the U.S. Securities and Exchange Commission, or the SEC. Following the termination of our Deposit Agreement, on January 28, 2020, the NYSE suspended trading in our ADSs and filed a Form 25 with the SEC to permanently remove our ADSs from listing. This removal became effective on February 10, 2020. Once we meet the criteria for terminating our reporting obligations under the Exchange Act of 1934, as amended, or the Exchange Act, we intend to file a Form 15F with the SEC to deregister and terminate our reporting obligations under the Exchange Act. Immediately upon filing Form 15F, our legal obligation to file reports under the Exchange Act will be suspended, and deregistration is expected to become effective 90 days later.

Our controlling shareholder may take actions that could be contrary to your interests, and our controlling shareholder will be able to prevent other shareholders, including you, from blocking these actions.  In particular, our controlling shareholder controls the outcome of decisions at shareholders’ meetings, and it can elect a majority of the members of our board of directors.

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Our controlling shareholder can direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses.  Its decisions on these matters may be contrary to the expectations or preferences of our non-controlling shareholders, including holders of our common shares.  See “Item 4. Information on the Company—Overview” for more information regarding State Grid’s acquisition and our announced intention regarding our ADSs.

We are exposed to increases in prevailing market interest rates as well as foreign exchange rate risk.

The costs of electricity purchased from the Itaipu Power Plant, or Itaipu, a Hydroelectric Power Plant that is one of our major suppliers, are indexed to the U.S. dollar exchange rate.  Itaipu rates rise or fall pursuant to the variation of the U.S. dollar/real exchange rate. Furthermore, changes in the price of electricity generated by Itaipu are subject to the Parcel A Cost recovery mechanism pursuant to which our tariffs are adjusted annually in order to contemplate the losses or gains from these purchases from Itaipu.  Our cash flows may be adversely affected by volatile exchange rates due to the mismatch between the date on which we purchase electricity from Itaipu and the date on which our tariffs are adjusted through the Parcel A Cost recovery mechanism. For more information on the Parcel A Cost recovery mechanism, see “Item 4. Information on the Company—Basis for Calculation of Distribution Tariffs.”

Natural disasters, the outbreak of a widespread health epidemic or pandemic, or other events, such as wars, acts of terrorism, political events and environmental accidents may cause sporadic volatility in global markets and result in volatile exchange rates. See “—An occurrence of a natural disaster, widespread health epidemic or pandemic or other outbreaks could significantly harm our business, financial condition and results of operations. Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in sporadic volatility in global markets. As a result, the Brazilian economy and outlook may be affected, and consequently, our business, financial condition and trading price of our common shares may be adversely affected.”

Our level of indebtedness and debt service obligations, as well as the restrictive covenants in our financial contracts, could adversely affect our ability to operate our business and make payments on our debt.

As of December 31, 2019, we had total debt of R$18,910 million.  Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal, interest or other amounts due in respect of our indebtedness.  In addition, we may incur additional debt from time to time to finance acquisitions, investments, joint ventures or for other purposes, subject to the restrictions applicable under our existing indebtedness, such as when we acquired RGE Sul in October 2016. If we incur additional debt, the risks associated with our leverage would increase.

Some of our financing agreements contain restrictive covenants that impose operational restrictions and other restrictions on our business. In particular, some of these covenants prevent us from incurring additional debt or making restricted payments, including the distribution of dividends, should we not comply with certain financial ratios and financial tests. These indexes and financial tests are based on the achievement of certain adjusted EBITDA levels (calculated according to the criteria contained in the debt instruments), interest expenses, total indebtedness and net profit. These indexes and financial tests are maintenance tests, which means that we must comply with them continuously every year to not breach our debt obligations. Our ability to comply with these indexes and financial tests may be affected by events beyond our control and we cannot assure that we will comply with these indexes and financial tests. Failure to comply with any of these covenants may result in an event of default under these agreements and others.

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Our level of indebtedness and the restrictive covenants in our debt instruments may entail significant risks, including the following:

·

increase our vulnerability to negative economic, financial and sectorial conditions in general; and

·

the need to dedicate a substantial part of our cash flows from debt service operations, thus reducing the availability of our cash flows to finance capital expenditures.

Our operational cash flow generation may not be sufficient to pay the principal, interest and other amounts owed in relation to current and future debt. In this case, we may not be able to borrow, sell assets or otherwise raise funds on acceptable terms or even do so to refinance our debt as soon as it is due or becomes due. If we incur additional debt, the risks related to our debt may increase, including the risk of default upon maturity of our debt.

In the event that we are in default under any of our financing agreements, the maturity of the debt underlying these agreements (including principal, interest and any fines) may be accelerated, which may trigger provisions for cross-default or cross-acceleration under our other financing agreements and, in view of our significant level of indebtedness, materially and adversely affect our financial condition. In the past, we have been unable to comply with certain of our debt covenants and we have requested and obtained waivers from compliance with certain debt coverage ratio covenants. We may, in the future, be unable to comply with such or other applicable debt covenants and be forced to seek additional waivers. We cannot guarantee that we will be successful in meeting our covenants, and if we are unable to meet our covenants, in obtaining or renewing any waivers.

Hiring costs may vary according to market demand due to a restricted number of suppliers.

Our maintenance needs and construction demands of new projects are met by a limited number of suppliers. We are vulnerable to market supply and demand, especially at times when there are large investments in the energy sector, which may cause us to pay high prices for these services and materials used in these projects.

The inability or unwillingness of such third parties to provide us these services at the quality level set forth in the contract, as well as to supply the necessary materials to perform these services, may: (i) cause non-compliance with our regulatory obligations; (ii) jeopardize the preservation of our power plants and transmission and Distribution Networks; or (iii) temporarily reduce the electric power generation availability or capacity of our power stations and our transmission and Distribution Networks. As a result, we may have lower sales revenues and a possible short-term market exposure, which may have an adverse effect on our results and image. Termination of these materials supply agreements and construction or operation and maintenance services, or our inability to renew them or to negotiate new agreements with other equally qualified service providers, in a timely manner and at similar prices, may have an adverse effect on our results.

We rely on third parties to supply equipment used in our facilities, as well as to conduct part of our operations, and the failure of one or more suppliers may adversely affect our activities, financial condition and results of operations.

We rely on third parties to provide the equipment used in our facilities and engineering services and, as a result, we are subject to price increases and failures by such suppliers and service providers, such as delivery delays or delivery of damaged equipment. Such issues may adversely affect our activities and have an adverse effect on our results. Furthermore, various sources of supply-chain risk, including strikes or shutdowns, loss of or damage to our equipment or their components while they are in transit or storage, natural disasters or the occurrence of a contagious disease or illness, such as the coronavirus, or COVID-19, outbreak that the World Health Organization designated as a pandemic in March 2020, could limit the supply of the equipment used in our facilities.

In addition, due to the technical specifications of our equipment and construction projects, there are few suppliers and service providers available. If a supplier discontinues the production or the sale of any equipment necessary to our activities or interrupts the provision of engineering services, we may not be able to acquire such equipment or service from other suppliers under the same price and conditions. As a result, the provision of transmission and generation services by us may be significantly impaired, which may adversely impact our financial condition and results of operations.

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Since we outsource part of our operations, in the event that one or more service providers discontinue its activities or interrupts the rendering of services, our operations may be adversely affected, which may have an adverse effect on our results and financial condition.

In particular, we may experience a shortage in some of the key equipment used in our activities due to disruptions caused by the current COVID-19 pandemic, particularly in China where some of this equipment is manufactured. Any continued operating complications caused by the COVID-19 pandemic, including any prolonged period of travel, work place closures, commercial and other similar restrictions may result in further shortages or service interruptions. Any shortages or interruptions may adversely affect the continuous development of our activities, which may have a material adverse effect on our results of operations and financial position.

Furthermore, in the event that one or more service providers do not comply with any of their labor or social security obligations, we may be jointly and severally or subsidiarily liable for such obligations. This may adversely affect our operating results, as well as negatively impact our reputation in the event of any future fine or indemnity payment.

We may acquire other companies in the electricity business, as we have in the past, and these acquisitions could increase our leverage or adversely affect our consolidated performance.

We regularly analyze opportunities to acquire other companies engaged in activities along the entire electricity generation, transmission and distribution chain, such as when we acquired RGE Sul in October 2016, or make non-controlling investments in companies in the sector. Such acquisitions involve risks and challenges relating to achieving the conditions that were used to project the future profitability of the business, including integrating operations, systems, employees, equipment and clients of the acquired companies, as well as generating the expected return on investments and exposure to liabilities of such companies. As a result, integrating our businesses with the business of the acquired companies and capturing its synergies may also require more resources and time than initially expected.

Such acquisitions may also require approval by CADE, ANEEL, and existing and future financial creditors. The decisions of any of these entities may be prejudicial to our businesses and may even result in the cancellation or nullification of the transaction.

If we do make investments in other electricity companies, this could increase our leverage or reduce our profitability.  Furthermore, we may not be able to integrate an acquired company’s activities and achieve the economies of scale and expected efficiency gains that often drive such acquisitions.  Any such failure could harm our financial condition and results of operations.  

Our transmission business may be obligated to perform certain work for a price established by ANEEL, which may be based on unrealistic costs and at a lower weighted average cost of capital than the one we accepted in the auctions in which we have participated.

The applicable laws and regulations, as well as the concession agreements of our transmission business, set forth that we are obligated to perform maintenance and enhancements on the existing transmission facilities when mandated by ANEEL.  The price for such projects is unilaterally established by ANEEL based on prices included in a theoretical cost database and on a regulatory weighted average cost of capital, which may be lower than the one we accepted in the auctions in which we have participated.  We may perform work for which returns on investment may differ from our expectations.

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The level of default by our consumers could adversely affect our business, operational results, and/or financial situation.

The level of default by our consumers may be affected by economic factors such as income levels, unemployment, interest rates, inflation and the price of energy.  The current macroeconomic situation in Brazil, combined with the increase in energy prices in recent years and the recent COVID-19 pandemic, which has led to a prolonged period of workplace closures, commercial shutdowns and other similar restrictions, could lead to an increase in the risk of default by our consumers.  ANEEL has also recently introduced measures restricting our ability to suspend service following consumer defaults for a specified period. For more information about the COVID-19 pandemic, see “—An occurrence of a natural disaster, widespread health epidemic or pandemic or other outbreaks could significantly harm our business, financial condition and results of operations. Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in sporadic volatility in global markets. As a result, the Brazilian economy and outlook may be affected, and consequently, our business, financial condition and trading price of our common shares may be adversely affected.” We cannot assure you that the measures to improve payment collection that we implemented will be sufficient or effective in maintaining our consumer default at current levels.  If the level of default increases, our business, operational results, financial situation and capacity to fulfill our contractual obligations could be adversely affected.

Our business is subject to cyber-attacks and security and privacy breaches.

Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data.  We also use key information technology systems for controlling energy and commercial, administrative and financial operations.  An increasing number of organizations, including large businesses, financial institutions and government institutions, have disclosed breaches of their information technology and information security systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure.

The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade service, or to sabotage systems may not be detected quickly or recognized until launched against a target.  Unauthorized parties may attempt to gain access to our systems or facilities through various means, including, among others, hacking into our systems or those of our customers, partners or vendors, or attempting to fraudulently induce our employees, customers, partners, vendors or other users of our systems into disclosing user names, passwords, payment card information or other sensitive information, which may in turn be used to access our information technology systems.  Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect.

Our information technology and infrastructure may be vulnerable to cyber-attacks or security breaches, and third parties may be able to access our customers’, suppliers’ and employees’ personal or proprietary information that are stored on or accessible through those systems.  Our security measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities.  Any actual or perceived breach of our security could interrupt our operations, result in our systems or services being unavailable, result in improper disclosure of data, materially harm our reputation and brand, result in significant legal and financial exposure, lead to loss of customer confidence in, or decreased use of, our products and services, and adversely affect our business and results of operations.  In addition, any breaches of network or data security at our customers or suppliers, including data center, could have similar negative effects.  Actual or perceived vulnerabilities or data breaches may lead to claims against us.

Additionally, we do not maintain insurance policies specifically for cyber-attacks and our current insurance policies may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.  We cannot guarantee that the protections we have in place to protect our operating technology and information technology systems are sufficient to protect against cyber-attacks and security and privacy breaches.

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Data breaches in our database, which contains the personal data of our clients, suppliers and employees, as well as the Brazilian General Data Protection Act, or GDPA, which will come into force in August 2020, and other developments in the personal data protection and privacy legal framework could have an adverse effect on our business, financial condition or results of operations.

We maintain a database of information about our customers, which mainly includes data collected when clients sign up for our services and through our mobile applications.  If we experience a breach in our security procedures, the integrity of our database may be affected.  Doubts or misgivings about the security and protection of our customers’ data stored in our systems or otherwise processed by us can affect our reputation and, therefore, negatively impact our results.  Unauthorized access of the personal data of our clients or any public perception that we unduly disclose the personal information of our clients may subject us to legal or administrative proceedings, resulting in damages, fines and harm to our reputation, especially after the GDPA (as defined and described below) comes into force.

Currently, the processing of personal data in Brazil is regulated by a series of rules, such as the Federal Constitution, the Consumer Protection Code and the Brazilian Civil Rights Framework for the Internet.  Efforts to protect personal data inserted into and/or made available in our systems may not ensure that these protections are adequate and comply with the rules established by the current legislation.  Failure to comply with certain provisions of applicable law, especially as regards to (i) providing clear information on the data processing operations performed by us, (ii) respect for the original purpose of the data collection; (iii) legal deadlines for the storage and exclusion of user personal data, and (iv) the adoption of legally required security standards for the preservation and inviolability of the personal data processed, can give rise to penalties, such as fines and even temporary suspension or prohibition of our personal data processing activities.

There can be no guarantee that we will have sufficient financial resources to comply with any new regulations or successfully compete in relation to data protection practices, in the context of a shifting regulatory environment.

In 2018, Law No. 13,709/2018, the GDPA, was published, as amended by Law No. 13,853/2019, and will come into force in August 2020.  The GDPA has a wide range of applications and applies to individuals and private and public entities, regardless of the country where they are located or where the data is hosted, as long as (i) the data processing takes place in Brazil; (ii) the data processing is aimed at offering services or goods or to process data of individuals located in Brazil; or (iii) the data collection takes place in Brazil.  The GDPA will apply regardless of industry or business dealing with personal data and is not limited to data processing activities through digital media and/or in the internet.

The GDPA brings deep changes in the regulation of personal data processing in Brazil, with a set of rules to be observed in activities such as collection, processing, storage, use, transfer, sharing, and erasure of information related to identified or identifiable individuals in Brazil, including that of our clients, suppliers and employees.  The GDPA establishes, among others, principles, requirements and obligations applicable to data controllers or processors, a set of rights of personal data subjects, the legal basis applicable to the protection of personal data, requirements for obtaining consent of data subjects, obligations and requirements relating to security incidents, and obligations related to cross-borders data transfers, obligations to appoint a data protection officer, corporate governance practices, civil liability regime and penalties for non-compliance with its provisions.  Law No. 13,853/2019 authorized the creation of the National Data Protection Authority, which will have authority and responsibility similar to that of the European data protection authorities. The National Data Protection Authority is currently not operational and no commissioners have been appointed to it. The National Data Protection Authority will be responsible for (i) conducting investigations, during which it will have the authority to issue rules and proceedings, decide on the GDPA interpretation and request information from controllers and processors; (ii) enforcing the law, in case of non-compliance, through administrative proceedings; and (iii) providing education, by disseminating information and knowledge about the GDPA and security measures, promoting service and product standards that support data control and developing studies about national and international practices for personal data protection and privacy, among other measures.

