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Earnings Transcript for ENGIY - Q4 Fiscal Year 2021

Aarti Singhal: Thank you, and good morning, everyone. It's my pleasure to welcome you to ENGIE's 2021 Full Year Results Presentation. There are two parts to our presentation this morning. In the first part, Catherine and Pierre-Francois will cover a review of 2021. And in the second part, they will cover the outlook over the medium term. Following which, we will open the lines for Q&A as usual. And one with the polite request to please limit your questions to one or two only. Thank you very much. And with that, over to Catherine.
Catherine MacGregor: Thank you very much, Aarti, and good morning, everyone. Very pleased to be on this call today with Pierre-Francois, who joined us last month. Hitting the ground running, I have to say, already making a great contribution. In May last year, we announced our plan, Putting Strategy Into Action, which was focused on 3 pillars, setting the foundation for long-term success. First, we wanted to simplify the portfolio by refocusing on our strength and improving the business mix. Second, we wanted to significantly step up the renewables growth. Third, to increase efficiency, to improve financial performance, of course, but also to enhance competitiveness so that we can capture the many growth opportunities that we see ahead through a returns focused and disciplined approach. I am convinced that by consistently delivering on these priorities, ENGIE will realize its purpose of accelerating carbon neutrality alongside driving sustainable returns for shareholders. ENGIE is a responsible company. We are very mindful of our role in finding solutions with regulators and policymakers so that we address the growing need for investment for the energy transition while supporting the affordability for customers. In 2021, our teams put tremendous efforts to translate the plan into action, and the results, they speak for themselves. We made strong progress on the simplification program with the enhanced exit of nonstrategic assets totaling €9.2 billion of disposals. The major of this being, of course, the sale of EQUANS which will offer strong development opportunities for its employees. We signed or completed agreements to exit 18 countries, which means, upon completion, we will be operating in 35 countries, well on track to be operating in under 30 countries by 2023. We also progress on exiting coal, which now represents less than 3% of our centralized power generation capacity. And in Renewables, we commissioned 3 gigawatts for a third year in a row, and of course, I'll give you more color on this later. We revised the investment process to really sharpen the focus to increase our selectivity, which is also, of course, helping optimize development resources. Overall, 90% of our growth CapEx last year was invested organically, completely in line with our strategy. And we have also worked on key organizational levers. We've set up our 4 global business units. We have renewed the group leadership, with a healthy balance between internal talent and external experience, including Pierre-Francois. And we have updated our incentive schemes to be further aligned with the interest of our shareholders on both financial performance, but also ESG. Together with the new leadership team, we are committed to enhance our performance culture to make us more competitive and to drive growth, which will no doubt create exciting new opportunities for our people, further enhancing ENGIE's attractiveness to the best talent. Turning now to our financial results. We posted a strong performance, with total EBIT, including EQUANS, increasing 47% on an organic basis, leading to total net recurring income group share of €3.2 billion. This performance was not achieved by chance. Of course, we benefited from external tailwinds. But we were only able to post such strong results because we leveraged our integrated business model. We've fully benefited from the favorable price environment as our assets delivered high level of availability. And we captured opportunities from the flexible generation. And we actively manage our contractual positions. And we ensured strong financial liquidity. And all these results were supported by our performance plan, which delivered its first impact. We invested €4.3 billion in growth CapEx. Return on capital employed increased to 9.1%, driven, of course, by higher profitability. On shareholders' returns, the Board has reaffirmed the group's dividend policy and proposes a dividend of €0.85 per share, up €0.32 from last year. We remain focused on delivering a progressively growing sustainable dividend for our shareholders. Tackling climate change is at the heart of our strategy. We are committed to achieving our net 0 ambition, covering all 3 scopes by 2045. In 2021, greenhouse gas emissions from energy production were reduced to 67 million tons, which is down 11% from 2019. And through, of course, growing investments and consistent delivery, we are increasing the share of renewables in our portfolio to 34%. On gender diversity, ENGIE had 25% women in management at the end of 2021. And here, we have to work more. We have strong plans towards our ambition of reaching gender balance by 2030. Moving to our operational achievements, starting with Renewables, a key growth engine for us. We have commissioned 9 gigawatt of renewable capacity to our portfolio since the end of 2018, leading to now over 34%, 34.4% accurately, of total installed capacity. And of course, this was primarily driven by very consistent 3 gigawatt of additional capacity commissioned each year over the past 3 years. Commercializing the energy from renewables is a competitive advantage for ENGIE. We signed contracts for 2.1 gigawatt of capacity, which is up from 1.5 gigawatt last year. And that is confirming ENGIE's top position as a green corporate PPA supplier. And that trend continues as we see very strong demand from a range of clients across consumer goods, technology and all industrial sectors. In November, we signed an agreement in partnership with Crédit Agricole Assurance to acquire Eolia, a leading renewable player in Spain. Very compelling acquisition with attractive returns, strategically a great fit, adding to ENGIE's existing scale in Iberia. And very importantly, industrially, where we will bring value in delivering the pipeline and provide multiple services to operating assets. Finally, Ocean Winds, our JV with EDPR, continues to progress in a very high-growth market. Turning to Energy Solutions. Our GBU is delivering decarbonization solution to customers through distributed energy infrastructure as well as energy efficiency services. A great example of this is ENGIE's selection alongside our partner, RATP, to manage the cooling network of the city of Paris. In this case, ENGIE's technical expertise was absolutely key to this 20-year concession. It covers the production, storage, transport and distribution of the city's cooling energy with additional growth perspectives. In Energy efficiency services, we signed a contract covering more than 100 sites worldwide with Faurecia, a global leader in automotive technology, supporting them in their ambitious commitment to reach carbon neutrality. In Energy Solution, our immediate focus is on performance improvement to strengthen this platform so that we can capture fully the many long-term opportunities that we see in this business. And now I'm going to hand over to Pierre-Francois to review the financial performance.
