Good afternoon, everyone. Welcome to ENGIE Energía Chile's fourth quarter 2018 results conference call. If you need a copy of the press release issued yesterday, it is available on the company's website at www.engie-energia.cl. Before we begin, I would like to remind you that this call is being recorded. That information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties. Actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. We would like to advise participants that this call is dedicated to investors and market analysts, not for the press. We ask all journalists to contact ENGIE Energía Chile's PR department for details. I will now turn the call over to Mr. Eduardo Milligan. Please go ahead, sir.
Thank you. Good afternoon. Thank you for attending this call. Today, Bernardita Infante, Head of Finance, Marcela Muñoz, Head of Investor Relations, and I are very pleased to be once again with you and present our full-year results for 2018. Now let's start. Please move directly to page number seven. Before we jump into the key messages we want to share, I just want to highlight and recall this page. Here we described back in January 2018 the main drivers of our growth during these two years. First, the new regulated PPA that started back in January 2018. This PPA allowed ECL to become an active player in the central system and shall add an additional 65% growth in our EBITDA by the end of 2019 compared to 2017.
Second, the importance of the interconnection for the Chilean system, its role to increase the overall efficiency of the system, also the sound execution of this project, which was delivered on time, budget, and performance. Third, what I want to highlight here, the new investments associated with the new regulated PPA, which experienced some months of delay compared to the initial schedule, still on budget and probably even below the estimated initial CapEx that we communicated before. After this initial introduction, please turn to page nine, in which we summarize our progress during 2018 with four key messages. First, in 2018, we reached solid results, meeting the high end of the guidance we provided one year ago. Our EBITDA reached $376 million, which is a 36% year-on-year growth. Our recurring net income reached $161 million, which represents an 86% year-on-year growth.
In these results, we need to recognize the importance of the new regulated PPA, which started last January, that became the main driver of our growth and results in 2018. We are also pleased to mention that besides the new regulated PPA, we signed new contracts with several free clients in different industries for almost 750 GWh that together have a duration close to 10 years. Second, back in April, we closed the renegotiation of almost 3 TWh of contracted PPAs with some of our main clients, implementing together with them a win-win scheme that will create value for both our clients and us. This renegotiation, as you know, triggered also the possibility to request the CME closure of two coal plants in Tocopilla. Also this new plan triggered the reconversion of part of our thermal portfolio to renewable technologies.
Third, our development and construction teams have been really busy during the last three years, for their pleasure, they will continue very busy in the upcoming years to finalize the synchronization of IEM projects, finalize the construction of the new transmission lines ECL was awarded back in 2018 auctions, finally, in line with our transformation plan, start at best time to market the construction of new renewable technologies in the system. Fourth, we continue to keep a sound and flexible capital structure with a strong cash generation that will allow ECL to benefit from attractive conditions to finance our transformation plan. Let's skip page 10, in which we present the main industry and company events during the year, but we will cover most of them in the next pages. I am now on page 11.
In this new page, we intend to give you a clear picture of 2018 achievements, which in other words, will become the base for ECL long-term growth under an improved risk profile. Our contracted demand reached almost 10 TWh under a well-balanced portfolio between free and regulated clients. As I mentioned before, we are now operating in an interconnected market, up to 900 MW of power transported by TEN, that also allow to release the trapped solar PV production, hopefully the interconnection will be fully completed in this first half of 2019. On the supply side, as you know, we signed new gas supply agreements to run our combined cycle plants that have become an important top-loss limit mechanism for the overall system, considering the higher intermittency when operating more and more with renewables.
Our construction team is completing the synchronization of IEM, which started operating in test mode back in October, that will be completed by the end of this quarter. As I mentioned before, we have had some months of delay in this final phase, but we are on track to reach the COD as fast as possible. Finally, back in 2017, we decided to implement what we called bridge PPA agreements with other generation companies to reduce volatility and basically implement a financial hedge for our margin, given the delay in the full interconnection of the system. All these actions allow to reduce risks, volatility, and secured our EBITDA and net recurring income growth in this two-year period. Now, let's move to next page to talk about the future and our decarbonization strategy.
