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Edited Transcript of ELI.BR earnings conference call or presentation 22-Feb-19 9:30am GMT

Full Year 2018 Elia System Operator SA Earnings Call

Brussels Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Elia System Operator SA earnings conference call or presentation Friday, February 22, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine Vandenborre

Elia System Operator SA - CFO

* Chris Peeters

Elia System Operator SA - CEO

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Conference Call Participants

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* Bart Cuypers

KBC Securities NV, Research Division - Financial Analyst

* Bart Jooris

Banque Degroof Petercam S.A., Research Division - Analyst

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Presentation

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Chris Peeters, Elia System Operator SA - CEO [1]

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Good morning, ladies and gentlemen. Thanks for being present or for participating in Elia's webcast for Investors and Analyst on the Full Year Results of 2018. Elia Group is represented by CFO, Catherine Vandenborre; and myself as CEO. The title of today's presentation will also be the title of our annual report 2018 that will be published end of March, Time to Accelerate. Why such a hurry, you might think, because it is what society expects of us. Our assets have equipped us with the resources we need to respond to a sustainable, reliable and affordable energy system. We are making the energy transition possible and ensuring that it is progressing at the right pace. The business are all in place for major changes to be made very quickly. Of course, this means that Elia Group will have to adapt to both locally and at the European level, since the integrated low-carbon economy will be a European economy.

Ladies and gentlemen, as a system operator, we have an important societal responsibility. Therefore, I'm proud to announce that 2018 has been another exceptional year for Elia Group. 2018 was a milestone year in our ambitious CapEx program. Major infrastructure projects have been delivered on time and within budget. The annual result also reflect excellent performance in our core activities.

Looking at this picture, I'm proud to say that Elia is at sea in Belgium. End of January, we started the commercial operation of Nemo Link, the first interconnector with the U.K. In November, we installed the foundations of the Modular Offshore Grid or plug at sea for the connection of future offshore wind farms. We'll come back to some other milestone projects and key figures but first, I would like to show you the disclaimer. The most interesting part of the presentation.

As mentioned in the subtitle of this slide, you must read the disclaimer before continuing. I suppose you all did by now. So let us immediately continue with today's program. First, we'll have a view on the achievements, then Catherine will give some comments on the financial results and finally, we will end with some conclusions and then outlook for 2019.

Let's start with the achievements of 2018 and immediately have a look at some important key figures. In 2018, we continue to -- the acceleration of our investment program, both in Belgium and Germany, with investments totaling slightly higher than EUR 1.1 billion. These investments were driven by the realization of the strategic investment programs in Belgium and the partial commissioning of the Ostwind 1 project in Germany. As a result of these investments, the regulated asset base of the group further increased, driven by a solid organic growth in Belgium and Germany. This was also supported by another key milestone for our group with the acquisition of 20% additional stake in Eurogrid. As a result, the regulated asset base totaled EUR 9.2 billion at year-end. Normalized net profit of the Elia Group increased by 38% to EUR 280.8 million. Excluding the noncontrolling interest and considering the accrued coupon for the hybrid bondholders, the net profit attributable to the Elia's shareholders came in at EUR 275.2 million, leading to an adjusted return on equity of 10% for the year.

As I already mentioned, one of the most significant events in 2018 was indeed the rise in our share in Eurogrid to 80%, significant both from a financial and from a strategic point of view. The transaction has given us full control of 50Hertz and will enable us to strengthen the collaboration between Elia in Belgium and 50Hertz in Germany. 50Hertz is an asset with long-term organic growth opportunities, driven by Energiewende and supported by 2030 renewable energy production targets. The acquisition underscores our growth ambitions to become a leading group of transmission system operators in the integrated European energy system. The acquisition was a good move in financial terms too. As you have seen in the previous slide, the effect is immediately reflected in the group results. The markets reacted positively and the investor showed great interest to refinance the bridge loan for the acquisition. Acquisition price of EUR 967.5 million and EUR 12.2 million in interest, with book building completed in just a few hours due to high demand, BBB+ rating confirmed by S&P.

Besides the fact that we obtained full control of 50Hertz, we also have a new German partner in Germany. As we sold remaining 20% of Eurogrid to the German state-owned bank KfW. I must say that it was a conscious choice to have a German partner, as our activities are strongly connected to the local context. Our new German partner has an excellent insight into the local context. This is important because it allows us to better judge the pace at which we should carry out developments and it makes it easier to seize future opportunities.

In the last few years, Elia Group embarked on unprecedented levels of investment. This continued in 2018 as the group pressed on with its efforts to realize the energy transition and to maintain a high level of security of supply. In total, Elia Group invested more than EUR 1.1 billion in 2018. Our investment program is mainly built on 3 pillars: the integration of renewable energy, development of an offshore high-voltage grid and the construction of interconnector to facilitate the integration of the European energy market.