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We may have difficulty adapting to the new legislation.  In the event of non-compliance with the GDPA, we may be subject to penalties which include the publication of the infraction, elimination of personal data to which the violation relates, and an administrative fine.

The GDPA and similar laws and regulations that may be passed or issued by the National Data Protection Authority in the future may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible they will be interpreted and applied in ways that will materially and adversely affect our business.  Any failure, real or perceived, by us to comply with the law in force relating to personal data protection or with any regulatory requirements or orders or other local, state, federal, or international personal data protection-related laws and regulations could materially and adversely affect our business.

We may be substantially affected by violations of our Code of Ethical Conduct, the Anti-Corruption Law and similar laws.

Non-compliance by our officers, managers, employees or representatives, as well as by our subsidiaries, controlling companies or affiliates, jointly and severally, of our Code of Ethical Conduct and of applicable anti-corruption legislation may expose us to penalties set forth therein. Accordingly, our compliance guidelines may not be sufficient to prevent or detect inappropriate practices, fraud or breaches of law by any officer, manager, employee, representative, subsidiary, controlling company, affiliate or by any third party acting on behalf of or for the benefit of such parties or their interests. We may, in the future, discover cases in which there have been failures to comply with applicable laws, regulations or internal controls, which may result in fines or other penalties and adversely affect our reputation, financial condition and strategic objectives.

Law No. 12,846 of August 1, 2013, or the Anti-Corruption Law, introduced the concept of strict liability for legal entities involved in acts harmful to public administration, subjecting the offender to civil and administrative penalties, similar to the United States Foreign Corrupt Practices Act.  Any failure to comply with anti-corruption laws, misconduct investigations or enforcement procedures against us may lead to fines, the loss of operating permits and reputational damage, as well as to other penalties, and may adversely affect us. We cannot ensure that our compliance guidelines are sufficient to prevent or detect all inappropriate practices, frauds or violations of the Anti-Corruption Law and similar laws by any of our officers, managers, employees or representatives.

Our internal controls may be insufficient to prevent or detect all violations of applicable law or of our internal policies.

Our internal controls may not be sufficient to prevent or detect all improper conduct, incidents of fraud or breaches of applicable law by our employees and members of our management. If our employees or other persons affiliated with us engage in fraudulent, corrupt or unfair practices or violate applicable laws and regulations or our internal policies, we may be held liable for any such violations, which may result in penalties, fines or sanctions that can substantially and adversely affect our businesses and our image.

Any future liquidation proceeding of the company or its subsidiaries may be conducted on a consolidated basis.

The Brazilian judiciary or our creditors and/or those of companies in our economic group may determine that any future liquidation proceeding of a company in an economic group be conducted as if the group were a single company (substantial consolidation theory). Should this happen, our shareholders may be adversely affected by the loss of value of the company in the event of allocation of our equity to pay the creditors of other companies in our economic group.

Unfavorable decisions in judicial or administrative proceedings or arbitrations may adversely affect our reputation, business, financial condition and operational results.

We and our managers are or may become defendants in judicial and administrative proceedings and arbitrations of a civil, criminal, tax, labor, regulatory and environmental nature, which we cannot guarantee will have favorable outcomes to us and our managers. The provisions we are required to make for these proceedings may be insufficient to cover the total cost involved. In addition, we and our management may be subject to contingencies for other reasons that require us to disburse significant amounts that affect the regular conduct of our business or result in the suspension or disqualification of our managers for the exercise of their positions. Unfavorable decisions for us or our managers may adversely affect our reputation, business, financial condition and operational results.

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An occurrence of a natural disaster, widespread health epidemic or pandemic or other outbreaks could significantly harm our business, financial condition and results of operations. Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in sporadic volatility in global markets. As a result, the Brazilian economy and outlook may be affected, and consequently, our business, financial condition and trading price of our common shares may be adversely affected.

Natural disasters, such as fires or floods, the outbreak of a widespread health epidemic or pandemic, such as the COVID-19 pandemic, or other events, such as wars, acts of terrorism, political events, environmental accidents, power shortages or communication interruptions could significantly harm our business.  The occurrence of a disaster or similar event may materially disrupt our business and operations.  These events may also cause us to close our operating facilities temporarily, which would severely disrupt our operations and seriously harm our business, financial condition and results of operations.  In addition, our net sales could be significantly reduced to the extent that a natural disaster, health epidemic or pandemic or other major event harms the economy of Brazil or any other jurisdictions where we may operate.  Our operations could also be severely disrupted if our consumers, service providers or other participants were affected by natural disasters, health epidemics or pandemics or other major events.

Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in volatility in global markets, potentially affecting the Brazilian economy and outlook. In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China and cases of infected patients have been reported in other jurisdictions, including reported cases in Brazil in, among other locations, the state of São Paulo, where we have our headquarters. On March 11, 2020, the World Health Organization designated COVID-19 as a pandemic. The spread of this virus has caused certain business, market and travel disruption globally and particularly in infected regions.

Increases in the number of infected patients in Brazil have adversely affected the Brazilian economy and the financial markets. Further increases in the number of infected patients in Brazil may cause these disruptions to be more severe and more acutely affect the Brazilian economy and the financial markets, consequently having an adverse effect on our financial condition, results of operations and the trading price of our common shares.  For example, Brazilian residents, including our employees, that are suspected of having contracted a communicable disease such as COVID-19 are subjected to quarantines.  On a business level, this may adversely affect our revenues and income from operations. For further information on the impact to our business, see "We rely on third parties to supply equipment used in our facilities, as well as to conduct part of our operations, and the failure of one or more suppliers may adversely affect our activities, financial condition and results of operations." Any such further outbreak could more generally restrict economic activities in affected regions in Brazil, resulting in reduced business volume, temporary closures of our or other companies’ facilities or otherwise disrupt our business operations.

While any disruption caused is currently expected to be temporary, there is uncertainty around the duration of these disruptions, the possibility of any government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. Furthermore, the COVID-19 pandemic has already disrupted consumption and trade patterns, supply chains and production processes at a global scale. The extent to which the consequences of the COVID-19 pandemic impacts our results, including the results of our consumers, will depend on future developments that are highly uncertain and cannot be predicted, such as any new information which may emerge concerning the severity of the coronavirus, the potential spread to other regions and the actions to contain the coronavirus or treat its impact, among others. 

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Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  This involvement, as well as Brazilian political and economic conditions, could adversely affect our business and the trading price of our common shares.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations.  The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports.  Our business, financial condition and results of operations may be adversely affected by changes in policy or regulations at the federal, state or municipal levels involving or affecting factors such as:

·

interest rates;

·

monetary policy;

·

currency fluctuations;

·

inflation;

·

liquidity of domestic capital and lending markets;

·

tax policies;

·

changes in labor laws;

·

regulatory environment of our sector;

·

exchange rates and exchange controls and restrictions on remittances abroad, such as those that were briefly imposed in 1989 and early 1990; and

·

other political, social and economic developments in or affecting Brazil.

 

Uncertainty over whether the Brazilian government will change policies or regulations affecting these or other factors may contribute to political and economic uncertainty in Brazil and to heightened volatility in Brazilian securities markets and securities issued abroad by Brazilian issuers.  Standard & Poor’s downgraded Brazil below investment grade on September 9, 2015 and further downgraded Brazil from BB to BB- on January 11, 2018, with stable outlook, it reconfirmed its position on August 9, 2018 and on December 11, 2019, with positive outlook, and reconfirmed its position on April 6, 2020, with stable outlook; Fitch Ratings lowered its rating for Brazil from BBB- to BB+ on December 16, 2015, to BB on May 5, 2016 and later to BB- on February 23, 2018, with stable outlook, and reconfirmed its position on May 21, 2019 and on November 14, 2019; and Moody’s Investors Service downgraded Brazil to Ba2 on February 24, 2016, with stable outlook, and reconfirmed its position on April 9, 2018.  These downgrades reflected poor economic conditions, continued adverse fiscal developments and increased political uncertainty in Brazil. 

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We cannot assure you that the Brazilian government will continue with its current economic policies, or that these and other developments in Brazil’s economy and government policies will not, directly or indirectly, adversely affect our business and results of operations.

Political conditions may have an adverse impact on the Brazilian economy and on our business.

The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy, as well as to a deteriorating political environment.  Despite the slow economic recovery and the still high fiscal vulnerability, several Brazilian macroeconomic fundamentals improved during 2018–19.  The main highlight was the deceleration of inflation and the achievement of historically low interest rates.

In addition to the economic instability, the recent political instability in Brazil has also contributed to a decline in market confidence in the Brazilian economy.  Various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato,” have negatively impacted the Brazilian economy and political environment.

Under “Operação Lava Jato” members of the Brazilian federal government and of the legislative branch, as well as senior officers of large state-owned and private companies, have faced allegations and, in certain cases, convictions, or, also, entering into plea bargains, related to crimes of political corruption, involving alleged bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies.  The profits of these kickbacks allegedly financed the political campaigns of political parties of the government that were unaccounted for or not publicly disclosed, in addition to alleged personal enrichment of the recipients of the bribes and the favoring of companies in contracts with the Brazilian government.  Furthermore, certain of these companies have or are also facing investigations, and, in certain cases, being convicted by the competent authorities, such as the CVM, the SEC and the United States Department of Justice.  Certain of these companies have chosen to enter into leniency agreements with the competent authorities, when possible.  The potential outcome of these investigations, convictions, plea bargaining and leniency agreements is still uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, political parties and on the general market perception of the Brazilian economy and political environment.  We cannot predict whether such investigations will lead to further political and economic instability or whether new allegations against government officials, officers and/or companies will arise in the future.  In addition, we cannot predict the outcome of any such investigations or allegations nor their effect on the Brazilian economy.

In August 2016, the Brazilian Senate approved the removal of Dilma Rousseff, Brazil’s then-President, from office, following a legal and administrative impeachment process for infringing budgetary laws.  Michel Temer, the former Vice-President, who assumed the presidency of Brazil following Rousseff’s impeachment, is also under investigation for corruption allegations. He was first arrested on March 2019, having been convicted of the crimes of cartel involvement, active and passive corruption, money laundering and public auction fraud. He was released and arrested again four days later, in May 2019, and then released once again six days later.  He continues to be under several investigation on corruption allegations.  In addition, another former president, Luiz Inacio Lula da Silva, began serving a 12-year prison sentence for corruption and money laundering in April 2018 but was released from prison in November 2019 following a Federal Supreme Court ruling. Mr. da Silva still faces pending charges and could return to prison if found guilty once all appeals are exhausted. A strong opposition figure, Mr. da Silva’s release from prison could further deepen political tensions in Brazil.

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On October 28, 2018, Jair Bolsonaro was elected the President of Brazil and took office on January 1, 2019. We cannot predict with certainty how Bolsonaro’s victory may affect Brazil’s overall stability, growth prospects, economic health and politics.

There is no guarantee that Bolsonaro will succeed in executing his campaign promises or approving certain favorable reforms, particularly when confronting a fractured congress. Additionally, during the presidential campaign, his Economic Minister, Paulo Guedes, proposed the repeal of the income tax exemption on the payment of dividends, which was recently reinforced together with reference to the extinction of interest attributable to shareholders’ equity. If such measures were to become law, there would be an increase in our tax expenses, which could impact our ability to pay and receive dividends or interest attributable to shareholders’ equity. Any future tax reform can also significantly influence our business if proposed and implemented. Moreover, Bolsonaro was generally a polarizing figure during his campaign for presidency, particularly in relation to certain social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms, all of which could have a negative impact on us and the price of our common shares.

In November 2019, the Brazilian government approved a pension reform after almost nine months of negotiations. The negotiations and delay in the approval of the pension reform exposed the political crisis between the Executive branch and Congress.  In addition, the Brazilian federal government is expected to propose the general terms of a fiscal reform to stimulate the Brazilian economy and reduce the forecasted budget deficit for 2020 and subsequent years, but it is uncertain whether the federal government will be able to gather the required support in the Brazilian congress to pass any proposed reforms.  If the Brazilian federal government fails to reduce public expenses and the expected reforms are not approved, Brazil will continue to run a budget deficit for 2020 and the subsequent years.  We cannot predict the effects of this budget deficit on the Brazilian economy, nor which policies the Brazilian federal government may adopt or change or the effect that any such policies might have.  Any such new policies or changes to current policies may have a material adverse effect on us or the price of our common shares.  Furthermore, uncertainty over whether the current Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility for securities issued abroad by Brazilian companies.

Inflation and interest rate policies may impact the Brazilian economy and could harm our business.

Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real interest rates in the world.  Between 2010 and March 2020, the base interest rate in Brazil, or SELIC, varied between 14.25% p.a. and 3.75% p.a.

According to the IPCA index, the inflation rate was 4.3%, 3.8% and 2.9% in 2019, 2018 and 2017, respectively.  On March, 2020, the accumulated inflation over the immediately preceding 12-month period was 3.30%. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government intervening in the economy and introducing policies that could adversely affect us, our business and the price of our common shares.  In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates.  The SELIC rate oscillated from 13.75% as of December 31, 2016 to 4.5% as of December 31, 2019, as established by the CMN.  More lenient Brazilian government and Brazilian Central Bank policies and interest rate decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect us and increase our indebtedness.

In the event that Brazil experiences high inflation in the future, we may not be able to adjust the prices we charge our clients to offset the potential impacts of inflation on our expenses, including salaries.  This would lead to decreased profit for the year, adversely affecting us.  Inflationary pressures may also adversely affect our ability to access foreign financial markets.

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Exchange rate instability may adversely affect our financial condition and results of operations and the market price of our common shares.

The Brazilian currency has experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies over the last decade.  The exchange rate of the real against the U.S. dollar was R$3.307 on December 31, 2017; R$3.874 on December 31, 2018; and R$4.030 on December 31, 2019.  On April 22, 2020, the exchange rate was R$5.384 per US$1.00.  The real may continue to fluctuate significantly against the U.S. dollar in the future.

Depreciation of the real increases the cost of servicing our foreign currency denominated debt and the cost of purchasing electricity from the Itaipu power plant, a Hydroelectric Power Plant that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs.  Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies.  Depreciation of the real against the U.S. dollar can also lead to decreased consumer spending, deflationary pressures and reduced growth in the economy as a whole.  On the other hand, appreciation of the real relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current account, as well as dampen export-driven growth.  Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations and our capacity to fulfill our contractual obligations.

Depreciation of the real also reduces the U.S. dollar value of distributions and dividends on our common shares and the U.S. dollar equivalent of the market price of our common shares.

Developments and the perception of risk in other countries, including the United States and emerging market countries, may adversely affect the market price of Brazilian securities, including our common shares.

The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries.  The global financial crisis that commenced in 2008 led to significant consequences, including stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates and inflationary pressure.  Global recovery from this crisis has been slower than expected in recent years, with the largest emerging economies of China, Brazil and India posting weaker than expected results and the European Union continuing to experience weak GDP growth.

On March 11, 2020, the World Health Organization designated COVID-19 as a pandemic. The spread of this virus has caused certain business, market and travel disruption globally and particularly in infected regions. While any disruption caused is currently expected to be temporary, there is uncertainty around the duration of these disruptions, the possibility of any government intervention or other measures, or the possibility of other economic effects on the stock market, foreign exchange rates and otherwise. For more information on risks relating to COVID-19, see “—An occurrence of a natural disaster, widespread health epidemic or pandemic or other outbreaks could significantly harm our business, financial condition and results of operations. Furthermore, the spread of communicable diseases on a global scale, such as the COVID-19 pandemic, may affect investment sentiment, cause disruptions and result in sporadic volatility in global markets. As a result, the Brazilian economy and outlook may be affected, and consequently, our business, financial condition and trading price of our common shares may be adversely affected.”