Pierre-Francois Riolacci: Thank you very much, Catherine, and thank you also for the kind words. And good morning, all of you. Of course, I'm very pleased to be here today in this role at such an exciting time for ENGIE. And as you can see, ENGIE is in a strong shape financially. And for sure, it's much easier when you join as a CFO to start with a solid set of results with good momentum, both on earnings and balance sheet. I will not elaborate on this slide on the left part because I will dig in. Just mentioned that we account for EQUANS as discontinued operations under IFRS 5. You had the 2020 numbers ahead of the release so I think we are all set to go. When we compare result with the 2021 guidance, which always was including EQUANS, we, of course, take the total earnings. And as you can see, our '21 results are at the top end of the guidance for all KPIs. Let's now move to the numbers. And starting, of course, with EBIT growth, which is quite significant, plus €1,652 million. It does include the negative FX and scope for minus €163 million. FX is related to Brazilian reals, and to a lesser extent, U.S. dollars. And the scope negative is due to the sale of the 10% of GTT's shares, which is partly offset by the sale of the 29.9% of SUEZ, which you remember contributed negatively in 2020. The organic growth is plus 42%, that is plus €1.8 billion. I will, of course, give some details on Renewables, Network and Energy Solutions. Just a few words on the other components. Thermal is slightly down, €47 million. And this is on the back, of course, of a strong comparison base. 2020 was actually very good. The merchant activities were also very strong this year with the high spreads and also ancillaries, which were captured by our European flexible generation fleet, both gas plants and the pump storage units. But we were hit on the contracted activities, mainly by higher sourcing spot prices in Chile. And this is due to poor hydrology in particular, but also overall low production in the country. Supply was down by €12 million. This is the effect of lower margins in Europe, especially in Belgium as well Romania, and also some reversal of 2020 positive one-offs. And this was offset partly by higher volumes, especially related to COVID recovery on one hand and colder temperature on the other hand. Nuclear, after 3 years of negative EBIT, has been posting an outstanding operational performance, with availability up from 63% to 92%. And this is a tailwind for us of €0.5 billion in results, coming both from units in Belgium and the drawing rights in France. We are also able to achieve higher prices, which is a plus €700 million impact, partly offset by profit-sharing taxes in Belgium, which have been increasing and reaching a total of close to €150 million in '21. On the others, the main driver of the increase is the strong commercial and trading performance of GEMS due to COVID recovery and also the exceptional market conditions. It's good to mention that the corporate costs were actually also lower than last year. Moving to Renewables. It's great to see that we are up €92 million to €1,185 million. There is an organic negative of minus €116 million. Roughly half of it due to scope, and this is a result of partial sell-downs that were completed last year and another half due to FX, mainly Brazil. Without that, Renewables have posted an impressive 22% organic growth, leveraging the price tailwind and also the contribution of the newly commissioned assets. The price impact is plus €335 million. It's coming mainly from hydro in France and in Brazil. And there was a negative volume effect that is reflecting the impact of the Texas extreme weather that we had early in '21. That's about minus €90 million. But also lower volumes in hydro, both in Brazil on the back of the drought and in France. It's good to mention that there is some link between the volumes and the price, especially in Brazil, where we find some natural matching between the 2 effects. Last but not least, we had the benefit of the capacity that we have commissioned over the last year. That was in '21 mainly in the U.S. and Brazil. And this new capacity contributed to an EBIT increase of €102 million, while some assets are still in a ramp-up phase. Moving to Networks. Here, we have a very limited impact from FX and scope, minus €13 million, and then an organic EBIT increase of plus 13%, that is plus €267 million year-on-year, to a total of €2,314 million. The French operations are actually up by €216 million. And this is on the back of colder temperature as well as recovery of COVID impact in '20. And this was achieved despite lower transmission volumes subscribed and also lower tariff revenues, reflecting regulatory reviews that, as you know, were expected. Temperature had a timing impact on P&L. And I think it's important that you remember that it will be recouped through the clawback mechanism. It is value neutral for ENGIE. On international, we are up by €51 million, with a good contribution of our organic growth in Brazil with a strong performance of TAC, but also the progress in construction of power transmission lines. And that came on top of colder temperatures that we had in Europe, so a good year on the international part as well. We move to Energy Solution now. Energy Solution, that benefited from a positive scope and this is due to the disposal of the stake in SUEZ, which was loss-making last year. The FX impact is broadly neutral. With that, we are reporting on Energy Solution a broadly flat organic EBIT variation. And this has reflected 2 positives and 1 negative. The positive is one -- first positive is a distributed energy infrastructure activities, which are increasing the EBIT by €14 million to reach €385 million. And this is on the back of strong operating performance as well as colder temperature for district heating in France. Good progress of energy efficiency services. EBIT is up by €74 million to €126 million, much better, and of course, benefiting from the COVID recovery, which was leveraged because we had also a strong operating performance. Good to see we are back in a decent profitability. But these 2 improvements were actually offset by the higher cost that we had with the development of EVBox. Contribution of EVBox is down €90 million, 9-0, year-on-year. And it's fair to say that the operation in '21 were disrupted, mainly due to the supply chain squeeze that happened in this market. The plan is to turn around the operations gradually in '22 and in '23, driving a significant EBIT improvement. We will at some point resume the process to monetize this asset, which is a good asset in a fast-growing market when we are comfortable with capacity to achieve the full valuation now that we have terminated the agreement with TPG in December '21. More broadly, I would like to highlight that the turnaround of Energy Solution is on its way, as evidenced further by the strong backlog increase and also the significant margin increase on EBIT. Excluding EVBox, clearly, Energy Solution is lining up for growth. How do we convert this improvement in operations into net income? You can see that depreciation and amortization is stable. And we have a mature asset base, which is offsetting the increase of depletion in the growth drivers. The net interest expense was up. It was mainly driven by a higher cost of debt and driven itself by the higher Brazilian rate. So the average cost of gross debt was actually 2.63%. It was up 25 basis points compared to last year. The tax charges were €400 million higher, and this is, of course, on the back of higher profit, partly offset by a lower effective tax rate at 29.3% in '21 versus 30.5% in 2020. And this lower tax rate is mainly due to the use of unrecognized tax losses, notably in Belgium, as well as a decreasing standard tax rate in France. And this is achieved despite significant negative one-offs in '21. Just to mention that minority interest were also slightly lower. All in all, we achieved a good conversion of EBITDA improvement into net recurring income. The reported net income group share is also positive €3.7 billion in '21. That is €800 million more than the recurring net income. It does include €1 billion of impairment, which is mainly -- which are mainly related to our operations in Latin America, but it does include as well €1.1 billion of capital gains coming from the sale of the 10% shareholding in GTT, including the revaluation of the 30% stake that we still retain, but also the earn-out on the 29.9% shareholding in SUEZ. We had, on top of these 2 times, commodity mark-to-market, which is positive for €700 million, which gives this €3.7 billion reported net income. How do we