Company profile tennet abn amro 21 may 2015

Marketing Communication

TenneT Holding B.V. Going green

Group Economics Macro & Financial Markets Research Hyung-Ja de Zeeuw +31 20 6283551

21 May 2015

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

TenneT, the state-owned electricity transmission system operator in the Netherlands with large transmission operations in Germany, announced a possible senior euro-denominated inaugural Green Bond transaction. As TSO, TenneT plays a forerunner role in the energy transition in Germany and the Netherlands. Last year, TenneT was appointed as sole developer and operator of the Dutch offshore network. The legislative proposals STROOM and the Offshore Wind Energy Act will officially define TenneT’s role. STROOM should be effective 1 January 2016, the Offshore Wind Energy Act should enter into force 1 July 2015. In Germany, TenneT’s responsible for a large share of the offshore wind connections, the connection of onshore renewables and the construction of transmission capacity to transmit the offshore wind generation capacity in the north, to energy consumption in the south. In the coming years, TenneT will need to invest approximately EUR 20 to 22bn.

We expect that a large share will be funded with debt. This will impact TenneT’s debt level and ratios. On the other hand, there are positive catalysts coming up in the near future regarding regulation which will be a significant improvement for TenneT. We are therefore positive on TenneT and we expect the utility to maintain its current rating.

Company Description

TenneT’s Dutch and German network

TenneT Holding B.V. is the sole TSO in the Netherlands. It is owned by the Dutch State. In 2009 TenneT acquired E.ON’s transmission assets in Germany. This high voltage network is one of four German electricity transmission systems. It is operated by TenneT TSO GmbH. The Dutch TSO operations are carried out by TenneT TSO B.V. In 2014, TenneT was appointed sole developer and operator of the Dutch offshore network by the Dutch minister of Economic Affairs.

In addition to the regulated activities, TenneT also deploys some non-regulated activities. These concern activities that support the energy market or are ancillary to it. Non-regulated activities make up 5% of TenneT’s assets.

Return on Capital As TSO, TenneT enjoys a natural monopoly in the areas it serves. Its revenues are regulated. Because its operations span two countries, it has two regulatory frameworks to take into consideration. Although TenneT is owned by the Dutch state, about 70% of its assets are in Germany.

In the Netherlands, for the current regulatory period (20142016) the WACC has been set at 3.6% pre-tax in real terms, which is lower than the previous WACC of 6% in the last

Source: TenneT

2

TenneT Holding B.V. - Going green

regulatory period. The fall in the risk free rate is the main

wind as the preferred source of renewable energy in the

driver. This implies that during this period, revenues for the

Netherlands, TenneT has estimated it will need to invest EUR

Dutch network will be lower compared to previous periods.

2 to 3bn in offshore grid connections in the coming 10 years.

TenneT has lodged an appeal against this decision. The

This means that TenneT could need to strengthen its capital

outcome is expected in Q2 2015.

structure in order to maintain its A-/A3 rating. We expect the Dutch Minister of Finance to support TenneT’s equity position

In Germany, the return on equity for new assets has also been

for its Dutch assets when necessary.

lowered for the current regulatory period (2014-2018).

However, the return on equity is still a substantial 9.05%

New Electricity Act will be beneficial for TenneT

(nominal, pre-corporate tax, post-trade tax). For debt, the

In Germany, the regulation that’s applicable to offshore

incurred cost of debt is used.

projects changed last year. Projects that are under construction remain outside the scope of the normal regulatory

Heavy investment schedule ahead in the coming years

framework. Instead, TenneT’s offshore expenses are

In order to accommodate the accelerated energy transition in

reimbursed from the start of the project, not at the completion

Germany and the Energy Agreement in the Netherlands,

of the project. This has worked out very positively for TenneT

TenneT has an intensive investment schedule ahead. In the

as the cash flows come back to the company at an earlier

coming years TenneT will need to invest EUR18 to 22bn.

stage.