Although economic conditions in other countries may differ significantly from economic conditions in Brazil, investor reactions to developments in those countries, including the spread of the COVID-19 pandemic and its economic effects in other countries, may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union, China or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of our common shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

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Risks Relating to Our Common Shares

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares at the price and time you desire.

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States.  Your ability to sell the common shares at a price and time at which you wish to do so is limited.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States.  The ten largest companies in terms of market capitalization represented 46.9% of the aggregate market capitalization of the B3 (previously known as BM&FBOVESPA) as of December 31, 2019.  The top ten stocks in terms of trading volume accounted for 33.9%, 40.8% and 32.1% of all shares traded in 2019, 2018, and 2017, respectively. 

Holders of our common shares may be unable to enforce judgments against our directors or officers.

Most of our directors and officers named in this annual report reside in Brazil. Substantially all of our assets, as well as the assets of these persons, are located in Brazil. As a result, it may not be possible for holders of our common shares to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil, attach their assets or enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside of Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, holders of our common shares may face greater difficulties in protecting their interest in actions against us or our directors and officers than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.

Judgments of Brazilian courts with respect to our common shares will be payable only in reais.

If proceedings are brought in Brazilian courts seeking to enforce our obligations in respect of our common shares, we will not be required to discharge any such obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Brazilian Central Bank, in effect on the date the judgment is obtained, and any such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of, or related to, our obligations under our shares.

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our common shares.

Law No. 10,833, dated as of December 29, 2003, provides that the disposition of assets located in Brazil by a non-resident to either a resident or a non-resident of Brazil is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposition of our common shares by a non-resident of Brazil to either a resident or a non-resident of Brazil. Any gain or loss recognized by a U.S. holder on the disposition of common shares generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes. Thus, a U.S. holder may not be able to benefit from a foreign tax credit for Brazilian income tax imposed on the disposition of common shares, unless the U.S. holder can apply the credit against U.S. federal income tax payable on other income from foreign sources in the appropriate income category. See “Item 10. Additional Information—U.S. Federal Income Tax Consequences—Taxation of Sales, Exchanges or Other Taxable Dispositions” for more information.

ITEM 4.                INFORMATION ON THE COMPANY

Overview

We are a corporation (sociedade por ações) incorporated and existing under the laws of Brazil with the legal and commercial name CPFL Energia S.A.  Our principal executive office is located at Rua Jorge de Figueiredo Correa, No. 1,632, parte, CEP 13087-397, Jardim Professora Tarcília, Campinas, state of São Paulo, Brazil and our telephone number is +55 19 3756-6211.  Our Investor Relations Department is located at the same address and its telephone number is +55 19 3756-8458.

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We are a holding company that, through our subsidiaries, distributes, generates, transmits and commercializes electricity in Brazil as well as provides energy-related services.  We were incorporated in 1998 as a joint venture among VBC Energia S.A., or VBC, 521 Participações S.A. and Bonaire to combine their interests in companies operating in the Brazilian power sector.

We are one of the largest electricity distributors in Brazil, based on the 68,055 GWh of electricity we distributed to 9.8 million consumers in 2019.  In electricity generation, our Installed Capacity at December 31, 2019 was 4,304 MW.  Through our interest in CPFL Renováveis, we are also involved in the construction of one SHPP and four wind farms, as a result of which we expect to increase our Installed Capacity by 109.7 MW over the next four years as these projects are completed.

We also engage in power commercialization, buying and selling electricity to power producers, Free Consumers and power trading companies.  We also provide agency services to Free Consumers before the CCEE and other agents, as well as electricity-related services to our affiliates and unaffiliated parties. In 2019, the total amount of electricity sold by our commercialization subsidiaries was 89 GWh and 19,097 GWh to affiliated and unaffiliated parties, respectively.  We are presently also developing our electricity transmission business, having successfully won three of ANEEL’s 2018 greenfield transmission auctions that will require an investment of R$924 million (as estimated by ANEEL) and will require us to build approximately 407 km in transmission lines to add 2,343 MVA in our portfolio.

On September 2, 2016, our former shareholder Camargo Correa S.A. entered into an agreement to sell its 23.6% ownership interest in our company to State Grid.  Following the announcement, other members of our then controlling shareholders’ block also decided to sell their ownership interest to State Grid.  As a result, State Grid acquired 54.64% of our voting capital.  State Grid Brazil Power Participações S.A. is an indirect subsidiary of State Grid Corporation of China, a state-owned enterprise of the People’s Republic of China.  The acquisition was approved by CADE, the Brazilian antitrust regulator, in September 2016 and by ANEEL in December 2016.  The acquisition was completed and, as a result, our control was transferred to State Grid on January 23, 2017.  In November 2017, State Grid launched a mandatory tender offer for our shares.  Following the closing of this tender offer on December 5, 2017, State Grid directly and indirectly through ESC Energia S.A. (a wholly-owned subsidiary of State Grid) held 964,521,902 of our common shares, equivalent to 94.75% of our total share capital.

In November 2018, State Grid also acquired 48.39% of the total share capital of CPFL Renováveis through a separate mandatory tender offer process. State Grid’s total share capital of CPFL Renováveis was diluted to 46.76% as a result of State Grid’s decision not to exercise its preemptive rights in the CPFL Renováveis capital increase that was approved by CPFL Renováveis’ board of directors on June 4, 2019 and to capitalize the Future Capital Increase Advance (Adiantamento para Futuro Aumento de Capital—AFAC) that CPFL Geração had held in CPFL Renováveis since 2016. This capital increase raised CPFL Geração’s total share capital of CPFL Renováveis to 53.18%.

On May 21, 2019, our board of directors authorized the beginning of CPFL Renováveis’ integration into our administrative structure. Our integration plan for CPFL Renováveis involves (i) the implementation of plans to restructure and improve the operations of CPFL Renováveis, with the aim of creating synergies between CPFL Renováveis and our current business, and (ii) conducting studies and analysis of a corporate reorganization that could involve a total or partial consolidation of CPFL Geração and CPFL Renováveis, which is still subject to further review by and ultimately the approval of our management. On July 1, 2019, following the authorization from our board of directors, our board of executive officers approved the integration of CPFL Renováveis’ administrative structure into our organizational model to optimize operations and gain efficiency. This potential consolidation would only occur following a final decision with respect to the B3’s requirement to reestablish CPFL Renováveis’ free float.

On May 30, 2019, we announced the launch of the Follow-on Offering, which closed on June 14, 2019. Pursuant to the Follow-on Offering, we offered 116,817,126 of our common shares in a global offering consisting of (i) a public offering of common shares with restricted selling efforts in Brazil, and (ii) a concurrent international offering of common shares, including in the form of ADSs, in the United States and elsewhere outside of Brazil. Also pursuant to the Follow-on Offering, we sold 17,522,568 additional common shares under an over-allotment option that closed on June 28, 2019. As a result of the Follow-on Offering, we received net proceeds of approximately R$3,164.3 million before expenses, after deducting underwriting commissions. We received net proceeds of approximately R$474.7 million before expenses, after deducting underwriting commissions, as a result of the over-allotment option. Following the closing of the Follow-on Offering, State Grid’s direct and indirect equity interest in our capital stock decreased to 83.71%.

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On September 30, 2019, we, together with State Grid, announced the closing of the purchase and sale of the shares issued by CPFL Renováveis and the transfer by State Grid to us of all the shares of CPFL Renováveis directly held by State Grid at a purchase price of R$16.85 per share, as determined by the independent members of our board of directors on May 29, 2019 on the basis of an appraisal report prepared by financial advisory firm UBS. The total purchase price paid by us to State Grid was R$4.1 billion. We expect such transaction to enable potential synergies between us and our subsidiaries. On December 19, 2019, our board of directors and the board of executive officers of CPFL Geração approved CPFL Geração’s tender offer to acquire the remaining outstanding common shares of CPFL Renováveis to allow for the conversion of CPFL Renováveis’ registration as a category “A” publicly-held company into a category “B” publicly-held company and/or its delisting from the Novo Mercado. This tender offer is subject to CVM registration and to authorization by the B3. The offered price per share is R$16.85, as adjusted by the SELIC from the date of the mandatory tender offer carried out by State Grid in November 2018.

On December 18, 2019, our board of directors approved our intention to (i) terminate our Deposit Agreement regarding our ADSs, (ii) delist our ADSs from the NYSE, and (iii) terminate our registration with the U.S. Securities and Exchange Commission, or the SEC. Following the termination of our Deposit Agreement, on January 28, 2020, the NYSE suspended trading in our ADSs and filed a Form 25 with the SEC to permanently remove our ADSs from listing. This removal became effective on February 10, 2020. Once we meet the criteria for terminating our reporting obligations under the Exchange Act of 1934, as amended, or the Exchange Act, we intend to file a Form 15F with the SEC to deregister and terminate our reporting obligations under the Exchange Act. Immediately upon filing Form 15F, our legal obligation to file reports under the Exchange Act will be suspended, and deregistration is expected to become effective 90 days later.

The following significant developments have occurred in our business since the beginning of 2017:

·

On June 2, 2017, CPFL Transmissora de Energia Morro Agudo Ltda., or CPFL Morro Agudo, a subsidiary of CPFL Geração commenced operations. The concession contract has a duration of 30 years.

·

In June 27, 2017, the Pedra Cheirosa wind complex (Pedra Cheirosa I and II) commenced operations. Pedra Cheirosa, located in Itarema, in the state of Ceará, has Installed Capacity of 48.3 MW and a physical guarantee of 27.5 MWavg, as amended by Ordinance No. 192/2017. Until December 2017, when the A-5/2013 Energy Auction agreement took effect, the energy generated by Pedra Cheirosa was supplied to the system and sold in the spot market. Energy was sold through long-term contracts in the A-5/2013 Energy Auction, at R$166.83/MWh for Pedra Cheirosa I and at R$167.50/MWh for Pedra Cheirosa II, both in December 2019.

·

On December 15, 2017, the management of RGE Sul and its parent company CPFL Jaguariúna Participações Ltda., or CPFL Jaguariúna, approved the merger of CPFL Jaguariúna and RGE Sul. As a result of this merger, CPFL Jaguariúna was dissolved. This merger aimed to improve our governance structure and increase synergy with the other companies of our group.

·

On November 21, 2017, through the Resolution for Authorization No. 6,723/2017, ANEEL approved our proposal to consolidate the concessions of five of our distribution companies (CPFL Santa Cruz; Companhia Leste Paulista de Energia; Companhia Sul Paulista de Energia; Companhia Luz e Força de Mococa; and CPFL Jaguari, together the Merged Companies), pursuant to Normative Resolution No. 716/2016. Effective as of January 1, 2018, the Merged Companies were merged with and into a company named CPFL Santa Cruz (which company was previously named CPFL Jaguari). This transaction was approved at the Extraordinary General Meetings held on December 31, 2017 at each of the Merged Companies. This merger led to the optimization of our administrative and operational costs and produced large-scale savings and synergy in 2018.

·

According to Normative Resolution No. 716/2016, until the first tariff review of the Merged Companies in March 2021, ANEEL may institute a policy that reconciles the variations in the old tariffs for each of the Merged Companies and the new unified tariff for CPFL Santa Cruz over time. ANEEL decided to introduce the unified tariff during the March 2018 tariff adjustment.

·

On June 29, 2018, we won the right to conduct transmission activities in Transmission Auction held by ANEEL.  We were also awarded the concession for the Maracanaú II Substation and segments of transmission lines, located in the state of Ceará.

·

On August 31, 2018, at the A-6/2018 energy auction, or the A-6/2018 Energy Auction, CPFL Renováveis sold 28.5 MWavg to be generated by SHPP Lucia Cherobim, located in the state of Paraná, with Installed Capacity of 28.0 MW (16.6 MWavg) and by the Gameleira wind complex, located in the state of Rio Grande do Norte, with Installed Capacity of 69.3 MW (39.4 MWavg). The agreement will be extended for 30 years for SHPP Lucia Cherobim and 20 years for Gameleira wind complex, with energy supply starting on January 1, 2024. SHPP Lucia Cherobim sold 16.5 MWavg at R$189.95/MWh (base August 2018), with annual adjustments by the IPCA index. The Gameleira wind complex sold 12.0 MWavg at R$89.89/MWh (base August 2018), with annual adjustments by the IPCA index. Additionally, the Gameleira wind complex sold its remaining energy in the Free Market.

 

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·

On October 14, 2018, SHPP Boa Vista 2 commenced operations, after receiving ANEEL’s authorization for commercial launch on the same date. SHPP Boa Vista 2 is located in the municipality of Varginha, in the state of Minas Gerais, has Installed Capacity of 29.9 MW and a physical guarantee of 15.5 MWavg. Until December 2019, when the A-5/2015 Energy Auction agreement took effect, the energy generated by SHPP Boa Vista 2 was supplied to the system and sold in the spot market.

·

On December 4, 2018, through the Resolution for Authorization No. 7,499/2018, ANEEL approved our proposal to consolidate the concessions of our two distribution companies (RGE and RGE Sul), pursuant to Normative Resolution No. 716/2016. Effective as of January 1, 2019, RGE was merged with and into RGE Sul, and RGE Sul began doing business under the name RGE. This transaction was approved at the Extraordinary General Meetings held on December 31, 2018 at each of RGE and RGE Sul. As a result of this merger transaction and the related transfer of the assets of RGE to RGE Sul, RGE no longer exists.

·

On December 20, 2018, we won the right to conduct transmission activities through Transmission Auction No. 4/2018 held by ANEEL. In this auction, we also won new Substations and transmission lines in the states of Santa Catarina and Rio Grande do Sul.

·

On May 21, 2019, our board of directors authorized the beginning of CPFL Renováveis’ integration into our administrative structure. Our integration plan for CPFL Renováveis involves (i) the implementation of plans to restructure and improve the operations of CPFL Renováveis, with the aim of creating synergies between CPFL Renováveis and our current business, and (ii) conducting studies and analysis of a corporate reorganization that could involve a total or partial consolidation of CPFL Geração and CPFL Renováveis, which is still subject to further review by and ultimately the approval of our management. On July 1, 2019, following the authorization from our board of directors, our board of executive officers approved the integration of CPFL Renováveis’ administrative structure into our organizational model to optimize operations and gain efficiency. This potential consolidation would only occur following a final decision with respect to the B3’s requirement to reestablish CPFL Renováveis’ free float.

 

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·

On September 30, 2019, we, together with State Grid, announced the closing of the purchase and sale of the shares issued by CPFL Renováveis and the transfer by State Grid to us of all the shares of CPFL Renováveis directly held by State Grid at a purchase price of R$16.85 per share, as determined by the independent members of our board of directors on May 29, 2019 on the basis of an appraisal report prepared by financial advisory firm UBS. The total purchase price paid by us to State Grid was R$4.1 billion. We expect such transaction to enable potential synergies between us and our subsidiaries. On December 19, 2019, our board of directors and the board of executive officers of CPFL Geração approved CPFL Geração’s tender offer to acquire the remaining outstanding common shares of CPFL Renováveis to allow for the conversion of CPFL Renováveis’ registration as a category “A” publicly-held company into a category “B” publicly-held company and/or its delisting from the Novo Mercado. This tender offer is subject to CVM registration and to authorization by the B3. The offered price per share is R$16.85, as adjusted by the SELIC from the date of the mandatory tender offer carried out by State Grid in November 2018.