convert these earnings into cash flows? I think that CFFO being down at €0.3 billion, it could look a bit disappointing. But you really need to double click. The operating cash flow is actually up €1.3 billion, slightly short of EBITDA improvement. And this is due to the contribution of GFOM, which is actually so-called pay to us through an extension of the concession and also the contribution of U.S. tax equity, which are reducing investments. The real point that we had in '21 was working cap variation, which is negative by €1.4 billion. This is due to margin growth, which was a cash outflow of €2.2 billion in '21 due to the higher prices but also to more stringent cash collateralization rules, which are imposed by the clearing houses. I would like to highlight that excluding margin calls, working cap variation is actually positive, plus €0.8 billion. And the CFFO would have been improving by nearly €2 billion year-on-year. This is an outstanding performance that shows the operational leverage of ENGIE when it comes to cash generation. Now let me spend 1 minute on the margin calls. You know what it is. It's a way to mitigate the counterparty risk on the hedging instruments through the cash collaterals. It's clear that there is no material economic or financial effect overall. As the margin goes by design, they equalize over the life of the financial instrument, but there are timing effects on the CFFO, as you could see. And that's why good margin cost management is absolutely critical in the kind of market we have today. You need strong balance sheet. So that, for example, you can use LCs or letter of credit instead of cash. You need a very strong risk control on liquidity framework because you need to stay in control in this very high volatile market. And then you need excellent trading capabilities because you need to be able to structure transaction in such a way that you minimize the cash requirements, for example, for liquidity swaps. All of that was actually excellent with ENGIE in '21 and clearly is a serious competitive advantage going forward. Cash generation, how do we use that cash? Of course, through our capital expenditures, which I think in '21 is also a good illustration of our capital discipline. The growth CapEx are running high at €4.3 billion, albeit lower than indicated. But it shows that there is no complacency when it comes to expected returns. Very focused on the core energy transition activities, and net 0, fully in line with our indication, also with a significant share, more than 90% coming from organic project. And it does pay a tribute to the strong pipe and its quality. The maintenance CapEx reached €2.4 billion. It's a key component of our performance optimization. Pleased to see that. And last but not least, we funded our nuclear provision for €1.3 billion as expected. How is this cash generation leaving our balance sheet and credit metrics? You can see that the net financial debt is increasing by €2.8 billion to €25.3 billion from December last year. It does include the €2.2 billion margin call impact that I just mentioned. And of course, the proceed of EQUANS are not yet part of this bridge. They will be recognized at the closing of the transaction, which is expected in the second half of 2022. The economic net debt is increasing by €0.9 billion, as the increase of the net financial debt is partly offset by the decrease in post-employment provision, and also, of course, because the nuclear provision funding is already accounted for the economic net debt. Therefore, we benefit of a slight improvement of our net financial debt to EBITDA on the back of the strong growth of EBITDA. But we have a significant improvement of our economic net debt-to-EBITDA ratio, which is at 3.6, a significant decrease compared to '20 and comfortably within the guidance, which is below or equal to 4. Lastly, there is no recent change on the rating, which is in line with the strong investment grade we want to stick to. And with that, I will hand over back to Catherine.
Catherine MacGregor: Thank you, Pierre-Francois. Turning now to the medium-term outlook. We are indeed strongly positioned to capture the opportunities that are presented by the energy transition. There is the need for massive investments, driven by countries, cities, corporates that are looking to decarbonize energy and address demand growth. We have a strong conviction that no single technology can be the solution to delivering a smooth and affordable energy transition. And this is where our integrated business model positions us strongly. Starting on the left of this slide. ENGIE is among the world leaders in renewables. We own and operate all major technologies. We are active in key growth markets, and we are continuously strengthening our renewables platform. Moving across to the box #2. ENGIE's strength is -- in renewables is complemented by a large portfolio of flexible generation assets. That includes our CCGTs as well as pump storage plants, which are absolutely key to addressing intermittency. We also have deep experience in gas activities and energy storage, which are critical to ensuring a balanced energy mix that supports the security of supply, this affordability, this overall system resiliency, which are -- which is going to be so important. All of these power and gas activities are increasingly needed together to deliver integrated solutions. This is why we have put ENGIE's energy management expertise in the middle of this picture. We have built this expertise over 2 decades, and we are very proud we have among the best professionals in the market. It is a clear competitive advantage, particularly when you consider that the energy market will become subsidy-free over time, with potentially shorter PPAs, more merchant exposure. We have strong expertise in commercializing renewables, in monetizing flexibility, in managing risk, in enabling the future of renewable gases. This unique energy management expertise helps us make the link between our flexible asset portfolio and our large customer franchise and energy markets. These access to customers, these strong relationships really give us an edge in capturing opportunity to decarbonize their activities to reduce energy consumption and to green the energy mix. This integrated model is built upon the strength of world-class industrial GBUs, and crucially, upon a strong local anchorage. We have a deep understanding of our local markets and stakeholders from starting a project to commercializing it. This is the result of years of constructive engagement with local suppliers, customers, regulators, policymakers, helping them find solutions that enable the delivery of their energy transition commitments. I'm going to give you a few examples. In the context of growing intermittency, transmission operators across Europe are looking for flexibility products. In the Netherlands, we monetize flexibility through a tailor-made solution. We sold ancillary services to TenneT by combining the flexibility of our thermal assets with demand response from our customers. Another example is how we have combined B2B supply and renewables. We signed a 25-year contract with BASF to offer 20 terawatt hour of green power through a unique multi-country, multi-technology approach that gives us the choice to deploy the most value-accretive renewable assets. And through a partnership with Equinor, involving both GEMS and the thermal GBU, we will be producing low carbon hydrogen from natural gas in Belgium. The target is to install up to one gigawatt by 2028. The low carbon H2 will be used as feedstock to decarbonize heavy industrial processes as well as CCGTs. There are so many other examples from across the group, such as the partnership with CMA CGM to produce synthetic LNG to decarbonize shipping and 150-megawatt battery storage project in Australia to capture excess renewable energy. Let me now update you briefly on some of our key priorities over the medium term. In Renewables, we are on a path to accelerate growth. As you may recall, we're targeting 50 gigawatt of total installed renewables by 2025. We will be stepping up to an average of 4 gigawatt capacity addition per year from this year to 2025. This ambition is supported by a robust pipeline of around 66 gigawatt of identified projects. You can see on this slide an updated view of this pipeline which shows you the mix of technology and the spread across different geographies. You will see that we have 7 gigawatt of secured or under construction capacity, 31 gigawatt in advanced development, a further 28 gigawatt under development. The 2022 capacity therefore is already secured or under construction. And for the period 