ENGIE : Transcript 9M 2022

9M 2022 RESULTS

10 November 2022

Operator

Thank you

Aarti Singhal

Thank you and good morning, everyone. It's my pleasure to welcome you to ENGIE nine-month conference call shortly. Catherine, and Pierre-Francois will present the performance following which we will open the lines to Q&A. And my usual polite request. Please to limit your questions to one or only two please.

And with that over to Catherine.

Catherine MacGregor

Thank you Aarti, and good morning everyone.

ENGIE has delivered in what have been clearly unprecedented market conditions.

Our teams have continued put in relentless efforts to help tackle the energy crisis. ENGIE is playing a leading role in supporting security of supply in Europe. We are also contributing to policy measures to help address these high energy prices. Importantly, we have maintained momentum on the execution of our strategic plan. The disposal program that we announced back in May last year, is now nearly complete and we are driving forward at pace on growth, particularly in renewables.

I firmly believe that this crisis offers society an opportunity for a faster energy transition, on which our teams are working day-in,day-out, executing on our strategy. A strategy that is indeed more relevant than ever.

Now, on to our financial and strategic progress in the past nine-months. EBIT grew 79% organically to €7.3 billion, driven by a higher contribution from most of our activities with a particularly strong increase from GEMS.

Higher cash flow from operations supported our growth capex. We invested €3.7 billion in growth of which 62% in renewables.

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We continue to roll out our performance plan, delivering efficiency improvements across the board, and we are on track with our plan and our three-year target.

We have maintained a strong balance sheet and high liquidity which remained very important in the current environment.

So, on the back of this strong performance that we've announced today, we are upgrading our 2022, guidance with net recurring income group share expected now to be in the range of €4.9 billion to €5.5 billion and the Board has reaffirmed our dividend policy.

I want to acknowledge the engagement of our teams as the performance that we are announcing today clearly would not have been possible without their contribution.

We have therefore decided to offer an exceptional bonus of €1,500 for each of our employees worldwide. We want to recognize their tremendous efforts in managing the crisis, the high inflation environment and of course, this measure is supported by our strong financial performance.

We have managed through significant disruptions to Russian gas flows this year with no implications on physical supply. Our infrastructure activities in gas transport, in gas distribution, LNG terminals, and storage have all been operating at high utilisation rates.

Gas volumes transported have increased and GRTgaz is now transporting gas from France to Germany.

French LNG energy terminals have operated at record levels, and storage levels at Storengy in France are nearly at 100%.

We have continued to diversify sources of gas supply with additional volumes from Norway, from the US and from Algeria. ENGIE is well prepared for this winter.

We continue to be confident that additional volumes contracted together with an expected decrease in demand will enable ENGIE to reach its required storage levels for next winter also.

And we are actively working on the future of renewable gases. And we are unlocking the potential of biomethane, in France 459 biomethane units are now connected to our grids and this represents a total production capacity of 7.7 terawatt hours per year.

We have also continued to drive forward on hydrogen. Five of our projects have been selected by your EC Public Funding Program to boost the development of hydrogen, which highlights their viability and relevance.

And as part of our R&D platform in France, we recently also inaugurated our H2 factory in order to help us to test the entire hydrogen value chain, including production, storage and usage.

Before covering our operational and strategic progress, first an update on some of the EU measures that have been at the forefront of recent policy debates to address high energy prices.

I start with the infra marginal rent cap where the EU adopted a regulation in October and now different Member States are working on its implementation.

Based on the current draft bills, we expect our nuclear assets in Belgium, our drawing rights on two EDF nuclear plants, as well as our CCGTs in France to be the main assets covered by these measures.

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We are awaiting further detail on these bills, which are expected to be adopted by the end of the year but we have simulated and included our best estimate of the potential impact of these measures in the guidance provided to you today.

And just a reminder, we have already contributed nearly €900 million in the nine-months, through existing government profit sharing mechanisms in Belgium, and in France. And in addition with the benefit of our strong financial position, we continue to provide working capital support to implement the tariff shield, as well as the higher gas storage requirements in France.

We are also helping vulnerable customers, as we already announced in the summer, supporting SMEs, alongside initiatives to help customers reduce energy consumption on days of high demand.

