Results 2019 18 February 2020 Credit profile Alliander Largest - - PowerPoint PPT Presentation

Alliander N.V. Results 2019

18 February 2020

Stable cash flow profile

Credit profile Alliander

Leading network company in NL Stable public shareholders Mature and constructive regulatory regime

• Largest regional energy network company in the Netherlands
• 3.2 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 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 provides high degree of cash flow predictability for next 2 years
• Over 85% regulated revenue from regional electricity and gas distribution
• Remaining revenue largely related to services offered to customers with regulated network activities

Robust capital structure

• Strong financial profile with well-defined and disciplined financial policy
• Financial ratios well within financial policy framework
• Proven commitment to stay within financial policy framework
• Strong liquidity position with significant volume of undrawn facilities available
• Recently affirmed ratings of Aa2/P-1/stable outlook by Moody's and AA-/A-1+/stable outlook by S&P

Operational expertise

• High quality assets; reliable grid with relative low annual outage duration in European context
• Focused capex program will ensure grid quality is maintained
• Smart meter offering on schedule

Sustainability leadership

• Highest ISS-Oekom rating amongst utility peer group at Prime B (31-dec-19)
• CO2 neutral by 2023

Operational

Highlights 2019 ; solid financials, operational challenges

Financial Strategic Regulatory

• More focus on feasibility of the workload, energy transition portfolio, heat transition and cost savings
• Method decision next regulatory period: consultation has started
• Progress in key legislative processes including integration of existing Electricity and Gas Acts and market order district

heating: Consultation expected in first half of 2020

• Increased workload due to economic growth and acceleration of energy transition
• Shortage of technically skilled personnel
• Transport restrictions and backlog in realizing new connections
• Smart meter offering on schedule
• Decrease in electricity outage duration to 21.9 minutes in past 12 months (31-Dec-18: 30.6)

3

Governance

• Appointment of Walter Bien as of the 7th of October to the Board of Directors as CFO and successor of Mark van Lieshout
• Appointment of Daan Schut as of the 1st of April to the Board of Directors as CTO ( Chief Transition Officer )
• Profit after tax decreased to € 253m (2018: €334m) due to book profit on Allego sale in 2018. Profit after tax excluding

incidental items and fair value movements rose by € 6m to €267m

• Revenue increased to € 1,930m (2018: €1,920m)
• Operational expenses slightly higher at € 1,591m (2018: €1,572m)
• Gross investment up to € 834m (2018: €731m). Net investment amount to € 710m. (2018: €605m) due to third party

contributions.

• Net debt increases to € 2,223m, an increase of € 316m, due to negative free cashflow and IFRS 16 effects.
• Issuance of a second Green Bond of € 300m, tenor 13 year ( June 2019 ).

3

Outlook 2020

• Lower result expected due to increased transportation charges by Tennet of €60m to be recovered in tariffs at T+2

Energy gy transitio ition and strategy egy 5 Regulation 13 Results 2019 15 Financial position 19 Other 25

Dutch Climate Law and Climate Agreement

Dutch ambitions for 2030 Climate Law: secures both the Climate Agreement and long term ambitions May 2019 2030 2030 2050 2050 Climate Law approved in Parliament. Presentation Climate Agreement CO2 emissions 49% lower compared to 1990 CO2 emissions 95% lower compared to 1990. All electricity is generated CO2 neutral June 2019 35 Terrawatthour renewable electricity production on land New heating systems for 1.5 million homes 1.8 million charging points

5

National grid

• perator

€14bn Other her Regiona

• nal

l grid id

• perat

erator

• rs

Alliander

€2,2 bn Total sector investment €17.5bn

Impact Climate Agreement on investment grid operators

Sector investment in additional electricity grid infrastructure in the Netherlands Impact on Alliander Impact on investment

• Additional investment (excluding replacements and maintenance) in electricity

grid infrastructure is estimated at ~€1.3bn for Liander.