2023 and 2025, the total 12 gigawatt expected capacity addition is very well supported, with a strong cover ratio of 2.8x. In Energy Solutions, we are focused on capturing several mega trend. USD 4 trillion of annual global investment is required, which is about 3x the current level to reach the sustainability pledges that policymakers, countries and companies have made. District heating and cooling networks are experiencing as a result around 5% growth globally. And distributed solar is forecasted to grow double-digits until 2025. We have international leadership in this domain with very strong client relationship. So we aim to add 8 gigawatt of low-carbon distributed energy infrastructure by 2025, which is well supported by a €14 billion pipeline of opportunities. And as we look to 2024, top line growth alongside higher cost discipline and better efficiency focus is expected to drive a strong improvement in margin, with a significant EBIT growth. So these 2 growth engines are complemented by the stability, cash generation, predictability of our networks activities. We are obviously a leading player in gas networks in France. We have around €29 billion in RAB, regulated asset base. And this is expected to increase by around 1.5% per year over the period '21 to '24. And then we have our international assets, which represent capital employed of €3.8 billion. We call it quasi-RAB. It has grown around 12% since 2019. And this growth coming from the commissioning of power lines, but also the expansion of our TAG assets. Important to the outlook for Networks but also for the rest of ENGIE is the absolute crucial role of gas. In the next decade, we will see new CCGTs being built. That will use, of course, more efficient technology to meet the power demand and share the system resilience. In Germany alone, we expect more than 20 gigawatt of additional capacity to be built. Gas will support the hard-to-abate sectors. And by 2050, as you can see on this slide, gas consumption will be predominantly low carbon. Of course, ENGIE is super well positioned across this entire renewable gas value chain. We have ambitious 2030 targets, all underpinned by a variety of project, with increased investment on biomethane and hydrogen. For example, with our subsidiary Storengy in France, we launched the first underground green hydrogen storage project in S, in another project led by GRTgaz. And a German gas network operator, we are aiming to convert 70 kilometer of existing gas pipelines for 100% hydrogen transport. And we have many, many more. Before I comment on the financial outlook, a quick update on Belgium. As you know, nuclear activities, they are planned to stop by the end of 2025. So we are preparing for an orderly phaseout. The Belgian government has proposed a new draft law, which is expected to be voted in spring 2022. This draft law focuses on the availability of funds against nuclear provisions. It proposes a timetable for the funding of dismantling and waste management costs by 2030. So if voted through, this would lead to an additional funding for dismantling cost to 2030, representing up to around €700 million per annum in 2022 to 2024. We don't expect any change to economic net debt from this draft law under discussion. The next triennial review of the nuclear provisions toward dismantling costs and waste management will take place later this year. Similar to the 2019 process, the review will consider any updates that would be required to the nuclear provisions based on discount rates and a review of baseline scenario for cost estimates. Let me now turn to the medium term to 2024. We are really maintaining a very consistent approach to our strategic plan. Most of the simplification and disposals are now behind us so we are going to focus on disciplined long-term earnings growth, driven mainly by investment in Renewables, higher results for Energy Solution and a resilient contribution from Networks. We will continue to drive significant improvement from the performance plan. And overall, we expect to more than offset the reduction from Belgian nuclear, leading to progressive growth in earnings and dividends. Over to Pierre-Francois for the key financials for the outlook of 2024.
Pierre-Francois Riolacci: Thank you, Catherine. I will try to give you some color about how we are going actually to drive this steady growth of earnings. And you know this value-creation framework and you are familiar with it. I'm not going to elaborate. The key message here is really about consistency. We want to use the same KPIs that will be refreshed, of course, to be continued or updated where needed. We want to stick to execution with 2023 commitment that we want, of course, to follow up. And with that, we believe that we have a strong value-creation proposition. Let's start with the first earnings driver, engine, the growth, and therefore, with capital expenditures. On the back of a strong pipe, I think that Catherine was pretty adamant to praise it, we are able to confirm our €15 billion, €16 billion gross CapEx target for '21, '23. We are actually well on track, with 60% of this CapEx already invested or committed, fully in line with the announced split, i.e., with a specific focus on Renewables, Networks and Energy Solution. For 2024, we expect consistently about €5 billion of gross CapEx, to be invested mainly in the same key activities. With regard to the maintenance CapEx, we also maintain indicative expectation of about €2.5 billion a year on average, progressively decreasing over time as part of our performance effort. Capital discipline is also for maintenance CapEx, of course. We like capital expenditures, but of course, we want to deliver value out of it. And that's, of course, at the center of our attention. In line with what we communicated last May, we maintained a strict discipline for investment decisions. This is about strategy, making sure that the investments are aligned with our priorities, geography, energy transition, focus on where we have a competitive advantage so that we can leverage our industrial or operational expertise. That's one criteria. Second criteria is, of course, financial. It's about value creation. It's also about P&L contribution. And last, but not least, cash generation. And the third criteria is about ESG. You know that we have a demanding journey on the CO2 emission, but also and some other very important KPIs, like biodiversity or resilience to climate change and a few others. This financial discipline at least is reflected by our project IRR, internal rate of returns, at the final investment decision date. And you have a graph on the left which is showing some recent projects and give you an idea where we are. Clearly, they are all considerably higher than the weighted average cost of capital. This value creation is expected, of course, to contribute positively as well to a return on capital employed, which we expect to maintain at the high level achieved in 2021, proving that our growth CapEx are actually not dilutive against our '21 reference, albeit, of course, there may be some yearly variation based on the pace of growth. There is a second engine to the growth of earnings, which is the performance plan. 2021 was in line with our expectation, albeit at the low end. And this is due to the loss of EVBox that we had not expected to have to this extent in '21 based on the disposal process. We are, however, confirming our ambition of €600 million net EBIT contribution for -- from 2020 to 2023. And beyond the period, we target a continued improvement effort with the same kind of magnitude of a yearly contribution to our earnings. There are, as you know, always new tools, new processes, ideas to improve performance. And the operational culture of ENGIE with the right push is a perfect ground to leverage these opportunities. And the 3 main levers will be there
Catherine MacGregor: Thank you very much, Pierre-Francois. So just a few key messages for today. Indeed, we posted strong results, delivered at the top end of the guidance range. I would like to take this opportunity to thank all ENGIE teams, again, for their commitment, for their hard work. We have made significant progress at pace towards the execution of our strategic plan. And we are accelerating investment in line with our climate ambition, notably in Renewables, with a very clear focus on returns. And I firmly believe that ENGIE's core capabilities, our assets, our integrated business model, and of course, our highly engaged professional committed teams all position the group very strongly to execute and also to create value. Thank you very much for your attention. And we can now open the lines for questions.
