Engie Sa Ord

Thank you. Good morning, everyone. I'm Aarti Singhal, Director of Investor Relations at Engie, and welcome to our 2020 Annual Results Conference Call. A quick word on the agenda for this morning. First, you will hear from our new CEO, Catherine McGregor, on the highlights of 2020, followed by our CFO, Judith Hartman, on our financial performance. Catherine will then come back and share our priorities. following which, as usual, we'll open the lines for Q&A. As always, my team and I are here to assist you, so do please reach out. And with that, I'm pleased to hand you over to Catherine.

Thank you very much, Aarti, and good morning, everyone. It is such an exciting time to have joined ENGIE, exciting time for the group and for the energy industry as a whole. We are facing an unparalleled opportunity to play a clear and meaningful role in tackling climate change. By 2050, over $15 trillion are expected to be invested in power generation globally, with over 70% in renewables. Significant growth is also expected in the use of renewable gases to accelerate the energy transition. According to the IEA's latest sustainable development scenario, in Europe alone, energy from biomethane and hydrogen could potentially grow three times from 2019 levels to over 300 terawatt hours in 2030. As we are reminded by extreme events such as the recent ones in Texas, it is critically important that decarbonization of the energy mix is both reliable and affordable. This will mean a transition based on a combination of electrification and decarbonization of gas, as well as on the development of flexible and resilient energy systems. Energy is a major player in the energy sector. and we are extremely well-placed to tackle most of the challenges posed by this transition. We have 101 gigawatts of gross power generation capacity, of which around 30% from renewables. We have a French regulated asset base of 28 billion euros, which makes us one of Europe's largest gas network operators and a growing footprint in networks internationally. These factors, together with a track record in decentralized infrastructure and a fast-growing position in renewable gases, means we are very well placed indeed. In just eight weeks that I have been here, I can already see the tremendous potential energy has in accelerating this energy transition. This is what I am committed to. Before I say more on this, let me review the group's overall 2020 performance. EBITDA and COI were both down significantly from last year, mainly due to the impact of the pandemic. However, our results were ahead of our expectations on both metrics. And this was driven by the fact that the second half confinements were lighter in our main markets and that we adapted our processes, contributing to improved activity levels. And as a result, the second half of 2020 was actually similar to H2 2019 on an organic basis. Net recurring income group share was within the guidance range, and Judith will cover financial performance in more detail shortly. The board has reaffirmed the group's dividend policy and proposed for 2020 a payout ratio of 75%, which is at the top end of the range. This translates to a dividend of 53 cents which will be proposed for shareholder approval at our AGM on the 20th of May. In terms of operational performance, I am pleased that the group made progress at pace despite the challenging backdrop. For this, I would like to say a big thank you to Judith, Paolo, and Claire for their strong leadership in 2020. as they had the dual challenge of advancing the group simplification agenda while at the same time ensuring we continue to deliver essential services to our customers. Following the launch of the new strategic orientation in July, Engie completed the disposal of its 29.9% shareholding in Suez in October. We also rapidly launched strategic reviews of businesses, including part of client solutions GTT, and NGEPS. In addition, NGE also progressed geographic rationalization and strengthened its position in key regions. For example, we significantly enhanced our renewables footprint in the U.S. Operationally in 2020, the group continuously evolved processes to tackle COVID, and we maintained high health and safety standards. for both occupational and process safety. We invested 4 billion of growth capex and successfully commissioned 3 gigawatts of wind and solar assets. In nuclear, following the announcements of the Belgian government in Q4 2020, it has been decided to stop all