Alpek SAB de CV

BMV:ALPEKA

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and welcome to Alpek's First Quarter 2018 Earnings Conference Call. With us today we have from Alpek, José Valdez, CEO; Eduardo Escalante, CFO; and Hernán Lozano, IRO, who will discuss the company's performance and answer any questions that you might have. As a reminder, today's conference is being recorded and will be available on the company's website, www.alpek.com. I will now hand the call over to Mr. Lozano. Please go ahead, sir.

[Hernán Lozano, executive]

Thank you, operator. Good morning, and welcome. We very much appreciate everyone's participation today. This call will be divided into 2 parts: first, Mr. Valdes, our CEO and Mr. Escalante, our CFO, will provide a general overview of Alpek's first quarter 2018 performance and an update on relevant events. Afterwards, we will have a Q&A session.

Before we get started, let me remind you that the information discussed in today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially and the company cautions not to rely unduly on these forward-looking statements. Alpek undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Mr. Pepe Valdez.

[Jose de Jesus Valdez Simancas, executive]

Thank you, Hernán. Good morning, everyone, and thank you for joining us today. This was yet another eventful quarter for Alpek, marked by solid operating results and progress in key initiatives. [ Although ] our business segment reflect a better than expected start this year in several fundamental variables. For instance, Brent oil price was $10 per barrel above our guidance, reaching its highest quarterly average price since 2014. Typically, a rising oil and feedstock price environment has a positive effect on Alpek's EBITDA.

The Polyester segment was also favored by the ongoing recovery in global polyester margin. During the first quarter, we referenced PTA and PET margins in Asia, posted the highest level since 2011. In addition, this was the first full quarter of normalized operation at M&G Mexico's PET plant since it shut down last year. We continue providing support through secure financing, while a definitive restructuring plan is implemented.

The Plastic & Chemical segment benefit from a temporary spike in polypropylene prices due to tight supply resulting from propylene plant startup delays and outages in the U.S.

Next up, I will focus on an important milestone. In the M&G USA restructuring process, our alliances in initial stage, it was important for Alpek to continue participating in the Corpus Christi project. Hence, we are glad to be part of the JV representing the winning bid. The closing of the acquisition is subject to approval by government and authority, and it is our understanding that this involves a multi-month process. Corpus Christi Polymers, NLC or CC Polymers, is the name of the entity that was formed to acquire, complete and operate the Corpus Christi project. The new company is solvently equal as shares by Alpek, Indorama and Far Eastern. All of which hold strong credential in the global polyester industry.

During the first quarter, CC Polymers received the court's approval to acquire all the assets in place at the Corpus Christi site in their current state. The winning bid implies a total value of $1.169 billion, each partner will contribute up to $390 million subject to final adjustments. Alpek's portion will be reduced by $200 million, which will be a noncash contribution representing partial recovery of the intangible assets that we wrote off from our balance sheet last year. The recovery will be duly recognized in accordance with IFRS upon closing of the transaction. The winning bid does not include the necessary funding for the plant's completion. Total cost to complete the site and the timeline are to be determined. This cost will be shared accordingly by 3 partners.

Upon completion, the Corpus Christi project will have a nominal capacity of 1.1 million tons per year of PET and 1.3 million tons per year of PTA, making it the largest single-line, vertically integrated PTA-PET production facility in the world and the largest PET plant in the Americas. Each partner will have the right to receive 1/3 of the capacity or approximately 366,000 tons of PET and -- 366,000 tons of PET integrated and in addition, 122,000 tons of excess PTA. CC Polymers will operate as the toll manufacturer, providing conversion services for Alpek, Indorama and Far Eastern. Each partner will independently procure its raw materials and will also independently sell and distribute their corresponding PTA and PET.

The progress of other key initiatives is as follows: in Brazil, we obtained the required regulatory approval from the CADE court to acquire PetroquímicaSuape and Citepe. Since then, we have worked closely with Petrobras to ensure that all agreed-upon conditions are met prior to closing, which is expected to occur before the end of the second quarter, and it could perhaps be -- closing could be at the end of this month, April.

