U.S. Markets open in 3 hrs 16 mins

Edited Transcript of ELI.BR earnings conference call or presentation 27-Jul-18 8:00am GMT

Half Year 2018 Elia System Operator NV Earnings Call

Brussels Jul 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Elia System Operator NV earnings conference call or presentation Friday, July 27, 2018 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Catherine Vandenborre

Elia System Operator SA - CFO

================================================================================

Conference Call Participants

================================================================================

* Bart Cuypers

KBC Securities NV, Research Division - Financial Analyst

* Bart Jooris

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Elia half year analyst call. I'm pleased to present Ms. Catherine Vandenborre, CFO of the Elia Group. (Operator Instructions) I would like to hand over to Catherine Vandenborre. Go ahead please, ma'am.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. It's my pleasure to welcome you to half year result 2018 conference call. And I'm here with Yannick Dekoninck, our Investor Relation Manager; and Chris Peeters, our CEO.

So let's start with an overview of our general performance for the first 6 months of 2018. First, we have invested EUR 389 million in order to further develop the electricity infrastructure of the future, integrating an increasing number of renewable generation capacity and further interconnecting region with a view to strengthening electricity exchange here.

In Belgium, we further accelerated to investment to a net amount of EUR 234 million or 22%, up compared to last year. In Germany, we have invested to EUR 104 million, which is 7% up compared to prior year.

Second, the net profit attributable to Elia increased by 38.6% from EUR 102 million to EUR 142.2 million. This is a result of first, the acquisition of an additional 20% stake in Eurogrid; Second, a strongly operational performance, both in Belgium and Germany; and third, the release of a legal claim provision in Germany.

Third, we also succeeded in maintaining grid reliability at a very high level of 99.998% to the benefits of more than 30 million consumers.

Now looking at the main highlights for the first half of 2018. Relatively, the acquisition -- [end of appeal] for additional 20% stake in Eurogrid International, the holding company of 50Hertz has been a key event. It allowed us to take full control of Eurogrid and to fully consolidate it in the group figures. The transaction represent an important step in Elia's development, strengthening our presence in the group's growth engine and increasing our critical mass to innovate and build the cost [effective] tools necessary to succeed in every condition. We will come back on the precise financial consequences of the transaction later on.

Also this morning, we announced that the Germany state-owned bank KfW will become all new partner in 50Hertz. The change in Eurogrid shareholding is consequence of IFM's decision to sale it's 20% stake in Eurogrid, followed by the execution of claims and rights on this 20% and an irrevocable agreement to sell this 20% stake of KfW at the same financial conditions. With KfW as a partner in Eurogrid, we've enforced the Germany-Belgium bench in critical infrastructure. More detail on this transaction will also be presented later on.

Besides to those non-organic evolutions, we also made significant progress on executing all the key areas of our strategy. First, with regards to market development, Elia Group signed an agreement with system operator TenneT, RTE and Swissgrid to create a reflection group on the market model of the future European energy system. The main purpose is here to contribute to a share understanding of the most promising market solutions for reliable, sustainable and affordable energy system for the future.

Also, a first shared data hub for the Belgian grid was launched in early 2018. The data hub is a result of a close cooperation between Elia and the Belgium distribution system operators. The data hub will promote flexibility of the electricity market to maintain the balance between supply and demand at the best price at all times. It is an example of efficient collaboration between Elia and the Belgian DSOs, collaboration that will also be essential for ensuring a successful energy condition.

From an operational point view, the investments in the grid infrastructure are right on track so far. In Belgium, the investment program is driven by the realization of the markup CapEx and the upgrade or the replacement of installations. Also, the name of projects and the Modular Offshore Grid with planned permission in 2019 are progressing.

In Germany, investment program is currently on track with the budget. In addition, the operational efficiency remains strong. The new infrastructure projects like the South-West Coupling Line which was taken in operation in the second half of 2017, led to lower congestion issues in the grid and thus a considerable saving in the dispatching cost.

