Hello.
Hello, electronic for CPFL.
Okay. Can you tell me please your first name?
First name would be Ren, R-E-N. Last name would be Cruz, C-R-U-Z.
Okay. Can you just please your first name?
First name is R-E-N, Ren.
Yes. What are calling this name?
What's this name?
Yeah.
CPFL Q4 2018 earnings.
Okay. Thank you very much. Just one moment. That was super.
Reconnecting.
Good morning. Thank you for waiting. Welcome to CPFL Energia's third quarter of 2018 earnings conference call. Today with us are Mr. Gustavo Estrella, CEO of CPFL Energia, Mr. Pan, CFO and Investor Relations Officer of CPFL Energia, and other officers of the company. The presentation will be available for download at CPFL Energia's investor relations website, www.cpfl.com.br/ir. We would like to inform you that all participants will be in listen-only mode during the company's presentation. After the company's remarks, there will be a Q&A session when further instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. I would like to remind you that this call is being recorded.
The conference will be held in Portuguese by Mr. Gustavo Estrella with simultaneous interpretation into English. We will have the participation of Mr. Pan, who will be addressing all listeners in English. Before proceeding, we would like to mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CPFL Energia's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events, and therefore depends on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may also affect the future results of CPFL Energia, and may cause results to differ materially from those expressed in such forward-looking statements.
We would like to turn the conference over to Mr. Gustavo Estrella. Mr. Estrella, you may proceed.
Good morning, everyone. I thank you for participating in our conference about the fourth quarter of 2018 results and the full year of 2018. Let's go to slide three, which on highlights of 2018. The first one is the increase in the consumption of energy in the load and our concession area, 2.7% increase, very much concentrated with the residential and industrial classes. It's important to highlight that this is the second year that we have over 2% increase after negative years. 2015, 2016, with 3%-4% market drops. In 2017, we had this recovery, higher than 2%.
I would like to highlight the growth of the EBITDA, 15.9% EBITDA, and net income, 74.2%, a record net income of the company, as well as a record EBITDA. Net debt closed at BRL 16.3 billion. Leverage reaching 3.05 net debt ratio with a drop vis-a-vis 2017. In 2017, the leverage was 3.20. Now we have 3.05. Another important highlight in relation of investment is the fourth quarter of 2018. Investments amounted to BRL 693 million, and for the year, over BRL 2 billion, closing at BRL 2.066 billion. We would like to mention the tariff reviews, especially CPFL Paulista, RGE Sul, and RGE that occurred during the year of 2018. By the end of the year, on December 31st, we grouped the concession of RGE and RGE Sul.
On January 1st, 2019, now we have only one concession in the state of Rio Grande do Sul with the assets of RGE and RGE Sul combined. Regarding those and the participation of the company in auctions, in the renewables auction, we won two projects. The first one is SHPP Cherobim with 28 MW installed, and also the Gameleira Wind Farm with 69.3 MW capacity. Another important landmark is the start-up of the Boa Vista SHPP. That should be started at the beginning of 2020, and we brought it forward at over one year, so will start up in December 18th. Another important highlight is the participation in the transmission auctions. We had two last year, and we won one lot in CapEx, BRL 102 million, and two lots in December 2018. The first one on June 2018, and the CapEx was BRL 366 million, the first one.
The second, BRL 349 million. Together, the projects of renewable energy plus the volume of transmission, we were talking about an additional CapEx for BRL 1.4 billion. At the end of November, we also had the auction for CPFL Renováveis. Controlling 99.94% of the shares. State Grid now holds 99.94% of the share of CPFL Renováveis. Going to slide number four, we see that besides the highlights of the EBITDA record. The EBITDA, as I said, BRL 5.6 billion, and we see the distribution per segment of the EBITDA. Distribution continues to be the main one with 53% share. Conventional generation 23%. Renewable, 21%. Lastly, the commercialization services and others were 3%. Here we have a highlight of our results, and afterwards, Pan will be talking about our results more in detail. We see an important evolution in the distribution segment.
