Naturgy Energy S A : will update the foundations for its next transformation stage this coming autumn after completing the first part of its Strategic Plan

Naturgy will update the foundations for its next transformation stage this coming autumn after completing the first part of its Strategic Plan

• After completing the first part of its 2018-2022 Strategic Plan, the company has announced a Capital Markets Day to be held in the final quarter, where it will explain the next stage of its transformation, go into detail about its industrial strategy to create value in every one of its businesses, and will update its targets; reaffirming its commitments with the dividend and creating sustainable value in every stakeholder and ESG.
• One of the core transformation concepts focuses in-depth on reducing gas-supply portfolio risks, where the company has made headway in terminating long-term contracts early for an annual volume of 20 TWh and expects new agreements over the second half of the year.
• Active management also accounts for a rise in the Group's liquidity, surpassing €10,000 million to date, enabling the company to meet its financial obligations with ease, as well as providing possibilities for seizing any growth opportunities that might arise.
• Naturgy is making steady progress in its commitment to ESG-related advances. This includes the company's definitive closure of all its coal plants on 30 June, and its new Environmental Policy. Moreover, it has proactively adopted key measures for supporting society and all its stakeholders during the Covid-19 crisis.
• The first half-year results were affected by the impact of Covid-19, causing a sharp drop in demand in this part of the year, with electricity and gas prices slumping, coupled with a sharp currency depreciation in Latin America. Nevertheless, and offset in part by increased management efforts across every single business unit, the half-year's ordinary EBITDA came to €2,037 million, down by around 11% on the 2019 figure.
• Naturgy remains committed to the shareholders' remuneration policy. This coming 29 July it will pay out the first interim dividend (€0.31/share) based on 2020 results. The company will furthermore see to cancelling 14,508,345 treasury shares, as had been foreseen, with its share buy-back programme still on hold until a perspective on the economy crisis' fallout is available.
• The company has finalised its negotiations with BlackRock, one of the largest investment funds worldwide, thus making it a finance partner alongside Naturgy in the vehicle that will hold 49% of the Medgaz gas pipeline. This deal provides Naturgy joint control over the company without enlarging its operations or investing any additional sums.
• The company has completed the latest reorganisation of its management team. After having taken on three external managers to head the business units (Networks, Renewables and Marketing) in June, the company streamlined the structure as a whole by encouraging in-house talent only.

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Naturgy has completed the first stage of its 2018-2022 Strategic Plan satisfactorily, due to all commitments with its main stakeholders being met, and is undertaking to provide the Group's transformation with a renewed boost.

'Despite the recent situation, we have made progress with all the cornerstones we put forward two years ago. We are a company that has become more efficient, dynamic and active in managing its business, enabling us to more realistically and effectively take on the challenges these circumstances pose', explains the company's Executive Chairman, Francisco Reynés.

The company will hold a Capital Markets Day this autumn, detailing its next transformation stage with a roadmap to 2022, without losing sight of its fundamental aims: remuneration to shareholders as a priority, an industrial strategy for each of its businesses to create value and growth, and its ESG-related commitments.

As the company has already made known, between now and 2022 its prioritised management lines will, among other things, focus on maintaining risk-profile reduction by means of asset rotation, in line with energy transition targets; as well as forging win-win relationships with regulatory authorities and in renegotiating gas-supply contracts. Other targets set by Naturgy are optimising and automating core processes and bolstering the company's position.

Major progress

The first half of the financial year saw Naturgy scrutinising its business-portfolio management, and triggering organisational changes in order to sustain the company's transformation. The economic crisis made its mark in the energy sector by way of a fall in gas and electricity demand in Spain and Latin America, a more challenging landscape in the international LNG market, and currency depreciation in key Latin American countries.

Over the first half of the year in particular, Naturgy started adopting measures for lowering its risk profile and renegotiating supply contracts based on ordinary as well as extraordinary review mechanisms set out in these contracts. This process will adjust market-supply conditions. Noteworthy in this respect are the agreements already concluded for terminating various long-term supply contracts early for an annual volume of approximately 20 TWh. The company aims to continue reaching agreements with other suppliers on amending contractual volume and/or price conditions in the second half of the year.

Naturgy has also set its sights on shoring up liquidity. This is demonstrated by it recently taking out a new syndicated sustainable loan to the sum of €1000 million, tied to environmental criteria such as targets for reducing greenhouse-gas emissions. This credit line has three years' maturity, up to June 2023.

Thanks to flexible management allowing to take advantage of the funding opportunities available, the group's total liquidity is up by more than €10,000 million. Hand in hand with the cash generated by the business activity itself, this solvency means the next few years' financial obligations can be faced with ease. The company increased its liquidity to €10,006 million by June 30, compared to €8,037 million at the close of the 2019 financial year.

'These new funding routes reveal the company's capacity to achieve a solid financial position, and it having as much liquidity to hand as possible in the face of an uncertain and unpredictable macroeconomic landscape. Moreover, the company has succeeded in coupling this financial vigour with headway in its ESG commitments, by buttressing its green-credit position and pushing ahead the company's transformation', explains Naturgy's Chairman, Francisco Reynés.

In this respect, Naturgy is finalising the processing of various renewable projects in Australia, with a power greater than 430 MW. The company already has more than 276 MW operating (Crookwell2) and under construction (BerryBank1) in this country. The company also boasts a portfolio exceeding 600 MV. This is how Naturgy endeavours to become one of Australia's main operators in renewables over the next three years, amounting to a total output exceeding 1.3 GW.