With a high level of reliability of 99.998%, the Elia Group's grid is once again one of the most reliable in Europe. In addition, since the acquisition of the initial 20% in Eurogrid, we have made good progress on strengthening the collaboration between Elia and 50Hertz. In this respect, we mainly focus on defining new and high standard of excellence for improving of CapEx management, in developing synergies in terms of IT and procurement and developing talent management within the group.

In terms of regulatory development, end of June, the Belgium regulator CREG confirmed the new tariff methodology that will be applicable for the period 2020-2023. The regulator opted for stability with the new tariff methodology of holding line with the general principals applicable to grid. The treatment of the non-regulated activities is subject to ongoing discussions. The Belgian regulatory framework remains based on a cost base model with coverage of all reasonable costs including a fair remuneration and completed by various incentives, the achievement of which remaining linked to operational objectives.

Figures, the fair remuneration remains based on actual equity and the embedded debt principal is confirmed with cost of debt coverage by the debts. And finally, there is risk on volume. The revenue difference caused by the difference in volumes between budgets and actuals are passed on to the next regulatory period.

Now there are some changes in the new regulatory framework and the main changes are related to a revised computation of the equity-based remuneration. The risk-free rate will be fixed ex-ante at 2.40% -- 2-4-0 for the whole period and represent equivalent average tenure for the year. Also, the regulatory gearing of 33% will increase of 30%, resulting in a possible strengthening of the balance sheet.

Finally, the markup compensation will lead up to you as most of the strategic interconnection project will be commissioned by 2020 and replaced by higher fair remuneration following the revised computation and additional incentives covering a wide range of regulated activities in Belgium.

In Germany, the framework applicable from 2019 is not yet fully defined by the regulator. Like you know, the regulatory sets the return on equity applicable from 2019 to 6.91% before tax. In the meantime, the cost assessment file for this year of 2017 -- sorry, 2016 is currently reviewed by the regulator. Also, the discussion on the efficiency and productivity structure are still ongoing. The outcome of the discussions is expected in the course of the second half of the year.

With the regulatory allowance of the offshore OpEx cost, we are currently in a transition to more of a cost-plus mechanism for offshore OpEx that will be applicable as from 2018.

Finally, on the financial side, a [straight] result has been realized during the first half of 2018. The net profit applicable to Elia group increased with EUR 39.6 million (sic) [39.2%] to EUR 142.2 million (sic) [EUR 142.7 million] and we will come back later on the financial. But before, it's maybe good to briefly keep some features of the transaction as this significantly impacted the half year results.

For the additional stake of Eurogrid, Elia paid IFM price of EUR 976.5 million increased by EUR 12.2 million of interest. The acquisition of closed on the 26th of April, bringing the ownership of Eurogrid to 80% and switching from a join control to full control. As from the 1st of May, Eurogrid and its affiliates are fully consolidated. From the 1st January to end of April the equity method is used.

The acquisition is currently financed by a bridge loan of EUR 968 million. The bridge loan has a maturity of 12 months extendable twice for further of 6 months. We intent to replace this bridge loan by issuing a mix of EUR 700 hybrid bonds and a EUR 300 senior bonds during the second half of this year depending on market conditions. In order to secure the low-interest rates environment, the mid-swap rate linked to the takeout financing is already fully hedged per half year.

Following the acquisition, Standard & Poor's confirmed the rating to a manageable B+, which is stable outlook. The transaction is honored affecting the financing of the regulated activities nor -- or investment plans in both Belgium and Germany.

The acquisition represented a unique opportunity for Elia and this is for various reasons. From a strategic perspective, the acquisition strengthens Elia's position in Europe through granting control of second major network. Also, 50Hertz represent assets with long-term organic opportunities driven by energy and wind and supported by a target of 65% of renewable energy production by 2013.

From financial perspective, the transaction is value enhancing. As announced on the day of the acquisition, and illustrated by half year result, the acquisition is accretive from the earnings and cash perspective. By increasing our stake, we increased our share in markets with a well regulatory framework with higher return than in Belgium. Also, we are convinced that enforcing our position in 50Hertz, we will serve the interest of the consumers in a context of European integration.