Approximately 90% is related to new infrastructure projects and approximately 10% regards modernisation of its existing

In the Netherlands, only completed projects are allowed to be

network. A significant share of the investments is related to the

included in the regulatory asset base (RAB). However, the

energy transition in the Netherlands and Germany.

current Electricity Act will be replaced by a new Act which is scheduled to be implemented in 2016 (Wet STROOM). In the

TenneT’s capex program for the coming 10 years

current draft of the new Act, TenneT is allowed to immediately

In EUR

add the assets under construction to its RAB. This applies to

Onshore Offshore Total

Netherlands 4-5 bn 2-3 bn 6-8 bn

Germany 7-8bn 5-6bn 12-14 bn

Total 11-13bn 7-9bn 18-22bn

Source: ABN AMRO Group Economics, TenneT

all the projects that qualify for the Rijks Coordinatie Regeling (RCR), which is 40 to 50% of its portfolio. This is a significant improvement for TenneT. Another supporting paragraph in the new Act is the limited liability for TenneT regarding the potential construction and/or

Capital structure: strengthening its balance sheet

cable availability of its offshore activities. The liability will be

The impact of the extensive capex program of EUR 1.8 to

capped and limited. The exact parameters are not available

2.2bn a year on average, is significant compared to an

yet.

EBITDA of EUR 1.2bn in 2014. However, TenneT is keen on preserving its current ratings (A-/A3) in order to keep flexible

Germany will remain the growth driver

access to the debt capital markets. It is taking several

In 2014 EBITDA reached EUR 1,282mln, a growth of 21.5%.

initiatives to strengthen its equity position.

The growing asset base in Germany and the offshore activities

For its regulated business in Germany, the company

Not just because 70% of the assets are located in Germany,

strengthened its capital position in 2014 by raising equity from

but also because the regulatory regime (2014 - 2018) is more

private parties, amongst others from CIP (Copenhagen

accommodating than its Dutch counterpart. The higher return

Infrastructure Partners) for offshore projects in the German

on equity and the fact that the regime allows a return on capital

North Sea. CIP is backed by Danish pension fund Pension

on large assets under construction without delay, works in

Danmark. TenneT’s equity position went from EUR 2,593mln

favour of TenneT. As mentioned before, investments will

to EUR 3,236mln, an increase of almost 25%.

increase in the coming years due to the accelerated energy

have been and will remain the main driver of TenneT’s growth.

transition in Germany. As a result, the regulated asset base In the Netherlands, TenneT is not allowed to privatise part of

will grow and EBITDA is expected to increase.

its Dutch regulated assets by law. However, sizeable investments are needed in the coming years as the Dutch

Because the German assets are the lion share of total assets,

Minister of Economic Affairs has appointed TenneT as

the adverse effects of the Dutch regulatory regime on total

offshore grid developer and operator in the North Sea. With

EBITDA will be completely mitigated by growing EBITDA from

3

TenneT Holding B.V. - Going green

Germany. We expect EBITDA growth to be in the range of 7%

FFO/adjusted Net Debt will fall

to 9% in FY2015.

TenneT’s FFO/adjusted net debt was 27% in 2013 and 21% in 2014. A further deterioration of the ratio is likely given the vast

Cash Flows distorted by EEG flows

capital expenditure programme that lies ahead. If the assumed

TenneT’s working capital and cash flows are extremely

EUR 4bn of capex for FY2015 would be entirely funded with

distorted by flows that are related to the German Renewable

debt, TenneT’s FFO/Adjusted Net Debt would decrease to the

Energy Act (EEG). The Act obliges TenneT to buy the

mid-teens range. However, TenneT is still comfortably

produced renewable electricity against a pre-determined

positioned with enough headroom for its current rating. The

(higher) feed-in tariff and sell it on the energy exchange at a

current rating requires a minimum adjusted FFO/ net debt of

(lower) market price. The difference is charged to all energy

8% at S&P.

suppliers and subsequently billed to the German consumers as a special EEG levy. The differences in costs and levy

We are positive on TenneT

revenues are settled in the following year. While TenneT only

TenneT has a very challenging investment programme ahead

acts as a pass-through, it causes large swings in working

with quite some execution risk. Its debt level will very likely

capital and distorts the picture.

increase and its adjusted FFO/adjusted net debt ratio will deteriorate but will remain comfortably above the critical

