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Edited Transcript of ELI.BR earnings conference call or presentation 24-Feb-17 9:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Elia System Operator NV Earnings Call

Brussels Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Elia System Operator NV earnings conference call or presentation Friday, February 24, 2017 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Peeters

Elia System Operator NV - CEO

* Catherine Vandenborre

Elia System Operator NV - CFO

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Conference Call Participants

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* Bart Jooris

Degroof Petercam - Analyst

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Presentation

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

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Good morning, everybody. Welcome to this presentation of our results. We have, as always, a disclaimer that limits our liabilities. It's the same as last year. So, I'm not going to read it through.

So, what we have on the agenda today is we're first going to discuss about the achievements of Elia Group over the year 2016. The CFO will give more elaboration on the detailed financial results. And I will conclude with the outlook, and then there is some time for Q&A at the end.

So, what was the Group performance for the last year? We invested almost EUR1.2 billion, so over the last year, which is quite significant. The regulated asset base increased to EUR7.1 billion, where we announced EUR7 billion last year, so a little bit more than was announced. Normalized net profit a little bit down, but the CFO will come back. There's some effects on the base here, effects in German that play a role in this result. Dividends will move up with 2%, coming from EUR1.55 to EUR1.58 as a trust in the future and the further growth of this Company. Normalized ROE is 6.7%, and leverage ratio 0.52.

If we look at the achievements, so what you see is that, on all the investments, we made good progress as well in Germany as in Belgium, meaning that all the markup investments in Belgium are on track and realized according to plan. The same is true in Germany with a little bit of a shift in cable laying in the sea, which has an effect on the total investment amount that we have over there. Give some more details on that. Very solid operational performance if you look both in Belgium and Germany. And in terms of reliability and adequacy as well, I can think that we are proud on how the year went last year.

In Belgium, we have the new regulatory frame that started last year. And you will see that this has positive effects on the results in Belgium. In Germany, we are in the base year, so in the middle of the regulatory period where we start to look at what will be the next regulatory period. There was an agreement now by the regulator or an approval of the regulator of the regulatory return for the next period. But, there are a lot of additional details that need to be clarified in the coming two years before we have full clarity on the impact of the results of Germany after 2019.

And so, last thing is, in Germany, there has been an important change in the energy law on the renewables, which has as a consequence that there will be more investments in the Baltic Sea. And as well, there will be earlier investments in the Baltic Sea. And this has an impact on the further investments of Elia Group as we are the ones that are connecting the Baltic Sea developments towards the shore.

Financially, as always said, EUR168 million normalized result, a little bit lower than last year, mainly the combination of an improved performance in Belgium based on the better regulatory frame plus good operational performance and, in Germany, the base year effects that have a reduced effect on the results.

Proposed divided approved yesterday by the Board of Elia is EUR1.58. So, 16 of May, we will see if the general assembly will follow that advice. And the -- we did a successful market transaction in debt capital in Eurogrid GmbH over the last year.

What I would like to talk to you about is what we did this year as a new element and an important element for you to look at compared to last year. As we said last year, we're working on the strategy. That strategy has been approved mid last year. And so, I would like to give you at least some clarity on what are the most important dimensions. What are we trying to development within this Company? How do we move forward? What are the big axes of that?

So, the starting point of the strategy is one where we said there are many things happening in the energy sector, but we need to understand well which are the trends that are really relevant for eight years old, yes? We are eight years old as the core of our business. So, how do we make sure that we take the opportunity out of those fundamental trends that we see in the market?

And so, we distilled this to three, for us, fundamental trends that will change the world in the energy market, but more specifically will have as well a serious impact on the transport business in electricity.

And so, the first trend of that is the development of intermittent generation. As you know, we are a Company which is responsible for the equilibrium at each quarter of the system. If you have a highly intermittent system, this has a serious impact in the way how the system will operate. And so, our system will have to evolve to adapt to that reality.

This is a very critical trend for all TSOs. That means that the current products and reserves that we have will have to be adjusted. The way how that we have market participation, the way how we make sure that flexibility can more participate into that market are all elements where we will have to work on to make sure that this future system with more intermittency will be able to be stable and will provide stable energy to all people in Europe as we have a full interconnected system.

Second thing is the effects of decentralization, digitalization, and new players. The effects that we see there is that more and more is happening in the distribution grid. We come from a world where actually being a TSO was simple. I exaggerate a little bit. Nothing is simple. But, we had in the end a variable demand. And we had thermal power plants that we could adjust and therefore we could follow that demand, which was -- and those power plants were connected to our grid, and the distribution was basically an injection point, yes? It was a one-way connection point.

Those injection points have become actually bidirectional points into our grid. There's a lot of things happening in storage and local production over there, in CHPs that are being installed over there. And so, many of those things are even today still invisible for us. Solar panels, rooftop solar panels are completely invisible. We only see the effects of that, but we don't have an exact metering of those ones. There is not smart meters rolled out in Belgium. So, you have no real idea. You just see the consequences happening on your network.

