ENGIE Energia Chile SA

SGO:ECL

Earnings Call Transcript 2017-Q4

[Operator]

Good day, everyone, and welcome to the Engie Energia Chile's Fourth Quarter 2017 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-energia.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. Our 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 that all journalists contact Engie Energia Chile's PR department for details.

I will now turn the call over to Mr. Eduardo Milligan. Please go ahead, sir.

[Eduardo Milligan Wenzel, executive]

Thank you, operator. Good afternoon and thank you for attending this call. Today, I will be together with Bernardita Infante and Marcela Munoz to present our 2017 results. Today, we will provide our audience with some relevant insights about the industry, our plans and operations, the status of our projects under construction, to finalize with the initiatives in which we are currently working, to prepare our company for the future. We hope you'll find this presentation interesting.

So let's start with the presentation. On Slide #2, we show the agenda and content for today. Since the previous quarter, we included in this first section some snapshots describing the relevant key figures about Engie, the industry and the evolution of our position in the Chilean market. We will focus on the most relevant changes, which will be useful to follow the next sections. Then, we will present in Section 2 the 4 main messages we want to share for 2017, our platform and growth engines for the future. Then, in Section 3, looking forward, Bernardita will explain our view of the future, will provide some guidance about our future results. I will also join in Section 4 to present the detailed financial results of the year. And finally, we will end this presentation providing our view of the main takeaways we want to share with you today.

So now please turn to Slide #4. Let's start with a brief update of our current position with 3 main messages. First, we are a relevant participant in the market. And today, with an integrated system through the interconnection, we will able to materialize additional business opportunities, which will be possible considering our strong presence into different segments of the energy chain. We continue with a strong focus on providing relative energy solutions for clients. We will talk later about these initiatives.

Second, and certainly, one of our main strength, we keep diversified and balanced portfolio clients with top-class content. As of December 2017, we maintained a remaining average life of more than 11 years. And first, we are very pleased to confirm that we were able to successfully deliver the results we committed to our shareholders during this important growth phase. First, TEN project reached its COD and scale, budget and performance. IEM project is on track to reach its COD from the third quarter of 2018.

And finally, in January 2018, we started to sign the distribution companies in the central system, a 15-year contract, which triggers a total investment of approx $2 billion between TEN and IEM to make possible the interconnection of both main grids in Chile. These investments will allow an approximately 40% to 45% increase in our energy sales by 2019.

In Slide #5, we can see a snapshot of our current operations. As I mentioned before, we are well integrated in the energy chain in the Northern region, and now with the standing operations, we will reach a full duration of our operations with the rest of the country.

Let's turn to Slide #6. In this page, we are presenting an updated snapshot of the integrated market, including some standalone figures of the former SING and SIC systems. In the future, once the full interconnection is completed, we may be able to look into a singular consolidated market. 2017 was not an important year in terms of demand growth. As you can see, total demand remained almost stable compared to previous year. While on the other hand, the total installed capacity in the market increased approx 12% compared to 2016. Hence, as of December 2017, the market keeps a total installed capacity of nearly 24 giga to the maximum demand of around 10 giga.

Let's continue now on Slide #7. To summarize some of the most important events in the industry and the company during 2017. First, the SING-SIC interconnection began operations on November 24. And consequently, the market is critically interconnected, and that's important today. You may realize that we are very proud of the different things who made this interconnection possible from the project conceptualization stage through commercial operations.

The interconnection is currently in a transition phase, and we expect to reach its full capacity very soon. It will also allow to reduce spot price volatility, the sensitivity to hydrologic conditions and will also allow renewable generation to be present throughout the country.

From a company perspective, I can mention 3 important milestones. First, the new 15-year PPA with distribution companies, the former SIC started on January 1 of the present year. Second and in line with what we anticipated early in 2017, we closed bridge PPAs for almost 60% of the expected demand of these new PPAs into 2018, until the southern section of the interconnection is operating at full capacity.