preparation works that would allow a 20-year extension of two units beyond 2025 as it seems unlikely that such an extension can take place given the technical and the regulatory constraints. These changes led to an impairment, which Judith will cover shortly. Our group remains committed to Belgium and to contributing to the country's security of supply. Alongside renewables, we are also developing projects of up to 3 gigawatts of gas-fired generation. These projects could participate in the Belgium capacity remuneration market auctions in the second half of this year, once approved by the European authorities. Let me now turn to our ESG performance. Carbon neutrality is at the heart of Engie's purpose and central to our strategic directions. Today, I am very pleased to announce a commitment to exit all coal assets in Europe by 2025 and globally by 2027, in line with our purpose to drive carbon neutrality. We are focused on driving our ESG performance using a wide range of metrics, three of which I will discuss here. Our greenhouse gas emissions from power production reduced 9% to 68 million tons as the share of coal has further decreased in 2019. We also increased the share of renewables in our portfolio to 31%, and I will cover this in more details shortly. And on gender diversity, we maintain 24% women in management of the group, and this must continue to be an area of focus for us in the coming years. The final area of 2020 performance I would like to highlight is the group's continued progress in growing a renewable portfolio, which has grown significantly by 32% since the end of 2018. The 3 gigawatts that we commissioned last year is in our key growth market for renewables, namely the US, Europe, and Latin America. 2020 was really a milestone year for energy in the US, with nearly Two gigawatts of this new capacity commissioned across four states, taking our total installed renewable generation there to over three gigawatts. In 2020, most of our newly commissioned assets were onshore wind, followed by solar. And for the first time, through our OceanWinds joint venture with EDPR, we commissioned both fixed and floating offshore wind. In addition to this strong organic growth, we also added two gigawatts through acquisition of operating assets. These included 1.7 gigawatts of hydro plants in Portugal, which benefit from long-term concession arrangements. And finally, we also strengthened our position in the rapidly growing market of corporate PPAs with over 1.5 gigawatts of contracts signed in 2020. For example, we signed several corporate PPAs with Amazon for a 650 megawatt global portfolio of wind and solar projects across the US, Italy, and France. Turning to an update on the strategic review of part of our client solutions business that was launched in the second half of last year. In November, we discussed the creation of a new leader in multi-technical services which would benefit from scale and strong growth prospects. I am very pleased that Jérôme Stubler, who has more than 30 years' experience in the construction industry, joined us recently and will be leading this important project. Employee consultation on the proposed organization design started this month as planned. and we expect it to conclude by the end of the second quarter. We will then consider next steps and review future ownership options for the new entity in the second half, maximizing value and acting in the interest of all our stakeholders. Now, the guidance for 2021. We expect financial performance to improve significantly from 2020 driven by a combination of strong recovery from COVID impacts, growth in renewables and international networks, improved nuclear availability and higher achieved price, and reversal of warm weather effects. Overall, these positive factors are expected to more than offset your negative evolutions. With respect to the recent extreme weather events in Texas, We are assessing the situation. It mainly affects our renewables and supply activities. Within this guidance, we have included our current estimate of the potential impact. We remain focused on executing disposals at pace, continuing to simplify the group, creating value, and reallocating capital towards growth. To this end, We expect to invest between 5.5 to 6 billion euros gross capex with over 90% of this in renewables, networks, and asset-based client solutions. Let me now hand you over to Judith to cover our financial overview, and I will come back on strategic priorities. Judith.