We are also engaged in discussion on the many policy measures which are being considered in Europe, not only to address the short-term but also on the longer-term market design. Our conviction is unchanged, delivering a smooth affordable energy transition will require a balanced energy mix with a critical role for power, for gas and of course increasingly for renewable gases.

On to our strategic and operational progress.

I'm very pleased to say that alongside all the actions that we've taken to tackle the short-term, our teams have made further progress on the strategic plan.

The announced disposal program is nearly complete with the sale of EQUANS.

Our geographic footprint will be down to 31 countries upon completion of the signed or closed agreements. This is to be compared to 70 back in 2018.

ENGIE is capturing many opportunities to accelerate the energy transition, primarily through investment in renewables where our platform is growing with nearly 37 gigawatts of installed capacity and a target of 50 gigawatts by the end of 2025.

We have exited 100% of coal in Brazil with the sale of Pampa Sul which is now signed and the closure of the last Tocopilla unit in Chile.

So now coal represents 2.6% of our centralized generation capacity and it is by exiting coal and by investing in renewables that we are indeed progressing towards our net zero ambition by 2045 and this will cover three scopes.

So with the progress to date, we consider that our strategic and geographic refocus is now more or less complete.

Let me now move to the operational progress.

ENGIE is operating in energy markets through GEMS, which offers a clear competitive advantage for us. In GEMS, we have over two decades of experience and we are linking our activities through a global portfolio approach, enabling us to achieve a number of objectives, such as commercializing renewables output, linking our flexible portfolio to our very large customer franchise, capturing value through optionality and of course responding to increasing demand from our customers for risk management services in this context of continuing volatility.

GEMS has benefited from record high level of activity in a favourable environment and Pierre-Francois will cover this in more details.

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In Renewables, we've continued to grow our installed capacity, adding 2.5 GW in the nine-months to a number of projects such as in Scotland with Ocean Winds, Eolia in Spain as well as projects in the US, in Chile and in France where for example we have commissioned 27 solar and wind projects this year further strengthening our leadership in this market.

And we also grew a renewable pipelines, for example, we just announced an MoU with a consortium in Egypt capitalizing on a long-term local partnership to build, own and operate, a 3 gigawatt wind farm.

Our Thermal business contributed to the security of supply and system stability through flexibility and ancillary services. Flexibility in generation will remain absolutely key to balancing intermittency from renewables.

To this end, recently, we acquired a 6 gigawatt pipeline of projects, including solar, paired and standalone battery project in the US which will be developed jointly by our Thermal and Renewables GBUs, clearly leveraging our integrated business model.

In networks beyond the high utilization rates in France, internationally in Brazil we reached commissioning for 94% of the Gralha Azul power line. TAG also posted a strong performance and is playing an important role in the opening of the Brazilian gas market.

In Energy Solutions, we are continuing efforts to increase efficiency and build a stronger platform for long-term growth. We have such a large pool of opportunities, the revenue backlog increased in the nine months and the GBU saw multiple wins. Confirming the strong market drivers for this business, examples of that include a concession to build and operate 5,600 EV charging units in Belgium, concessions in district heating cooling such as the network of Hautepierre in France and multiple distributed solar opportunities, such as with Saint Gobain in Romania and Heineken in Spain.

Finally, in Supply we're working on affordability initiatives and our strong supplier brand is contributing to a lower customer churn across our European presence.

So, in general, strong operational progress underpinned by the strength of our integrated business model. Let me now hand over the floor to the PFR.

Pierre-François Riolacci

Thank you very much, Catherine, and good morning to all of you. We are, as you can imagine, pleased with our nine months performance, with EBITDA and EBIT continued to grow significantly. Cash generation improved with €8.4 billion of CFFO in the first nine months, up €3.1 billion versus last year. And economic net debt is slightly higher, while our credit ratios are improving further.

We are well on track on our three-year strategic plan, reaching around €10.5 billion of net financial debt impact with disposals already closed as we speak. That is to say that our at least €11 billion financial target for our disposal plan is almost achieved. And last but not least, we are upgrading, indeed, our 2022 guidance, while we are reaffirming our dividend policy.

