Earnings Transcript for ENGI.PA - Q1 Fiscal Year 2022

Operator: Thank you for holding and welcome to ENGIE’s Q1 Presentation. For your information, this call is being recorded. [Operator Instructions] I will now hand you over to Aarti Singhal. Please go ahead.

Aarti Singhal: Thank you and good morning, everyone. It’s my pleasure to welcome you to our Q1 conference call. Shortly, I will hand over to Catherine and Pierre-Francois who will present our first quarter performance. Following which, we will open the lines to Q&A. And with my usual polite request of limit your questions to one or two only please. And with that, over to Catherine.

Catherine MacGregor: Thank you, Aarti and good morning everyone. Let me start this morning’s presentation with the actions that we are taking towards enhancing the security of supply given the current context, a context that is triggered by the war in Ukraine that is having such a tragic impact on lives. ENGIE prides itself in being a responsible and compassionate company. We are engaged in many ways to help the humanitarian efforts directly, but also in partnership with NGOs. The ongoing crisis reinforces the relevance of our strategy, a strategy that aims at a balanced, resilient and affordable energy mix. Our business model is built upon the strength of world class industrial global business unit that position us strongly to steer through the current energy crisis and to create sustainable value in the long-term. We are indeed among the world leaders in renewables and that is a platform that we are continuously developing. The strength in renewables is complemented by a large portfolio of flexible generation assets, which are absolutely key to addressing intermittency. And we own and operate significant critical network and distributed energy infrastructure. All of these activities in combination with our unique global energy management expertise help us find solutions to the energy transition commitments of our customers. Our teams are more focused than ever in contributing to the transformation of the energy mix for the development of both renewable power and renewable gases. As a major energy player in Europe, we are playing an active role in shaping the future of energy. First, we have diversified and increased sources of gas supply to address volume risks. We have entered into new contracts. We are maximizing volumes from existing ones, such as in Norway. Second, our networks are delivering strong operational performance and reliability in the backdrop of such a higher utilization. For example, our 3 LNG terminals in France have operated close to maximum capacity with a record 64 ships unloaded in the first quarter. And we are enhancing LNG operational capabilities we are taking dedicated actions to debottleneck and also to expand the import capacity for the next 3 years. Third, our supply teams have significantly stepped up efforts to help customers with extra support in these very difficult times for many. We are always mindful of our role as a utility and of our responsibility towards affordability. We are engaging with governments and regulators to play our part. For example, through working capital support to enable the regulated gas tariff freeze in France. And there are many other examples, such as power and gas customers in France, with fixed tariffs being protected from the price increases in the last month and individualized cash management support by increasing the number of payment installments in Belgium, France and Romania. We are advising customers on how to better manage their payments and we have also increased our resources to respond to customer costs, for example, in Belgium, we have increased the number of staff members in call centers by about 30%. Lastly, we are helping prepare for the future. We truly see an inflection point in unlocking the potential of renewable gases, more on this later. Before turning to the highlights of the Q1 performance, first, a few words on ENGIE’s gas positions in Europe. We have a portfolio of gas purchase and gas supply contracts. We procure gas for sales to B2B and B2C customers and for our own consumption by our CCGT power plants and these volumes totaled around 400 terawatt hours a year and that is talking about Europe. Related to this commitment, we are structurally long gas. The delta is sold in wholesale energy markets. In the current context, obviously, we have adapted our risk policy and hedging strategy to actively manage our exposures. Pierre-Francois will cover this more in detail later. On the topic of payment terms for Gazprom, ENGIE has taken the necessary steps to be ready to execute on our payment obligations in compliance with European sanction framework and without modifying the balance of risks for ENGIE. Moving now to our operational and strategic progress, ENGIE has continued to perform strongly. We posted an EBIT of €3.5 billion, growing 76% year-on-year on an organic basis. GEMS delivered very strong performance in exceptional market environment, optimizing our flexibilities in long-term contracts, but also responding to strong customer demand. Again, strong operational performance enabled us to capture high prices, particularly in nuclear, renewables performed strongly as well, and European thermal also saw high contribution from higher spreads as well as ancillary services. Supply contribution increased in the market conditions that we know. The group has benefited from its strong balance sheet and liquidity supporting temporarily higher working capital requirements. Finally, we are upgrading the guidance for 2022 in light of this very strong Q1 performance and with updated assumptions for commodity prices we will cover that in more detail. Importantly, we have made strong progress on the execution of our strategic plan, a plan which is designed to build a solid foundation for long-term growth with a focus on simplification and value creation. We have advanced further on our disposal program. Last week, we signed the SPA with Bouygues after conclusion of the consultation period with relevant employee representative bodies. So, we are on track for the completion of the EQUANS transaction in the second half. And this, of course, will represent a major step in the implementation of our strategy. We have also completed the disposal of a further 9% of GTT and the sale of Endo, which is a subsidiary, specialized in industrial maintenance and energy services. And we progressed with the sale of 17 energy services companies in Africa, further rationalizing energy solutions activity. We have maintained the momentum on efficiency improvements across the group through the implementation of our performance plan that is focused on operational excellence, improvement of super functions and fixing of loss-making entities. Renewable growth is on track and Energy Solutions saw strong commercial momentum, particularly in distributed energy infrastructure, winning contracts in local energy networks and onsite generation, such as the signing last week of a global contract with Faurecia, where ENGIE will install, operate and maintain solar panels across 14 countries. In renewables, we are continuing to work and develop a strong platform. We are targeting 50 gigawatts of total installed capacity by 2025 with an average of 4 gigawatt addition per year to 2025, always with a return-focused approach. In terms of progress in the first quarter, we have secured a French hydro portfolio with a Ciena concession extension granted to 2041. We have continued to strengthen our operating asset base as well as our project pipeline, with the closing of the acquisition of Eolia in May, which is reinforcing our Iberian platform and we have also acquired Photosol in the U.S., which will bring 17 early-stage development projects. Really pleased with Ocean Winds that is making strides in its offshore program. Ocean Winds was only created in 2020. Since then, its portfolio has doubled reaching 11.2 gigawatts of offshore wind projects in operation, under construction or under development. For example, in the first quarter, Ocean Winds has been awarded a lease area in the New York based offshore wind energy auction for a site with a capacity of up to 1.7 gigawatts. In the context of rising global inflation and supply chain constraints, we are geared up to operate in what is a new normal. So, the focus is on mitigating the risk of price increase and shortage of critical supplies. Our renewables and procurement teams are working very closely, doing a fantastic job. They are working with existing and new suppliers they are leveraging economies of scale even more so with the organization per global business unit. And then I am very proud to share that ENGIE recently launched a new initiative to enhance the acceptability of renewables by society. It’s a certification that we are calling Ted, which will be audited by Bureau Veritas founded on 9 concrete commitments that go beyond regulatory requirements, which is demonstrating ENGIE’s strong commitment on sustainability. From renewable power, let’s now move to renewable gases. Renewable gases have a critical role to play in the energy transition. This is recognized by the repowered EU plan as the commission is presenting proposals to boost biomethane production aiming for 380 terawatt hours by 2030, which is doubling the current ambition. This new target corresponds to around 20% of current Russian imports. They will support the acceleration of biomethane production in France, which has the largest potential in Europe and this is driven by strong agricultural sector. France biomethane production capacity has been growing strongly over the last years. They have reached 6 terawatts in 2021 and we believe that the current 2030 target could actually potentially rise to at least 60 kilowatt hours. We have been engaging with public authorities to accelerate the development of biomethane in France, very encouraged by the fact that the regulatory agenda has progressed with new incentives such as production certificates, large tenders and increased level of support on grid connection cost. Our regulated gas networks in France are already contributing to biomethane development. For example, with around €500 million, I expect it to be invested for grid connections alone from 22% to 24%. And this new momentum in renewable gas will obviously play a very important role in achieving a 2045 net-zero target. Alongside biomethane, we are at the forefront of developing hydrogen. Let me give you a few examples of the project we are working on, with a project to produce synthetic fuels from capture CO2 combined with green hydrogen. That green hydrogen will be produced by an electrolyzer, install bioenergy. Yuri, a partnership through which we will be producing green ammonia from green hydrogen and that project is in Australia and right now, a proof-of-concept in South Africa, where we just inaugurated the world’s largest hydrogen-powered mining truck, aiming to reduce diesel emissions in mining operations. There are so many other examples from across the group, such as the partnership that we signed with Alstom to offer the rail freight sector, a solution to replace diesel with hydrogen as a fuel. And let me remind you that ENGIE is targeting to deploy 4 gigawatt of green hydrogen production capacity by 2030. Lastly, a quick update on – as you know, the Belgium government decided to consider the extension of the operational lifetime of two reactors to 2035. We are obviously contributing to this rethinking. We are working with the government on studying the feasibility and also the implementation condition of such a scenario. Given the project scale and timing, the group would engage in such project with a balanced risk-sharing approach. In the shorter term, our priorities in Belgium are to maintain high operational availability, which has been very strong so far, prepare the upcoming shutdowns and enter into the process of the triennial review of nuclear provisions in H2. Let me now hand over the floor to Pierre-Francois.

