Good morning. This is a conference call of ENGIE Brasil Energia. Here is Alpha. This is the second quarter of 2018. All participants will be connected in listen-only mode. Later on, we're going to open a question-and-answer session. You are going to receive instructions for your participation. Should you need the assistance of an operator during this conference call, please press star zero. This conference call is being recorded. This presentation, along with exercise, will be simultaneously transmitted on the internet at the website www.engie.com.br in the tab Investors. There you may also find a copy of the presentation and the company learning system.
Before continuing, I would like to clarify that statements made during this conference call relative to the company's business process should be considered as forecasts that depend on the economic scenario of the country, on the performance and regulation of the electric industry, and in other variables that therefore are subject to change. Today with us, we have Mr. Eduardo Sattamini, CEO of ENGIE Brasil Energia, Carlos Freitas, CFO and IRO, and Mr. Rafael Bósio, Investor Relations Manager. They are going to talk about the performance of ENGIE Brasil Energia in the second quarter of 2018. Right afterwards, they are going to answer any questions you may have. As a reminder, journalists who want to ask questions may do so by email sent to the company's press services. Now, I give the floor to Mr. Sattamini. Mr. Sattamini, you may start.
Good morning, everyone.
is a pleasure to be with you here again. I am going to talk about the good results that the performance we have had in the quarter. We are going to start on page five. We had a quarter full of good news considering our business volume that had a significant increase in our net operating revenue with a variation of 26.9% quarter- on- quarter and 21.8% if we compare the first half of 2017 to 2018. We also had a dip of 42.4% in the quarter, especially because of our portfolio management and obviously also because of the increase in the volume of contracts and prices. Our net income had an increase of 20% in the quarter, and year to date in the first half of the year, the increase of 14.5%, thereby showing how the company is performing well.
They are obviously smaller than it is because we have had the contribution of the debt in the acquisition that led our debt to grow significantly from last year to this year. Our net debt, total net debt in the second half of 2018, went to BRL 6.2 billion, approximately, in contrast to BRL 1.5 billion in the second half last year. The net debt included financial expenses, and that's why our net result is slightly smaller than we captured in the dip. We have an increase in the volume of energy sold, what's significant to showing the continuation of our sales policy and the fact that we are the largest traders of energy in Brazil. There was a slight variation of 5.7%, thereby contributing to our results. We have had a total increase in the number of employees from last year to this year of about 100 employees.
Here, we are talking about construction and our own employees. Construction work, as I said, are not yet generating revenue, but this increase in the number of employees that we have avoided ended with approximately 50 employees out of the 90 employees of ENGIE that comprise our company. Now, we are going to move to the second slide, slide number six, talking about the highlights. We had the issuance of debentures for the company Energética Jaguara and Miranda, totaling BRL 1.8 billion, and the longer debt profile comparing what we hired last year with a long debt. We were very successful, and we had almost twice the offer in market demand. Also, as a result of the funding structure of Miranda, we had on the controlling company, controlling assets of Miranda in the debentures with 1.7 superior or oversubscribed at a very competitive cost.
Also, we have had in the quarter, at the start of the operations of the first plant of Campo Largo operations, Campo Largo 7 with 29.7 non-conventional renewable energy, and this is the first complex piece of generating a branch of Campo Largo complex, and there will be fully operational by the end of this year. Campo Largo Wind Farm is close to Umburanas that is going to start operations as of January next year. We might be slightly earlier considering what we are discussing with our suppliers. We have also had the beginning of the full operations of the ID Wind Complex. We are saving in operations and an improvement in the quality of operations in our assets too.
Now, continuing on the highlights on slide number seven, a binding agreement has been signed for the acquisition of 50% shares that are still remaining of ENGIE Solar Distributed that we started with a partner in early 2016. We had an investment plan that we reached earlier this year, 2018. We have come to a level that justifies exercising our option to buy, now it's 100% ours. We are going to move towards the path of developing distributed solar energy as part of the transition that we think is happening and we think will be faster over the next year. The installation of the special independent committee for transactions with related parties was approved for agreement that our part of the acquisition of Transportadora Associada de Gás, the gas transportation company.
