Good day everyone, and welcome to Engie Energia Chile's third quarter 2018 results conference call. If you need a copy of the press release issued last week, it is available on the company's website at www.engie.cl. Before we begin, I would like to remind you that this call is being recorded and 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, and 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 Energia Chile's PR department for details. I will now turn the call over to Mr. Eduardo Milligan. Please go ahead, sir.
Thank you very much. Good afternoon, and 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 results for the first nine months of this year. I will start the presentation with the key messages, the status of our main projects under construction, and some of the main events in the industry and the company during these first nine months of the year. Bernardita will present our detailed financial results and our updated financial plan. Please, let's move directly to the main messages on page number nine. You may note that we kept the same key messages that we reported three months ago. Sometimes it's good to keep consistency on the same messages during the time, confirming the trends anticipated for this year.
In the first place, we are glad to report another strong quarter in line with the guidance we provided for this year. As you know, the main driver for our recent growth have been the new PPAs, which started last January. Second, as mentioned in our last two calls, during the first quarter, we announced an important event for ECL, which will drive our strategy and the main development efforts in the future. We finalized the renegotiation of some TPPAs with mining companies, with conditions that will trigger the possibility of starting a gradual transformation of our thermal portfolio to renewables, mainly wind and solar. Third, through this year, we have continued developing a renewable portfolio, and our next goal is to put these projects into a ready-to-build stage. As mentioned in our previous call, the construction phase will be launched at the best time to market conditions.
In the transmission business this year, ECL won three auctions to build new transmission systems within the process launched by the CNE in relation to the National Transmission Expansion Plan. Last but not least, we are in the final phase of our 2015-2018 CapEx plan. Given our continued strong cash generation and the fact that our projects have been completed within or even below budget, we do not expect additional debt needs in the upcoming months to finalize the IEM project. In fact, as you will notice, we repaid a portion of our short-term debt in October beyond the cut-off date of these results. Let's now move to page number 10 and look into the main industry and company events during these nine months. We will start with the industry events. First, as you know, the interconnection between the SIC and the SING grid began operations in November 2017.
Since then, the interconnection has proven important for the system. It triggered the birth of a single grid, the SEN, with a single coordinator. Currently, the interconnection's transmission capacity is limited to around half of its total capacity or the equivalent of approximately 700 megawatts, since the southern section of the interconnection has not yet been completed. In any case, the interconnection so far has allowed the solar PV generators in the central system to export their power production to the northern system, allowing them to reduce between 75%-80% the trapped solar PV capacity in the central system. We expect the final interconnection should be ready during the first half of 2019, following the development company's recent announcements.
Second, last January, the main generation companies agreed not to develop new coal plants. Together with the relevant authorities and other stakeholders, established a roundtable to discuss alternatives to start a gradual decarbonization of the system. This work group will analyze this ambition, taking into consideration all the impacts from the different perspectives: social, economic, regulatory, systems, reliability, among others, that should be considered when such important decisions will take place. Finally, the CNE conducted public auctions to award new transmission projects under the annual National Transmission Expansion Plan. The aggregate referential investment value was $300 million, and we were awarded with around 13% of these investments. These auctions were followed by bidding processes for solar transmission projects, considering investments for an aggregate of $750 million. We presented bids for some of these projects, but we were not awarded with any of them in the last process.
From a company perspective, the main events during these nine months, some of them in length in previous call were, I will first mention the second bullet point, which is the most recent news. The IEM plant was successfully synchronized on October 29, meaning that it injected power to the grid for the first time. This is a very important milestone for the project. Other relevant milestones, such as the maximum load and heat rate test, have been scheduled for January 2019. The project COD was postponed then for a couple of months. Now we expect the full COD to occur during the first quarter of 2019. However, as I just mentioned, we expect to reach the full maximum load during January, which is again, a very important milestone before we declare the full commercial operation of the plant.