Pierre-Francois Riolacci: Thank you very much, Catherine and good morning, everyone. And let’s crack straight on the numbers. And indeed, we are coming out this morning with a solid set of results for Q1. On the P&L, we posted significantly higher earnings with EBITDA up by about 50% and EBIT being up by about 75%. As we have seen already in Q4 ‘21, the cash generation is impacted by some temporary effects, which are actually reflected in the working capitalization. And this led to a negative minus €0.1 billion in CFFO for Q1 and of course, I will come back on that. The net debt is higher by about €2 billion for both financial net debt and economic net debt. However, as you can see, our credit ratios did improve and we maintained a strong liquidity with high cash levels. And last but not least, we are upgrading our ‘22 guidance. Let’s go a bit closer and to the details. So, EBIT is up by €1,500 million, plus 74% growth. We have a slightly negative scope and FX impact of minus €27 million. The scope is linked to 2021 events, the partial sale of our GTT shares and also some asset disposal mainly to achieve, of course, our geographical refocus and the core exit targets. On the FX side, the positive, which is linked to the appreciation of Brazilian reals and to a lesser extent, U.S. dollar against euro. The organic increase is plus 76%. I am pleased to see that quite a few business units are actually contributing. Renewables is up by nearly €200 million, plus 72%. The strong growth driven by higher prices – so higher prices in Europe, mainly coming from the French hydro, but also benefiting from the – also, of course, to flag the contribution of new capacity commission and test, which is of course a great contribution. We had some headwinds and especially some lower hydro volumes in France and in Portugal due to hydrology. On networks, we are down by €94 million, which is minus 9%, this is on the back of negative effects in Europe due to warmer temperature on one hand, but also lower regulated revenues from our French assets, which are actually reflecting the regulatory reviews from the last period. We are now coming in the end of this regulatory review and we see this negative impact. These negative impacts were partly offset by tailwinds outside Europe, mainly from higher contribution in Brazil with our power line construction progressing. Energy Solutions is plus €12 million, plus 9%. We see some nice positive effects from energy prices increase, but also a commercial market dynamic. However, we still are hit by EV box, which is posting a lower contribution in Q1 than last year. This impact should fade away through the year and we expect H2 to be in a much better position. On Thermal, up €254 million, that is plus 91%, very positive results mainly linked to the European activities as we were able to capture higher spreads, but also a good contribution from ancillaries. And this was achieved despite our Chilean operation being still under pressure. Supply is up €94 million, that is plus 43%. And this was driven by a bit of an unusual effect. We had warmer comparative, which usually is not great news. But in this case, it led to long gas position that we were able to monetize in the market, of course, in good conditions. There was a negative impact of prices in some countries, such as price cap in Romania, but this is a Q1-only impact, which is not expected to be repeated. Our nuclear plus €530 million, an exceptional performance, which is indeed driven by much higher achieved prices, which are only partly offset by increasing taxes, specific to our units in Belgium. We had also somewhat lower volumes due to a slightly lower, albeit still high availability for our Belgian reactor, but that was planned and it was on the back of planned outage. Last but not least, other is up €536 million and it is driven by the exceptional outperformance on all GEMS activities, which I am going to detail in the next slide. But before I move there, I just want to highlight that our performance plan, as Catherine was mentioning, is contributing in Q1 for about €68 million. It’s a decent quarter in line with our full year expectation. So, while we are leveraging the current market condition, it’s clear that it is critical to keep the basics right and drive competitiveness agenda in the long run. So, moving to GEMS, I mean, you are familiar with this business that we had the opportunity to highlight already a couple of times. It’s a strong expertise with more than 3,300 employees. And GEMS, which stands for Global Energy Management and Supply, is actually integrating our energy position for our own accounts as well as for our customers and sometimes even for partners. So, they are the guys who are actually negotiating a large part of the PPAs, but also architecting our revenue blend. And I think that needs to be fully understood. Of course, in the current environment, this is offering some opportunities. And here, GEMS had two key strengths. The first one is this long gas position in Europe with optionalities embedded in the contract. Catherine was pointing to it. The other one is, of course, GEM is a net seller of volatility. And if you take a look on the year-on-year delta for some of these key market drivers in the table on the right hand side, it is quite spectacular for both prices and volatility. And of course, you can imagine, this market has been providing strong tailwind to our GEMS activity. And indeed, GEMS delivered this exceptional outperformance in Q1 with some key drivers. The gas optimization was of course boosted by the prices, but also the geographic spread and this was leveraged for dynamic optimization of all the contractual flexibilities, which are embedded in our contracts. We had also a higher contribution of our risk management. We had a lot of requests from our customers to asking for a cover and for hedging and support solution, so more volumes driven by customer demand. And last but not least, our trading activities of course benefited from the higher volatility. Let me be crystal clear. Our business model is not based on taking open or directional positions. It is actually the opposite. We have strong risk control processes, tested hedging policies and procedures. And to take into account the new uncertainties of course, we had to adapt some of them. As such, we have adjusted our hedging policy towards our short-term exposure on our Gazprom contracts. And our risk at the end of March was just under 5 terawatt hours for a maximum exposure of 15 terawatt hours as it was disclosed early March. However, this position is managed dynamically depending on price environment or assessment of short-term gas disruption risks and a few parameters. But at the end of March, again, it was just below 5 terawatt hours versus 15, which is the maximum exposure. So, great job done with GEMS which is more than ever a critical component of our value proposition to our customers. If the market was