So, it makes the task that we have much more complex, even to the point that we say, in this digitalization, we as a Company will have to pay a role to be able to still have sufficient goods forecast, to be able to sufficiently control the system and ensure that a level of reliability that's needed for a system that is well performing and ensures that, A, households can trust the system, and on the other side, companies that have production that is critical to that supply can trust that they will have the supply at any single moment.

And the third level that we see is the regionalization. The fact that we have more and more renewables actually has a very positive impact for transport companies because transport distance will go up. And this is an interesting one because most people think that transport distance will go down. They see solar panels on the roof. And they see their consumption down that roof. And they say like: Hey, we don't need this network.

What we see is fundamentally is completely the opposite. Transport distance will increase, and there will be need for more and more grid. And the reason for that is very simple. If you have renewable production, you're extremely dependent on weather conditions. And weather conditions tend to be the same in certain regions, which means that, when you have sun in Brussels, you might have sun as well in Antwerp, but not in Munich. And so, you will have to transfer energy between those two places or the other way around.

And so, the challenge will be that we have a system that supplies stable energy to all consumers in Europe, while wind will go over Europe and that we will capture that wind first in Scotland. Then we will go through the North Sea. Then we'll go to the Baltic. And if we don't have it over there, we might get sun from the salt that we pump up towards the level where people will consume it. And this is what TSOs will do. And to make that happen, we will need more infrastructure to bring this energy to those end consumers.

So, from those, let's say, trends that are fundamental and where we say we are convinced that they will continue to be there, some of them were initially driven by a willingness in Europe to go there. Some of them were driven by international agreements on reduction of carbon emission into it. But, now, we see that, even if they're -- the willingness to pay subsidies for that will go down. We see as well that technology has evolved to a level where these technologies will be self-propelling.

If we see today the costs of, for instance, offshore wind and we compare it to a newbuild nuclear plant, then you see actually that those start to become in competition. And some people even start to say, and it's a level of how much do you interpret the variability of something and the controllability of something and what is baseload versus intermittent load that you will have. But, actually, if you start to look at those costs, it will become cheaper to have offshore wind, which is not the cheapest form of the renewables, than to build a new nuclear plant.

And that means that those trends about getting carbon free will actually start to be autopropelling without a big subsidy mechanism behind it. So, even at some point, we will -- we are very close to the point where at even if subsidies would all of a sudden stop, this renewable trend, this intermittent trend will continue to be there.

And so, therefore, we're very confident that we can take these trends as realities and that we say actually building infrastructure that is ready for that, building system that is ready for that is actually a no regret for any TSO in Europe and as well for Elia Group in Germany and in Belgium.

And so, in that strategy, we said we have six axes that we need time to focus on to make sure that we are the ones that continue to be the reliable source of transporting energy, the one that is providing a system that gives equal access to all parties to use that system, to use that infrastructure. And first of all is, of course, make sure that that grid that we deliver is efficient and reliable.

So, that is an important element, of course, that if you cannot trust that, then why would I not start to have my own battery, even if it would be more expensive, or why would I not go to alternative? But, if I have a reliable grid which is efficient, it's probably the unbeatable thing against anything else.

Very simple, in the physics of a grid, you lose 2%, maximum 3%, for even very high distance in transport. On one cycle of a battery, you will at least lose 15% to 20%. So, in the physics already that you say a battery, whatever cost it has, if I could place energy from where it is produced to where it can be used immediately is always the cheapest thing you can do.

So, therefore, grids will always be the first choice in the flexibility that you need. That might be specific needs of batteries at some point of time. But, they will always be more costly than the use of the grid.

And so, in that perspective, actually, we think we have a very robust business, but we need, of course, to be sure that it's reliable and that we can ensure that it is maintained in a cost-effective way.

The second thing is we need to deliver this infrastructure. And we see that those tensions are very important. For instance, if you look in Germany, the cost of redispatch and curtailment are very high. And this is actually the cost of lack of grid. And so, there will be a society looking at us. Are those guys able to deliver at the right speed the grid of the future?

And I will come back on a couple of examples of what we're doing there. But, we're not only investing. We're also adjusting our organization to make sure that we deliver all these projects on time, on quality, on budget. That is very critical because that's what society expects from us on this dimension.

The third one that we do is what I said about the system needs to be able to use intermittency. The system needs to be able to take flexibility very deep in that. In the end, even the flexibility on your own house, where you say: The use of my boiler, I can choose over the day when I will do that, somebody needs to be able to aggregate all that flexibility and use it in the market where it can then be even balanced against intermittency of, for instance, onshore wind. And so, that is something where we have a critical role to make sure that that system evolves into that direction.