In Belgium, Elia further accelerated its investment in 2018, reaching a record high of EUR 637 million, 31% higher than last year, mainly in 4 types of assets. First, the full realization on time, on quality and on budget of our market CapEx amounting to EUR 221 million, which represents 33% of our 2018 investments. Those market investments are contributing to the European integration of the electricity markets and therefore, benefit from a higher return than the rest of the investments. Significant progress has been made on the projects like Brabo, which aims at reinforcing the grid in the region of Antwerp, in which we invested EUR 47 million in 2018; Mercator-Horta, we invested EUR 43 million in strengthening the backbone to allow a higher integration of renewables from offshore; and ALEGrO, the interconnection with Germany that we expect to commission in 2020, in which we invested EUR 101 million in 2018. Secondly, we continued our investments in the construction of the Nemo Link cable. We invested EUR 59 million in the finalization in subsea power cable between the U.K. and Belgium that has just recently been taken into operation at the end of January. This investment represents the first offshore interconnection that has been delivered on time and on budget. Third, we maintained a high level of replacement investments EUR 197 million in our existing grid, in order to maintain a high quality grid and high security of supply.

Finally, we continued our investments in the Modular Offshore Grid, which is of strategic importance for Belgium's future in terms of its participation in the further development of renewable energy in the North Sea, investing EUR 111 million in it in 2018. The implementation of the project is on schedule and aims to go live later this year and become fully operational in 2020.

In Germany, 50Hertz transmission invested EUR 491 million, needed for delivering a smooth energy transition, integrating even more renewable energy sources. In the zone, operated by 50Hertz, the percentage of green production capacity is close to 56%, which is the highest level in Germany. The Ostwind 1 project connecting the offshore wind farms in the Cluster Westlich Adlergrund to the grid is almost complete and marks another step towards the culmination of the German energy transition. After 3 years of construction, the submarine cables have now been laid and 2 offshore substations are successfully interconnected with electricity feeded into the grid.

In 2018, EUR 127 million has been invested. Works on the combined grid solution project is also progressing well. It entails constructing the first interconnector between 2 offshore wind farms in 2 different countries with a planned transfer capacity of 400 megawatt. This project is first in the world in collaboration with the Danish system operator, Energinet. After installing both offshore cables and platforms, another important milestone was reached early November as 50Hertz and Energinet successfully accomplished a 24-hours energizing test of both of the offshore cables connecting the Danish platform of the Kriegers Flack wind farm with the German platform Baltic 2. The civil works and the construction of the back-to-back converter are ongoing and the commissioning of the project is planned for the second half of 2019.

Last, following a wind tender issued in April 2018, the Germany’s Bundesnetzagentur allocated 733 megawatt of capacity to 3 new wind farms in the Baltic Sea. With the Ostwind 2 project, 50Hertz will connect the new wind farms to the mainland by installing 3 cable systems. After initiating talks with the wind farms operators, 50Hertz awarded the contract to manufacture and install 3 220-kilovolt AC cables for the Ostwind 2 project.

Before giving the floor to Catherine, I would like to stress that we realize our CapEx program through proactive dialogue with a variety of stakeholders during the entire project duration. This dialogue is based on mutual respect and empathy to come to the best societal and environmental solutions.

In 2018, we also continued to perform the necessary studies and analysis and act as an adviser to the different governments. In November 2018, Elia Group published a vision paper on how to deliver a consumer-centric system to enable a more central role of the consumer in the future power system. We invited market parties to sign up and to participate together in developing energy services that are fully responding to the needs of the end users. Yesterday morning, we had the official kickoff of the IO. Energy ecosystem that will set up a testbed for selected use cases. That was it, in short, an overview of our activities in 2018. There is, of course, much more I would like to refer to the press release that has been published this morning.

For more details on the financial result, I would like to give the floor to Catherine.

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Catherine Vandenborre, Elia System Operator SA - CFO [2]

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Thank you very much, Chris. So like you just explained, 2018 has been a very good year for Elia and both from an operational and financial perspective. To take over of 80% of Eurogrid is an important milestone. And as a consequence, we now fully consolidate Eurogrid accounts in our financial statement.

Beside this acquisition, other initiatives have been taken to position the Elia Group as a leading TSO in Europe and in the energy transition. Some examples are the vision paper we published in November, aims toward a consumer-centric system, to which Chris just referred. We also launched a Cross-Border-Intra-Day platform together with other 14 European TSOs. And we launched a shared data hub for the Belgian grid together with the Belgian distribution system operators. And those are some examples of how Elia is acting in the interest of society.

Our operational activity was also intense in 2018. In Belgium, our investment program has been progressing well, reaching record amounts of EUR 637 million. We have just shown you some particularly significant achievements, such as Nemo Link, MOG or Brabo. For the third consecutive year, the mark-up investment plan has been fully realized and also strong progress has been achieved in upgrading and replacing the existing high-voltage grids.