The process to finalize the sale of our 2 cogeneration power plants in Mexico is moving forward. However, issues in the implementation of regulatory changes in Mexican power tariffs have weighed on timing. The regulator's implementation process has taken longer than expected, and the recent price movement of certain power tariffs relative to others has caused confusion among multiple participants. Our view is that this issue should be resolved soon, within the next 2 or 3 months. In the meantime, we are advancing as much as possible on internal matters and undertaking all efforts to conclude the process and reach the final agreement.

My final update relates to the PET antidumping cases in the United States and Canada. The U.S. Department of Commerce is conducting its investigation of PET imports from Brazil, Indonesia, Korea, Pakistan and Taiwan. Preliminary determinations and provisional duties, if applicable, are expected during the second quarter. Moreover, the Canadian International tribunal, or CITT, ruled that PET imports from China, India, Oman and Pakistan have not caused injury and are not threatening to cause injury to the sole Canadian producer. We were surprised by this, given that the Canadian Border Service Agency has found that imports from Oman and Pakistan have been dumped, and their imports from China and India have been dumped and subsidized. The CITT ruling was appealed a few days ago. At this point, I would like to turn the call over to Eduardo.

[Eduardo Escalante Castillo, executive]

Thank you, Pepe, and good morning, everyone. The first quarter was marked by growth in volume, sales and EBITDA.

[Technical Difficulty]

[Operator]

I'm sorry, sir. If you could please go ahead on your backup line. Your first line disconnected. Please go ahead. I'm sorry, the speaker's line temporarily disconnected. Please hold, we will reconnect momentarily.

[Technical Difficulty]

[Operator]

Yes, please go ahead, sir, we're unable to hear you on your main [ feed ] line. Please go ahead.

[Eduardo Escalante Castillo, executive]

Let me transfer this one. Give me a second.

[Operator]

Yes, sir, please go ahead.

[Eduardo Escalante Castillo, executive]

Give me a second. Let me try to reconnect call.

[Hernán Lozano, executive]

Hello, this is Hernán. Sorry about the interruption. Operator, are we back on?

[Operator]

You are back on, sir. Please go ahead.

[Eduardo Escalante Castillo, executive]

Let me restart just to be able that -- you hear all the respective comments. I was mentioning that the first quarter was marked by growth, volume, sales and EBITDA. Alpek's first quarter consolidated revenue was up 19% year-on-year and 16% quarter-on-quarter, driven by higher prices and volume in both business segments. Volume was up 3% and average consolidated prices increased 15% year-on-year, reflecting the rise in oil and feedstock prices.

First quarter consolidated EBITDA was $181 million, including a $16 million noncash inventory gain and $5 million in nonrecurring legal expenses. Adjusting for these 2 items, comparable consolidated EBITDA was $170 million, up 30% versus a year ago and 37% higher than the previous quarter, driven mainly by the performance of the Polyester segment. A favorable oil price environment, the ongoing recovery in lower polyester margins and normalized operations at M&G Mexico contributed to first quarter comparable Polyester EBITDA growth of 48% year-on-year and 54% quarter-on-quarter. Quarterly comparable, Polyester EBITDA was higher than $100 million for the first time in more than 2 years. Comparable Plastics & Chemicals EBITDA was up 9% and 17% versus 1Q '17 and 4Q '17 respectively, driven mainly by higher-than-expected polypropylene margins.

Moving down on the P&L. Alpek's first quarter profit attributable to the controlling interest was $83 million compared to $87 million a year ago as the improvements in operating income was more than offset by the lower noncash foreign exchange gains under notice.

Regarding of balance sheet and certain cash flow items, net debt was $1.3 billion, up 1% of $7 million versus year-end 2017. Our net leverage ratio and interest coverage were 3.1x and 4.8x respectively, mainly due to the M&G position that affected trailing 12-month EBITDA. Adjusting for these $150 million nonrecurring charge, net debt to EBITDA was 2.4x and interest coverage was 6.1x. The largest cash flow items in the first quarter were net working capital and CapEx.