In 2014 TenneT had a negative Free Cash Flow of EUR 558mln. This included a positive movement in EEG cash flow of EUR 869mln. For FY2015 we expect TenneT to remain Free Cash Flow negative. This assumes a constant EEG cash flow compared to 2014 and capital expenditures of roughly EUR 4bn. Although the average capex over 10 years will be in

threshold. The lion share of TenneT’s cash flows are derived from Germany which has a more favourable regulatory regime than the Netherlands. On top of that, the new energy Act STROOM, that will be implemented in the Netherlands in 2016, will allow TenneT to immediately add the assets under

the range of 1.8 to 2.2bn, the capex programme will be

construction to its RAB. This will be a significant improvement

frontloaded. With these assumptions TenneT will have funding

for TenneT. From a fundamental perspective we are positive

need of somewhere between EUR 3 and 3.5bn this year which

on the credit. We expect TenneT to maintain its current rating.

will be most likely funded with debt. Its adjusted debt will therefore increase to roughly EUR 7bn compared to EUR 4.8bn in FY2014.

Marketing Communication

TenneT Holding B.V.

Group Economics Macro & Financial Markets Research

Tear sheet

Hyung-Ja de Zeeuw +31 20 6283551

21 May 2015 Ratings S&P

ASTABLE

Moody's

A3 STABLE

Consideration for low er rating: - Adjusted FFO/debt persistantly < 6% - If likelyhood of government support decreases materially, A dow ngrade of the Dutch sovereign w ould not result in a dow ngrade of TenneT

TenneT's internal policy - FFO/Net debt > 8% as calculated by S&P and Moody's - Committed to A-/A3 rating

Consideration for low er rating: - FFO interest cover < 2.5x - FFO/Net debt persistantly < high single digit

Strenghts and Risks Strengths - Ow ned by the Dutch state (AA/AAA/AAA). Enjoys implicit state guarantee for its Dutch assets - Sole TSO in the Netherlands and large TSO in Germany - Forerunner in developing and operating offshore connections - Appointed as sole developer and operator of offshore grid in the Netherlands - 95% of assets in stable regulated low risk business - Favourable regulative framew ork in Germany (70% of assets) - Strong position in North West Europe

Financial summary in EUR mln

2013

2014

2015e

Revenues

2,429

2,597

2,800

EBITDA

1,055

1,282

1,350

755

973

1,000

Capex

1,868

2,296

4,000

adj. Net Debt

2,835

4,732

7,000

27%

21%

15%

FFO

FFO/adj. Net Debt (in %) EBIT by geography

Risks - Dutch regulatory framew ork makes TenneT sensitive to low interest environment - Execution risk due to accellerated energy transition in Germany - Potential liabilities related to delays or interruptions of German offshore activities - Execution risk on its Dutch offshore developments - Delays or changes in the Energy Agreement w ith w ind as the preferred renew able energy source - Reset risk of the German (2014 -2018) and Dutch (2014-2016) regulatory regimes

Catalysts - The revised Electricity Act should be implemented in January 2016 and brings several beneficial changes for TenneT. The most important one being the immediate addition of projects under construction to the RAB and the limited liability for the Dutch offshore netw ork operations.

2% 28% Netherlands Germany

Assets by geography 8%

27%

Netherlands

Germany

- TenneT w ent into appeal w ith the Netherlands Trade & Industry Appeals Tribunal (CBb) to challenge the regulatorâ&#x20AC;&#x2122;s decision on the revenue cap. TenneT also lodged an appeal against the permitted rate of return used for the WACC calculation of 3.6% in the regulatory period 2014-2016. The outcome of the appeal is expected in the second quarter of 2015.

- In Germany large offshore projects are entering the operational phase. Until now these projects have received a fixed percentage reimbursment for operational and maintanance costs. In the coming years it w ill have to become clear if the reimbursement is sufficient to cover the actual costs.