In Germany, the operational efficiency remains strong. First, the savings plan that we introduced last year is proving successful. And then in addition to that, the new infrastructure project like the Southwest coupling line, which was taken into operation in 2017, led to lower congestion issues in the grid and thus an important savings in (inaudible) costs. In term of investment, 50Hertz invested EUR 491 million in the course of 2018, it's 7% more than in 2017. And the biggest portion of the investment was invested in the 3 cables, connection for the Ostwind 1 project in the Baltic Sea.

With a reliability level of 99.999%, the Elia's Group is once again one of the most reliable system operators in Europe. Despite the unexpected outages of nuclear unit in the second half of 2018 in Belgium, we managed to ensure an ongoing safe balance between production and consumption. All of these operations often performed in difficult conditions are done with the highest standard of safety. The safety of everyone everywhere is always our #1 priority.

In 2018, we invested continuously in safety and work in a responsible and safe manner. Our goal is 0 accidents for all people and for contractors.

Now in terms of regulatory evolutions. End of June, the Belgian regulator had confirmed the new tariff methodology that will be applicable for 4 years, starting from 2020. I refer you to the communication that we made during the publication of our half year results for the details of this regulatory framework. With regard to the nonregulated activities, the new methodology contains a provision that the financing of the nonregulated activities being the activities either regulated outside of Belgium are purely nonregulating activities, is to be valued in terms equivalent to a financing that would be fully provided by equity.

Elia lodged an appeal against this new provision. And in the beginning of January, we received a judgment of the market course, which declares our appeal unfounded. As a consequence, the tariff methodology 2020, 2023 will remain enforced as published on the 28th of June 2018. Based on the detailed analysis of the judgments, we are convinced that this judgment has no significant impact on our current investment in nonregulated activities but could result in potential limitation of future new nonregulated activities, starting after June 2018.

In Germany, more clarity has been received regarding the regulatory framework applicable for 2019 till 2023. Like you already know, the regulator sets the return on equity for the third regulatory period at 5.64% after-tax, again 7.39% until end of 2018. What's new? Well, in addition, 50Hertz received end of January following the cost assessment for the past year of 2016, the regulator's decision on the individual efficiency factor. Similar to the past regulatory periods, 50Hertz is regarded as fully efficient with an efficiency factor that seems like, we call it, of 100%.

Also, the general productivity factor, so the factor applicable for all the electricity sector has been published by the regulator. The Xgen, as we call this one, has been set at 0.9% against 1.5% currently. With regard to the offshore remuneration, the lump-sum allowance for the offshore cost will be replaced by a cost-plus mechanism for offshore OpEx. As you know, this was already applicable in 2018. As part of the regulatory procedure, the regulator has also decided on the balance sheet items.

In this regulatory period, so starting from 2019, receivables and current assets related to EEG and similar surcharges will not be accepted anymore in the imputed balance sheet and therefore, will not be accepted anymore in the regulated-asset base. However, the P&L impact of this will be mitigated by a specific remuneration outside of the RAB remuneration. In this respect, BNetzA will accept an amount that equals to 50% of the remuneration that would be due for full acceptance of this working capital in the base year imputed balance sheet. Based on all those factors, we remain confident to achieving the third regulatory period, a return on equity between 8% to 10% in Germany.

With regard to Nemo Link. You know that the joint venture has its own regulatory framework, that is already in place, and which is based on the Cap/Floor model. This is a cost-based regime set for the next 25 years, which frames the maximum and minimum returns that Nemo Link will generate. Within this cabin floor, the revenues of Nemo Link will depend on the pricing difference of commodity and availability of the interconnector. Finally, on the financial side, strong result has been realized in 2018. The normalized result of Elia Group increased by 38% to an amount of EUR 280.8 million. The increase is driven by many elements: first, the acquisition of the additional 20% stake in Eurogrid, and that's together with -- in Belgium, the realization of strategic investments and in Germany, strong operational performance reported by the release of legal and claim provision. All those elements are being partially offset by higher nonregulated funding costs linked to the acquisition and the disappearance of the offshore lump-sum in Germany. Like already mentioned by Chris, the acquisition of the 20% stake in Eurogrid has been definitively financed by debt in August 2018, with the issuance of EUR 700 million hybrid bonds and a EUR 300 million senior debts.

Now before looking in detail to the Group result for 2018, I would like to draw your attention on the fact that we have amended the segment reporting compared to last year. With the increased stake we have taken in Eurogrid, the impact of the financing cost of the nonregulated activity increased. And as a result, we have set up a third segment, which covers mainly the financing cost of the acquisition, EGI and Nemo Link. As a result of the segment reporting, the performance of Elia Transmission and 50Hertz Transmission will be closely linked to the regulatory framework. And the impact of the nonregulated activities, including Nemo Link, are isolated in a separate segment. Please bear in mind, when you look at the third segment that the hybrid bonds that we issued to finance part of the acquisition has no profit impact as it is equity accounted under IFRS.