Regarding the second tranche, we announced this morning that the state-owned German bank KfW will become our new partner in Eurogrid after Elia we will have acquired -- sold the Eurogrid shares. The change in Eurogrid shareholding follow notification received from IFM of an agreement with a third party for the acquisition of IFM's remaining 20% stake in Eurogrid.

After carefully analyzing the transaction from the strategic and financial point of view, and considering we always achieved our objective of full control in order to realize the fullest potential for growth strategy, we were not interested in earning 100% of Eurogrid.

After contacts with different stakeholders, it was decided to execute all claims and rights followed by a condition on [sale] of this 20% stake to the German bank KfW. These transfers occur at identical financial conditions. The closing of the transaction is expected to be finalized in the next week after which KfW will earn 20% of the shares in Eurogrid and Elia remains in full control with the shareholding of 80%. Considering that this transaction is completely neutral for Elia, the current rating being a BBB+ stable outlook remains unchanged. Also organically, a lot of progress has been made with the execution our CapEx program in order to deliver the transmission infrastructure of this merger.

In Belgium, substantial progress was made on the number of strategic investment project, and let's highlight some key milestones. First, on the ALEGrO project, interconnector between Belgium and Germany, we have received all permits and authorizations in late 2017 and infrastructure rollouts have started. They are expected to take 2 years with the commissioning plans in 2020.

Second, the Nemo Link project, interconnector with the U.K., showed a good progress with the commissioning still planned in the first quarter of 2019, providing there are new technical setbacks. The converter stations at both sides of the channel will soon be connected to the grid. The last section of the subsea cable is planned to be connected to the land cable in Belgium in September. Energizing test of the interconnector is planned for the last quarter of the year. In the meantime, the project partners are also making good headway in preparing the business side of things by establishing the required contractual frameworks and commercial agreements and also developing and testing essential IT platforms.

Finally, also the Modular Offshore Grid. The MOG is progressing well. In the course of the first half of the year, all main construction contracts has been awarded. The implementation of the project is on schedule and aim is to go live by the end of 2019 and become fully operation in 2020.

With regards to the offshore project Ostwind 1 in Germany, we are progressing well. The first and second cables are now in test operation mode. And since good progress has been made only on laying the third and final cable system, the project is well on track to become fully operational by its biding completion date.

Work on the Kriegers Flak Combined Grid Solution project is progressing well also. This project entails constructing the first interconnector between 2 national offshore wind farms with a planned transfer capacity of 400 megawatts. In the course of the year, the offshore platforms were successfully installed. The laying and pulling of the 2 interconnector cables was successfully concluded recently. The interconnector's first energization is scheduled for the end of this year followed by a trial operation period beginning in 2019.

Last, following a wind tender issued in April. The BNetzA allocated 733-megawatt capacity to 3 new wind farms in the Baltic Sea. With this Ostwind 2 project, 50Hertz will connect the new wind farms to the mainland by installing 3 cable systems. The tender for manufacturing, laying and installing the cables has been launched and good progress is being made with other preparatory work, such as seabed survey and UXO clearance. A final decision on the investment is scheduled for the end of the year.

Now, going to the results of the first half of 2018. As already mentioned, the growth normalized net profit increased by 39.2% compared to last year at EUR 142.7 million. This is a combined result of solid performance in Belgium and Germany over the first half year supported by the release of a legal position in Germany and direct impact of the acquisition of the additional 20% stake in Eurogrid leading a change of consolidation. Considering the higher return generated in Germany, Eurogrid is now contributing for 63% to the group result.

If we take into account the nonrecurring elements, the reported net profit of the Elia Group increased to EUR 147.6 million. Non-controlling interest has been recognized amounting to EUR 5.4 million due to the 2 month of full consolidation of Eurogrid. The net profit attributable to Elia increased by 38.6% to EUR 142.2 million.

As mentioned, the financial of the first semester has strongly impacted by the acquisition and -- sorry, and the change in consolidation of Eurogrid. Therefore, purely for comparison purposes, we had rebased the key figures of 2017 having the acquisition and changing consolidation would have occurred in 2017, meaning, full months of equity method at 60% and the last 2 months using full consolidation at 80% ownership.