a strong tailwind to our P&L, it was definitely a headwind in the short-term for our cash generation. And indeed, the CFFO amounted to a negative amount of minus €0.1 billion, which is down €1.7 billion compared to Q1 2021. The operating cash flow is up by €1.7 billion, broadly in line with the EBITDA improvement, nothing wrong. Working cap variation is negative minus €3.3 billion. It’s not a big surprise. It doesn’t trigger any specific worry. Let me take you the different building blocks. The first impact, minus 700 is actually the higher stored gas volumes, which was driven primarily by security of supply, but also warmer temperature at the end of the quarter, so higher volumes in our inventory, gas inventory. But of course, the main impact was linked to the higher commodity prices, which has been impacting the gas inventory to a certain extent, the net receivables, big time, the unbilled B2C volumes, which are the energy in the meter and also the margin costs, which were also impacted by higher volatility. You know, the margin growth are driven by prices, but also volatility assumption. And the last component, which is coming from the French supply tariff shield for about €500 million negative in Q1. By design, most of these items are not repeatable in the future, as they are triggered by the price increase mainly and could actually reverse if we had another price environment. One point which is very important which is linked to receivables, is that we have actually reduced slightly our DSO to 53 days year-on-year, and this is due partly to the activity mix. And this is on the back of our disposal program. We have actually sold activities, which were more demanding in terms of DSO, and that’s good, of course, that will benefit from that impact. We have also the benefit of a higher energy-related content in our building, and this energy content is going for shorter payment terms than the other part of the service, but we had also the benefit of continued discipline in cash collection, which is very important, and I’m pleased to report that we don’t see any significant deterioration of collection patterns other than agreed, of course, and also not reporting any significant increase on bad debt. With healthy operational activities, robust earnings, these effects are temporary and are expected to be recovered over time. In this unprecedented market environment with this gas supply disruption [Technical Difficulty] on the right hand side. Our starting point, of course, was very good, but we still have taken a few further actions, especially regarding liquidity, we have increased the initial margin substitution through standby letter of credit up by about €700 million on the quarter year-on-year on the first quarter. We are also constantly acting to limit the margin cost through the use of liquidity swaps. And as a safeguard, we opened new credit line, especially to cover the daily volatility, notably with [Technical Difficulty] billion coming on top of our existing facilities. On cash, we are actively managing our treasury, for example, with an increased use of commercial papers at undeteriorated unaffected conditions and of course, commercial papers, which are backed by a syndicated credit line, and this is used when needed to finance our initial margin increase. We are, as you can imagine, scrutinizing our liquidity on a daily basis, both short-term and long-term. Moving now to the balance sheet and some credit metrics. So the net financial debt stood at €27.3 billion in the quarter, up €2 billion compared to the end of last year. This is, of course, including the negative Q1 2022 CFFO of minus 0.1%. The capital expenditure for €0.8 billion, but also the new rights of use of same amount, €0.8 million mainly following the renewal of the C&R hydro concession for 20 years. We had another €0.6 billion impact, which is related to ForEx. These elements were only partly offset by the disposals for about €0.8 billion related to the earn-out of the sale of the 29.9% shares of U.S., the sale of the remaining 1.8% in U.S. and a 9% partial sale of GTT. It does not include, of course, the net proceeds of the EQUANS disposal, which is progressing as planned. The economic net debt stood at €40 billion with an increase in line with the net financial debt evolution. Our leverage ratios improved, driven by the strong LTM EBITDA increase notably, economic net debt-to-EBITDA ratio stood at 3.3%, down 0.3% compared to 31st of December ‘21 and in line, of course, with our target ratio which is to be below or equal to 4.0. Lastly, no recent change on the rating, which is in line with the strong investment-grade target we want to stick to. With that, in light of this very strong Q1 ‘22 and with updated assumptions for the balance of the year, notably on the commodity prices, now being based on the average forward seen over Q4 ‘21 and Q1 ‘22. We are in a position to upgrade our full year 2022 guidance. We indeed expect ‘22 net recurring income group share to be in the range of €3.8 billion to €4.4 billion. That means the mid-range up by €0.9 billion, which is based on an indicative EBITDA range of €11.7 billion to €12.7 billion, again, midrange up by €1.3 billion and an EBIT range of €7 billion to €8 billion mid-range €1.2 billion. You can see that we have widened the ranges, and this is, of course, to reflect the current context of high volatility, but also the increased absolute number that we are guiding on. A few important comments on these figures. First, since the beginning of the crisis, we have taken action to increase and diversify our sources of gas supply as well as optimize our hedging positions. Together with the lapse of time, our 22 exposure to current uncertainties are therefore decreased. Second, we have considered various scenarios, some business as usual, just tweaking the price assumption and some operating assumption, some with a cut in Russian gas supplies with again, different assumption and some with a significant cessation in H2. In all cases, our expected performance for ‘22 remains resilient and it will take actually the conjunction of various significant negative assumptions to derail our performance in ‘22. The main reason is that while a Russian gas supply cut would likely have an immediate negative impact in some mark-to-market position. The overall environment resulting from that is likely to be supportive to a significant part of our business, both in prices and volumes of ancillary services, allowing for some recovery over time. As usual, we have some qualification in our guidance. But overall, we are confident in our ability to limit the impact of potential headwind thanks to the strength of our integrated business model, which includes a growing renewable portfolio, large regulator networks and flexible thermal generation. The other part of the guidance related to operating and to dividend remains unchanged. With that, I would like to hand over back to Catherine.