And third, Puerto Andino, our new port in Mejillones, successfully unloaded its first shipment in December 2017. In addition and in line with our strategy to maximize the value of our infrastructure, the authority approved on December 2017, the possibility to construct the capacity of Puerto Andino [indiscernible].

And fourth, I can mention that in 2017, we raised additional debt for $100 million at very competitive rates, which also allows to reduce the average cost of debt. I would certainly need to add some delivery of structural cost optimizations, and we will come back to this. We will explain these structural optimizations in a few minutes.

Well, now, let's move to next section and continue with the key messages we want to share for 2017. And now on Slide 9. First, we want to highlight the strong delivery in 2017. Our results were pretty in line with the guidance we provided early in 2017. Second, our growth strategy and construction is well on track. Projects will be delivered on performance, budget and scale. Third, with this aggressive expansion phase with total investments of approximately $1 billion, we were able to keep a robust and sound capital structure and be prepared for new business opportunities in the future.

Finally, as mentioned in our previous call, we need to be more agile and adapt to a new environment. The industry is continuously changing, and we need to be part of this transition process by being more client-oriented, sustainable and lean.

Please turn to Slide 10. And let's start with the first message. We want to highlight the following in this slide. Our EBITDA of 2017 reached $276 million. As I mentioned before, the figures were aligned with initial guidance of 2017, represents a 3% decrease compared to 2016. This result was mainly explained by lower physical sales and the effects of the new CO2 taxes together with implementation of the last part of our emission reduction program, which were partially offset by the positive savings in our structural O&M costs.

Second, like I mentioned, 2017 recurring net income was 4% higher compared to 2016. This positive result is mainly explained by lower interest expenses and lower depreciation. Bernardita will go into the details in some minutes.

In relation to our supply-demand balance, we continue with a strong net buyer position. In 2017, we supplied almost 34% of our client demand through spot purchases. This trend has remained stable during the whole year.

And now, let's move to Slide 11. This is a well-known snapshot of our -- of one of our main strengths. In 2017, we signed, in addition, new PPAs for approx 250 gigawatts hour. The total duration of our portfolio remains about 11 years. And we continue working to offer energy solutions to our clients and with new prospects to increase the contracted energy and the duration of our portfolio for the future.

On Slide 12, we can see the evolution of our energy sales and prices. In this graph, we want to highlight the stable behavior of our portfolio in terms of demand and price. During this period, the marginal cost, also, remained relatively stable, slightly above $50. In 2017, we also saw some volatility in the SING system during certain periods of the year, which were finally controlled by the system operator, with specific measures to increase the spinning reserve and also the natural gas visibility in order to reduce the diesel cycling throughout the second half of the year.

Now let's move please to Slide #13. In Slide 13, we present a snapshot of how we are supplying our clients between our own generation and spot purchases. In 2017, this mix changed with the entrance of new efficient capacity in the system, which implies on average 34% of our clients' needs with spot purchases, which means new efficient coal, gas and renewable generation will play in the dispatch ranking part of our oldest units, mainly located in the Tocopilla. On the other hand, the supply cost increased in 2017, impacted by higher fuel and coal prices, CO2 taxes and the emission-reduction costs. These impacts were in line with our expectations. And in summary, are in line with the initial guidance we provided during our first call this year, which together with the additional cost savings, we added during the last quarter, allow to deliver an EBITDA above the $270 million.

Now let's move to Slide #14, and present our growth strategy and projects under construction. First, our new PPAs in the SIC will represent around 40% to 45% increase in total energy sales. I know this may be conservative, but we still need to see the evolution of demand, migration of regulated client to better understand the real trend in 2018. We will monitor and communicate these figures during the next quarter. It means the composition of our portfolio will move from approx 75% and 25% between free and regulated clients to a more balanced portfolio...

[Technical Difficulty]

[Operator]

Sorry to everyone. The speaker line has reconnected, please resume with your presentation.

