Engie SA

PAR:ENGI

Earnings Call Transcript 2022-Q3

[Aarti Singhal, executive]

Good morning, everyone. It's my pleasure to welcome you to ENGIE's 9 months conference call. Shortly. Catherine and Pierre-Francois will present the performance, following which, we will open the lines to Q&A. [Operator Instructions]

And with that, over to Catherine.

[Catherine MacGregor, executive]

Thank you, Aarti, and good morning, everyone. ENGIE has delivered in what have been clearly unprecedented market conditions. Our teams have continued putting relentless efforts to help tackle the energy crisis. ENGIE is playing a leading role in supporting security of supply in Europe. We are also contributing to policy measures to help address these high energy prices.

Importantly, we have maintained momentum on the execution of our strategic plan. The disposal program that we announced back in May last year is now nearly complete. And we are driving forward at pace on growth, particularly in renewables. I firmly believe that this crisis offers society an opportunity for a faster energy transition, on which our teams are working day in, day out, executing on our strategy, a strategy that is indeed more relevant than ever.

Now on to our financial and strategic progress in the past 9 months. EBIT grew 79% organically to EUR 7.3 billion driven by a higher contribution from most of our activities with a particularly strong increase from GEMS. Higher cash flow from operations supported our growth CapEx. We invested EUR 3.7 billion in growth, of which 62% in renewables.

We continue to roll out our performance plan, delivering efficiency improvements across the board. And we are on track with our plan and our 3-year targets. We have maintained a strong balance sheet and high liquidity, which remains very important in the current environment.

So on the back of the strong performance that we've announced today, we are upgrading our '22 guidance with net recurring income group share expected now to be in the range of EUR 4.9 billion to EUR 5.5 billion and the Board has reaffirmed our dividend policy.

I want to acknowledge the engagement of our teams as the performance that we are announcing today clearly would not have been possible without their contribution. We have, therefore, decided to offer an exceptional bonus of EUR 1,500 for each of our employees worldwide. We want to recognize their tremendous effort in managing the crisis, the high inflation environment. And of course, this measure is supported by a strong financial performance.

We have managed through the significant disruptions to Russian gas flows this year with no implication on physical supply. Our infrastructure activities in gas transport, in gas distribution, LNG terminals and storage have all been operating at high utilization rates. Gas volumes transported have increased and GRTgaz is now transporting gas from France to Germany.

French LNG terminals have operated at record levels and storage levels and storage in France are nearly at 100%. We have continued to diversify sources of gas supply with additional volumes from Norway, from the U.S., from Algeria. ENGIE is well prepared for this winter.

We continue to be confident that additional volumes contracted together with an expected decrease in demand will enable ENGIE to reach its required storage levels for next winter also. And we are actively working on the future of renewable gases and we are unlocking the potential of biomethane. In France, 459 biomethane units are now connected to our grids and this represents a total production capacity of 7.7 terawatt hours per year.

We've also continued to drive forward on hydrogen. 5 of our projects have been selected by an EC public funding program to boost the development of hydrogen, which highlights their viability and relevance. And as part of our R&D platform in France, we recently also inaugurated our H2 factory in order to help us test the entire hydrogen value chain, including production, storage and usage.

Before covering our operational and strategic progress, an update first on some of the EU measures that have been at the forefront of recent policy debates to address high energy prices. I'll start with the inframarginal rent cap, where the EU adopted the regulation in October and now different member states working on its implementation.

Based on this current draft bill, we expect our nuclear assets in Belgium are drawing rights on 2 EDF nuclear plants as well as our facilities in France to be the main assets covered by these measures. We are awaiting further detail on these bills, which are expected to be adopted by the end of the year. But we have simulated and included our best estimate of the potential impact of these measures in the guidance provided to you today.

And as a reminder, we have already contributed nearly EUR 900 million in the 9 months through existing government profit sharing mechanisms in Belgium and in France. And in addition, with the benefit of our strong financial position, we continue to provide working capital support to implement the tariff shield as well as the higher gas storage requirements in France. We are also helping vulnerable customers, as we already announced in the summer, supporting SMEs alongside initiatives to help customers reduce energy consumption on days of high demand.