Rebased figures are only presented here a basis for accessing growth rates on a comparable basis and not have the measure of all pro forma financial performance. In appendix, you can find the definition of the rebased figures and also the full details.

First semester EBIT increased by 36.3% compared to the same period in prior year. This increase is mainly driven by the full consolidation of Eurogrid as of May compared to the 60% result contribution last year. On a rebased basis, the EBIT increased by 13.3% driven by a strong operational performance in Germany, including the release of legal claim provision in April, contributing for EUR 29.2 million to the Group's EBIT. The EBIT at the level of Elia entities slightly decreased due to higher non-regulated costs and the lower revenues from Elia Grid International.

The normalized net profit of the Group increased by 39.2% to EUR 142.7 million. Even on a rebased basis, and just ignoring the consolidation impact, the normalized net profit increased by 30.8% and is driven by organic growth in Belgium.

As for half year, the Elia Group carried a total net financial debt slightly above EUR 4.8 billion. The increase in the net debt due to 2 elements. First, the change in consolidation method of Eurogrid which considered more than EUR 1 billion to the net debt. And second, the bridge financing contracted to finance the acquisition contributing for another EUR 1 billion to the net debt. As a result, the leverage came in at 0.17. At entity level, and excluding the bridge financing, the net debt of Elia increased slightly. The CapEx program has mainly been financed by cash flow from operating activities and working capital movements.

In addition, Elia used EUR 50 million year of its commercial paper program. No long-term financial debt has been issued in the first half of the year to finance the Belgian related activities.

At the level of Eurogrid, the first half of the year for positive free cash flow of EUR 402 million due to the positive EEG cash flow and also strong operational cash flow exceeding investment payouts. Consequently, the net financial debt decreased to an amount slightly above EUR 1 billion.

Now let's take a more detailed look at the underlying performance of the different segments, starting with Elia. The normalized net profit increased by 3.8% to EUR 53.3 million, driven by a higher fair remuneration and the ongoing realization of all investment program.

In more details, the key drivers are. First, the fair remuneration increased by EUR 2.7 million compared to same period last year, benefiting from an increase in average OLO, leading to an increase of the remunerated equity. [European average] went from 0.68% on average in the first semester of 2017 to 0.87% on average in the same period of 2018. Second, the markups contributed for the amount of EUR 18.1 million, increasing by EUR 3.7 million, thanks to the full realization of the markup investments since the start of the tariff period in 2016 and a strong progress realized on those strategic investments during the first half of 2018. Also for the intermediate, we remain confident on the full realization of the market investment of EUR 221 million in total.

On the other side, we realized incentives amounting to EUR 9.4 million. This represent a decreased of EUR 1.8 million driven by a higher average tax rate compared to last year. And as a reminder, I recall that tax are passed through under Belgian regulatory regime except for the calculation of incentives which are tax sensitive.

And secondly, let me explain the decrease is to lower the performance on the incentive linked to efficiency, both only partially offset by good operational performance on all the values -- incentives like welfare and interconnection capacity. Also Elia Grid International recognized a loss of EUR 1.2 million since revenue declined as fewer owner engineering and consultancy services were delivered compared to the same period last year.

Finally, the result is also impacted by the financial cost relating to the acquisition of Eurogrid, which is regarded as non-related financing and therefore not impacting the related tariff. [Eurogrid], the acquisition has been financed by bridge loan resulting in a net financial cost amounting to EUR 1.1 million as of end of June.

The reported net profit increased more pronounced by 9.1% to EUR 56.0 million considering a non-recurring profit of EUR 2.7 million linked to the acquisition of the additional stake in Eurogrid. First, a financial non-recurring gains was recorded of EUR 9.2 million linked to the remeasurement to fair value of the group's initial 60% interest in Eurogrid. This was partially offset by acquisition-related expenses for legal and advisory services of EUR 2.6 million.