[Eduardo Milligan Wenzel, executive]

Hello, we are back. Well, we were starting with Slide #15. I was mentioning that to complete our global plan, we implemented a concrete financial plan, which is described in this page. So the total CapEx invested and shown in the graph is between 2015 and 2017 reached approximately $1 billion considering both expansionary and maintenance CapEx, while we still need to fund the remaining amount for 2018, which will be close to $300 million. These investments were mainly funded by our own cash generation. In addition, we also used the proceeds from the sale of TEN. And in addition, we also reduced the dividend ratio to 30%. So with these 3 sources, we basically funded the $1 billion of total investments in the last 3 years.

So to complete our financial plan in 2018, we expect to raise additional debt for around $125 million plus $25 million. That will depend on our cash flow generation. The main message in these slides, I think, is that we maintained a sound financial structure, which is reflected in our international BBB rating. The outcome of this strategy is that we will be in a stronger position to face new business opportunities with a stronger balance sheet in the upcoming years.

In the previous quarter, we presented new slides, now in Page 16, introducing the 3 pillars, in which we are supporting the execution of our strategy and energy transition process. These pillars are: clients centricity; sustainability; and productivity. And these 3 concepts are well aligned with the new market trends and what we strongly believe will be key to continue delivering results and creating new business opportunities in the future. It is clear that we need to become more agile [indiscernible] and also continue increasing productivity through initiatives like Engie's lean program to adapt our cost structure for the future.

Finally, we will reinforce the continued support of Engie's expertise in different skills in which the group can provide a differentiation factor during this energy transition.

So now, let's move to next section, in which Bernardita will provide us some additional details about the industry, how we are preparing the company for a new environment and finally, we'll present the detailed variance of our main financial indicators compared to the previous year.

[Bernardita Infante, executive]

Thank you, Eduardo, and good afternoon, everyone. We will now talk about the current environment, our views on the near future and our strategy. As Eduardo pointed out, we are clearly in the transition to a very different environment, so we would like to go over some of the main changes we are going through.

To talk about the new industry scenario, please turn to Slide 19. We discussed this in our last quarterly call. So the only thing that has not changed is what we said then, the changes in the power industry, both worldwide and in Chile, are proving fast and disruptive. So we also stated that technology advances, the consciousness regarding climate change and regulatory changes in power auction conditions promoted investments in renewable and caused an increasing competition. This hasn't really changed but has only deepened.

Last quarter, we talked about a slowdown in power demand growth due to slower GDP growth, energy savings efforts across all types of consumers and a down cycle in Chile's engine, the copper mining lining industry. Now with copper prices firm at or about $3 per pound, the mining industry may be in better shape to recover, and we are witnessing new discussions to research expansion initiatives, which now come accompanied by dissemination and water pumping facilities that entail an increase in power demand.

Mining companies are actively looking to reduce not only their energy cost but also their carbon footprint. One of the ways to achieve this is to shift away from pricing indexation to fossil fuels. At Engie Energia Chile, we are convinced that understanding our clients and becoming valuable partners for them with a diversified energy service offer is the key to our future success.

So this is why we have canceled our commercial energy management and development department. We are working on developing, tailor-made, innovative solutions for our clients that permit us to leverage our asset base and financial strength. But at the same time, we are looking to become a leaner and more agile organization as we need to reduce our operating costs.

So please turn to Slide 20 to take a glance at the grid coordination challenges. As we discussed in our last call, the coordinator and the generation companies are learning to live with intermittent power sources, basically solar and wind plants. Until these plants are prepared to function 24 hours a day through the development of economic storage systems, our projects will remain subject to some stress to cope with this intermittent. Since late November, the SIC and SING have begun to operate as a single grid, and we are proud to say that our TEN projects was largely responsible for this significant milestone in the Chilean power industry.