Our EBITDA are going up by 8.7% in the fourth quarter and 34.5% in the full year of 2018 accumulated comparing to 2017. It's important to highlight the work of the market that directly affects the evolution of EBITDA, the conclusion of our tariff review in our distribution companies as well. In the conventional generation segment here, which is basically the 13.4% in the quarter, 6.1% in the year, has to do with the long-term contract that we have because here we don't have any new project. In the renewable energy, we see an effect in the fourth quarter of 2018. Due to the write-off of assets of BRL 47 million, this is a non-recurrent effect with the impact only on this quarter. Because of that, we have a drop of 15.8% of the year. We see a drop of 1.1%.
We'll be talking in detail, but the main reasons for that is the reduction in the volume of wind. In commercialization services and others in the market, it's more general, the nature of the commercialization segment. We have here a drop in margin, that leads to the EBITDA drop in the fourth quarter as well as of the year, with 75% in the quarter and 26.9% on the full year. Moving on to slide 5, we have here a little bit more detail in the increase of energy consumption under concession area in the fourth quarter of 2018. Specifically, the total sales in concession, we have an increase of 1.2%, a 0.4% in the captive market and 2.8% in the free market. We still have a bit of a reflection of that migration from the captive market to the free market.
Looking here when we break down per segment, the increase in the residential segment is 2.2%, followed by industry that 0.9%, commercial 0.7%, and others, basically on the rural, of 0.6%. In the comparison by region in our concession, where our concessions are located, we compare CPFL with Brazil, where we see a growth of 1.2% comparing the Brazilian market that increased 1%. In the Southeast, CPFL increased 0.6% compared to 1% of the region as a whole, and in the South region, 2.6% for CPFL, 2% for the region. On the next slide. It's the same information but focusing on the year 2018. We can see sales in the concession area of 2.5%. Even with the same effect of the first quarter we see here, the increase in the captive market of 0.5% and the increase on the free market of 7%.
That's basically due to the migration of clients from the captive market to the free market. Some of the highlights is the increase in the residential segment of 2.6% with an effect over the year that was positive in the consumption due to temperature, especially in the RGE region with a growth of 3.7%. In the industrial class, on the average of the year, we have an increase of 2.8%. The highlights are Piratininga with a 4% increase, RGE at 3.1%, and CPFL Santa Cruz at 7.6%. For this year, the main highlight of the consumption segment that we have in our concession areas, as we see, is the motor vehicles, metallurgy, and chemical segments being the main classes contributing to this growth in 2018.
The comparison by region, we see higher growth in all of them when compared to the country's growth in the comparison of the Southeast and with the Southern region. On slide 7, we have the hydrology scenario, we can see a significant recovery in the reservoir levels throughout the month of March with a more pessimistic expectation in the beginning of the year with a decrease in the level of reservoirs, but an important recovery on the average.
In the month where we historically have a lot of rainfall, this is an important piece of data. There's recovery of the reservoir during the month of March. In April, we started April a little bit more pessimistic in terms of rainfall. It's slightly below average, but still at a good level, and the month of April should bring more recovery in the reservoir levels. We should close at around between 48%-49% by the end of the month. We see here in the spot price charts, the PLD, which is connected to the expectation of rainfall increase in the month of March. After the peak in February, where the expectation was of much less rainfall, we come now to these levels.
In 2017, we see a curve that is suffering from an impact with the industry agents, secondary in power in the beginning of the year, with an expectation of higher levels in the second half of 2019. Moving on to the next slide, I will turn over to Mr. Pan, he will talk a little bit about the details of the company. I would now like to turn over to Mr. Pan, he will give his presentation in English.
Good morning. My name is Pan, the CFO of CPFL Energia. The first one is about revenue. In the first quarter of 2018, our revenue, net revenue, BRL 6.7 million, which is 10% lower than last year. In terms of the EBITDA, the first quarter of 2018 was BRL 1.3 billion, which is around BRL 12 million less than last year. In terms of net income, our first quarter income in last year is BRL 617 million, which is BRL 173 million higher than last year. That is 35%. Before I explain the valuation of EBITDA, first about the distribution contributes around BRL 68 million of increase. In terms of the market and tariffs, we have BRL 186 million of increase. The RAB adjustment is BRL 63 million lower than last year. In terms of the PMSO, we see a BRL 38 million of increase.
