Engie SA (ENGI) Earnings Call Transcript & Summary

Thank you for holding, and welcome to ENGIE's Half Year 2023 Results Presentation. For information, this call is being recorded. [Operator Instructions] I will now hand you over to Delphine Deshayes, Head of Investor Relations.

Thank you, and good morning, everyone. We are pleased to welcome you to our H1 conference call. Shortly, Catherine and Pierre-Francois will walk you through our first half results, and then we will open the lines for Q&A. [Operator Instructions] With that, over to Catherine.

Thank you, Delphine, and good morning, everyone. I am very pleased to announce a very strong set of results for the first half of 2023 with some major breakthroughs and achievements. First, our earnings performance is up substantially on what was already a strong first half last year, which demonstrates the benefits of our integrated model and indeed that we can capture fluctuating market conditions. Second, we continued to focus on delivery of the strategic plan that we set out in February this year. Third, we achieved a fundamental derisking of our exposure to nuclear and consequently, a derisking of the group as a whole. And this happened when we concluded a framework agreement with the Belgium government just a few days ago, following on from the interim agreement of late June. Moving to the next slide. We have made further headway on our main ESG targets. Greenhouse gas emissions from energy production in the first half were 26 million tons, below 30 millions of last year. The share of renewables in our total power generation capacity was up to 39% at the end of June and we expect to accelerate in the rest of this year. In Brazil, which is one of the 4 countries, which we are targeting to be net zero for 2030, we sold our Pampa Sul coal plant in June and we are now a purely renewable-based electricity generator in this country. And this disposal also means that our coal capacity globally is now just 2.1 gigawatts, which is slightly above 2% of our total capacity and down by more than a quarter since the end of 2021. This means that we are well on track for a full exit by 2027. We have made strong operational progress across our global business unit in the first half. In Renewables, I will go on Renewables a bit more details in the next slide. In Networks, we boosted our grid activity in Brazil as we won a 30-year 1,000-kilometer power transmission concession. This is our third such regulated project there and it adds to the 2,700 kilometers that we have been awarded since 2017. We consider this to be a key and value-accretive business within a framework of robust regulation, which complements our renewable generation in the country. In France, it is worth mentioning the report from the CRE, the energy regulator, in April confirming the need for resilient transport and distribution gas networks by 2050. And just this morning, the CRE communicated a preliminary proposal of a 2.9% to 4.2% return on RAB pretax or real for gas transport networks and storage in the upcoming regulatory period starting April next year. This is part of a public consultation. As you know, the remuneration of the RAB is an important criteria, but it is also part of a broader set of parameters such as level of investments and inflation. And we are in constructive ongoing engagement with the CRE, expecting that the final outcome will be in line with our guidance. Moving on to our Flex Gen and Retail business unit. We recently commissioned our biggest battery facility at Hazelwood in Australia, of which more in a moment. In Retail, regulated gas tariffs in France ended in June, a smooth transition indeed as we were able to transfer around 2 million customers who have not opted out of regulated tariffs to the switchover tariff also known as offre passerelle. Finally, in our Energy Solutions business unit, we continue to win business on very supportive markets, including multiple district heating and on-site energy production contracts such as in Cannes, a 25-year district heating and cooling concession; in Barcelona, a biomass plant; and also contracts to support the decarbonization efforts of customers such as Arkema in France and Legrand in Italy. And in June, we launched our electric charging brand, ENGIE Vianeo already rolled out to an initial 1,000 points in France with a target of 12,000 in 2025. Moving on to the next slide. You will already know that we met these major milestones that we announced in Belgium nuclear in June. I won't repeat the main elements, just a couple of updates. First, that we moved forward from the interim agreement, which was signed in June with the government to a framework agreement that was signed last week. Things are, therefore, moving forward as planned towards the signing of the transaction later this year. Second, that the aim will be a restart of output from November 2025 and a flexible long-term arrangement that we named Flex LTO. There's arrangement still for 10 years of additional production to be sold according to a CFD mechanism that we described to you earlier. And third, the impact on our 2023 reported earnings and economic debt has been favorably fine-tuned since June and Pierre-Francois will go into more details on this. Important to stress there is negligible impact on our net recurring income for this year and on our medium-term guidance. And I repeat this eliminates perhaps the major source of long-standing uncertainty for the group. It also substantially derisks our company. Turning briefly to our very positive first half financial performance. EBIT excluding Nuclear, grew 53% organically to EUR 6.7 billion, leading to a significantly higher recurring net income group share of EUR 4 billion. And this was driven by a higher contribution from most of our