As we already discussed, the interconnection is not yet operating at full capacity, as the southern segment of the line of the interchile project is still under construction. We have started to see energy flows of up to some 200 megawatts in both directions and that to 650 megawatts in recent days, as a -- part of -- as of these -- interconnection was integrated in a few days back. So far, energy has been regularly flowing from south to north from the Norte Chico to the Norte Grande region during the day. Since there is solar capacity exceeding demand in the Norte Chico region.

During the night, we've seen flows of thermal power in both directions depending on economic and technology dispatch positions. The graph in this slide shows the actual power generation in the SING grid in the last 10 days of 2017. During these days, the generation pattern was quite stable with little mountains yellow and pink of renewable production peaking at 700 megawatts at around 5:00 p.m. to 6:00 p.m. This is without considering the flows of renewable production coming from the SIC through the interconnection, which represents another 170 to 200 megawatts in peak hours. If you consider that in a system with total demand of 2,500 megawatts, this means that renewable generation accounts for about -- for up to 35% of demand at certain moments of the day.

During the nights, however, we see valleys or lack of renewable generation. These valleys are normally filled in with thermal generation. Coal plants are being generally dispatched at their technical minimum level and are required to increase their output at night. Gas units are being required to turn on and off every day and are filling most of the generation gaps. During these specific days, illustrated in this chart, we could even observe some diesel generation. In the specific time period covered by this graph, interconnection flows, which is like the orange segment on the top of the chart, we are mostly south to north as opposed to other weeks when we've seen energy flowing north-south during the night. During the day, it's always been from south to north.

Marginal costs averaged about $55 per megawatt hour in 2017, down 11% from 2016's average, despite the increase in international fuel prices. The decrease was largely explained by the larger penetration of renewable generation and also because units operating at technical minimum levels do not set the marginal cost, but rather we see the compensation through the over cost or for the cost of mechanism.

On the one hand, average marginal cost have indeed fallen. And we have seen 0 marginal cost episodes at times when all thermal plants are operating at their technical minimum level. On the other hand, marginal costs have been more volatile, and there are additional costs related to the coal plants spinning reserve increase and the gas plants cycle. We must note that new regulations regarding ancillary services are currently with the country's controller office, and once approved, they would become effective in 2020.

Now please turn to Slide 21. As mentioned previously, one of our main strengths is our contract portfolio with various clients. The graph shows our clients' actual consumption estimates under our existing contract portfolio assuming we don't sign any new contract. So the last relevant contract maturity was the Radomiro Tomic contract in August, 2017. The new 15-year contract with distribution companies in central Chile started this year on January 1. This contract has a ramp up starting 2019. This results in a 43% growth in 2 years, coupled with a rebalancing of our portfolio.

Our current sales split approximately 80-20 or 75-25 between mining companies and distribution companies. From 2019 onwards, the breakdown will be more or less 50-50. We must note that these projections already take into account that some companies whose level of consumption allows them to choose to become unregulated are migrating away from the regulated regime. So the consequence of this migration is that demand from distribution companies should increase at a slower pace and this has been taken into account in this chart.

Demand under our contracts with distribution companies in the SIC could reach roughly 1.6 to 1.7 terawatt hours in 2018 and levels of between 3.6 and 3.7 per year beginning 2019.

Please turn to Slide 22. We said many times that 2017 was a transition year for us. A transition from a certain level of operations, revenues and income to new much higher levels. Between 2015 and 2017, we focused on preparing ourselves on investing in CapEx, et cetera, for the first step in this growth program, which is 2018. By 2018, if you remember, we needed to have 10 projects in operation. We sold half of these projects to an excellent operator, we raised the financing for the project and most importantly, we delivered. The project began operations in late November 2017, ahead of the deadline committed with the government and within budget. So on January 1 of this year, our new PPA to supply distribution companies started. The interconnection is not yet operating at full capacity, but we have to be ready to begin supplying, so we need -- we signed bridge PPAs to secure the party of the supply, and we are ready to buy the remainder from the spot market until we can bring our own generation from the north.