• For 2020 Alliander expects total investments of : € 880m
• The investment levels in the coming years will remain around this level
• The increased investments lead to a higher financing requirement

2030 – 49% scenario Liander

6

€1,3 bn

Alliander′s mission and strategy

Helping customers make choices that are right for them and the overall energy system Investing in new,

• pen grids

Digitisation of grids Top-class grid management

Alliander stands for an energy supply that gives everyone equal access to reliable, affordable and renewable energy

7

Data driven grid management Reliability Safety Customer convenience

Focus on a number of aspects in the coming years

& using knowledge and tools for the benefit of customers and other network operators Cost-conscious and efficient working Heat transition Energy transition portfolio Feasibility of workload Prioritize, increase capacity, more efficiency Realise innovations and smart solutions and applying them in practice + alternative (sustainable) uses of our gas grids Cooperate with municipalities to ensure a successful heat transition + install heat grids Cost savings to enable future increasing investments

8

2 4 6 8 10 12 14

mln m3

2017 2019 2018 1,20 1,22 1,24 1,26 1,28 1,30 1,32 1,34

GW

1000 2000 3000 4000 5000 6000 7000 2018 2019 2017

Energy transition in our service areas

Local electricity feed in: capacity growth

Ambition 2030: 67,000 Actual 2019 : 6,600

Installed wind capacity Installed solar capacity Greengas feed in on our networks Number of public charging poles

9

Tot

• tal tran

ansported volu volumes in n our se servic ice areas (20 2019)

• Electricity 28,548 GWh per year ( = 78.2 GWh per day)
• Gas 5,860 million m3 per year

0,0 0,5 1,0 1,5 2,0 2,5

GW Ambition 2030: 12.6 GW Actual 2019 : 2.2 GW Ambition 2030: 3.5 GW Actual 2019 : 1.3 GW Ambition 2030: 880 million m3 Actual 2019: 32 million m3

2018 2018 2019 2017 2019 2017

189.816 .816 270.646 .646 381.429 .429

• 100.000

200.000 300.000 400.000 500.000 2017 2018 2019

Energy transition in our service areas

Local electricity feed-in: number of customers and energy source

• About 11% of the total transported electricity volume in our service areas is locally

generated renewable energy

• Main contributor is wind which accounts for 2/3 of all locally produced electricity.

Its contribution varies per year depending on the weather conditions

• Contribution of PV generated electricity shows rapid growth
• Numbers include only electricity generated by businesses and not by consumer

households.

• 381,429 customers have a registered connection with an active feed-in

installation in our service areas

• Number of customers increased by 40% in 2019
• The large increase is due to decreasing PV panel prices, a recovering economy

and a favorable subsidy regime

Customers with renewable generation Breakdown of local renewable electricity feed-in

10 10

9,9% 7,1% 2,3% 0,3% 0,2% 10,0% 6,8% 2,2% 0,7% 0,2% 11,4% 7,4% 2,3% 1,5% 0,3%

Total Renewable Wind Biomass Solar Other

2017 2018 2019

Heat transition: future plans and developments in our regions

11 11

Devel velop

• pments

ents in the built lt environm

• nment

ent Futu ture plans ns

Realized gas removals Share gasless in applications for new connections From a national climate agreement to plans at neighborhood level

3.481 4.648 2018 2019 47% 67% 2018 2019

Energy transition and strategy 5 Regulatio lation 13 13 Results 2019 15 Financial position 19 Other 25

Regulatory framework

Current regulation period Legislation Next regulation period

• Current 5-year price-control period runs from 2017-2021
• Gradually decreasing real WACC
• Allowed revenues have been set at the efficient level at the start of the current period
• Benchmark on average sector cost. In the long run the sector as a whole is able to cover

its total cost including capital cost

• The adjusted Method decisions for electricity and gas for the 2017-2021 period have been annulled by

the Trade and Industry Appeals Tribunal (CBb) due to appeal of the TSO′s and DSO′s. ACM has to make new method decisions with a real WACC of 3,0% which would result in € 30 million extra revenues in 2021.

• The Ministry of Economic Affairs/Climate is still discussing topics in relation to new legislation that is to replace the existing E,G and H Acts:

– Integration of existing E and G legislation (Energy Act 1.0) – Market organization Heat (Heat Act 2.0) – Hydrogen – Enabling measures Climate Agreement

• Consultation of these Acts is expected in the first half of 2020. Expectation is that legislation will not come into force before 2022.
• Important for Alliander are 1) flexibility for necessary innovations in network management, 2) effect of changes in gas market and 3) market
• rganization of expected expanding heat applications.
• Official process of consultation for the next regulation period has been started in September 2019.
• Solid fundamentals of existing methods will remain unchanged.
• Focus of both regulator and grid companies is on necessary improvements/add-ons on existing method:

– usual discussion on level of WACC: the current low interest rates will have an impact on the WACC – a better method on forecasting future cost levels/tariffs: extrapolation of history is not always the best way in case of trend reversal – impact of an exponential increase of renewable energy (PV, wind) on our grids. – impact of the starting decrease in the number of connections on our gas grid – the duration of the regulation period.