activities with particularly substantial increases from GEMS and Renewables, robust financial performance, indeed, that demonstrates the strength of our integrated model. Cash flow from operations also very strongly up, and our balance sheet remained solid. I can reaffirm our full year guidance, which you recall we raised just a few weeks ago, and Pierre-Francois will obviously go through more details in this -- for these results. In Renewables, we raised the capacity to 38.2 gigawatt over the first 6 months and our construction schedule guarantees a strong second semester. We accelerated our capacity under construction with about 6.6 gigawatts and it has more than doubled over the last year. It's not a surprise given the project that we won in recent years and also the construction schedule, but still, it is a pretty striking increase. We started several flagship projects such as Gulf of Suez 2 in Egypt, Lomas del Taltal in Chile in onshore wind. In offshore, we started work on Moray West in Scotland, on Ile d'Yeu and Dieppe-Le Treport in France. These 3 with combined capacity of 1.9 gigawatts, which had [indiscernible] stream in '25 and '26. Ocean Winds raised its stake in Principle Power to over 36%. PPI is a market leader in floating offshore platform technology and manufacturer, and I'm really excited about the future of our collaboration as floating turbines raise their profile within the wider growth of offshore wind. We acquired BTE in South Africa, which more than doubles our local renewables capacity on a fast-developing market that we know very well. Also there in South Africa, we raised our stake in the Kathu solar farm, which takes us to a majority position. As I said earlier, I am very confident in our annual renewable capacity target of 4 gigawatts on average to 2025 and 6 gigawatts to 2030. This ambition is fueled by a growing pipeline, which has continued to rise now to 85 gigawatts from 80 gigawatts at the end of last year. Just a few words on wind turbines. Since you're that less aware that there is a lot of attention on technical problems that have been experienced by Siemens Gamesa on its 4x and 5x onshore wind turbine platforms. We have 2 projects in Latin America that use the turbines in question. We have encountered technical issues at one of them. Remediation works are in progress while Siemens Gamesa is obviously finalizing its root cause analysis. In our other Lat Am project, where we are using the same turbines in Santo Agostinho in Brazil, we have had an isolated event, which, at this stage, seems to be unrelated to these current wider issues. You can be assured that we are closely monitoring developments. And more generally, we have decided to undergo a full operational review of all of our sensitive sites. Let me now end with 2 slides illustrating our strategy in battery energy storage systems, also known as BESS. We have an ambitious 10-gigawatt target for BESS capacity by 2030. So where are we today? Well, at the end of the first half, we had nearly 200 megawatts in operation, 740 megawatts under construction. We are obviously at an early stage, but we are accelerating towards some degree of scale and you will be seeing BESS profile growing fast with a focus right now on the U.S. followed by Chile and Australia. So why do we have such an ambition and why are we so optimistic of being successful at ENGIE on BESS? Several reasons. First of all, as a product, BESS offers large-scale electricity storage and is a great complement to existing flexible sources of pump storage and CCGTs. In our 2050 projection, we estimate that 600 gigawatts of additional flexible generation capacity, in other words, a quadrupling needs to be developed in Europe in order to optimize the growth of renewables. And we believe that BESS will dominate this. In fact, we estimate that we need about 150 megawatts of BESS in order to get the most out of every gigawatts of additional renewables capacity. And as for our strength in BESS at ENGIE, we are already a leading provider of flexible generation through our fleet of CCGTs, pump storage and BESS now, altogether around 59 gigawatts of capacity. And we will drive growth of both -- of BESS both stand-alone and also colocated with our expanding Renewables and Flex Gen capacity that will add optionality for solar, in particular, by cutting the risk of curtailment. And the value creation potential of BESS is substantial and will be bolstered, thanks to GEMS. GEMS will optimize BESS output, when to store, when to send on to the grid and will be able to extract the maximum value as it expands for the benefit of the group and for our customers. So I'm convinced that we can grow this business not just rapidly, but in such a way that we will create value for the group. And the best example that makes us particularly proud at ENGIE is the transformation of Hazelwood, which was an Australia -- in Australia, a coal power plant, and this transformation into one of its largest battery storage facilities, and for ENGIE, it's our largest so far. We closed these Hazelwood units in 2017 and we started this program to completely rehabilitate the site. And this rehabilitation has included the construction of this 150-megawatt stand-alone big battery that we just commissioned. Obviously, it will store electricity during off-peak times, deliver it back on to the grid when demand is at its highest. The battery will also have stabilized supply by helping to control the frequency at which it is delivered. So for us, Hazelwood is a major milestone that perfectly illustrates the transition made by our group, and it also contributes to the goal that I mentioned to develop 10 gigawatts of batteries by 2030. With that, turning now to Pierre-Francois, who will discuss our first half financial results. On to you.