The following chart provides an overview of our corporate structure at March 31, 2020:

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Notes:

(1)   RGE is held by CPFL Energia (89.0107%) and CPFL Brasil (10.9893%).

(2)   CPFL Soluções = CPFL Brasil + CPFL Serviços + CPFL Eficiência.

(3)   51.54% stake of the availability of power and energy of Serra da Mesa HPP, regarding the rental contract and a PPA between CPFL Geração and Furnas Centrais Elétricas S.A., or Furnas.

(4)   CPFL Renováveis is held by CPFL Energia (46.7609%) and by CPFL Geração (53.1831%).

Our core businesses are:

Distribution.  In 2019, our four fully-consolidated distribution subsidiaries delivered 68,055GWh of electricity to 9.8 million consumers primarily in the states of São Paulo and Rio Grande do Sul.

Conventional Generation.  At December 31, 2019, our conventional generation subsidiaries had Installed Capacity of 2,173 MW.  During 2019, we generated 7,180GWh of electricity, and we had 9,592GWh of Assured Energy at December 31, 2019, which consists of the amount of energy representing our long-term average electricity production, as established by ANEEL, which is the primary driver of our revenues from generation activities.  We currently hold equity interests in eight Hydroelectric Power Plants: Serra da Mesa, Monte Claro, Barra Grande, Campos Novos, Luiz Eduardo Magalhães-Lajeado, Castro Alves, 14 de Julho and Foz do Chapecó. Although the concession for the Serra da Mesa Hydroelectric Facility is held by another party, Furnas, we are entitled to 51.54% of its Assured Energy.  We also own two Thermoelectric Power Plants, Termonordeste and Termoparaíba.  In addition, 10 of our 48 Small Hydroelectric Power Plants remain under the management of two of our conventional generation subsidiaries, CPFL Geração and CPFL Centrais Geradoras, and report their results within our conventional generation segment. On July 17, 2018, MME published Order No. 304/2018, which terminated the Cariobinha concession, without reversal of assets. In September 2019, SCG/ANEEL published Dispatch No. 039/2019, which declared the Cariobinha concession agreement null.  Also in 2019, CGH Santa Alice’s register was cancelled, and the project was leased to TIM Celular S.A. and began operations as distributed generation services on June 1, 2019.

In 2017, we began to report within this business the activities of our two transmission assets held through CPFL Geração, CPFL Piracicaba and CPFL Morro Agudo, both of which are operational. Our transmission subsidiaries provide electricity transmission services to the Brazilian power grid. On June 29, 2018, we won the right to conduct transmission activities in Transmission Auction No. 2/2018 held by ANEEL by means of the concession for the Maracanaú II Substation (Lot 9) and segments of transmission lines, located in the state of Ceará. Lot 9 has annual allowed revenues, or RAP, of R$7.9 million, an estimated investment of R$102.2 million (as estimated by ANEEL) and its regulatory commercial operation is scheduled for March 2022. In December 2018, we 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) at ANEEL’s Transmission Auction of greenfield assets No. 4/2018. Lot 5 has a RAP of R$26.4 million, an estimated investment of R$366.0 million (as estimated by ANEEL) and its regulatory commercial operation is scheduled for March 2024. Lot 11 has a RAP of R$33.9 million, an estimated investment of R$348.9 million (as estimated by ANEEL) and its regulatory commercial operation is scheduled for March 2023. Besides their remuneration as stand-alone assets, this new business line is expected to have a positive effect on the reliability and quality of our Distribution Networks, as some are located in our distribution concession areas or have a direct impact on them.

Renewable Generation.  Our indirect subsidiary, CPFL Renováveis, in which we own a 99.94% interest, concentrates our activities in energy generation through renewable sources.  CPFL Renováveis operates all of our wind farms and Biomass Thermoelectric Power Plants, as well as 40 of our 48 Small Hydroelectric Power Plants.  These 40 Small Hydroelectric Power Plants, which are all operational, are located in the states of São Paulo, Santa Catarina, Rio Grande do Sul, Minas Gerais, Mato Grosso and Paraná, and have aggregate Installed Capacity of 453.1 MW.  One Small Hydroelectric Power Plant (SHPP Lucia Cherobim) is under construction, scheduled to commence operations by 2024, and expected to have an Installed Capacity of 28 MW.  CPFL Renováveis also has 49 wind farms, located in the states of Ceará, Rio Grande do Norte and Rio Grande do Sul, (i) 45 of which are operational and have aggregate Installed Capacity of 1,308.6 MW, and (ii) four of which make up the Gameleira wind complex and are under construction with operations scheduled to commence operations by 2024, and expected to have an Installed Capacity of 69.3 MW.  CPFL Renováveis also has eight operational Biomass Thermoelectric Power Plants, with aggregate Installed Capacity of 370 MW, located in the states of Minas Gerais, Paraná, São Paulo and Rio Grande do Norte.  CPFL Renováveis also operates the Tanquinho Solar Power Plant, which is located in the state of São Paulo and has Installed Capacity of 1.1 MW. At December 31, 2019, our total consolidated Installed Capacity through our renewable generation segment (calculated on the basis of our 99.94% interest in CPFL Renováveis) was 2,131.5 MW, and we expect that our renewable generation segment will reach an Installed Capacity of 2,228.7 MW by 2024.  These capacity amounts do not include eventual decreases in our Installed Capacity ballast (limit of energy produced in our own power plants that we are allowed to sell).  Those decreases are calculated by the MME, for power plants participating in the MRE.  See “Regulatory Charges—Energy Reallocation Mechanism” for more information about the MRE.

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Commercialization.  Our commercialization subsidiaries handle our commercialization operations and provide agency services to Free Consumers before the CCEE and other agents, including guidance on their operational requirements.  CPFL Brasil, our largest commercialization subsidiary, procures and sells electricity to Free Consumers, other commercialization and generation companies and distribution facilities.  In 2019, we sold 19,186 GWh of electricity, of which 19,097 GWh was sold to unaffiliated third parties.

Services.  We report the results of our services activities as a separate operating segment.  Our activities in this sector include providing electricity-related services, such as project design and construction, to our affiliates and unaffiliated parties.

In addition to our five operating segments above, we consolidate a number of activities known as “Other.” The activities consolidated under Other consist mainly of  our holding company expenses.

Our Strategy

Our overall objective is to be the leading power utility company in South America, supplying reliable electric energy and credible services to our customers while creating value for our shareholders.  We seek to achieve these goals in all of our sectors (distribution, conventional generation, renewable generation, transmission, commercialization and services) by pursuing operational efficiency (through innovation and technology) and growth (through business synergies and new projects).  Our strategies are grounded on financial discipline, social responsibility and enhanced corporate governance.  More specifically, our approach involves the following key business strategies:

Complete the development of our existing renewable generation projects and expand our generation portfolio by developing new conventional and renewable energy generation projects.  At December 31, 2019, our total consolidated Installed Capacity (calculated on the basis of our 99.94% interest in CPFL Renováveis) was 4,304 MW, of which 2,173 MW was through conventional sources and 2,131.5 MW through renewable sources.  Through CPFL Renováveis, in August 2011 we became the largest renewable energy generation group in Brazil in terms of Installed Capacity and capacity under construction, according to ANEEL.  Today, we continue to be the largest energy renewable generation group in terms of Installed Capacity in operation in Brazil, according to ANEEL.

Many of our generation facilities hold long-term PPAs approved by ANEEL, which we believe will ensure us an attractive rate of return on our investment.  We have a consolidated portfolio of 2,131.5 MW (calculated on the basis of our 99.94% interest in CPFL Renováveis).  We also have 110 MW under construction and a total portfolio of 2,904 MW of renewable generation projects to be developed by CPFL Renováveis in the coming years.

Focus on further improving our operating efficiency. The distribution of electricity in our distribution concession areas is our largest business segment, representing 66.8% of our consolidated profit for the year in 2019.  We continue to focus on improving the quality of our service and maintaining efficient operational costs by exploiting synergies and technologies.  We also make an effort to standardize and update our operations regularly, introducing automated systems where possible.  We also acknowledge the need to invest in digital assets, such as Smart Grid technology and in 2019 we deployed 1,563 automatic circuit reclosers, or ACRs, bringing the total number of ACRs in our concession areas to 11,394. These ACRs allow greater flexibility in the operation of the electrical system and are supported by our robust proprietary communication infrastructure, including digital radio communication systems, radio frequency mesh and fiber optic network, as well as our partnership with telecommunications utility providers.

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To this end, we plan to make capital expenditures aggregating R$3,069 million in 2020 and R$2,924 million in 2021.  Of the total budgeted capital expenditures over this period, R$4,598 million, or 77%, are expected to be invested in our distribution segment, R$681 million, or 11%, in our renewable generation segment and R$33 million, or 1%, in our conventional generation segment and R$130 million, or 2%, in our commercialization and services activities.  In addition, over this period, we plan to invest R$552 million, or 9%, in our transmission business. We have already contractually committed to part of these expenditures, particularly in generation projects.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Funding Requirements and Contractual Commitments” and “Item 3. Key Information—3D. Risk Factors—Risks Relating to our Operations and the Brazilian Power Industry—If we are unable to complete our proposed capital expenditure program in a timely manner, the operation and development of our business may be adversely affected” for more information.  Planned capital expenditures for development of our generation capacity, and the related financing arrangements, are discussed in more detail under “Item 4. Information on the Company—Generation of Electricity.”

Expand and strengthen our commercialization.  Free Consumers make up a significant segment of the electricity market in Brazil, representing more than 30% of the market. This percentage may increase in the future as a result of Ordinance No. 514/2018, issued by the MME on December 28, 2018, which lowers the requirements for being a Free Consumer of conventional energy, dropping the minimum contracted energy demand from 3.0 MW to 2.5 MW, effective as of July 1, 2019, and from 2.5 MW to 2.0 MW, effective as of January 1, 2020. Additionally, on December 12, 2019, through Ordinance No. 465, the MME announced the timeline to open the Free Market, thereby reducing the minimum contracted energy demand to 1.5 MW, effective as of January 1, 2021; from 1.5 MW to 1.0 MW, effective as of January 1, 2022; from 1.0 MW to 0.5 kW, effective as of January 1, 2023. This is expected to be followed by the publication of studies by ANEEL and the CCEE, by January 31, 2022, on the regulatory measures required to enable the Free Market to be opened for all consumers, including the creation of a new regulated energy trader, and on proposed opening schedule beginning on January 1, 2024.  Through our subsidiary CPFL Brasil, our commercialization subsidiary, we are focusing on signing bilateral contracts with former customers of our distribution companies that became Free Consumers, in addition to attracting additional Free Consumers from concession areas other than those covered by our distribution companies.  In order to achieve this objective, we foster positive relationships with customers by providing dedicated key account managers, CCEE operational support and PPAs customized to each consumer profile.

Position ourselves to take advantage of consolidation in our industry by using our experience in successfully integrating and restructuring other operations.  We believe that further stabilization of the regulatory environment in the Brazilian power industry in the future may lead to substantial consolidation in the generation, transmission and, particularly, the distribution sectors. Over the last few years, we have successfully integrated RGE Sul (acquired from AES Guaíba II Empreendimentos Ltda. in 2016), exploring operational synergies with our neighboring legacy concession RGE, merged RGE and RGE Sul into one (RGE Sul, now operating under the name RGE), and also merged our smaller distribution subsidiaries into one (CPFL Santa Cruz) in order to benefit from a leaner corporate structure.  Moreover, our expansion into the transmission business supports our distribution operations with added reliability and quality from the new Substations that we will put into operation.

Given our financial strength and managerial expertise, we believe that we are well-positioned to take advantage of this consolidation in the Brazilian electricity market.  If promising assets are available on attractive terms, especially in areas where we already operate, we may make acquisitions that complement our existing operations and afford us and our consumers further opportunities to take advantage of economies of scale.

Strategy and management for sustainable development and social responsibility. We maintain a strategic focus on a low carbon business portfolio and have created and implemented our 2020-24 Sustainability Plan, or Sustainability Platform, which is structured based on three pillars, sustainable energy, smart solutions and shared value society, and three enablers, ethics, transparency and employee development & inclusion. The Sustainability Platform is our main management tool. It was created to strengthen our commitment to sustainable development and social responsibility and is aligned to the SDGs.

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We also support initiatives to advance the economic, cultural and social interests of the communities in which we operate and contribute effectively to their further development. In this context, one of our main objectives is to promote the sustainable development of these communities through actions that contribute to the improvement of public policies and that foster inclusion, social development and networking, training and empowering each individual to face social challenges. In 2019, we invested R$39.4 million in projects that impacted approximately 320 thousand people, directly benefiting 121 municipalities in nine states, with 391 activities.

Follow enhanced corporate governance standards.  We are dedicated to maintaining the highest levels of management transparency and corporate governance, providing equitable shareholder rights and, through various measures, including the increase of our free float volume and the liquidity of our shares, seeking value for our shareholders.

Our Service Territory

Distribution

We are one of the largest electricity distributors in Brazil, based on the amount of electricity we delivered in 2019.  Our four distribution subsidiaries together supply electricity to a region covering 300,411 square kilometers, primarily in the states of São Paulo and Rio Grande do Sul. Their concession areas include 6871 municipalities and a population of 22.2 million people.  Together, they provided electricity to 9.8 million consumers as of December 31, 2019. Effective as of January 1, 2019, RGE, one of our five distribution subsidiaries existing in 2018, was merged with and into RGE Sul, and RGE Sul began doing business under the name RGE. As a result of this merger and the related transfer of the assets of RGE to RGE Sul, RGE no longer exists and, as of January 1, 2019, we have four distribution subsidiaries. Our distribution subsidiaries distributed 14.3% of the total electricity distributed in Brazil in 2019, based on data from the EPE.


1 This total refers to the total number of municipalities situated within our subsidiaries’ concession areas. In addition, we serve consumers located in municipalities outside of our concession areas in cases where those consumers are not served by the local concessionaire.

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Distribution Companies

We have four distribution subsidiaries:

CPFL Paulista.  CPFL Paulista supplies electricity to a concession area covering 90,486 square kilometers in the state of São Paulo with a population of 10.3 million people.  Its concession area covers 234 municipalities, including the cities of Campinas, Bauru, Ribeirão Preto, São José do Rio Preto, Araraquara and Piracicaba. CPFL Paulista had 4.6 million consumers at December 31, 2019.  In 2019, CPFL Paulista distributed 21,030 GWh of electricity.  Considering CPFL Paulista’s sales in its concession area, including sales to Captive Consumers and TUSD, CPFL Paulista sold 31,369 GWh of electricity in 2019, accounting for 24.3%2 of the total electricity distributed in the state of São Paulo and 6.6 % of the total electricity distributed in Brazil during the year.

CPFL Piratininga.  Companhia Piratininga de Força e Luz, or CPFL Piratininga, supplies electricity to a concession area covering 6,954 square kilometers in the southern part of the state of São Paulo with a population of 3.9 million people.  Its concession area covers 27 municipalities, including the cities of Santos, Sorocaba and Jundiaí. CPFL Piratininga had 1.8 million consumers at December 31, 2019.  In 2019, CPFL Piratininga distributed 7,963 GWh of electricity.  Considering CPFL Piratininga’s sales in its concession area, including sales to Captive Consumers and TUSD, CPFL Piratininga sold 14,058 GWh of electricity in 2019, accounting for 10.9%2 of the total electricity distributed in the state of São Paulo and 3.0% of the total electricity distributed in Brazil during the year.

