Engie marks a new beginning

Following the announcement that European utility giant GdF Suez has rebranded as Engie, Nigel Hawkins examines the French utility’s full-year financial results and its prospects for the future.

While Engie (GdF Suez as-was) may not be a member of the big six UK integrated energy suppliers, it remains one of the EU’s utility big hitters, with a market capitalisation of £32 billion, just behind both EDF and National Grid.

It also employs more than 150,000 people in almost 70 countries, making it far more international than, say, RWE.

The Suez part of the business can trace its lineage back to the memorable opening of the eponymous canal in 1869. However, its first significant commercial appearance in the UK occurred in the late 1980s during the lead-up to water privatisation, when it bought shares in several small water-only companies.

Its business was transformed when Suez merged with Gaz de France, broadly France’s equivalent of the former British Gas, in 2008. The subsequent acquisition of International Power in 2012 gave it an important foothold in the expanding global power generation market.

Indeed, it now has a total installed capacity of over 115GW, a portfolio that compares favourably with the 140GW of fellow French behemoth EDF.

Importantly, too, Engie still maintains a sizeable minority stake in the demerged Suez Environnement.

Freshly rebranded, Engie recently announced its full-year figures for 2014. The overall story was one of relative solidity despite plunging oil and gas prices as well as adverse weather conditions. Earnings before interest, tax, depreciation and amortisation (Ebitda) were €12.1 billion, compared with €13.0 billion in 2013.

The biggest drag on Ebitda was the French gas business, both in terms of very warm winter weather (in 2014, France had its warmest year since 1900) and of the impact of the tariff recoup. These two factors cost around €450 million of normalised Ebitda.

Added to this, Engie experienced various outages at its Belgian nuclear power stations, particularly at Doel 3 and Tihange 2, which cost it around €250 million of Ebitda. And it suffered from the worst hydrological conditions in Brazil for 50 years. Hence, on a normalised basis, Ebitda would have been quite close to the 2013 outturn had these issues not arisen.

Engie’s Ebitda is split between five divisions, with its Energy International operations and its Infrastructure business being the most important. In total, they account for over half of overall Ebitda.

In terms of the consolidated figures, the UK’s contribution is relatively modest, despite several substantial UK assets. After all, Engie owns majority stakes in several power plants, including Rugeley, Saltend and Deeside. And, as part of its joint venture with Japan’s Mitsui, it owns the 1,728MW Dinorwig and 1,360MW Ffestiniog pumped storage plants.

Engie continues to be involved in the North Sea oil and gas business, and therefore remains exposed to the plunging Brent Crude oil price.

For many years, Suez Environnement has participated in the UK waste business, notably via its Sita operations. However, this stake is no longer consolidated and is treated on an equity accounting basis.

More generally, Engie is represented in virtually all the world’s leading markets, although it is especially strong in Europe through its French gas operations and its Belgian power stations that regularly attract controversy. In particular, its gas infrastructure business in France is the source of dependable returns, with its regulated revenues and its lack of exposure to fluctuating commodity prices.

In recent years, Engie’s main thrust has been in its international energy operations, currently its biggest contributor to Ebitda. Many of its plants were inherited from International Power.

Outside Europe, Engie seems set to invest further in the Middle East. It already owns several plants there. And, despite various political and security issues, North Africa still offers opportunities – Engie is currently building a 1,386MW coal-fired plant at Safi in Morocco.

Like Iberdrola, Engie is keen to exploit opportunities in Latin America, with Brazil its favoured market, despite the hydrological setbacks of 2014.

In the medium term, further investment in Asia looks almost certain. After all, there is sharply rising demand for power capacity. However, Engie will be selective in deciding exactly where to invest.

Looking forward, and despite plunging oil and gas prices, Engie is forecasting a similar financial outturn for 2015. Though to be sure, some of its more aggressive growth expectations have been reined back.

Importantly, and unlike some other members of its peer group, Engie has managed to cut its net debt sharply. At December 2014 year-end, debt was €27.5 billion. Two years previously, the figure was €36.6 billion. This falling net debt profile will enable Engie to raise its ongoing capital expenditure.

Furthermore, there are many power station projects being pursued around the world, a few of which may attract significant investment from Engie.

Certainly, it will be interesting to see how Engie continues to respond to lower oil and gas prices. After all, energy experts differ as to whether the oil price will recover sharply, perhaps on the back of conflict in the Middle East, or whether much lower oil prices are likely to endure for some years.

In addressing future strategy, which includes delivering material savings from implementing Perform 2015, chairman and chief executive Gerard Mestrallet set out Engie’s quest “to be the leader in the energy transition in Europe and to be the benchmark energy player in fast-growing markets”.

Events may yet blow Engie off course, but currently it is weathering the many financial challenges rather better than some other European power companies.

Nigel Hawkins, director, Nigel Hawkins Associates