Due to the sales and the rising feedstock price environment have acquired additional investments in net working capital, mainly in the Polyester segment. Although, relative to sales, net working capital gains are lower quarter-on-quarter. CapEx of $54 million reflects the ongoing development of strategic projects. A majority of these funds were invested in the initial contribution to CC Polymers for the acquisition of the Corpus Christi project and the Altamira power cogeneration project.

In terms of liquidity, our cash balance was $440 million at the end of the first quarter. In addition, we signed a 3-year dollar-denominated credit of up to $710 million with the Bank of Tokyo, Citigroup, HSBC and JP Morgan, which provides additional financial flexibility to refinance existing short-term debt and temporarily finance the Brazil and Corpus Christi acquisitions. This loan has an 18-month availability period and can be prepaid at any time in whole or in part. Net proceeds from the potential sale of the 2 power cogeneration plants would be used to pay down the loan's balance, up-to-date, this credit is unused. On a final note, several relevant variables had a better-than-expected start this year that translated into higher EBITDA. These will be taken into consideration as we plan on updating our guidance next quarter to include pending transactions such as the Brazil acquisition and the potential sale of the 2 power cogeneration plants. Until then, we maintain our 2018 guidance unchanged. This concludes my remarks, and now I will like to open the call for questions. Operator, please instruct the participants on how to place their questions.

[Operator]

[Operator Instructions] And we will take our first question today from Nikolaj Lippmann.

[Nikolaj Lippmann, analyst]

I have 2 questions. First, on the commercial structure of the North American pricing for Polyester. Historically, we had a cost plus model that helped visibility, reduced volatility. It looks like, over the past couple of years, that that model has been a little weaker with imports. We have seen a lot of volatility results, to date, it's going in the right direction. But could you perhaps reflect a bit on where we are today and if we could move closer towards a cost plus model, where you have better visibility, lower volatility results? So that's the first one. And number 2 is on Brazil, and I hope it's not too early to talk about Brazil. But if you could give us a sense of how we should think about pricing in Brazil. Would that be similar to sort of Asian global pricing? Or would there be factors that would limit pricing in Brazil or be different from global? And also, do we have a sense of the initial sort of Q3, Q4 capacity utilization of the Brazil plant?

[Eduardo Escalante Castillo, executive]

Versus cost basis.

[Jose de Jesus Valdez Simancas, executive]

Good morning, Nikolaj. Well, with respect to your first question. Well, yes, we do have seen some price volatility in prices in North American PET. But to a great extent, prices have remained cost-plus. The only problem is that, due to the pressure from imports over the last months, these -- the cost changed, okay? So what happened was that the margin over the cost, that came down as a result as I mentioned, mostly I would say imports, [ simply a certain ] extent the expected back off of the Corpus Christi plant. But I think the biggest impact was coming from imports. And so again, we -- I think is -- I mentioned already that the margins of -- the integrated margins of PET in Asia have moved up considerably or particularly over the last, I would say, 4 or 5 months. And just to give you a reference, traditionally we use a specific reference for margin in Asia of integrated PET around $225 -- somewhere between $200 and $250 per ton. That is typical number that we have seen over the last 6 years. From -- pretty much from, let's just say, from '12 onwards. Now -- and that has remained in that range, let's talk about $250 to make it easier. A little bit less, a little bit more, but $250 was pretty much probably the average. Now the situation we are seeing and particularly, I would say the start is -- it start at the fourth quarter last year, we've seen prices moving or margins moving more towards the $300 number as opposed to $250. The margins have been moving closer to $300. And today, meaning March, April, those prices have been going up, up to the $370, $390 per ton. And I'm talking Asian prices, not necessarily China prices, but even in -- which is -- normally, Asian prices are a bit higher than in China. But recently, even in the last week, we've seen prices, even in China, was typically lower than Asia, with the margins of going over $400 per ton. So it's very difficult for us to forecast what's going to happen with those margins. But I would say that we would be comfortable to say that, if anything, the margins of integrated PTE in Asia are going to be more in the $300 range than in the $250 range that we have seen for several years. What is the reason for this? Well, there are several reasons. I think one of the reasons is pretty much the fact that demand has been improving. As you know, there have not been new -- significantly new plants built. So one way or another, the capacity utilization is also getting better. And it's also -- we are familiar with the fact that in China there was -- they were buying a lot of bottles, PET bottles, from the U.S., recycled. And then there was a regulation, which bans imports of recycled material. So that has created additional, again, demand for the built-in raw materials. So again, that is helping improve capacity utilization. So when you put all of these factors together, we believe that, again, we are seeing a change in margins in Asia from the $250 to the $300. We will see [ where it standardizes ]. We don't believe the $400 are going to be there for quite too long. We believe this is a very short-term situation. But regardless, even if margins go from $250 to $300, that is a very significant improvement. And eventually, Nikolaj -- not in an automatic way, eventually, these would probably also support, perhaps returning the cost flows or the plus in the following months. In North America, at least for us, most of the contracts of PET for this year are already a financial cost-plus, and they have been already determined. But if the margins in Asia remain at this levels of $300 or higher, there might be an opportunity of improving contracts for next year. In the meantime, of course, we can see improvements in our margins in our PET exports out of Mexico or North America. We can see perhaps improvements in our Argentinian plant, which is very much related almost automatically to the margins in Asia. We might get some improvement in our Canadian plant as well for the same reason. And also, we might see improvements, there is a small portion of our PET base in North America that have some reference to the Asian prices. So we do expect that if these margins continue in the service to see some improvement. And hopefully, again, the major improvement could come next year, if again, if global or if Asian situation remains at the low level. Let me just remind all of you that the margins that we have seen over the last 6 years, and we have repeatedly say that, that the $225, $250 are basically covering cash cost for the Asia producers. So most of the producers have not been making money. In fact, most of them have been losing money. So again, there is a chance that margins will stay more around the $300 and the $250. So yes, we could expect an improvement in the margins going forward. But as I said, it's not going to be automatic, and most of the impact will be seen in next year's results, particularly if the margins in Asia remain in the $300 or higher.