Thank you very much, Catherine, and good morning to all. And indeed, a good set of results for this half year as expected and maybe even a bit better than expected with also a very high level of cash flows as working cap has started to [indiscernible]. Please note that the main impact of the framework agreement signed with the Belgian government are booked in our H1 accounts, leading to a one-off hit in the net income and economic net debt. All this, of course, is leading us to confirm the guidance we just upgraded end of June. Let's go a bit deeper in the numbers. And first, with EBIT, which -- excluding Nuclear, which is up 53% organically. In a nutshell, except for the decrease of the contribution of networks, mainly due to low winter volumes and of Energy Solutions only due to a one-off expense in the U.S., all businesses are doing good or even, I should say, very good like Renewables, not mentioning GEMS. Let's go a bit deeper. Renewables first. Strong increase in EBIT contribution, plus EUR 63 million, that is plus 43% organic growth. The key drivers behind this strong operational and financial performance is a positive price effect mainly in France and Portugal in hydro. You remember that we had buyback, which cost us more than EUR 100 million last year in H1. The positive volume effect, same geographies; the contribution of commissioning of growth for EUR 90 million. Performance was limited due mainly to G&A, which reflect higher inflation. That's a general comment, and I will come back to it at a later stage. And then the Others contribution positive, thanks to some one-off in France and in Brazil despite the absence of DBSO margin over the period that keep coming down. This is in line, as you know, with our strategy to keep more assets on the balance sheet, and our sell-down today are capped to 49%, therefore, without EBIT impact. For H2, please note that the price effect, including the impact of the higher tax rate on C&R will turn negative. We do not expect further tailwind on volumes and we will not get the benefit of sell-down comparable to last year. Continued support from commissioning, from performance plan are not expected to overcome these headwinds for H2. So a very good start of the year. On Networks, lower contribution, minus EUR 116 million, that is 8% down organically. The key driver of that decrease is, of course, the lower volumes especially in distribution in France as a result of another mild winter and energy sobriety. We had also to cope, still in France, with increasing staff costs and higher energy costs as well as the impact of strikes on LNG terminals. Our business abroad, including in Americas has been performing well. In Europe, we have benefited from additional revenues from capacity subscribed for gas transit between France and Germany as well as higher margins for storage activities in the U.K. and in Germany, where these nonregulated assets can monetize the market volatility. On Energy Solutions, it's a steep decrease, minus EUR 99 million. And as you can see on the graph on the left side, we have 2 very different stories. I will start by the bad one, which is in the U.S., where we have 2 different contracts for which we are facing cost overruns for plant construction, I mean CHP plant construction, combined heat and power production. This cost overruns that will materialize in H2 this year and also in 2024 resulted first and utmost from poor performance of the EPC contractors. We are quite disappointed as we are used to handling this kind of project work successfully in the rest of our geographies. We have taken immediate action and implemented specific strong managerial focus: first, to finalize construction works in a new budget time line, also with strong quality control; and second, to realize any opportunity to reduce the cost, including through contractual discussions with suppliers, partners and customers. Accordingly, we have booked a provision for onerous contract of EUR 150 million in EBIT, and we are confident our risk is now covered. We are also strengthening our project management capabilities in the U.S. for Energy Solutions to make sure we have no further surprises. Aside from this