13 13 4,5% 4,2% 3,8% 3,5% 3,1% 2,8% 2016 2017 2018 2019 2020 2021

Regulated real WACC

Schedule publication ACM method decisions new regulation period

14 14

Preliminary studies ACM Informal consultation (technical content) Formal preconsultation Study ACM parameters

2019 2020 2021 Today

View period

= ACM process = process w/stakeholders = formal decision/publication moment Final Method decision Draft Method decision Tariffs

Energy transition and strategy 5 Regulation 13 Results s 2019 19 15 15 Financial position 19 Other 25

Lower net profit due to sale of Allego in 2018

• Net turnover increased by €10m compared to the previous financial year to

€1,930m. The (regulated) turnover for electricity and gas decreased by €22m and €4m respectively. This is caused by a decrease in the (regulated) tariffs. For electricity these lower tariffs are compensated for by a growth in the number of

• connections. The tariffs for metering services have risen, resulting in a €22m

growth in turnover. The non-regulated activities of Qirion and Kenter have achieved a €14m higher turnover.

• Other income decreased by €108m, mainly due to the book profit on the sale of

Allego (€105m) in 2018.

• Reported operating expenses (excluding fair value mutations) increased from

€1,572m to €1,591m in 2019 due to, among others, rising costs of hiring contractors and material consumption (+ €20m) and higher depreciation charges (+ €20m) as a result of higher investments, compensated by lower external personnel costs (- €21m).

• Taxes have decreased by €43m compared to 2018 (€119m) due to changes in the

corporate tax rate, resulting in an incidental expense of €29m in 2018 and an incidental benefit of €9m in 2019.

• The reported net income after tax amounts to €252m compared to €334m in
• 2018. Last year the net income after tax was high, due to the sale of Allego. The

corresponding achieved book profit of €105m is the main cause of the lower result in 2019.

Consolidated profit and loss statement

16 16

€ million Reported 2019 2018 Revenue 1,930 1,920 Other Income 40 148 Total purchase costs, costs of subcontracted work and operating expenses

• 1,399
• 1,404

Depreciation and impairment of property, plant and equipment

• 449
• 409

Own work capitalised 257 241 Operating profit 379 496 Financial income/(expense)

• 52
• 46

Result from associates and joint ventures 1 3 Profit before tax 328 453 Tax

• 76
• 119

Profit after tax from continuing operations 252 334 Profit after tax from discontinued operations

• Profit attributable to minority interests

1

• Result after tax

253 334

Investments €100m higher than in 2018

• Gross investments €103m higher than in 2018.
• Investment level increased due to higher investments in our electricity grid (+ €105m) and buidlings, IT, etc (+ €18m), partly mitigated through lower investments in metering

devices (- €12m) and our gas grid (- €8m).

• The difference of €124m between gross- and net investments is caused by third party contributions (2018: €126m)

Gross investment in PPE Third party contributions and net investments

17 17

502 397 117 129 129 137 86 68

2019 2018

834 834 731 € million 710 605 124 126

2019 2018

834 834 731

€ million

Smart meter offering is on schedule

• In 2019 according to plan the smart meter has been offered to

624.911 customers

• By the end of 2020 the smart meter has to be offered to all of
• ur 3.2 million customers
• By the end of 2019 the smart meter was offered to in total 89%
• f all customers. In 2019 the meter was offered to 20 % of all
• customers. Target for end of 2019 was 85%
• The overall project runs according to schedule
• Total CAPEX for smart meters in the period 2008-2020 amounts

to approximately € 800 million. Progress large scale offering of smart meter in 2015-2019 (% of total number of customers)