Now coming to the details of the Group result. Let me remind you that the Group normalized net profits reached EUR 280.8 million. Eurogrid, in blue on the chart, was contributing for 61% to the Elia Group result. If we take into account the nonrecurring items, the reported net profit of the Elia Group increased more pronounced to EUR 307.2 million. This increase is mainly related to nonrecurring income linked to the acquisition as well as revenues linked to the partial commissioning of the Ostwind 1 offshore connection.

Noncontrolling interest of EUR 25.7 million has been recognized, linked to the consolidation of Eurogrid. The net profit attributable to Elia shareholders. So post noncontrolling interest and post accrued coupon for the hybrid, this net profit attributable to Elia shareholders increased by 32% to EUR 275.2 million. Those results led to an adjusted return on equity for the shareholders of ordinary shares of 10%. As mentioned, the group results are impacted by the acquisition and the changing consolidation of Eurogrid. And therefore, and purely for comparative purposes, we have rebased the key figures of 2017, as if the acquisition and the change in consolidation would have occurred in May 2017, meaning 4 months of equity method at 60% and 8 months using full consolidation at 80% ownership. In the press release issued this morning, you can find the extended definition of the rebased figures.

Previous figures are only presented here as a basis for assessing growth rate on a comparable basis and not as a measure of our pro forma financial performance.

So if we look at those rebased figures, what we see that the EBIT increased by 54.8% compared to prior year. On a rebased basis, the EBIT increased by 8.3%, driven by the solid operational performance in Germany, including the release of the legal claim provision and the strong operational performance of Elia Transmission. The nonregulated activities represented an operating loss of EUR 5.9 million due to acquisition costs and the lower contribution of EGI.

The rebased normalized net profit of the Group, just ignoring the consolidation impact, increased by 13%, driven by organic growth in Belgium, following the realization of the investment program and further growth in Germany due to the operational performance and once again, the release of the legal claim provision, contributing for EUR 32.1 million to the Group net profit. The nonregulated segments contributed negatively to the normalized result of the Group, which the higher nonregulated financing cost for the acquisition, the lower result for EGI and the fact that Nemo was not yet into operation in 2018.

Now looking at the evolution of the regulatory asset base. The increase to EUR 9.2 billion at the end of 2018 was driven by strong organic growth in Belgium and Germany and the acquisition of the additional 20% stake in Eurogrid. Without this acquisition, the RAB would have increased by EUR 600 million at Group level. And with regard to Belgium, the RAB increased by slightly more than 9% compared to prior years. This RAB is not including the Nemo Link investment, which has its own regulatory framework and remuneration scheme. Looking at the last 5 years, we can see that the RAB increased quite considerably, witnessing our continuous strategy of organic growth.

Now in term of net debt's evolution. At year-end, Elia Group carried total net financial debt slightly above EUR 4.6 billion. It's an increase of EUR 1.9 billion. The increase is due to: first, the changing consolidation method of Eurogrid, which contributed for EUR 1.3 billion to the net debt; second, the issue of around EUR 300 million senior debt to finance the 20% acquisition; and the third, EUR 210 million dedicated financing loan was taken to fund the Nemo Link investments. The hybrid bond is accounted directly in equity and is therefore, not included in the net debt. It benefits from a 50% equity components for S&P. The rating of the Elia Group is BBB+ with a stable outlook.

At entity level, the sizable CapEx program of Elia Transmission was mainly financed by cash flow from operating activities, and also the use of EUR 50 million of commercial paper and EUR 100 million loan from the European Investment Bank. At the level of Eurogrid, 2018 showed positive free cash flow of EUR 278.7 million, due to positive EEG cash flows and strong operational cash flows exceeding the investment payouts.

Consequently, the net financial debt decreased to an amount slightly below EUR 1.3 billion. This amount includes an EEG cash position of EUR 859.4 million. The average cost of debt dropped to 2.30%.

Now let's take a more detailed look at the underlying performance of the different segments, starting with Elia Transmission. The normalized net profit of Elia Transmission increased by 17.2% at EUR 115 million. The value drivers are first elements the fair remuneration which increased by EUR 2.9 million compared to the same period last year, and this following a slight increase of the OLO, 7 basis points more in 2018 than in 2017, but more importantly, an increase in equity due to the reservation of part of our net result of 2017. This reservation amounted EUR 45 million. Second, the most important contribution comes from the markup, which contributed for an amount of EUR 42.2 million, increasing by EUR 11.1 billion, as in the start of the new regulatory period in Belgium. So as -- since 2016, Elia has year-after-year realized a markup investment program. Third, we realized incentives amounting to EUR 16.4 million. This represents a decrease of EUR 1.8 million, driven by lower incentive on timely completion of the investment program, as no project was planned to be taken in operation in 2018 and lower efficiencies. Also, the results benefited from the limited damage years to electrical installation and lower regulatory settlement from prior year. This all resulted in an increased normalized return on equity of 6.5%. As no nonrecurring items were recognized in 2018, the reported net profit increased to a lesser extent, up by 11.5% to EUR 115 million.

