Engie SA (ENGI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining this call on the consequences of the Ukranian crisis on the European gas market. In a moment, I will hand the floor to our CFO, Pierre-Francois Riolacci. As this is a short call, please can you e-mail me your questions? If you haven't already done so, the e-mail address is in the statement that we issued this morning. And I will read them out on your behalf. And with that, over to you Pierre-Francois.

Thank you, Aarti, and good morning, everyone. I need to start reminding you that, as we said in today's announcement, the ENGIE Group, of course, condemns the invasion of Ukraine and expresses its support for the affected people. And of course, even if we talk about a lot of very important things, we need to keep that in mind. We have organized this call in response to the number of questions that we received last week. But let me start by saying that the group is progressing well on its commitments to plan, including the completion of the EQUANS transaction, which remains on track. Let me remind you also that we have a strong balance sheet, high liquidity, which is in the current market quite a strength. Also, let me remind you, as we speak, Gazprom is fully delivering on its commitments and the gas is flowing. But clearly, a shortfall arising from Russian gas supplies being stopped would severely impact the gas market in Europe, for example, in case the EU was to decide to extend sanctions. I want to manage expectations. I'm not going to answer all the questions that you may have on this crisis, which is unfolding day-after-day. But we'll try to share in a transparent way some key facts which are very important. And especially, we try to provide you with our best view of the price and volume effects in the extreme scenario that there is a disruption to the supply. The first, the key point, is to understand how the market works. I mean, we buy our gas at market prices, variable price. And that's the bulk and that's a vast majority of the gas, if not all. And then we sell the gas again on a variable price or fixed price. But if it is fixed price, at the inception, we are actually hedging in the market so that we eliminate, neutralize, the price risk. That's why most of the gas, which is bought and sold at market price, and unhedged volumes under fixed price contracts are quite insignificant. Another reason why ENGIE's economic exposure to price increase is, by design, limited and actually mainly due to short-term delivery in relation to the price mechanism. As you know, most of the purchase contract, they do include a provision that actually sets the price 1 month or a quarter ahead of the delivery and thus create a short-term exposure. For Gazprom, it's 1 month ahead. And that relates to the 15 terawatt hour that we have in the statement. So that's the first point to understand is that the market, by design, is not exposing us to a significant price risk. The second point is that in an extreme scenario of no Russian gas supply, based on European and national regulations, authorities would step in to allocate scarcity between customers through curtailment on a predetermined merit order. And therefore, the normal market mechanisms, which are based on price, would not apply anymore. The third point is that such measures and events would actually supersede contractual arrangements or constitute force majeure events. These actions could come along with initiatives to stabilize the market in terms of pricing, for example, price ceiling. Now we're going to move to questions. But I would like to remind you that ENGIE benefits from a diverse and integrated portfolio that does contribute to a balanced energy mix, which is key to supporting security of supply, affordability and overall system resilience. We remain very focused on driving strong growth in renewable energy and the transition to renewable gases. Thank you very much for listening, making yourself available on short notice. And now Aarti, we can take questions.

Okay. Pierre-Francois, thank you. We're just receiving some questions, the first one being what is the financial impact for ENGIE if there is no more Russian gas imported?

As I told you, I mean, in terms of price, we have these hedging structure through the gas that we buy and the gas that we sell. And therefore, our exposure would be limited on the price part. We estimate a short-term exposure due to this -- mainly due to this 1-month ahead provision that we have in the contract with Gazprom, about 15 terawatt hours. And this is again short-term. So even if we actually supply 121 terawatt hour from Gazprom under our long-term contract, that was the number for last year, no reason that it is very different this year, we do have a limited exposure to the price. Now of course, if we move to another world, there would be scarcity and quantities. Authorities would have to step in and that there are regulations on that. And there will be allocation, not through suppliers but through customers. So the authorities will define which customer has to stay away from the market, and there would be allocation of the scarcity based on that criteria.

Okay. So we have another question coming through, which is can you explain what are the mechanisms in place for shocks in supply at the moment?