RGE.  RGE supplies electricity to a concession area covering 182,722 square kilometers in the state of Rio Grande do Sul with a population of 6.9 million people.  Its concession area covers 381 municipalities, including the cities of Canoas, São Leopoldo, Novo Hamburgo, Santa Maria, Uruguaiana, Caxias do Sul, Gravataí, Passo Fundo and Bento Gonçalves.  RGE had 2.9 million consumers at December 31, 2019.  In 2019, RGE distributed 14,573 GWh of electricity.  Considering RGE’s sales in its concession area, including sales to Captive Consumers and TUSD, RGE sold 19,568 GWh of electricity in 2019, accounting for 70.9%2 of the total electricity distributed in the state of Rio Grande do Sul and 4.1% of the total electricity distributed in Brazil during the year.  As of January 1, 2019, RGE (previously named RGE Sul) is the surviving entity of its merger in December 2018 with our previous distribution company Rio Grande Energia S.A.  See “—Overview” for more information regarding the merger.

CPFL Santa Cruz.  CPFL Santa Cruz supplies electricity to a concession area covering 20,250 square kilometers, which includes 45 municipalities in the northwest part of the state of São Paulo, three municipalities in the state of Paraná and three municipalities in the state of Minas Gerais.  In 2019, CPFL Santa Cruz distributed 2,333 GWh of electricity to 0.5 million consumers.  Considering CPFL Santa Cruz’s sales in its concession area, including sales to Captive Consumers and TUSD, CPFL Santa Cruz sold 3,061 GWh of electricity in 2019, accounting for 2.3%2 of the total electricity distributed in the state of São Paulo and 0.6% of the total electricity distributed in Brazil during the year.

Distribution Network

Our four distribution subsidiaries operate distribution lines with voltage levels ranging from 11.9 kV to 138 kV.  These lines distribute electricity from the connection point with the Basic Network to our power Substations, in each of our concession areas.  All consumers that connect to these distribution lines, including Free Consumers and other concessionaires, are required to pay a tariff for using the system, the TUSD.

Each of our subsidiaries has a Distribution Network consisting of a widespread network of predominantly overhead lines and Substations having successively lower voltage ranges.  Consumers are classified in different voltage levels based on their consumption of, and demand for, electricity.  Large industrial and commercial consumers receive electricity at High Voltage ranges (up to 138 kV) while smaller industrial, commercial and residential consumers receive electricity at lower voltage ranges (2.3 kV and below).


2 Based on preliminary data as disclosed by the EPE on January 17, 2020. Final data is expected to be available in the second half of 2020.

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At December 31, 2019, our Distribution Networks consisted of 329,370 kilometers of distribution lines, including 476,474 distribution transformers, and 12,856 km of High Voltage distribution lines between 34.5 kV and 138 kV.  At that date, we had 525 transformer Substations for transforming High Voltage into Medium Voltages for subsequent distribution, with total transforming capacity of 18,743 mega-volt amperes. Of the industrial and commercial consumers in our concession area, 403 had 69 kV, 88 kV or 138 kV high-voltage electricity supplied through direct connections to our High Voltage distribution lines.

System Performance

Electricity Losses

There are two types of electricity losses: technical losses and commercial losses.  Technical losses are those that occur in the ordinary course of our distribution of electricity.  Commercial losses are those that result from illegal connections, fraud, billing errors and similar matters.  Electricity loss rates of our distribution subsidiaries compare favorably to the average for other major Brazilian electricity distributors according to the most recent information available from ABRADEE, an industry association.

We are also actively engaged in efforts to reduce commercial losses from illegal connections, fraud or billing errors.  To achieve this, in each of our four distribution subsidiaries, we have deployed trained technical teams to conduct inspections, enhanced monitoring for irregular consumption, increased replacements for obsolete measuring equipment and implemented a system to identify issues in internal processes that could generate losses (e.g., incorrect billing, lack of meter readings, meters with wrong parameters, among others).  We conducted 567.4 thousand fraud inspections in the field during 2019, as a result of which we recovered around R$61.2 million in additional payments from consumers (retroactive billing relating to losses).

Power Outages

The following table sets forth the frequency and duration of electricity outages per consumer for the years ended December 31, 2019 and 2018 for each of our distribution subsidiaries:

 

Year ended December 31, 2019

 

CPFL Paulista

CPFL Piratininga

RGE(3)

CPFL Santa Cruz(4)

SAIFI(1)

4.38

4.34

6.25

4.25

SAIDI(2)

6.72

6.48

14.01

5.56

 

______________________

(1)   Frequency of outages per consumer per year (number of outages).

(2)   Duration of outages per consumer per year (in hours).

(3)   RGE merged into RGE Sul (which now operates under the name RGE) effective as of January 1, 2019.  See “Item 4. Information on the Company—Overview”.

(4)   CPFL Santa Cruz, CPFL Mococa, CPFL Leste Paulista and CPFL Sul Paulista merged into CPFL Santa Cruz (formerly CPFL Jaguari) effective as of January 1, 2018.  See “Item 4. Information on the Company—Overview”.

 

Year ended December 31, 2018

 

CPFL Paulista

CPFL Piratininga

RGE(4)

RGE Sul(4)

CPFL Santa Cruz(3)

SAIFI(1)

4.03

3.87

6.30

5.89

5.09

SAIDI(2)

6.17

5.92

13.43

15.56

6.01

 

______________________

(1)   Frequency of outages per consumer per year (number of outages).

(2)   Duration of outages per consumer per year (in hours).

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(3)   CPFL Santa Cruz, CPFL Mococa, CPFL Leste Paulista and CPFL Sul Paulista merged into CPFL Santa Cruz (formerly CPFL Jaguari) effective as of January 1, 2018.  See “Item 4. Information on the Company—Overview”.

(4)   RGE merged into RGE Sul (which now operates under the name RGE) effective as of January 1, 2019.  See “Item 4. Information on the Company—Overview”.

We seek to improve the quality and reliability of our power supply, as measured by the frequency and duration of our power outages.  According to data from ABRADEE for 2019, the most recent data available, our frequency and duration of interruptions per consumer in the past few years compare favorably to the averages for other Brazilian distribution companies.  

Based on data published by ANEEL, CPFL Santa Cruz had its historically lowest SAIDI in 2019.  CPFL Santa Cruz also had the lowest SAIDI and the second lowest SAIFI among Brazilian distribution companies in 2019. The duration and frequency of outages at CPFL Paulista and CPFL Piratininga are among the lowest in Brazil compared to companies of similar size.  Although RGE’s duration of outages remains in line with the average rate for power companies in Southern Brazil, they are comparatively higher than those at CPFL Paulista and CPFL Piratininga, mainly as a result of logistical challenges in the region that specifically impact RGE’s SAIDI. CPFL Energia is focused on improving RGE’s SAIDI by continuously investing in technology and grid robustness. RGE’s SAIFI compares favorably to that of companies of similar size. Additionally, CPFL Energia has been conducting R&D projects aiming at demonstrating to ANEEL that the Southern Region of Brazil has unique operational characteristics that should be taken into account in future revisions of the regulatory framework by ANEEL.

ANEEL establishes performance indicators per consumer to be complied with by power companies.  If these indicators are not reached, we are obligated to reimburse our consumers, and our revenues are negatively affected.  In 2018 and 2019, according to data from ANEEL, the amount we reimbursed our consumers in the State of São Paulo remained lower than the average amount reimbursed by power companies of similar size. The amount RGE reimbursed consumers was slightly higher in 2019 than the average amount reimbursed by power companies of similar size in Brazil generally but it was in line with the average amount for power companies in the Southern Region of Brazil.

Our distribution subsidiaries have construction and maintenance technology that allows for repairs of the electricity network without interruption in electricity service, thereby allowing us to have low rates of scheduled interruption, which amounts to up to 9.6% of total interruptions in 2019. Unscheduled interruptions due to accidents or natural causes, including lightning storms, fire and wind represented the remainder of our total interruptions.  In 2019, we invested R$2,033 million in our distribution segment, primarily in: (i) expansion, maintenance, improvement, automation, modernization and reinforcement of the electrical system in order to meet market growth; (ii) operational infrastructure; and (iii) customer service, among other things.

We strive to improve response times for our repair services.  The quality indicators for the provision of energy by CPFL Paulista and CPFL Piratininga have maintained levels of excellence while complying with regulatory standards.  This was also mainly the result of our efficient operational logistics, including the strategic positioning of our teams and the technology and automation of our network and operation centers, together with a preventive maintenance and conservation plan.

Purchases of Electricity

Most of the electricity we sell is purchased from unrelated parties, rather than generated by our facilities.  In 2019, 11.6% of the total electricity our distribution subsidiaries acquired was purchased from our generation subsidiaries (including our joint ventures).

In 2019, we purchased 11,021 GWh of electricity from the Itaipu Power Plant, amounting to 14.1% of the total electricity we purchased.  Itaipu is located on the border of Brazil and Paraguay and is subject to a bilateral treaty between the two countries pursuant to which Brazil has committed to purchasing specified amounts of electricity.  This treaty will expire in 2023.  Electric utilities operating under concessions in the midwest, south and southeast regions of Brazil are required by law to purchase a portion of the electricity that Brazil is obligated to purchase from Itaipu.  The amounts that these companies must purchase are governed by take-or-pay contracts with tariffs established in US$/kW.  ANEEL determines annually the amount of electricity to be sold by Itaipu.  We pay for energy purchased from Itaipu in accordance with the ratio between the volume established by ANEEL and our statutorily established share, regardless of whether Itaipu generates such amount of electricity, at a price of US$27.87/kW.  Our purchases represent 19.7% of Itaipu’s total supply to Brazil.  This share was fixed by law according to the amount of electricity sold in 1991.  The rates at which companies are required to purchase Itaipu’s electricity are established pursuant to the bilateral treaty and fixed to cover Itaipu’s operating expenses, payments of principal and interest on its U.S. dollar-denominated debts and the cost of transmitting the power to their concession areas.

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The Itaipu Power Plant has an exclusive transmission network.  Distribution companies pay a fee for the use of this network.

In 2019, we paid an average of R$253.52 per MWh for purchases of electricity from Itaipu, compared with R$240.03 during 2018 and R$199.58 during 2017.  These figures do not include the transmission fee.

We purchased 49,964 GWh of electricity in 2019 from generating companies other than Itaipu, representing 82% of the total electricity we purchased.  We paid an average of R$237.61 per MWh for purchases of electricity from generating companies other than Itaipu, compared with R$227.30 per MWh in 2018 and R$191.88 per MWh in 2017.  See “—The New Regulatory Framework—The Regulated Market” and “—The New Regulatory Framework—The Free Market” for more information on the Regulated Market and the Free Market.

The following table shows amounts purchased from our suppliers in the Regulated Market and in the Free Market, for the periods indicated.

 

2019

2018

2017

 

GWh

GWh

GWh

Energy purchased for resale

 

 

 

Itaipu

11,021

11,117

11,779

Spot market/Proinfa Program

1,102

1,111(1)

1,142(1)

Energy purchased in the Regulated Market and through bilateral contracts

66,283

61,461(2)

65,053(2)

TOTAL

78,406

73,689

77,974

 

______________________

(1)   Energy purchased for resale through the Proinfa Program only.

(2)   Energy purchased for resale through the Regulated Market and bilateral contracts, as well as in the spot market.

The provisions of our electricity supply contracts are governed by ANEEL regulations.  The main provisions of each contract relate to the amount of electricity purchased, the price, including adjustments for various factors such as inflation indexes, and the duration of the contract.

Beginning in 2013, all distribution companies in Brazil have been required to purchase electricity from generation companies whose concessions were renewed in accordance with Law 12,783/13.  The tariffs and volumes of electricity to be purchased by each distribution company, as well as the provisions of the applicable agreements between the generation and distribution companies, were set by ANEEL in the law.  Since distribution companies are required to contract in advance, through public auctions, for 100% of their forecast electricity needs and are only authorized to pass through the cost of up to 105% of this electricity to consumers, any involuntary quota to be purchased from generation companies whose concessions were renewed under Law 12,783/13 that takes a distributor’s energy volume to more than 105% of its forecast would lead to additional costs for the distributor.  As a result, Normative Resolution No. 706 of March 29, 2016 provided that the costs resulting from involuntary purchase quotas can be passed on to consumers, and the energy volume can be offset from electricity auctions from existing power generation facilities in the following years.  See “Item 3. Key Information—Risk Factors—Our operating results depend on prevailing hydrological conditions.  Poor hydrological conditions may affect our results of operations” and “Item 3. Key Information—Risk Factors—In our distribution business, we are required to forecast demand for electricity in the market.  If actual demand is different from our forecast, we could be forced to purchase or sell electricity in the spot market at prices that could lead to additional costs for us, which we may not be able to fully pass on to customers” for more information.

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On June 10, 2018, ANEEL issued Normative Resolution No. 824/2018 establishing a new mechanism, called the Surplus Selling Mechanism, to allow the sale of surplus electricity purchased by distributors to Free and Special Consumers, generators and self-generators.  The Surplus Selling Mechanism is voluntary for sellers and purchasers and is set to take place periodically several times per year through 12-month, 6-month and 3-month agreements, with settlement at the equilibrium price set for each submarket and energy type.  In 2019, Surplus Selling Mechanisms were held on January 4, March 29, June 24-25 and September 24. We participated in the first two mechanisms. In 2019, ANEEL and CCEE began to evaluate improvements to the mechanism to predict for multiple bids for the same product, changes in tiebreaker procedures and new products for the 6 months between July and December 2019. These improvements, discussed in the context of Public Hearing No. 33/2019 and Public Consultation No. 34/2019 (Second Phase of Public Hearing No. 33/2019), were approved through ANEEL Normative Resolution No. 869/2020.

Transmission Tariffs.  In 2019, we paid a total of R$2.464 million in tariffs for the use of the transmission network, including Basic Network tariffs, connection tariffs and transmission of high-voltage electricity from Itaipu at rates set by ANEEL.

Consumers and Tariffs

Consumers

We classify our consumers into five principal categories.  See Note 27 to our audited annual consolidated financial statements for a breakdown of our sales by category.

·

Industrial consumers. Sales to final industrial consumers accounted for 16.5% of revenues from electricity sales in our distribution segment in 2019.

·

Residential consumers. Sales to final residential consumers accounted for 48.4% of our revenues from electricity sales in our distribution segment in 2019.

·

Commercial consumers. Sales to final commercial consumers, which include service businesses, universities and hospitals, accounted for 21.0% of our revenues from electricity sales in our distribution segment in 2019.

·

Rural consumers. Sales to final rural consumers accounted for 4.5% of our revenues from electricity sales in our distribution segment in 2019.

·

Other consumers. Sales to other consumers, which include public and municipal services such as street lighting, accounted for 9.6% of our revenue of electricity sales in our distribution segment in 2019.

Retail Distribution Tariffs.  We classify our consumers into two different groups, Group A consumers and Group B consumers, based on the voltage level at which electricity is supplied to them.  Each consumer is placed in a certain tariff level defined by law and based on its respective classification.  Some discounts are available depending on the consumer classification, tariff level or environment for trading (Free Consumers and generators).  Group B consumers pay higher tariffs.  Tariffs in Group B vary by type of consumer (residential, rural, other categories and public lighting).  Consumers in Group A pay lower tariffs, decreasing from A4 to Al, because they are supplied electricity at higher voltages, which requires lower use of the energy distribution system.  The tariffs we charge for sales of electricity to Final Consumers are determined pursuant to our concession agreements and regulations ratified by ANEEL.  These concession agreements and related regulations establish a cap on tariffs that provides for annual, periodic and extraordinary adjustments.  See “—The Brazilian Power Industry” for a discussion of the regulatory regime applicable to our tariffs and their adjustment.