The fourth one is about cooperation to strengthen our position. And that is actually on a number of dimensions. There is a cooperation that we do on the level of politics. And on politics means -- in Belgium, it's very obvious. If you're around here, it's about the adequacy discussion that we have, the nuclear phase out. How do we get ready to that? I think the best information about how this can happen and the most neutral information on that is actually sitting in Elia.

The same on the energy [bend] in Germany. We did -- we last year issued a study on 2035. It's probably the most used study these days, even by the regulator, and seen as a reference. And we think that that's an important role that we have.

The second thing that we see is collaboration with the DSOs, the distribution people, as more is happening over there as they become to have elements in the system bringing flexibility up with congestion problems, with other potential issues they have. We need to collaborate more to make that happen.

And then the third dimension is, of course, among the TSOs, as transport distance will go out, we as well need to have better connection to each other to make sure that that transport can happen. So, that's the fourth dimension to make sure that we have an organization that is open, that can collaborate with all those different stakeholders that we have to make the full system work.

That, of course, needs a culture that is, as I said, open, that is agile. We are working in a world which is turbulent and where things can change. So, we need to be able to adjust to that reality in a high speed and as well where we empower people more. We come from an organization which is the traditional TSO organization, quite, let's say, hierarchical, centralistic way of looking at things.

If you look, the size of complexity when it goes up, you need to have more empowerment of people that they can adjust the decision making onto those -- all those microdecisions that make the real difference. And that's what we are pushing for as well in Germany as in Belgium.

And then the last one is, although we have, of course -- I mean, Elia is a fantastic growth story by itself. We will show figures like how much we will grow organically already in the future. We still think that we should look beyond that. Are there opportunities coming from the system change that we need to look at? Are there other interconnectors outside our region where we can monetize the knowledge that we have? These are all things where we look at.

EGI, you know already the story about, we would have a very [brief element]. But, these are really elements where we say we can continue to use all the knowledge, all the value that we have to monetize that in different places than the two TSOs that we have today additioned by the Nemo project fairly soon.

So, I will give a brief element of what is then behind each of those different buckets. If you look at the reliable grid, a secure grid, we say there is one first thing we need to make sure, a modern company is a safe company. And so, we launched our Go For Zero program now about, yes, almost two years ago, I think 1.5 year ago, where we first focus on the safety of our own employees.

High voltage is per definition a dangerous environment. And it will always be a dangerous environment. So, you need people that have the right method that are rightfully trained, but also a full company culture which is focused on that safety. That is what Go For Zero is about.

It is now in its second year. And we're now focusing on suppliers, contractors, DSOs, people that are working on the same sites. How do we make sure, even as those companies might not have the same standards as we have? When they will be on Elia's site, they will have to lose the same level of standards to ensure that we really go to this level of zero accidents. A modern company has zero accidents, has care for its employees, and has care for everybody who is involved with this installation.

Second thing, what we do there is, although we still see a growth for as far as we can see, so even beyond the plans that we will show you, there will be continued growth in this Company, we think that we need to be better to maintain that grid of the future. And so, the AMEX program is asset management excellence.

That is to better understand, how do you do lifecycle management over all these installations? How do you make sure that the lifecycle cost, the lifecycle reliability of those installations is optimally managed? And how do we leverage new technologies like big data, etc., in this environment to make sure that all these trends, all these correlations, that we can apply them and make sure that our intervention program is optimized on that?

Third element not shown on the picture as well is that we look at the way how we do interventions on that grid, take into account the new reality of that grid, the new reality of the grid that it is one where it's always on, so meaning interventions will become more complex. Before, you could say: Hey, there is a power station that will be in maintenance. So, everything around that we can maintain as well.

That world is soon over. The world will be -- there will always be some mill turning, some solar panel producing. And so, you will always be under tension. And so, the way how you can due interventions will become more complicated. And we need to adjust to that. All those elements are things that we have in an important transformation program in this box one.

In this box two, where we talk about infrastructure, and I said already on time, on quality, on budget, we apply the most recent and best practices coming out of other sectors in the way how you make decisions and the way how you manage portfolios, in the way how you ensure that the best know-how is there at the moment that you need to know how.

So, we implemented a new organization structure on that where we make sure that, from a management of a portfolio of small projects, we go through a very decent milestone management of large projects where a small event today can have a big impact on your CapEx program two years from now because a permit will be too late or etc. So, that's one thing that we do, implementing a stage gate, making sure that we do the right activities and check the quality of those activities early enough that risks are reduced over the time of the project.

We introduced the element of public acceptance, where we said you cannot build large infrastructure on places where you're not yet present without an extreme dialogue with the environment. We see that already in Germany, where we're a little bit ahead of that big infrastructure.

It becomes more and more complicated to build infrastructure. You all can see it on different kind of projects, have people trying to build bridges and tunnels in Antwerp or people that try to build shopping centers, how complicated it is to get things done in an environment where nobody wants things to be built.