This is done with agreement with other parties, also with ENGIE International, and the idea is for us to be part of this group that controls this new asset. Right now, we can't say much about it because of injunctions. It is now at a standstill. We are waiting for a legal decision from the courts to move forward. This company, along with the decision that we made last year, is a company that invests in infrastructure that will capture opportunities with good profitability and apply its features and skills of an investor in infrastructure depending on opportunities that come up. This is our strategic direction as investors of infrastructure in areas that are adjacent, in the area that we already operate in and generation. Now we are going to gas.
In this manner, we widen the array of opportunities that we can explore in a profitable way. Lastly, we have approved in our board meeting the payout of interim dividends, 100%, corresponding to 100% of distributable net income for the first half of 2018 in the amount of BRL 1.1 billion. This is going to be taxed interim dividends on August 21, 2018. We may also mention that we have had the inclusion of our transition company, now shareholding structure, and also our wind complex, Umburanas, that is also part of our structure. Soon, we are going to change from 50% to 100% ENGIE Solar Distributed so long as we finalize all our legal procedures. This is going to be very soon because we have met all requirements. We are going to have 100% of this company, as we said before.
In terms of portfolio, basically on slide nine, we are still growing. Now we have grown 29 something installed MW for Campo Largo 7, and we are going to grow at a monthly rate so that we reach 326.7 MW just with the assets related to Campo Largo and the Campo Largo company. We keep our strategy of growing in renewable energy and gradually decarbonizing our portfolio. On slide 10, you can see our relevant position among private power producers. On slide 11, we talk about our entry in the transmission industry without any significant changes. We are just rounding up numbers considering the last auction, and unfortunately, we were not successful because of the aggressiveness of some other players. On slide 12, you can see our diversified portfolio and our position in terms of our customers.
We have our distribution companies, pre-customers and trading companies who have 16% in terms of trading companies considering the increase of our trading activity. We have short-term trading activity that also permits us to have more flexibility to manage our energy portfolio, and that's why our performance has improved significantly. We have trading plus a more proactive action in terms of exposures, and this has provided this touch in terms of improving the management of our portfolio. On slide 13, you can see the segment where our customers are located. In the free market, it's very important for us more and more, especially because now it's more open. We need to pay attention at risk, also paying attention to market growth, even more so with significant growth of the market that is expected for the next few years.
On slide 15, you can see the energy market. We have had very high prices in the spot market and apparently excess offers, and this is driving prices up. This has been the key tone over the past five or six years. This excess of structural offers, but our dependence on rainfall leads prices to have great volatility. Somehow, we have been able to surf the waves and everything that has happened in the energy market over the last few years. Now, our sales strategy on slide 17, on the left-hand side, you can see our uncontracted energy. All cancellations, there have been short-term cancellations that serve as a buffer for possible hydrological crises that might come. In 2018, we had 612 MW and still available in terms of average megawatts.
This is a good buffer for the hydrological risk, and this allows us to have consistent results for 2019. It is also 2020. We have been managing the short-term vision as we see actively managing our portfolio. Whenever we understand that there is hydrological risk, we build the reserves as we find that it is necessary to reduce the volatility of our portfolio. On the right-hand side, you are very familiar with this. You can have the uncontracted energy compared to the availability on a given year. You can see the energy prices on specific units considering the features of our markets that have price volatility. This also provides stability in our results, and it is a strategy that we are still using. On number 18, you can see the energy balance of June 30, 2018.
For analysts to model the data you have on the company, if you look at the details, you see that there has been considerable commercial activity in the second quarter. A good amount of energy for years of 2019 to 2023, about 160-170 average MW. It varies in some years; it is more or less. For some years, the total sales is close to 230 average MW. We have this tool for you to understand how we are structured in terms of sales and management of our assets. On slide 20, you have Geral. Nothing new about it. We are still not yet paying great attention to the transfer that we were expecting for 2018. We have many challenges in 2018. We are having many challenges this year. For some reason, we cannot pay the due attention and our share in Jirau.
