Good afternoon, everyone, and welcome to Engie Energia Chile's second 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.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, Marcela Muñoz, the Head of Investor Relations, and I are very pleased to be here with you and present ECL results for the first half of this year. I will start with the presentation of the key messages, the status of our main projects under construction, and of course, we'll discuss some of the main events in our industry and for the company during this semester. Marcela will present our detailed financial results and the financial plan. To be concrete, please, let's move directly to the main key messages and turn to page number nine of our presentation. First, we are glad to mention ECL has delivered another strong quarter and continues to deliver solid progress towards our objectives for this year.
We confirm that we are in line with the guidance we provided early this year. The new PPAs, which started last January, will become the main source of growth during the next two years. Second, during the first quarter, we announced an important event for ECL, which will drive our strategy and main development efforts in the future. As you know, we finalized the negotiation of some key PPAs, which will also trigger the possibility to start a gradual transformation of our thermal portfolio from basically coal to renewables. Third, during this year, we continued with the development of our renewable portfolio, and our next goal, as we mentioned in our previous call, is to put these projects into a ready-to-build stage very soon. The construction phase will be launched at the best time to market conditions.
Another important point for us, this year, ECL won three options to build new transmission lines as part of the process launched by the CNE in relation to the National Transmission Expansion Plan. We will present these three projects in a few minutes. Fourth, in relation to our capital structure, we are in the final phase of our CapEx plan, and due to the strong generation and delivery of projects under construction on budget, in fact, below budget, we do not expect any additional debt needs in the upcoming months to finalize, for example, IEM projects. In fact, we paid a portion of the outstanding short-term debt during last month. Now let's move to page number 10, and let's take a look into the main industry and company events during this first half. Let's start with the industry.
First, as you know, the interconnection began operations last November. It seems the interconnection has proven to be important for our system, allowing to reduce between 75%-80% of the trapped solar PV capacity in the central system. Now, as you know, currently, the interconnection is not working at its full capacity and is limited to around half of it, or the equivalent of approx. 700 MW. We expect the line will run and will be operated at its full capacity once the final section of interconnection in the southern system is finished. The official date provided by the developer of this line has moved to the end of 2018.
This is something that we are closely monitoring to see when this line is going to be finalized because this will also impact the condition that we have to the commission, the two units we already also announced some months ago that will be closed in April 2019. Second, last January, the main generation companies jointly announced not to develop new coal units, and a roundtable was implemented during the second quarter to discuss with all the main shareholders some future options to start a global decarbonization of the Chilean system. This work group will analyze this vision, taking into consideration all impacts from different perspectives: social, regulatory, economic, the system's reliability, et cetera. Finally, as recently mentioned, the CNE conducted these public auctions to award new transmission projects under the annual National Transmission Expansion Plan. The aggregate referential investment value was under $300 million.
As I mentioned, we are glad to announce that 13% of these investments were awarded to TEN through three projects that we will discuss in a few minutes also. From a company perspective, the main events during the first six months were, first, on April, we signed amendments with Colbún and Glencore to start the gradual decarbonization of these PPAs, together with an important extension of these contracts. This is what we already announced at the end of the first quarter. Following this announcement, TEN requested authorization to disconnect units 12 and 13 in Tocopilla with date April 2019. The authorization was granted during the second quarter by the CNE, and both units could be disconnected subject to one condition, which is, in practice, that the full interconnection of both systems should be ready.
As we know, the most important event for TEN in 2018 is the start of the new regulated PPAs. Besides, there were and there are still some concerns about the total demand. We can mention that the demand of TEN-regulated clients is moving in line with our estimates and the guidance that we provided to you early this year. In this same context, we signed what we call the bridge PPAs to hedge our exposure in the central system until the full interconnection is ready. These bridge PPAs are already in force and will be in force until the end of 2018 for around 60% of the expected demand. For 2019, we are analyzing if we will need or not extend a portion of these PPAs until the full interconnection is ready.
In any case, we will share with you as soon as we have a better view to optimize this structure. In relation to the two projects under construction, also glad to mention our 4th bridge commercial operation on June 30. While IEM is in the final commissioning phase. We experienced some delays in this final phase. It's a general delay. It's not related to any specific event. This delay in practice is not material, and our best estimate is that we should be ready in the 4th quarter of this year. Let's go to page 11. In this snapshot, we're summarizing our first half results compared to previous year. As I said a few weeks ago, ECL operating results were pretty in line with our expected solid growth for 2018.