I think the basic scheme, which is in place at the moment, is that the authorities, by decree, would actually decide which customers would have to stay away. And there will be a merit of order, which is -- which can depend from one country to the other, and also there will be some flexibility. So you know that we've seen that in the past for a short-term period. And in short-term period, usually the customers that would be -- would have to stay away from the market would be the large industrial side, which have usually committed also to actually step away in case they were requested. So it is something which is already structured. That is for short-term situation. For longer-term situation, of course, that does trigger other choices, which will be made again by the authorities. It could be that it's not based on the national decision, it can be moved to a local decision, depending on the situation in each and every region or marketplace. And then you will have those big ticket, so the large industrial customers, the CCGT, the households, of course, that are also part of it. And you know that it's not easy to actually cut, stop providing the gas to households because then it's very difficult to start it again. So there is some stickiness on the household side. But the decision again will be made by authorities and based on decrees or any regulation. The law is already there. But there would be, of course, implementation decrees.

Thank you, Pierre-Francois. The next question is realistically how long would it take to diversify away from Russian gas?

Yes, that's a bigger question. And I think that you've heard already that it is significant. The Russian gas is 40% of the supply in Europe. So that's a big number. It's clear that you know that in the very short term, there is a limited impact because we are now moving to the summer season. The issue would be more in next winter. It's not easy to move away from gas in such a short time frame. It will probably take 2, 3 years to actually ease the pressure developing new import sources but also developing biomethane, which can be a good contribution to that one. It's clear that in the short term, it would require some strong demand management. And of course, authorities would have to lead the way.

Thank you. And we have some questions related to Gazprom. What is the proportion of long-term take-or-pay contracts that ENGIE has with Gazprom?

As we discussed, I mean, we -- last year, we had 121 terawatt hour of gas that were bought from Gazprom because that's the kind of volume you need to have in mind. Of course, we could buy on top of that. But that's another story. And clearly, that's a different part. And it's clear that these volumes are covered for a vast majority through take-or-pay provisions. But of course, these take-or-pay provisions would go away if there was a EU sanction.

And another question that, I think, you partly addressed before, but do you have flexibility in your contracts with other suppliers to increase volumes?

We do have a bit of flexibility, but this is very limited. And as you can imagine, about the last few weeks, we have even accelerated further our diversification. That comes with indeed negotiating extra volumes with some of the providers that is being done and also securing new slots of LNG. But you know that now in Europe, we are getting close to the point where it is difficult to add new ships. So we've done that, which is to extend to a maximum our diversification but again not commensurate to what the volumes delivered by Gazprom.

Okay. We have a question, which is on the EBITDA of the Supply activities. And just to quickly take that, for last year, that was EUR 375 million (sic) [ EUR 445 million ]. Okay. So the next question is if there is a situation where there's a certain shortfall in deliveries, let's say, 25% and not a total stop with government intervention, would ENGIE have to replace and buy in the market? And the second one is what is the risk of clawbacks in Belgium and France and further power price regulation for customers?

I think that if there is no scarcity, so if there is a partial limitation, I'm not sure what scenario could trigger that, to be very candid. It could be more Gazprom not delivering part of it or something like that. It's hard to imagine that the EU sanction would be a partial sanction. But I don't know if there was that kind of scenario which we struggle again to build. Remember that there is a natural hedge between what we sell and what we buy. So if there is still gas in the market, we will go and chase the gas. And then that would go to the customer, of course, with the different mechanisms that are applicable. And those who have hedged, for example, the hedge would still work. So that would still function. And on EBITDA, there was this question on EBITDA. Bear in mind that our job is not to -- again, I need to highlight that, it's not to buy gas and sell at a different price and take a bet on the variation of price. I mean, our job is to deliver gas and make a margin for that service. So we are not overexposed on that part.

Okay. The next question is you mentioned sanctions from EU. But what is the risk of Gazprom cutting gas deliveries?

It can, of course, always happen. And that could be a decision that could come as a kind of retorsion against other sanctions. It will not change significantly the picture. You would have the same kind of stepping by the authorities to manage scarcity. And we would also benefit from the force majeure. And we will have a claim against Gazprom. To be very candid, it does not make a huge difference if it is a decision from the Russian to stop the gas or if it is EU sanction.

