Presentation Results 2017 22 February 2018 Key credit highlights - - PowerPoint PPT Presentation

Presentation Results 2017

22 February 2018

Key credit highlights

• Largest regional energy network company in the Netherlands
• 3.1 million electricity and 2.5 million gas connections
• Natural monopoly status in its license areas
• Strong and stable shareholder base with 100% of the shares held by provinces and local municipalities
• Geographically, network coverage regions largely coincide with the shareholders’ base
• Privatization not allowed by law
• Low risk profile due to stable and proven regulatory environment
• Well defined, mature and constructive regulation with 5 year regulatory period
• Total cost recovery for the industry is one of the basic regulatory principles
• Current regulatory period (2017-2021) just commenced providing high degree of cash flow

predictability

• 85% regulated revenue from regional electricity and gas distribution
• Remaining 15% of revenue largely related to services offered to customers with regulated network

activities

• Strong financial profile with well-defined and disciplined financial policy
• Alliander well above the ratios defined in the financial policy
• Proven commitment to stay within financial policy framework
• Strong liquidity position with significant volume of undrawn facilities available
• Current ratings of Aa2/P-1/stable outlook by Moody’s and AA-/A-1+/stable outlook by S&P
• High quality assets; reliable grid with one of the lowest annual outage duration in Europe
• Focused capex program will ensure grid quality is maintained
• Smart meter offering on schedule
• Highest oekom rating amongst utility peer group at Prime B+

2

Leading network company in the Netherlands Stable cash flow profile Proven operational expertise Mature and constructive regulatory regime Stable public shareholder base Robust capital structure Sustainability leadership

Highlights 2017 YTD

• Profit after tax decreased to € 203M (2016: € 282M, including € 176M in non-recurring net sales

proceeds from asset swap). Profit after tax excluding incidental items and fair value movements increased by € 74M compared to 2016

• Revenue rose to € 1,697M (2016: € 1,584M) as a result of one-off tariff compensation for sufferance

tax charges over past few years

• Operational expenses slightly higher at € 1,535M (2016H1: € 1,516M)
• Investments remain high in the coming years due to continuing the roll-out of smart meters
• Refinancing of €500M subordinated perpetual bonds at 1,625% coupon (jan-18)
• New € 300M EIB term loan at 1,4% interest and expiring in 2031 (jul-17)
• New 5-year regulatory period has started
• Status of proposed legislation:

− Proposed VEt legislation (including limitation on mandatory gas connection) is currently in

Parliament

− Parliament voted in favor of the phase out of sufferance tax by 2022

• Ingrid Thijssen appointed as CEO
• Conversations with municipalities on energy transition completed
• Sales process Allego started
• Sector consolidation largely completed
• Heat transition plan put into action with municipalities
• Realization of workload is challenged by shortage of technically skilled employees
• Large scale offering of smart meter on schedule
• Roll-out of fiber-optical and mobile (CDMA) network completed
• Electricity outage duration falls to 21 minutes over past 12 months (2016: 23.3)

3

Financial results and position Strategic developments Operational developments Regulatory framework

Corporate profile

Corporate profile 5 Update on regulatory framework 14 Results 2017 16 Financing and policy 20 Miscellaneous 27

Corporate profile

Alliander results 2017

• Alliander is the largest regional energy network company in the Netherlands
• Distributes electricity and gas to more than 3 million customers
• Electricity outage duration of about 21 minutes per year is among the lowest

in Europe

• Revenue of about € 1.7bn of which >85% is regulated
• Fixed assets of about € 7bn
• Annual CAPEX of € 600-700M
• S&P and Moody’s credit ratings at AA-/Aa2 level with ‘stable outlook’
• Carbon footprint of 632kton (past 12 months)

Network # Customer connections Grid length Transported volumes Electricity 3,135,000 90,000 km 29.960 GWh Gas 2,520,000 42,000 km 6,228 million m3

Other 24% Province of Gelderland 45% Province of Friesland 13% Province of Noord-Holland 9% Amsterdam 9%

Alliander shareholders: provinces & municipalities Service areas

• Alliander shares are owned by provinces and municipalities
• Province of Gelderland is the largest shareholder and owns 45% of all

shares

• The four largest shareholders together own 76% of all shares
• Privatization is not allowed by law

5

Electricity and gas Electricity

How to achieve Paris Climate goals: Roughly three things to do

All homes and buildings with energy label B Solar panels on all roofs Wind turbines on 10% of continental shelf Heating without natural gas (District-heating, biogas, electrification) All cars to become electric

Source: McKinsey, Alliander

Key initiatives

2

• 1. Saving energy
• 2. Switching energy type
• 3. Sustainable generation of

electricity

Alliander results 2017 6

Mission and Strategy

Alliander empowers customers to make the right energy choices. For themselves and for the energy system as a whole. In order to ensure that everyone has equal access to reliable, affordable and renewable energy Supporting customers in making choices Investing in new

• pen networks

Digitization of networks Excellent network management

Alliander results 2017 7

Heat transition plan put into action at local level…

8 Alliander results 2017

What do we see?