Now focusing on the balance sheet of Elia Transmission, we see that the regulated equity, which is the basis for the calculation of the fair remuneration increased by 4.1% over 2018 at EUR 1.75 billion. All liquidity positions remain strong and enables us to finance the organic growth in Belgium. We have back-up facilities with different banks, which will come to maturity in July 2021, and which are currently undrawn. We have also a commercial paper program of EUR 350 million and currently EUR 50 million has been drawn.

Looking at the maturity of the existing bonds and loans portfolio contracted to finance the regulated activity in Belgium. We ensure to have a manageable profile, finding the right balance between going as long as possible, seeing the type of asset we own and avoiding too high refinancing risk with an average debt duration of 7 years. During the year, Elia has taken out the EUR 100 million loan it agreed with the European Investment Bank in 2017. The proceeds of this loan were used to finance the finalization of the saving project. And after year-end, Elia successfully refinanced EUR 500 million bond coming to maturity in May 2019. The coupon of this bond is of 1.375%, largely below the 5.2% of the existing bonds. The lower financial cost being fully to the benefits of the consumers in the debt pass-through system we have under the Belgium regulation.

Now let's have a look at the result of 50Hertz Transmission. You see that revenues slightly increased by 2.6%, and as you can see on the right-hand side, where we show the value drivers of the revenues, the increase is driven by higher pass-through revenues and lower investment revenues. With regard to the pass-through revenues, a new cost-sharing mechanism for this patch was agreed between the German TSOs, resulting in higher offshore cost pass-through to the customers from the 50Hertz zone. Additionally, revenues received from the balancing RAB dropped as the corresponding cost for control energy were lower than in 2017. The investment revenues dropped by EUR 26 million as the increase of the offshore and onshore remuneration amounting to EUR 31.5 million and driven by the ongoing investment program was fully offset by the lower regulatory allowance for an offshore OpEx due to the disappearance of the OpEx lump-sum. With the transition towards the cost-plus mechanism for offshore investments, only the incurred offshore cost has been accepted in 2018 compared to 3.4% OpEx lump-sum on invested capital as applied last year. And as a result, the offshore OpEx allowance decreased by EUR 57.4 million compared to 2017.

Now looking at the cost side. First, the operating cost decreased by EUR 74 million. This decrease was mainly driven by the one-off release of the provision for the legal claim easements amounting to EUR 72.1 million before tax. You will remember that this provision was established after the German unification to cover possible legal claims by landowners in the Eastern Germany. And after reassessment by management and following a tax audit, part of the provision has been released. A major portion, EUR 69 million, was already released in April and therefore, only 60% was attributable to Elia. In addition, thanks to the containment of the operating expenses, following the launch of the efficiency program already in 2017, the operational cost further decreased by EUR 2.2 million. The financing cost decreased by EUR 7 million, due to lower interest on taxes can no more default interest on the easement provision that was released. This decrease was partially offset by higher depreciation, up with EUR 11.8 million, following the commissioning of big investments like the Southwest coupling line, the North Ring and the partial commissioning of the Ostwind project in 2018.

Finally, the higher profit resulted in higher tax. With those revenues and costs, 50Hertz realized a reported net profit of EUR 237.9 million in 2018. Excluding the nonrecurring items, the normalized profit amounts to EUR 216.3 million, up with 18.5%. Those nonrecurring items mainly represent revenues linked to the partial commissioning of the Ostwind 1 project, partially offset by regulatory settlement of prior years. The normalized return on equity came in at 14.5% in Germany.

From a balance sheet perspective, the balance sheet remains strong with equity increasing by 10% as results are partially reserved within the company to contribute to the financing of the important investment program ahead of us. The liquidity position remains very strong, partly linked to the EEG business. In the EUR 1.6 billion cash position, an amount of EUR 859 million of EEG cash is included and has to be given back to the consumers. The revolving credit facilities and the bank overdraft facilities remain fully undrawn. In 2018, no debt capital transaction has taken place. The investment program has been fully financed from operating cash flow. The average weighted debt duration is slightly less than 7 years, and the average cost of debt amounts to 2.1%.

In terms of rating. The rating of Eurogrid was reconfirmed as Baa1 stable outlook by Moody's. Also S&P published in the second half of 2018 rating on Eurogrid confirming a BBB+ rating with stable outlook.