Catherine MacGregor: Thank you, Pierre-Francois. So just to summarize some of the key messages. We are indeed enhancing security of gas supply in the current context. We delivered a very strong first quarter financially, but also operationally in what are exceptional market conditions. Of course, this would not have been possible without the engagement, the enthusiasm, the strong commitment of our teams who are rising to the challenges of the situation. I am really proud of them. We are maintaining strong liquidity, robust balance sheet, and importantly, our strategy and integrated business remains more relevant than ever to contribute to the energy transition, to create sustainable value in the long-term. We can now open the line for questions.

Operator: Thank you. [Operator Instructions] Your first question today comes from the line of James Brand from Deutsche Bank. Please go ahead. Your line is open.

James Brand: I have three questions.

Pierre-Francois Riolacci: We can hear you.

James Brand: Okay, that’s good. That’s why I said well done on the very good results. And then I have two questions. The first was on the Belgium nuclear [ph] life expansions when you were talking about in the statement. You made a comment towards the end of that where among other things you said you are looking for a clarified dismantling and nuclear waste framework. I was wondering whether if you give some more details on what you are looking for in that area? And then the second question was just on the gas procurements, you have obviously been very clear on how much of your gas is coming from the Gazprom contract out of the total? I was wondering whether you could give us whatever breakdown you were able to give in terms of where the rest of the procurement is coming from, is that mostly on wholesale markets, is – are there other some bilateral contracts there, anymore details on the rest of that so we can conceptualize that’s what the rest of kind of ex the Gazprom contract will be really useful? Thank you very much.

Pierre-Francois Riolacci: Yes. Maybe just on the gas supply, I think that you need to know that most of our gas supply is actually sourced for long-term contracts. Whether they are coming through pipe or through LNG and they are coming from various operators, of course, Gazprom is one of them. And then it comes to many others, including Equinor and including all the names that you can think about. So it’s not that we are actually getting our supply out of the wholesale market. It’s already long-term contracts, which is the bulk of our gas supply.

Catherine MacGregor: Okay. And let me take the Belgian extension – nuclear extension question. I think what is really important to understand with potential extension is that it would come with a number of risk and uncertainty related to, first of all, the technical aspects of the project. But also the regulatory has a lot of regulatory framework components need to be put in place for this extension to be both planned and then, of course, executed. And so we’re looking at this project as a whole concerning all of our nuclear activities in Belgium, the risk of this extension and of course, the risk related to the dismantling of the plants, which would happen at the same time as well as the waste management. So we’re really looking at the whole risk balance and making sure that, indeed, through this potential project we remain and we continue to have a balanced risk overall in Belgium for our nuclear operations.

James Brand: Okay, great. Thank you very much.

Operator: Thank you. Your next question comes from the line of Ajay Patel from Goldman Sachs. Please go ahead. Your line is open.

Ajay Patel: Good morning. Firstly, thank you for the presentation and congratulations on your numbers this morning. I have two questions. One, I wanted to just focus on Russian gas exposure. So in the statement, you kind of highlighted that previously you had exposure up to 15 terawatt hours because you fixed that procurement contract 1 month in advance and that you have done a number of things in the portfolio to reduce that exposure to 5 terawatt hours at the end of March. I guess what I wanted to understand is, is that 5 terawatt hours just a function of us having been now moving into the summer, and therefore, it would be naturally lower or have you done something specific within the portfolio to reduce that exposure? And how long would – could you detail what those are? And secondly, how long has that exposure being reduced at that level. Just to understand how much of the – how much of this risk has been size mitigated on what basis really? And then the second question, wanted to talk about just clearly, compared to your Investor Day on CMD that you have done before. The cash generation of this business has improved. And that clearly will eventually benefit with you, and we’re having a better opportunity to invest. I just wondered if you could flag where would be your strategic priorities for that cash flow?

