Good morning, ladies and gentlemen. Thank you for waiting. We would like to welcome everyone to CPFL Energia 3Q 2018 Earnings Results Conference Call. Today we have with us the executives, Mr. André Dorf, CEO of CPFL Energia, Gustavo Estrella, CFO and IRO, as well as other officers of the company. The presentation will be available for download in the website www.cpfl.com.br/ir. We inform that all participants will be only in listen-only mode during the conference call, during the company's presentation. After the presentation, there will be a Q&A session when further instructions will be provided. Should any participant need assistance during this conference call, please press star zero for an operator. It is important to mention that this conference call is being recorded. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on the beliefs and assumptions of CPFL Energia management and on information currently available to the company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore dependent circumstances that may or may not come in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of CPFL Energia and could cause results to differ materially from those expressed in such forward-looking statements. I will turn the conference over to Mr. André Dorf. Mr. Dorf, you may proceed.
Thank you. Good morning, everyone. Welcome to another CPFL Energia earnings conference call to discuss third quarter 2018 results. I have with me the main officers of the group.
We will go over a brief presentation, then we will all be available to answer your questions. Please go to slide three, where we find the 3Q 2018 highlights. Increase in load in the concession area up 1.2%, highlighting the growth of the residential and industrial classes more in the free market than in the captive market, as we're going to see shortly. We also had a growth of 4.4% in net operating revenue of the company. As a result of that and of cost management, we had EBITDA growing 21.4%, the cash generation of the company in the quarter. Our net debt ended the quarter at BRL 15.5 billion, therefore a leverage of the last 12 months of 2.92 times net debt over EBITDA. This is the lowest leverage level for the company in a long while. We also continued our investment program.
We invested a little more than half a billion BRL in the quarter, BRL 525 million, particularly in the distribution segment. Another highlight is the winning projects of CPFL Renováveis, renewables, winning projects in the 28th [new energy] A-6 auction, Cherobim SHPP, and the Gameleira Wind Complex. You're probably following some relevant sector issues. I would highlight here the tariff flags coverage for the distribution segment to deal with the expenses related to Parcel A. Here we are dealing with insufficient flags and insufficient coverage, generating a higher need for liquidity and working capital by all distribution companies in Brazil. We have the GSF team. This is a recurring topic in our discussions, this topic is being analyzed by the House of Representatives. It has gone through the Federal Senate, let's wait to see if there will be novelties by year-end.
A great expectation, not limited to the electric sector, but of all Brazilians, is the composition of the first-level team of the new administration that will take office. Here we highlight the team of the Ministry of Mines and Energy, but it is important to highlight that our high expectations apply to all levels of government, of state-owned banks, development banks, and all of the agencies of the new government. The first news are quite promising. We see good names being considered to occupy these high positions in the government. Moving on to slide four, please. Here we have our EBITDA, our cash generation by segment. Starting with the upper left-hand corner, try to only have our EBITDA BRL 1.548 billion in the quarter. 46% of the EBITDA came from the distribution segment, followed by renewables.
Here it accounts for a higher share than we normally saw in prior quarters because of the seasonality. Conventional generation, 22%, followed by commercialization services and others, 4% of the company's EBITDA. Starting with the upper right-hand corner here, we have the distribution segment posting a significant EBITDA growth quarter-over-quarter. This stems mainly from a market increase. Market increase drove most of this positive variation that we see in our distribution EBITDA. In conventional generation, here we also have a positive variation, 4.7%. Here we have some recovery of PIS and COFINS credits and CFURH, and recovery of retroactive credits, tax credits, which helped this positive number. Renewable generation grew the same percentage, 4.7%, here very much driven by greater wind power generation in 2018.
We had more wind power generated in 2018 than in the third quarter of 2017. In commercialization services and others, here we also post an EBITDA growth, particularly stemming from a reversal of ADA in our commercialization company, and because of the new services and contracts of CPFL Serviços. This is also a positive result in these new segments of the company. Please go to slide five. Here, we give you more detail about the distribution segment. We have the highlights for the quarter. Like I said, we had an increase in load of 1.2%. We had an increase in sales of 2% in the concession areas. We can see on the upper right-hand corner 2%, 2% increase in sales in the concession area, more representative in free market clients, 5.4% and practically flat for captive market clients. We have growth of the residential segment.
