ENGIE : Transcript Q1 2023

Q1 2023 RESULTS

11 May 2023

Q1 2023 RESULTS

Delphine Deshayes

Thank you and good morning everyone. It's my pleasure to welcome you to ENGIE's Q1 conference call. Shortly Catherine and Pierre-Francois will present our first quarter performance, following which we will open the lines to Q&A and with my polite request of limiting your questions to one or two only please, and with that over to Catherine.

Catherine MacGregor

Thank you, Delphine and good morning everyone. Very pleased to present another very good performance for ENGIE. We have indeed made a strong start to the year with continued momentum on financial and operational delivery. The actions that we have previously taken to build a simpler, more industrial ENGIE to capitalize on our integrated model are delivering results and they are also allowing us to capture market opportunities.

We have continued to move at pace with our strategic plan, particularly with the expansion of our renewables platforms where at the end of March, 5.5 GW were under construction, allowing us to maintain a sharp focus on our target to add 4 GW on average to 2025 and to contribute to a faster energy transition in alignment with our strategy. And I will come back to Belgium later.

Turning now to our operational and strategic progress, the performance over the first quarter positions us well to indeed deliver good results in 2023. EBIT, excluding nuclear grew organically 29% year-over-year to EUR 3.8 billion and this was driven by higher contribution from GEMS but also Renewables. Cash flow generation was also up EUR 3.8 billion alongside growth in EBITDA and supported by working capital improvements. We maintain a strong balance sheet, high liquidity as well. During the quarter, we successfully issued a triple-tranche Green Bond for a total amount of EUR 2.75 billion supporting the development of sustainable finance. In light of the strong Q1 performance, we now expect Net Recurring Income group share to be in the upper end of the range of our guidance for the full year. And it is each GBU that is driving operational progress at pace. It is also our integrated model that once again demonstrated its ability to leverage on favorable market conditions.

On Renewables, I will share more details about our leading platform in the next slide but I can already tell you that we continue to grow our installed capacity adding 13 wind and 7 solar projects in various places including Peru and France.

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GEMS benefited from a lower risk environment as well as a robust performance of all of these activities and we saw continuing demand from customers for risk management and also captured value through the flexibility of our portfolio.

In Networks, we keep contributing to the security of supply of Europe with gas storage levels in France at 30% at the end of March and as of May 3rd it was at 43%, which is to be compared to 33% at the same time last year. Our infrastructure played a critical role and that was indeed confirmed by the recent report published by the CRE, the French regulator, which is confirming the needs for transport and distribution gas networks by 2050.

Alongside focusing on the near term, we are also working on the future of renewable gases. We are unlocking the potential of biomethane with now more than 9 TWh per year of production capacity, which is connected to our networks in France. Internationally, in Brazil, we have commissioned 100% of Gralha Azul and Novo Estado power transmission lines and this is supporting access to electricity in the country.

Our Flex Gen business is crucial to balance the intermittency from renewables and to support the resiliency of the power system. And to this end, we have more than 1 GW of battery storage systems under construction in the US, in Chile and in Australia.

Energy Solutions is continuing its efforts to build a stronger asset based platform for long term growth. We have a large pool of opportunities, the revenue backlog increased since the beginning of the year and we saw multiple important wins such as the extension of our DHC in Barcelona, which includes the construction of a new cold production plant. Also several wins in District Heating in France, where we are market leaders including the construction and the operation for 25 years of a new network in Toulouse and 3 large contract extensions in other cities. These wins are on the back of a buoyant market, which is anticipated to grow by nearly 7% per year until 2030 and that offers great opportunities to densify, to expand, but also to develop new assets. We've also won a new concession of more than 4,000 EV charging points in France with B&B Hotels.

Quick word on Retail where,e as announced last Autumn, we have launched initiatives to help customers reduce their energy consumption, especially on days of high demand. This campaign was a success where we had 200,000 customers being rewarded a bonus for their energy savings. Finally, we are preparing for the end of gas regulated offers in France, which will be going on as planned by the end of June 2023.

So clearly an excellent start to the year with strong operational progress across the board. A testimony to the high level of commitment of our team in the execution of our strategic plan.

Quick focus now on our leading renewable platform, which operates all major technologies in key growth markets and that we keep expanding, leveraging our industrial expertise and our competency. In terms of progress we are securing our future operating asset base with 5.5 GW under construction at the end of March. That represents 71 projects that our teams are working on day in, day out. This includes flagship projects such as Gulf of Suez 2 in Egypt and Moray West in Scotland. We are industrializing execution with an average delay of less than 2 months and cost overruns of less than 4% for projects in execution, which is well within our projects' contingencies. We kept growing our pipeline with the acquisition of 3.5 GW of solar and battery storage projects at different stages of development in the US offering a unique opportunity to diversify our portfolio by securing interconnection positions in new markets.

Ocean Winds made strides in its offshore program reaching the final investment decision for two French project of 500 MW each. By leveraging our integrated model we commercialized Renewables through GEMS and signed nearly 500 MW of green corporate PPAs, the majority of which has a maturity longer than five years. This reinforces our position among the leaders in this market supporting our customers in their decarbonization efforts.