Operator: [Operator Instructions] We have the first question coming from the line of Vincent Ayral from JP Morgan.
Vincent Ayral: Yes. Congratulations for the very strong results. That's pulling out 2 guidance upgrades and it seems ready to repeat defeat. And congratulations as well for the very good presentation. Good charts and information on the guidance and power prices. It's really appreciated in this context. So I have plenty of questions here, quality, working capital requirement, [indiscernible], renewables, supply chain issues, taxonomy. We have plenty to be asked. But as we need to stick to 2, I will focus on the coal, if I may say. So let's talk coal price. You've provided your assumptions here. Indeed, they are quite conservative when we look at where H1 this year trading on the forward curve. And basically, would like to know if you could provide us with some level of net recurring income sensitivity to move, I don't know, €10 per megawatt hour. You could even do €50 to where prices are. That would be very interesting. The second question is here straight on Nuclear. You're talking about your Nuclear exit by 2025, which you made clear a year ago. Yes, Belgium is facing a real secure supply issue and -- in a few years' time. And the Iliad report is expected mid-March to talk about this topic. The SANC, so the nuclear safety operator, publicly said, we could reorganize the regulatory process. So life extensions of [indiscernible] to tier 3 could be done. So would you be considered early extension of these 2 reactors and help basically if this is where the government finally decides? They've been postponing the decision forever, but now it's just 3 months to do so. How do you see yourself protected in this case if the nuclear liabilities are not capped? So will you be considering here potentially a regulated life extension and the cap of the liability? Is this the type of thing you would be open to discussing with the Belgium government? So 2 questions, sensitivity [indiscernible] and regulated life extension cap of liabilities.
Catherine MacGregor: Thank you. Thank you very much, Vincent, and thank you for the nice comments. So I'll take -- I'll start with the question on Nuclear and then I'll please pass it on to Pierre-Francois for the second question -- or the first question rather. So on nuclear, you've got it right. We are expecting yet another report around mid-March, which is going to look at the whole security of supply of Belgium. Our understanding is that the situation in Belgium, albeit quite politically sometimes, let's say, agitated, the reality has not much -- has not changed much. And therefore, the security of supply reports, including the number of CRM capacity that has been secured through last year's exercise, is going to convince the government to stay the course, and indeed, confirm the exit of Nuclear by 2025 as it was reaffirmed again last year. But you're right to say that, that decision -- black and white is not completely taken yet. From the ENGIE standpoint though, very consistent to what we've said all along, which is we do not see any scenarios where we will have time to extend 2 tranches beyond 2025 should we be asked. So I understand your point on ASCN, but you have to realize that there is a lot of other factors to be considered. You have, of course, the security of -- and the safety of operations, which the authority that you are mentioning is important. But there are a lot of other aspects, including the fuel, including other countries permitting, including potentially a new CRM. There is a number of things. Not to mention, of course, a major investment in the assets that we continue to believe that we do not have time to do that before 2025. So I understand your point. But really from our point of view, absolutely no change. And we are planning, as I've mentioned in my slide, for an orderly phaseout of Nuclear by 2025. And I think you've pointed out the good news that we are able to make up for the loss of contribution from these nuclear tranches despite the good results that we saw from nuclear in 2021. Pierre-Francois, you want to comment a bit on the power price sensitivity?
Pierre-Francois Riolacci: Yes. Thank you. And you're testing my new skills, but I will do my best. And of course, it's a very good question. And to be very candid, I ask the same say, is there a way that we could easily model our exposure to price? And of course, it is much more complicated than that, because you have, of course, different power prices depending on the day and the load and the peak, and then you have also an exposure to gas. You have the exposure to the clean part spread. So it is actually a whole set of assumption that need to be factored in. And that doesn't make the modeling that simple. That's the reason why we have indeed chosen a scenario and given a sensitivity to that scenario. And that's really to frame the discussion. And I don't think that we are prepared to go much further than that. And you should be careful indeed to just to use a rough calculation because there are, again, many things that can play, including the nuclear tax in Belgium that will offset part of the earnings. So there are a lot of parameters. And to be very candid, this is not what we are after for ENGIE. I mean the way we want to drive the dialogue with you guys is much more about the value creation in the long run. And of course, we have this sensitivity to prices, but this is kind of a short-term thing. I think it's more important that we keep the dialogue on where we can actually make the difference in the long run and drive this value creation. That's why we don't want to create a confusion with too many mark-to-market of our results each quarter.
Operator: The next questions come from James Brand from Deutsche Bank.
James Brand: And also, well done from me on the good results and a good presentation. I have 2 questions -- or at least I'll keep it to 2 questions. Firstly, on thermal, interested in how your contracting looks on your European gas plants for the next couple of years. You did provide a bit of detail in the thermal slide on kind of split between merchant and contracting. I wasn't quite sure whether to interpret that as literally is your contracted position for next year or whether you were just making a high-level distinction between plants, have long-term contracts and operate merchant. But obviously, spark spreads in the near term are generally very high. It depends a bit on the market. So I'd be interest in how much exposure you have to that over the next year or 2. And then secondly, on the French gas networks, you kind of highlighted the RAB growth over the next few years being kind of around 1% or so. A lot of utilities that have gas networks are starting to talk a lot about hydrogen. In some cases, that's not really affecting the investment over the next few years, but maybe from the mid-2020s. Do you see scope for significant investments related to hydrogen to be kicking in at some point for your gas networks in France and for your RAB growth rates to pick up at some point?