This additional delay for a couple of months, was because there was a short circuit incident last August during the dummy synchronization test, which caused damage to the generator circuit breaker and busbars. This equipment was replaced. The damages were quickly repaired, in order to resume commission. These efforts proved to be successful and the synchronization was achieved at the end of October as I just mentioned. In April, we signed amendments with Codelco and Glencore PPAs to start a gradual decarbonization of these PPAs, together with an important extension of the contracts. This is not new. This is what we already mentioned during the first quarter results of this year. Following this announcement, we also requested authorization to disconnect units 12 and 13 in Tocopilla in April 2019.
We obtained the authorization from the CNE to disconnect these two units, totaling around 138 megawatts, subject to one condition, which is the full interconnection of the system, which should occur close to such date. As I mentioned before, we expect this should occur during the first half of 2019. As mentioned in previous quarters, the most important event for ECL in 2018 is the start of the new regulated PPAs. Demand under regulated contracts is not growing at the rates we used to see in the past, as more clients are now able to negotiate their power supply directly with generation companies instead of buying or contracting through distribution companies.
Despite these trends, we can confirm that the demand of ECL regulated clients is moving in line with our estimates and the guidance we provided to you early this year, which in fact already considered our estimation of this risk. What we are seeing right now is a materialization of a risk we already considered in our guidance. Also, to meet the demand from distribution companies in central Chile, we signed bridge power supply agreements with other generation companies, basically to hedge our exposure in the central system until the interconnection begins operating at full capacity. These bridge PPAs accounted for about half of the power supply needed for the new contract with distribution companies in 2018. Now, for 2019, we are working on similar alternatives to extend this hedging structure. As soon as we have news on this topic, we will share them with you.
Finally, Puerto Andino, our new port, is already in operation. It has unloaded almost 1.2 million tons of fuel from 19 vessels, including a Capesize carrier during this year. The port is running very efficiently and as expected. Now, please, let's go to page 11. In this snapshot, we are summarizing our nine-month results compared to the previous year. Once again, our operating results were pretty much in line with our growth expectations for 2018. Indeed, ECL reported 22% revenue growth and 39% EBITDA growth, while recurring net income almost doubled from last year. Even after considering the impairments related to the future closure of units 12 and 13, which we registered in 2018, and which had a $53 million after-tax impact, net income grew in 5%.
These results are mainly driven by the new regulated PPAs and other smaller PPAs signed in 2017 and 2018, together with savings in operating expenses as part of our lean program. Physical energy sales increased 12%, while our spot energy purchases increased 13%. During the first nine months of the year, we supplied our clients with 37% of spot purchases. If we add the bridge PPA, this hedging ratio increases to 46%. Our EBITDA in the first nine months reached then $279 million, slightly exceeding the full-year EBITDA figure reported in 2017. Let's turn now to page 12, please. This graph better explains how we are supplying our clients between our own generation, spot purchases, and the bridge PPA. One, spot purchases remain being an important source of supply for our contracts, as you can see in this graph.
Second, bridge contracts met a little more than half of the regulated demand in the center, as expected and as part of our hedging strategy for this year. Third, units 12 and 13 further reduced their relative contribution, and they have been displaced to the last position in the dispatch ranking, producing only 3%, as you can see in the graph to the right. Once we have IEM in full operation, of course, we could expect these two units will be completely displaced out of the dispatch ranking, and that's why we are closing them next year. Once IEM begins operation in the first quarter of next year, we expect to start receiving capacity payments. As I mentioned before, units 12 and 13 will be completely displaced, and IEM will also replace part of our spot purchases during next year.
Considering that our contracted demand will also increase during next year, we could expect that the total or that this graph could remain stable during the next quarters of 2019. Finally, the average realized economic price in the first nine months of the year was $115 per megawatt hour, while the average supply cost, including all direct charges, was close to $65. We keep a relative average like in the previous quarters. Pages 13, 14, and 15 illustrate one of ECL's main strengths, our excellent signed portfolio and the average 12-year duration of our PPA portfolio. During the first nine months of 2018, we signed new PPAs for a little bit more than 500 gigawatts hour with a duration close to nine years and an average energy price slightly above $47.