industrial step-back, Energy Solution is doing quite well across the board, in line with the plan, plus 22% EBIT organic increase, plus 78 basis points on EBIT margin, excluding the U.S., strong operational performance, good commercial development. This led us to be quite confident for the upcoming second half. Flex Gen contribution is up EUR 102 million. That's plus 16% organic growth, to a large extent, same drivers than in Q1. In Chile, the situation keeps improving, thanks to the normalization of market condition and reduction of our short position. In Europe, our locked position from the past hedging have enabled us to capture higher spreads offset by a lower level of ancillaries from a record high in 2022. And finally, the year-on-year variation benefits from the negative impact in 2022 of the extraordinary tax in Italy, that was about EUR 130 million. Overall, very pleased with H1. For H2, despite active hedging activity since the beginning of the year, only 60% is hedged at the end of June for the balance of year. So we still have significant open position while average spot -- clean spot spreads in Europe are decreasing. Of course, unexpected events can suddenly boost or depressed prices. So it's fair to say there is a fair degree of uncertainty over where we will end up. On Retail, the EBIT amounted to EUR 489 million, that is 17% organic growth. And this EBIT increase was mainly driven by price effects due to higher margins in France, including phasing effect and in Romania, as well as a new profit-sharing mechanism and portfolio optimization that was put in place between GEMS and Retail. This was largely offset by a negative volume effect, mainly due to a mild winter and lower consumption. Last but not least, Others, and here, of course, I mean mainly GEMS. GEMS has been posting a very strong contribution, plus EUR 2.1 billion improvement with each and every arrow pointing in the right direction. That's a long list. Firstly, first half results of last year at GEMS were negatively impacted by substantial costs and provisions to cover the risk from suspension of Gazprom contract. This was not repeated. Second, GEMS has achieved a persistent, strong performance in energy management activities in Europe, taking advantage of a combination of key market drivers. These drivers, they are well down on the extreme levels we saw last year, but they are still favorable. So volatility indicators, which are bread and butter are still on average around quite quadruple the levels of 2021, and prices are still high on a historical basis, especially year ahead when they include a significant risk premium. Third, as the market was somewhat less tight than last year, this led to a continuous reversal of market technical reserves that we had booked in '22, which has offset the decline of some of these market drivers. Four, in the B2B segment, we see continued flight to quality. This has meant slightly less intense competitive pressures compared to precrisis, which have enabled full valuation of the cost of risk. Five, some contracts include winter-summer seasonality, and H1 is benefiting from some timing effect, about a couple of hundred million that will reverse in H2. And finally, for part of the business, with some contract duration, there was a continued positive effect of deals signed in 2022 at good conditions, which materialized at delivery date. So first half EBIT for GEMS was clearly ahead of expectations. But please don't get carried away and don't expect the second half to be anything like H1. First, prices and in particular, volatility in H2 last year were at their peak. And there is no significant negative Gazprom effect in second half to the price, the base of comparison for 2023. Second, the potential for further release of market reserves is now far more limited as normalization of market conditions is not expected to go much further. Third, the timing effect, I mentioned earlier, will indeed be negative in H2. And last, there will be a steady slowdown in delivery of high-margin volume negotiated last year, but booked at time of physical delivery. All in all, you should expect a significant year-on-year decrease in EBIT for GEMS in H2. To