41


 
 

Group A consumers receive electricity at 2.3 kV or higher.  Tariffs for Group A consumers are based on the voltage level at which electricity is supplied, and the time of day electricity is supplied.  The consumers may opt for a different tariff applicable in peak periods in order to optimize the use of the electric network.  Tariffs for Group A consumers consist of two components: the TUSD and the tariff for energy consumption, or TE.  The TUSD, expressed in reais per kW, is based on: (i) the electricity demand contracted by the party connected to the system; (ii) certain regulatory charges; and (iii) technical and non-technical losses of energy on the distribution system.  The TE, expressed in reais per MWh, is based on the amount of electricity actually consumed.  These consumers may opt to purchase electricity in the Free Market under the New Regulatory Framework.  See “—The New Regulatory Framework” for more information.

Group B consumers receive electricity at less than 2.3 kV (220V and 127V).  Tariffs for Group B consumers are charged for the tariff for using the distribution system and also for energy consumption.  Both are charged in R$/MWh.

The following tables set forth our average retail prices for each consumer category for 2019 and 2018.  These prices include taxes (ICMS, PIS and COFINS) and were calculated based on our revenues and the volume of electricity sold in 2019 and 2018.

 

Year ended December 31, 2019

 

CPFL Paulista

CPFL Piratininga

RGE(1)(2)

RGE Sul(1)

CPFL Santa Cruz(3)

 

 

Residential

702.33

744.71

860.73

-

704.68

Industrial

608.48

641.85

671.14

-

578.38

Commercial

656.58

680.27

848.56

-

668.44

Rural

411.09

463.59

471.62

-

437.15

Other

547.99

661.63

429.34

-

445.46

Average

641.21

702.08

694.22

-

591.94

 

 

Year ended December 31, 2018

 

CPFL Paulista

CPFL Piratininga

RGE(1)(2)

RGE Sul(1)

CPFL Santa Cruz(3)

 

 

Residential

639.65

673.63

820.70

757.09

666.20

Industrial

581.90

592.27

669.67

561.23

543.21

Commercial

611.34

624.76

812.30

730.86

632.51

Rural

362.50

420.49

365.84

386.52

403.56

Other

469.08

457.57

444.47

315.12

404.96

Average

583.47

620.97

665.83

572.79

555.37

 

______________________

(1)  

On December 4, 2018, through the Resolution for Authorization No.7,499/2018, ANEEL approved our proposal to consolidate the concessions of our two distribution companies (RGE and RGE Sul), pursuant to Normative Resolution No. 716/2016.  RGE merged into RGE Sul (which now operates under the name RGE) effective as of January 1, 2019.  See “Item 4. Information on the Company—Overview” and"

(2)  

Considers ten months of RGE before the consolidation of the concessions as described in item (1) above.

(3)  

On November 21, 2017, through the Resolution for Authorization No. 6,723/2017, ANEEL approved our proposal to consolidate the concessions of five of our distribution companies (CPFL Santa Cruz; Companhia Leste Paulista de Energia; Companhia Sul Paulista de Energia; Companhia Luz e Força de Mococa; and CPFL Jaguari, together the Merged Companies), pursuant to Normative Resolution No. 716/2016.  Effective as of January 1, 2018, the Merged Companies were merged with and into a company named CPFL Santa Cruz (which company was previously named CPFL Jaguari).  See “Item 4. Information on the Company—Overview.”

Under current regulations, residential consumers may be eligible to pay a reduced TSEE tariff.  Families eligible to benefit from the TSEE are (i) those registered with the Brazilian government’s Single Registry of Social Programs (Cadastro Único para Programas Sociais do Governo Federal) with monthly per capita income at or below half the national minimum wage and (ii) those who receive the Continued Social Assistance Provision Benefits (Benefício da Prestação Continuada da Assistência Social).  Discounts range from 10% to 65% on energy consumption per month.  In addition, these residential consumers are not required to pay the Proinfa Program charge or any extraordinary tariff approved by ANEEL.  Indigenous peoples and residents of traditional rural communities (quilombos) receive free electricity up to maximum consumption of 50 kWh.

42


 
 

Since the end of 2018, there has been a growing concern from the Brazilian government regarding the need for tariff reductions. Thus, on December 27, 2018, the Brazilian Government published Decree No. 9,642, which determined that, as of January 1, 2019, the discounts applied to rural and water, sewage and sanitation services consumers during their respective adjustments or ordinary tariff review procedures will be reduced at a rate of 20% per year over the initial value until terminated.

TUSD.  The TUSD tariffs, which are set by ANEEL, consist of the three tariffs described under “Item 4. Information on the CompanySystem TariffsTUSD.”  In 2019, tariff revenues for the use of our network by Free Consumers and Captive Consumers amounted to R$16,261 million.  The average tariff for the use of our network was R$151.61/MWh and R$131.10/MWh in 2019 and 2018, respectively, including the TUSD we charge to other distributors connected to our Distribution Networks.

Billing Procedures

The procedure we use for billing and payment for electricity supplied to our consumers is determined by consumer and tariff categories.  Meter readings and invoicing take place on a monthly basis for Low Voltage consumers, with the exception of rural consumers, whose meters are read in intervals varying from one to two months, as authorized by relevant regulation, and consumers of our subsidiary RGE, whose meters are read in intervals varying from one to three months.  Bills are issued from meter readings or, if meter readings are not possible, from the average of monthly consumption.  Low voltage consumers are billed within a maximum of three business days after the meter reading, with payment required within a minimum of five business days after the invoice presentation date.  In case of nonpayment, we send the consumer a notice of nonpayment with the following month’s invoice, and we allow the consumer up to 15 days to settle the amount owed to us.  If payment is not received within three business days after that 15-day period, the consumer’s electricity supply may be suspended.  We may also take other measures, such as inclusion of the consumer in the list of debtors of credit reporting agencies, or extrajudicial or judicial collection through collection agencies.

High Voltage consumers are read and billed on a monthly basis with payment required within five business days after the receipt of an invoice.  In the event of nonpayment, we send the consumer a notice two business days after the due date, giving a deadline of 15 days to make payment.  If payment is not made within three business days after that 15-day period, the consumer’s service may be discontinued.

According to the most recent data from ABRADEE, the percentage of customers in default for our three largest distribution subsidiaries compare favorably to the average for other major Brazilian electricity distributors.  For this purpose, consumers in default are consumers whose bills are over 90 days overdue.  Bills due and outstanding for over 360 days are written off.

Customer Service

We strive to provide high-quality customer service to our distribution consumers.  We provide customer service 24 hours a day, seven days a week.  The requests are received using a variety of platforms such as call centers, our website, SMS and our smartphone application.  In 2019, we responded to 91.2 million customer requests.  We also provide customer service through our branch offices, which handled 9.1 million customer requests in 2019. The improvements we implemented on our digital channel (such as our IVR, website and app) has allowed us to reach 80% of our customer requests through digital channels, thereby reducing our customer service costs.  In order to improve our customer experience, we created two new customer service channels in 2019: video service at our branches and chatbot.  We have improved billing understanding through the “Learning about my bill” service. We send an SMS to customers who had a significant increase in their bill. The customer receives a link to a personalized digital service that compares their current invoice with their previous invoice and has inputs for the reasons for the increase. Customer service also reaches the customer in person as we dispatch our technicians to make any necessary repairs upon receiving a customer’s request.

43


 
 

Generation of Electricity

We are actively expanding our generating capacity.  In accordance with Brazilian regulations, revenues from generation are based mainly on the Assured Energy of each facility, rather than its Installed Capacity or actual output.  Assured Energy is a fixed output of electricity established by the Brazilian government in the relevant concession agreement.  For certain companies, actual output is determined periodically by the ONS in view of demand and hydrological conditions.  Provided that a generation facility has sold its electricity and participates in the MRE, it will receive at least the revenue amount that corresponds to its Assured Energy, even if it does not actually generate all the energy.  See “—The Brazilian Power Industry—Generation Scaling Factor” for more information.  Conversely, if a generation facility’s output exceeds its Assured Energy, its incremental revenue is equal only to the costs associated with generating the additional energy.

Most of our Hydroelectric Power Plants are members of the MRE, a system by which hydroelectric generation facilities share the hydrological risks of the Interconnected Power System.  Our total Installed Capacity in our conventional generation and renewable generation segments was 4,304 MW as of December 31, 2019.  Most of the electricity we produce comes from our Hydroelectric Power Plants.  We generated a total of 13,611 GWh in 2019, 10,648 GWh in 2018 and 10,137 GWh in 2017.

If less than the total Assured Energy is being generated (i.e., if the GSF is less than 1.0), hydroelectric companies must purchase energy in the spot market to cover the energy shortage and meet their Assured Energy volumes under the MRE.  From 2005 to 2012, the GSF remained above 1.0.  Beginning in 2013, however, this scenario began to change, which led the GSF to remain below 1.0 for the whole of 2014, and in 2015 it ranged from 0.783 to 0.825, requiring electricity generators to purchase energy in the spot market, thereby incurring significant costs.  Under Federal Law 13,203, however, we renegotiate our PPAs for the Regulated Market in December 2015, setting the GSF cost at a risk premium of R$9.50/MWh per year through the end of the PPA or the end of the concession, whichever occurs sooner.  See “—The Brazilian Power Industry—Generation Scaling Factor” for more information on the GSF and Federal Law 13,204.

Conventional Generation

Hydroelectric Power Plants

At December 31, 2019, our subsidiary CPFL Geração owned a 51.54% interest in the Assured Energy from the Serra da Mesa Power Plant.  Through its generation subsidiaries CERAN, BAESA, ENERCAN and Chapecoense, CPFL Geração also owned interests in the Monte Claro, Barra Grande, Campos Novos, Castro Alves, 14 de Julho and Foz do Chapecó Power Plants, which have been operational since December 2004, November 2005, February 2007, March 2008, December 2008 and October 2010, respectively.  Through CPFL Jaguari Geração, we owned a 4.15% (59.93% of 6.93%) interest in the Assured Energy from the Luis Eduardo Magalhães Power Plant.

All Installed Capacity and Assured Energy numbers stated in the discussion below refer to the full capacity of the plant in question rather than our consolidated share of such energy, which reflects our interest in the plant.

Serra da Mesa.  Our largest Hydroelectric Facility in operation is the Serra da Mesa facility, which we acquired in 2001 from ESC Energia S.A. (formerly VBC), one of our shareholders.  Furnas began construction of the Serra da Mesa facility in 1985.  In 1994, construction was suspended due to a lack of resources, which led to a public bidding procedure in order to resume construction.  Serra da Mesa currently consists of three generation units located on the Tocantins River in the state of Goiás.  The Serra da Mesa facility began operations in 1998 and has a total Installed Capacity of 1,275 MW.  The concession for the Serra da Mesa facility is owned by Furnas, which is also the operator, and we own part of the facility.  Under Furnas’ agreement with us, which has a 30-year term commencing in 1998, we have the right to 51.54% of the Assured Energy of the Serra da Mesa facility until 2028 even if, during the term of the concession, there is an expropriation or forfeiture of the concession or the term of the concession expires.  We sell all of such electricity to Furnas under an electricity purchase contract that was renewed in March 2014 at a price that is adjusted annually based on the IGP-M/FGV index.  This contract expires in 2028.  Our share of the Installed Capacity and Assured Energy of the Serra da Mesa facility is 657 MW and 2,879 GWh/year, respectively.  On May 30, 2014, the concession held by Furnas was formally extended to November 12, 2039.  In 2016, due to the renegotiated GSF, the Serra da Mesa concession was extended to September 30, 2040, in accordance with ANEEL’s Authoritative Resolution No. 6,055/2016.

44


 
 

CERAN Hydroelectric Complex.  We own a 65.0% interest in CERAN, a subsidiary that was granted a 35-year concession in March 2001 to construct, finance and operate the CERAN hydroelectric complex.  The other shareholders are CEEE (with 30.0%) and Desenvix (with 5.0%).  The CERAN hydroelectric complex consists of three Hydroelectric Power Plants: Monte Claro, Castro Alves and 14 de Julho.  The CERAN hydroelectric complex is located on the Antas River 120 km north of Porto Alegre, near the city of Bento Gonçalves, in the state of Rio Grande do Sul.  The entire CERAN hydroelectric complex has an Installed Capacity of 360 MW and estimated Assured Energy of 1,449 GWh per year, of which our share is 942 GWh/year.  We sell our participation in the Assured Energy of this complex to affiliates in our group.  These facilities are operated by CERAN, under CPFL Geração’s supervision.

Monte Claro.  Monte Claro’s first generating unit, which became operational in 2004, has an Installed Capacity of 65 MW and the second generating unit, which became operational in 2006, also has an Installed Capacity of 65 MW, giving total Installed Capacity of 130 MW and Assured Energy of 491.5 GWh per year.

Castro Alves.  In March 2008, the first generation unit of the Castro Alves Power Plant became operational, with total Installed Capacity of 43.4 MW.  In April 2008, the second generation unit became operational, with Installed Capacity of 43.4 MW.  In June 2008, this plant became fully operational (when the third generation unit started operations), giving total Installed Capacity of 130 MW and annual Assured Energy of 541.4 GWh per year.

14 de Julho.  The first generation unit of the 14 de Julho Power Plant became operational in December 2008, and the second generation unit became fully operational in March 2009.  This plant has a total Installed Capacity of 100 MW and an annual Assured Energy of 416.1 GWh.

We are currently assessing alternative measures in order to improve our financial and operational results.  Discussions are currently underway with ANEEL and other entities in the transmission sector, regarding the conditions under which we will transfer the Monte Claro Substation to the Basic Network, which could eliminate maintenance costs and our responsibility for operation of the Substation.

Barra Grande.  This facility became fully operational in May 2006 with a total Installed Capacity of 690 MW and total Assured Energy of 3,266 GWh per year.  CPFL Geração owns a 25.01% interest in this plant.  The other shareholders of the joint venture are Alcoa (42.18%), CBA (Companhia Brasileira de Alumínio) (15.0%), DME (Departamento Municipal de Eletricidade de Poços de Caldas) (8.82%), and Camargo Corrêa Cimentos S.A. (9.0%).  We sell our participation in the Assured Energy of this facility to affiliates in our group.

Campos Novos.  We own a 48.72% interest in ENERCAN, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in May 2000 to construct, finance and operate the Campos Novos Hydroelectric Facility.  The plant was constructed on the Canoas River in the state of Santa Catarina, and became fully operational in May 2007 with a total Installed Capacity of 880 MW and Assured Energy of 3,327 GWh per year, of which our interest is 1,621 GWh per year.  The other shareholders of ENERCAN are CBA (33.14%), Votorantim Metais Níqueis S.A. (11.63%) and CEEE (6.51%).  The plant is operated by ENERCAN under CPFL Geração’s supervision.  We sell our participation in the Assured Energy of this joint venture to affiliates in our group.