18 18

13% 19% 32% 49% 69% 89%

13% 18% 31% 48% 66% 85% 100% Pre GSA 2015 2016 2017 2018 2019 2020

% target and realised

Target Realisation

Energy transition and strategy 5 Regulation 13 Results 2019 15 Financial ancial posit ition ion 19 19 Other 25

• Stable dividend
• Pay-out: 45% of after-tax profit, adjusted for incidental items, unless CAPEX from regulatory obligations or financial criteria require

higher retained earnings

• Minimum solvency of 30%
• 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

Divid viden end Policy cy

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

Finan anci cial al Fram amew ewor

• rk

General eral Princip ciples es

Financ nancia ial l Polic icy

Liquidity ty Credit t Rating/ Debt providers Shareho holders' equity ty

Alliander's Financial Policy

20 20

Financial position

1 Excluding € 226m lease obligations

in € million

Alliander N.V 2,114 Liander 174 Qirion Kenter Other

Gross and net debt Location of gross debt (€2,288m) Maturity profile1 Capitalisation

21 21

297 7 409 400 9 300 646 500 100 200 300 400 500 600 700 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 >2030 0.875% 2.25% 2.875% 1.625%

Capital Market Programs

• EMTN

3,000 million

• ECP 1,500 million

Backup credit facility RCF 600 million Gross debt (including CBL related financial lease obligation) 2,288 Cash 153 CBL investments 160 Total cash and investments 313 Net debt according to IFRS 1,975 50% of the perpetual loan 248 Net debt according to financial policy 2,223

Committed credit facility €600m (exp: Jul-23)

1st call option hybrid

Equity 3,729 Subordinated perpetual bond loan 495 Subordinated loans 66 EIB loan 300 Euro Medium Term Notes 1,392 Lease obligations 226 Other 15 Euro Commercial Paper 289

Total l 6,512 12

Financial ratios well within financial policy framework 1

1) Ratios based on figures with 'held for sale'-classification (IFRS 5) not taken into account. 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/capitalisation: net debt divided by the sum of net debt and equity .

22 22

Interest coverage ² FFO / Net Debt ³ Solvency ⁴ Net debt / capitalisation ⁵

10,2 12,9 13,3

31 1 dec 2017 17 31 1 dec 2018 18 31 1 dec 2019 19 min. 3.5x

27,4% 4% 32,2% 2% 29,0% 0%

31 1 dec 2017 17 31 1 dec 2018 18 31 1 dec 2019 19 min. 20%

56,7% 57,3% 3% 55,6% 6%

31 1 dec 2017 17 31 1 dec 2018 18 31 1 dec 2019 19 min. 30%

34,4% 4% 33,8% 8% 36,5% 5%

31 1 dec 2017 17 31 1 dec 2018 18 31 1 dec 2019 19 max. 60%

• 713
• 496

2019 2018

246 10 10

2019 2018

• 150
• 92
• 8
• 21

2019 2018

• 158
• 113

113

Higher financing need as a result of higher investments

• The cash flow from operating activities remains stable at €638m in 2019 and 2018. The lower interest paid of €20m in 2019 is compensated by a higher working capital of

approximately the same amount.

• The cash flow from investment activities amounts to €713m and is €200m lower compared to 2018. This is caused by an increase in investments of €103m and the sale of

Allego in 2018, due to which the cash flow from investment activities was improved by €110m in 2018.

• The dividend paid in 2018 is €58m higher than in 2017, due to a higher net result in 2018.
• The cash flow from financing activities amounts to €246m and consisted mainly of the proceeds from ECP issuance
• On balance, €39m was added to cash

23 23 Note: e: * Excludin ing divid iden ends and reim imbursem emen ent of perpetu etual al bondhold lder ers

Dividend paid and reimbursement of holders perpetual bonds

in € million

Cash flow from investing activities

Dividend paid Reimbursement bondholders

Cash flow from financing activities *

638 638 638 638

2019 2018

Cashflow from operating activities

Strong corporate credit ratings

Rationale

• Alliander's credit profile is underpinned by (1) its low business risk profile as

the monopoly provider of electricity and gas distribution network services in its service area; (2) stable and predictable cash flows, generated under a well- established and transparent regulatory framework; and (3) its strong financial profile, with very modest leverage (Net Debt/Fixed Assets) compared to European peers