We are currently focused on mastering the growth achieved, which means a much higher back-office processing level and more transactions, including the new PPA with distribution companies plus transactions among generation and transmission companies in the interconnected systems. Couple of these have to be done more efficiently at a lower cost.

So this is part of the message we're trying to reflect in this slide. We are preparing the ground for our largest scale and leaner operations. We've taken one important step in our growth path, but we need to do it well, we need to deliver, give good client service, complete our projects, including IEM and Puerto Andino. While continuing to develop new projects, diversify our service offer and innovative in the way we do business. This is our focus for this year.

So based on the contracted physical sales we discussed when looking at the previous slide, we are providing some financial guidance for 2018 and 2019. If everything goes according to plan in 2018, we should be reporting EBITDA of between $350 million to $370 million, stepping up to levels in the range of $460 million to $480 million in 2019, net income should increase accordingly.

In terms of new developments, please turn to Slide 23.

We are focusing on renewables, specifically wind and solar, where growth may come by way of greenfield projects or via acquisitions. The idea is to meet the demand from clients, seeking to reduce their carbon footprint and breaking the tie between energy prices and international fuel prices. We have our own Calama wind farm project, in which we are currently working. We're also studying the feasibility of acquiring wind capacity in different locations to achieve geographic diversification. In the case of solar capacity, we are in the process of purchasing around 400 megawatts in projects under development and are starting energy storage solutions. Our objective is to develop new sources to gradually replace coal generation. We are also working in the Las Arcillas natural gas project, which has been submitted for environmental approval. And we are also focused on diversifying our energy solutions offer. This includes also energy infrastructure projects such as transmission as well as water and desalinization.

Now moving to next section, the financial update. We will talk about our financial performance in 2017.

Let's move to Slide 25, please. As we had anticipated, EBITDA decreased compared to the same period of last, basically due to first: lower physical sales as a result of the end of the Cerro Colorado PPA in September 2016 and Radomiro Tomic PPA last August. Second, we suffered the effects of the new CO2 taxes and the implementation of the last part of our emission reduction program.

In third place, we reported sufficiency capacity liquidation, which meant increasing the future provisions and at the same time reimbursing amounts previously invoiced to our clients for this concept. The combined net effect of these 3 variables reached a negative $40 million. All of this was partly offset by $12 million in net operating cost reductions; and $8 million margin improvement, mainly due to commodity price behaviors; and an $8 million positive variation in provisions and reliquidations, which had negatively impacted 2016 results. So our EBITDA reached $276 million in 2017, only 3% below 2016.

Now Slide 24 (sic) [ Slide 26 ] shows our net income evolution. All the bars show variation on an after-tax basis. In 2016, our results were positively impacted by nonrecurring income. So we decided to isolate these effects to have a clear picture of recurring results. In 2016, we reported income from asset sales, notably a 50% stake in TEN, and a substation, which was sold to SQM. And we also reported some impairments, basically our Camellia fuel oil plant. Net recurring income in 2016 was then $83 million. In 2017, net recurring income amounted to $87 million, a 4% improvement from this previous year, basically because of the $7 million after-tax EBITDA reduction was offset by lower interest expense.

Interest expense decreased because we capitalized part of it in the IEM and port projects. In 2017, we also had some nonrecurring effects. We reported $9 million in insurance compensation related to past losses at our combined cycle units U16 and CTM3. In addition, the tax reform in Argentina, which includes a gradual reduction in the income tax rate, had a onetime $5.7 million positive impact in deferred taxes of our Gasoducto Norandino subsidiary. In this way, net income reached $101 million in 2017.

Now please turn to Slide 27, our net debt evolution. This slide shows that the main use of cash in 2017 was, by far, capital expenditures, which, excluding capitalized interest, reached $471 million. Other relevant uses of cash were income taxes of $65 million, higher than usual, due to the effects of the sale of TEN. Dividends amounted to $35 million, including the dividends paid to our partners in CTh. We also lent $30 million to TEN to finance the project's construction. The main sources of cash were operating cash flow, proceeds from insurance recoveries and the use of cash funds that we had available at the end of 2016. As a result, net debt increased to $771 million as we took new debt for $100 million, while cash decreased by $200 million.