And we have a massive infrastructure program that we have to build on places where people might not yet be ready to do so. So, we launched a massive effort on public acceptance, making sure that we start a dialogue as early as possible and that we go to co-design together with that environment so that we make sure that those people are early enough involved that they say: Hey, I understand that this needs to happen, and I understand that the solution they have found here is actually a solution where I have a win as well.

We have projects today where we see that people say: Thanks to the corridors of Elia, there is more biodiversity in my region. They manage it in a way that they gave something back, not only they paid me, but they also gave something back which is of value.

And this kind of dialogues we are engaging more and more in to make sure that that infrastructure which is absolutely needed to come to a clean energy environment in Europe, we need an infrastructure to get there in time. And so, therefore, this is a very important dimension that we take.

Then number three is about a system which gives equal access to any player which wants to monetize energy, wants to monetize the flexibility that he has, whatever that format is. Today, these are mainly suppliers that are owning power plants, that are owning windmills, that are owning photovoltaic or aggregators that are people that say: I have some demand response software that I can manage some of the demand side and that use, or I have some CHP, and I use that in a kind of virtual plan that I manage.

But, the future might be even that millions of people would like to participate on that system. And our system needs to be ready that it gives equal access to anybody who wants to participate into that energy system. Anybody who has an energy package on a location needs to be able to monetize it in the best way possible so that the consumer has the best benefit of that as well.

And that's the role of a regulated monopoly to make that happen, to ensure that this is going to happen and that this is in a system which is reliable and where we as a TSO keep that system security, meaning we are the last resort. If for whatever reason the forecast misses in the last 15 minutes, we intervene. If for any reason something goes wrong, like a big power plant goes down, we intervene and make sure that the system remains safe.

And as I said before, in a highly intermittent environment, this will become ever more complex. In an environment where you start to have HVDC installations much more involved, this will become more complex, and that is the evolutions that we do within that environment.

Then I mentioned already the reports you have seen that Elia is issuing as well in Germany as in Belgium much more reports than we did before. We came before around one report per year. Now, we're around four reports per year, something like that. And I think that the market is appreciating that a lot. We see that all reports are used in many discussions about what does the energy transition need to deliver, and how can we have the real facts of that reality and how do we [lead the] challenge?

And so, we get more and more involved in this discussion. Where does the system go? And what is the role that we have? And why does an infrastructure need to be built?

Then the performance culture, I already said our couple of elements which are important, making sure that we push decision making further down in an organization because the environment becomes more complex, making sure that we have a higher agility of the people because agility is needed in a turbulent environment, where you need to course correct while running. These are nice structures for the strategy, but there will be course corrections. And people need to be able to take initiative to make that happen.

And then the last one on growth and innovation that we do outside of the business, EGI, as you know, in the last year, we not only could launch our presence in Middle East. You know that we have a very big contract running there in Saudi Arabia. We signed an agreement with Qatar, where we hope that at least we will get in a same kind of dynamic for many years that we will have new projects coming there.

We signed a similar contract in Malaysia, still needs to start in 2017, needs to happen. We were present in Cameroon for a project. We were present in Kosovo for a project. So, EGI starts to become a stable business with a stable pipeline that, on the one hand, gives consultancy peer to peer between TSOs and, on the other hand, delivers EPC services for the in-house company.

So, a lot of that activity is in Germany today, where we build substations, 450Hertz, but as well in Belgium and in Germany, where we do third party or that otherwise would be in the TSO side and that now EGI is leveraging that knowledge so that we can grow that business further.

Next thing what we are doing there is a lot around innovation. We are looking today at a market where we say: You need not only have agile people. You also need to look at trends and make sure that you can early step into new things that are happening, like blockchain. What is blockchain going to mean for the energy market? And should we maybe do small investments to ensure that that new growth is taken up and picked up early for us?

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

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Thank you. Well, it's my great pleasure to present you the Elia Group financials for 2016. And I will start in continuation with the presentation of Chris. I will start with the CapEx, where we succeeded once again in delivering those investments which are necessary for facilitating the energy transition and maintaining a high level of security of supply.

First, in Belgium, we invested EUR440 million. It's 25% higher than what we did on the same period last year. And we invested primarily in three types of assets. First, we managed to make the full realization on time, on quality, and on budget of all so-called markup CapEx, amounting to EUR193 million, which represented 44% of all 2016 CapEx portfolio. Those markup investments, they are the ones contributing the most to the integration of the European market of electricity.

Second, we realized all-time high level of replacement investment, so replacement in our existing grids, in order to maintain a high quality of the grid and a high security of supply.

And third, we started the construction of the Nemo cable, the first subsea power cable between the UK and Belgium, the commissioning of which is still planned in the first quarter of 2019.

In Germany, we invested EUR737 million, investment needed for delivering a smooth energy transition and integrating even more new renewable energy sources. In the zone operated by 50Hertz the percentage of green production capacity is close to 50%, which is to my knowledge the highest level in Germany, but also in Europe.

