Engie embarks on its great overhaul

Like other European energy giants, France’s Engie is restructuring its business. The project will take time, but the company starts from a better place than most, says Nigel Hawkins.

Under chief executive Isabelle Kocher, Engie is undergoing a major corporate overhaul as its range of business activities is pruned – to achieve both much-needed focus and to lower net debt.  

Nonetheless, the company still operates in around 70 countries, employing 150,000 people worldwide. Its long-term strategy revolves around its three growth engines: low-carbon generation (renewable and thermal-contracted); infrastructure; and customer solutions.  

To a considerable extent, this reflects modern thinking among the leading energy players. Eon and RWE have both adopted a similar strategy shift. Furthermore, Engie is responding to the prevailing political and financial climates. The former supports the low-carbon economy while the latter now accords a higher rating to price-regulated infrastructure-related revenue streams.  

Clearly, the new strategy marks a pronounced shift away from Engie’s historic roots. Indeed, its predecessor company, GDF Suez, can trace its origins back to the 1850s  and the financing of the Suez Canal project.   

While water has historically been at the core of its business activities, arguably the most notable transaction was the merging of Suez with Gaz de France, the equivalent of British Gas, in 2008. Seven years later, the company was rebranded as Engie.  

Today, it has a far lower water industry exposure, although it remains a significant minority shareholder in the de-merged Suez Environnement business.  

Despite the impetus of recent years, the fact remains that its share price performance has been lacklustre. In May 2008, the share price peaked at almost €44 (£39). Currently, it is below €15, thereby representing a fall of more than 60 per cent. And, over the past five years, the share price is also down although not massively.  

However, while lacklustre may best describe Engie’s recent share price performance, it has outperformed many of its comparators. EDF’s share price has tanked because of various woes, including nuclear power challenges, depressed retail prices, soaring net debt and the political requirement to absorb part of Areva. And the two German behemoths, Eon and RWE, have seen their shares plunge, due partly to the decision to close all Germany’s nuclear power plants by 2022.  

In terms of its own finances, Engie’s 2017 half-year results showed stability rather than growth. Between January and June 2017, overall revenues were up marginally on the comparative period for 2016 at €33.1 billion.  

Importantly, earnings before interest, tax, depreciation and amortisation (Ebitda) were flat at €5 billion. Net recurring income growth was little better. Perhaps the clearest analysis of Engie’s activities lies in its Ebitda breakdown, although a single six-month figure can give a misleading impression.  

Of the €5 billion 2017 half-year Ebitda, almost €1.9 billion arose from Infrastructures Europe – the figure edged up from its 2016 comparator. Given that this division accounts for over one-third of total Ebitda, it is clearly the key profit-driver for Engie. After all, it finances much of the dividend cost and underpins the share price.  

Aside from infrastructure, Engie’s various operations in France, both gas and electricity-related, also make a substantial contribution to overall Ebitda. The half-year 2017 outturn was €828 million, around 12 per cent below the equivalent for the same period in 2016: warm weather recently curbed gas sales.  

Numerically, the most impressive rise was in Engie’s Latin American business, although the commissioning of new assets distorts comparatives. Engie’s Latin American Ebitda was €919 for the half-year, up by almost 27 per cent. Few French companies can report as good Ebitda returns in a region which has caused grief for many international companies of late.  

Less successful have been its Belgian operations where H1 Ebitda fell from €488 million to €242 million, probably the key factor in ensuring that Engie’s overall Ebitda for the period was flat. The culprit was the Tihange 1 nuclear power plant in Belgium, which was shut down for nine months from September 2016.  

The UK is also a significant part of Engie’s international operations, although its Ebitda contribution – at €211 for the 2016 full year – remains modest. After all, it employs 20,000 people here, has annual revenues exceeding £3 billion and has a 4 per cent share of the UK generation market. It also owns the First Hydro generating business.  

Looking forward, the focus is likely to be on developing its customer solutions business. Its operations extend to 32,000 business customer sites and it serves no less than 170 councils. Examples of its activities include the c£420 million 30-year private finance initiative facilities management contract with Mid-Yorkshire NHS Trust providing 15 different services, and the c£200 million ten-year contract with Wakefield Council.  

Furthermore, Engie’s recent acquisition of the regeneration business of Keepmoat will give it further penetration into the valuable UK Local Authority market.  

More generally, further disposals – including much of its exploration and production operations – are underway as net debt, €22.7 billion in June 2017, continues to fall. For Kocher, though, turning around Engie must seem like reversing a massive tanker – it will undoubtedly take time.