Now like I mentioned, when introducing the Group result, we have setup a new segment reporting in order to separate the nonregulated activities from the regulated activities. This segment regroups all the nonregulated activities, like already mentioned. So the financing on Eurogrid, EGI and Nemo Link.

As a reminder, the lending cost related to the acquisition of this additional share are regarded as nonregulated and therefore, not covered by the tariff charged to the customers. The hybrid bond has no profit impact, as it's equity accounted under IFRS, due to its perpetual nature and the issuers ability to optionally defer the coupons.

So looking at the result, we see that the normalized net loss increased to EUR 7.8 million. First, the acquisition of the additional stake in Eurogrid was fully financed by debt. Consequently, the financing cost increased by EUR 3.5 million. Also the result of EGI decreased by EUR 0.5 million as less owner engineering services were rendered. And finally, as Nemo Link was not yet in operation in 2018, the net contribution from Nemo Link was limited to EUR 0.7 million.

Taking into account nonrecurring items. The reported net loss totaled EUR 3.5 million as the reevaluation to fair value of the Group's initial participation in Eurogrid for EUR 9.2 million was partially offset by acquisition-related expenses and nonrecurrent financing energy cost, totaling EUR 4.9 million. And last but not least, once again, we will propose to the general assembly an increasing dividend amounting to EUR 1.66 per share. It represents an increase of around 2.5%, slightly higher than inflation, and which takes into consideration the good result, but also the CapEx plan we have ahead of us and our commitment to execute our organic growth strategy.

And with this, I will give you the floor back for presenting the outlook and making the conclusions.

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Chris Peeters, Elia System Operator SA - CEO [3]

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Thank you, Catherine. 2018 was a very busy year, with many events and developments to be handled on top of all our usual work. We even had a capacity crisis in Belgium with the sudden and unexpected unavailability of several nuclear plants. While our people were sometimes tested by the events of the past year, their dedication gives us the confidence to continue with our transformation into an international group. This is a vital step for our Group.

Now looking at the outlook. With Nemo Link being in operation since the beginning of this year and anticipating on a possible capital increase, the Elia Group expects to realize an adjusted return on equity between 7% and 8%. Compared to the 10% realize this year, calculated on the reported results, difference is explained on the one hand by the 2% decrease in the return on equity in the new German regulatory framework and on the other hand by the absence of exceptional results budgeted at this stage.

In addition, the capital increase, if it takes place in 2019, will only be remunerated at a rate of OLO plus 70 basis points, since the new Belgium regulatory framework, providing for gearing including 40% of equity enters only into force in 2020.

The RAB of the Elia Group is expected to decrease to EUR 8.9 billion. The RAB will continue to grow with our ambitious investment plan, but the composition of the German RAB is affected by a change in regulation. With the new regulatory framework starting in 2019, the EEG and similar surcharges will no longer be accepted in the imputed balance sheet. In 2018, this position represented EUR 889.1 million in the RAB on a 100% basis. Nevertheless, the result impact will be limited as the EEG phase out from the RAB is compensated by specific remuneration scheme acknowledged by the regulator. This compensation will represent a compensation that equals 50% of the remuneration that would be due for the full acceptance of these receivables. This return is based on the underlying performance of both Elia Transmission and 50Hertz Transmission. In Belgium, we remain confident to achieve a regulated return between 5% and 6%, assuming a stable trend in the Belgium 10-year OLO, no changes to the regulatory framework and a possible capital increase. The investment program will be further increased to approximately EUR 700 million with a view in further upgrading and expanding the grid. The Modular Offshore Grid is planned to be commissioned in the second half of 2019 and will create further opportunities for development of renewable energy in the North Sea.

In Germany, we start the first year of the third regulatory period, driven by the lower return on equity, set by the German regulator, we remain confident in our ability to achieve a return between 80% and 10%. 50Hertz Transmission intends to invest approximately EUR 420 million in 2019.

Looking beyond 2019, Elia has the following investment program in Belgium, we plan to invest EUR 2.2 billion for the next 5 years. In 2019, the focus will be on the finalization of the strategic markup investments like ALEGrO and the Modular Offshore Grid. In 2020 to 2022, the CapEx is decreasing and relating to investments in -- to reinforce the existing corridors to absorb the higher imports resulting from the nuclear phaseout combined with reinforcing the existing grid. Further integration of European market and security of supply will drive our investment program, as from 2023, with projects such as a second Modular Offshore Grid. In Germany, the investment program remains driven by both onshore and offshore projects in order to realize the energy vendor. Over the next 5 years, we plan to invest EUR 3.4 billion. In 2019, there is small drop in the CapEx as the Ostwind 1 project, as already mentioned, is almost finished and the major expenditures for the Ostwind 2 project will start in the second half of the year. However, on a 5-year basis, investments will further increase and this in the first year is driven by the integration of renewables and later on by the interconnection to these renewables with the main consumption center in the south with these used (inaudible) link.