Second, in order to secure the low-interest rate environment, the mid-swap rates linked to both the hybrid and senior debt has been fully hedged, resulting in a temporary non-recurring financial cost of EUR 3.9 million, recognized in income statement for the hybrid bond and EUR 4.9 million in other comprehensive income for the senior bonds.

From balance sheet perspective, we see that the regulated equity, which is a basis for the calculation of fair remuneration, remains stable at last year. On the other hand, the other hand the non-regulated equity slightly decreased due to the payment in June of the 2017 dividend, only partially compensated by the [Elia share] result.

Our liquidity position remains strong to finance the investment program ahead of us. Elia has 4, [EUR 150 million] backup facilities, with different banks coming to maturity in July 2021. Those are guarantees undrawn. We also have EUR 350 million commercial paper program in place in guarantee EUR 50 million has been drawn. Finally, we have a 7-year loan contract of EUR 100 million with the European Investment Bank and we expect to use this loan in the second half of the year, and use the proceeds to finance the finalization of the Stevin project.

Again the bridge loan contracted for the bond financing the 20% stake in Eurogrid, it has maturity of 12 months. We intend to replace the bridge loan, during the second half of 2018 depending on market condition and our rating issued by S&P is stable a BBB+.

Now let's have a look at the result in Germany. Revenues have decreased by 12.2%. And as you can see, on the right-hand side, the decreased is driven by lower pass-through revenue and lower investment revenues. With regard to the pass-through revenue, a new cost-sharing mechanism for redispatch was agreed between the German TSOs, while the competition of the southwest coupling line reduced the requirement of redispatch measures. Consequently, redispatch volume could be further reduced, leading to lower cost and consequently revenues for 50Hertz. Additionally, revenues received from the groups dropped, as the corresponding cost for control energy were lower than in the first half of 2017.

The onshore and offshore investment revenues dropped by EUR 14.5 million as the increase of the onshore and offshore remuneration emerging to EUR 14.1 million and driven by the ongoing investment program, was fully offset by a lower regulatory allowance for offshore OpEx. With the transition towards a cost-plus mechanism for offshore investment as from 2019, the 3.4% lump-sum for 2018 has not been confirmed by the regulatory yet and there is a strong conviction that only the incurred offshore cost will be accepted also for the year and that compares to the 3.4% OpEx lump-sum on invested capital as applied last year. As result, the offshore OpEx allowance decreased by EUR 28.6 million compared to prior year.

As indicated on the right-hand side as well, you'll see what those revenues are covering. First, the operating cost decreased by EUR 79 million. This decrease was mainly driven by the release of provision for legal claim easements, amounting to EUR 69.2 million before tax. The provision was established after the German unification to cover possible legal claims by landowners in Eastern Germany.

After a reassessment, following a tax audit, part of the provision has been released. As the position was released before the acquisition of the 20% stake, area profit benefit for 60% of the release. In addition, thanks to the containment of operating expenses following the launch of an efficiency program last year, the operational cost further decreased by EUR 8.5 million. This decrease was partly offset by higher depreciation, up with EUR 5.5 million from the commissioning of the southwest coupling line and the North Ring in the second half of last year and partly offset by lower financial cost.

Finally, the higher profit resulted in higher taxes. With those revenues and costs, 50Hertz realized a reported net profit of EUR 133.9 million over the first half of 2018. Excluding the nonrecurring items, the normalized net profits amounted to about EUR 132.4 million, up by 55.3%. Those nonrecurring items are very limited and consisting regulatory settlements from previous year.

From balance sheet perspective, the equity has increased as a result, or partly kept within the company to contribute to the financing of important investment programs. The liquidity position remains very strong, partly linked to the EEG business. In the EUR 1.8 billion cash position, an amount of EUR 954 million of EEG cash is included and has to be given back to the consumers.

The revolving credit facility and the bank overdraft facility remains fully undrawn. The average cost of debts amounts to 2.1% In the first half of 2018, no debt capital transaction has taken place, and the investment program has been fully financed from operational cash flow.

