ENGIE : Transcript H1 2022

H1 2022 RESULTS

29 July 2022

Operator

Thank you for holding and welcome to ENGIE's, Half Year Results Presentation. For your information, this call is being recorded. It will take place in a listen-only mode and you'll have the opportunity to ask questions after the presentation. (Operator Instructions)

I'll now hand you over to Aarti Singhal, Group Director, Investor Relations.

Aarti Singhal

Thank you and good morning, everyone. It's my pleasure to welcome you to our H1 conference call. Shortly, Catherine and Pierre-Francois will walk you through our first half results and following, we will open the lines to Q&A. And with my usual polite request, if you could please limit your questions to one or two only.

And with that, over to Catherine. Thank you.

Catherine MacGregor

Thank you, Aarti, and good morning, everyone. Very pleased to present another good performance for ENGIE. With a favorable price environment, we continue to benefit from the strength of our integrated business model. A business model that includes a growing renewable portfolio, large regulated network business, and our flexible generation assets fleets.

This H1 performance positions us very well for the remainder of the year. Importantly, we have significantly reduced our direct exposure to Russian gas, with new contracts for both pipeline gas and LNG, and using the flexibility within our gas portfolio. And on this financial side, the residual risk is also minimized as Pierre-Francois is going to explain later.

In Belgium, we have co-signed with the Belgium state, a non-binding Letter of Intent, that is an important first milestone as well we are working constructively to assess the feasibility of a potential extension of two nuclear units under a clear risk-reward framework. And our teams are maintaining the sharp focus on execution of the strategic plan.

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My strong conviction is that the recent developments in the energy sector and the surge in extreme climatic conditions are calling for much faster energy transition. Our strategy is fully aligned to that and this is the only way forward to support energy security, affordability, and the long-term decarbonization of the sector.

Turning now to our actions on energy security, we have been diversifying and increasing sources of gas supply. Our infrastructure teams in gas transport, in gas distribution, LNG terminals, storage, are all playing a critical role with a really strong operational performance in the backdrop of higher utilization rates. For example, gas volumes that are transported by GRTgaz are up 10% versus last year, LNG is supporting a record ship and loadings up 54% from last year, and we have now completed our LNG capacity increase by adding another 11 terawatt hours and the storage levels at Storengy in France are close to 76%. And of course that is well above this time last year.

In addition to this short-term actions, we continue to be focused on the long-term to unlock the potential of renewable gases. In France, to date, 425 biomethane units are connected to our grids that represented total yearly production capacity of 7.2 terawatt hours and we continue to drive forward other projects, for example, the Jupiter, which started producing e-methane from hydrogen in the south of France, with the inauguration of the world's largest hydrogen-powered mining truck in South Africa, or again, future production of biomethane in partnership with CMA CGM.

So managing physical volumes, I'm going to turn to our actions to support affordability where we have significantly stepped up our efforts. In France, we have nearly 70% of our B2C gas and power contracts who have benefited from some sort of protection against price increase through the tariff shield or fixed price over the lifetime of the contract.

Our customer are also supported in Belgium by social tariffs or in Romania through again, a price cap mechanism. And we are working with customers on energy efficiency to help reduce their bill, for example, we are helping them through boiler maintenance contract and installation of very high-performance equipment to reduce consumption. We are obviously involved in launching marketing campaigns on energy management and the development of software apps on consumption management which helps leverage the more than 10 million smart meters installed in France.

We are also providing support to payment facilities with working capital of more than EUR1 billion to enable price protection tools. We also contributed for EUR467 million in the first semester to well-established profit sharing mechanism such as taxes specific to nuclear units in Belgium and to the CNR Hydro concession in France. We are engaging on the recent purchasing power law in France through which we are expected to provide further working capital to support gas storage levels.

Finally, this morning we have announced that we are deploying two additional measures in France that would be implemented in the fall to help support purchasing power. We have proposed a top-up of the energy voucher to just under 1 million vulnerable B2C customers for a total of EUR90 million cost to ENGIE, and by setting up a fund to help SME in contracting energy. And this is global across our operations that our teams are working days in, days out, to better support our customers.

Quick update on Belgium, the signature of this Letter Of Intent does mark the start of negotiations under a clear framework which is designed to achieve a fair risk-reward balance. It comprises a number of inseparable conditions that includes extension for 10 years of two of our units, the setup of a legal entity to manage the two units with the participation of the Belgian State as well as our affiliate Electrabel, and a cap on future liabilities and costs for the management of nuclear waste and spent fuel related to all our seven units that would be in the form of a fixed amount that still needs to be determined.

Subject to the progress we make, the goal is to sign a binding deal which would define all of the above conditions by the end of this year. And in the short-term, our priorities in Belgium are to maintain high operational availability

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to prepare the upcoming shutdowns and to finalize the process of the triennial review of the nuclear provisions in H2.