These new contracts will be added to our existing portfolio, and that's why you can see in the bottom of the graph that the two free client areas in the north and in the center are bigger in this quarter than in the previous year. We'll continue with our commercial efforts to continue increasing our client base and adding other products and solutions to these clients. Just a reminder of what we already discussed in the previous two calls. On page 14, we present the main changes related to the PPA renegotiations announced last April. This includes three different phases. The first one considers a short-term discount in the PPAs. The second includes an additional discount together with what we call contract decarbonization, which in simple words means to change the indexation from the current formula that includes coal to only CPI.
The third phase consists of a new contract based on current market conditions applicable to our important clients like Codelco and Antofagasta. The end result is that we have extended the average life of our PPA portfolio, leaving behind the price indexation to coal. This triggers the need for new investments in renewables, which will gradually replace our thermal capacity once this thermal capacity reaches the end of its economic life. The chart on page 15 presents a summary of our portfolio by type of contract. About half of demand in 2019, which we are expecting to reach about 12 terawatts hour, will come from regulated clients corresponding to the blue and light blue areas in the picture. The other half corresponds to our free clients. The green area shows the PPAs that were renegotiated around three terawatts hour, as detailed on slide 14.
Beginning 2021, the contracts included in the green area of the graph will be decarbonized or fully indexed to CPI. The supply to meet this contracted demand will come from new development of renewable power, which is the essence of our transformation plan. Throughout this year, our development team has continued working on bringing at least two projects to a ready-to-build stage by the end of this year. Well, we expect to share more details with you in the upcoming months. What we can mention about this is that, in the case of two solar projects, our environmental permits were confirmed, and this is one important milestone for next year and to be ready in case we want to launch the construction of our first renewal projects during 2019. The regions in which we are developing these solar PV and wind projects are shown on page 16.
Our Calama wind farm has environmental approval, and we are negotiating turbine purchases with some contractors, doing some market reads, and moving forward with this project, which should become one of the first to move into a construction phase. However, as we have previously said, time to market decision will be important since the investment costs could change over time based on market conditions, interest rates, demand for turbines, and further technology improvement. We need to be flexible in terms of when to take the decision. Page 17 provides details of the transmission projects awarded to ECL in the national transmission auctions. The total investment of these three projects will be close to $40 million. They will require around two years for construction, and the AVI will be close to $1.5 million.
These projects were interesting for ECL because first, they are located in areas in which we can create synergies. Second, they are linked to our renewal portfolio under development. Third, they will contribute to increase our regulated revenues. In this quarter, we also want to highlight the commercial operation of our new port, Puerto Andino. This project required a total investment of approx $120 million. This is a mechanized port with the ability to receive Capesize carriers or, in practical terms, ships that can transport more than 180,000 deadweight tons. The picture on the right shows the first Capesize carrier that arrived to Puerto Andino some weeks ago. The benefit, of course, is related to economies of scale, higher unloading speed, lower demurrage cost, and therefore lower cost for ECL.
As you can imagine, the full capacity of this port will not be used for coal unloading, considering this port was also designed for the potential needs of a second coal unit similar to IEM. 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 with a state-of-the-art port like Puerto Andino could be close to around $5 million. We have appointed a development team, and they are working on these different alternatives. Page 18 summarizes the operation of our new port in Mejillones, Puerto Andino. Since it began its test late last year, almost 1.2 million tons of fuel, including coal and limestone, have been downloaded from 19 vessels. The good news is that this port is ready and working in the efficient way we were expecting.
Please turn to page 19. Since we are in the last phase of IEM's commissioning and Puerto Andino is already in operations, our CapEx financing needs have been considerably decreased, releasing on-balance sheet financing capacity for ECL. 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. In terms of guidance, please move to page 20. We are pleased to confirm that ECL is delivering strong results as expected. Therefore, we maintain the guidance provided early this year with only a minor adjustment in our expected EBITDA for 2019, which is mainly explained by the delay in the full interconnection. We have also seen that hydrological conditions for 2019 will not be very good. Third, coal prices are moving up.