Catherine MacGregor: And let me start with that second question because that’s – it’s actually quite exciting because when I look at what’s happening in the world of the energy, I really feel that we are a bit of a turning point and the crisis that we are experiencing here in Europe is actually creating a momentum behind the energy transition with potentially a strong acceleration. And it’s really interesting right now a lot of the discussions we are having with regulators and government is that what can you do to accelerate the development of the renewable energy, for example. And it is true for power. It is also true for gas. So a bit of the context to your question, Ajay, is the fact that we are seeing a number of acceleration opportunities. Of course, we continue – we are on track with our CapEx plan as presented to you at the CMD. The strategic priorities are pretty much the same. It’s very much renewables, decentralized energy infrastructures. Renewables includes power but also, of course, gas and very excited about the renewed objective in biomethane and analytic longer-term hydrogen. And so that framework has not changed in a way it is being validated by what’s happening in the world. So very much continue to look forward to investing CapEx into organic growth opportunities, mainly not immune to potential inorganic opportunities as they come up and that’s why we mentioned the closure of – the closing of Eolia which is very interesting one because it’s very adjacent, very complementary to our current portfolio. We feel we can add value as an industrial operationally. So that’s the type of thing that you would be looking at focusing on in terms of growth. So that’s a little bit our priority. It’s very much unchanged. It’s probably even more exciting environment actually than before. Pierre-Francois, you want to comment on the 5 terawatt hours?

Pierre-Francois Riolacci: Yes, a quick one. So you remember that this exposure is coming from this us sourcing gas with a price mechanism, which is actually detaining the price 30 days ahead. And as a good operator, we are actually sitting in the same way so that we make sure we are not creating an exposure. The exposure is coming from the risk that gas pump could suddenly stop, and then we would be short of the volumes that we have pre-sold. So there are different ways. You can address this you could actually play on the sales. You could also actually source other quantities in another way on a rolling basis. So there are an array of instruments that we can actually use and our teams are doing the best to make sure it’s done in the most efficient way. What I would like to highlight again is that nothing to do with seasonality or winter summer. So you should not expect that it should be moving on the back of this quarter. However, we want to retain the possibility to position the right level depending again on the price environment, on the risks that we see in the market. Because, of course, when you are doing that kind of hedging or counter hedging, it comes with a cost. So that’s our job to make sure that we do the best, and we do that based on market conditions. So the five is not carved in stone, like 15 was not carved in stone. I don’t say that the 15% was a max. And then within there, we can manage the position. Nothing to do with winter storm.

Ajay Patel: Thank you. And just to make sure that we have the full picture there, that 5 terawatt hours of that reduction or the mitigation measures that you put in place, do they last for the rest of the year? Do they last for the next few months? Do we have any idea of timeframe?

Pierre-Francois Riolacci: Again, they are short-term exposures. So you need to think indeed in terms of months. But stay with me, these 30 days is recreated every day. So we have to roll this position and we have to manage this position, which is not going to disappear. So you will still have these 30 days at the end of the year, of course, if Gazprom continues to deliver, you will still have this 30-day position. And in ‘23, we would be still potentially managing this position. So, it’s not going to disappear like that. It is embedded [Technical Difficulty]

Operator: I am not sure if the question was finished. I will go to the next question and the next question comes from Arthur Sitbon from Morgan Stanley. Please go ahead your line is open.

Arthur Sitbon: Thank you for taking my questions. The first question is on is on government intervention across Europe. We’ve seen some measures being taken on the gas price cap in the South of Europe and broader acknowledgment of that type of measure. We’ve also seen some headlines on potential windfall profit taxes in Belgium. I was wondering, well, first, if your guidance was taking into account those potential risks? And as well, if you could just comment on the likelihood of such measures being implemented in your main geographies? That’s my first question. The first one is actually regarding the fact that the engine name has been associated in the press lately with two French renewable businesses regarding potential M&A. I know you don’t comment to rumors. But I was wondering more generally speaking, what would be your M&A policy? What kind of M&A operation you could consider? Thank you very much.

Catherine MacGregor: Yes. Okay. Thank you, Arthur, for the question. So just on the M&A, I think I commented briefly on this. Indeed, we’re not commenting rumors in terms of growth, we are indeed very focused in organic growth opportunities. At least that’s the 50 and 80 gigawatt in Renewables. Our objectives are really designed that way, many organic without necessarily eliminating inorganic opportunities such as the one that I’ve mentioned, we have mentioned Photosol as well earlier. So that’s some of the targets that we would be considering. And so far, we’ve really delivered on that. So no change there. And just maybe on green, yellow, just for the sake of clarity, we do have a JV with green, yellow called reservoir, which is involved in development of on-site solar and these JVs is indeed a 50-50 JV that we have with them. On the first question, which is around government intervention, just a bit of context here again, it’s that we have indeed a situation today where governments are faced with not only the urge of energy transition, but also the sheer size of investments related to energy transition. So whatever they do already, they are balancing the need for companies like us to be able to invest. And so we are really is seeing that any attempt to do taxes, are balanced with the fact that they need companies like ENGIE to invest in the energy transition. That doesn’t mean, of course, that there are not any government initiatives to intervene. There is one, for example, in Italy, which is ongoing, which frankly, we believe the methology is not present, let’s say, present some flows. So we have obviously in discussion there. Whatever we know has been taken into account in our guidance at this stage, so that one would be taken into account in our guidance. And in Belgium, just a comment that there is already a quite clear legal framework and contract for the production of nuclear power tax regime. And so at this stage, we think that there is – this is well taken care by this very clear framework and contract.

Arthur Sitbon: Thank you very much.

Operator: Thank you. Your next question comes from the line of Sam Arie from UBS. Please go ahead your line is open.

Sam Arie: Thank you very much. Good morning, everybody. Maybe I’ll just check that you can hear me okay, before I launch in.

Catherine MacGregor: All good, Sam.