Foz do Chapecó.  We own a 51.0% interest in Chapecoense, a joint venture formed by a consortium of private and public sector companies that was granted a 35-year concession in November 2001 to construct, finance and operate the Foz do Chapecó Hydroelectric Power Plant.  The remaining 49.0% interest in the joint venture is divided among Furnas, which holds a 40.0% interest, and CEEE, which holds a 9.0% interest.  The Foz do Chapecó Hydroelectric Power Plant is located on the Uruguay River, on the border between the states of Santa Catarina and Rio Grande do Sul.  The Foz do Chapecó Power Plant became fully operational in March 2011 with 855 MW of total Installed Capacity and Assured Energy of 3,743 GWh per year.  We sell 40.0% of our share in the Assured Energy of this project to affiliates in our group and 60.0% through CCEARs.  In January 2013, at the request of ANEEL, we began the process of transferring the Foz do Chapecó Substation and exclusive transmission lines to the Basic Network, thereby eliminating maintenance costs and responsibility for operation of these assets, and reducing the transmission line energy loss factor (regulatory loss).  The transfer process was completed in October 2016.

45


 
 

Luis Eduardo Magalhães.  We own a 4.15% (59.93% of 6.93%) interest in the Assured Energy from the Luis Eduardo Magalhães Power Plant, also known as UHE Lajeado.  The plant is located on the Tocantins River in the state of Tocantins and became fully operational in November 2002 with a total Installed Capacity of 902.5 MW and Assured Energy of 4,425 GWh per year.  The plant was built by Investco S.A., a consortium comprised of Lajeado Energia, EDP (Energias de Portugal), CEB (Companhia Energética de Brasília) and Paulista Lajeado (which we acquired in 2007).

Thermoelectric Power Plants

We operate two Thermoelectric Power Plants.  Termonordeste, which commenced operations in December 2010, and Termoparaíba, which commenced operations in January 2011 under ANEEL authorizations, are powered by fuel oil from the EPASA complex, with total Installed Capacity of 341.7 MW and total Assured Energy of 2,170 GWh per year.  On December 31, 2019, we owned an aggregate 53.34% interest in Termonordeste and Termoparaíba.  The Termonordeste and Termoparaíba Thermoelectric Power Plants are located in the city of João Pessoa, in the state of Paraíba.  The electricity from these power plants was sold in CCEARs, and part of this energy was purchased by our own distributors.  In 2018, ANEEL passed Resolution No. 822/2018, allowing thermoelectric power plants to perform, and be compensated for, the recovery of system operational reserves for frequency control as an ancillary service.  Thus, since October 2018, every week, thermoelectric power plants can offer prices up to 130% of their current dispatch cost and ONS schedules the dispatch considering the lowest cost for the electrical system.  Resolution No. 822/2018 represents recognition by ANEEL of the additional expenses incurred by thermoelectric power plants in order to respond to ONS’s intermittent dispatches due to the variation in energy generation by wind farms in connection with operative restraints on hydropower plants.  The 30% increase in price over the power plants’ operational cost is being tested by ANEEL while the agency examines the prices offered by Thermoelectric Power Plants, and is intended to allow for compensation for the maintenance and fuel consumption arising from the power plants’ need to start and stop operations at various times throughout any particular week.  Before Resolution No. 822/2018, such additional costs were borne by the thermoelectric power plants for purposes of providing an ancillary service to customers for frequency control.  Our EPASA complex has chosen to perform such ancillary service, resulting in additional revenues of R$176 million in 2019.

The remaining facility, Carioba, has an Installed Capacity of 36 MW; however, it has been officially deactivated since October 19, 2011, as provided for in Order No. 4,101 of 2011.  We have applied to terminate the Carioba concession since ANEEL reduced the subsidy associated with the CCC Account.  In response to our termination application, on August 14, 2019, MME published Order No. 315/2019, which terminated the Carioba concession, without reversal of assets. Its concession agreement was declared null trough Dispatch No.039/2019-SCG/ANEEL.  Since 2016, we have ceased to include Carioba in our installed capacity since the facility is inactive.

Small Hydroelectric Power Plants

At December 31, 2019, 10 of our 48 Small Hydroelectric Power Plants were under the management of two of our conventional generation subsidiaries, CPFL Geração and CPFL Centrais Geradoras.  These 10 Small Hydroelectric Power Plants reported their results within the conventional generation segment.  They consist of two groups of facilities:

·

Nine of these facilities were originally managed together with their associated distribution companies within our distribution segment. Law No. 12,783 of January 11, 2013 specified the conditions for the renewal of generation, transmission and distribution concessions obtained under articles 17, 19 or 22 of Law No. 9,074 of July 7, 1995. Under Law No. 12,783/13, these concessions may be extended once, at the discretion of the Brazilian government, for up to 30 years, in order to ensure the continuity and efficiency of the services rendered and of low tariffs. In addition, Law No. 12,783/13 provided that holders of concessions that were due to expire in 2015, 2016 and 2017 could apply for early renewal in 2013, subject to certain conditions. However, Resolution No. 521/12 published by ANEEL on December 14, 2012 established that the generation concessions to be renewed under Law No. 12,783/13 must be partitioned into separate operating entities in cases where the Installed Capacity of the original concessionaire entity exceeded 1 MW. On October 10, 2012, in anticipation of Law 12,783/13, we applied for early renewal of the concessions held by our distribution subsidiaries CPFL Santa Cruz, CPFL Jaguari, CPFL Mococa, CPFL Leste Paulista and CPFL Sul Paulista (now all merged into CPFL Santa Cruz), which were originally granted in 1999 for a 16-year term. Pursuant to the partition requirement under Resolution No. 521/12, we were required to separate the generation and distribution activities of three of the plants, Rio do Peixe I and II and Macaco Branco, whose generation facilities were transferred to CPFL Centrais Geradoras on August 29, 2013. At that time, our Management decided for operational reasons to partition the generation and distribution activities of the remaining six facilities held by the four distribution subsidiaries (Santa Alice, Lavrinha, São José, Turvinho, Pinheirinho and São Sebastião), the generation facilities of which were also transferred to CPFL Centrais Geradoras. In addition, the concession agreements for Macaco Branco and Rio do Peixe were transferred from CPFL Centrais Geradoras to CPFL Geração on September 30, 2015 (see “–Overview”).

46


 
 

 

During 2014, the concessions for the Salto do Pinhal and Ponte do Silva facilities were terminated under Authorizing Resolution No. 4,559/2014, which determined that concessions for inactive Micro Hydroelectric Power Plants would be extinguished without reversion of the respective assets to the government.

·

The remaining facility, Cariobinha, has been held by CPFL Geração since the signing of the concession contract. Since 2016, we have ceased to include Cariobinha in our Installed Capacity and Assured Energy data since the facility is inactive. We also applied to terminate the Cariobinha concession. In response to our termination application, on July 17, 2018, MME published Order No. 304/2018, which terminated the Cariobinha concession, without reversal of assets. In September 2019, SCG/ANEEL published Dispatch No. 039/2019, which declared the Cariobinha concession agreement null. Pursuant to the local law which allowed us to include Cariobinha in our generation assets, we are arranging to return Cariobinha’s facility to the municipality of Americana, where it is installed.

On December 4, 2012, the concessions of the Rio do Peixe I and II and Macaco Branco Small Hydroelectric Power Plants were renewed for 30 years under Law No. 12,783/13.  The renewals of these concessions were subject to the following conditions:

(i)

The energy generated must be sold to all distribution companies in Brazil according to quotas defined by ANEEL (previously, energy was sold only to the related distribution subsidiary);

(ii)

The concessionaire’s annual revenue is set by ANEEL, subject to tariff reviews (previously, the energy prices were defined contractually and adjusted according to the IPCA); and

(iii)

The assets that remained unamortized at the renewal date would be indemnified, and the indemnification payment would not be considered as annual revenue. The remuneration relating to new assets or existing assets that were not indemnified would be considered as annual revenue. Rio do Peixe I and II received a total of R$34.4 million in indemnification payments. The assets of Macaco Branco had been fully amortized, and therefore generated no indemnification payment.

The following table sets forth certain information relating to our principal conventional generation facilities in operation and the Small Hydroelectric Power Plants that reported their results within the conventional generation segment as of December 31, 2019:

 

Holding company

Share ownership

Capacity (MW)

Assured Energy (GWh)

Placed in service

Concession expires

 

 

 

Our share

TOTAL

Our share

TOTAL

 

 

Hydroelectric plants:

 

 

 

 

 

 

 

 

Serra da Mesa

CPFL Geração

51.54%

657.1

1,275.0

2,878.6

5,585.1

1998

2039(1)

Monte Claro

CPFL Geração

65.00%

84.5

130.0

319.5

491.5

2004

2036

Barra Grande

CPFL Geração

25.01%

172.5

690.0

816.7

3,266.1

2005

2036

Campos Novos

CPFL Geração

48.72%

428.8

880.0

1,620.8

3,326.6

2007

2035

Castro Alves

CPFL Geração

65.00%

84.5

130.0

351.9

541.4

2008

2036

14 de Julho

CPFL Geração

65.00%

65.0

100.0

270.5

416.1

2008

2036

Luis Eduardo Magalhães

CPFL Jaguari de Geração

4.15%

37.5

902.5

183.8

4,425.2

2001

2032

Foz do Chapecó

Chapecoense

51.00%

436.1

855.0

1,908.8

3,742.7

2010

2036

SUBTOTAL – Hydroelectric plants

 

 

1,966.0

 

8,350.6

 

 

 

Thermoelectric plants:

 

 

 

 

 

 

 

 

EPASA facilities:

 

 

 

 

 

 

 

 

Termonordeste

CPFL Geração

53.34%

91.1

170.9

578.5

1,084.6

2010

2042

Termoparaíba

CPFL Geração

53.34%

91.1

170.9

579.0

1,085.5

2011

2042

SUBTOTAL – Thermoelectric plants

 

 

182.3

 

1,157.5

 

 

 

Small Hydroelectric Plants

 

 

 

 

 

 

 

 

Lavrinha

CPFL Centrais Geradoras

100%

0.3

0.3

2.1

2.1

N/A

(2)

Macaco Branco

CPFL Geração

100%

2.4

2.4

14.5

14.5

N/A

2042

Pinheirinho

CPFL Centrais Geradoras

100%

0.7

0.7

4.2

4.2

N/A

(2)

Rio do Peixe I

CPFL Geração

100%

3.1

3.1

3.9

3.9

N/A

2042

Rio do Peixe II

CPFL Geração

100%

15.0

15.0

46.8

46.8

N/A

2042

Santa Alice

CPFL Centrais Geradoras

100%

0.6

0.6

3.6

3.6

N/A

(2)

São José

CPFL Centrais Geradoras

100%

0.8

0.8

2.1

2.1

N/A

(2)

São Sebastião

CPFL Centrais Geradoras

100%

0.7

0.7

4.6

4.6

N/A

(2)

Turvinho

CPFL Centrais Geradoras

100%

0.8

0.8

2.2

2.2

N/A

(2)

SUBTOTAL – Small Hydroelectric Plants

 

 

24.3

 

84.1

 

 

 

TOTAL – Conventional Generation

 

 

2,172.6

 

9,592.2

 

 

 

______________________

(1)   The concession for Serra da Mesa is held by Furnas.  On May 30, 2014, the concession held by Furnas was formally extended to November 12, 2039.  In 2016, due to the renegotiated GSF, the Serra da Mesa concession was extended to September 30, 2040, in accordance with ANEEL’s Authoritative Resolution No. 6,055/2016.  We have a contractual right to 51.54% of the Assured Energy of this facility, under a 30-year agreement.

(2)   Hydroelectric projects with an Installed Capacity equal to or less than 5,000 kW that are registered with the regulatory authority and the administrator of power concessions but do not require concession or authorization processes for operating.

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Renewable Generation

At December 31, 2019, we owned a 99.94% interest in CPFL Renováveis, a company resulting from an association with another Brazilian renewable energy producer, ERSA – Energias Renováveis S.A., which holds our subsidiaries engaged in the generation of electricity from renewable sources.  Through CPFL Renováveis, in August 2011, we became the largest renewable energy generation group in Brazil in terms of Installed Capacity and capacity under construction, according to ANEEL.  We have fully consolidated CPFL Renováveis in our financial statements since August 1, 2011.  CPFL Renováveis carried out its initial public offering in July 2013, resulting in a decrease in our shareholding from 63% to 58.84%.  On October 1, 2014, CPFL Renováveis acquired 100% of the shares of DESA through an issuance of shares of CPFL Renováveis, resulting in a decrease in our shareholding of CPFL Renováveis from 58.84% to 51.61%.  On November 29, 2018, State Grid acquired 243,771,824 common shares of CPFL Renováveis through a mandatory tender offer that State Grid was required to carry out upon gaining control of our company in accordance with applicable Brazilian law.  As a result of this mandatory tender offer, State Grid and us, indirectly through our subsidiary CPFL Geração and CPFL Energia, held 99.94% of CPFL Renováveis’ total capital stock.

On May 21, 2019, our board of directors authorized the beginning of CPFL Renováveis’ integration into our administrative structure. Our integration plan for CPFL Renováveis involves (i) the implementation of plans to restructure and improve the operations of CPFL Renováveis, with the aim of creating synergies between CPFL Renováveis and our current business, and (ii) conducting studies and analysis of a corporate reorganization that could involve a total or partial consolidation of CPFL Geração and CPFL Renováveis, which is still subject to further review by and ultimately the approval of our management. On July 1, 2019, following the authorization from our board of directors, our board of executive officers approved the integration of CPFL Renováveis’ administrative structure into our organizational model to optimize operations and gain efficiency. This potential consolidation would only occur following a final decision with respect to the B3’s requirement to reestablish CPFL Renováveis’ free float.

On September 30, 2019, we, together with State Grid, announced the closing of the purchase and sale of the shares issued by CPFL Renováveis and the transfer by State Grid to us of all the shares of CPFL Renováveis directly held by State Grid at a purchase price of R$16.85 per share, as determined by the independent members of our board of directors on May 29, 2019 on the basis of an appraisal report prepared by financial advisory firm UBS. The total purchase price paid by us to State Grid was R$4.1 billion. We expect such transaction to enable potential synergies between us and our subsidiaries. On December 19, 2019, our board of directors and the board of executive officers of CPFL Geração approved CPFL Geração’s tender offer to acquire the remaining outstanding common shares of CPFL Renováveis to allow for the conversion of CPFL Renováveis’ registration as a category “A” publicly-held company into a category “B” publicly-held company and/or its delisting from the Novo Mercado. This tender offer is subject to CVM registration and to authorization by the B3. The offered price per share is R$16.85, as adjusted by the SELIC from the date of the mandatory tender offer carried out by State Grid in November 2018.

CPFL Renováveis invests in independent renewable energy production sources with low environmental and social impact, such as Small Hydroelectric Power Plants, wind farms, Biomass-fueled Thermoelectric Power Plants and photovoltaic solar plants, focusing exclusively on the Brazilian market.  CPFL Renováveis has extensive experience in the development, acquisition, construction and operation of electricity-generating plants using renewable energy sources.  CPFL Renováveis operates in eight Brazilian states and its business contributes to the local and regional economic and social development.

At the date of this annual report, CPFL Renováveis consists of the generation entities described below.  All Installed Capacity and Assured Energy numbers stated in the discussion below refer to the full capacity of the plant in question rather than our consolidated share of such energy, which only reflects our interest in the plant.

·

23 subsidiaries involved in the generation of electric energy through 41 Small Hydroelectric Power Plants, consisting of (i) 40 SHPPs that are operational, with aggregate Installed Capacity of 453.1 MW, located in the states of São Paulo, Santa Catarina, Rio Grande do Sul, Paraná, Minas Gerais and Mato Grosso, and (ii) one SHPP, SHPP Lucia Cherobim, with 28 MW of Installed Capacity, which is under construction and scheduled to commence operations by 2024. 