In ECL, we're certainly aligned with the market, stakeholders, and society expectations towards the necessity for a cleaner and more efficient system. We know the decarbonization of the energy matrix is vital, gradual, and also a responsible path. This is why in the recent years, we took some early steps which are aligned with this decarbonization, developing 10 projects and deciding not to build any new coal plants, besides IEM, which was contractually committed since 2014 as part of the regulated PPA awarded to ECL. Back in April 2018, ECL was a first mover by announcing the negotiation of around 3 TWh of PPAs that triggered the possibility to request closure of two coal units in Tocopilla, totaling almost 170 MW.
More important, this agreement also triggered the plan to develop and build almost 1 GW of renewable capacity in the upcoming years, which will require all our efforts and resources, considering this new capacity will demand an investment close to $1 billion. In these lines, during 2018, ECL actively participated also in a round table organized and led by the Ministry of Energy to work together in the design of a more efficient system by gradually start replacing thermal generation with the most efficient technologies that will certainly be available in the next years. Now, please, let's see some numbers. I'm now on page 13. Here we summarize ECL financial performance. There are no bad surprises here. Our results and performance are well-aligned with the guidance we provided one year ago.
As I mentioned before, EBITDA reached $376 million, $100 million increase compared to 2017, while the recurring net income increased to $161 million, which after the impairment accounting recognition of units 12 and 13, almost reached the same net income of 2017. Now let's move to the next page to see our supply and demand balance during the year. Our total demand, as you can see, reached almost 10 TWh, which was supplied from two main sources, our own production, and the second source, energy purchases from the spot market. In summary, we supplied our demand in 50% with our own generation and almost 50% with spot purchases, including the supply agreements with other generation companies, that I mentioned before, we signed to reduce volatility in the spot market, basically.
As you can see in the graph, units 12 and 13 only produce 2%, and with the entrance of IEM together with a full interconnection, these two units will be completely displaced in the dispatch ranking, allowing its final closure. Now on page 15, we can see the duration of our portfolio. As you can see, we keep a 12-year average remaining life, and we are working to increase this duration by signing new contracts or discussing options with our existing clients to increase the duration of existing PPAs. Next page 16, I believe was explained in detail in our three previous quarters, and we are ready to say goodbye to this page until we might be ready to bring new developments on this important matter.
On page 17, a different way to show our main strength and our vision through 2030, you can see that the green area has become wider, and this is because in 2018, ECL was awarded with additional 750 GW h of contracted demand with a 10-year duration. Our commercial B2B team is also delivering tangible results. Now let's turn to page 18, please. We showed this map a couple of quarters ago, to conceptually explain our development plan, and to gradually replace aging coal plants. We mentioned that we are planning to develop a 24/7 renewable portfolio by combining solar PV and wind technologies in different regions of the country, while at the same time keeping several options in parallel and deciding construction and type of technology at best time to market conditions.
In this line, we have two projects reaching ready-to-build stage, which may become the first two renewable projects to be launched as part of the transformation plan that we launched last year. First, Calama Wind Farm in Antofagasta, with approximately 150 MW of installed capacity, and second, Capricornio Solar PV with around 90 MW. At the same time, we continue to build three new transmission lines, which were awarded back in 2018, which are described on next page 19. They will require around two years of construction, and the AVI will be close to $1.5 million per year. As we explained in the previous quarter, these projects were interesting for ECL because first, they are located in the areas in which we can create synergies with our existing operations. Second, they are linked to our renewal portfolio under development. Third, they will contribute to increase our regulated revenue.
Now on page 20, we also want to highlight the commercial operation of our new port, Puerto Andino. This project required a total investment of $130 million. This is a mechanized port with the ability to receive a Capesize carrier. The picture on the right shows the first Capesize that arrived to Puerto Andino. As we explained before, the benefit is related to economies of scale, higher unloading speeds, lower demurrage cost, and therefore lower cost for ECL. As we also mentioned a couple of quarters ago, the full capacity of this port will not be used for coal unloading, considering that this port was designed for the potential needs of a second coal project that we decided not to build. Therefore, we are currently negotiating and looking to different alternatives in parallel to optimize this asset.