The highlights going to RGE and RGE Sul. A more significant growth in the southern region of the country because of the temperature difference quarter-over-quarter. Higher temperature in 2018 generated more significant increase in the south region. We see stability in the commercial segment. Here we don't really see a more substantial recovery of the commercial segment. However, in the industrial segment, we see more exciting growth of 2.4%. Highlight going to CPFL Piratininga, RGE, and RGE Sul. Here it is worth highlighting some segments that drove this kind of growth. I would highlight chemical, automotive, rubber, plastics, and food industry. These were the segments that really drove this recovery. In terms of losses, we continue to work on this to invest in recovering losses. Here we see an indicator of 8.87%, which was lower than the third quarter of 2017.
In the pie chart on the bottom left-hand corner, we see the market breakdown in the concession area. Industrial continues to account for the largest portion, almost 40%, followed by residential, commercial, and other segments. In the middle chart, we illustrate the comparison or the behavior of CPFL Energia comparing with the regions. Overall, CPFL grew 2% in sales versus 1.3% growth of the Brazilian market. In the Southeast, we grew 1.7% versus 2.2%, and in the southern region, we grew 2.6% versus the whole region growing 1.5%. I'm not going to get into details about the charts on the right, but they show sales performance by consumption segment. Here I would highlight in the quarter the residential segment and the industrial segment. Residential, because of the difference in temperature. In the industrial segment, because of the slow recovery that we are observing, particularly in the segments that I mentioned.
Moving to slide six, please. Here we talk a little about generation. The big theme of the quarter regarding generation, not only applying to CPFL but also the interconnected system, is the reservoir levels. We started the third quarter with a yellow light in terms of reservoir levels of the regions and of the [SIN] system. We ended November a little more optimistic. We moved from the low part of the curve. We don't have any more of the worst curve in the history, and recent rainfall has shown a marked recovery in the Southeast and in the SIN system overall, which results in our spot price. On the bottom left-hand corner, we can see the volatility of spot prices along the months and along 2018.
We can observe on the chart that we started 2018 more or less at half the chart at BRL 180 to BRL 100 because of that yellow light regarding hydrology. We hit a top mark of BRL 505, and now it was at BRL 142 in the first week of November. On the right, we see the effect of hydrology on GSF, an indicator that we monitor, and that generates financial impact to generation companies. In September, in the quarter, we had the worst GSF level ever, and now the trend is that it will ramp up given that we are going to start a favorable hydrological period. On the next page, we have a little more details on our results, and I turn the floor to Gustavo Pereira, the Chief Financial Officer of the group.
Well, I am on slide number seven with our results. This quarter had good results. You can see a performance of our EBITDA of 21.4% on the quarter, of 22.5% in the nine months. When we compare the net income, 60% up vis-a-vis 2017 for the quarter and for the nine months, 100.6% higher. This net income of this first months of year of BRL 1.496 million is already higher than the whole year of 2017, which was BRL 1.2. As we can see in the main effects, the main effect really comes from the distribution segment with a total variation in our EBITDA of BRL 230 million positive. The main effect here is coming from what we call market and tariff. We have seen that the concession market had a growth of 1.2%, and the main effect here is undoubtedly coming from tariffs.
Here especially, we have an effect of tariff reviews of our distribution companies, BRL 178 million, and this is coming from the tariff review of companies that did have that tariff review over 2018. We also had a positive effect in here. This is basically inflation effect and the adjustment of the financial asset adjusted by the IPCA, and we have a variation of almost BRL 90 million. Some lower variations for private pension funds of BRL 6 million. Here we have a positive effect. I'm sorry, this is a negative effect of PMSO. In the quarter of BRL 70 million, negative. Here, we do have some seasonal effects. Basically, we were affected by legal and judicial expenses and for our ADA in this quarter. Once again, these are seasonal effects.
It's important to look at the legal and judicial expenses that are not recurrent in terms of results, and the same applies to ADA. When we look at the nine months, both legal and judicial expenses, as well as ADA, for 2018, they are at lower levels than what we had in 2017. This is the trend, which is a positive trend when we compare what we have so far in 2018 to 2017. In conventional generation, there was a total variation of BRL 50 million. As André has mentioned, we are recovering retroactive credits. The main one has to do with PIS and COFINS credits at EPASA, and that was BRL 11 million. This is our main effect coming from conventional generation. In renewable, we have a higher effect in the wind farms.