The Netherlands have set their goal in being a society without harmful carbon emissions by 2050 at the latest:

• 1,000 neighborhoods in 145 municipalities within our service areas need to

abandon natural gas consumption

• This heat transition takes place on a local level
• High impact on living, neighborhoods, real estate and infrastructure
• Various stakeholders with divergent interests
• Too many individual choices stand in the way of the best collective solution

Active cooperation

• Alliander actively seeks cooperation with municipalities, housing corporations,

residents and other stakeholders on how the transition from natural gas to other heating sources could take place in the best possible way and what choices are beneficial for society.

• Management Board has visited municipalities and provinces in our service

areas

• Smart phase-out of natural gas by aligning plans and programs (urban

programming)

• Provide insight in new heat solutions that best fit local circumstances

…at the lowest possible social cost

To make sure that changes in the heat transition take place with maximum customer convenience Minimize social cost by aligning heat transition and replacement need Develop infrastructure further for green gases Maximize the feed-in of green gas Create or adapt infrastructures to enable flexibility in the energy supply Innovation of products and techniques to minimize cost of

• peration and

replacement Improve insight in remaining useful life of network components Improve insight in network utilization to minimize costs of

• peration and

investment Create awareness in the market about Liander being the most logical district heating network

• perator

Develop district heating capabilities

AGE

1 2 3 4

To facilitate the heat transition by phasing out natural gas in an efficient way where sustainable alternatives exist Facilitate the application of sustainable gases and new applications of the gas networks Economic and effective

• peration of remaining gas

networks Prepare for the role of district heating operator 9 Alliander results 2017

Energy transition in our service areas

Capacity growth in decentralized electricity generation

• Installed solar capacity: 873 MW
• 34% growth in past 12 months
• Installed wind capacity: 1,295 MW
• No growth in past 12 months
• Installed combined heat and power capacity:

1,108 MW

• No growth in past 12 months
• Limited scale
• Current green gas feed-in on gas networks is

about 9 million m3

• 56% growth in past 12 months
• 3,574 public charging poles in our service areas
• 21% growth in past 12 months

Total transported volumes in our service areas (2017) Electricity 29,960 GWh per year 82,082 MWh per day Gas 6,228 million m3 per year Our service areas show high growth in solar capacity and stable wind and CHP capacity. Overall impact still limited 10 Alliander results 2017

Installed wind capacity Installed combined heat and power capacity (CHP) Installed solar capacity Green gas feed-in on our networks Number of charging poles

Energy transition in our service areas

Volume growth of decentralized electricity feed-in

• Actual feed-in of decentral generated electricity in the Liander service

areas is at 8 to 10% and shows annual growth

• Main contributor is wind which accounts for 3/4 of all decentral

generated electricity

• Throughout the last 5 years monthly feed-in %

varied between 4 to16% of total monthly transported electricity volume

• Observed volatility is mainly caused by wind

Roughly 8 to 10% percent of the total transported electricity volume in our service areas is decentral generated. The overall impact on our networks is still limited Alliander results 2017 11

• Increase in decentral generation, electric transport and heat pumps leads to additional peak load on electricity networks
• Costly network upgrades cause high social cost and extra workload
• This can be prevented by deployment of technical innovations

and new market models: – In the city of Nijmegen customers are being compensated for not using the networks during peak load hours – Testing the use of shared connections for solar fields and windmills – Pilot with ‘Buurtbatterij’ for shared battery capacity storage in neighborhoods

• Current laws and regulations are not adapted to new insights and solutions
• To address these shortcomings Alliander is talking to the Ministry of Economic Affairs & Climate and the regulator ACM.

Prevention of peak load by deploying innovations and new market models

12 Alliander results 2017

Update on regulatory framework

Corporate profile 5 Update on regulatory framework 14 Results 2017 16 Financing and policy 20 Miscellaneous 27

• As of 1 January 2017 the new regulatory period has started.