Thank you, Catherine, and good morning, everybody. It's a pleasure to welcome Catherine to Engie, and I'm looking forward to executing our strategic plan together. We have ambitious goals to continue to simplify energy at pace, to play a key role in accelerating the energy transition, and to focus on the long-term profitable growth of the group. Before I share my view on 2021, here are our 2020 financial highlights. The second half of 2020 showed a strong recovery after a second quarter which was heavily impacted by COVID. This very unusual year translated into a mixed set of numbers. EBITDA and COI at 9.3 and 4.6 billion were down by 11 and 21% respectively on a gross basis. Organically, these evolutions were slightly better. This decrease in total COI was mainly driven by a negative 1.2 billion COVID impact a negative 300 million pressure from foreign exchange, mainly due to the depreciation of the Brazilian real, and a negative 160 million impact from French temperatures. Net recurring income group share amounted to 1.7 billion, down 37% year on year. Net income group share stood at negative 1.5 billion. This was mainly due to impairments, especially related to our nuclear reactors. This was partially offset by capital gains, the main one being 1.7 billion due to the sale of the 29.9% shareholding in Suez. Compared to 2020 guidance, I'm pleased that both EBITDA and COI stood above the ranges we indicated last summer. Net recurring income group share was in line with guidance, but at the bottom end of the range. This was due to higher contributions from entities with minorities, which fully contributed at EBITDA and COI levels, but only contributed at share at net recurring income group share level. We also posted higher financial costs. This was notably due to the discounting of liabilities related to hydro concessions in Brazil that are indexed to inflation and which increased significantly in 2020. Let's keep in mind that revenues are also indexed to inflation and will benefit from that increase over time. Although we were in crisis management mode most of 2020, we did not lose focus on our long-term objectives and continued to invest for the future. We invested 7.7 billion of CapEx in total. This included 4 billion of growth CapEx, almost exclusively in our areas of strategic growth, with approximately 40% in renewables, 40% in networks, and 15% in asset-based client solutions. We also continued our relentless pursuit of simplifying the group. We completed the Swayze transaction in October and launched further strategic reviews. Let me give you the 2020 COI highlights. COI was adversely impacted by roughly 300 million due to foreign exchange and by an aggregate negative scope effect of 75 million. On organic evolution per business line, Renewables, thermal and nuclear, were resilient and even grew organically. Networks were mainly impacted by warm temperatures and by higher DNA. COVID weighed particularly heavily on client solutions and on supply. Let me now move to a detailed view per business line. Renewables showed continued progress and overall operational resilience to COVID with organic growth of 11% in 2020. However, the gross COE evolution was negative 125 million, mainly due to foreign exchange. Starting with our biggest contributor, Latin America, we had 195 million headwind from FX and an unfavorable energy allocation for hydro in Brazil. These negative effects were partially offset by the positive GFOM ruling in Brazil of approximately 165 million. This was linked to a recovery of past energy costs following the agreement on renegotiation of hydrological risk, which was finalized at the end of 2020. The contribution of French renewables was also lower due to the reduction in DBSO margins in 2020. This impact was partially offset by higher achieved prices for our hydropower production and higher volumes produced mainly by our wind assets. In other geographies, we benefited from commissioning, new capacity in the United States, and from higher wind production. We invested 1.5 billion of gross capex in 2020, mainly for the acquisition of 1.7 gigawatt of hydro assets in Portugal. Moving to networks, which were resilient despite the pandemic. The 281 million year-on-year COI decrease notably reflects warm temperatures and higher DNA in France. The negative temperature effect was roughly 100 million in France with lower gas volumes distributed by GRDF. French networks had limited COVID impact also mainly on distributed gas volumes. Remember that for regulated activities, volume effects are recoverable in the short to medium term through the clawback mechanism and are therefore value neutral. Higher DNA was mainly due to accelerated amortization of some distribution assets. This is value neutral over time as DNA is integrated in the regulated revenue. The reversal of a positive internal one-off from the fourth quarter 2019 offset in supply as well as the first effect of the RAP remuneration rate decreases also contributed to this lower COI in France. In Latin America, COI was up significantly, driven by the scope, in effect, and higher organic contribution of TAG, which I'm very pleased to say has outperformed our expectations. In addition, we had higher contributions from power transmission lines