Catherine MacGregor: Yes. Okay. Thank you for the question. So let me start maybe with hydrogen because I think it's obviously a really good question. And you pointed out that our RAB is going to be increasing over the next '21-'24 period. That much increase indeed is not going to come much from hydrogen, but rather some normal investment as well, obviously, as biomethane. So in France, we are seeing real traction on biomethane. Biomethane, as you know, has the benefit of being produced locally. And it's exactly the same molecule as the natural gas, the fossil natural gas. So it's a direct one-to-one drop-in replacement. However, it does need some investment in networks because you need to be able to inject biomethane into the network. So in the period '21-'24, when you talk about -- when you think about renewable gas, it's more going to be around biomethane. In the longer run though, you're very right to say and the example I gave on GRTgaz is a good example of that, where we are looking to potentially being able to transport hydrogen or a blend of hydrogen, and that will require investment. So the example that we gave was about 70-kilometer pipe that we are trying to -- that we will try to use to transport 100% hydrogen. And for that, you will need some investment to be able to be hydrogen proof. And of course, in that case, that would provide RAB growth opportunities in the future. But again, not necessarily super visible on the period '21-2024. So then there is a question around our thermal fee, so maybe just a few comments that I'll make to say that we are obviously extremely pleased with our thermal fleet in Europe. And kudos to the team that have -- making sure that it's available, flexible. And that it fully plays its role of stabilizing the network because it does that as well as obviously producing electricity in peak demand. So we have -- we still have a few open volumes in those assets. So we had some. We have still open volume. But a good balance that we are pleased with. And obviously, we're really using this field to be to be playing its absolute required role of stabilizing the energy system as we need to in Europe in these very volatile times. Well, we're not providing necessarily the percentage between hedge and open. And we have some hedge and we continue to have some open volumes.
James Brand: And may I just ask a follow-up on that? I thought it was quite interesting to see you disclosed your capture spark spreads in Europe, which I'm not sure that's been disclosed in the past. You might know one's comment explicitly on this, but I'll just try. But do you see those -- directionally, do you think you can counter higher spreads for over the next few years? Or they're already quite good spreads you captured in 2021, or would you see spreads being more stable?
Pierre-Francois Riolacci: I mean, I have a very fresh science so I need to be very careful. But bear in mind [indiscernible] is very different also depending on the season. So when -- you know that in the winter, we know that we are going to use our gas plant, so that's where we, of course, target max availability. And this is already in the market, that it will come. When it comes to the summer, that's where indeed some tension on the power market can create some further opportunities, because then, we don't know if we are going to be used. So it does, of course, open a bit of a different hedging position because there is an uncertainty. And there is here a potential to capture a higher spread depending, of course, on the balance of the market. So be careful with the data. And probably, we need to be -- to go for a longer history of data as we want to draw conclusions.
Operator: The next questions come from the line of Peter Bisztyga from Bank of America.
Peter Bisztyga: Yes. Two from me, please. Firstly, could you walk us through what the implications for Energy would be in the, so let's call it, hypothetical event that Gazprom doesn't fulfill its supply obligations to you on your long-term contracts and also from Nord Stream to never goes ahead due to sanctions? And then my second question is on your dividends. So you've clearly flagged that there's potentially quite a lot of upside to your earnings this year if you are to mark-to-market. And I'm just wondering how you deal with that with respect to your dividend policy because you've reiterated your sort of payout ratio range. But you've also said that you want to progressively grow a sustainable dividend. So I'm just wondering whether you sort of consider dropping below the bottom end of your payout ratio range this year just to make sure that you can deliver that nice, stable sustainable growth going forward.
Catherine MacGregor: Okay. So very, very topical questions indeed on Gazprom. Really, I can share with you is the fact that Gazprom historically has been a very reliable partner to ENGIE, fulfilling its long-term commitment, long-term contracts. And we have seen that for years and years and decades of operation with Gazprom. So from that standpoint, we are somehow reassured. In terms of Nord Stream 2, as you know, we are financing partners. And we will be looking, obviously, at Nord Stream 2 and its future with great attention. Not just because we are financing partners, but also because we believe it is important to the security of supply of gas in Europe. And this is maybe how I would also answer your question, which is not just around ENGIE and Gazprom, but rather in terms of security of supply for Europe, for the gas, but also for power, that it is indeed very, very important that we are able to get the import from Russia because such an important contribution of our power supply comes from this Russian gas. So it is indeed a very, let's say, potentially tense situation should we envisage not to have, obviously, Russia delivering gas. And that the consequences would be well, well beyond ENGIE's only. And then I think you asked a question around dividend, progressive growth. And I think this is obviously a very, very good point, that we will be looking at sustainable earnings growth, turning into sustainable dividend growth. We're really looking at long-term stability. We are looking for consistency. Long-term sustainable growth is what we have been looking at and this is indeed some of the reasoning behind how we've decided and recommended to the Board of Director and to the AGM rather the payout of dividend that we're proposing.
Operator: The next questions come from the line of Rob Pulleyn from Morgan Stanley.
Rob Pulleyn: Two questions, please. The first one, if I may, regarding growth. Last year's CMD guidance was for high single-digit EPS over the medium to long-term following the disposal of BRIGHT and EQUANS. Just looking at the guidance to 2024 and taking into account what seems like pretty conservative assumptions on power generation and also on FX, the CAGR is sort of 4.5% to 6.5%. So just trying to see sort of post 2024, a, should we assume growth accelerates? And b, through which drivers? The second one is a much simpler question. And that is on Slide 42, you talk about the weakness in supply, which seemed to be below everyone's expectations. Could you just add a little bit more color as to why Belgium margins were under pressure? What's happening in Romania? And given the guidance for improving supply, what gives you confidence these issues will pass?
Catherine MacGregor: Okay. So let me start with the first question. When you look at beyond 2024, of course, the tailwind -- or rather the headwind from the nuclear stoppage will be behind us. So the underlying business growth will be fully felt across ENGIE without having such a strong headwind. And so it gives you a little bit of a view of how we see growth here and beyond '24 and '25. Maybe on supply, Belgium margins, you want to comment here, Pierre-Francois? Thank you.