Moving now to the H1 financial and strategic progress. Our EBIT grew 73% organically to EUR5.3 billion, which is leading to a significantly higher recurring net income group share of EUR3.2 billion. This was driven by a higher contribution from most of our activities with a particularly strong increased from GEMS, from Nuclear, and from Renewables. A strong operational performance indeed that has enabled us to capture this exceptional market conditions. Our balance sheet and our liquidity remain strong and well placed to support temporary higher working capital requirements.

On growth, we invested EUR2.2 billion, 60% of which was in Renewables, and overall our renewable capacity has grown now representing 36% of our centralized generation portfolio.

In the context of the current environment that continues to face uncertainty, the full year 2022 guidance is unchanged. If the prevailing market conditions and price environment continue into the second half, this would present an upside to this guidance. So as I said earlier, this H1 performance positions us very well indeed to deliver strong results in 2022.

And in addition to our day-to-day operational activities, the teams have maintained their sharp focus on the execution of the strategic plan that we presented to you in May last year. We have indeed progress on all four pillars of the plan: on the simplification, with the announced disposals of non-strategic assets, we have signed now or completed, we have signed or completed deals totalling nearly EUR10 billion and that is compared to our increased target of at least EUR11 billion. The measure of these being the sale of EQUANS where closing is expected in the second half.

Our geographic footprint upon completion of signed or closed agreements will be down to 35 countries and this compares to 70 back in 2018. On coal exit, recently we completed the closure of one additional unit of Tocopilla in Chile and coal represents now 2.7% of our centralized power generation capacity. So we are well on track for a complete coal exit by 2027 as committed. Overall, this major simplification is enabling ENGIE to allocate more capital to core activities, particularly to step-up growth in Renewables.

Moving to increasing efficiency and discipline allocation of capital, we are investing in line with our target of EUR15 billion to EUR16 billion of growth Capex over the plan period. In terms of organization and performance, our four global business units which were launched at the start of last year are well established now and we are benefiting from the first synergies of scale and scope.

We have maintained momentum on efficiency improvements with EBIT saving of EUR163 million in the first half and these arose from the implementation of our performance plan that is focused on operational excellence, on improvement of support functions and fixing of loss-making entities. And as a reminder, we are targeting EUR600 million of net EBIT savings over the plan period.

So we are doing what we said. Putting our strategy into action. We are well on track to build a solid foundation for long-term growth, a sustainable dividend and a strong balance sheet for the Group. Quick update on our renewables portfolio, we have continue to strengthen both our operating asset based and our project pipeline, we added 2.2 gigawatt of renewable capacity in the first half, a mix of offshore wind, onshore wind and solar. And we are maintaining our focused geographic approach. For example, in France, we commissioned 150 megawatt in solar and wind and this is bringing our leadership position in this market to a total installed capacity of nearly 8 gigawatts.

Ocean Winds continue to make strides in its offshore program. Commissioning 952 megawatt at the Moray East offshore wind farm and having been awarded a CFD for the delivery of nearly 300 megawatt form Moray West.

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As a reminder, we are targeting 50 gigawatt of total installed capacity by 2025 with an average of 4 gigawatt addition per year to 2025 aiming to step-up to 6 gigawatts with a return focused approach that we are mentioning.

The ambition is supported by a robust pipeline of 71 gigawatt of identified projects which is an increase of 5 gigawatts over the past six months, still with a balanced mix of technology, spread across our main geographies. And I want to highlight that the project that are secured or under construction remains stable at around 7 gigawatts, meaning that the capacity entering into operations is indeed being replaced by new projects.

Let me now hand over the floor to Pierre-Francois.

Pierre-Francois Riolacci

Thank you very much, Catherine, and good morning to all. Indeed, we are very pleased with the first half of the year and the key takeaways on that page which I would detail in the upcoming slides are pretty simple.

We posted the significantly higher earnings which are flowing consistently from EBITDA to the bottom line. The cash generation did recover from the weak Q1 with EUR6.8 billion of CFFO in H1, up EUR2.5 billion versus last year. We also invested EUR3.3 billion of capital expenditures of which EUR2.2 billion in growth, almost exclusively 95% in our key energy transition activities and about 80% organically. So fully in line with our strategy and our commitments. The net debt is slightly higher for both financial and economic, of course, after dividend of the year was paid earlier. But our credit ratios, as you can see further improved. And of course, we are not changing our 2022 guidance, including the risk associated to Gazprom full disruption.

Let's get into the numbers now. And start with EBIT first. Strong growth, almost entirely driven by EUR2.2 billion improvement, plus 73% in organic variation with main contributing activities being GEMS, Nuclear, and Renewables.