Those investments in 2016 are a little bit below the plans. And we announced around EUR800 million investment in Germany. And it is almost entirely linked to one project, one offshore product called CWA, where we faced some delay in the cable laying due to weather condition. But, as the cable laying on the project is not on the critical path of the project as such, the commissioning date is still unchanged and remain planned in 2018.

Now, those important investments lead to an increase in our regulated asset base, amounting to EUR400 million compared to 2015. And over the last five years, the RAB growth amounts to, on average, 6.1%, witnessing the strategy of organic growth, we are currently focusing on at Elia Group, and that we will pursue over the next years.

The RAB at the end of 2016 amounts to EUR7.1 billion, and includes 60% of the 50Hertz RAB, which is the source of the RAB growth. Despite investment that we have realized in Belgium, the RAB remained there stable as a result of important working capital movements.

And those movements are due to, first, an increase in trade payables at year end and, second, temporary regulatory liabilities to the settlement of our tax file, leading to 2016 tariff excess which have to be given back to other customers in application of the cost-plus regulatory model we are operating in. And as already mentioned, compared to the plan, the Group RAB is a little bit higher, EUR100 million higher, than foreseen.

Now, let's have a look at the results. We can say that we are posting once again a solid Group normalized net profit, decreasing by 4.4% compared to last year at EUR168 million. The decrease is driven by the drop in German result, which has been well counterbalanced by increased Belgian results, thanks to strong operational year and a high investment level. This represents a normalized return on equity of 6.7%. And if we take into account the nonrecurring elements, the reported net profit amounts to EUR179.8 million in 2016.

On a reported Group balance sheet perspective, we see an improvement of our metrics, witnessing our willingness to keep balances to finance the further growth of Elia Group. First, we have a slight decrease of our net debt position, and this despite the important investment that we have realized. This is primarily a result of the positive settlement of the fiscal claim, which resulted in a cash inflow of EUR146.5 million. And this amount is included on the chart in the other category.

Second, the leverage position has improved following the repayment of a bond that came to maturity in April and which was already refinanced by a bond that we contracted in 2015, taking advantage of very low interest rates.

And as a consequence of the refinancing at attractive financial condition, the average cost of debt also decreased, something which the consumers will benefit from, seeing the cost-plus regulatory model we have.

Now, the figures more in detail, starting with the Belgian results, first, the normalized net profit increased by a good 13% from EUR88 million to almost EUR100 million, thanks to a very strong operational year.

The fair remuneration compared to 2015 has increased, and this despite the further decrease in the long-term interest rates and the Belgian OLO, which was on average on 0.49% in 2016 against 0.86% in 2015. And this increase follow the formula that is now applied in the new regulatory framework.

As a reminder, in the regulatory framework, we use as parameters for determining the remuneration which is applicable on the equity, a beta which is now flat at 0.53%, and there is also an illiquidity premium of 10% which is applied.

Secondly, the markup on strategic investments was fully realized, contributing for about EUR22 million in the result.

Thirdly, we realized in 2016 incentive amounting to EUR23.3 million compared to prior year. It represents a decrease of EUR24.4 million as prior-year incentive included the so-called goodwill, which does not exist anymore in the new regulatory framework.

Also, as part of the incentive, the efficiencies realized were above target. They amounted to EUR12 million, something which the consumers will also benefit from because the efficiencies, they are shared 50/50 between the shareholders and the consumers.

Finally, the customer contributions, which represent one-off payment received from clients as a contribution for dedicated investment realized by Elia, were significantly higher, increasing with EUR8 million, and following this the increasing trends in our investment.

On the opposite, more damages to the electrical installations on the back of strong storms in the summer and movement in the pension provision, the IAS 19, were negatively impacting the results. These all resulted in a normalized return on equity of 5%.

The nonrecurring items amount to almost EUR5 million, leading to a reported net profit of EUR104.5 million. And those nonrecurring elements were mainly consisting of an exceptional regulatory bonus linked to the good management and the positive outcome of the tax claim for a net amount of EUR5 million and a tax reduction on 2015 incentives, so a minus 1 incentive realized to a research and development tax credit that we obtained in 2016 for EUR2 million in the accounts.

Finally, a one-off negative impact of EUR3.1 million was recorded following the reversal of a prior-year adjustment on inventories not covered to regulatory tariffs.

Now, looking at the balance sheet, we see that the regulated equity, which is the basis for the calculation of the fair remuneration, increased by 4%. The nonregulated equity is principally the equity used for the 50Hertz participation.

At the end of 2016, we had a solid liquidity position. You might remember that we signed in July the new revolving credit facility, increasing the amount from EUR550 million to EUR650 million, witnessing the increased flexibility we want to have for financing of further development in the grid. The facility has a duration of five years and can be extended twice for one year.