During this timeframe, Naturgy completed its acquisition of Medgaz after the entry of Global Energy & Power Infrastructure Fund (GEPIF) from BlackRock in the Special Purpose Vehicle (SPV) formed for this purpose. The outcome of this is that Naturgy and BlackRock now each control a 50% stake in the SPV, which in turn holds 49% of Medgaz stock with joint shareholder rights together with Sonatrach. GEPIF was incorporated into the SPV at the same price for which the 34% stake in Medgaz was purchased from Mubadala last April.

As a whole, this transaction represents a milestone for the company on multiple fronts, in which it has established a relationship with a prestigious and internationally renowned partner such as BlackRock, and converted the former financial stake of 14.9% into a strategic one of 24.5%, with rights control, and with no cashflow on the part of Naturgy required.

Francisco Reynés highlights that 'for us, this deal is very attractive. On the one hand, BlackRock coming aboard the investment vehicle attests to the appeal and uniqueness of Medgaz as a strategic infrastructure. On the other hand, the deal also allows us to significantly enhance our control rights and to create value for shareholders in view of the appealing valuation. BlackRock is one of the main investors globally, and we are pleased to form a company together with them'.

Commitment to shareholders

Naturgy's shareholder remuneration policy-commitment continues. As had been anticipated, the company approved the first interim dividend from the 2020 financial year (€0.31/share), set to be paid out on 29 June. In light of the current economic and social landscape, this dividend policy benefits more than 100,000 minor shareholders who have backed the company as an investment for creating value and liquidity.

The company also decided to amortise 14,508,345 treasury shares from the share buy-back programme, as set out in May's General Shareholders' Meeting. The company is keeping the programme on hold until greater clarity is available.

Results

The ordinary EBITDA came to €2,037 million, around 11% down on the same period the previous year, while the ordinary net profit reached €490 million. The overall investment level came to €552 million.

The slump in economic activity has had a considerable impact on developments in gas and electricity demand worldwide, thus also in the various regions where the group operates. Notably, demand in Spain for gas and electricity over the first half of the year on average fell by 8.5% and 9.7% respectively, when compared to the previous year. Demand for gas and electricity in Latin American regions where the company operates has likewise undergone a downturn.

Certain Latin American currencies have also significantly dropped in value compared to the euro, with their future still unclear. This has had a negative effect of €87 million and €23 million on the group's ordinary consolidated EBITDA and the net profit respectively, during the period and when compared to the previous year.

Reduced energy consumption due to the uncertainty surrounding the Brent production cutbacks of the main global producers has given rise to substantial volatility and an unprecedented plunge in raw-material prices in the primary markets, including a drop in gas prices in the main gas indices. On average, during the first half of 2020, HH and NBP fell by 34% and 53% respectively, compared to 2019; with electricity prices also falling in wholesale markets (the Spanish pool was on average down 44% during the first half of the year).

Stepping up the transformation

The stage for accelerating the company's transformation is already underway, having completed the reorganisation of the management team. After bringing in three external managers to head the business units in June (Network and Energy Management; Renewables, Innovation and New Businesses; and Marketing), Naturgy is moving forward in streamlining its structure, in both business and corporate departments, with sights set on scaling down dependency levels and direct reporting to the Executive Chairman.

To achieve this restructuring, the company has opted for invigorating in-house talent and has only promoted Naturgy managers, thus doing its part in ensuring that those recently joining as well as the radical organisational changes are integrated.

ESG compliance

Aside from efforts made for supporting and protecting customers, employees and shareholders, Naturgy also took decisive measures over the first half of the year to promote its ESG (Environmental, social and Governance) commitments by including significant environmental targets in the company's new Environmental Policy Plan. The recent abandonment of coal-fired generation on 30 June this year, and the plans to expand renewable energies, will help in reaching the desired targets.

Moreover, a Sustainability Committee has been set up within the Board of Directors to oversee the group's progress and role in the energy transition alongside its facets and environmental, health and safety and corporate responsibility indicators.

Over the first half of the year, Naturgy also continued making headway in good corporate governance practices, particularly in sex equality, appointing Lucy Chadwick and Isabel Estapé as new proprietary directors of GIP and Criteria respectively.

Main figures

	Reported			Ordinary
(€m)	1H20	1H19	Change	1H20	1H19	Change
EBITDA	1.870	2.176	-14,1%	2.037	2.291	-11,1%
Net income	334	592	-43,6%	490	703	-30,3%
Capex	552	699	-21,0%	-	-	-
Net debt	14.920	15.268	-2,3%	-	-	-
Free cash flow after minorities	1.101	1.448	-24,0%	-	-	-

EBITDA contribution by activity

	Reported			Ordinary
(€m)	1H20	1H19	Change	1H20	1H19	Change
Gas & Power	547	665	-17,7%	599	708	-15,4%
Infrastructure EMEA	822	919	-10,6%	895	970	-7,7%
Infrastructure LatAm South	371	449	-17,4%	377	450	-16,2%
Infrastructure LatAm North	189	189	0,0%	191	190	0,5%
Rest	-59	-46	28,3%	-25	-27	-7,4%
TOTAL	1.870	2.176	-14,1%	2.037	2.291	-11,1%

Scope and topic:Corporate, Financial

Madrid, 22nd July 2020