Total revenues increased by 13%, EBITDA by 33%, and the recurring net result by 91% compared to the same half of previous year. As you know, these results are mainly driven by the new regulated PPAs and other smaller PPAs we signed between 2017 and this year, together with the additional important savings in OpEx. The physical energy sales increased 11%, keeping the same trend of the first quarter, while at the same time, our spot energy purchases increased 13% compared to the same half of 2017. This means during the first half, we supplied our clients with almost 40% of spot purchases, keeping a very similar ratio as in 2017, considering a larger base of energy. If we add the bridge PPA, this ratio increases to almost 45%-46%. This means our first half EBITDA reached a new record figure of $187 million.
Let's turn to page 12. This graph better explains how we are supplying our clients between our own generation, spot purchases, and the bridge PPAs. First, spot purchases continue to become an important source of supply for our contracts. Second, bridge contracts represent slightly above 50% of the regulated demand in the center. The 3rd, units 12 and 13 have been completely displaced to the last position in the dispatch ranking, producing less than 5% during this year. As we explained before, this situation will continue once IEM commercial operations in the 4th quarter of this year. Both units will be required by the system, this is why we request to close these plants in next year.
The average economic price of our contracted portfolio in the first half was $116 per MWh, while the average supply cost, including all charges, was close to $65 per MWh. We are pretty in line with the previous quarter. On page 13, 14, and 15, we do not have additional news compared to what we already announced during our previous conference call. Considering the main strength of ECL and the excellent portfolio of clients and the duration of the portfolio, it is worth to mention that we keep an average life of more than years, and that we signed during the first half of 2018 new PPAs for more than 500 GWh. I believe that during the next quarter, we will probably open a bit the new PPAs that we have been signing to show these additional efforts from a commercial point of view.
On page 14, we present the main changes in the PPAs, which were announced in early April. In summary, there are three different phases. A first phase in which we agreed a short-term discount in the PPAs, a second phase in which we agreed an additional discount together with what we call the decarbonization of these contracts, which means changing the indexation from the current formula that includes coal to only CPI. Third, a new contract based on current market conditions applicable for clients like Codelco. With these changes, we have increased the average life of our portfolio of PPAs, leaving behind the indexation of coal, and therefore, through new investments in renewables and the idea we already mentioned is to gradually replace our thermal capacity with these cleaner technologies. On page 15, we present our total portfolio by type.
I want to highlight that from our contracted portfolio, which may reach around 12 terawatt hour in 2019, half of energy supplied to regulated clients, the blue and light blue areas, and the other half to our free clients, both green and brown areas. Other important consequence of what we just explained is that since 2021, the green area in this graph will be, as we say, decarbonized, indexed to CPI. Therefore, as part of our transformation and as we explained during 2018, we were focusing on renewables, mainly on wind and solar technologies. In this second quarter, our development team continued working to put at least two projects on our ready-to-build stage by the end of this year.
We expect to share more details in the coming months on those projects, and the idea is to have them ready in case time to market is good to give, let's say, notice to proceed next year. On page 16, we show the regions in which we are developing those renewable projects. Our Calama wind farm has the environmental approval, and we are negotiating the turbine agreement, let's say, at this stage. This project may become one of the first, or will become one of the first to move into a construction phase. As I said before, the decision will depend on market conditions, and also considering the investment costs could change over time based on market conditions, change on interest rates, demand for those turbines, but also impacted by new improvements in the technologies behind this type of turbine.
To continue, please, let's move to page 17. In this page, we are summarizing the results of ECL participation in the recent transmission auctions. Participated in these projects, and we model the total investment between the three of them will be close to $40 million, will require around two years of construction, and the AVI will be close to $1.5 million per year. These projects are interesting for ECL. First, because the return is good. It's a regulated return for this type of business. Second, because these projects are, let's say, strategic for us. These projects are located in areas in which we have presence, and therefore, we'll be able to create some synergies. In this line, these projects are linked to our renewable portfolio under development. It was important for ECL to secure these projects.
These projects, let's say, since they are linked to our existing projects under development, could have an impact in the total return of the renewables, in case we can find a better match than, let's say, waiting for others to build these projects in a different way. This means that we were able to capture around 13% of the total investment value, which was auctioned so far in 2018. Besides what we expect in the future, well, we will continue participating in these auctions if they comply with the conditions I already mentioned. 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. It 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 in Puerto Andino some weeks ago. The benefit, of course, is related to economies of scale, higher unloading speeds, lower demurrage costs, and therefore, lower costs 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 project similar to IEM. Well, in fact, the name of this project was IEM Two. We are currently negotiating and looking for different alternatives in parallel to optimize this asset. We believe the overall additional income we can create with this type of new port, like Puerto Andino, could be close to around $5 million. As you can imagine, we have appointed a development team to chase all these alternatives during the next years.