Key changes compared to previous regulatory period:

• 5-year price control period
• Gradually decreasing WACC
• Allowed revenues will be set at the efficient cost level at the

start of the new period

• The basics of the regulatory framework are unchanged
• Streamlining of the existing Electricity and Gas Acts
• Parliament is expected to vote on Energy Transition Bill (VEt) before end of 1Q2018
• Vet will possibly be phased in parts and enter into force mid-2018 at the earliest
• Financial impact of VEt on Alliander is assessed as neutral
• Parliament voted in favor of the phase out of sufferance tax. A five year transitional period will be
• bserved, allowing municipalities to levy sufferance tax up to 1 Jan-2022
• The sufferance costs will be fully recovered in tariffs, partly in advance and partly afterwards.
• Bill proposed by Minister of Economic Affairs to allow municipalities to designate urban areas were

no gas network will be installed if provisions are made for district heating or other heat supplies

• In the designated areas the regional network operator will be exempt from the legal obligation to

connect homes to the gas network

Update on regulatory framework

4.0% 3.8% 3.5% 3.3% 3.0% 2017 2018 2019 2020 2021

Regulated WACC

14

New regulatory period Legislation VEt Limitation on mandatory provision

• f gas connection

Sufferance tax

Alliander results 2017

Results 2017

Corporate profile 5 Update on regulatory framework 14 Results 2017 16 Financing and policy 20 Miscellaneous 27

Higher result due to increased revenue

• Revenue increased by € 113M from € 1,584M to

€1,697M due to higher tariffs and coverage of a

• ne-off compensation of sufferance tax charges in

past years

• Total purchase costs, costs of subcontracted work

and operating expenses increased by € 64M as a result of higher transport costs (+ €13M), higher staff costs for own and external personnel (+ € 51M).

• Net financial expenses € 10M lower caused by

lower interest rates on refinancing

• Excluding incidental items and fair value

movements the profit after tax increased by € 74M

• No material incidental items and fair value

movements 16 Alliander results 2017

Investments slightly lower

• Net investments are € 15M lower than last year due to

lower investments in buildings (€ 27M) partly offset by higher investments in electricity networks

• Investment level remains high due to smart meter offering
• € 104M difference between gross and net investments is

caused by third part contributions (2016: € 95M) 17 Alliander results 2017

Smart meter offering is on schedule

• By the end of 2020 the smart

meter has to be offered to all of

• ur 3.1 million customers
• The overall project runs according

to schedule

• At 2017 year-end the smart meter

was offered to in total 49% of all

• customers. In 2017 the meter was
• ffered to 17% of all customers
• Target for 2018 is to offer another

17% to arrive at 66% at year-end.

• Total CAPEX for smart meters in

the period 2008-2020 amounts to approximately € 800M 18 Alliander results 2017 Progress large scale offering of smart meter in 2015-2020

(% of total number of customers)

Financing and policy

Corporate profile 5 Update on regulatory framework 14 Results 2017 16 Financing and policy 20 Miscellaneous 27

Increase in financing need

• € 78M increase in cash flow from operating

activities, mainly due to a higher operating profit as a result of an increase in revenue by € 105M

• Cash flow from investment activities rose by

€317M compared to 2016, due to one-off positive effect of € 359M in net sales proceeds from asset swap in that period

• Dividend payment over 2016 is € 19M higher

than over 2015 due to higher distributable profit

• A total of € 252M financing is attracted (2016:
• € 100M) to finance the funding deficit

resulting from the sum of cash flows from

• perations and investments and dividend paid
• On balance € 53M is added to cash and cash

equivalents 20 Alliander results 2017

Financial position

Capitalization (in €M) Gross and net debt (in €M) Maturity profile (in €M) 2 Location of debt (in €M)

Available committed credit lines:

• Term loan (until 2031)

EIB 225

• Back-up credit facility

RCF 600 Capital Market Programs EMTN 3,000 ECP 1,500 Gross Debt (including CBL related financial lease obligations) 1,934 Cash 101 Other Investment

• CBL Investment

193 Total Cash and Cash Equivalents 294 Net Debt according to IFRS 1,640 50% of subordinated perpetual bond loan 248 Net Debt according to financial policy 1,888

1 Including € 148 m financial lease obligations Liander 2 Excluding € 148 m financial lease obligations Liander

Alliander N.V € 1,785 Liander € 149

1

Liandon

1 8 400 9 300 4 113 408 7 231 307 200 400 600 800 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028>

Credit Facility (€ 600M)3 First call remaining €87M subordinated perpetual bonds First call new € 500M subordinated perpetual bonds