From a maturity perspective, we make sure to have a manageable profile, finding the right balance between going as long as possible in maturities in the type of asset we have and taking into account the market conditions, but avoiding too high risk of refinancing.

Finally, S&P downgraded Elia in 2016 from A-minus with a negative outlook to a BBB-plus, stable BBB-plus rating on the back of the heavy investment program that we are facing over the coming years in both Belgium and Germany.

Now, let's take a look at the results in Germany. Revenues have come down by 13.7%. And as you can see on the right-hand side, where we show the different drivers of the revenue, the main reason for the decrease is the drop in the pass-through revenues, which are in gray on the graph.

This is mainly a result of the important decrease in the energy and the dispatching cost, which are passed through in the tariffs, and this thanks to both favorable weather condition, but also measures taken by 50Hertz to avoid those higher dispatching costs. Those measures, like Chris already mentioned, consist precisely in investing in cables, lights, (inaudible), so electricity assets, by which 50Hertz can decrease the congestion on the grid, and so the redispatching and consequently the electricity price.

Secondly, following the important investment in 2016, the investment budget revenues increased to cover the cost for those investments. The other revenues contain some specific items such as customer contribution.

Finally, the base year revenues decreased slightly. The inflation of the revenues did not fully cover the (inaudible) general productivity targets.

With those revenues, 50Hertz realized a reported net profit of about EUR126 million. Excluding the nonrecurring items, the normalized net profit amounted to about EUR114 million. Those nonrecurring items consisted, first, of the final regulatory approval of secondary equipment, as investment measures, and [these are] (inaudible) a court case against (inaudible) and, second, energy bonuses that we realized.

The normalized net profit is down 22% compared to 2015. And in addition to the evolution in the revenues, there was indeed an important increase in the cost. This increase was for a big part linked first to us reaching a peak in the maintenance activity cycle, putting some pressure on the productivity, and second, higher damages to the grid following heavy storm at the beginning of the year.

A third important driver for the increased costs are the personnel costs following the investment program. The personnel base grew, and increasing the personnel costs by EUR11.5 million.

The depreciations grew as well as a result of the commissioning of investment, and more specifically, the commissioning of the Baltic 2 cable. If you remember, back in 2015, we already started to receive the recovery for those depreciation, which leaded to an important nonrecurring revenue in 2015, as only two months of depreciation cost were accounted for following the commissioning in November. And now, in 2016, we take, of course, the full effect of the depreciation.

Finally, the financial result was important -- was impacted by some important debt transaction that we have done on the last two years. In October 2015, bonds were issued for a total amount of EUR890 million. And in April 2016, we went again to the debt capital market. And we have attracted EUR750 million with maturity on 12 year at a very attractive coupon of 1.5%. And in the second half of the year, we closed a syndicated loan amounting to EUR150 million. As a result of all those elements, the normalized return on equity came in at around 9%.

Finally, from a balance sheet perspective, the equity has increased as results are partly kept within the Company to contribute financing the important investment program we have on the next year. The liquidity position remained very strong, partly linked to the EEG business. At the end of 2016, EUR591 million of the total cash is coming from the EEG business and has to be given back to the customers.

The revolving credit facility and the bank overdraft facility remained fully undrawn. The Moody's rating is stable at Baa1.

Now, in addition to the two regulatory models from Belgium and Germany, we are also looking for new possible contribution to our profitability. Chris already mentioned Elia Grid International. In 2016, Elia Grid International has generated EUR19.7 million revenue with an increasing contribution to the Group net result of EUR1.3 million.

Secondly, we have started already in 2015 the Nemo project. This project is subject with proper regulatory framework, being a cap and flow model. And it is assumed 2019 that the cable between Belgium and the UK will become operational and generate its first results. The project clearly fits in all strategy of diversification of regulatory risk.

And last but not least, we will propose to the general assembly a dividend amounting to EUR1.58 per share. It is an increase of around 2%, which takes into account both our CapEx plans and our commitment to invest our time and energy in executing our organic growth strategy.

And I give back the floor to Chris for commenting the outlook.

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

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Thank you. So, in conclusion, what do we see? We see that Elia Group continues to invest heavily over the coming years and even beyond the horizon that we will show in building that grid of the future. So, it is a real growth story that we have.

And if you reflect back to the strategy, then you see that, in Belgium, the whole discussion around interconnecting even more than we are today, we're already thinking today about the next wave.

Of course, let's say, the throughput time before really you start to build is beyond five years. So, you will not see it in the figures. We are already looking at what is the next wave. How does the world look like after the nuclear era in Belgium? What level of interconnection do we need to have? How do we need to further ensure that security of supply is guaranteed and that we have cheap energy and clean energy for all consumers in Belgium?