Sam Arie: Okay. Very good. Excellent and thank you for the presentation and congratulations on the results. I’ve got a question on, if you like, old gas and one on new gas. And so on the old fossil gas side, I think my question is, if you can help us understand when you buy gas from Gazprom on the long-term contracts, where you actually take delivery of it. And the reason to ask is I suppose we’re looking at this German process to amend the energy security law, which looks like it’s going to mean gas midstreamers can renegotiate prices in the event of a curtailment or sort of a loss of Russian supply. And I am just wondering if that has any benefit for you or indeed, if you expect any sort of similar arrangements to be in place in France. Any comment on that general topic would be super helpful? And then on the clean green gas side, you are obviously talking a bit more on biomethane. I mean you have talked about biomethane in the past, but it seems like it’s becoming bigger and more serious. And I was just wondering if you could take a minute to talk to us about the economics of biomethane at the moment. And maybe just something very basic, like what does it cost you today to supply a megawatt-hour of green biomethane. And how far are we from biomethane anything being competitive without subsidies just given where natural gas prices have gone. Again, any comment around that topic in general would just be super helpful?

Catherine MacGregor: So, let me start to talk a little bit about biomethane. Until fairly recently, it remained quite expensive to produce biomethane in relation to the natural gas, of course, with the current market price now around €80 to €100 megawatt hours in terms of biomethane and production cost, makes it actually not so ridiculous in comparison to natural gas, right? So, of course, there is still a lot of work to do and particularly development, economies of scale, looking at the size, looking at the feedstock, looking at what can be industrialized. And of course, grid connection cost is also a big factor. So, that’s some of the levers that can still be the actions. And always the balancing between the size of the installation versus, of course, the acceptability is something that we are acutely aware of in France. And we think different countries in Europe could take a little bit of a different approach on that aspect of the industrialization process because the sites can make a big difference in cost as well. So, that’s some of the elements of answer on the biomethane. And on the first question, to be honest, I was not sure – I am not sure I completely got it. But I am going to ask Pierre-Francois to comment on the delivery points and the Gazprom contract features.

Pierre-Francois Riolacci: Thank you. And your question is actually directed to, of course, gas that we procure through pipes in Europe and especially Gazprom because indeed, most of our contracts, they do not actually provide for many options. But in the case of the Gazprom contract, indeed, there are different delivery points that can be picked up. I was mentioning that some of the contracts offer some optionality. So, you can have one of those, which is stated there. So, of course, today this is a very important point. So, yes, this is option to get gas in different places. Of course, this is framed in the contract. But we do have some flexibility there. And it means also that when we are contemplating the future, we need also to prepare ourselves for a potential scenario where it would not flow the same way. So, that’s part of the complexity and opportunities that we are managing.

Sam Arie: Thank you. Very helpful on both. Do you mind if I just have a quick follow-up on that second point now on the contracts, because I suppose what I am trying to get to is if there was a disruption to the volumes that you do still have on the Gazprom contracts. Do you anticipate that you might be able to sort of get out of any obligations that you have made to sell that gas on to somebody else. And that seems to be the implication of the German legal amendment that’s going through at the moment that midstream gas traders could re-price their contracts if there was a curtailment scenario. Do you think that you would be able to do that as well, or is there any discussion of similar legal changes in France, [indiscernible] understand to get to.

Pierre-Francois Riolacci: I am not going to enter into each and every year position because I think that’s definitely not something we are prepared to do. But I can tell you that we are, of course, when we are managing our overall position. We take everything in account, and we are entering the macro hedging, which is necessary to make sure that we indeed protect the group to the maximum extent of any change in assumptions. So, still trying to run our business and get the best of our business as it is today, but also preparing for a worse scenario and make sure that we would, of course, limit our exposure. This is definitely handled proactively.

Sam Arie: Okay. Very clear. Thank you. And of course, it is much more risky for you than for some of the German companies, so understood.

Operator: Thank you. Your next question comes from the line of Lueder Schumacher from Societe Generale. Please go ahead. Your line is open.

Lueder Schumacher: Hi. Good morning. Just a quick question coming back to the Russian contracts, the counter hedging, as you referred to it of Russian gas, I am not quite sure how you can manage to reduce your exposure to Russian gas, given that, as you pointed out, most of your gas procurement comes from long-term contracts. Now, I get the price hedging sourcing volumes from different sources and all this. But all this doesn’t get you out of your initial Russian long-term contract, or am I missing something here? That would be the first question. The second one is related to this, you also mentioned that this counter hedging comes at the cost. Can you maybe give us a rough ballpark here, what we should be looking at?

Catherine MacGregor: Look, the key weapon we have to reduce our exposure to Russian contract is diversification and flexibility. Both levers we are actioning to our maximum through a number of measures. Some of them have described which is a lot around LNG, which is a lot around contracting additional gas from other counterparties. And through this flexibility, we will be able to reduce average and exposure should Russian gas delivery be disrupted. Anything you want to add on the hedging…

Pierre-Francois Riolacci: Yes. I think, of course, it does create a further complexity when you have to actually drive your position and manage your position, taking account two different scenarios that increased complexity. And therefore, it requires indeed, that you work with different instruments and count [ph] instrument. This comes with a cost, of course, and I am certainly not going to mention that cost because that cost is, of course, moving. And – but as you can see, we feel confident enough that while managing this cost, we can deliver strong results in 2022. That’s our job. That’s our core skills and that’s what ENGIE has been doing for many, many years, and we are just doing the same, but of course, with a different set of assumptions. So, there is, I don’t think there is anything to be really concerned about. This is something that we do. We are managing risk and should not be worried about the cost of risk management.

Lueder Schumacher: Thank you. I wasn’t really concerned about it. More curious, I think will be the right word. Can I just add one variation margins, what is the net impact of variation margin as it stands at the moment? And should be maybe make adjustments to net debt as a result?

Pierre-Francois Riolacci: So, we had a further deterioration of margin calls in Q1 of €600 million. I don’t know if this is the number that you are after.