remind you of what I said back in Feb and again in May, the long-term expectation is that GEMS should deliver a hard core EBIT of around EUR 1 billion with potential upside coming on top of this in supportive market conditions as demonstrated. On Nuc, we have a strong decrease of the contribution, minus EUR 0.6 billion, same driver as in Q1. Positive effect of higher captured prices over the period, but almost fully offset by the inframarginal rent cap and the specific nuclear tax. That was their purpose. The volumes are positive with higher availability in Belgium and also drawing rights in France. But you can see on the other side the comprehensive negative impact of the closure of the 2 reactors, Doel 3 and Tihange 2 for a total of EUR 621 million. And last, higher D&A as a result of the 2022 triennial review of the provisions. This D&A impact, now that we were notified of the final decision of CPN, is slightly lower than initially planned as part of the value of this dismantling asset has been revised downward. This is a good transition to turn to the next slide to explain the impact on H1 of the framework agreement that was signed with Belgian government. As I described in our call on June 29, we have agreed a fixed amount of liabilities for waste of EUR 15 billion and this sum will be transferred to the Belgian state in 2 stages. I stress that the EUR 15 billion amount is fixed, albeit indexed up to payment. So no more uncertainty going forward related to the 3-year CPN reviews of future cost of waste management. And following the 2-stage transfer, we will have no nuclear waste management liabilities left on our balance sheet. The graph on the left shows the different steps that take Belgian nuclear liabilities from EUR 19 billion to EUR 23 billion. This view is a kind of a pro forma to help you to understand the transaction with a position at year-end 2022 and for Belgium only. So in the past months, we have made with ONDRAF a very deep and precise job to define and classify all categories of waste to define what type of expenses would stay with ENGIE and what will be transferred. And this led us to a recategorization of liabilities, as you can see in the first 2 bars. Then from the EUR 19 billion -- to the EUR 19 billion, a EUR 5.1 billion increase in liabilities corresponding to a prudent scenario, could even say a very prudent scenario, have been agreed with the Belgian government minored by our partner share in the increase, which is 0.4 billion. On a parallel track, as part of the 2022 revision process, CPN has agreed to revise downwards the provisions for ENGIE liabilities by EUR 0.6 billion. The total impact is a net increase of our nuclear liabilities due to the transaction of EUR 4.1 billion reflected in the valuation of the economic net debt. We expect the funding to come in H1 2024 and in H2 2025 at the time of the restart of LTO. The overall nonrecurring P&L impact at the end of June amounts to a negative EUR 4.4 billion based on the exact same reasoning with 2 nuances. The EUR 5.1 billion increase has now risen to EUR 5 2 billion because of the H1 indexation. And the decrease in provision has a positive effect of only 0.4% as when we booked end of '22 the provision increase, we also recognized the dismantling asset and not all of it was impaired then. Therefore, the provision decrease triggers a derecognition of EUR 0.2 billion of dismantling assets, which we will not have, of course, to amortize in '25 as mentioned briefly when we reviewed the Nuc H1 performance. Performance plan. You will recall that by the end of last year, we reached over EUR 500 million on our '21-'23 target. So we were ahead of schedule, leaving something close to EUR 100 million to achieve the full target this year. In the first half of 2023, we are again strong on the operational side, clearly a more industrial-focused approach that we introduced in 2021 with the GBU has continued to unlock efficiency opportunities. On the other hand, we must offset the stronger inflationary pressure on G&A. We take into account, as you know, the growth variation. So given our growth and given the inflation, it requires significant efforts of productivity to bend