We are at home, and GSF has impacted generation companies as a whole. We are not in a hurry to accelerate transfer. Transfer will be something providing the least risk possible. We do not think that it is likely to take place in 2018, maybe more like 2019. This is the perception of an affiliate, and of course, it is going to depend on the controlling company. As to the distributed solar energy or rather ENGIE, we have found so large distribution that there has been a growth in this market. The scale is important. We have made agreements with the federations of industries in the state to increase the reach of our small and medium-sized customers. We are replicating what we did before in Rio Grande do Sul and Mato Grosso. I think that we will soon announce new agreements with federations of industries. We have Gralha Azul.
Nothing new about this project. It's moving on as expected with environmental licensing and definition of projects and everything that needs to be done. In the first phase, two years into the project, there is not much to say except for environmental licensing and the construction that we will be able to see more or less in 2020. We have some pass-through projects. It's going fast. The only remark here is that we are having some schedule issues. This round of operation will be in the second half of 2019, most likely. We had already seen that possibility, and we had already negotiated the cancellation of parts of the contracts in the regulated market so that we were not exposed to the sale of energy in the first half of 2019.
We have already negotiated everything, determining a new date for the beginning of some contracts. It does not have a significant impact, but this is what we have to say about Pampa Sul on the upside. We have had a test of our coal transportation, and in May, we tested the hydroelectric testing of the boiler, and it was successful. With no leaks, this is really unusual in a boiler that is as big as the boiler that we are building there. We have good quality, and quality is what we are expecting. Obviously, there are difficulties that we are finding. We had to delay a little bit, but we continue seeking to minimize as much as possible the impact. As to Campo Largo Wind Complex, it has gone live. We have Campo Largo 7 is now live and operational.
I think next month, and by the end of August, all these wind farms will begin to operate in this year of 2018. Umburanas Wind Complex also is moving forward at a fast pace. Our commitment is to start operations in January, and we are working so that in November, December, some plants will already be operational. The main feature of these wind complexes, in contrast with Cear`a, is they have metal towers, which is much faster than concrete towers. For concrete towers, there is a local logistics complexity. It's difficult, and it takes much longer. While it takes three days to assemble a metal tower, a concrete tower takes almost two months to be built. It's completely different from the previous wind farms that were built in Cear`a. There's a reason for it to be concrete.
In Cear`a, the towers have to be very high, and this requires them being built in concrete. It is different features of the wind complexes that we have in Cear`a and in Bahia. We have a set of projects under development. Nothing new here. I am going to turn the conference over to Carlos Freitas, who is going to share with you the financial performance of the company.
Thank you. Good morning, everyone. On page 29, we have a summary of the company's financial performance. In the first half of the year, net sales came to BRL 2.1 billion, a significant growth of 27% as compared to the second quarter last year. It did grow even more, grow 42%, almost BRL 1 billion in this quarter. It is a growth not just compared to Q2 last year, but also along this year, we have seen a significant growth this quarter.
As a reminder, the first quarter of this year, it was BRL 1.46 billion . Net income has grown slightly less because of what we already explained, but still growing 20% as compared to the second quarter last year. Now, we are going to break down and give you more details of where this growth came from. On page 30, regarding the net operating revenue of the company, this increase has come because of 7% in sales. It was 7.9% in businesses in this quarter. The combined effect of higher prices with higher volumes added to a good result. We have also had a contribution of the power plants of Jaguara and Miranda HPPs that provided a good contribution. As a reminder, 70% of these two power plants are in the quota system in long-term contracts without GSF and also regulated in terms of O&M and improvement.
These three sources of regulated revenue add BRL 133 million in one quarter. Moreover, there's the free part of the power plants, which is distributed in terms of sales volume and in the spot markets too. We do not usually break down exactly the biggest per project, and you can do the calculation. It's not too hard to do it. You can see that these two power plants are providing quite a significant positive impact for the company. In the spot market, in addition to the impact of Jaguara and Miranda, we have had a significant effect of energy allocation and increase as compared to before. There is also a small impact in terms of reduction of thermal power generation, but this is very much related to the company's portfolio management.