Pierre-Francois Riolacci: Yes. Thank you for the question on Belgium. Indeed, pressure on margins, this comes from a different point. But of course, it is driven, first and utmost, by the price variation. So you know that we have campaigns where we actually sell based on the current price. There are monthly campaigns. So the more volatility you have, the more it is difficult to make sure that you perfectly hedge your position when resourcing and, of course, supplying to customers. And to be very candid, we had some hiccup in the hedging in Belgium, which are fixed. But that's -- given the sharp increase of volatility, that was one thing. Then the other thing is that we have more of social tariff, which is a kind of a tariff shield, which is provided in Belgium. That's also another impact that hit us. And last, but not least, we are also the last resort provider in Belgium, like in other countries. And it means that when small players are actually leaving the market, we have to take actually these new customers on board. And they are coming with quantities which are not always hedged. So you can see that it is, of course, putting some pressure on our margins. They are not a significant amount. But they do, at the end of the day, add up and then we have this pressure. We have also in Romania, I would say, intense dialogue with authorities because there is a clear pushback from the authorities to the price increase. And it is something that we are discussing with different mechanisms. It's not, again, a massive effect in '21, but it gives a good idea of the level of pressure that you have today and with this question of the affordability for the regulators.
Operator: We have the next question coming from Emmanuel Turpin from Societe Generale.
Emmanuel Turpin: And first of all, a very warm personal welcome to Pierre-Francois. It's very good to have you back in the scope of listed French utilities. And I would like to focus my questions on Slide 32, which in my eyes summarized very well the investment case in ENGIE right now, which is maintaining reasonably high returns achieved in '21 over the coming years with a lower risk within the portfolio, essentially a decline in merchant, while maintaining nicely a rising amount of capital deployed. My first question is to check on that last point. Based on my calc, taking into account total CapEx minus depreciation and taking into account also the remaining scope effects, we should have capital invested in the business rising by mainly €5 billion to €6 billion between '21 and '24. Do you kind of recognize that order of the magnitude. Number two, focusing on the chart on the left-hand side, very interesting set of examples about current projects, I understand. First of all, for Renewables, these are expected IRRs, asset IRRs, including DBSOs, tax equity. On average, for those IRRs, how much -- how many points of IRR do you see in the actual DBSO assumptions that you're seeing? And another way to look at these green points, between the low and the high points, you've got a very big difference. I would expect the lower IRRs to be many vanilla projects in France. Can you confirm? And could you give us a couple of examples for how you can achieve those higher kind of mid-teens IRRs? What sort of geographies? What sort of technologies? What's the magic source that ENGIE is using? And finally, for the thermal projects, are they contracted? Are they merchant projects? Of course, the risk level is very different between those 2 asset classes. We should shed some light on the attractiveness of the returns you're looking at.
Catherine MacGregor: Yes. Thank you, Emmanuel. And I think it's a very good and important question that you're asking. Obviously, when we look at our investment policy, as you know, we have a WACC 200 bps policy, which translates into the graph that you say. With Renewables, we have a bit of wiggle room that we give ourselves. We go between 150 and 250 bps, around that figure. And we try to remain centered at the 200. Of course, the WACC varies. It varies depending on the country, risk profile. The risk of the project, of course, are -- contribution to the variation of the WACC. And so in certain places where, indeed, very low-risk country, country risk profile which is low, technology that is fairly low risk as well, obviously, you will see a bit of a lower IRR. And examples of that could be indeed a solar plant in countries in OECD type of countries. Now higher IRR are not, by the way, necessarily countries where super high risk, super high technology. It can be. But sometimes, it is also ability to draw more value from certain project. And here, I would highlight the fact that in countries where we have already project in construction, we are able to win very competitively additional projects because we have fairly derisked the execution, and therefore, able to drive better return from this project. And it is really this idea of doing as much as possible in places where we have a platform where we have already the construction companies, the EPCs, the people, the talent. And therefore -- and often even the connection infrastructure ready, that we can run and deliver some higher IRR. And examples of that, by the way, it can be in the U.S., but also in Brazil, where we are able to draw higher IRR from some of our projects because of that. So it's really a combination of factors. You want to comment on the DBSO impact on this IRR, Pierre-Francois?
Pierre-Francois Riolacci: Yes. But this is the project IRR, so it is excluding DBSO. So it's not actually impacting the numbers that you have here. It would come on top of it and would indeed boost the IRR if it was to be taken in account. But again, this is not necessarily always our model. And we want to focus on the project value creation first. And then we have some financial optimization that can come on top of it. And on the capital employed point, I think that, again, I mean, I'm very pleased to see you again. And you have been not only very smart to sneak a lot of questions in 2, but also a very good question. So yes. And I think that, let's say, that the level of magnitude of capital employed increase is consistent with what you would expect, the reasoning is not wrong. And of course, with a significant increase in the Renewables, as you would expect, which is driving this capital employed growth.
Catherine MacGregor: And maybe just, Emmanuel, as a reminder, we have said that we would be looking to keep more of our renewable assets on our balance sheet. So directionally, excluding obviously Ocean Wind, you should see DBSO margins reducing over time.
Operator: Next questions come from the line of Sam Arie from UBS.
Samuel Arie: And congratulations to everyone today, and welcome, Pierre-Francois. I would like to just ask a follow-up, if I can, on -- I think it was Peter's question on the global gas markets. And in particular, there seems to have been some possible positive news this morning on the Russia-Ukraine situation. So I guess what I wanted to ask is, in the scenario where Russian gas flows to Western Europe were to bounce back quickly to normal levels, how quickly would you expect gas and power prices to do the same, to normalize in Europe? And what do you think that normal level would then be? And if I can squeeze in a sort of part B, I suppose, related to that, [indiscernible] to know, do you have any sense of where discussions are going in Europe on the carbon price, and if the recent energy crunch and high price levels are creating any pressure on legislators to...
Catherine MacGregor: We didn't hear the end of the question. Did Sam get disconnected? Yes?
Operator: Yes. The participant got disconnected. If we go for the next one, the next one meanwhile go for the line of Ajay Patel from Goldman Sachs.
Ajay Patel: And so my question is just one. I'm just thinking that if we look at all the targets relative to last year, you've set a guidance which indicates that your cash flows are improving. Also potentially, if you take the current forward curves even more so, if you look at the disposals, you've upgraded that to be at least €11 billion, which is clearly larger than the €9 billion to €10 billion before. But growth CapEx doesn't change. And so my question is, is that -- what are you intending to spend the additional cash flows on? Is it just redeploying acquisitions? Or is it held back for some other reason? Just then an idea just to complete the picture would be very kind.