[Unknown Executive]

For fuel pricing, operative rates and PET.

[Jose de Jesus Valdez Simancas, executive]

Okay. And with respect to your second question, [ for ] you asked about the fuel pricing. The fuel pricing follows the same logic that in Argentina. In Brazil, it's also much more aligned in almost automatic ways to the prices in Asia. So yes, if prices in Asia remain in these levels, there will be also -- that will also benefit us in our Brazilian project, both the PTA and PET. This will be [ definitely ] good news, okay? And operating rates, I didn't realize if you are asking globally or...

[Nikolaj Lippmann, analyst]

No, I was thinking about Brazil.

[Jose de Jesus Valdez Simancas, executive]

Okay. Well, look, again, operative rates in Brazil, there is quite a lot of excess capacity, as you know. The market is probably -- the market it's around -- for PET, it's around 500,000 tons. Perhaps now with the situation of April prices, it could be higher. Indirectly, this market might grow because a lot of this market is also import before from other Latin American countries that buy PET from Asia. So I would say the market could be, under these new circumstances, around 600,000 tons, and the capacity there, I would say, it's close to 1 million tons. So there is excess capacity in Brazil for PET. And PTA, it should be -- capacity utilization is very high, simply because difference between market is 600,000 tons of PET, that would be like 500,000 tons PTA, the capacity of the plant is 650,000. So I would say that PTA capacity utilization looks good in Brazil, and PET is still -- there is still a significant gap, it's still a significant oversupply. We still believe that, in coming years, Brazil has a lot of potential to grow. We -- I mean, it's not only media, I mean, the consultants, the experts, and the analysts in the industry think so. And eventually, we do see a possibility over a field consumption growing 700,000, 800,000, 900,000 tons. At which time, you know the capacity utilization will be much more balanced. But for the next 6 months, we still believe there's going be plenty of oil capacity in PET and a much more balanced supply, demand in terms of the PTA.

[Operator]

And our next question will come from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

My question is about the -- first of all, one quick one about the antidumping case in the U.S. Do you remain positive that there will be a positive resolution on this case for the U.S.? Or do you think that the Canadian result has -- I mean, changes your view there? And then probably related to that, when Corpus Christi starts operating, do you think there will be need for rationalizing capacity of PET in the U.S. or North America? Or how much does that depend on that resolution for the antidumping case?