This is the last slide of today's presentation. We like to share the milestone moments for financial communication in 2019.

And that brings us to the Q&A. Do you have any questions? Oh, many questions already. Go ahead.

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Questions and Answers

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [1]

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Bart Cuypers, KBC Securities. The press release and you also talked about it, an update on the productivity and efficiency factor in Germany. Is there, at this point, also an update on the legal case from the German TSOs and DSOs concerning the lowering of the allowed return. That was my first question. Secondly, recently, the German TSOs also announced latest grids development plan with EUR 52 billion by 2030 to be invested. Naturally, this is for entirety of Germany and also, I assume, it still has to be talked through with the regulator. But with this ballpark figure, is it not conservative to assume that after the next 5 years, the CapEx program of EUR 3.4 billion, that the next 5 years will only be a continuation of that budget?

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Catherine Vandenborre, Elia System Operator SA - CFO [2]

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So on your first question, regarding the legal case. No, currently there is no new information to be mentioned regarding the decision on the return for Germany. Currently, and based on the information we have, we expect the judgment to be taken at the end of 2019, maybe in 2020. So that's the first element. Second element on the grid development plan. So it's indeed something which has been published. First element is that, I think, the total duration of this investment plan is more than 10 years. Also, including investment, which have already been realized in the past. So that's the first element. Second element, on the contrary, it doesn't include investment foreseen for offshore connections, so the connection between the onshore grid and the offshore wind farms. Third element, we only publish information on our investment for the next 5 years. But that's true and I think that's something that Chris already mentioned that the energy transition is something that is ongoing that emission targets have been set for reduction of CO2 emission for 2030 and already ahead for 2050. And so our expectation is indeed that investment will continue in the grid infrastructure in Germany after the 5-year period that we published. At which pace exactly? It's too early to say. It's impossible, for the time being, to give precise figures for the horizon after the next 5 years.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [3]

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Bart Jooris, Degroof Petercam. Few questions from my side. Firstly, you mentioned in the Belgium guidance the capital increase. Could you give us an update on the amount of the capital increase you are looking at for this moment? And secondly, if we look at the last 5 years of German regulation, and if you see your results you, except for one year, always exceeded the guidance. I assume this year because of the legal provision that that's really a one-off. Do you see possibilities there to exceed the guidance further and for those amounts? And then thirdly, we have, in Belgium, the whole discussion going on of, let's say, support for gas plants to step out of the nuclear electricity production. Is something of that already included in your investment plan? And if not, would that change your investment plan in the coming 5 years?

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Catherine Vandenborre, Elia System Operator SA - CFO [4]

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Okay. So thank you for your questions. So first, regarding the capital increase. First element is that, to be totally clear, no decision has been taken formally yet now. So the capital increase is a decision that needs to be taken by the competent bodies, being the general assembly, ordinary or extraordinary general assembly. It's still our intention to do capital increase in 2019. The amount that we are currently envisaging, but to be, of course, discuss later and possibly approved by the General Assembly, is around EUR 400 million plus/minus EUR 50 million. So around EUR 350 million to EUR 450 million of capital increase. Regarding the German guidance, 2 elements: first, compare to what we have seen in the past, there is a significant change in the offshore regime. A portion of our outperformance came from -- outperformance on the OpEx in the offshore operations with the evolution towards a cost-plus system. This outperformance will not be possible anymore, that's the first element. Second element, by definition, in the guidance, we do not include one-off elements or exceptional elements. And of course, if the -- those elements, those nonrecurring items would have to occur in 2019. They will come on top of the foreseen normalized result, but that's not something that we include in the guidance.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [5]

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If I can do a little follow up, what did you include for in ROE on Nemo on this?

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Catherine Vandenborre, Elia System Operator SA - CFO [6]

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For Nemo Link, for 2019, Nemo has not yet a full year of operation. So we include partially Nemo Link in the guidance. And we expect a contribution of Nemo Link of around 6% in the total net profit of the Group.

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Chris Peeters, Elia System Operator SA - CEO [7]

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So on the capacity mechanism that is discussed these days and that you see often mentioned in the press. First of all, it's a capacity mechanism so it's not a purely gas plant driven mechanism, so it's on technology neutral basis. For Elia, it has relatively little impact on the investment plans. So our network has been prepared for the nuclear phaseout that is upcoming and the mechanism is actually focused on replacing some of the nuclear capacity going forward. So the only impact that we could see has to do with potential connection of these plans. And what we see happening these days is that we have from our side, and [Flux] from their side have already looked for, in case it would be gas plants, where they would be situated in a way that is a relatively small investment compared to the overall investments that we are doing. So in that perspective, there might be some slight differences but not from the order of magnitude that would substantially change our plans.