the curve down. You may agree, it's quite ambitious, even demanding, given that we have demonstrated our ability to pass inflation to customers. On loss-making entities, EVBox, while progressing well in delivery and operation, is still behind on its plan to grow sales in a market which is less buoyant. And the good news, should mention that we have completed our restructuring plan in H2 on July 1. I'm very confident that next February, we will be able to show you a '21-'23 performance plan that is reaching the target. Let's have a quick look now on the net income. Depreciation is up, mainly coming from nuclear and the residual dismantling assets that I mentioned before. Net financial expenses are up year-on-year, as expected, and this is due to higher cost of net debt. Income tax is sharply up and a combination of higher pretax earnings and the normalization of the tax rate to 25.1%, in line with the decrease of our Nuclear EBIT in Belgium. Minorities are up 47%, in line with the growth of results. And thanking all this, the net recurring income increased by almost 25% to EUR 4 billion. Reported net income is actually a loss of EUR 0.8 billion. The major factor here being the EUR 4.4 billion negative exceptional result coming from the Belgian nuclear agreement that we flagged back in June. Let's move to cash. Great to see that the CFFO is up EUR 2.7 billion to EUR 9.5 billion. And also good to see for the first half of 2023 the working cap requirement variation is a positive EUR 1.4 billion, which is an improvement of 0.8% compared to last year, so a variation of a variation. But there are a few key items you need to look at. As expected, there was a very positive EUR 4 billion impact from gas storage activities with a more favorable volume trend plus 7 terawatt hour and also a more favorable price environment in withdrawal period, January, April and injection period May, June. Also, the net receivables have deteriorated by EUR 1.1 billion as we are still observing the effects of contracts initiated in H2 with high prices, but you see the supply tariff shields payments from government is now flowing in big time. There was a much lower contribution of margin calls this first half compared to last year, which was very high. But you remember also last year that was reversed massively in H2. So well on track to see the drag of working cap and cash flow smoothing out. Therefore, our balance sheet remains quite strong after taking in account the transaction in Belgium. Financial debt was slightly down at EUR 23 billion. CapEx set at EUR 3.3 billion includes EUR 2.3 billion of gross investment, you should expect this to be much higher in H2. The nuclear phaseout outflow is up on the CPN provision calculation. And dividend outlay, of course, is up as well due to the sharp rise in '22 dividend per share. Economic net debt was up by 7% to EUR 41.4 billion, the reason being the EUR 4.1 billion recognition of our nuclear waste commitments under the new agreement. Given the 21% rise in our LTM EBITDA, we, in fact, managed a slight reduction in net economic net debt-to-EBITDA versus first half from EUR 2.8 billion to EUR 2.7 billion while taking in account the Belgian transaction. Of course, we do not expect to keep such a low ratio in the future, but we maintain our objective of a strong investment credit rating. With that, we, of course, confirm the guidance we recently upgraded, meaning that we expect our '23 net recurring income to be in the range of EUR 4.7 billion to EUR 5.3 billion with an EBIT excluding Nuc in the indicative range of EUR 8.5 billion to EUR 9.5 billion. As explained before, some timing effects, especially with GEMS, are embedded in this performance and we also expect price tailwinds from which we benefited in H1 to decrease over the second half of the year. Please keep in mind that we are more open than usual on our outright production. Volumes are 89% hedged for the balance of year versus 92% last year or even 96% in '21. Also, same for CCGT in Europe where we have, on average, close to 1/3 less locked position for the rest of the year than what we had in H2 -- in H1 2022. With that, I hand over back to Catherine for conclusion.