Among this PMSO, we have legal and judicial expenses increased by BRL 14 million, in terms of the ABA, around BRL 14 million increase. The second part is about the conventional generation. We have around a BRL 37 million increase compared to last year, the fourth quarter last year. Among this BRL 37 million, we have price adjustment of contracts contribute BRL 23 million. ISS contingency in 2017 in Amazon, this contribution contributes BRL 13 million. The GF compensation agreement with Bahia is BRL 11 million contribution. We have kind of the physical derivative reduction that decreased our EBITDA by BRL 9 million. The third part is the commercial under service areas, which we see a BRL 62 million of decrease, mainly because the margin in the commercialization side, around BRL 40 million. In terms of the renewable generation, we see a BRL 56 million decrease.
That is because of the write-off of assets, which is BRL 47 million. Also we have lower remunerations in the plants, of course, partially offset by the lower GF impact and hedge. That is around BRL 10 million. In terms of the net income, we see a 34% increase compared to the fourth quarter of 2017. That is mainly because we have a decrease in CDI from 7% to 6.5%. That contributes around BRL 25 million. If you would like to go to slide nine. This is the full year numbers. In terms of revenue, 2018, we have 5.2% increase compared to 2017. The EBITDA, our 2018 number is BRL 5.6 billion, which is historical high, and that is around a 16% of increase compared to 2017. That is BRL 773 million.
Net income, 2018, we have BRL 2.2 billion of net income, also a historical high, which represents 74% increase around BRL 923 million compared to 2017. Okay, in terms of this valuation of EBITDA, I would like to explain as follow. The first distribution side, we have a total valuation of BRL 770 million. That BRL 770 million, around BRL 641 million comes from the market and tariffs revision we had last year. In the financial assets side, we have the adjustment of BRL 151 million. In the second part, about the conventional generation, we have BRL 73 million of increase compared to 2017. The price adjustment contracts contribute BRL 44 million, and PFF compensation adjustment, BRL 44 million. The ISS contingency in Amazon contributes BRL 13 million. We have the reduction, as I mentioned in the previous slide, contributes negatively BRL 45 million.
In terms of the commercialization in the service sector, we have around BRL 56 million of deficit. That BRL 74 million comes from the commercialization side, the merchant loss. In the service sector, we have a margin gain of BRL 8 million. Let's go to the renewable generation. We see a negative BRL 17 million of variation compared to 2017. The PPA exposure, the surplus of certificates, and the compensation mechanism, MCSD, and also the wind farms, we have around negative BRL 33 million. In hydro energy, negative BRL 30 million. We have a positive of BRL 61 million of increase, comes from the higher biomass generation. In the net income side, we have increase of BRL 385 million, comes from the financial results. That is the reduction of the interest rate, the CDI contributes BRL 260 million. Okay, next slide 10. We have a breakdown of the four groups.
You can see here in the fourth quarter of last year, we have around historical, a very low net income over EBITDA ratio. That is 3.35. Our adjusted EBITDA in the last 12 months is BRL 5.3 billion. In terms of the gross debt cost is 7.5% in nominal, exclude inflation of real terms with 3.6%. The breakdown of the gross debt, we have 64% is CDI linked, and the BNDES is 24%, and the inflation indexed at 7%, and we have the drop of the floating interest rate financing is 5%. I come back on slide 11 of the Boa Vista SHPP, which is new, as I said, was commissioned startup in the end of last year with an installed capacity of 29.9 megawatts, or 100% already operational. Now on slide 12.
We see the two projects that we won in the last auction in A-6 of 2018. The first one is the SHPP Lucia Cherobim with an installed capacity of 28 MW, a project that we will initiate construction. Same thing for the Gameleira Wind Complex, 69.3 MW of installed capacity, with the project to be structured to begin the construction and the financing. On slide 13, we see a transmission auction. There were two auctions throughout the year, one in June 28, where we won lot nine in the state of Ceará, with a contracted RAP of BRL 7.9 million and the investment estimated of BRL 102.2 million. In the December auction, we won two lots, one in Santa Catarina, with a RAP of BRL 26.4 million, and an investment estimated in BRL 363 million.
The second lot 11 in Rio Grande do Sul, RAP of BRL 33.9 million and investment estimated of BRL 348.9 million. On slide 14, we have our CapEx program for 2019 until 2023. What we have here for the five years, CapEx in the total close to BRL 12 billion is BRL 11,938.
