Yesterday night, the CREG published three proposal documents on its website relating to the tariffs for the 2012-15 transmission operator. In a 145 page consultation paper the CREG responds to remarks made by Elia, a 48 page report outlines the methods to calculate the tariffs, while a 68 page note provides further detail on the actual tariff proposals of Elia for the period 2012-15. These are still proposals and Elia has up to 12 December 2011 at the latest to respond.
Most items remain intact
A first read of the documents demonstrates that most items to calculate the fair return remain the same (Rf = Belgian OLO 10 year; Rm = 3.5%; target D/E 67%/33%). Also goodwill decommissioning will remain part of the net profit calculation, while the transfer pricing method remains intact. The CREG still needs to decide on the Y-factor and hence the costs savings on manageable costs that can result in the advantage of shareholders.
Beta factor adjusted
We spot one large amendment to the way the fair return is calculated, namely the Beta-factor. While under the previous method, the minimum Beta was set at the minimum of the covariance of the Elia share vs. the BEL20 calculated over a period of 7-years and 0.3x, the current proposal does no longer include the minimum of 0.3x. This minimum is now replaced a by Rf + 70bps, hence in-line with the S-factor, which is kind of a punishment for excess equity (Equity in excess of 33% of RAB). Hence, the ROE on 33% of Equity is the highest of Rf + 70 bps and Rf + Rm * Beta.
Goodwill Decommissioning
A further adjustment stems from the way Goodwill Decommissioning is added to net profit. While Elia under the previous regulatory regime passed on the full amount into equity (no allowed to pay-out as dividend), this would be reduced to an after tax amount. This could in our view impact the leverage potential of the Group, and hence lower its potential to invest (and grow RAB).
Conclusion:
Since the documents of the CREG are still proposal documents, and Elia has up to 12 December 2011 to provide a counter reaction, we will leave our forecast currently unchanged. Note that our current FY12 OLO rate is set at 4.0% and we have taken into account a Beta of 0.3x 2012-2015.
Ceteris paribus, lowering the Beta factor to 0.1475x (Beta calculated by the CREG at year end 2010), would impact our FY12 net profit for the Belgian activities by € 4.5m, and lower Group net profit by 3.5%. Lifting the average OLO rate to 4.3% over FY12 (current 10-year Belgian OLO at 5.5%), would erase any negative impact of a lower Beta.