We believe the overall additional income we can create could be close to $5 million by using the unused capacity. Let's talk a bit about IEM synchronization. The plant was successfully synchronized on October 29 and reached the first base load on mid-November. As of December 2018, the overall progress is close to 100% from a physical point of view, and we are currently finalizing all required tests to reach the commercial operation as soon as possible. The completion date of this project was rescheduled for the end of the first quarter of this year. As I mentioned before, the project is on budget and on performance. Now please turn to page 22. Since we are in the last phase of IEM's commissioning and Puerto Andino is already in operations, our CapEx financing needs have considerably decreased, releasing on-balance sheet financing capacity.
We believe that we may be able to finance at least $700 million of new investments in renewable capacity through additional debt, while keeping our leverage ratios under control, considering our forecasted cash flow generation in the coming years. In terms of guidance, please move to page 23. As mentioned before, ECL delivered solid results in 2018, reaching the high end of 2018 guidance. Well, in fact, results were better than the high end. Let's move forward and keep our focus in 2019, which is the second year of an important ramp-up period. For 2019, we maintained the guidance provided early this year with only a minor adjustment in our expected EBITDA, mainly explained by the delay in the full interconnection. To the left side of this slide, we show the main variables that may impact our results depending on their behavior.
For example, in relation to our PPA portfolio, there are two effects, a positive impact of the new regulated and the non-regulated PPAs, and the negative impact related to the short-term discounts we may apply in any future or existing renegotiation. In terms of spot prices and increasing coal prices or drier hydrology would have, of course, a negative impact in our EBITDA. In terms of supply, what we can mention is that further delays in the full interconnection and also IEM's COD could have a negative impact, since we will continue to rely on spot purchases to meet the demand under our contract. However, the closure of units 12 and 13 would have a positive effect on operating costs. While the power supply agreements with other generation companies provide a reasonable hedge against spot price risk and volatility.
In terms of demand, we are closely following up the migration of clients from the regulated to the unregulated segment. To prepare our guidance here, we already used some conservative assumptions, but in real life, these conservative assumptions have materialized. I think we are very aligned with what happened in real life. We are also monitoring longer-term demand trends in terms of demand from the mining industry and the development of electric mobility. Finally, regulatory changes such as green taxes or changes in ancillary services can always have an impact on our results. Well, you may have noticed also that we have modified our guidance to one year, and this is because our intention back in early 2018 was to give a strong visibility of the structural transformation during these two years.
Once again, we are glad to confirm that our guidance has been met, and we remain committed to deliver positive results going forward and meet the 2019 guidance. Well, let's move to the next section. I will let Bernardita to give you more details on our financial results for 2018.
Well, thank you, Eduardo. Hello, everyone. Please turn to slide 25. As Eduardo just said, we are proud to confirm that our actual results were even better than the high end of the guidance range. Our EBITDA grew by 39% to $376 million. That is a $100 million increase. The main reasons for the EBITDA improvements are the following. The most important reason is the new PPA with distribution companies, which contributed physical sales of more than 1.6 TWh , just in line with the volume we had anticipated, and represented $173 million in additional revenue. As expected, we did report a decrease in physical sales to three clients, mainly due to the end of the [audio distortion] PPA in August 2017, which was partly offset by higher demand from other mining clients and also sales to new clients.
Lower physical sales to three clients had a - $9 million effect on EBITDA. In terms of contract prices, we reported a + $12 million net income impact, which resulted from movements in different directions. The PPA renegotiations closed since late last year had a negative impact in the surroundings of $24 million. This figure was offset by other factors such as differentials in sufficiency capacity provisions, one-time payments agreed to in the context of the PPA renegotiation, and the most relevant one, the tariff indexation resulting from the increase in inflation and fuel prices, which had a $26 million positive effect on revenue. Given the significant sales increase, we naturally reported higher energy procurement costs. These higher costs amounted to $72 million in 2018.