Lueder Schumacher: The total, what is the net total you have a variation, not just the movement in Q1, if you have no…

Pierre-Francois Riolacci: Yes. You need to accumulate with the last year numbers, it is your point. So, we are talking billions. I think that our overall level of margins initial margins was something running and I wasn’t there, but that was about €500 million or something like that. And now we are talking about more something like €6 billion. So, it is significant, what is actually invested in margins and I can come back to you with a more precise number in a minute.

Lueder Schumacher: That’s great. Thank you very much.

Operator: Thank you. Your next question comes from the line of Juan Rodriguez from Kepler. Please go ahead. Your line is open.

Juan Rodriguez: Hi. Good morning. Thank you for taking our questions. Two on my side, if I may. The first one is on guidance. I want to better understand the numbers between your full year and Q1 results. Is this mainly an adjustment as well as your commodity price assumptions? And if that is the case, what can we say about your 2023 and ‘24 guidance that I see new information yet. And within guidance, can you give us a little bit more color or what can we expect in the top and the bottom part of the range because you have a big range here for ‘22. This will be the first one. The second is around Belgium nuclear. It’s mainly on your – you signaled a balanced risk approach with the Belgian government for it to go through. But what are the difficult points in these discussions? And what is the horizon that you and the government have set for this Belgium nuclear extension? Thank you.

Catherine MacGregor: Yes. So, let me start again with the Belgium nuclear question. A number of points that are under discussion include regulation elements that are going to be structuring for the extension program. And that’s some of the examples. Obviously, I am not going to go into great level of details, but there are so many dependencies between what one has to do and regulation, environmental assessment, permitting, even sometimes things that depend on other countries for that matter. So, a very, very complex project. Again, we are looking at making sure that we take a balanced approach to risk for ENGIE because a number of these things are indeed outside our control. In terms of timing, it’s a bit difficult to be honest to give you a clear calendar. My understanding is that the Belgium government would like to give a direction by June. But whatever that communication will be, it’s a little bit difficult to anticipate at this stage. And Pierre-Francois will comment a bit more on the guidance.

Pierre-Francois Riolacci: Yes, we are not prepared to give indication for ‘23, ‘24. We usually don’t do that at this point in time in the year. And given circumstances, I don’t think that it is advisable. So, I will not comment on ‘23, ‘24. On ‘22, what could actually help us, there is room compared to our assumption. There is some room for a potential price tailwind. We can also deliver our new availability in a better way than what we have embedded in the guidance. We do have some risk cover, which may not materialize. And of course, there is a potential for, James, to further create value in the year, a bit more than what we have factoring. So, there is potential on the upside. On the downside, there are, of course, some big topics. I mean gas curtailment in Russia, albeit not devastating. It could be a negative, of course, in some scenarios. So, that’s there. We have some turnaround that we need to complete in our business. And of course, there is this question mark that was raised a bit here about windfall profit taxes. And, of course, we can cope with, let’s say, a material amount. But if it was significant, then that, of course, that will drive the guidance at the bottom end.

Catherine MacGregor: Thank you. Are you finished?

Juan Rodriguez: No. I just want to come back on this. So, just to be clear, on the bottom part of your range, you are implying some possibility of curtail on gas of profit – windfall taxes in some of your key regions. How is that? Thank you.

Pierre-Francois Riolacci: Two scenarios, so the – depending on how these scenarios come through, definitely, you can be at the low end of the guidance. There are also scenarios that can take us out. But as I mentioned, it would require a conjunction of very significant negatives. Today, again, on the low side, we see more this execution risk and turnaround, potential disruption on gas and profit – windfall profit taxes.

Juan Rodriguez: Excellent. Thank you.

Operator: Thank you. Your next question comes from the line of Peter Bisztyga from Bank of America. Please go ahead. Your line is open.

Peter Bisztyga: Yes. Good morning. Peter Bisztyga here. So, two questions from me, please. Firstly, a bit confused still of this whole payment issue. The European Commission, I think issued guidance that it’s okay to open a Gazprom bank accounts. But to avoid breaching sanctions, your contractual obligation has to be met when you have made the payments in the contract currency, which I think in your case is euros, maybe you can correct me. Meanwhile, Russia has been saying that the contractual obligation will only be met when the ruble conversion has been made. So, I am wondering, have you actually resolved that issue for certain, or is there still a potential problem here? And how comfortable are you that the next payments due this month can be made without any problems? So, sorry if that’s a bit longwinded question, but that’s my first one? And then the second one, I am just wondering, if gas supply did get interrupted to France, do you think you could avoid rationing with gas in this coming winter, or do you feel confident that you can manage that with the flexibility and diversification as you discussed?

Catherine MacGregor: Okay. So, let me maybe start with the gas supply situation in France. At this stage, the storage level in France is very good for the season. As you know, LNG has come to Europe in quite impressive quantities, helped, of course, by the very strong demand, but also what’s happening in Asia, which has created really this quite massive rival of LNG, which is really good. It helped us with our storage. And so providing we can go through this summer filling the storage, we do have a scenario where beginning of the winter, the storage will be very, very full. And assuming, obviously, a medium climate conditions like average climate conditions, we would be able to go through the winter with very little impact. Obviously, no need for curtailment for France. So, there is a scenario where no curtailment is envisaged. Of course, if there was a disruption before the summer, then that would be a bit of a different story, and then we would need to be a bit careful on consumption for the winter. The issue then becomes a little bit for next winter because you would indeed start the next filling season with very low storage levels, but then that will be another story. And in terms of ruble, just – we have today, line of sight for a solution that will allow us to pay using the currency for the contract, which seems to be acceptable for Gazprom and which is in compliance with the EU sanctions at least to our understanding. So, that’s where we are. Payments, no, I am not going to give you any timing, but it’s imminent. We have said that there will be a next payment before end of May, so imminent. And that’s where we are on this story, which indeed has created quite a bit of airtime.

Peter Bisztyga: Sorry. Just to clarify on that, the contract currency is euro still?