Let's go straight into Renewables. Here again strong increase of the EBIT contribution, plus EUR282 million, that is plus 54% organic growth. And let me highlight four key topics. On the positive, first, industrially, we kept on commissioning new capacities and this is translating in visible additional EBIT contribution at about EUR150 million. Second, the market conditions remained a tailwind, especially with higher prices captured by French hydro assets. However, we had some headwinds, and especially, in Portugal and France, we faced low hydro volumes that led to some buybacks which impacted the achieved prices. And in some market areas in the U.S., especially in SPP, Southwest Power Pool, we are experiencing some transmission congestion, leading to revenue losses. This is what we call basis risk and is disrupting some of our projects and requires further management to be mitigated. We want to be completely transparent, it is not a walk in the park to grow a business like that, but a very good start to the year and great to see that the gigawatts are converting into good P&L.

On networks, we achieve slightly lower contribution, minus EUR60 million that is minus 4% organic decrease, which is interestingly enough split in minus 12% in France and plus 25% outside France. As the main headwinds that we faced were caused by warmer temperature and lower French regulated revenues were already impacting networks in Q1, let me highlight two positive drivers. First, the inflation indexation of the revenues, this is the case not only for most of our activities in Latin America but also for regulated gas networks in France. So French RAB is inflated yearly, translating to higher revenues through the RAB remuneration rate. Second, we monetized the market volatility through our storage asset, the salt caverns that we operate in the UK, this non-regulated activities are allowed to do own account trading which captured higher margins.

On Energy Solutions, we delivered slightly lower contribution minus EUR15 million organic decrease. The main drivers actually very similar to Q1. So I would tackle two specific issues, EVBox and the decrease of our EBIT margin. On EVBox, we do have some positive signals coming from operations, the production is ramping up

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and the process enhancement is on track. The second half now of the year would be very important to get revenues to pick up. H1 was impacted by some balance sheet cleanup, which mainly explain the minus EUR11 million evaluation year-on-year. We faced some EBIT margin squeeze and I would like to highlight that this is due to two items: one is the higher energy prices which are embedded in the revenue but which are attracting EBIT margin, which are lower than the average portfolio, so this is diluting margin just by mechanical effect. And the second point is that we had some positive one-off in '21. We have also in '22 a new internal reallocation of costs which is adverse to Energy Solutions and that is two different items which are driving EBIT margin down. I would like to say that the Energy Solutions' teams are doing a great job, both turning around parts of the business while detouring EQUANS activities.

In Thermal, the EBIT contribution is up EUR95 million that is plus 17% organic growth. Good trends of Q1, like higher spreads and strong ancillaries in Europe are still there, persisting, and of course contributing to EBIT growth. So let me focus on a couple of headwinds that we had actually already flagged in May, especially Italy, this extraordinary tax which is by the way, also impacting our GEMS activities, both for Thermal and GEMS that is about low triple-digit amount that we are talking about all booked in EBIT. We are firmly contesting this tax as we think it is ill design, the base is not being profit, but the VAT base which creates a distortion between earnings coming from financial and physical deals.

Second headwinds that I want to mention, we are facing some difficult market configuration in a couple of countries, Chile and Australia. Structural supply-demand imbalance is penalizing activities based on merit order also very disturbed market context with gas and power prices increasing exponentially. And that demonstrates that current market conditions can cause some unexpected impact. For us, this resulted in non-significant losses in H1 that are expected to persist in H2. But don't get me wrong. This is a great performance from Thermal people and assets as the numbers show.

Supply EBIT, indeed a growth of EUR220 million fully organic and a big part of this increase was actually secured in Q1 and that was on the back of warm climate. The main variation in Q2 is a positive timing effect on power margins in France and it is linked to classical ARENH mechanism. No major change in the mechanism itself, but as power prices have increased massively compared to last year, this timing effect went from non-material to visible. We expect it to partly reverse in H2.

Nuclear has been posting another exceptional performance, driven by the same items. I mean, higher prices, despite lower volumes and higher specific Belgian nuclear tax, as in Q1, same trends. Price and volumes are on the slide, I will not elaborate on it but let me share a couple of words on the higher nuclear tax. This profit- sharing agreement has been in place for several years now and is based either on fixed royalties or on valuable contributions, depending on specific margins with or without floor.

ENGIE, of course, has always respected it including in bad times, for example, despite nuclear activities were making significant losses back in 2018, we had then an additional EUR150 million impact from this major nuclear tax due to the fixed contribution and the floor. In H1, '22, the specific tax was EUR312 million, plus EUR267 million versus last year and this tax is expected to increase further in H2.

Last but not least, the Others part EBIT is, again, posting a very strong contribution, plus EUR1 billion all organic growth. GEMS saw the same trends as in Q1, that are persisting with opportunities to optimize gas contract optionalities, high volumes with healthy margins on risk management, and of course, monetization of market volatility. Although, it is not directly visible, thanks to the very strong performance of all activities, let me be crystal clear that the H1 earnings include the cost of the hedging actions, which were required to reduce the Gazprom exposure that I'm going to detail in a minute. It is of course also impacted by the Italian extraordinary tax that I mentioned for Thermal. So very robust performance of GEMS. On others, efforts on cost reduction are paying off, good to see, despite high inflation which is creeping up but also helped by some internal reclassification of costs I was mentioning earlier and some timing effect that will revert in H2.

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