in Brazil as their construction is progressing well. Together, these drivers helped to more than offset negative foreign exchange in Brazil, Mexico, and Argentina. We invested 1.5 billion gross capex in 2020, mainly in Brazil on power transmission lines and for the acquisition of the remaining 10% in TAG. In France, we continued to invest into the gas smart meters rollout. On the next slide, you can see client solutions, which faced unprecedented headwinds in 2020. COI decreased mainly driven by a 600 million impact from the pandemic. Access to customer sites was much reduced during the strict lockdowns of the second quarter 2020 and we were not able to perform various services. Revenue declined on a gross basis by approximately 900 million for the full year. Strong management actions allowed us to variabilize and reduce total OPEX by approximately 300 million. Lower results from Swayze also impacted client solutions COI by approximately 160 million. The second half showed a clear recovery with less stringent confinement measures, but also with improved processes and protective equipment for our teams. We also continued to benefit from the cost actions launched in the second quarter. Excluding the scope out effect of Swayze in the fourth quarter, the second half performance in 2020 was similar to previous year. Despite unfavorable temperature, our district heating and cooling and on-site generation activities were resilient. We continue to develop these activities, including through an acquisition of the world's largest district cooling scheme in Dubai, allowing us to increase our DHC net install capacity by 9%. In Green Mobility, we are a leading global provider of smart charging solutions for electric vehicles through EVBox, a startup we acquired in 2017. We announced last December that EVBox would be listed on the New York Stock Exchange. We are expecting this to happen in a matter of weeks following the closing of this back transaction. Regarding client solutions project backlog, we recorded a total increase of 5% since December 2019, representing approximately 13 months of activity. Let's now move to Thermal. which was impacted by scope and effects, notably 90 million of disposals mainly in Thailand and close to 40 million negative effects impact. On an organic basis, the business line saw 1% growth, which was a strong result considering that there were over 100 million of positive operational one-offs in 2019 from LDs on newly commissioned power plants in Brazil and Chile. We had very good results from our Italian assets due to higher level of ancillaries as well as to higher spreads captured throughout Europe. This was also driven by higher operational contribution of Brazilian assets and by improved performance from Middle East gas contracted activities. The COVID impact on our thermal activities was minimal with lower demand mainly in Chile and Peru. To conclude on thermal, let me highlight the demothballing of two Dutch gas units, demonstrating this fleet's flexibility to take advantage of market opportunities. Let's now move to our supply, nuclear, and other activities. Supply suffered a net COVID impact of roughly 290 million, mainly due to lower consumption, bad debt, and lower B2C services. Warm temperatures in the first half also weighed on energy consumption, mainly in France, for B2C gas volumes. These headwinds were partially offset by various one-offs, including an internal negative 2019 one-off mirrored in networks. We continued to put in place dedicated action plans, including OPEX reductions and GNA resizing. COVID had little impact on nuclear and its contribution improved by 203 million euros, mainly reflecting higher achieved prices and lower OPEX. These positive effects were partly offset by lower volumes, mainly due to a decrease in availability of our Belgian assets caused by the last planned LTO maintenance works on Dool 1, Dool 2 and Tienge 1. Lastly, COI for other activities decreased as 2019 benefited from a positive one-off related to partial sale of a gas supply contract. And 2020 was impacted by COVID, mainly due to credit losses for CHEM. These headwinds were partly offset by the outperformance of CHEM activities on the back of market volatility. We also benefited from higher contributions of GTT thanks to a strong past order intake. Next, a few words on the bridge from EBITDA to net recurring income group share. DNA was up mainly because of acquisitions, asset commissioning, and accelerated amortization for some French gas distribution assets. Net interest expense was also slightly higher, driven by negative effects and lower cash remuneration. Tax charges were 300 million lower, mainly due to the decrease in profit. This was partly offset by a temporary higher effective recurring tax rate at 32.5% in 2020 versus 28.2% in 2019. This higher tax rate included notably the adjustment of carrying value of some deferred tax assets and the one-off effect of the tax rate change in the U.K. Minority interests were lower, mainly due to lower contributions from our listed entities in Latin America and to the scope effect of GLOBE. And now, I'll comment on the bridge from net recurring income group share to net income group share, which was negative 1.5 billion in 2020. First, we recorded