Concentrated in the distribution segment with slightly above BRL 10 billion, with investment close to BRL 3 billion per year in the distribution segment. Since last year, we have additional investments in generation or the renewables project, but also in the transmission segment with the two auctions that we won last year. Here finally on the last slide, just to give you a highlight of the grouping of RGE and RGE Sul. As we were saying in the state of Rio Grande do Sul, we have a new concession that will be RGE. One concession with close to three million clients, 2.9 in 381 municipalities. The capacity for synergies is a lot greater when we have one single concession. This concludes our presentation, and we would like myself and Pan to make ourselves available for the Q&A session. Thank you.
Ladies and gentlemen, we will have the Q&A session now, which will be in Portuguese with translation into English. In order to ask a question, please press star one. In order to remove your question from the queue, please press star two. Juliana Jeni from Claritas Investment.
Hello. This net income over BRL 2 million was beyond even the most optimistic analysts. I have two questions, in fact, [inaudible] . State Grid, when they acquired CPFL, it was BRL 25. At the time, it was about 24 times P/E. 2019, it would be close to 12 times P/E. Do you believe there is a possibility of a follow-on, for instance, below the price that they paid for? This is my first question. The second question is the following. Let's suppose you do a follow-on, having a primary offering. How much of the funds of the primary offer would be invested? Do you believe this could happen over 2019? What again could be? What would be the destination of these funds to the other funds?
Thank you for your question. First, regarding the price. We see an important evolution in net income.
In 2016, we announced the acquisition, and it was contributed in 2017. In 2016, the net income of the company was BRL 102. Now it's almost BRL 2.2 billion. In fact, it's a major recovery of our results, and this affects the price. If we have a follow-on process of the company, of course, this is a talk that is just starting based on the perspectives and the results that the company obtained today and not 2016. In this case, it would be a follow-on issue based on the perspectives of the company today and not on 2016. We have a very different scenario today compared to 2016. If we choose a follow-on path, we will be telling the story of CPFL today and not 2016. The scenario is completely different, and we are just talking about that. Regarding the primary offering and the secondary offer.
In the case of a follow-on and in the case of a primary offer, we have many different alternatives ahead of us. One of them would be the acquisition of a participation of State Grid in RGE Sul. The expectation of synergies would be
The interpreters apologize. However, the sound that we are receiving here in the interpretation booth is totally impossible to translate. We are trying, we are doing our best. We have a pipeline of CapEx of BRL 24 billion less. Based on the expectation of a recovery of consumption. For the whole of Brazil, in general, in generation, this opens opportunities for additional investments. We have also the expectation of distribution as well in that sense. Assets that could be financed by our possible follow-on if we choose this path. Let me take this opportunity and ask you another question. The decision about the follow-on, when this could happen, and do you believe it could be by the end of May, which would be the 18 months? We could make a very fast decision, and this is on the table.
This is being discussed today between CPFL and State Grid. We expect to have a very quick decision about this subject. Regarding the deadline, we are almost in April already, so any of the two alternatives, they will be done, or they will be carried out within this framework. Thank you very much.
Our next question is from Bruno Varella from Solana Capital.
Good morning, Estrella. I have two questions, but first, in line with Juliana's question, how much time did you have? We are in the beginning of April. How long would you estimate for each of the processes, both in the MTO or Re-IPO, and what you would have to meet in terms of discussing with the stock exchange in terms of a time or deadline? The second question, in this last quarter, in particular, there have been some increases in the working capital accounts, very relevant. I had considered a cash generation of just around BRL 1.5 billion, and it came to BRL 1.4 billion. If you consider the basic accounts of EBITDA, CapEx, interest, and tax rates, you get to these numbers. If you include CVA in a negative receivables account and providers, you can invert this BRL 1.5 billion positive to BRL 1.4 billion negative.
CVA is clear enough. I would like to understand the dynamics of the receivables from providers in your working capital. First, in terms of the deadline, it is a challenge for us to estimate. Of course, in an MTO process, this is not 100% controlled by the company, so this process may be longer as we receive questions or discussions about the process on the table. If it is a process without any surprises, it would be something around two or three months for its conclusion. This could be much longer depending on how the discussions develop in the market. As for the follow-on, it also depends on a number of factors. If you have an expectation that there is an open window with a regular time, that would be until mid-July, for example, for our results.