Let's get maybe closer to the details and look at EBIT variation. EBIT is up €3.3 billion, €3.2 billion organically. We have, indeed, a positive FX impact of €236 million, with the appreciation of Brazilian real and US dollar against euro, and also an aggregate negative scope impact of €116 million. This scope effect is linked to 2021 events and also to some asset disposals, mainly to achieve our coal exit target and geographical refocus. So, on an organic basis, the 79% EBIT growth is actually across almost all GBUs, as Catherine was pointing to.

Renewables are plus €117 million, that is plus 13%, and let me highlight some key points. On the positive, we are leveraging our industrial performance. We are continuing to commission new capacity, and this is translating

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into higher contribution. We are also capturing some higher prices in Europe, mainly with French hydro, and we take advantage of the reversal of the 2021 one-off, the Texas extreme weather event impact. But this is offset partly by very severe hydro conditions in France and in Portugal that led to the double effect of, one, lower hydro volumes; but also, two, some buybacks. If you are looking in Q3 in isolation, you should also remember that, in Q3 2021, GFOM ruling in Brazil impacted by €150 million the comparable basis. But overall, we are very pleased with the underlying trend of Renewables business.

Networks is slightly down, minus €31 million, that is minus 2%. And it comes from France, where we had some negative effects due to warmer temperatures, but also to lower regulated revenues from our assets which are reflecting the latest regulatory review. It is, of course, important to mention that GRTgaz benefited from increased subscription of capacities related to transported volumes from France to Germany. These revenues are, of course, expected to reverse in the future. Outside France, Networks benefited from higher contributions in Latin America, mainly driven by strong performance in gas transmission in Mexico and in Brazil, as well as inflation indexation, partly offset in Europe by warmer temperatures and also some higher energy costs.

Energy Solutions is broadly flat, minus €4 million, minus 2%. We had some positive effects from energy prices, which have been going up in France mainly, but that was offset by a net aggregate negative impact of one-offs. There were positives in 2021, negatives in 2022; nothing really material but, of course, has an impact. And also, we had some headwinds from warmer temperatures in France. Overall, very confident that we can deliver a strong improvement in Q4 for Energy Solutions.

Thermal is up €259 million, that is plus 34%. Very positive results with a strong contribution of our European activities, which have been able to capture higher spreads, and also very strong level of ancillary services. But we had also a fair share of headwinds. We had some outages in France, and the cost was even more important given the current level of commodity prices. We had this extraordinary tax in Italy, which, by the way, is also impacting our GEMS activity. And we also already say that we firmly believe this tax is not properly designed. And also, as in H1, we are still facing some difficulties in a couple of countries, in Chile and Australia, with structural supply/demand imbalance, which penalize activities based on merit order and also a disturbed market context in which gas and power prices are increasing exponentially.

On Supply, up €459 million, so a very strong improvement compared to last year. As in H1, we had a positive timing effect linked to the existing ARENH mechanism, and this existing ARENH mechanism, given the current prices, becomes fairly visible. We expect actually to reverse this timing effect in Q4, and that should be somewhat significant. We had also some warmer temperature in Europe that led to a long gas position that could be monetized in exceptional market conditions during Q1. The performance also reflects the start of implementation of support measures to households mainly in France that we introduced during the summer.

Nuclear is up €583 million. That's an exceptional performance, which is driven by much higher achieved prices, which are only partly offset by increasing taxes specific to units in Belgium. And you should know that, in Q3, the specific G2 taxes increased significantly. The reason being that part of the calculation mechanism is based on forward prices, which are up strongly compared to last year. Last but not least, lower volumes were produced both in Belgium and France on the back of planned but also unplanned unavailability, particularly in Q3.

Others saw also a very strong improvement, plus €1.8 billion, and it is mainly driven by the exceptional outperformance on all GEMS activities that I'm just about to detail.

Indeed, a very strong performance from GEMS, and let me take you through what's behind that. As an integrated player, ENGIE is operating in energy markets through GEMS, sourcing energy for customers but also selling its own production, as well as hedging upstream and downstream positions. That's our core business. As we have been highlighting since the first quarter, unprecedented market conditions are offering opportunities to this business which benefits from the strong expertise of its more than 3,000 employees.

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