Thank you, Pierre-Francois. So just to wrap up, we are progressing rapidly at ENGIE, indeed. We are achieving strong financial results. We're making our energy output cleaner and more flexible. And we are derisking. Our focus is based on our conviction that we have the right strategic positioning for the energy transition. It fits with our 2050 vision for Europe, which concludes that gas will remain highly relevant as it decarbonizes. And that flexibility, battery storage, pump storage, CCGTs have a crucial role to play in the context of rising power demand and booming renewables. With that, turning to the questions. Thank you.

[Operator Instructions] First question comes from Ajay Patel of Goldman Sachs.

I've got one question, please. It's more about the guidance and today's performance. I start to look at the performance over the first half, and I think, well, okay, second half of the year to come. Even if I was to assume 0 for others, so very, very little GEMS performance and a repeat of last year's second half, I would get a situation where the numbers on EBIT would be higher than your guidance range. And I was thinking more the second half also had the inframarginal rents. It had a weak performance from supply. So it makes me wonder how conservative is the guidance on, say, the EBIT basis. Is there any -- can you give me maybe a laundry list of where you would have sizable headwinds in the second half of the year that we need to think about to help us sort of calibrate where maybe the full year numbers could be.

Yes. It's an obviously very, very good point. So your key question is when you look at the guidance and when you look at H1, we have in H2, which is going backward versus 2022 to a significant implicit amount. So let me take you through the key items. There is, as you know, always is an [indiscernible] of profit. So you cannot compare H1 to H2, and that's not what you're doing, obviously. Now if we take a step back, it's clear that all GBUs, which have only residual exposure to commodity prices are expected year-on-year in H2 to be up. And I mean Networks, I mean, Energy Solutions, which is doing well in H1 except for the U.S. And in Retail also, we expect them to go up. Now we have 3 GBUs that we expect to go backward. The first one is Renewables. I mentioned very clearly the price effect, and we expect in H2 the price effect net of tax and net of the CNA of tax to be storing and to be actually going negative in France. We expect also some negative prices because we had some merchant position last year that we benefited from in Europe. So there is definitely a drag on prices that we expect to see in H2, which is somewhat significant. We also expect to have no DBSO contribution in H2. We had about EUR 50 million last year that's not going to come through, exactly for the same reason in H1. And then we had also some positive one-offs that we don't expect to repeat in H2 this year. And that explains why our GBU despite good contribution of commissioning, despite positive contribution of performance, we expect still Renewables to be down compared to in H2 last year, which was pretty good. So that's the first one. Second one is Flex Gen. And indeed, of course, in Flex Gen, we have open position. I've been very open. So a key assumption underlying our expectation in H2 is, of course, the clean spark spread that we will achieve in Europe and the use of ancillaries. Again, only 60% at the end of June or the balance of the year is locked, where last year we were more -- and the years before, more 75%, 80%. So it's definitely lower, the reason being that the market is still illiquid, so we are struggling to find the right hedging and also to fully value, so time value the optionalities, which are in our CCGTs. So that's the key point. And indeed, we are planning that we would go down compared to last year. Last year, which I remind you was exceptional in '22 with disrupted markets, with very high spreads, very strong ancillaries, and of course, not repeatable. You may remember when we discussed the guidance in February that some of you were a bit nervous about our ambition in Flex Gen. We are extremely pleased by the H1, which is very good, supported by the recovery of Chile, supported by also the good market conditions, we finally were able to secure, but this is not repeatable. And we do expect Flex Gen to come down in H2, that's not a big surprise. And then you have GEMS, indeed, which we plan to go down, maybe not to 0, but you should expect a significant decrease. And I'm not going to elaborate much further, but we have definitely the spillover effect of the 2022 contracts, which have started fading away. We can see also the first kind of competition being more intense in June, and we are expecting it. Actually, we're expecting a bit earlier, but it's coming. And also, we have now limited anticipation of further market reserves release that is going to explain this GEMS, indeed, going backward. So that's the key point for H2, and I hope it gives you some sense why we are a bit cautious about H2. And you can see for the 3 that I mentioned, it's very, very much price and market-driven.

And I just want to follow up just to make sure, right? Offsets to those points though are that there isn't -- there should not be inframarginal costs in the second half of the year and also that supply was weak in the second half of the year, which you're not expecting to be as weak. Is that fair? Or should we be expecting those headwinds?

No, no. Both assumptions are fair.

The next question is from Michael Harleaux of Societe Generale.

I've just one. We've seen some news flow in France about the plans of the government to tax toll road operators. And the next day that this plan was announced, we had declarations by Bruno Le Mer saying that in order to be compatible with EU law, we will need to tax hydroelectric concessions as well. And then we've seen very little news from that point. So if you could tell us what you think about the budget law of 2024 and what it might look like for ENGIE, that would be very helpful.

Just not much new news here. There is very good -- well working hydro tax on existing. So we don't expect major changes on those existing schemes, which have worked very effectively. So no comment on this, Michael. We are ready for the next question, operator.

The next question is from James Brand of Deutsche Bank.