Between these three impacts, we want to adapt a little bit our guidance to have them top of mind and continue monitoring the impact of these three variables in our results during 2019. To the left side of this slide, we show the main variables that may impact our results depending on their behavior. Although at the time of preparing our forecast, we normally use quite conservative assumptions. For example, in relation to our PPA portfolio, there are two effects, a positive impact of the new regulated PPAs and a negative impact related to the short-term discounts.
In terms of spot prices, as I mentioned before, an increase in coal prices and drier hydrology would have a negative impact, which in fact is materializing for 2019 as I said before. In terms of our power supply, further delays in the full interconnection or IEM COD could have a negative impact, since we will continue to rely on spot purchases to meet the demand under current contracts. However, the closure of units 12 and 13 have a positive effect on our operating costs, while the bridge contract provides an excellent hedge against spot price risk. In terms of demand, we are closely following the migration of clients from the regulated to the unregulated segment. To prepare our guidance, we had already used conservative assumptions in this regard.
We are also monitoring longer-term demand trends in terms of demand from the mining industry and the development of electric mobility, which also could be important drivers for the future demand. Finally, regulatory changes such as green taxes can always impact results. The actual results or the actual impact of green taxes, of course, is negative since its implementation. Once again, I want to finalize this section saying that we are very happy to confirm that our guidance has been met, and we remain committed to deliver positive results going forward. We expect in the next quarter to confirm our guidance for 2019. Now, we'll please move to next section. We'll talk about our financial results. I will let Bernardita to give you more details on our financial results for the nine months of the year.
Okay. Thank you, Eduardo. Hello, everyone. Please turn to slide 22. As Eduardo just said, our results continue to be in line with our guidance for the year. Our EBITDA grew by 39% to $278 million. The main drivers behind the EBITDA improvements were, of course, first and most important, the new PPA with distribution companies. This contract contributed additional physical sales of 1,266 gigawatt hours, which translated into $135 million in additional revenue. Second, we reported a decrease in physical sales to unregulated clients, mainly due to the end of the Palomino PPA in August of last year, which was partly offset by higher demand from other mining clients and sales to new clients. Lower physical sales to free clients had a negative $10 million effect on EBITDA. Third, in terms of contract prices, we reported a positive net impact of $16 million.
However, this is a result of movements in different directions. For example, the PPA renegotiations closed since late last year had a negative impact in the surroundings of $15 million. However, this figure was offset by several effects that caused an increase in revenue. The main one was the tariff indexation resulting from the increase in fuel prices, which had a positive effect on revenue. For example, average coal prices increased 13% to $92 per ton in the first nine months of 2018. We also reported a positive variation in terms of sufficiency capacity provisions. Finally, we received $5 million in one-time payments upon the closing of the PPA renegotiation. Fourth, we reported higher energy purchase costs to supply the new contract with distribution companies, mainly.
Our physical energy purchases increased by roughly 1,000 gigawatt hours in the first nine months of the year, with an estimated net effect of $53 million over our EBITDA. Between March and August, spot prices were generally higher because of dry weather conditions in central south Chile, and also because of higher fuel prices, particularly coal. Our bridge PPAs with other generation companies partially mitigated this effect. This net figure of $53 million includes a positive impact, which was a decrease in the net overcost. Fifth, the contribution of other businesses, including transmission and gas sales, decreased by $18 million compared to last year. The main effect was related to positive reliquidations of tolls, okay, reported the year before, and delays in the transfer of energy withdrawal tolls to prices.
Six, other positive effects on EBITDA included $6 million related to our 50% share in TEN net income, which we compute in our EBITDA calculation. A $3 million insurance recovery for business interruption related to a past loss at our CTM3 plant, and a $1 million net reduction in operating costs. In sum, a positive period with a 12% increase in physical sales and a 39% increase in EBITDA. If we go to slide 23 and look at the highlighted area in the center of the slide that shows the evolution of net recurring income. We can see that net recurring income almost doubled and reached $121 million in the first nine months of the year. This was primarily explained by the stronger operating performance. Interest expense decreased a little as we continued to capitalize interest expense in our IEM on port projects.