Following the acquisition of the additional stake in Eurogrid, Moody's has put Eurogrid under review. With Elia obtaining full control over Eurogrid, Moody's is currently evaluating whether Eurogrid has sufficient contractual and functioning in place to be regarded as standalone entity or whether the consolidated credit quality of the Elia Group may constraint Eurogrid's credit quality. The outcome of Moody's credit rating review is expected in the beginning of August.

Finally, regarding to guidance. In Belgium, the implementation of our investment plan is progressing well, so assuming a stable trends in the Belgian 10-year OLO, we can retain a positive outlook for all 2018 results with expected regulated return slightly above the one of 2017, despite the change in accounting treatment for customer contributions considering the adoption of IFRS 15.

Having invested EUR 234 million in the first 6 months of the year, with good progress on strategic interconnection projects like Brabo, ALEGrO, but Nemo and MOG, we expect our total investments being around EUR 630 million for this year as a whole.

The forecast for Germany are positive. The lower offshore OpEx remuneration due to a transition towards a cost-plus mechanism is more than offset by the reversal of the legal claim provision and a stronger operational performance.

As a result, we are confident that we will achieve a return on equity in the upper end of the targeted 10% to 12% range. With capital expenditures of EUR 104 million in the first 6 months of 2018, we remain good on track to achieve the announced investment program of EUR 470 million for the full year of 2018.

As already mentioned, in the second half of the year, we intend to replace the current bridge loan by issuing a mix of a hybrid bonds and a senior bond. Also, the mid-swap rate for both, the hybrid bonds and the senior bonds are fully hedged. The final terms depend on market condition and will only be known at the time the take-out funding is issued.

And I open now the floor for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

The first question is from Bart Cuypers, KBC Securities.

--------------------------------------------------------------------------------

Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [2]

--------------------------------------------------------------------------------

I have 2 questions on Germany. First of all on the change in allowance of the offshore OpEx. So yes this year the transition periods, the lower allowances are almost compensated by the increasing remuneration on an offshore CapEx as well as the benefits from the cost program. Now as this is a transition period and the actual change takes effect next year, do you expect a further decrease or is it at levels as already foreseen today? And then secondly, regarding the CapEx in Germany. Yes, in Belgium, in the next 5 years there is a CapEx plan of about EUR 2.3 billion for the next 5 years. But if you have a look at the current plans for the provisioned nuclear exit that it's not expected to go down in 5 years after that. For Germany, the CapEx plan is EUR 3.3 billion for the next 5 years. So I was just wondering on what your expectations are and how that number will evolve going forward after 5 years?

--------------------------------------------------------------------------------

Catherine Vandenborre, Elia System Operator SA - CFO [3]

--------------------------------------------------------------------------------

Okay, thank you for your questions. On the lump sum, I will try to clarify as much as possible. So maybe starting from where we were until this year. Actually, for establishing the load revenue on the onshore investment, the German regulators took mainly into consideration 2 elements. The first is regulated return on the invested capital and -- like now it's currently 9.05% pretax applied to the hub. It remains unchanged into 2018. The second demand is or was lump sum for covering the OpEx. This lump sum was last year set at 3.5% of the invested capital and the difference between the lump sum and the actual being positive or negative difference was a profit or a loss element for the company. Now this percentage needs to be reconfirmed every year, but has not been reconfirmed but -- for 2018 yet. In the further regulatory framework, so the one that we'll start at from 2019, the offshore will be remunerated as a cost-plus mechanism. So it means that still rate of return on the invested capital will be applied. You know that this rate of return has been revisited by the regulator of all the investment to 6.91% pretax. And second, the OpEx will be passed through. Meaning that there is no -- there will be no lump sum anymore, but a coverage of the OpEx cost without possibility of a optimization but also we saw the risk of having the actuals above the lump sum. On the long term, we really expect the mechanism to be neutral for Eurogrid because we expected the OpEx cost to increase over the years with the aging of offshore installation and recovery of some regulatory access from the past. On the medium-term for the next regulatory period, of course, we have to wait for the full package of the regulation to precisely estimate the mix impact of all those different elements. But on the lump sum specifically, as from 2019, the cost will be passed through, so no other effects than the one we can already see in 2018. So that was for your first question. Your second question was regarding the CapEx plan in Belgium and Germany. Like you know we published only the figures for [holding] period of 5 years. Indeed we have published investments in Belgium of EUR 2.3 billion in Germany EUR 3.3 billion for the next 5 years. For Germany, we expect really the trends to continue at more or less the same level on average as what we have seen until now. Investment are driven by the energy condition and the large investments which has been seen in the past are absolutely not finished yet. In Belgium, we expect also a second wave of important investments. But these ones is not likely to come immediately in the next few years. So we are likely to have a tendency that you can already see today when we published the information on investments for the next 5 years. You see a decrease at the end of the period with investments stabilizing around EUR 300 million a year. So these trends will be continued for small period after the 5 years, and then we expect to have a second big wave of investments for meeting all the target linked to renewable energy, but also for ensuring the adequacy and security of supply in Belgium.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Bart Jooris from Degroof Petercam.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