Wind generation that has a volume of energy produced this year, which was higher than the volume we had in 2017. Therefore, we have an additional revenue coming from renewable. Also we had some penalties in 2017, which we did not have in 2018. This has also provided us a positive effect in the comparison. Also as André has already mentioned, we did have a negative effect of BRL 14 million coming from the impact of GSF. Another important thing in our results comes from the financial results. Basically, because of the variation of interest rates, that allowed us to have an. Slide number eight. We analyzed the performance of our leverage. We go back to a level that since 2012, we were not able to see. We are now at 2.92 in the third quarter of 2018.
It's very important to highlight that now we have a regulatory asset of almost BRL 2 billion also affecting our leverage. Without that regulatory asset, we would be at a leverage close to 2.5x net debt over EBITDA. It's important to stress that these BRL 2 billion will be integrated to the tariff review over 2019. Therefore, that will go back to cash, accelerating our reduction of leverage over the next year. Our gross debt cost basically is stable vis-a-vis the prior quarter. As we have mentioned, mainly all our exposure is of CDI of our net debt. Here we show gross debt, but in our net debt, we had zero exposure to CDI, and now we have 45% of our gross debt already prefixed at prefixed interest rates for 2018. We'll go back to having exposure to CDI in 2019.
This year, I would say that we have a stability regarding financial expenses up to the end of the year. Turning to slide number nine, we analyze our liquidity in the company. We have ended the quarter. All our maturities in the short term, and here we are following our policy of a previous refinancing of the company in order to avoid any type of exposure to market volatility. On slide number 10, we have a highlight of our projects. The main one is Boa Vista SHPP, which should start operating in 2020. This will be anticipated. In the next few weeks, we should have the project going into operation 100% was ahead of time when we consider the schedule that we had in the A-6 auction.
We have two projects that we were winners in the A-6 auction, Cherobim HPP with 28 MW of installed capacity, and the Gameleira Wind Complex with 69 MW of installed capacity. Both of them should have their start-up in 2024, and we'll now start the development of these two projects.
Well, this is André Dorf again. We have a final slide to share with you. This is an interesting initiative coming from the company. We have ended the third quarter, the first edition of the Programa Inova. This was an initiative that we created here in the company in order to extend the interaction of our initiative of our business areas or management areas. In terms of what's happening about startups and technologies out of the company, we know that major innovations are happening out of the larger companies.
For us, this is a new learning, such as for any other company, to be able to bring that in and to create a type of cooperation with startups. We launched this project in a partnership with Endeavor, which is a company totally dedicated to foster startups and scale ups. We intend to accelerate 12 startups. In this first edition, we had 496 companies enrolled in the program, and our solutions are listed in the bottom part of the slide. Everything is very hands-on, very practical, and it is of great interest for our business and for our company.
At the end of this initial edition, we already have BRL 6 million in contracts with these companies, the solution should bring us optimization of processes in the company, also new services to be provided to the market, also solutions that will optimize costs, avoid losses, will deal with data in a different fashion, anything that could allow us more efficiency in our services as well as greater productivity in the company. I now end the presentation. I'll turn the floor back to the operator to start the Q&A session.
Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one. If at any time you want to remove yourself from the queue, please press star two. As a reminder, if you have a question, please press star one on your touch-tone phone now. Our first question comes from Bruno Varella, Solana Capital.
Hello, André and Estrella. I have three questions. The first is, I'd like to know from your standpoint, can we see a higher EBIT of RGE Sul higher than RGE? The second question about RGE Sul, I was looking at the EBITDA of this quarter, and in the comparison with the prior year, we have an increment.
I would like to understand why there was a restatement of some account because the RGE Sul EBITDA last year was 77 negative and not the 72 positive that we see now. Was there a restatement of any sort? Finally, I'd like to understand the legal and judicial expenses that you mentioned, Estrella. I would like to know what is the origin of this. Does this have anything to do with the São Paulo pension fund discussion? Where did these expenses come from, and are they to be expected to recur in the next quarter? Thank you.