On Slide 28, we are showing the results of our cost optimization efforts, which include one-off as well as structural cost reductions. In 2016 and 2017, structural cost reductions amounted to an aggregate $51 million, confirming the fruits of these efforts.

On Slide 29, you may find details of our liquidity and debt structure. Net debt-to-EBITDA increased to just 2.8x despite the intensive investments in capital expenditures. We do not expect this ratio to exceed 3.5x at any time during the coming quarters as EBITDA should strengthen starting 2018 and debt should not increase by more than $200 million or $225 million from current level. I mean it's $100 million or $125 million from the last debt reported at the end of 2017.

The new debt will be a mix of short and long and eventually, drawings under the $270 million committed revolving bank facility, which matures in June 2020. We have not used this facility so far. We have taken 1-year debt with BCI, Banco de Crédito del Perú and Scotiabank at a lower cost than if we had drawn our liquidity facility. So this will allow us to continue financing our current CapEx program at a lower cost while preserving our liquidity cushion. Our credit ratings have been confirmed as BBB, stable on the international scale by both S&P and Fitch. On a national scale, Feller Rate has confirmed these sales A+ rating and changed the outlook from stable to positive last December.

Finally, on Slide 30, you can find information on our dividend policy, market cap and stock price evolution. Our dividend policy is flexible. And in the last 3 years, dividends have been limited to 30% of net income, the minimum allowed in Chile, to support our CapEx expansion. This percentage might change going forward depending on the company's cash requirements. At the end of December 2017, our market caps have recovered to almost $2.3 billion as our stock price rose by 26% in 2017. And, well, this is all on my side.

And now, I'll leave you with Eduardo to wrap up the presentation.

[Eduardo Milligan Wenzel, executive]

Thank you, Bernardita. To conclude this presentation, I want to summarize the main takeaways for this afternoon in 2 concrete messages. First, today in terms of the deliveries, we are proud to announce the successful execution of our projects under construction in 2017 with a special emphasis in the delivery of TEN, together with delivery of operational results, which are in line with the guidance we provided in early 2017. And second, looking forward, our operational teams made extraordinary efforts to execute our cost optimization and lean program, which will be key for our future transformation, together with commercial development initiatives. We explained this afternoon that we are launching in 2017 to better understand our clients' needs, providing concrete solutions and becoming a long-term partner.

So with these main messages, we conclude this presentation for 2017. As always, we hope this presentation was interacting for you. Thank you for your attention, and we are ready for any questions that you may have.

[Operator]

[Operator Instructions] And our first question of today will be from Arturo Murua with Santander.

[Arturo Murua, analyst]

My question, it's about Page 22, where you provided your EBITDA net income estimate for 2018 and '19. I just want to know what are your assumptions of marginal cost for 2018 and '19 to reach your targets?

[Eduardo Milligan Wenzel, executive]

Well, as you've probably noticed the average marginal cost in 2017 was close to 55. For 2018, what we expect is a lower marginal cost than that benchmark. Today, on average -- and talking about average sometime it's not very accurate because we have this intermittent situation, we have different systems in the center. So we may be able to say that it should be closer to 50. But again, this will depend on several factors and one of them, which is very important, is hydrology. If we consider an average hydrology, we may be able to be close to this 50. But if we see the same situation of the last 3 or 4 years with the hydrology more closer to B80 and B90, then it could be a bit higher. But I think it should move in that range.

[Arturo Murua, analyst]

Perfect. And I have a second question. I just want to know why the maintenance CapEx for 2017 it's a bit higher? I don't know if it's related to CTM2 maintenance or I don't know.