We could try to access that window, but the market is developing, and the windows open and close very rapidly. If we chose the path of the follow-on, we would be paying attention to that. Of course, we would not go to market without a definition that is very clear that there is a window that allows us to go to market for that operation. Without being too clear. There are many factors involved, and they will be discussed at some point, and any of these processes will be addressed with serenity and following all the proper procedures for us to have the best operation possible. As for the working capital, an important point here, the company raised funds in December
At the end of the year, we made use of the cash available to anticipate some payments, to advance some payments that would usually be done in the beginning of the year, we made in the month of December. Just making use of the cash available at the table. We can see that effect as for the month of January, the payments that would have been made had been made, and we're starting with that on the working capital in January. There's no structural change in the working capital flow. That was basically us making the most of an opportunity in the payments that had to be made.
Thank you. Following up on the MTO or the re-IPO question, at what stage do you think the decision is at State Grid?
Is this still at the State Grid International level, or has it been forwarded to the controlling shareholder in China? Considering how close the final deadline is, this subject is a top priority not only for us, but for them as well. We're at the last stages to have this decision shortly. Excellent. Thank you. That will be it. Thank you. Sure. Good morning, Helena. My questions have mostly been answered already because they were included in Bruno and Juliana's questions. I would like to ask a question about CapEx. What about the wind farm, the options that you won, are you going to bring forward the CapEx? Are you going to bring it forward to have a more short-term return? This was a very recent fact. I didn't say the auctions that we won. We are evaluating this possibility.
Of course, we are looking at this as an alternative. This is still being studied. It depends on many factors, the execution of the project and the grid connection. It's a little bit too early for us to say anything about this. Of course, we will be analyzing this over the next few months to check if this is a real possibility or not. Thank you very much.
Our next question will be in English from Roger of EY.
I'm sorry. Thank you. I have two questions. The first one is related to the slide eight. What are the major components of the assets that were written off? Secondly one, is also on the same slide. What is the major reason for the reduction of interest rate? Thank you.
Could you please repeat your question?
Sure. The first question, what are the major components of the assets that were written off in the renewable generation? The second one, what is the major reason for the reduction of interest rate? Thank you.
You ask him in Mandarin.
Very clearly. Can you repeat again? Or if you can speak Chinese, we can also repeat in Chinese. We can also understand Chinese Mandarin. Okay. I can speak English, so I can use English to repeat my question first. I will repeat my question in Chinese later. My first question is related to the assets that was written off. What are the major components of assets that were written off? The second one is related to the reduction of interest rate. What is the major reason for the reduction of interest rate? Now I will use Chinese to repeat my question. Thank you.
The first question actually is about on slide eight, we have mentioned here write-off of assets. Actually, this BRL 37 million of write-off of assets, we have some small projects, hydropower plants projects in the rivers. In the end, we found that this asset has little value to continue for the development. According to the company rule, we found there is kind of impairment, so we did some write-off. The name of the project is Tando Energia. This is the project we write off. In terms of the second question about the decrease of interest rate, actually the decrease of interest rate is the intra-bank certain interest rate, CDI, which is the basic rate in Brazil. It decreased from 7% from 6.5%. This is from the central bank of Brazil. Because most of our financing, actually 64% of our financing is linked to CDI.
Once we have this kind of decrease of interest rates, we have this kind of benefits in interest expenses. I'm not sure you heard it clearly. It's not very clear. I can explain in Mandarin.
Yes, it's clear. Thank you. Thank you very much.
We would like to conclude the questions and answers session. I will turn over to Mr. Gustavo Estrella for his final considerations.
Once again, thank you all for your presence and participation in our results conference call. It's an important moment for the company with record results in the net income of the company's EBITDA. As important as the results, we also have a significant reduction in our indicators and an improvement in our quality levels. We've also broken records with a decrease of 17.8% compared to 2017. It's record results with excellent quality indicators and an aggressive expansion plan for our CapEx that we could see with close to BRL 12 billion in investments with a very good result of growth last year. We have an asset base that has quality, efficiency, generating results, and with the possibility to bring future growth.
That's our scenario with very positive perspectives and outlook for 2019 and the coming years. Once again, thank you. Have a great day.