[Jose de Jesus Valdez Simancas, executive]

Well, I do believe that the -- I don't think it's in the U.S. It looks good. As I explained the situation in Canada, that was also recent. They determined that there was no injury to the Canadian supplier. We should know it's something we want to better understand. But in the case of the U.S., the determination of injury has pretty much been done, and now we are in a stage where they are determining the preliminary duties. So we do believe that we have a very strong case and very good possibilities in the antidumping case in the U.S. And we believe we should be having at least this preliminary recognition in the next month, couple of months. And assuming this is the case, imports into the U.S. in the last years are around 700,000 tons. So if we do have this -- if we [ would succeed with ] this antidumping, then, I mean, a significant part of the Corpus Christi capacity would be -- will replace those imports. So yes, of course, once the Corpus Christi starts, there's going to be a lower capacity utilization. But hopefully, if we are successful in replacing the imports and also, with 2% or 3% growth of the market on a yearly basis, if the market in North America is [ 12 ] million tons or around that, 2%, 3% is 100,000 tons per year. So again, I think there shouldn't be a need to rationalize capacity. In fact, I would say, hopefully, we will have an opportunity of increasing capacity in the year. But not too long after the Corpus Christi Starco, we're more -- again, depends a lot on the antidumping. But we are more looking into new possibilities to grow than to shutting down capacity at this stage.

[Vanessa Quiroga, analyst]

Okay, okay, Pepe. Can I add a question about process for the sale of the cogeneration plant? Do you see risk -- do you see any risk that bottlenecks or that difficulties in implementing that -- the prices, the pricing system? Do you see a reason that will take longer, even longer than 2, 3 months? Or that it's not resolved in a timely manner for your interest?

[Jose de Jesus Valdez Simancas, executive]

Yes, well, we certainly are prepared for that. In case that situation develops, we are prepared to face that. We have seen the -- if I tell you the story, it was, as I mentioned, a change in tariffs that was starting in December last year, and when we [ understood all that ], at the end of this transition, the power rates in Mexico will be probably increasing somewhere between 10%, 15%. But the government, they made a determination that in order to soften this increase and not to create a solid increase in the tariffs, they wanted to sort of transition to 5 months, and they wanted to, let's say, increase -- or calculating against 80% of the old tariff for the first month, 20% of the new one and so on and forth. The second month, 60%-40%, and then 40%-60%. So that, eventually, we'll be gradually converging into the new tariff at the end of the 5 months. Something happened that we don't understand, so I cannot really explain to you what happened. But as opposed to going up, the rates came down. And the rates came down significantly in the first couple of months, particularly in December, January and February. And as I say, don't ask me, we don't understand, and I don't think anybody understands. I don't even think the government understands what happened. But -- so that happened. And now we have seen the -- a gradual change starting a little bit in February, March, and we do understand also there's going to be another change in April. So eventually, perhaps, I think by June, I think, perhaps, the new tariffs will be finalized around that time, in June, August -- in June, July, August, I don't know. And of course, that's going to determine also the speed of our forward process. I would say, if I am optimistic, perhaps in June, the new tariffs or the tariffs will reach their intended level and if not, perhaps, around August. So that would be the time frame. And that has impacted us in a way that we are about to sign or to close a lot of contracts that we have, and some of the customers are really just waiting to make sure that the power rates, the tariffs, are what they are supposed to be. And that's why this has created a delay for us. And again, time frame I see for tariffs to normalize would be somewhere between June and August.

[Vanessa Quiroga, analyst]

Okay, Pepe. That's extremely helpful. And right now, when do you expect Altamira to come to operation?

[Jose de Jesus Valdez Simancas, executive]

Our date is the fourth quarter. We still believe we start operations in the fourth quarter this year. We are pretty much on time, on schedule.

[Operator]

The next question will come from Eduardo Altamirano with HSBC.