Non-regulated

70%

65%

Non-regulated

Debt maturity profile in mln EUR 600 500

1st call date

400 300 200 100 0 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

5

TenneT Holding B.V. - Tear sheet

TenneT’s senior bonds outstanding and Dutch senior comparables Swap spread levels of 21/5/2015

45 TENN 4 1/2 02/09/22

40

TENN 4 5/8 02/21/23 ENEXIS 3 3/8 01/26/22 NEGANV 2 5/8 07/13/22

35 NEGANV 3 5/8 10/13/21

ALLRNV 2 1/4 11/14/22 ALLRNV 2 7/8 06/14/24

TENN 2 1/8 11/01/20

30

NEGANV 4 1/2 06/20/21 ENEXIS 1 7/8 11/13/20

25 TENN 3 7/8 02/21/18

20

ALLRNV 4 1/2 12/17/19

15 NEGANV 5 1/8 03/31/17

10

5 NEGANV 4 1/4 06/20/16

0

-5 2014

ALLRNV 5 1/2 04/20/16 NEGANV 0 7/8 10/30/15

2016

2017

2019

Source: ABN AMRO Group Economics, Bloomberg

TenneT has five bonds outstanding that are benchmark eligible of which one is a Perpetual bond (not plotted in the graph).

Compared to the other Dutch utilities, TenneT’s bonds are more liquid.

TENN 3⅞% 02/21/18 and TENN 4½% 02/09/22 are the cheapest bonds on the curve. However, ENEXIS 1⅞% 11/13/20 offers better value as it trades only slightly inside the TENN 4½% 02/09/22 while having a 1.3 year shorter maturity and a two notches better rating.

2020

2021

2023

2024

2025

6

TenneT Holding B.V. - Tear sheet

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This material has been generated and produced by a Fixed Income Strategist (“Strategists”). Strategists prepare and produce trade commentary, trade ideas, and other analysis to support the Fixed Income sales and trading desks. The information in these reports has been obtained or derived from public available sources; ABN AMRO Bank NV makes no representations as to its accuracy or completeness. The analysis of the Strategists is subject to change and subsequent analysis may be inconsistent with information previously provided to you. Strategists are not part of any department conducting ‘Investment Research’ and do not have a direct reporting line to the Head of Fixed Income Trading or the Head of Fixed Income Sales. The view of the Strategists may differ (materially) from the views of the Fixed Income Trading and sales desks or from the view of the Departments conducting ‘Investment Research’ or other divisions This marketing communication has been prepared by ABN AMRO Bank N.V. or an affiliated company (‘ABN AMRO’) and for the purposes of Directive 2004/39/EC has not been prepared in accordance with the legal and regulatory requirements designed to promote the independence of research. As such regulatory restrictions on ABN AMRO dealing in any financial instruments mentioned in this marketing communication at any time before it is distributed to you do not apply.

This marketing communication is for your private information only and does not constitute an analysis of all potentially material issues nor does it constitute an offer to buy or sell any investment. Prior to entering into any transaction with ABN AMRO, you should consider the relevance of the information contained herein to your decision given your own investment objectives, experience, financial and operational resources and any other relevant circumstances. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice on issues that are of concern to you.

Neither ABN AMRO nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication.

Any views or opinions expressed herein might conflict with investment research produced by ABN AMRO. ABN AMRO and its affiliated companies may from time to time have long or short positions in, buy or sell (on a principal basi s or otherwise), make markets in the securities or derivatives of, and provide or have provided, investment banking, commercial banking or other services to any company or issuer named herein.

Any price(s) or value(s) are provided as of the date or time indicated and no representation is made that any trade can be executed at these prices or values. In addition, ABN AMRO has no obligation to update any information contained herein.

This marketing communication is not intended for distribution to retail clients under any circumstances.

This presentation is not intended for distribution to, or use by any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.

In particular, this presentation must not be distributed to any person in the United States or to or for the account of any “US persons” as defined in Regulation S of the United States Securities Act of 1933, as amended.

CONFLICTS OF INTEREST/ DISCLOSURES This report contains the views, opinions and recommendations of ABN AMRO (AA) strategists. Strategists routinely consult with AA sales and trading desk personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of a specific fixed income security or financial instrument, sector or other asset class. AA is a primary dealer for the Dutch state and is a recognized dealer for the German state. To the extent that this report contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental credit opinions and recommendations contained in credit sector or company research reports and from the views and opinions of other departments of AA and its affiliates.

Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. In addition, strategists receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter, AA and/or its affiliates normally make a market and trade as principal in securities discussed in marketing communications.

ABN AMRO is authorised by De Nederlandsche Bank and regulated by the Financial Services Authority; regulated by the AFM for the conduct of business in the Netherl ands and the Financial Services Authority for the conduct of UK business.

Copyright 2015 ABN AMRO. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without ABN AMRO's prior express consent.