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So overall on Renewables, I'm very proud of what the teams are achieving. We are well on track to add 4 GW on average per year to 2025, 6 GW on average from 2026 onwards to reach our target of 50 GW of installed renewable capacity by 2025 and then 80 GW by 2030.

Before handing over to Pierre-Francois let me share a quick update on our nuclear discussions in Belgium with regards to the extension of two units.

We have come much closer to an agreement around a few key points, such as the legal structure, which will be co-owned by the Belgian State and ENGIE, the business model of the extension with a balanced risk allocation, the joint development agreement, the framework for the transfer of all waste liabilities and associated security package. Despite these progresses some important parameters of the deal still need to be discussed such as a clear allocation of risks and associated risk premium.

We keep working very actively with the Belgian Government to address the remaining issues with the aim to have an agreement signed by the end of June. Should this objective not be met, given the operational and industrial complexity of this extension project, a restart in November 2026 would not be reasonably achievable anymore. And now over to Pierre-Francois.

Pierre-François Riolacci

Thank you very much Catherine and good morning to all.

Indeed, a strong start for 2023, which is supported by a seamless execution on growth and performance agendas, but also of course by the strength of our integrated model in continued favorable energy market conditions.

Our EBITDA and EBIT excluding Nuclear grew respectively by 23% and 30% to respectively EUR 4.8 billion and EUR 3.8 billion. We also generated a high level of cash flow, further reducing our financial debt and improving further our credit ratios. We are confirming our 2023 guidance, albeit, we expect our Net Recurring Income group share to be in the upper end of the range. If we get a little bit closer to the numbers, you see that EBIT is up EUR 855 million which is a 29% uplift organic growth. There is a slight positive from FX and scope, including the Eolia acquisition last year and helped by the Brazilian real and the US dollar against euro for FX.

Renewables reported more than 30% organic growth, benefiting from better hydro volumes in Portugal and in France, remember last year was tough. Also higher prices in Europe, mainly for French hydro and again the contribution of the capacity that has been commissioned over the last twelve months.

Networks decreased by EUR 59 million and three key drivers on the negative side, the biggest one being in France with lower distributed gas volumes mainly linked to energy sobriety this winter which means lower consumption, and also another mild winter. Second driver was lower transported gas volumes in Germany and finally, we had also to face higher energy cost in operating our facilities. Part of this was actually mitigated by tariff increases that we got in Germany and in Romania and on top of that, our EBIT in Latin America increased as our operations there are growing as Catherine mentioned, and also increased thanks to good indexation provisions. Lastly, our storage activities in the UK and Germany have performed well benefiting from the current favorable environment.

Energy Solutions is up EUR 21 million with good operational performance and positive contribution from growth, but it includes the negative impact of strikes in France in District Heating and the net negative effect of energy prices in Europe. It might be worth to mention that EV Box, which was previously reported in this GBU, has been reclassified into the Others segment due to a change in the management reporting line. As you know this EV Box business is not core for ENGIE and will be monetized when all conditions will be fulfilled.

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Flex Gen is slightly up EUR 12 million. We have captured some higher spreads in Europe compared to Q1 '22 but ancillaries have declined from very high basis. In Chile the situation has started to improve with the recovery of energy margins thanks to the normalization of market conditions and reduction of the short position.

Retail is down by EUR 217 million compared to Q1 2022. You may remember that last year in the first quarter, the warm temperatures in Europe led us to a long gas position that we were able to monetize in a market with very good conditions. This year we are again over hedged due to mild winter, but this time, we sold our position with a loss given the lower prices of gas.

Last but not least Others is up EUR 948 million fully driven by an exceptional outperformance on all GEMS activities again, and I will of course detail this figure in the next slide.

Just a quick word on Nuclear, EBIT is down EUR 194 million to EUR 392 million. The positive effect of higher captured prices over the period was actually more than offset by the inframarginal rent cap and the specific nuclear tax. We also produced lower volumes despite higher availability of our plants as we have closed two units in the past nine months. And as you also know, depreciation increased by about EUR 100 million for the quarter, and this is a result of the 2022 triennial review of the provision that led us to recognize, at the end of last year, the dismantling asset which is depreciated over the remaining lifetime of the plants.

The last word before we move to GEMS, just to know that all businesses are delivering as planned. Sounds a bit boring maybe but it goes still with impressive growth in Renewables, successful turnaround in some parts of Energy Solutions, significant transformation in Flex Gen, market adjustments in Retail and also at the same time embedding a performance plan in a continued improvement culture. So this quarter again ENGIE's teams have done a stunning job.