However, as discussed in the second quarter call, we reported a $52 million non-recurring after-tax loss related to the impairment of the two coal-fired units, number 12 and 13 in Tocopilla, which we plan to close in 2019. We also had some non-recurring insurance recoveries in both periods. In 2017, a positive $8 million after-tax impact related to property damage at the unit 16 combined cycle gas plant, while in 2018, it was $5 million in after-tax insurance recoveries related to property damages at unit 16, CTM3, and the El Aguila PV plant. Even after considering these significant non-recurring effects, net income increased 5% to almost $73 million. Please go on to slide 24. The evolution of our net debt shows our main cash flows during the first nine months of 2018.
Our net debt increased 5% from the beginning of the year to $811 million as of September 30. Our main uses of cash during this period were, A, capital expenditures of $161 million, mainly related to the IEM project. Please note that this number does not include interest expense. B, dividends of $36 million, including $7 million paid to our partner in CTH. C, income tax payments for $28 million. These cash uses were primarily financed with operating cash flow, which reached $280 million. Our gross debt increased basically due to three things. One, we signed a 20-year tolling agreement with TEN for the use of dedicated transmission assets, 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 these assets. Accounting-wise, this is a financial lease and is thus considered financial debt. The transmission assets are accounted for as fixed assets on ECL's books. Two, last April, we took one-year loans totaling $50 million with Scotiabank and BancoEstado. With this, our short-term debt climbed to a total of $150 million last April. In July, we reduced our short-term debt by $35 million to a new total of $116 million, as we refinanced $75 million in bank loans maturing in July with a one-year $40 million loan with BancoEstado. Our cash balances, on the other side, increased by $29 million, thereby partially offsetting the increase in net debt. Three, accrued interest and mark-to-market variations from FX hedges contributed to a $36 million increase in net debt.
Finally, I'd like to mention a $20 million cash payment from TEN in early October, after the cut-off date of this presentation. TEN achieved project completion, which is an important milestone under the terms of its loan agreement, and total project costs were below those initially agreed with the lenders. This gave origin to a final loan disbursement called a cost underrun advance, which TEN used to distribute to its shareholders. This is why ECL received $20 million in early October. Slide 25 provides details of our liquidity and debt structure. Net debt to EBITDA decreased to 2.3 times despite the increase in net debt, and this is obviously because of the EBITDA improvement. Last 12 months, EBITDA was $354 million, up from $276 million in 2017.
We expect the net debt to EBITDA ratio to remain below 3.5 times during the coming quarters and years, probably, as EBITDA should continue strengthening, and we do not expect debt to increase significantly from current levels. Actually, in October, beyond the cut-off date of this presentation, we repaid at maturity a $25 million short-term loan with Scotiabank, reducing further our short-term debt to a new balance of $90 million. We have an available committed revolving credit facility maturing in June 2020. We have not used this facility so far, and we have requested the banks to reduce the commitment to $100 million beginning November 5. That is yesterday.
We believe this level still provides a strong liquidity cushion as we have one-year debt at a lower cost than if we had drawn our liquidity facility. In terms of credit ratings, both S&P and Fitch have confirmed ECL's rating at BBB stable. Fitch upgraded ECL's national scale rating to AA- last June. If we move to slide 26, this gives information on our dividend policy, market capitalization, and stock price evolution. As you know, our dividend policy is flexible. In the last three years, dividends have been limited to 30% of net income, which is the minimum allowed in Chile, to support our CapEx expansion. As we approach the end of our 2015-2018 CapEx financing program, and since we received this cash payment from TEN, we decided to pay 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 is quite likely that we pay dividends. The payout ratio will be calculated based on net recurring income and not net income, which would be the equivalent of the $120 million we reported instead of the $100 million we reported this year. This is all on my side, and now I'll leave you, Eduardo, to wrap up the presentation.