In spite of the difficult or challenging scenario with great volatility in terms of GSF and spot prices, we have had active management and even more active than we used to do in the past. This is proving to be a good strategy with positive impact on the company's bottom line. Lastly, we have had a non-recurring event with an impact of BRL 70 million. It was something that happened two years ago, and I was being regulated. Also, a fine that we negotiated because of a construction of a power plant. These two non-recurring events added BRL 70 million in this quarter. As to EBITDA, it has the margin. EBITDA growth grew significantly this quarter. EBITDA grew 42% in addition to the three effects that I have already mentioned. On EBITDA, we have also had a slight increase in some costs of materials and third parties and services.
The main differential in this quarter is first provision that we had made last year for an agreement for the power plant. We had a partial agreement, and then we reversed the provision. This has had an impact. There was a negative effect because we did not have this effect this year. Now, the main significant event this quarter has been the greater volume of purchases for resale. As we are more active in the market, there is more trading, and we have a more active management of the portfolio. We are buying and selling more energy. This increase in the short term, plus the increase in sales volume of 139%, has been partially set off by the increase in costs for purchases for resale, totaling BRL 138 million. There was also something significant of about BRL 350 million in EBITDA this quarter.
Net income on page 22, in addition to the EBITDA, we have had a slight effect because of a gas power plant that we are operating. There was an adjustment in the book value of this asset. There has been an increase in the financial cost of almost BRL 180 million. We have funded 100% of the purchase of Jaguara and Miranda last year with debt. Clearly, it has a financial impact. It is a good financial impact. We are translating in higher financial expenses of about BRL 180 million plus income tax because the income has increased to a net increase of 20% in our net income. On page 33, we still have our excellent levels of return on equity and return on invested capital. Thereby, it is a negative of our financial discipline of reinvesting capital.
As I said many times, we don't want to grow just for the sake of growing. We are going to do it as we think it's worthwhile. This has been translated in good return on equity and also good return on invested capital, also because we pay out good dividends. As to debt, just to give you an idea, on page 34, the debt has come to the end of the quarter, and the net debt is BRL 7.5 billion. Most of this difference comes from funding for Jaguara and Miranda. We have also loans for Campo Largo that we have already withdrawn. We have withdrawn BRL 500 million at the end of July and also for Pampa. This volume of debt of BRL 7.5 billion.
We had a net debt over EBITDA of just 1.5 times because it used to be like more or less BRL 6 billion. We have a conservative management of our debt, and we still see room for us to increase our indebtedness in the long term. This evolution of net debt that you can see on page 35 basically showing that along the second quarter, our investments and the payout of dividends that were paid in June, most of them were funded by cash generated by the company, the company's operational cash. Our operational cash was BRL 1.15 billion in the quarter. The reduction of net debt along the quarter was also high. With debt as an interesting profile, the company is triple-A rating. We can issue for Jaguara and Miranda that we did in late June.
We issue a debt of BRL 1.8 billion that was used to refund the long-term debt that was in the short term. If you look at the snapshot of the debt at the end of the first half, the short-term debt was BRL 3 billion. We had BRL 1.8 billion in Jaguara and Miranda. We have had bilateral banking transactions. Thereby we have managed to reduce the volume of debt this year to about BRL 600 million, and half BNDES, and BRL 300 million for Jaguara and Miranda that will be paid in November. Basically, this has been distributed, and today it is distributed between IPCA and the long-term interest rate. Today's nominal cost of debt is 8.2%. It is a significant decrease as compared to last year that was 9.4%. This strengthens and reinforces our AAA rating.
The debt, as I said, is going to increase a little bit along this year and next year too. On page 37, you can see that for 2018, we are expecting to have a CapEx of about BRL 3.7 billion, more or less distributed between Umburanas, Campo Largo, and Pampa, and they are funded by debt. One part is in the company's cash, and the rest is going to grow. Next year, our Capex is BRL 1 billion, also distributed between Campo Largo, Umburanas, and Transmission. Transmission Capex only starts a little bit next year and more in 2020. We are going to have more debt in 2019, also most of it with BNDES. In this manner, we are going to increase the net debt of the company, the net debt over EBITDA.