[Eduardo Altamirano, analyst]

I actually have 2. The one -- one is, if you can walk us through any sort of update on the process that is going on with M&G and Altamira right now? If there are any next steps in terms of what kind of milestones or any sort of, let's just call it, breaking point that we might come to expect that could be a potential catalyst present for you? And the second one is, with regards to the sale of the cogen asset, it -- I know that you've stated that you are intent on doing so. However, I -- and I understand that you'll be using those proceeds to buy what could be considered distressed assets, however, wouldn't it be, from a strategic standpoint -- and this is just one person's view, which is mine, be that -- those assets provide a certain level of cash flow stability that you don't have in a very volatile and cyclical industry? And wouldn't it be better to keep those -- lever up the company for this interim process of acquiring M&G's assets and [ swap it, step in ] and maybe just deleveraging within the next couple of years?

[Jose de Jesus Valdez Simancas, executive]

Let me turn your first question to Eduardo. He's very familiar with the Altamira M&G restructuring. And then if -- then I will get back and talk about the sale of cogeneration.

[Eduardo Escalante Castillo, executive]

Eduardo, thank you for your question. Yes, regarding the M&G Altamira plant, it is still -- it is -- it has been operating at very high rates. We think we will be able to maintain that in order to make sure that the supply to the market remains stable. The process itself -- we are providing financial support via a big financing secured by a second lien. All in all, our commitment is $60 million. As of the first quarter of this year, we have provided $30 million, and the remaining towards the $60 million will be provided when restructuring plan in [indiscernible] that in place by [indiscernible] the grade also of M&G Mexico. We think that is going, still, to take some time. But again, in the meantime, we are making sure that the company continues at very high operating rates and maintaining a PET supply to the market.

[Jose de Jesus Valdez Simancas, executive]

Okay. So again, the Altamira restart looks good, looks solid, and we will continue to support the Christi because of 2 reasons, of course: number 1, it's now [indiscernible] with PPA. But also, I think -- an important consideration is we don't want to open the road for additional imports into the North American market. So we want PET to be produced here. And so that way, it'll help us supply the demand for our customers. And then with respect to the sale of cogeneration. Look, for us, the strategic reason to develop the cogeneration project was to assure a competitive power rate to our facilities in Mexico and also to assure reliability. The lower plant that we've shut down, we have -- cost us a lot of money. So the reason for building those plant is both, not only to reduce our power rates and -- but also to improve the quality and reliability of our Mexican power supply. So that was the, let's say, mandatory objective. Now -- the only issue we have now is that we have realized that these assets, the cogeneration assets, are quite different than our petrochemical assets in terms of the cyclicality or volatility of the cash flows. And it has always been our understanding that these assets could command a higher multiple in the market if they were separated from our existing operations. So that's the other part of the rationale behind -- we consider that this asset could help Alpek significantly, not only to deleverage but also to generate more value for the shareholders because we see that -- let me explain, if Alpek is trading at 7x, 8x NPA, and we can sell this cogeneration asset at 8 or 9x, that would -- again, that will increase value to the shareholders. So that's the -- I think, again, the rationale why we are undertaking this transaction. But what you said is also true. The fact is that, of course, we want to deleverage, but in the worst of the cases, yes, I think, it's very likely that we couldn't sell the assets, but the company, Alpek, would very quickly deleverage anyway. So that's the situation, but we have decided that the best thing for us to do is to deleverage and then, again, use that money to continue to acquire other assets in -- more closer to our fields of expertise.

[Eduardo Altamirano, analyst]

All right, makes sense. Oh sorry, did you have something else -- Sorry, I didn't mean to interrupt.

[Jose de Jesus Valdez Simancas, executive]

No, no. I just wanted to make sure if that answers your question, Eduardo?

[Eduardo Altamirano, analyst]

It does.

[Operator]

And we'll now go to Luiz Carvalho with UBS.

[Luiz Carvalho, analyst]

Apologies, if I'm -- I was -- I'm coming back to some of the topics that were already discussed, but I'd like to approach them, maybe, from a different angle. First, we saw some, I would say, some delays on the cogen sales in Mexico and understand that, maybe, these has some co-relation with the tariff revision happening in the country right now. I just would like to understand -- what is the status of the negotiation now? Is it waiting mode? Or still negotiating some of the conditions? And how can -- how can I say, a potential favor on the negotiation could impact your leverage and dividend payment plans over the next year or so? And second question is regarding the M&G plants in Mexico. You already mentioned that, I mean, plants are operating at a very high level, and we saw that, as a consequence, in the results. And -- but now M&G is working [ their ] restructuring plan, which should be presented by the first half of this year, right? And I understand that any potential acquisition from Alpek or other companies would only come after that. But I would like to understand your approach in terms of capital allocation versus leverage. What is the -- what are the plans to approach the asset in the back of opportunity of the, let's say, potential cash generation in the country and higher exposure versus the leverage that you might see?