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·

43 subsidiaries involved in the generation of electric energy from wind sources.  49 wind farms, located in the states of Ceará, Rio Grande do Norte and Rio Grande do Sul, consisting of (i) 45 wind farms that are operational, with an aggregate Installed Capacity of 1,308.6 MW, and (ii) four wind farms (Gameleira, Figueira Branca, Farol de Touros and Costa das Dunas), with an aggregate Installed Capacity of 69.3 MW, which are under construction and scheduled to commence operations by 2024.

·

Eight subsidiaries involved in the generation of electric energy from biomass, all of which are operational, with total Installed Capacity of 370 MW, located in the states of Minas Gerais, Paraná, São Paulo and Rio Grande do Norte.

·

One subsidiary involved in the generation of electric energy from a Solar Power Plant, Tanquinho, which is located in the state of São Paulo and has total Installed Capacity of 1.1 MW. Tanquinho started operations on November 27, 2012 and has the capacity to generate 1.7 GWh/year.

 

Existing Installed Capacity

The following describes our existing and operational renewable generation plants:

Small Hydroelectric Power Plants

Small Hydroelectric Power Plants are plants with generation capacity between 5 MW and 30 MW and a reservoir area of up to three square kilometers.  A typical Small Hydroelectric Power Plant operates under a “run-of-river” system, and as a result, it may experience idleness when the available water flow is less than the turbine inflow capacity.  If flows are greater than the equipment’s capacity, water flows through a spillway.  Small Hydroelectric Power Plants are allowed to participate in the MRE, and in this case, the amount of energy sold by the power plant depends solely on its certificate of guarantee and not on its individual energy production.

CPFL Renováveis operates 40 of our 48 Small Hydroelectric Power Plants primarily under the concession and authorization regime, all located in the states of São Paulo, Minas Gerais, Mato Grosso, Paraná, Santa Catarina and Rio Grande do Sul.

There have been several revisions, mainly consisting of reductions, to CPFL Renováveis’ Assured Energy, on account of reductions in the expected operational performance.

The automation of the power plants allows us to carry out control, supervision and operations remotely.  Since CPFL Energia acquired CPFL Renováveis’ renewable business, we have established an operational center for the management and monitoring of our power plants in Jundiaí, in the state of São Paulo.  Regarding the remote control, supervision and operation of the wind energy assets, we have also established a remote control center in Fortaleza, in the state of Ceará.

Biomass Thermoelectric Power Plants

Biomass-fueled Thermoelectric Power Plants are generators that use the combustion of organic matter for the production of energy.  This organic matter may include products such as sugarcane bagasse, vegetable coal, biogas, black liquor, rice husk and wood chips.  Energy fueled by biomass is renewable and creates less pollution than other energy forms, such as those obtained from the use of fossil fuels (petroleum and coal), create.  The construction period of Biomass-fueled Thermoelectric Power Plants is shorter than that of Small Hydroelectric Power Plants (from one to two years, on average).  The necessary investment per installed MW for the construction of a Biomass-fueled Thermoelectric Power Plant is proportionally lower than the investment for construction of a Small Hydroelectric Power Plant.  On the other hand, the operation of a Biomass-fueled Thermoelectric Power Plant is generally more complex, as it involves the acquisition, logistics and production of organic inputs used for power generation.  For this reason, the operational costs of Biomass-fueled Thermoelectric Power Plants tend to be higher than the operational costs of Small Hydroelectric Power Plants.

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Despite being more complex, Biomass-fueled Thermoelectric Power Plants benefit from: (i) expedited environmental licensing; (ii) abundant fuel in Brazil, which may come from sub-products of other activities (e.g., wood chips); and (iii) proximity to consumers, reducing transmission costs.  Fuel acquisition and logistics costs are significantly lower for Biomass-fueled Thermoelectric Power Plants compared to Thermoelectric Power Plants from non-renewable sources.  Additionally, even though they are eligible for the Clean Development Mechanism established by the Kyoto Protocol (Mecanismo de Desenvolvimento Limpo), or MDL, and the corresponding mechanism established by the Paris Agreement (Mecanismo de Desenvolvimento Sustentável), yet to be regulated, and have the potential to generate carbon credits, Biomass-fueled Thermoelectric Power Plants installed in Brazil have encountered difficulties in obtaining approval for projects due to the issues related to the boiler format and methodology of the approval process.

We currently have eight Biomass-fueled Thermoelectric Power Plants under the authorization regime, located in the states of São Paulo, Minas Gerais, Rio Grande do Norte and Paraná.

CPFL Alvorada.  The UTE Alvorada plant is located in the city of Araporã, in the state of Minas Gerais, began operations in November 2013.  The total Installed Capacity of UTE Alvorada is 50 MW and Assured Energy is 163.8 GWh. This project has an associated PPA in force until 2032 with CPFL Brasil.

CPFL Bioenergia.  In partnership with Baldin Bioenergia, we have constructed a co-generation plant in the city of Pirassununga, in the state of São Paulo, which became operational in August 2010.  This co-generation plant has total Installed Capacity of 45 MW. The plant has an Assured Energy of 91.1 GWh and all its electricity is sold to CPFL Brasil.

CPFL Bio Formosa.  In 2009, CPFL Brasil established the Baía Formosa power plant (CPFL Bio Formosa), located in the city of Baía Formosa, in the state of Rio Grande do Norte, with total Installed Capacity of 40 MW.  The CPFL Bio Formosa plant began operations in September 2011.  11 MWavg of energy were sold in the A-5 auction (see “—The New Regulatory Framework—Auctions on the Regulated Market”), with CCEARs in force until 2025.

CPFL Bio Buriti.  In March 2010, CPFL Bio Buriti, which was formed to develop electric energy generation projects using sugarcane bagasse, executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects.  The CPFL Bio Buriti plant, located in the city of Buritizal, in the state of São Paulo, began its operations in October 2011.  The total Installed Capacity of this plant is 50 MW.  CPFL Bio Buriti has an associated PPA of 184.1 GWh in force until 2030 with CPFL Brasil.

CPFL Bio Ester.  In October 2012, CPFL Renováveis completed the acquisition of the electricity and steam co-generation assets of SPE Lacenas Participações Ltda., which controls the Ester Thermoelectric Power Plant, located in the municipality of Cosmópolis, in the state of São Paulo.  The assets have total Installed Capacity of 40 MW.  Around 7 MWavg of co-generation energy from the Ester Thermoelectric Power Plant was commercialized in the 2007 alternative energy sources auction, for a period of 15 years.  The remaining energy produced is sold on the free market for 21 years.

CPFL Bio Ipê.  In March 2010, CPFL Bio Ipê, which was formed to develop electric energy generation projects using sugarcane bagasse, executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects.  The CPFL Bio Ipê plant, located in Nova Independência, in the state of São Paulo, began its operations in May 2012.  The total Installed Capacity of this plant is 25 MW.  This project has an associated PPA of 71.7 GWh in force until 2030 and the energy has been entirely sold to CPFL Brasil.

CPFL Bio Pedra.  In March 2010, CPFL Bio Pedra, which we formed to develop electric energy generation projects using sugarcane bagasse, executed a partnership agreement with Grupo Pedra Agroindustrial to develop new biomass generation projects.  CPFL Bio Pedra, located in Serrana, in the state of São Paulo, started operations in May 2012 with total Installed Capacity of 70 MW and Assured Energy of 209.4 GWh. The electricity from CPFL Bio Pedra has been sold through an auction held in 2010, with CCEARs in force until 2027.

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CPFL Coopcana.  The construction of UTE Coopcana began in 2012 in the city of São Carlos do Ivaí, in the state of Paraná, and operations started on August 28, 2013.  The total Installed Capacity of UTE Coopcana is of 50 MW and Assured Energy is 157.7 GWh.  This project has an associated PPA in force until 2033 with CPFL Brasil.

Solar Power Plant

Tanquinho.  The Tanquinho Solar Power Plant, in the state of São Paulo, started operations in November 2012, with total Installed Capacity of 1.1 MW. We expect Tanquinho to generate 1.7 GWh per year.

Wind Farms

Wind power is derived from the force of the wind passing over the blades of a wind turbine and causing the turbine to spin.  The amount of mechanical power that is transferred and the potential of electricity to be produced are directly related to the density of the air, the area covered by the blades of the wind turbine and the wind speed and height of each wind turbine.

The construction of a wind farm is less complex than the construction of Small Hydroelectric Power Plants, consisting of the preparation of the foundation and installation of wind turbines, which are assembled on site by suppliers.  The construction period of a wind farm is shorter than that of a Small Hydroelectric Power Plant, ranging from 18 months to two years, on average.  The investment per installed MW for the construction of a wind farm is proportionally lower than the investment for construction of a Small Hydroelectric Power Plant.  In contrast, the operation may be more complex and there are more risks associated with the variability of winds, especially in Brazil, where there is little history of wind measurement.

Certain regions of Brazil are more favorable in terms of wind speed, with higher average speeds and lower volatility as measured by speed variation, allowing for more predictability in the volume of wind energy to be produced.  Wind farms operate complementary to hydroelectric plants, since wind speed is usually higher in drought periods and it is, therefore, possible to preserve water from reservoirs in scarce rain periods.  The complementary operation of wind farms and Small Hydroelectric Power Plants should allow us to “stock up” on electric power in the Small Hydroelectric Power Plants’ reservoirs during periods of high wind power generation.  Estimates of Brazilian Wind Power Association (ABEEólica – Associação Brasileira de Energia Eólica) indicate a wind energy potential of 500 GW in Brazil, a volume that greatly exceeds the country’s current total Installed Capacity of 15.4 GW as of December 2019 according to ANEEL, signaling a high growth potential in this segment. Wind farms are also eligible for MDL and have the potential to generate carbon credits for sale.

We currently have 45 wind farms under the authorization regime, located in the states of Ceará, Rio Grande do Norte and Rio Grande do Sul.

Atlântica Complex.  The Atlântica complex consists of the Atlântica I, II, IV and V Wind Farms.  The complex has an aggregate Installed Capacity of 120 MW and aggregate Assured Energy of 449.4 GWh.  The electricity from these wind farms has been sold through an alternative energy auction held in 2010, or the 2010 Alternative Sources Auction, with CCEARs in force until 2033.  The Atlântica complex commenced operations in March 2014.

Bons Ventos.  Bons Ventos Wind Farm, in the state of Ceará, has an Installed Capacity of 50 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The acquisition of Bons Ventos Wind Farm was concluded in June 2012.

Campo dos Ventos II Wind Farm.  In 2010, CPFL Geração acquired Campo dos Ventos II Wind Farm (CPFL Renováveis currently holds this investment) in the cities of João Câmara and Parazinho, in the state of Rio Grande do Norte, which began operations in September 2013.  This wind farm has an Installed Capacity of 30 MW and Assured Energy of 131.4 GWh.  The electricity from Campo dos Ventos II has been sold through an auction held in 2010, with PPAs in force until August 2033.

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Canoa Quebrada.  Canoa Quebrada Wind Farm, in the state of Ceará, has an Installed Capacity of 57 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The acquisition of Canoa Quebrada Wind Farm was concluded in June 2012.

Enacel.  Enacel Wind Farm, in the state of Ceará, has an Installed Capacity of 31.5 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The acquisition of Enacel Wind Farm was concluded in June 2012.

Eurus Complex.  Eurus complex consists of the Eurus I and Eurus III Wind Farms.  The complex has an aggregate Installed Capacity of 60 MW and aggregate Assured Energy of 31.6 MWavg.  The Eurus complex sold its energy through the 2010 Reserve Energy Auction.

Foz do Rio Choró.  Foz do Rio Choró Wind Farm, in the state of Ceará, began operations in January 2009.  It has an Installed Capacity of 25.2 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The PPA is in force until June 2029.

Icaraizinho.  Icaraizinho Wind Farm, in the state of Ceará, began operations in October 2009.  It has an Installed Capacity of 54.6 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The PPA is in force until October 2029.

Macacos Complex.  The Macacos complex consists of the Pedra Preta, Costa Branca, Juremas and Macacos Wind Farms.  The complex has an aggregate Installed Capacity of 78.2 MW and aggregate Assured Energy of 37.5 MWavg.  The Macacos complex sold its energy through the 2010 Alternative Sources Auction.

Morro dos Ventos Complex.  The Morro dos Ventos complex consists of the Morro dos Ventos I, Morro dos Ventos III, Morro dos Ventos IV, Morro dos Ventos VI and Morro dos Ventos IX Wind Farms.  The complex has an aggregate Installed Capacity of 145.2 MW and aggregate Assured Energy of 68.6 MWavg.  The Morro dos Ventos complex sold its energy through the 2009 Reserve Energy Auction.

Morro dos Ventos II.  Morro dos Ventos II wind farm, in the state of Rio Grande do Norte, has an Installed Capacity of 29.2 MW and aggregate Assured Energy of 15.4 MWavg.  This wind farm commenced operations in April 2015.

Paracuru.  Paracuru Wind Farm, in the state of Ceará, began operations in November 29, 2008.  It has an Installed Capacity of 25.2 MW and an associated PPA in force until November 2028.

Pedra Cheirosa.  The Pedra Cheirosa complex, located in the state of Ceará, consists of the Pedra Cheirosa I and Pedra Cheirosa II Wind Farms, which have an aggregate Installed Capacity of 48.3 MW and aggregate Assured Energy of 27.5 MWavg.  This wind farm commenced operations in June 2017.

Praia Formosa.  Praia Formosa Wind Farm, in the state of Ceará, began operations in August 2009.  It has an Installed Capacity of 105 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The PPA is in force until August 2029.

Rosa dos Ventos Wind Farm.  In June 2013, CPFL Renováveis acquired Rosa dos Ventos Wind Farm (Canoa Quebrada and Lagoa do Mato fields), located in the state of Ceará.  This wind farm has an Installed Capacity of 13.7 MW and the electricity produced by Rosa dos Ventos is subject to an agreement with Eletrobras under the Proinfa Program.

Santa Clara Complex.  Santa Clara complex, in the state of Rio Grande do Norte, comprises seven wind farms with an Installed Capacity of 188 MW and an associated CCEAR in force until June 2032.  The Santa Clara wind farms sold their energy through the 2009 Reserve Energy Auction.

São Benedito and Campo dos Ventos Complexes.  The São Benedito complex consists of the Ventos de São Benedito, Ventos de Santo Dimas, Santa Mônica, São Domingos, Ventos do São Martinho and Santa Úrsula wind farms.  The São Domingos and Ventos de São Martinho Wind Farms, previously part of the Campo dos Ventos complex, were allocated to the São Benedito complex in order to increase synergies.  The Campo dos Ventos complex consists of Campo dos Ventos I, III and V Wind Farms.  Together, they have an Installed Capacity of 231 MW.

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Taíba Albatroz.  Taíba Albatroz Wind Farm, in the state of Ceará, has an Installed Capacity of 16.5 MW and an associated agreement with Eletrobras under the Proinfa Program to sell all of the energy generated for a period of 20 years.  The acquisition of Taíba Albatroz Wind Farm was concluded in June 2012.

The following table sets forth certain information relating to our principal renewable facilities, held by CPFL Renováveis (99.94% our share) in operation as of December 31, 2019:

 

Capacity (MW)

Assured Energy (GWh)

Placed in service

Facility upgraded

Concession expires