Catherine MacGregor: Okay. So yes, thank you for the questions. And also, to be pointing out that indeed the sales of EQUANS have allowed us to -- using the same principles on a disposal program, indeed to look forward to a bit more proceeds, which some of it will come a bit later this year. So that is really on the positive side. Of course, in terms of principles of investments, really we'll be looking at very ...
Ajay Patel: I lost her. Can you? I can't hear anymore.
Operator: Ladies and gentlemen, please stand by. The conference will continue shortly.
Ajay Patel: Hello? I'm not sure if you can hear me on my side, but I can't hear you from yours. So it may be worth moving on.
Catherine MacGregor: 40, 45% of our CapEx is going to go into Renewables specifically. So yes, so we'll be looking at continuing to invest, always balancing the 3 pillars. Obviously, the balance sheet, and Pierre-Francois mentioned that we are indeed looking forward to a healthy credit ratio from a net debt-to-EBITDA point of view. Obviously, shareholder returns to our dividend policy with sustainably growing dividend, that you're going to see some of that this year, of course, and then investing in the business as much as possible. We also have, as a possibility, ability to continue to simplify the group by sometimes looking at a few projects where we have minority interest that we would be looking at potentially buying, again, in order to remain more in control of our assets, to continue to be able to have a better share of these assets, assets that are merely derisked that we know very well. And in that case, we would be looking at doing that in some cases. But the main answer is investing in our priorities, balancing growth and returns. And we feel we have a lot to do in the coming years and a lot of good, good opportunities.
Ajay Patel: So just to follow up because it cuts out a little bit during your reply. Catherine, does that mean basically as we roll forward through time and things become a little bit surer and CapEx projects become clearer, there is the potential to add to those growth CapEx numbers on the stronger cash flows and disposal proceeds that you've indicated today?
Catherine MacGregor: I mean, yes, potentially, we will not be limiting our growth CapEx as long as we obviously can continue to balance these 3 pillars that I have mentioned. We -- in 2021, to be fair, we have been quite selective. We only spent €4.3 billion in growth CapEx. We are looking to accelerate that to be around €5 billion a year to 2024. But should our equation continues to strengthen as it has -- and as it is today, we obviously would be looking at potentially increasing that growth CapEx. Again, in a very, very disciplined approach, in line -- and very much in line with how we described our capital allocation discipline that we want to apply going forward.
Operator: We have the next questions coming from the line of Michael Harleaux from BNP Paribas Exane.
Michael Harleaux: That was very insightful. So I just have one question, and quite a naive one, if I may say so. Essentially on the guidance on power prices, what you're saying is that if you were to look at the follow-up curve, things would be even more enticing than they are currently, which is great, which I'm not going that far. Hence, my question is as follows
Catherine MacGregor: Yes. I mean, I think you should not read too much. And we are not in the business of forecasting commodity prices. Frankly, it's very, very difficult. I think Ajay was trying to ask the question about how we see the commodity prices evolving, which is really, really difficult. So no, we're not taking a position. There is a bit of conservatism indeed in the assumption that we took. However, there is a scenario if commodity prices were to normalize from H2 onwards, that we would be in the scenario that you have mentioned. So we have a realistic scenario that would allow us to deliver what we said. But obviously, there is also a lot of upside scenarios, which is what we've described. And Pierre-Francois very, very clearly laid out today, in order to be very, very transparent in the impact of the commodity price on -- potentially on this guidance. But really, we're not taking a position on future commodity price. There is 20% open positions which is -- which are exposed to this price, which is why we're taking this approach.
Operator: [Operator Instructions] The next questions comes from Louis Boujard from ODDO.
Louis Boujard: And welcome, Pierre-Francois. Regarding -- I have, in fact, 2 questions on my side. The first one would be regarding the slide Page 24 more specifically. You talk here with 8 gigawatt of potential investment. And at the same time, we see the buoyant market notably in terms of commodity prices and electricity prices. So I would expect that eventually, the potential area there that you might be able to extract into this business might be, in fact, [indiscernible] past few months and eventually would enable you to lock into better returns than what could have been expected. Could you confirm that that's in the current environment in spite of the competitive environment? So you are in a situation where, in fact, there's a potential for growth is pretty good and pretty attractive in this kind of a division, which could constitute quite a large and significant part of your growth in the next few years? My second question would be dedicated to the Belgium, and more specifically, to the auction that you won, 1.6 gigawatts. We know that we will have to refurbish a little bit the market here with the closing of the nuclear plants. Could you please give us a quick update on where you stand on this auction, and if it's still okay or if there is any issue on the [indiscernible] project?
Catherine MacGregor: Okay. Yes. Thank you, Louis. Yes, definitely, Energy Solution, experiencing strong market growth. And what is extremely exciting about this business is that, first of all, we have a number of opportunities that come our way where there is not one day where I need to see or my team meets industrial clients, cities, schools, that are looking at help to decarbonize their operations. And so we are almost overwhelmed by the number of opportunities, which we try to translate numerically with this €14 billion number, which is really mind blowing. But what is very interesting is that, yes, there is competition. But at the same time, a lot of the value we bring to this operation is our energy expertise, our ability to decarbonize. So it's not just a price war. It's really the value that we bring through our unique expertise and the ability to do solar, to do energy efficiency, to do upgrade and big CapEx projects, et cetera, et cetera. So we are very differentiating. And so indeed, it does give us a strong competitive edge. And this is why I wanted to point out on the Climespace renewal on the cooling system in Paris is that we were selected a lot based on our technical expertise. And of course, this is value that we are able to create. And so therefore, I am very optimistic about this business. Now it is really -- coming from the EQUANS process, it's still quite a diverse business. So we are really working very hard with the management team, obviously, to focus, focus, focus on the high value creation. And that's really what the work that we are doing right now. So really exciting. And of course, the pipeline is such that we are able to cherrypick and to really select the right project, which is fantastic. And then you asked me a question on CRM auctions. So we have won 2 new gas projects, both under development. One is going through a repermitting process. So this one is a bit more challenged from a permitting standpoint. The first one is really going well [indiscernible] is under development.
Louis Boujard: Thank you very much.
Catherine MacGregor: You’re welcome. Okay. I think we are now just arriving at the end of this session. So thank you very much for the questions and for bearing with us for this hour and a half. Thank you so much.
Pierre-Francois Riolacci: Thank you.