The ratio is going to increase, but we are going to try to work within the ranges that we have already agreed. Two and a half, a little bit less or more. If there is a project going to operation, it might change. We do not have a very restricted policy regarding this, but it is conservative so that we have the confidence to have room in the balance if there are any market opportunities for us to grow. Finally, all of this keeping a good payout that was confirmed as 100% of the net income of the first half of the year at the level of 4.7% in the first half of 2018. As we usually say, our policy is sensitive when it is more favorable. We pay 100% when the environment is not so favorable, and we want to retain more cash. We reviewed these numbers.
Right now, in early August, we thought to decide to announce the payout of 100% for the first half of this year is BRL 1.76 per share. This was all I had to say about the financial aspects. Now I would like to open for questions and answers.
Ladies and gentlemen, we are now going to start the Q&A session. If you want to ask a question, please press star one. If you want to take a question properly, please press star two. Please stand by while we prepare for questions. Our first question comes from Mr. Andr`e Sampaio from Santander. Mr. Andr`e, please.
I would like to ask about taxes options. Have you made any decisions about the participation? I also have a question about the debt. Would the company be interested in increasing exposure to the TJLP for long-term interest rates?
Shared fees and interest rate assets. We need to look at the database and information for these unasset that brings a few risks with it. We are assessing it internally, and we are going to make a position to make a decision on our position in a minute. As to your second question, we think that the long-term interest rate is interesting if compared to the cost that was cost in terms of the history of TJLP, in terms of its real rate. In our understanding, it is still within our portfolio. In our portfolio, we have a much smaller share. It has risk diversification. Today, in our minds, there is no intention of taking TJLP out from our financial costs.
As to the composition of the debt, we try to work with short-term debts indexed by the CDI, especially because we are investing in CDIs for a debt of one, two, three years using new CDIs. For the mid and long term, either in IPCA, which is our natural hedging, or TJLP, trying to avoid too much risk. In practice, it is a long time. It has behaved almost as a spring. As I said, the rates today are higher than we would like to see. This is a fact. Today, we do not have the intention of changing from TJLP to anything else. The new debts of the company will always think carefully and try to balance, also considering time.
Thank you very much for the details.
Our next question comes from Maria Carolina Carneiro from Credit Suisse. Please, Maria Carolina, you may start.
Good morning, everyone. Thank you for the call. I have two questions. First is an update, if you can, about the contracting profile. You don't give price guidance. It's also because of your strategy. But we have noticed that you have closed the contract for 2018 up to 2023. So it looks like yet other companies have also had slightly longer contracts moving towards more five years rather than just three years as you used to have. So I would like to confirm whether my understanding is accurate in terms of your trend towards having longer contracts. And the other question is that you have said that the company has approved an independent committee for related parties to assess potential participation in the acquisition of TAG. If you could tell us, what would be your strategic interest? So what is the rationale for you to be analyzing this project?
So what are the advantages of this asset as compared to other assets, either your core or related in generation and transition? And just if you could give us your idea of your stakes there. So would you be on a par with a controller or would it. Significant?
First, the question of pricing, that is the easier one. Price. Sometimes prices might be higher or lower, and this will not define whether you're going to cancel contracts or not. And you can see what would be a short, medium, and long-term pricing. So under the pressure of bad hydrology in 2018, it gradually goes down until in the midterm and has a price level that is not different from what we have been seeing that would be BRL 150 MW/hour .
And people say, "Well, that our company is selling wind and power for less than that." And I said, "Okay, but then it's in the Northeast. It's not flat energy." So there are many things that make a difference in terms of price. And obviously, so I think that there are variations and you need capacity to manage the portfolio. And a generator that is concentrated on one source and needs capacity to absorb the market variations. It's always important to remind our people who are listening, and then when there is a pressure from our customers to lower our prices, of course, we resist this movement because we know that there are risks because we provide more convenience for these customers. Now, a little bit about time and longer time, as a reminder, we have [PR 1917].