We are also engaged in discussions on the many policy measures which are being considered in Europe, not only to address the short term but also on the longer-term market design. Our conviction is unchanged. Delivering a smooth, affordable energy transition will require a balanced energy mix with a critical role for power, for gas and of course, increasingly for renewable gases.

On to our strategic and operational progress, I'm very pleased to say that alongside all the actions that we've taken to tackle the short term, our teams have made further progress on the strategic plan. The announced disposal program is nearly complete with the sale of EQUANS. Our geographic footprint will be down to 31 countries upon completion of the signed or closed agreements. This is to be compared to 70 back in 2018.

ENGIE is capturing many opportunities to accelerate the energy transition primarily through investment in renewables, where platform is growing with nearly 37 gigawatts of installed capacity and a target of 50 gigawatts by the end of 2025.

We have exited 100% of coal in Brazil with the sale of Pampa Sul, which is now signed and the closure of the last Tocopilla unit in Chile. So now coal represents 2.6% of our centralized generation capacity. And it is by existing coal and by investing in renewables that we are indeed progressing towards our net zero ambition by 2045 and this will cover 3 scopes.

So with the progress to date, we consider that our strategic and geographical refocus is now more or less complete. Let me now move to the operational progress. ENGIE is operating in energy markets through GEMS, which offers a clear competitive advantage for us. In GEMS, we have over 2 decades of experience and we are looking our activities through a global portfolio approach, enabling us to achieve a number of -- such as commercializing renewable output, linking our flexible portfolio to a very large customer franchise, capturing value through optionality and, of course, responding to increasing demand from our customers for risk management services in this context of continuing volatility.

GEMS has benefited from record high level of activity in a favorable environment and Pierre-Francois will cover this in more detail.

In renewables, we've continued to grow our install capacity, adding 2.5 gigawatts in the 9 months through a number of projects such as in Scotland with Ocean Winds, Eolia in Spain as well as projects in the U.S., in Chile and in France, where for example, we have commissioned 27 solar and wind projects this year, further strengthening our leadership in this market.

And we also grew our renewable pipeline. For example, we just announced an MOU with a consortium in Egypt, capitalizing on our long-term local partnership to build, own and operate a 3 gigawatt wind farm.

Our thermal business contributed to the security of supply and system stability through flexibility and ancillary services. Flexibility in generation will remain absolutely key to balancing intermittency from renewables. To this end, recently, we acquired a 6-gigawatt pipeline of projects, including solar, paired and stand-alone battery projects in the U.S., which will be developed jointly by our thermal and renewables GPUs, clearly leveraging our integrated business model.

In networks, beyond the high utilization rates in France, internationally, in Brazil we reached commissioning for 94% of the Gralha Azul power line. That also posted a strong performance and is playing an important role in the opening of the Brazilian gas market.

In energy solutions, we are continuing efforts to increase efficiency and build a stronger platform for long-term growth. We have such a large pool of opportunities. The revenue backlog increased in the 9 months and the GBU saw multiple wins, confirming the strong market drivers for this business. Examples of that include a concession to build and operate 5,600 EV charging units in Belgium, concessions in -- cooling, such as the network of -- in France and multiple distributed solar opportunities such as with Saint-Gobain in Romania and Heineken in Spain.

Finally, in supply, we're working on affordability initiatives and our strong supplier brand is contributing to a lower customer churn across our European presence. So in general, strong operational progress underpinned by the strength of our integrated business model.

Let me now hand over the floor to Pierre-Francois.

[Pierre-Francois Riolacci, executive]

Thank you very much, Catherine, and good morning to all of you. We are, as you can imagine, pleased with our 9 months performance with EBITDA and EBIT continued to grow significantly. Cash generation improved with EUR 8.4 billion of CFFO in the first 9 months at EUR 3.1 billion versus last year.