Let me now share a bit more color on how GEMS posted this plus EUR 988 million year-on-year improvement to achieve EUR 1.6 billion EBIT in one quarter. This impressive year-on-year variation is largely driven by a very different risk environment. First, in the first quarter last year, we had to take specific provisions considering the risk of physical gas disruption due to the high level of uncertainties related to Gazprom contracts. And you remember this stopped later in the year at Summer. Of course this provision did not repeat in Q1 2023 and it does explain about half of the year-on-year improvement. Second item on the risk side, a better market visibility with significant normalization of key market parameters has also allowed for improved valuation of some assets and liabilities and led to the reversal of some technical reserves.

So now if we look at the operation of the period in this first quarter of 2023, GEMS is delivering very strong performance and why is that. First, the results are supported by transactions that were contracted in 2022 at good and sometimes very good conditions, which now materialize at delivery date namely during this first quarter and our boosting our sales contribution in particular. And also you can see in the table on the right hand on the slide that market conditions remain positive for GEMS albeit less buoyant of course than last year. So energy management activities in Europe are still performing strongly both on asset optimization and client risk management although less than in peak times last year.

Compared to Q1 2023 GEMS contribution for the next quarter is of course expected to gradually decrease due to the combination of the non-replicable impacts as well as a high contribution from transactions locked in '22, which is expected to normalize in the future as these transactions are lapsing.

To remind you of what I said back in February 2023, the long-term expectation is that GEMS should deliver a hardcore EBIT of around EUR 1 billion with potential upside coming on top of this in supportive market conditions as it is obviously the case this Q1.

Moving to cash flow it is great to see that the strong EBIT results are actually turning this quarter into improved cash generation and good to see that the operating cash flow is up EUR 0.6 billion, which is broadly in line with

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the growth of EBITDA. On the working cap, change in working capital requirements, and you remember here, we are comparing variation of working cap to variation of working cap. The strong improvement of plus EUR 3.1 billion, thanks to the overall decrease of commodity prices. There is the first positive impact from gas storage activities, which is plus EUR 1.2 billion and this positive variation is driven by the high price of the withdrawn volumes despite lower volumes withdrawn during the same period. Energy in the meter variation is slightly negative for the quarter, we have faced to be very candid, some billing delays this quarter as we had to implement numerous and somewhat unstable schemes of governmental measures and tariff shields for which we continuously have to adapt our IT tools and we expect of course to catch up in the next months. Margin calls are also benefiting from the decrease in commodity prices and overall market volatility, as well as strong management of our liquidity risk attached to the margin calls. So it's a plus EUR 1.8 billion quarter to quarter. You remember last year it was a use of funds of EUR 0.4 billion and this year it is cash in of EUR 1.4 billion.

Lastly, we had a net positive effect on supply tariff shields for plus EUR 0.5 billion, with a significant cash in from public authorities, especially in France compared to last year and this is just that the schemes are now up and running and the cost of carry is decreasing big time compared to last year. Peering through the year, a key element when you click on cash flows is cash out that we expect on the 2022 nuclear taxes, cash out which is in Q3 for the inframarginal rent cap and in Q4 for the G2 and let me remind you that this represents an increase of more than EUR 1.1 billion.

So in addition to our strong EBITDA growth, as the cash generation is strong, the net financial debt and the net Economic debt are going down. Net financial debt is decreasing by EUR 1.4 billion as our cash flow generation was higher than Capex and nuclear phase-out costs combined. Our Economic net debt decreased by EUR 1.8 billion broadly in line with our net financial debt. On the back of these elements, our leverage ratios are further improving with an impressive 2.5x Economic net debt to EBITDA ratio on LTM at March end.

Coming to the guidance, in the context of decreasing volatility and energy prices with numerous uncertainties in the macro environment, we have decided to keep our guidance for 2023 unchanged. With a very strong performance of GEMS during this first quarter and an overall strong beginning of the year, we expect our Net Recurring Income group share to land in the upper end of the EUR 3.4 to EUR 4 billion range with an EBIT excluding Nuclear at the top end of the indicative range of EUR 6.6 to EUR 7.6 billion.

You've seen in the preview materials that we are entering this year with slightly higher outright volumes open. Our hedging ratio, for the current year is 82% versus 86% at the end of Q1 '22. It is even more the case for European CCGTs fleet for which we have much less locked position for the balance of year 2023 that we had at the end of Q1 '22 for the balance of year. So in this context of uncertain environment and falling prices and given our open position, we prefer to keep a prudent approach.

We are of course committed to a strong investment grade. Credit rating continue to target ratio below or equal to 4x Economic net debt to EBITDA over the long term. Our dividend policy remains the same notably, with a 65% to 75% payout ratio based on Net Recurring Income group share. With that I handover back to Catherine for the conclusion.

Catherine MacGregor

Thank you very much Pierre-Francois.

So to conclude, two key messages. One, we delivered a very strong first quarter both financially and operationally and that positions us well for the rest of the year. The second point is to remind everyone that we didn't achieve these results by chance. Our strategy to build a simpler, more industrial ENGIE to accelerate the energy transition, well, this strategy is working. And we are delivering at pace notably with the expansion of our renewable platform.

Thank you very much for listening and we will now turn for the Q&A. Thank you.

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