[Eduardo Milligan Wenzel, executive]

Yes, it's related to specific maintenance that we have during the year. In the specific case of CTM2, the maintenance started during the last quarter and will end during the first quarter of this year. We hope to be able to finalize the maintenance and all the corrective maintenance that we are applying early February, if possible.

[Operator]

And our next question for today will be Andrew McCarthy with Citi.

[Andrew McCarthy, analyst]

My first question is just predicting these bridge PPAs that you have in place for 2018. Can you provide some more color there as to the key terms of those, please?

[Eduardo Milligan Wenzel, executive]

Sure. In terms of the main conditions of the PPAs, we're talking about 15-year PPA located...

[Bernardita Infante, executive]

The bridge.

[Eduardo Milligan Wenzel, executive]

The bridge, sorry. The bridge PPAs, of course. The bridge PPAs, we signed around 1 terra a bit lower than 1 terra with different companies in the center. I can summarize or try to give you some color about which companies. We can say that 20% of this energy was contracted with newcomers and the other 80% with existing and larger companies. What else, the total tenure is 1 year, started on January 1 and will end at the end of the year. And the price, the targets that we closed is very aligned with the average marginal cost of 2017. And the rest of conditions are customary for this type of contract. I think there is nothing else that could be materially different from any other contract.

[Andrew McCarthy, analyst]

That's the average marginal cost in the SIC, I guess, right?

[Eduardo Milligan Wenzel, executive]

Yes, yes. Both are very similar in the mid-50s.

[Andrew McCarthy, analyst]

Yes, correct. And just a follow-up question on the maintenance CapEx. Could you give us a sense for what you're seeing if -- going forwards and then into 2019 once IEM is up and running.

[Eduardo Milligan Wenzel, executive]

Sorry, we missed some parts of your question. But I assume that what you would like to know is, how we foresee the average maintenance CapEx of this company in the future or at least for the next 2 years, is that correct?

[Andrew McCarthy, analyst]

Yes, that's right.

[Eduardo Milligan Wenzel, executive]

Well, for 2018, I think if you are to give an idea of where we should be. Why because we have a clear view of the operation and the number of hours we should be running these plants. For '19, '20, '21, I think it's something that -- in this new world, it's something that we will need to monitor in the short term to better optimize the maintenance. So it will depend on the number of hours, we expect our plants will be running. And if we extrapolate what we have seen in 2017 to the next 2 years, I think, it could be very, very similar in terms of how we are supplying our clients' demand in '18, '19 between our own generation and spot purchases. So we should expect in that line that the number of hours could be closer, but with the entrance of new renewals, maybe, we should expect a reduction in our production with the oldest unit. And in that line, I think in relation to the oldest units, we need to also better analyze if we should continue with some important maintenance in the short term, or if we are going to change this major maintenance for minor and try to optimize a little bit of maintenance in relation to the average useful life for the remaining life of these assets. But this is something that will need to be monitored very closely, and it's difficult right now to give you a certain number of what we expect beyond the 2018. But in general, it should be lower.

[Andrew McCarthy, analyst]

Okay, that's understood. And just one final question, if I may, would you be able to give us some more detail or color on some of the other assumptions, especially mainly on the cost side that you are considering with your -- in your EBITDA guidance on Page 22 of the presentation?

[Eduardo Milligan Wenzel, executive]

On the cost side, I think, we should continue optimizing our cost structure. Of course, in 2018, we will have IEM in operation, so this should increase our OpEx during the year. Probably, we will be able to offset part of these OpEx with additional savings that we are currently implementing. That's on the cost side. And what else could be -- I think on the demand side, Bernardita already mentioned that the total demand could be between 1.6 to 1.7 terawatts hour for '18 and 3.6 to 3.7 terawatts for '19...

[Bernardita Infante, executive]

Of the new constructs.

[Eduardo Milligan Wenzel, executive]

Of the new contracts. And on our existing contracts, we do not expect important changes, including the regulated PPAs in the SIC.