21 Alliander results 2017

4.5% 2.25% 2.875% 0.875%

Financial policy

Dividend policy

• FFO/Net debt: Minimum 20%
• FFO Interest cover: Minimum 3.5x
• Net debt/capitalization: Maximum 60%
• Solid A rating profile (on a stand alone basis)
• Comply with regulatory criteria for the network operators

Financial framework General principles

Financial policy

Credit Rating/Debt providers Shareholders' equity Liquidity

22 Alliander results 2017

• Part of overall policy and strategy
• Balance between protection of debt providers and

shareholder returns

• Financial strength and discipline
• Maintain cushion relative to regulatory criteria
• Flexibility to grow and invest
• Transparent reporting
• No structural subordination
• Stable dividend
• Pay-out: 45% of after-tax profit, adjusted for incidental items, unless CAPEX from regulatory obligations
• r financial criteria require higher retained earnings
• Minimum solvency of 30%

Financial ratios well within financial policy framework1

1. According to the principles of Alliander’s financial policy the subordinated perpetual bond loan is treated as 50% equity 2. Interest cover: 12-months profit after taxation adjusted for deferred tax asset movements and incidental items and fair value movements plus depreciation and net finance income and expenses, divided by net finance income and expenses adjusted for incidental items and fair value movements 3. Funds From Operations: 12-months profit after taxation adjusted for deferred tax asset movements and incidental items and fair value movements plus depreciation of PP&E, intangible assets and deferred income. 4. Solvency: equity including period result less the expected dividend distribution of current financial year divided by balance sheet total less the expected dividend distribution for the current year and deferred income 5. Net debt/capitalization: net debt divided by the sum of net debt and equity

23 Alliander results 2017

Rationale

• Alliander’s low business risk profile assessment is

supported by regulated activities providing relatively stable and predictable cash flows under a transparent regulatory regime and medium term visibility over investment requirements

• Over the next five years, Moody’s expects Alliander to

continue to exhibit strong financial metrics with FFO/net debt above 25% and RCF/net debt in excess of 20% over the medium term

• Alliander’s Aa2 rating incorporates a two-notch uplift from

the strong probability of extraordinary financial support from its owners, given the importance of Alliander to the regional economy, the fact that the four largest shareholders together hold 76% of the company’s shares and the strong governance framework in the Netherlands

Rationale

• Excellent business risk profile supported by low-risk

regulated operating environment for electricity and gas distribution network business, high-quality assets and strong operating performance

• The stable outlook reflects S&P’s expectation that

Alliander will report growing revenues and a slight strengthening in credit ratios with adjusted funds from

• perations to debt of 25% or better
• Alliander’s liquidity was reassessed as strong, compared

with adequate previously and is supported by S&P’s view that Alliander’s liquidity sources will exceed its funding needs by more than 1.5x over the next 12 months and remain above 1.0x over the following 12 months.

Issuer Aa2/Stable Short-Term P-1 Basket C Hybrid A2

Source: Moody’s Investors Service 12 April 2017. Standard and Poor’s as of 27 November 2017.

Strong corporate credit ratings

Corporate AA-/Stable Short-Term A-1+ Junior Subordinated A

24 Alliander results 2017

Industry-leading oekom research Sustainability Rating at Prime B+

25 Alliander results 2017

Source:

• ekom research, publication 30 November 2018

Miscellaneous

Corporate profile 5 Update on regulatory framework 14 Results 2017 16 Financing and policy 20 Miscellaneous 27

Carbon footprint decreases further

• Greening in past 12 months

increased to 128 kiloton

• 632 kiloton net-emissions in past

12 months

• Target is to be carbon neutral in

2023, i.e. no net carbon emissions by our network

• perations, offices and transport
• Carbon footprint is largely caused by technical grid losses. This is energy loss (through heat) caused by resistance during

electricity transport

• Alliander carbon policy is based on trias energetica: reducing energy consumption (e.g. through more energy-efficient

assets, climate neutral buildings like Duiven and Bellevue), greening of energy consumption (newly added renewable capacity in NL) and economical residual energy consumption

Carbon footprint own operations (last 12 months)

27 Alliander results 2017

• Net Present Value of tax deferral for US investor
• Increase in solvency for Alliander by sharing NPV

with US investor

Rationale

At transaction closing: 1. Alliander leases grids to US Trust (headlease) 2. US Trust leases grids back to Alliander (sublease) 3. US Trust prepays all finance obligations under headlease to Alliander 4. US Trust finances these prepayments via equity provided by US Investor and bank debt 5. Alliander invests prepayment proceeds in a defeased structure (off balance):

• Deposits
• Bonds

During transaction: 6. Use of investment returns to fulfil financial lease

• bligations (off balance) and to fund purchase price at

end of sublease At end of sublease: 7. Alliander option to buy grids back against predetermined purchase price