Fuel costs decreased 10%, despite the increase in fuel prices through most of the year, and this was due to the decrease in our own generation, and also due to our efforts in reducing logistics costs related to our emission reduction processes. Our generation has decreased due to the entrance of lower-cost producers, including renewables, and also due to energy flows coming from the interconnection. We reported much higher energy purchase costs to counter the decrease in our own generation and to supply the new contract with distribution companies. Our physical energy purchases increased by almost 1.9 TWh , including purchases on the spot market and purchases under bridge supply agreements with other generation companies, which contributed to soften the volatility in spot prices.
The increase in energy purchase costs, combined with the drop in fuel costs, explains this $72 million impact on EBITDA. The contribution of other businesses, including transmission and gas sales, decreased by $9 million compared to last year. The main effect was related to positive liquidations reported the year before. Other positive effects on EBITDA included $5 million related to our 50% share in TEN's net income, which we compute in our EBITDA calculation. There was also a $4 million insurance recovery for business interruption related to a past loss at our CTM3 plant, and a $4 million net reduction in operating costs. A very positive period with a 14% increase in physical sales and a 36% increase in EBITDA, which, as Eduardo mentioned, exceeded our guidance. Please turn to the following slide 26.
The interesting part of this slide is the highlighted area in the center that shows the evolution of net recurring income. Net recurring income almost doubled and reached $160 million in 2018. This was mostly because of a stronger operating performance, as EBITDA increased by $78 million on an after-tax basis. There were other smaller effects, including a small reduction in net interest expense. This was because of higher interest income and the continued interest capitalization in the IEM and Puerto Andino projects. As we look at the bars falling out of the highlighted area at the center, we can observe significant non-recurring items affecting net income in both years. The difference is that in 2017, the non-recurring effects were positive, while in 2018, they were negative. In 2017, we had insurance recoveries, as well as a deferred tax reversal explained by the tax reform in Argentina.
These two items, taken together, cost a $15 million after-tax increase in net income in 2017. In 2018, we had the opposite situation. Although we had $4 million in insurance recoveries, we reported a $62 million after-tax effect from asset impairments and write-offs, notably the impairment of the two coal-fired units, 12 and 13, in Tocopilla, which we plan to close sometime in 2019. Even after considering these significant non-recurring effects, net income increased 1% to $102.6 million. Now please move to slide 27. Our net debt increased 9%, or by $71 million from the beginning of the year, reaching $842 million as of the end of December. This evolution is better understood when looking at our cash flow. Let's first look at the four main uses of cash in 2018. First, capital expenditures reached $187 million, mainly related to the IEM project.
Please note that this number does not include interest during construction. Second, dividend payments amounted to $71 million, including the $30 million final dividend on account of ENGIE's 2017 net income, which we paid in May, and $14 million paid to our partner in CTH throughout the year. We also paid a $26 million provisional dividend on account of our 2018 net income last October. Third, we had income tax payments for $39 million. Fourth, although it doesn't show clearly in any column in the slide, we repaid debt. Our short-term debt decreased by $10 million, reaching a new total of $90 million with Scotiabank and BancoEstado. The main sources of cash, which we use to finance these four main cash uses, were the following. One, by far, the most important source was net operating cash flow, which reached $313 million.
Two, we received a $20 million debt repayment from TEN in October. TEN achieved project completion as defined in its loan agreement and was entitled to make a first cash distribution to its shareholders. Three, we used our available cash as our cash balances decreased by $17 million during the year. The increase in our gross financial debt is mainly explained by the 20-year tolling agreement signed with TEN for the use of dedicated transmission systems connecting our power plants in Mejillones with the national grid. The agreement has a present value of approximately $60 million and considers annual tolling payments of approximately $7 million. At the end of the 20-year period, ECL will become the owner of the asset. From an accounting perspective, this is a financial lease and is thus considered financial debt. Now, our slide 28 has not changed significantly from the previous quarters.