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Catherine Vandenborre, Elia System Operator SA - CFO [8]

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If there are no questions anymore in the room, we may ask whether there are questions from people being on the phone. You have still one? Okay. Sorry, so...

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Unidentified Analyst, [9]

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Yes, maybe as it is being really recent right now, Brexit. Your risk exposed to that. Of course, the agreement is in place between U.K. and Belgium regulated right now. So even in case in Brexit, I assume that does not change. So it's only on the evolution of the energy prices those are between U.K. and Belgium. How do you assess, specifically, your risk towards Brexit in that regard?

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Catherine Vandenborre, Elia System Operator SA - CFO [10]

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Well, you are right. First element is that the Nemo Link regulation is set in a contract between Nemo Link, CREG and Ofgem. So we expect, even in case of hard Brexit that the contract will remain in place. Second element, also, like you mentioned, it's not because the risk or there would be a hard Brexit. Brexit that the electricity will stop flowing between the continents and U.K. And of course, there will be a remuneration for this equity. So knowing that the contract would remain in place, it means that the Cap/Floor should remain in place. But that within this Cap/Floor, in case of hard Brexit we could have a change in the way the cross-border capacity is allocated. Currently we do what we call an implicit allocation of this cross-border capacity, meaning that the cross-border capacity is sold together with the commodity to the market. In case of hard Brexit, we'll have to change these allocation methods to evolve to us what we called an explicit allocation, meaning that the commodity and the cross-border capacity are sold separately, the cross-border capacity being sold through auctions. So that's basically the change that we could see, but in terms of financials impact, we don't expect any material impact linked to a possible change from an implicit auctioning mechanism to an explicit auctioning mechanism.

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Unidentified Analyst, [11]

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And Forex?

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Catherine Vandenborre, Elia System Operator SA - CFO [12]

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Forex is something that is neutral because most of the investment is done in euro. The only impact that we could have in terms of Forex is a possible evolution in terms of the Cap/Floor, depending on the amount that would be -- to have to be taken into consideration.

You can open the floor for the questions from the webcast.

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Operator [13]

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There is a question from Ms. (inaudible), Columbia Threadneedle Investments.

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Unidentified Analyst, [14]

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I just had a question about the RAB remuneration in Germany. I -- two parts of this question. Can I just confirm what's the RAB for Elia? So what's the RAB in Belgium and the RAB in Germany is? And secondly, how does that fall in RAB? How does that remuneration actually takes place?

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Catherine Vandenborre, Elia System Operator SA - CFO [15]

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So I'm not sure to have fully catched your question. And so -- what I understood is, first element that you were asking on the RAB amounts in Belgium and in Germany. But I don't know whether if it's in the outlook or in the present situation. I suppose it's more in the outlook because in the current situation you have the information in the presentation. I don't know the page exactly, but there is a graph where we present the RAB, and you see in blue the portion for Germany and in yellow the portion for Belgium. Knowing that on this graph what we represent is 80% of the RAB of 50Hertz. Now in terms of outlook, what we expect is a growth of the RAB in Belgium during 2019 of approximately 6%. For the RAB of Germany, it's a little bit more complicated due to the change in the EEG mechanism that has been decided by the regulator. And so basically, if we take into account the impact of this change, we will see a drop of the RAB in Germany of approximately EUR 1 billion comparing to the value at the end of 2018. The RAB at the beginning of 2019 should decrease with approximately EUR 1 billion for being set at EUR 5.1 billion for 100% of Eurogrid. That being said, like I mentioned, the -- this effect of the decrease of the RAB, will from a cash flow and net profit perspective, be partially compensated by the mechanism that the regulator has put in place, and by which 50% of the amount, which would have been remunerated in the past system will now be remunerated for a compensation mechanism outside of the RAB. And this represents approximately EUR 4.7 million on a yearly basis before tax.

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Unidentified Analyst, [16]

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And does that only cover -- I guess, what I'm trying to ask is that -- does that only cover half the RAB that's lost?

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Catherine Vandenborre, Elia System Operator SA - CFO [17]

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Yes. You are right. But the mechanism is set in such a way that for the remuneration of the EEG. It's not the total amount that was taken into consideration by the regulator. There was, what's it's called in Germany, a symmetrical cuts between the assets and the liabilities. Leading to the way that it was not the full amounts of EEG in the base year, which would have led to a remuneration. And from there, that I am specifically mentioning the amounts of EUR 4.7 million before tax to avoid any possible misleading interpretation.

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Operator [18]

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There are no further questions from the call.

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Catherine Vandenborre, Elia System Operator SA - CFO [19]

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Okay. So if there are no further questions, we thank you very much for your presence today. And we wish you the best for the rest of the day.

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Chris Peeters, Elia System Operator SA - CEO [20]

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Thank you.

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Catherine Vandenborre, Elia System Operator SA - CFO [21]

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Thank you.