If you look at the German side, it is a discussion of two elements that bring it together. One is making sure renewables gets interconnectedness. You know, in Germany, there is a lot of onshore wind and offshore wind in the north, and there is a lot of consumption in the south. So, a lot of infrastructure works needs to happen, A, to connect those onshores to the shore, to reinforce the grid around this onshore activity, and then to build the corridors to the south to make sure that you can evacuate all the energy that you produce towards the point where you consume it.

And so, these are structural trends that you see and that we see actually -- I mean, we're already looking in Germany beyond 2030. In Belgium, we're looking beyond 2025. And it is a trend that we see to continue.

Even if you would look at [Ensuvie] reports about that, there is still a need for buildings of investment in the grid to make sure that we arrive on the objectives or Europe in terms of a carbon-free or close to carbon-free electricity market.

And so, that is as well reflected then in the plans that you see compared to what we showed to you last year. We move the next five years from EUR2.2 billion to EUR2.5 billion. That is because we have now included the offshore activity into our plan. So, the MOG, the first platform that we will build in the North Sea, is included in those plans, as you can see. And that is actually an important extension.

The situation on the MOG today is that it went through the government for first lecture. It will next month pass for second lecture, which then means that it passes closely afterwards through Parliament. And then we will be able to start building that thing and to connect the last windfarm to that. But, for us, it's a strategic move because it means that we start to be present as well as an offshore operator in Belgium.

If we look to the specific projects, Brabo, we closed Phase 1 of Brabo with the parallel positioning of the phase shift in Zandvliet in October last year on time, on budget. So -- and well ready before the winter, which was important for the adequacy during this winter.

And we will start, or we start somewhere as we speak the second phase. You'll have heard about the important works that we're doing around the Scheldelaan, where we will build an underground 150 KW cable, so that we can use the existing corridor of 150 KW, like we did in Stevin to build a 380 KW and reinforce that side of the circle that we try to build around the industry and the consumption of Antwerp.

The ALEGrO project, we signed the contracts with as well the producer of the converter station as on the cable side. Now, we are in the phase that they're getting ready for permits. And so, this project is on time today. And so, we'll follow the sequence that we have seen.

The Stevin project will be commissioned by the end of the year. So, it's probably -- we do quite some site visits with external people. It's very interesting these days to see what those massive works are that we are doing over there.

And as well, what you can see actually when you go there, the Nemo works are actually very close to each other. So, there's a lot of activity happening over there. It's very nice to see that, in Belgium is -- again, we see cranes and building cranes and activity and excavation so that we see that the world is moving forward. We're investing, important I think for the country that's happening.

Boucle de l'Est, we last -- no, we this week -- beginning of this week, we had the opening of the first part of the Boucle de l'Est in the east, which is to better evacuate new onshore wind that we have in that corner. There will be a next phase coming connecting through the south side in the same cycle as well to make sure again that we have sufficiently redundancy that we can use all the energy where it gets produced.

And then finally, as said, we're moving ahead with this new project where we still have those legislative steps to be taken and where as well there is some negotiation on the regulatory framework, but where we see that, although it's a complex political process, as you can imagine, things are converging more and more, and we think that we can keep this thing on track. This is one where we would deliver the platform by Q3 2019 to make sure that we are in time for those additional windfarms that themselves are in negotiation today on their [LCAOE], as you can read in the press.

In Germany, we increased from EUR3.5 million to 3.8 million (sic - see Presentation, page 25, EUR3.8 billion). The most important thing that has changed over there is that the change in the renewable law in Germany has, on the one hand, increased the volume of renewables in the Baltic Sea and as well put priority on first building some of those future windfarms into the Baltic Sea. And that's an effect that you see slightly coming in here, but that will be even more important in the period 2022 to 2025 because that's the moment when the most of the building is happening.

What you don't see but that will be beyond that phase as well is, around 2021, we start to build what was for a long time famously called corridor D. They changed the name a couple of times. Now, I think it's called Sudostlink, which is this HVDC long-term connection between the north of Germany and Bayern.

We are -- we changed partners. So, we changed from Amprion to [Tenant] after long negotiation. And now, the teams are all steaming up making sure that they're ready to get all the permits ready, which is, as we said, not an easy task with the public acceptance side of that, but to make sure that we can start building around 2021 in that environment.

And so, what are the big projects? So, the first HVDC I've just come to say South-West interconnector, that one is in operation. And that has to a large extent reduced the curtailment and redispatch cost as Catherine came to mention. So, it is on the other side an AC connection that makes sure that we can evacuate some of the capacity.

Kriegers Flak, that's where we will connect our windfarms to the Danish windfarms that are sitting relatively close to each other with a connection line that's as well a DC line, given the fact that we have a different frequency on the both grids. So, it's 60 hertz versus 50 hertz.

We have this CWA, which is a very big development in the Baltic Sea on offshore wind and where we are in the cable laying phase, as mentioned, and where we had some delay due to weather conditions end of last year, but where we continue to do that, and where there will be a second phase, even larger and more important, which is today in study phase and the budgeting phase, but where we then will further connect windfarms in the Baltic Sea.