Thank you, Bernardita . To conclude this presentation, I just want to highlight the three important messages for this quarter. First, we are glad to confirm that the IEM plant was successfully synchronized on October 29, injecting power to the grid for the first time, and our goal is to reach the maximum load and complete heat rate test during January 2019 to reach full COD during the first quarter of 2019. Second, we signed around 10 new PPAs, representing a total demand slightly above 500 gigawatts hour with a nine-year duration during this year. These new PPAs represent an important increase in our total contracted demand or around 5%. Our objective, of course, is to go for more, but with focus on profitable cases, let's say. Third, we are again glad to confirm the guidance we provided for 2018. We are still on track to reach 2019.
While our CapEx intensive program for 2015-2018 is ending and a stronger cash generation phase is starting for ECL. With this final message, we are concluding our nine-month presentation. We hope this presentation was interesting. Thank you for your participation, and we are ready for any questions that you may have.
Thank you. The floor is now open for questions. If you have a question, please press star then 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 then 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. The first question will be from David Galanti with Scotiabank. Please go ahead.
Thank you. Hi, Eduardo and Bernardita . Thank you for the presentation and congratulations on the results. I have a question regarding EBITDA guidance. I'm sorry if you talked about it during the presentation and I missed it. In slide 19, we can see that the EBITDA guidance for 2019 is lower. Then it goes even lower to 2020. When we compare it to the last quarter presentation, we would see that EBITDA will grow higher in 2019 and even higher in 2020. I was wondering if this is related to the restructuring of the PPAs that took place during the second quarter, and maybe during that quarter you didn't update the presentation? Is there something else that happened over the last three months? Thank you.
Hello, David. Thank you for your question. Basically, your question is about the guidance. We haven't given any guidance yet for 2020. The only update that we included in our presentation this quarter was a very small reduction of only $10 million for the 2019 guidance. For 2020, we don't have any figures in this presentation, right?
Okay. In the guidance, you're talking about slide 21, which you have 2017, 2018, and 2019 in the bar graph, right? I'm talking about.
Right
Slide 19, which has a line, a green line with the EBITDA estimates for 2015 through 2020. On the second quarter of this year on the presentation, we would have in 2019, EBITDA guidance at around $460, then it would go up to something close to $500 million for 2020. On this quarter, on the same slide, we have the green line in 2019 around $450, which makes sense because you reduced the guidance for this year. The line goes down in 2020 to something around maybe $430, $420. It's hard to know because it's a line, I'm not exactly the number.
Yes.
It goes down.
Yes, you are right. In 2020, what we expect or the impact that we will expect in 2020 is not the negotiation of the PPAs, it's mainly the end of Zaldívar PPA, which will end in 2020. Without doing anything from our side, mechanically, the EBITDA should be a bit lower than 2019. However, this is something that we are using for budget purposes or to show a little bit our view on the debt capacity. For sure, our plan is to keep or try to keep the same result as 2019. This is something that, in fact, will change over time, considering also the marginal cost evolution and hydrologic conditions for 2020, et cetera. Usually, when we forecast the long term, we try to use a conservative assumption on marginal costs, like something close to P90. Why?
It's what we have seen during the last seven years in our market, this is something that could change, the impact in case hydrologic conditions in 2020 are better could be important. This is just an idea of where our EBITDA should be, there are some upsides in 2020 that we may have. The mechanic, let's say, explanation of why in 2020 is a bit lower than 2019 is because of the end of Zaldívar PPA with Anto.
Okay. Thank you. That's very helpful.
You're welcome.
Once again, if you'd like to ask a question, please press star then one. Again, we'll just pause momentarily to assemble our roster. This concludes our question and answer session. At this time, I'd like to turn the floor back over to Engie Energia Chile for any closing remarks. Once again, I'm turning it back to management for any closing remarks that you may have.
Okay. Thank you very much for your participation, and looking forward for our next call with you, hopefully to confirm our guidance for the year and to present you probably new updates on our development plan. Thank you very much.
Thank you. Goodbye, everyone.
Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.