It leads to a change in source attributes and a source that is the energy backup and differences in that. This leads to questions in the minds of consumers and what is ahead with the regulation changes. So if we need to contract energy in the future, whether it's a fuel or energy, you need to think about that. So I think that this is what consumers are trying to do and are seeking in order to reduce uncertainty, and it's important for their productive trade. So whenever there is a contract, it doesn't matter whether they are buying gold, plastic, or power. They want to guard themselves against any changes in regulation. So my perception is this is an important component for longer contracts. And long contracts, they're not so long. We're always talking about five, six years, no more than that.
And we are seeing contracts to be delivered in 2020, 2023, not much later than that. And then there are very few customers who sometimes want longer contracts, but this is not usual. Now, the rationale for our independent committee for transactions with related parties, I cannot say much about that. It's under a secrecy agreement. So I cannot reveal all discussions. And right now, we have stopped because there is an injunction that has been filed. And it should not move forward until there is a decision. But the rationale is, as I said before, the company has the possibility of becoming a platform for investment in infrastructure. We see that opportunities come up in the industry of energy, for oil and gas, too. And there are sometimes very competitive conditions.
We are generating cash, and if we can invest it in profitable investments, whenever we see the possibility of going into areas with significant flexibility, we see that this is related to our historical equity. And this is the rationale. As to our stakes, we will have a share that will assure some power within the shareholding infrastructure. It needs to make sense for us a nd we are moving in that direction.
Thank you very much.
Our next question comes from Mr. Fernando Zorzi from UBS. Mr. Zorzi, you may ask your question.
Hi, this is Marcelo , actually. Thank you for the call. I have a question about the discussion of GSF. There was a letter of an asset PL that was approved in the lower house but not approved in the Senate. But it was to compensate companies for their delays in structuring projects.
Today, there are some companies that were totally in the green, like Tiete and Light That there is an injunction going on because of GSF. And if this project really becomes a loss, there will be a disbursement, and they are going to have an extension in the concession. My question is, a company such as yourselves that have energy in the regulated and free markets new adheres to the regulated, do you think you could, too, receive the benefit for the share of energy that was on the free market? Do you think you could win any if this becomes a law? And do you have an idea of how this impact could be?
Well, this was a broad discussion involving many parties and the idea. It's for the companies that were on the regulated market, and it's a new market solution for the free market.
And in this manner, it is our understanding, and it is written in the law, the bill that is being voted in the Senate, not just because of GSF, but also related to privatization of state distribution companies on the year of election. But we are involved, and we will be entitled to have the extension that is equivalent to the value in the free market that represented the generation outside the order of merit. As to amount, I can't say about that. There are many calculations that have been made within the philosophy that obviously the negotiators needed to understand what was the computation and what were the values involved. And I don't want to say what it is. So there's a guidance that may be wrong. But on the whole, half of the energy is in the regulated market and half free.
And then you can take this ratio, 50/50, in terms of the total capacity for hydropower together with GSS. And then you can do the math per average megawatt. And then you may come to the formula, but I don't want to say it.
Well, thank you. I just wanted to understand the concept, whether you thought you were entitled or not, because the market also considers for Tiete and Life. But I did not see how much the other companies could win.
Thank you for the question.
As a reminder, if you want to ask a question, please press star one. Please wait while we collect your questions. We are now closing our Q&A session. I would like to turn the conference over to Mr. Eduardo Sattamini for a final remark. Please, Mr. Sattamini, you may continue.
I would like to thank everyone for your participation.
This is another focus. We have been working very hard in every area, and we have had success in all fronts, financial, and with the leverage of the company towards the development in terms of executing and opportunities and the capacity to fund the growth in the operation, with an operation that needs to be increasingly more efficient. There are no cuts in costs in terms of portfolio management in a change of mindset also in dealing with a market that is completely different with a growing pulverization. I would say that you are to be praised, and the company as a whole needs to thank the support of the market. Also, with this interpretation, the performance has been very good. We are improving more and more.
So I would like to thank you, and I would like to thank you for the work that you have been doing a long time. I think that our work also includes having good communication with everyone. So if you have any questions, please get in touch with us. We are available. We want to have meetings to explain something that is not so difficult to understand, but our doors are open to improve communication. Please ask any questions you may have.
The conference call of ENGIE Brazil Energy has now ended. So thank you very much for your participation, and we wish you a good day. Thank you for using V.oitel