[Jose de Jesus Valdez Simancas, executive]

Look, in terms of the negotiations for the cogen sale, I think mostly -- I think the most critical issue for us right now is to -- signing PPA, signing the power purchase agreement with certain customers. We have a threshold we agreed in negotiation that we have to reach before we sell. And we are a bit delayed in signing those agreements as a result of this, let's say, volatility or uncertainty in the tariffs. I think as long -- I mean, as the tariffs become normal or are normalized, we will be able to continue to sell or to sign those PPAs. And once we reach a certain level of PPA, the transaction can proceed almost automatically. So I would say that's the key factor delaying the cogeneration at this stage.

[Luiz Carvalho, analyst]

Okay. And just a follow-up on this. Likewise, the tariffs in Mexico are likely to be higher. So of course, I understand that this is likely to be translated in the end valuation, right?

[Eduardo Escalante Castillo, executive]

Yes.

[Jose de Jesus Valdez Simancas, executive]

Okay, now, with respect to the Altamira restructuring plan. Well, right now, there is a lot of, I would say, discussion or negotiations between the [indiscernible] of any company to determine the best route. Basically, I would tell you there are 2 routes: one is, of course, it is to get indicative offers, people interested in buying the asset, number one. Number two is doing a restructuring plan, which means understanding how much debt the company can carry and then perhaps using longer term to the remaining debt or lower interest rates or even consider acquisition of the other part. And I think, honestly, what's going to happen is a combination of both. I think the company has been now asking for indicative offers to sell the company. And I think, depending on that, the decision will be taken. My guess is that, with the uncertainty that we are facing today as part of, for example, NAFTA, whether NAFTA has signed or not signed -- NAFTA could have a significant impact on the evaluation of Altamira. So I think that this uncertainly probably, yes, again, the -- what's going to happen is that the existing [indiscernible] are going to run the company for some time and then eventually, of course, looking for an M&A opportunity. Okay, from our side -- from [ what was ] signed and again, with all these [ uncertainty ] as well, cogeneration, not cogeneration? Corpus, not Corpus? How much is going to be required to finish Corpus? We are pretty much standing on the sideline with respect to acquisition of Altamira.

[Operator]

Next is Sarah Leshner with Barclays.

[Sarah Leshner, analyst]

I just wanted to see if we could get a little bit more clarity about the guidance for 2018 because I think I was surprised that you weren't raising that in light of more growth than we had previously expected coming from the M&G operations in Mexico and Corpus Christi and the assets in Brazil and -- anyway, if I could just understand whether I'm missing something that you think will offset that growth? Or whether you are being more conservative until you have further clarity on some of those developments?

[Eduardo Escalante Castillo, executive]

Thank you, Sarah. Thanks for the question. When we filled the guidance for this year because of the uncertainty regarding the Brazilian acquisition and the sale of the cogeneration assets, in particular, the timing of them, we decided not to include those in the guidance. So the guidance is basically a pro forma of the operations that we currently have. Now after this first quarter, which was significantly higher than what we consider in the guidance, the guidance had $139 million in [ debt ] for the first quarter versus the $181 million that we were able to achieve. We are planning, after the second quarter, to review the guidance, to incorporate what we had at that date, most probably the Brazilian acquisition, and hopefully, we will be more advanced in the negotiations of the cogen assets. But at this time, we decided not to reveal the guidance until we have incorporated a few more months as well as the Brazilian acquisition.

[Operator]

And we'll now go to Christian Landi with Scotiabank.