Also considering that there are several mining projects around this facility. We can provide not only energy, but integrated solutions through the whole, let's say, infrastructure and energy chain to these projects. As I mentioned at the beginning of this call, with the port fully commissioned and entering into the final phase of IEM, our CapEx needs will be declining in the short term. That's on page 19. We can see how since this second semester, we release an important capacity to fund new investments. We may be able to finance at least additional $700 million-$800 million of new investments through additional debt and keeping our leverage ratios under control. This means starting 2018, financing capacity for our transformation plan will be released. The company will be in excellent conditions to finance on balance sheet these new investments.
To conclude with these key messages, please move to pages 18 and 19. Here, we are pleased to confirm that the ECL delivering strong results as expected, therefore the guidance we provided early this year for 2018 and 2019 is confirmed. On page 18, we highlighted the main KPIs to be followed to monitor this guidance for 2018 and 2019. In relation to our PPA portfolio, there are two effects, a positive impact of the new regulated PPAs and a temporary negative impact related to the short-term discounts. In terms of demand decline migration from regulated to free clients continue to impact the overall demand of regulated PPAs. Recently, we saw some new projections from the CNE, in which we could expect an additional negative impact from the decline migration.
However, in the specific case of ECL, we were already considering most of these downside case assumptions as part of our guidance. Do not expect an important adjustment from our side in relation to these specific events or new projections. Fuel prices are negatively affecting our results in 2018. Coal prices have increased, and also the additional cycling of gas units is creating higher diesel costs, which were not foreseen in our base scenarios. For example, unit 15 is cycling almost on a daily basis, and these additional costs are not compensated by the system. On the same line, hydrological conditions are not helping this year to offset the high fuel prices. Hydrologic conditions this year continue to be close to the P90. The entrance of IEM will be relevant for 2019.
On the other hand, the closure of coal units 12 and 13 will bring savings in O&M and CapEx compared to their capacity revenues, and this is why we're closing these units. The interconnection is not currently at its full capacity. An additional delay in the southern part of the interconnection could have a negative impact in our margin in 2019. One of our top priorities is to monitor this project and take the measures from a portfolio management point of view to mitigate any negative impact of this delay. We are very glad to confirm that the guidance and first half results are in line with the expectations, and we are proud of the operational and commercial efforts of our teams to meet these targets during this first half.
We are fully committed to deliver the same performance in the second half of this year. Let's move to next section. Marcela will give more details on the evolution of our financial results.
Thank you, Eduardo. Hello, everyone. Please turn to slide 23. I'm happy to say that our results continue to be in line with our guidance for the year. We said that EBITDA would reach between $350 million and $370 million this year. In the first half, we report $187 million. In addition, to being in line with our forecast, this represents a $46 million EBITDA increase or a 33% improvement compared to last year. The main driver for these results were, first and above all, the new PPA with distribution companies, which contribute additional physical sale of 846 GWh. Energy sales under this new contract caused a $90 million increase in revenue.
Second, we report a decrease in physical sales to unregulated clients, mainly due to the end of the Radomiro Tomic PPA in August 2017, which was, however, partly offset by higher demand from other mining clients who paid. Lower physical sales to free customers had a negative $10 million effect on EBITDA. Third, we also reported a decrease in spot energy sales, which had a negative effect on $9 million on EBITDA. Moreover, in 2017, we had reported $6 million corresponding to capacity relocation and provisions, these revenues were absent in 2018. Fourth, fuel prices, especially coal prices, increased during the first half of this year. This had an effect on energy prices, also put pressure on our costs. This is one of the reasons why our fuel costs remain at similar levels than last year, despite the decrease in our generation.
The other reason is that our gas units were more frequently dispatched to cope with the intermittence of renewable generation, which led to a higher cost fuel mix. Fifth, we report higher energy purchases cost to supply the new contract with distribution companies. In the second quarter, spot prices increased because of dry weather conditions in central Chile, our bridge PPAs with other generation companies mitigate this effect. Finally, we have two positive effects. First, our 50% share in TEN net income, which we compute in our ABC calculations, increased by $4 million. Second, we report a $3 million insurance recovery for business interruption related to a past loss at our CTM3 plant. In sum, a very positive semester with an 11% increase in physical sales and a 33% increase in EBITDA in line with our projections.
Please turn to slide 24 and look at the highlighted area in the center of the slide that shows the evolution of net recurring income. Net recurring income increased by 91% to $83.6 million, clearly because of the stronger operating performance. Interest expense decreased a little as we have been capitalizing interest in our IEM and port projects. As communicated last month in a material event notice, we report a $52 million non-recurring after-tax loss related to the impairment of the two coal-fired units, which we have been authorized to close in 2019. We also have some non-recurring insurance recoveries in both periods. In the first half of 2017, we report a positive $8 million after-tax impact related to property damage at the unit 16.