Okay. So we have -- the next question is on how much volume are we taking this year if only the elapsing contract would not be renewed with Russia for ENGIE?

Our contract structure is pretty stable. So there is no real change in volumes up to 2025. Then it starts decreasing. And the volumes are basically insignificant from 2030. But in the next 2, 3 years, volumes are similar.

Thank you. Bear with me one moment, there's quite a few questions coming through. What's the impact if the French government limits the price passed through?

I think that there might be -- if there is scarcity, there would be a need to, at some point, find a way to determine the price. Because the market would not be efficient anymore. If there is a physical imbalance between supply and demand, it's clear that the price cannot be determined by the market. Could that be that there is a kind of a price ceiling? Yes, it could be. I think that the pricing would have to cope with two key principles that we are very used to. One is affordability. The other one is security of supply. Affordability means that the price should not be too high. And you remember that the price of gas is important. But it's also even more important because it is driving, to a large extent, the price of power. So clearly, there would be a need to have a price cap. But that price cap needs to be high enough to make sure that there is good financing for Europe to buy the exact quantities in the market for LNG. So I think it's very important that this price is strong enough, first, to drive the right behavior in terms of demand but also to support operators buying the quantities abroad. With that in mind, and given again that we have this kind of balance in our sourcing and selling, this is something that, depending, of course, on the regulation -- and there are so many unknowns we need to be very careful. But in principle, it's not something that would be detrimental to ENGIE.

Okay. And the next question is on the dividend. Under the current situation, if things deteriorate, is there a risk on ENGIE's dividend that was already announced for 2022?

In the current situation, clearly we have no reason to change our statement, whether it is our dividend, whether it is about guidance. I mean, in the current environment today, there is no worry about that. Now you cannot ask me to confirm, whatever happens in Russia, in Ukraine and in Europe, there will be no change. I mean, today, you have a war, which is raging only a few hundreds of kilometers from the EU. This is something, of course, that we need to pay attention to. But if things stay into a reasonable framework, I think we are confident today with our guidance and dividend. Of course, you cannot know what will happen next week.

Okay. Thank you. And there was actually a follow-up question, which was on the risk of clawback, which we didn't address before, in Belgium and France and further price regulations for consumers.

Yes. I mean, this is a different point. I mean -- and you remember that we had that discussion already on the back of the call of the release. It would not be advisable for ENGIE anyway to post massive profits at the time of there is a war and households are struggling to pay their bills, whether they are gas and power. And as a utility, again this is something that we are very familiar with. So that there might be, at some point, if we were in that kind of situation, we are not, but if we are in that kind of situation of -- where there would be an imbalance between the people and operators making good profit, there is a possibility that there would be a kind of clawback. In Belgium, you know that we have a law, that the law is pretty stable. That's what it is. And we just discussed that there could be a price cap if there was a shortfall. So I mean, there are too many unknowns. Today, again we are not aware of anything of that kind. But clearly, the situation is pretty fluid and unfolding quite quickly. But again, we believe that there is a good balance to find between affordability and security of supply. And we are confident that with a proactive dialogue with authorities, we can reach common goals.

Okay. Thank you. And the next question is about a scenario of supply curtailment in France. The volumes of gas flowing into your distribution and transmission network would be lower. Do you feel that the current regulatory framework would protect you against a loss of revenue, EBITDA in your regulated pipeline business?

Well, the regulation does address the volume part. So there is a good cover in the existing regulation. And lower volumes would trigger some adjustments. Now of course, it's at constant regulation. If you come into something which is completely different, you never know. But clearly, we are well covered in our current agreements.

Another question is when we talked about the French -- the price pass-through, you mentioned no impact on EBITDA. What about impacts on cash flow?