So, where are we heading at? We think that we will land end of the year with a further increased regulated asset base to EUR7.4 billion. So, logically with such a program, the asset base continues growth. The investments by 2021 will be EUR6.3 billion. And it will not stop after that.

So, that means in summary we think Elia is a fantastic organic growth story with a nice dividend linked to it. Last year, I think we said the opposite. It's a nice dividend, sorry, with some growth. I think, if you start to look at the figures, you more and more see that, in essence it is actually an enormous organic growth story for many years to come and with an attractive dividend linked to that, given the fact of the specific nature of the business that we have.

And then I leave you the floor for your questions. Yes?

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Questions and Answers

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Bart Jooris, Degroof Petercam - Analyst [1]

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Bart Jooris, Degroof Petercam. A few questions, if I may. So, from the EUR60 million cost increase in Germany, could we state that only the personnel cost increase is something that would be recurring this year?

You went pretty well above target in Belgium on the incentive side. Is that something that could be sustainable now that you have experience on that model?

And then a little bit more general, now that you included the MOG in your Belgian investments, could you give us an update on timing and pricing -- or not about pricing -- amount of the capital increase?

And then finally, in the new strategy, the last point was you looking at M&A. Is there anything concrete on the table right now?

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Chris Peeters, Elia System Operator NV - CEO [2]

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You take the first?

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

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Yes, I will take the first question. For -- about the EUR60 million increase in OpEx, you are right to say that we can expect the percent cost keep growing. We have included the amount. There are still more investments to come. So, the percent cost will keep growing. But, it's not the only limit. It's not the only factor.

Of course, as you have more investment, you have also raised more maintenance to do, and so more maintenance cost. So, in the EUR60 million that you have, we will keep a portion of that for both personnel cost and OpEx cost that will come in the future.

Second element, coming on Belgium and the incentive, in the incentive, we have -- at least we are used to make the difference between two big categories, the first one that we call already the incentive, and the second one that we call the efficiency.

On the incentive, based on the experience we have, we can indeed confirm the target that we mentioned in the past, which is a level of realization between 50% to 60% and depending on the years, depending on all capacity to deliver on all the list of the incentives we target between 50% to 60%.

On the efficiency, we are at the beginning of the period. So, we are above the target. The target that we always announce is around EUR6 million before tax, knowing that the EUR6 million has to be shared 50% for the shareholders and 50% for the tariff.

And we, of course, will make everything possible to maintain this efficiency in the future at this level of EUR6 million in the benefit of both the consumers and the shareholders.

Regarding the MOG and the capital increase, so the business plan has -- we have to include indeed a capital increase, a small capital increase, the timing of which likely to be after full clarity on the regulatory framework of Germany, but also of Belgium. You know we have a six -- sorry, a four-year period for the regulatory framework in Belgium. It started in 2016. And we will do the negotiation for the next regulatory framework in 2018 and finish this discussion in 2018 with the Belgian regulator.

So, that was saying that, if we want to bring to the market full visibility on the regulatory frameworks of both countries, capital increase is likely to be planned in 2019, of course, depending on the speed of the realization of the CapEx plan in its totality because, for determining an amount, it depends of course of all the investment that you want to do.

And then the last question was more relating to --

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Chris Peeters, Elia System Operator NV - CEO [4]

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M&A.

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Catherine Vandenborre, Elia System Operator NV - CFO [5]

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-- The strategy in the M&A.

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Chris Peeters, Elia System Operator NV - CEO [6]

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Yes, so the situation M&A is the following. So, we have no concrete acquisitions file of size on the table as we speak. So, we have a couple of smaller things which are more for innovation and technology reasons that we are looking at. But, the main focus there is we would consider it under the nonorganic as it is growth outside of our two zones that we operate in interconnectors.

So, we are one of the two TSOs in Europe which has the most experience in building interconnectors. There are many to come. There are many projects, for instance, from North Africa to Europe, between other countries and where we see that colleague TSOs have less experience in doing that and are looking for partnerships that are a combination of a part of financial partnership and a part of knowledge partnerships that we [include].

That are the things that we're trying to spot for, more than the, let's say, the pure infrastructure deals. As you know, infrastructure deals these days go to infrastructure funds or Chinese with a cost of capital which is lower than the one that you see in a typical TSO. And therefore, we consider them as too expensive for us as we see them.

But, on the other hand, the places where we can monetize the knowledge that we have in a combined financial deal looks to us quite attractive. And there are many of them, let's say, coming up in the future. And so, that's what we're actually screening for.

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Bart Jooris, Degroof Petercam - Analyst [7]

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Thank you very much.

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

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If there are no questions anymore in the room, we can take questions on the phone, if there are.

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Operator [9]

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There are no questions from the conference call at the moment.

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

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Okay. Then I think that we can close this meeting. Thank you very much for being there. And hoping see you next time.