Basic structure in steps Basic structure scheme

Cross border leases – Basic structure

Alliander results 2017 28

Partly pledged

Financial Institutions US Investor

Equity Debt Head lease Sub lease Prepayment Deposits and bonds Annual payment

• f financial lease
• bligations

4 Buy back

Banks

4 1 3 2 7 5 6

Alliander US Trust

Cross border leases – Risk update

CBL related risks

• Obligation to pay contractual termination value in

case of Event of default and/or Event of loss

• Credit risk on investments
• General and tax indemnities
• Posting additional L/C’s in case of Alliander

downgrade

Risk summary Contractual termination value

• Contractual termination value represents the amount

needed to safeguard the intended transaction return in case of early contractual termination

• Equity strip risk varies over time depending on the

mark-to-market value of investments relative to contractual termination value.

(1)

Contractual termination value Equity strip risk Equity investments Debt investments

1

Contractual termination values CBL’s (in USD bn)

29 Alliander results 2017 3 leases 3 leases US leases 31 Dec 2017 31 Dec 2016

in USD million

Equity strip risk 186.2 193.7 Overview Letters of Credit 31 Dec 2017 31 Dec 2016

in USD million

Issued

• Additional L/C's at A3/A-

138.8 140.1 Additional L/C's at Baa1/BBB+ 24.0 23.6

Alliander activities in Germany

Berlin Cottbus Rüsselsheim Waldfeucht/ Heinsberg* Hagen Düren* Wickede Coesfeld Siegen Strausberg Wunstorf Köln* Electricity and gas Public lighting Traffic lights Gas Infrastructure services for industry Telecom for utilities 450Mhz telecom services *

Strategy

• Innovative service provider working closely together with our

partners in the energy business and municipalities to support them in creating a new energy architecture for network operation, public lighting and traffic lights.

• Apply Alliander technology and services in Germany
• Establishing telco business (450connect) for critical infrastructure

in Germany via partnering Existing activities (2017)

• Revenue of €42m and total assets of €65m
• Activities:

− Public Lighting activities in various cities (50% of revenue) − Network operations in various cities (46% of revenue) − Build-up of Telco business in Cologne (4% of revenue)

• 175 employees (162 FTE)
• Number of electricity connections: 15,600 (Heinsberg)
• Number of gas connections: 4,700 (Heinsberg and Waldfeucht)
• Number of light points: 76,400 (all locations)

Regulatory regime E and G

• Revenue cap regulation
• Regulatory period: 5 years (gas 2018-2022, electricity 2014-2018)

Telco Business roll out (450connect)

• Continuing roll-out of 450Mhz infrastructure together with our

utility partners to establish a mobile communication infrastructure (like CDMA/Utility Connect in NL) Investment

• In 2018/19 ca. €16m (of which €9m for setting up telco business in

Germany). 30 Alliander activities in Germany

Disclaimer

This presentation is a translation of the Dutch presentation on the consolidated annual results 2017 of Alliander N.V. Although this translation has been prepared with the utmost care, deviations form the Dutch presentation might nevertheless occur. In such cases, the Dutch presentation prevails. ‘We’, ‘Alliander’, ‘the company’, ‘the Alliander group’ or similar expressions are used in this presentation as synonyms for Alliander N.V. and its subsidiaries, Liander refers to the grid manager Liander N.V. and its subsidiaries. Stam refers to Stam Heerhugowaard Holding B.V. and its subsidiaries and Liandon refers to Liandon B.V. Alliander N.V. is the sole shareholder of Liander N.V., Liandon B.V. and Alliander AG. Parts of this presentation contain forward-looking information. These parts may –without limitation– include statements on government measures, including regulatory measures, on Alliander’s share and the share of its subsidiaries and joint ventures in existing and new markets, on industrial and macroeconomic trends and on the impact of these expectations on Alliander’s

• perating results. Such statements are preceded by, followed by or contain words such as ‘believes’, ‘expects’, ‘thinks’,

‘anticipates’ or similar expressions. These prospective statements are based on the current assumptions and are subject to known and unknown factors and other uncertainties, many of which are beyond Alliander’s control, so that future actual results may differ materially from these statements. This presentation has been prepared with due regard to the accounting policies applied in the 2017 financial statements of Alliander N.V., which can be found on www.alliander.com. All financial information shown in this presentation has not been audited and is made available for the purpose of discussing the current and future financial position of Alliander. No party can rely upon this presentation unless explicitly confirmed otherwise in writing by the company. 31 Alliander results 2017