significant impairments, mainly driven by the 2.9 billion nuclear impairment, caused by the change in lifetime assumption for Belgian nuclear reactors, as well as by changes in the commodity price scenario. In addition, the extension of fair value accounting to a European gas contract and its related assets also led to a net impairment of 500 million. These negative figures were partly offset by capital gains, mainly coming from the Suez transaction. Let me now focus on the evolution of net debt and on our leverage ratios. Financial net debt decreased by 3.5 billion to 22.5 billion from December 2019, primarily due to disposal proceeds. CFFO was 7.1 billion in 2020, down 500 million versus 2019, mainly driven by the following effects. First, operating cash flow was 1.1 billion lower, mainly reflecting the drop of EBITDA. change in working capital requirements from activities excluding energy management at an impact of negative 200 million. These headwinds were partly offset by a 700 million positive change in working capital requirements from energy management activities driven by dynamic management of margin calls in 2020 in a context of extreme volatility of commodity prices. We reshaped the portfolio by investing 7.7 billion capex and by disposing of 4.2 billion of assets. Overall, the average cost of gross debt was 2.38%, down 32 basis points compared with December 2019. At the end of 2020, the financial net debt to EBITDA ratio was 2.4 times, a slight decrease compared to December 2019. Economic net debt to EBITDA ratio was four times stable compared with December 2019 and better than 2020 guidance. We maintained a high level of liquidity with 23 billion, including 13.3 billion of cash as at the end of December 2020. This is particularly noteworthy in the context of the unprecedented pandemic. We strengthened our leadership in green bonds, having issued 2.4 billion green bonds in 2020, for a total of 12 billion since 2014. We also dynamically managed our hybrid bonds, which are showing an average outstanding amount of 3.9 billion. The current total coupon of 100 million per year has been reduced by 28% since 2017. Lastly, no change on the rating since mid-November in line with the strong investment grade we aimed for. Let's now look at the outlook for 2021, starting with our capital reallocation to fund growth. We expect to invest between $5.5 and $6 billion in growth capex, with over 90% allocated to our strategic priorities. We will continue funding nuclear provisions in Belgium and invest for maintenance with a total of approximately $4 billion. In addition to EVBOX, we expect to execute disposals of around $2 billion aligned with the group simplification. On the following slide, I'll share our 2021 expectations for each business line. In renewables, we expect growth from asset commissioning in the United States, from higher achieved prices for French hydro and from the potential positive effect of the CNR concession extension. This growth will be partly offset by a lower benefit from the GFORM ruling in Brazil and by the assumed FX deterioration. In networks, lower RAB remuneration rates in France should be offset by the reversal of 2020 warm temperatures as well as continued growth in Latin America. In client solutions, overall, we are expecting a strong recovery from COVID, albeit with a relatively slower recovery for asset-light activities. We are also expecting a year-on-year accretion resulting from the partial disposal of SVEs and EBBOCs, which contributed negatively in 2020. In thermal, we expect a COI decrease due to the normalization of a strong 2020 performance in Europe, which was supported by high spark spreads and ancillary contributions. In supply, the outlook is improving as these activities should strongly recover from COVID and on the assumption of temperature normalization. In nuclear, we expect contribution to increase as volumes should be higher thanks to better availability. We have already secured better pricing for 80% of our 2021 outputs at 46 euros per megawatt hour. Included within this guidance is an estimated impact that follows the extreme cold weather in Texas earlier this month. We are assessing the situation, which mainly affects renewables and supply activities. Overall, we currently estimate a potential net impact at the group COI and net recurring income group share level of between 80 to 120 million. Now the 2021 guidance. We expect EBITDA to be in the 9.9 to 10.3 billion range, COI to be in the 5.2 to 5.6 billion euro range, and net recurring income group share to be in the 2.3 to 2.5 billion range. Regarding COVID, our projections assume restrictions similar to the fourth quarter 2020 and a gradual easing over 2021. We assume up to 100 million dilution effect at the COI level from approximately 2 billion disposals, in addition to previously signed transactions. We remain committed to a strong investment credit rating and continue to target a ratio of below or equal to four times economic net debt to EBITDA over the long term. And importantly, we reaffirm our dividend policy, which relies on a 65% to 75% percent payout ratio on the basis of net recurring income group share. I will now hand you back to Catherine for our 2021 priorities. Catherine, the floor is yours.