First of all on the release of the provisions you took. You said it is part of the provision. How much provision is still left? Is there any view on -- can they be released also? On what timing could that be? Then secondly, the line was little bit bad when you talked about the German regulation. You talk about the review of the return on equity, the return on investment to 6.91%, but I thought that was rejected in court. Has that been reconfirmed in the meantime? And then secondly, could you repeat the timings you said during the call? And following on that, if the final regulation would only be known, let's say, in the first half of 2019, does that have an influence on the timing of the capital increase you were first expecting for near the end of this year, beginning next year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, thank you for your questions. So regarding the release of the provision, so indeed there is still element of provision in the Eurogrid account. It's a [EUR 15 million], EUR 1.5 million which is still in the account. But we expect to use it to cover possible claims that might be introduced, and the regime -- or at least the possibility to introduce claim at least till 2020. So still 2 years to go from now on. Second element, regarding the 6.91%. Yes, it has been rejected by court. But BNetzA introduced an appeal against the decision taken by the court. So for the time being there is no new regulatory percentage which are being defined, and this one is still the one that we considered has been applicable. There is still a possibility that it will change in the future, but nothing confirmed until now. And so for safety reason for making sure that we take into consideration, the best rates we have today is the 6.91%, which has to be considered. Next question on the timing regarding the discussion for the regulatory framework in Germany. If I understood correctly your question, you said, timing and I made the link with your past question. So I suppose it's the timing for...

--------------------------------------------------------------------------------

Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [7]

--------------------------------------------------------------------------------

Yes, you just said something about the second -- something to be announced about the second half of 2018. It was not clear on the line, sorry.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I see. So, there are still few elements to be discussed with the German regulators, namely what we call the efficiency factor and the base year cost. So what is the base for the OpEx, one element and second element, what is the efficiency applicable to the OpEx? The discussions are still ongoing and we expect to have a decision on that by the end of the year, so by the second semester of the year. Then regarding your last question, and the increase of the gearing in the Belgian regulatory framework. It might have an indeed an impact on the capital increase. We announced the capital increase of EUR 110 million in the past. So it might indeed be the opportunity to bring the equity of the regulated activity to the 40%, which would lead to higher capital increase than the one announced currently, around EUR 300 million-EUR 350 million. But no decision is taken for the time being. Of course, we will give more information once we can be more precise of that, so once a decision has been taken.

--------------------------------------------------------------------------------

Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [9]

--------------------------------------------------------------------------------

Will you wait for the capital increase until the German regulation is completely final, so even when the appeal on the return on investment has been spoken out?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, our intention is indeed to issue the capital increase as from the moment that they are -- there is enough clarity on the regulatory framework. That being said, the 6.91% can be considered as a flow. A possible order decision coming from the court decision would only improve the regulatory framework in Germany. So we would not consider this element as being key for a taking decision on timing of the capital increase.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions). Ms. Vandenborre, there are no further questions, so please continue.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So thank you very much to all of you. And I wish you a nice Friday afternoon. And for some of you being on holiday, I suppose, after this week, enjoy the summer vacation. Thank you very much. Bye, bye.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes the Elia event call. You may now disconnect your lines. Thank you, and have a nice weekend.