Hello, Bruno. Thank you for the questions. First, regarding RGE Sul, the higher EBITDA than RGE. We had a situation in the first quarter of this year. RGE Sul was in EBITDA for the first time. It was higher than RGE in the year. Our expectation, given the characteristics of the two concession areas, which are relatively similar, but with the potential of investment in the RGE Sul area higher than in RGE. Our expectation is that perhaps in one or two years, we'll be able to overcome the EBITDA of RGE, but not for this year. This year, RGE EBITDA will be higher than the EBITDA of RGE Sul. I'd like to remind you that in the beginning of 2019, we should have the merge of the two companies. We're going to see the results of one single company.
In terms of the business plan, we will continue t o manage this, looking at the companies separately so that we can know exactly whether the business plan that we drafted in 2016 is being executed as defined by our board of directors.
You mentioned an EBITDA variation of RGE Sul, a negative EBITDA. Last year was a year of adjustment in RGE Sul because of the adjustments we made of the PPA, the process to restate the balance sheet after an acquisition. The PPA is the power purchase agreement. We have to know exactly what comparison you are making, if it's in the individual balance sheet of RGE Sul or the RGE Sul balance sheet for consolidation purposes, because they have different bases. I need to know whether we are comparing the same thing here.
I was using the restated balance sheet and not the one for consolidation purposes.
What we see is that there is a difference. It is basically because of the restatements that we had to mirror the PPA effects. This is basically regarding contingencies in the balance sheet of RGE Sul. If you want, perhaps we can speak more in detail in person, and I can explain to you the variations. The reason is exactly this, the accounting of PPA reflected in the RGE Sul individual balance sheet of 2017.
Okay, perfect.
Finally, we talked about legal and judicial expenses. This is basically because of civil claims. Again, when we look at this isolatedly, the first quarter is not a good proxy to show a trend of legal provisions, because we have perhaps a predetermined seasonality to recognize legal provisions in our balance sheet. What we normally do is look at the year-to-date comparison.
Year-to-date, despite some seasonality that we had different from 2017, year-to-date, this has kind of softened in the two-year comparison. Our expectation in our view is that we have a positive trend with a volume of legal and judicial provisions, again, based on civil claims at lower levels than what we had in 2017. Considering everything we're doing at the company in terms of follow-up of lawsuits, legal claims, and having preventive measures for both civil and labor claims, with everything we've done, we start bearing the fruits in the balance sheet of the company.
Thank you. One last question regarding leverage. You mentioned adjusted leverage of 2.5 times the EBITDA. Given the concern of the controlling shareholders regarding the three times net debt over EBITDA that the company was having, what would be a level that you would consider comfortable for you to work with looking forward and to go back to paying dividends with a somewhat higher yield? Would it be something like two times or 2.5 times?
Hello, Bruno. Here we don't have a leverage target. We changed the philosophy of the company. We used to work with a maximum leverage, having a maximum dividend payout, therefore our debt costs varied between short and long-term debt, we had to accumulate a lot of cash to deal with a somewhat more short-term debt. All of that has changed.
Now, because we are generating more cash and we have fewer capital-intensive projects and fewer dividend payouts in the last two years, we have significantly reduced our leverage. The target is that we will reduce this leverage a little more. We do not have a target index, though. Looking forward, we have to consider paying more dividends to our shareholders. At the moment, we do not have any final decision regarding how to pay dividends on the future results of the company because we do not have any pressing need on the part of our shareholders.
Perfect. Thank you very much.
As a reminder, if you want to ask questions, please press star one. We are now closing the question and answer session. I would like to invite Mr. André Dorf to proceed with his closing statements. Please go ahead, sir.
Very well. We are getting to the end of the first two years since we started this corporate transition. We have focused a lot of our efforts on cultural issues and trying to harmonize the culture, but always placing the company in the first place, always doing what is best for the company. We have devoted a lot of attention to operating aspects with investments and an organization that will give us more quality and greater control over information and over our operations, and also focusing on lower costs for the company. We are seeing some results of these endeavors, and we are reporting this to the market. In addition to operating issues, we are dealing with a very agitated sector in terms of consolidation, M&As, and privatizations.
I want to stress that we are keeping our ears and eyes open to all opportunities of growth, about organic growth through options or via acquisitions, always with a lot of discipline, which is our mark. With this, I end this conference call to discuss our results. I thank all shareholders and partners of the group for their trust and confidence, and I would like to thank you for joining us in one more conference call. Thank you very much.
That does conclude CPFL Energia conference call for today. Thank you very much for your participation, and have a good day.