It provides details of our liquidity and debt structure. Despite the net debt increase we just talked about, the net debt to EBITDA ratio decreased from 2.8 at year-end 2017 to 2.2 x. This was obviously because of the EBITDA improvement. We expect the net debt to EBITDA ratio to decrease during the coming quarters as EBITDA should continue strengthening, and we do not expect debt to increase significantly from current levels. We have a $100 million available committed revolving credit facility maturing in June 2020, which remains fully available. This supports our liquidity. In terms of credit ratings, both S&P and Fitch have confirmed ECL's rating at BBB stable, while both Fitch, and more recently, Feller Rate, upgraded ECL's national scale rating to AA-.
Finally, on slide [audio distortion], we see that in 2018, we paid $56 million in dividends, and that in the last four years, our dividends have been limited to 30% of net income to support our CapEx expansion. As you know, we paid a provisional dividend of $26 million on October 25 on account of 2018 net earnings.
The final dividend payout ratio for 2018 will depend on the company's cash availability and financing requirements. It will be proposed by our board and approved at the annual ordinary shareholders meeting next April. As a result of the dividends paid in 2018, the dividend yield rose to 2.5%. Our stock price evolution, on the bottom of the page, generally followed the market, although in the last quarter it decoupled from the IPSA and recovered clearly above the market. All in all, ECL's share price decreased 4.1% in 2018, while the IPSA fell 8.3%.
That's all from my side, and I'll leave you with Eduardo to wrap up the presentation.
Thank you, Bernardita. To conclude this presentation, I just want to highlight and share three main messages for 2018. First, in 2018, we reached solid results, meeting the high end of the guidance, as we mentioned before. We are keeping the same guidance for 2019. We also provided one year ago. Second, 2018 represents an important year for ECL transformation plan. Back in April, we implemented together with our clients, a win-win solution that will create value for both of us and that will trigger the development of new efficient technology. Third, a stronger cash generation phase is starting for us, which will allow further flexibility to implement our transformation and development plan. With this final message, we are concluding our 2018 annual presentation. We hope this presentation was interesting and that we met your expectations.
Thank you for your participation, and as always, we are ready for any questions you may have. Thank you.
Thank you. The floor is now open for questions. If you have a question, please press star one on your touch tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Again, if you have a question, please press star, then one. Once again, to ask a question, please press star, then one. Our first question comes from Arturo Murúa with Santander. Please go ahead. Arturo, your line is open. Is it muted on your end?
Hi, good afternoon, everyone. Congratulations for the results. I have two questions. The first one is: When do you expect to start the construction of Calama Wind Farm and Capricornio Solar PV? The second question: If the growth in 2019 will be only through renewable energies, or you also have plans in investing desalination water business? Thanks.
Hello, Arturo. Thank you. Let's start with the first one. What we are planning is to take these two projects to a ready-to-build stage in the, let's say, by the end of the first half of this year. The idea is to be ready to launch the construction and to give NTP, let's say, at the best time to market. I will continue explaining this in this way because it will depend on when will be the best moment to start the construction, but we can't wait three more years. This is something that may happen in the second half of this year, or could happen in the first half of next year. The first two projects should receive an NTP, let's say, very soon, in the coming 12 months- 18 months. This is part of the plan.
The second question was related to where the growth is coming, and yes, the answer is, of course, we are concentrated on, let's say, developing renewables and to transform parts of our thermal portfolio, to these new technologies or to these technologies. Also to add potential new demands, also based on renewables. The growth could come from the transformation of our thermal portfolio to renewable, but also from potential new PPAs that we may be able to sign with industrial mining companies in the future. While in relation to other infrastructure activities, yes, the answer is, we are also analyzing different projects in which we can participate in water desalinization or also in electricity transmission. There could be additional options in the upcoming years. As you know, the development of these type of projects requires some years.
Today we have some people working on these two type of, let's say, alternatives. Water desalinization, transmission, renewables. The idea is to keep ENGIE Energía Chile focused on infrastructure alternatives in the upcoming years.
Perfect. Very clear. Thanks.
This concludes.
You're welcome.
This concludes the question and answer section. At this time, I would like to turn the floor back to ENGIE Energía Chile for any closing remarks.
Well, thank you very much for your participation, and see you around and during the next quarterly call. Thank you very much.
Thank you. Have a nice day.
Thank you.
Bye.
This concludes today's presentation. You may disconnect your lines at this time and have a nice day.