• Alliander's Aa2 rating incorporates two-notches of uplift from its stand-alone

credit quality, reflecting the strong probability of extraordinary financial support being provided by its owners the largest of which is the Province of Gelderland with a 45% shareholding, if this was ever needed

• The stab

able e outloo

• ok refl

eflec ects Moody′s expec pectation

• n that

at Allian ander der will continue e to

• deri

erive ve the e vast st majori rity of its s earning rnings s and d cash sh flow

• ws

s fro rom low-ri risk sk regu egulat ated ed activities es and d maintai ain a finan anci cial al pro rofile e in line e with our r minimum mum guida dance ce for

• r the

e curr rren ent rati ating. Rationale

• Alliander N.V. continues to generate most of its earnings from its fully

regulated electricity and gas distribution activities in the Netherlands, providing good visibility over its cash flows streams. Despite challenging regulatory returns, we forecast that the company will continue posting stable funds from operations (FFO) because of efficient operations and a relatively stable cost structure.

• The Dutch regulatory framework has a high degree of regulatory stability

because it provides well-developed tariff-setting procedures, and we see low risk of political interference

• The stab

able e outloo

• ok refl

eflec ects our r expect pectat ation that, at, desp espite e increm cremen ental al debt bt due e to

• increa

creased sed capex pex and d a sched eduled ed decli cline e in regul gulat atory y WACC CC, , Allian ander er will pos

• st an FFO-to

to-deb ebt rati atio com

• mfor
• rtab

ably y abo bove ve 25% over er the e next xt 24 month

• nths,

, thanks s to

• highe

gher regul gulat atory y elect ctricit city y and d gas s reve venues es and d efficien cient

• perat

perations s that at tran anslat ate e into

• a stabl

able e cos

• st struc

ructure.

• re. We also

so believ eve e that at investme ments s relat ated to the energy rgy tran ransi siti tion

• n in the Nethe

therl rlands ds will supp pport Allian ander' er's regul gulated ated asset set base. se.

Issuer Aa2/Sta table Short-Te Term P-1 Basket C Hybrid A2 A2

Source: Moody's Investors Service 29 November 2019. Standard and Poor's 29 November 2019.

Corporate AA AA-/S /Sta table Short-Te Term A-1+ 1+ Junior Subordina nated A

24 24

Energy transition and strategy 5 Regulation 13 Results 2019 15 Financial position 19 Other 25 25

On the way to a CO2 neutral business in 2023

Climate te Neutra tral operat rations ns In 2019 Alliander's CO2 emissions fell by 24 kilotonnes, representing a reduction of some 8% compared with the same period last year. Alliander's climate-neutral operations objective by 2023 will be achieved via: 1. Saving energy and improving energy efficiency. 2. Using renewable energy where possible 3. Carbon offsetting the use of non-renewable energy by purchasing certificates of origin for renewable energy from newly built windfarms in the Netherlands

Alliander er's net CO CO2 emission ions own operatio ions1

26 26

• 18

15 10 110 64 58 288 209 196

416 288 264

2017 2018 2019 Mobiliteit Netverliezen administratief Net- en lekverliezen technisch TOTAAL

Mobility Administrative grid losses Total Technical grid losses

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

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 obligations (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

Cross border leases – Basic structure

Partly pledged

Financial Institutions US Investor

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

• bligations

4 Buy back

Banks

4 1 3 2 7 5 6

Alliander US Trust

Basic structure in steps Transaction rationale

27 27

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0

• 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

CBL related risks Contractual termination values CBL's Alliander (USD billion)

• 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.

Contractual termination value

(1) (1)

Risk summary

(1) (1) 1

Contractual termination value Equit uity strip ip risk Equit uity inve vestments Debt inv nvestment nts

Cross border leases – Risks

3 leases 3 leases US leases 31 Dec 2019 31 Dec 2018

in USD million

Equity strip risk 139,6 199,6 Overview Letters of Credit 31 Dec 2019 31 Dec 2018

in USD million

Issued

• Additional L/C's at A3/A-

106,0 148,2 Additional L/C's at Baa1/BBB+ 24,7 24,3

28 28

Disclaimer

This presentation is a translation of the Dutch presentation on the consolidated annual results 2019 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. Alliander N.V. is the sole shareholder of Liander N.V., Qirion B.V., Kenter 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 operating 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 2019 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.

29 29