Catherine MacGregor: Yes, we are paying in euros, and so we are not getting exposed to FX risk.

Peter Bisztyga: Okay. Thank you very much for that.

Pierre-Francois Riolacci: I mean you need to recognize that we are working with a high level of uncertainties in many ways. For example, on this gas curtailment, I mean you know that the government will be stepping in. And if the government is instructing our customers not to off-take the gas, of course, we are freed from our responsibilities. And I see that opportunity to be very clear that on the guidance, we know what we know. We don’t know what we don’t know, okay. And so the guidance is based on what we know. We have widened the range to indeed cope with all kind of assumption, trying to really be realistic about what can be achieved. But of course, there will always be things that we cannot plan for and that can impact. But please stay with us that we are with the winning of the range, we are trying to accommodate for a reasonable risk environment, which is, as you know, very high.

Peter Bisztyga: Thanks.

Operator: Thank you. Your next question comes from the line of Louis Boujard from ODDO. Please go ahead. Your line is open.

Louis Boujard: Thank you very much and good morning everyone. Congratulations again for the results today. Maybe two questions on my side. Sorry to come back on it, but maybe to have a bit more details, notably on the lifetime extension on the nuclear fleet. I have the feeling that for 1 year, it was reserving and that now we are maybe going towards something that is more like a starting discussion phase with a lot of stakeholder uptake. At the same time, I think that you still don’t feel necessarily amazingly happy with large positions in the market with these assets. So, does that mean that you can eventually have to open for discussions regarding regulated returns on this lifespan extension at this stage is something that you start to discuss about going forward with the stakeholders and the situation and of course, with the Belgian government. The second question would be regarding the administrative burden in the development of renewables. Of course, we know that this is, at the moment, maybe some things that needs to be tackled in order speed up the development in renewables, you come with an initiative called, the transition energy you have. Could you just provide some elements regarding the actual consequences that it would have in terms of geographies. And if and when you expect it to eventually have any implications in your capacity to speed up your actual development. You have more than enough balance sheet on to do it. So, maybe it’s the only bottleneck that prevents you for being a bit more aggressive in your development in renewables. So, could you please light us on this topic? Thank you very much.

Catherine MacGregor: Okay. Thanks for the question. So, on Belgium and the extension, what we have been always very clear on is that it would take 5 years to conduct such a project. And so what we had said is that as time went on, we didn’t see any way we could do this extension to be ready for 2025. And that has not changed. The discussion now that we are having with the government is to do such an extension, but that would obviously not resolve the issue of 2025 security of supply, but rather put those units online a little bit later, basically 2022 plus 5 years roughly, plus or minus. So, that’s the discussion that is at hand. Again, really difficult to comment on the specifics of the decisions of the discussion. But all the options are in the open and on the table, including potentially indeed the type of contract that we would derive from the generation of these two units. Everything is [indiscernible] but very, very difficult to comment any further on this. And then the second point is on the TED label. So, the scope of this label is really France onshore wind and solar. So, quite specific, but really important because, as I am sure you know, there has been a lot of debates around acceptability of wind onshore, particularly in France, sometimes to the point that it has become politicized. And given what is happening in the context and in the world of the energy, we think it’s really, really important to foster what we have been able to witness, which is a citizen appropriation of energy issues. And we think renewables is a fantastic response to that. But we want to make sure that the method that we use to develop the projects of renewables indeed fulfill a number of criteria. There are three categories, one which is around territories, the other one, which is the one climate, and the other one, the third one, which is around nature, meaning, obviously, very important and key biodiversity issues. And we want to make sure that when people or clients, stakeholders, see ENGIE develop renewable projects, they know that, that methodology has been followed. So, we think it’s really, really important indeed to help acceptability, whether there is going to be an immediate acceleration of renewables, I don’t know. We are just humbly – in a humble manner, bringing a stone to a debate that we feel is really important that it is pacified and that the reality of the need to have a mixed energy transition, a balanced mix, diversified technology is really, really, really important. And the world reminds us of that every single day. So, right now, the scope is France, and we will be looking at whether we want to extend that to other countries, but we want to walk before we run. And so this is something that we have introduced in France, again, with a certification body, Bureau Veritas involved in the launch of this label.

Louis Boujard: Thank you very much.

Operator: Thank you. Your last question today comes from the line of Tancrède Fulop from Morningstar. Please go ahead. Your line is open.

Tancrède Fulop: Hi. Good morning. Thank you for taking my questions. I have two. The first is on renewables, if you could maybe tell us what is the share of renewables construction costs, which are locked in the foreseeable future, let’s say, to – for the next couple of years. And if – and also if you have some projects for which you have already signed the PPA, but those costs are not locked. This will be the first question. And the second question, if you could confirm that in your French gas networks, you have indexation to inflation. Thank you.

Catherine MacGregor: Yes. So, yes, to the second question. And to the first question, so typically, we are matching the signature of PPAs with the securing of the CapEx. So, generally, there is a good synchronization of these two events. In terms of the share of the project that have a CapEx locked, we have a number of projects that obviously under construction, and that CapEx is locked, and I will give you the numbers quickly. The key point regarding inflation, and obviously, we are not immune to what’s happening in the market. But what is really, really important is that there is also such a high demand for PPAs. So today, when we are looking at developing assets, we sometimes believe it or not, we have competition between customers for the PPAs that we are able to sell associated with these assets. So, it gives you a little bit of a illustration of the tension we see in the PPA market, which, of course, helps us on the other side to absorb some of the inflation effect that we are seeing, which we are then looking with the CapEx with our suppliers. And we have about 4 gigawatts of renewable currently under construction. So, then that’s about the number of gigawatt that we have with secured CapEx. And I think this was the last question. Aarti, few comments.

Aarti Singhal: Thank you very much for attending the call. Sorry for the technical glitches. And thank you again for the questions to us today. Have a great day. Thank you.

Operator: Ladies and gentlemen, this concludes the conference call ENGIE. Thank you for your participation. You may now disconnect.