[Christian Landi, analyst]

So my question is kind of related to the previous one. It's -- Jose, would it be fair to say that the additional EBITDA from the positive environment of which you have been talking about in the Polyester segment could overshadow the negative impact that you might have when you ramp up Suape and when you take over Suape and Citepe, which as far as I understand, will generate negative EBITDA in the first months? And also the savings that are going to be lost once you transfer the Coso and Altamira plants or cogeneration plants to the -- to a buyer. That would be my question.

[Jose de Jesus Valdez Simancas, executive]

We will -- we are, I would say, a bit more optimistic about the PQS and Citepe acquisition. We no longer believe that there will be a negative EBITDA. We are hopeful that, from the very beginning, they're going to generate some positive EBITDA based on the changes that I've talk to you in the marketplace and based also in the changes taking place in Brazil since the situation with M&G. In fact, PQS has been generating positive EBITDA for the first quarter already. And then say -- PQS and Citepe, they have been generating positive EBITDA for the fourth quarter last year and the first quarter this year. So we believe we have a less conservative outlook of the PQS consolidation. We do believe we will be accretive from -- probably from day one. So that's perhaps one of your questions.

[Eduardo Escalante Castillo, executive]

Yes. Let me also add, Christian, that the guidance for 2018 does include a $20 million to $25 million EBITDA from the current Coso cogeneration plant. So when that transaction -- when the same transaction is concluded, we will have -- we would need to subtract from the guidance the remaining months of that asset. But that is all that was included from cogen in our guidance.

[Operator]

And we'll go to Gilberto Garcia with Barclays.

[Gilberto Garcia, analyst]

Given all the -- we have talked about how there are a lot of moving pieces and uncertain timing across the board. Can you talk about what sort of -- what's the higher end of a leverage that you would be comfortable with? At what point do you say, "You know, I -- we like the -- say, the M&G Altamira assets and then maybe we will go above our traditional levels, but we would think this is worth it."

[Jose de Jesus Valdez Simancas, executive]

No. We have targeted, and we have explained to you, I would say, around 2x, I mean, leverage, 2x -- I mean, a ratio of 2x net debt to EBITDA. That is, that they were comfortable over -- a situation where we feel comfortable on an equilibrium basis. I agree with you. And the timing on the transaction, we might go higher for a short period of time. So do not worry, we will not let a strategic project go away for -- if it only means going [ beyond ] the 2x for a short period of time. So I do believe we will have a flexibility to go beyond that. But again, we have an idea that this is going to be only for 1 year, 2 years at the most. And -- so we will have some flexibility for that. But we will -- and Altamira, as you can imagine, is very strategic for us.

[Gilberto Garcia, analyst]

Right. And on Altamira -- I'm sorry, you were saying?

[Jose de Jesus Valdez Simancas, executive]

Oh, yes. Altamira is very strategic for us. It's another important project. And for us, particularly, the PPA contract is critical. So we -- for us, that's mandatory. So [ we're able to be ] very, let's say, rational from our valuation point of view, and then based on [indiscernible] that offers the higher price that we believe it's worth, that's okay. And I think, in such a case, we will just try to keep the PPA contract, supply PTA in that plant because it makes a lot of sense. And that would be it.

[Gilberto Garcia, analyst]

[ Oh, wait ]. And on Altamira, since I don't know if it's fair to say that now you have more visibility into the results of that plant. Are those assets performing well? Because obviously there's not a lot of clarity on the type of distress that M&G has. But our sense is that those assets, in particular, were at least profitable, right?

[Jose de Jesus Valdez Simancas, executive]

Yes, the company has traditionally been profitable. It's such a good plant. It's a competitive plant. And again, it also has the advantage of being on the same size as the PTA plant. So that's a virtual integration, which I think is very positive in these new times of PET, where you have more intense competition. But again, for the same reason, I do believe that we want to be very close to this and make sure that, in the worst of cases, we maintain the PTA supply.

[Operator]

[Operator Instructions] And with no questions in the queue, I'd like to turn the conference back over to Mr. Lozano for any additional or closing remarks.

[Hernán Lozano, executive]

Yes, I would just like to thank everyone for participating in today's call. And please feel free to contact us if you have any follow-up questions or comments. Have a nice day.

[Operator]

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining us.