[Operator]

[Operator Instructions] And our next questioner today will be Ezequiel Fernández with Scotiabank.

[Ezequiel Lopez, analyst]

I have basically 3 questions. I would like to go one by one, if you don't mind. The first one is -- I'm sorry to insist on this point, it's just related to the EBITDA guidance for 2018. And I would like to know, which is the level of sales in gigawatt for the SIC contracts -- the new SIC contract that you're assuming there? And also second point on the EBITDA guidance is, if I'm not mistaken from 2019 onwards, you will have another gas contract kicking in. I understand that the first gas contract with Engie was very favorably priced. So Engie might be more willing to give you some leeway in canceling or resending those LNG vessels. So you might need to resource to the other contracts, would you say that's a fair comment?

[Eduardo Milligan Wenzel, executive]

Well, first, the total demand for 2018, what I just mentioned, was around 3.6 to 3.7 terawatts hours. That's I think the first point, right?

[Bernardita Infante, executive]

Yes. And the total is...

[Eduardo Milligan Wenzel, executive]

The total for '19 is in the bottom of Page 22, with an average of 1.3 megawatt...

[Bernardita Infante, executive]

Hours. This is -- yes, this is in terms of capacity, so you have to just multiply by the hours and the years...

[Eduardo Milligan Wenzel, executive]

By 8.7 and you will have the total gigawatt hour per year. So it should be close to 12 -- it's around 12. I said at the end of the presentation, I think, also, no? We would include something like 11.7. The second one about the gas contract, it's true. To date and for 2018, we are bringing 5 gas contracts, which are part of the first contract we signed some years ago. And in 2018, we will have also 2 additional LNG cargoes and 1 additional on top of those 2 or 3 in '19. And yes, what we are currently doing is trying to optimize these cargoes. Of course, we have different options. One of the options is to use it in electricity generation and you can use them as stop-loss limit. In case, we don't want to experiment the same situation, like in the first quarter of 2017 with the cycling with diesel, we can sell this gas in the local market. And the third option, which is also very interesting, is related to the possibility to export and the swap agreement between Argentina and Chile. And today, I think, we are working in #2 and #3 in terms of trying to find a better solution for this gas in case we do not leave them in -- for electricity generation.

[Ezequiel Lopez, analyst]

Great. The Argentina part really sounds interesting. Well, I'm going maybe to -- now my second question is, if you could give an update on your idea about selling the remaining 50% stake in the TEN projects in the interconnection line? I don't know if you have any updates on that.

[Eduardo Milligan Wenzel, executive]

Not really. As always, it's an option. But as of today, we are not running any analysis or projects on that one.

[Ezequiel Lopez, analyst]

Okay, great. And my final question is related, before the last regulated auction in Chile at the end of last year, we saw prices for industrial customers, mainly in the SIC going for $50 per megawatt hour, sometimes a little bit higher, sometimes a little bit lower. After the auction coming out at around $35 per megawatt hour, have you seen those PPA prices in the unregulated price coming down a little bit or have they stayed more or less the same?

[Eduardo Milligan Wenzel, executive]

A little bit, yes. Why? Because technologies are also -- the cost of these new technologies and the different options that you may have to provide a 24/7 PPA in the future indexed to inflation is also going down. Not in the level of what we saw in the recent auction, besides it was a small auction of 2.2. But again, the trend is going down, but a little bit, not a very important change compared to the figure you mentioned.

[Operator]

And this will conclude the question-and-answer session. At this time, I would like to turn the floor back to Engie Energia Chile for any closing remarks.

[Eduardo Milligan Wenzel, executive]

Okay. Thank you very much for your participation and see you in a couple of months.

[Bernardita Infante, executive]

Okay. Thank you and goodbye. Thank you for listening this conference.

[Eduardo Milligan Wenzel, executive]

Bye bye.

[Operator]

Thank you. This concludes today's presentation. You may now disconnect your lines at this time, and have a nice day.