While in the first half of this year, we report $5 million in after-tax insurance recoveries related to property damage at unit 16, CPN3, and the El Águila PV plant. When including all of these non-recurring effects, net income drops by 31% to $35 million. Let's move to slide 25. Our net debt increased 80% to $830 million in the first half of 2018. Our main uses of cash were, one, capital expenditure of $117 million, mainly related to the IEM project. Two, dividends of $31 million, including $2 million paid to our partner in GPA. Three, income tax payments for $16 million. These cash uses were financed with operating cash flow, which reached $191 million after paying taxes of $35 million last April. Our gross debt increased, basically due to two things.
One, we signed a 20-year tolling agreement with TEN for the use of dedicated transmission system connecting our plants in Mejillones with the national grid. The agreement has a present value of approximately $60 million and considers annual tolling payment of approximately $7 million. Two, we took one-year totalizing $50 million with Scotiabank and BancoEstado. With this, our short-term debt climbed to a total of $150 million at the end of June, but our cash balance increased by $56 million, thereby neutralizing the effect on net debt. Slide 26. This slide gives more display of our liquidity and debt structure. Net debt has decreased to 2.6 times EBITDA in net debt. In mid-July, we paid $35 million of our short-term debt, and we reduced our total short-term debt to $115 million.
To support our liquidity, we have a commitment revolving credit facility, which matures in June 2020. We have not used this facility so far, and we request the bank to reduce the commitment to $200 million, which we think is a good backup level. We have taken one-year debt with BCI, Banco de Crédito del Perú, Scotiabank, and BancoEstado at a lower cost than if we had drawn our liquidity facility. This will allow us to complete the financing of our current CapEx program at a lower cost while preserving our liquidity caution and keeping net debt to EBITDA below three times. In terms of credit rating, S&P just confirmed ECL rating at BBB- stable on the international scale and so did Fitch last June. Fitch upgraded ECL national scale rating to AA- last June.
Finally, on slide 27, we can find information on our dividend policy, market capitalization, and stock price evolution. Our dividend policy is flexible, and in the last three years, dividends have been limited to 30% of net income, the minimum allowed in Chile to support our CapEx expansion. The dividend payout ratio to be calculated on 2018 net earnings will depend on the company cash ability and financing requirements. This is all on my side, and now I leave you with Eduardo to wrap up this presentation.
Thank you, Marcela. To conclude this presentation, I want to highlight the agreements we reached with our clients this year, the possibility to start a global transformation of our thermal portfolio, and to confirm our guidance for 2018 and 2019. The first half results are pretty in line with the expectations. Hopefully, we will be able to deliver results in 2018 close to the upper limit of the guidance we provided. 2018 will be a solid year with a strong EBITDA organic growth, and we continue working to structure new and innovative solutions for our clients, which we believe will certainly create value for our shareholders. A final message, we are concluding our first half presentation. We hope the presentation was very interesting for you. Again, thank you for your participation, and as always, we are ready for any questions you may have now.
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. Our first question will come from Andrew McCarthy of Citibank.
Good afternoon, everyone. Thanks very much for the presentation and the opportunity to ask a couple of questions. My first question is with respect to the two renewables projects that you're focusing on or trying to get to ready-to-build status. I gathered from the presentation that one of those was Calama. Could you also provide information on which is the other project that you're prioritizing? My second question was on the possibility of extending a portion of the bridge PPAs into 2019. I was just wondering if you could provide any color on how you think that could impact your EBITDA and net income guidance for next year. Thanks very much.
Hello, Andrew. Thank you. In relation to projects under development, yes, at least one of them is Calama. This is one of the two projects that we intend to have ready next year. It's a wind project. The other project is a PV, it's a solar one, which again, as we explained, our intention is to combine solar with wind, so the development of one should come together with the development of the other. The other project is a solar PV that we have in the north. The idea is to start also this second project during this year. In relation to PPAs, yes, we are currently analyzing if we can extend a little bit the duration of these PPAs. In fact, these bridge PPAs could be even extended for the long term. Why?
At the end, what these PPAs are providing us is exactly a financial hedge, like an effect for commodities. It's exactly the same. What we are currently evaluating from a portfolio point of view is the duration of these type of hedges. If this is something that we may be able to do for one additional year, for five, for three. We expect to finalize this analysis during the next months. At this stage, an impact on the EBITDA, we do not have ready those figures to provide some guidance on that. Give us one additional quarter, and probably we'll come back with some sensitivity on that.
Okay, wonderful. Thanks a lot.
Once again, if you would like to ask a question, please press star then one at this time. This will conclude our question and answer session. 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 attending this call, and see you soon. Thank you very much. Bye-bye.
Thank you. Bye.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.