Well done for the good results. Just had 2 questions. Firstly, at the Q1 results for GEMS, you said you expected the business to normalize over time to the EUR 1 billion-or-so kind of medium-term guidance that you have. But the impression I believe you gave, obviously, the one that I took, was that, that could take quite a while to happen. It wasn't necessarily something that's going to be happening in a few quarters, maybe it was more like a few years. I just wanted to ask, is that still your kind of broad view? Obviously, markets have normalized a little bit more since the Q1's. So wondering whether that's changed at all. And then secondly, on batteries. So you kind of highlighted what you're doing at Hazelwood. Do you think are we at the point for Europe where battery is becoming economic without capacity payments? Or do you think that capacity markets and capacity payments are needed still to justify the economics of investing in stand-alone batteries?

Yes. Thank you very much. Let me pick up the first one, and I'm sure Catherine will elaborate on the batteries business model. So on the first one, yes, of course, we do expect normalization of the earnings of GEMS. But as you can see, it's taking a bit more time than expected. And definitely, we have some speed that has been onboarded. Where is it coming from? We have these 2022 deals, which are not exhausted. I mentioned that in the B2B business, 2023 is still coming nicely in terms of margin. So it means that we are still signing deals, which are, let's say, above average margin and that will help us, of course, in the future. Second key item is, of course, to keep an eye on the prices and keep an eye on volatility. And here, I mean, especially [indiscernible] volatility, which is the key one. And clearly, even if the markets have normalized, we are still at a level, which is higher than what it was a couple of years ago. So is it going to go further? Is it going to smooth out? Difficult to say, but there is some way to think that it can stay at a good level for still a bit. And then clearly, we expect to be higher than the EUR 1 billion hard core for the quarters to come, that's for sure, including 2024. That was already the case in February. It's even more the case today.

Maybe on the battery, a few comments because it's fair to say that in Europe there is quite a bit of expectation that the CRM, so the capacity remuneration mechanism, is going to be needed for a widespread development of batteries. I think this remains true, although what we are seeing is punctually some very interesting cases, particularly colocated with renewables. When you start to see in Europe some very negative price from solar and obviously battery has an immediate application and value can be extracted even though you don't have a CRM. But I would say wide deployment of batteries is to support that you will need a bit of a CRM scheme to be integrated into the new market design, which is what we have been calling for quite a bit.

The next question is from Vincent Ayral of JPMorgan.

Vincent here. I'll come back on the first question. Clearly, I mean, on your net income level guidance, you're already at [ 81% ] at H1. So I can understand that year-on-year H2 will be lower in the Flex Gen. It will be lower in Renewables and potentially lower in GEMS, absolutely. But I don't see any of these being loss-making or anything like that. So how do you plan to print only 20% of additional net income to the end of the year to reach your guidance midpoint at net income level. Is there anything we don't know, below the EBIT line? Or actually, do you have quite some margin to delivery, if I may phrase it this way? And the second question is regarding the Belgium nuclear deal. So congratulations again. I mean that was a very important step for ENGIE. I saw on the Belgium press last Friday, they were talking about the comment, which would ultimately sign the agreement finally. I haven't seen any update on that. So has it been done? So is this really fully settled? Or are there still any potential material moving parts we should be aware of on that front. So it's all a very good deal, but it's important to be sure that it's all been cast in stone.

Yes, Vincent. So in terms of where we are on the Belgium deal, obviously, we've been clear all along that we were signing a number of agreements in anticipation to signing transaction documents, and we said Q4 2023. So we are completely on track for that. Followed -- we signed an intermediate agreement in June, which allowed us, by the way, to recognize the financial impact of the deal on to our results, including balance sheet, as you know. So it's -- in our mind, it is indeed an agreement that is very, very solid. However, we've always said that transaction documents will be signed in Q4 and then the transaction itself will be closed sometime next year. Remember, there is also legislative work that needs to happen because the law needs to be changed, and that is obviously going to be taking some time. Since the agreement at the end of June, we signed a framework agreement, which precises a number of items in line with what was signed in June just to show you that, indeed, we are progressing. We've ordered the fuel, so the project is well underway. But the transaction will be signed only in Q4. Pierre-Francois, you want to...