I think that's a good one. You know that there is a tariff shield that has been decided by the government. And we claw back the money through the future billings of the customer. And it's clear that with what we see today, there is an increasing chance that the gas price will not drop soon. And therefore, the advance or the cash that we have to carry on behalf of the government to support households is increasing. You know that we have a guarantee from the government. And it's a guarantee which is carved in stone. And if the amounts were going to move further and there was no visibility on how to reclaim this amount, there would be a need for a discussion to see how we can actually claw back that money. And again, we are not in a -- there probably would be a discussion. But we will protect ENGIE's rights but also very conscious that the situation is extremely difficult. So today, it's part of our job to help carrying the cash.

Thank you. And we're jumping around here on topics. The next one is on CCGT power plants. And what about the profitability for these in the current market environment?

Well, for the time being, it's clear that we still have the correlation between gas and power. So the CCGTs are profitable, as you can imagine, in the current environment. And you know that it is a very important source of flexibility. So it is the vested interest of all parties to make sure that the CCGT can play their role and balance the power market.

Okay. And with regard to the Nord Stream project, do you have any update there, Nord Stream 2?

No. You need to check every day your e-mail box. But as far as we know, there has been no formal announcement. But we have been pretty open that the situation is quite concerning. And it is our expectation that we'll provision this amount soon. And of course, we are expecting any time from now the trigger, which is that the company will file for insolvency or any kind of action of that same purpose.

Okay. The next question is on the hedges and the duration. How long are your hedges in place for trying to ascertain when might the exposure to wholesale gas in future might be higher than it is now?

No, I think our hedge portfolio is matching exactly our commitments to our customers. So there is a natural fit between the two. It is ongoing, of course. The maturity is usually not very long. For a B2C, it will be typically 1 to 3 years. For a B2B, it can be a bit longer than that, up to 5 years. Again, we work with very strong counterparties, so our hedging is robust. Either it goes through the clearing houses or if it goes to [ ETC ], it is with first-class signatures and with limits, which are tracked day in, day out. So we are comfortable that our hedging portfolio is supporting our customer portfolio.

Okay. We have 6 minutes. We'll try and squeeze in a few more questions. Would you consider adding LNG regasification capacity in France?

It's too early to say. But that could be part indeed of the plan. You know that there is a resilience plan, which is being defined and -- with the lead of the authorities, of course, and we are part of this thinking. And as we speak, we are working very hard with all the ecosystems, so the authorities but also other players to see what is -- what are the best action. And definitely, building more capacities on regasification is on the agenda.

Okay. And we also had a question on the gas from Gazprom comes through which pipelines? And answer there is the flows to France, they transit in practice through Ukraine, through Poland as well as through Nord Stream 1. Bear with me one moment. I will see if we have any other final questions. Can you clarify the first statement about how the month adjustments in your long-term Gazprom contracts work, e.g., if month-ahead price moves 25%, what proportion of price adjusts? Or is this adjustment only minor?

No. Yes, okay. Thanks for asking the question because that's an important one and maybe not that easy to understand. What it means is that the price on the delivery date is actually fixed 30 days ahead. So on the 15th of February, we are locking the price of the delivery that will happen on the 15th of March. So in a normal time frame, in a normal business, what you do is that you will be hedging also 1 month ahead. And that's what we have consistently been doing. And then that's the risk that we are referring to. The residual risk is that one that if, for some reason, Gazprom -- but it would be true with any other provider. But if Gazprom was to stop supplying suddenly, then we have this hedge in the market. And that would be the hedge we need to buy back. And that's the risk that we are referring to. And so the risk is between the day you learn that the delivery will not come and the day of the delivery. It can be significant in a time the market is, of course, very volatile.

And I think you have addressed this before, but it's come back. What is the maturity of the gas contracts with Gazprom?

I tried to cover that already. But we have a pretty stable volumes with Gazprom from up to '25. Then it starts decreasing up to 2030. In 2030, it starts to be a much smaller amount. You can say that the bulk of our volumes with Gazprom are not contracted beyond 2030. And with that, if there is -- there might be questions forever. But we are getting close to the end of this slot. Again, not big news, but just trying to give you some clarification. I hope it helps. And if I've not been fully clear, I'm sure that Aarti and the team would be happy to follow up with you guys. Thank you very much for making yourself available in these very demanding times. Thank you, and be safe.

Thank you.