Our economic net debt is slightly higher while our credit ratios are improving further. We are well on track on a 3-year strategic plan, reaching around EUR 10.5 billion of net financial debt impact with disposals already closed as we speak. That is to say that at least EUR 11 billion financial target for our disposal plan is almost achieved. And last but not least, we are upgrading indeed our 2022 guidance while we are reaffirming our dividend policy.

Let's get maybe closer to the details and look at EBIT variation. EBIT is up EUR 3.3 billion, EUR 3.2 billion organically. We have indeed a positive FX impact of EUR 236 million with the appreciation of Brazilian real and U.S. dollar against euro and also an aggregate negative scope impact of EUR 116 million. This scope effect is linked to 2021 events and also to some asset disposals mainly to achieve our coal exit target and geographical refocus.

So on an organic basis, the 79% EBIT growth is actually across almost all GBUs, as Catherine was pointing to. Renewables are plus EUR 117 million, that is plus 13%. And let me highlight some key points. On the positive, we are leveraging our industrial performance.

We are continuing to commission new capacity and this is translating into higher contribution. We are also capturing some higher prices in Europe mainly with French hydro. And we take advantage of the reversal of the 2021 one-off that takes that extreme weather event impact. But this is offset partly by very severe hydro conditions in France and in Portugal that led to the double effect of: one, lower hydro volumes; but also two, some buybacks.

If you are looking in Q3 in isolation, you should also remember that in Q3 2021 -- rolling in Brazil impacted by EUR 150 million the comparable basis. But overall, we are very pleased with the underlying trend of renewable business.

Networks is slightly down, minus EUR 31 million, that is minus 2%. And it comes from France, where we had some negative effects due to warmer temperatures but also to lower regulated revenues from our assets, which are reflecting the latest regulatory review. It is, of course, important to mention that GRTgaz benefited from increased subscription of capacities related to transported volumes from France to Germany. These revenues are, of course, expected to reverse in the future.

Outside France, networks benefited from higher contributions in Latin America mainly driven by strong performance in gas transmission in Mexico and in Brazil as well as inflation indexation, partly offset in Europe by warmer temperatures and also some higher energy costs.

Energy solutions is broadly flat, minus EUR 4 million, minus 2%. We had some positive effect from energy prices which have been going up in France mainly -- but that was offset by a net aggregate negative impact of one-offs. They were positive in '21, negative in '22, nothing really material but of course, has an impact. And also, we had some headwinds from warmer temperatures in France. Overall, very confident that we can deliver a strong improvement in Q4 for energy solutions.

Thermal is up EUR 259 million, that is plus 34%. Very positive results with a strong contribution of our European activities, which have been able to capture higher spreads and also a very strong level of ancillary services. But we had also our fair share of headwinds. We had some outages in France. And the cost was even more important given the current level of commodity prices.

We had this extraordinary tax in Italy, which, by the way, is also impacting our GEMS activity. And we also already say that we firmly believe this tax is not properly designed. And also, as in H1, we are still facing some difficulties in a couple of countries, in Chile and Australia, with structural supply-demand imbalance, which penalized activities based on merit order and also a disturbed market context in which gas and power prices are increasing exponentially.

On supply, up EUR 459 million, so a very strong improvement compared to last year. As in H1, we had a positive timing effect linked to the existing RN mechanism. And this existing RN mechanism given the current prices becomes fairly visible. We expect actually to reverse this timing effect in Q4 and that should be somewhat significant. We had also some warmer temperature in Europe that led to a long gas position that could be monetized in exceptional market conditions during Q1. The performance also reflects the start of implementation of support measures to households mainly in France that we introduced during the summer.

Nuclear is up EUR 583 million. That's an exceptional performance, which is driven by much higher achieved prices, which are only partly offset by increasing taxes specific to units in Belgium. And you should note that in Q3, the specific G2 taxes increased significantly, the reason being that part of the calculation mechanism is based on forward prices which are up strongly compared to last year.

Last but not least, lower volumes were produced both in Belgium and France on the back of planned but also unplanned and availability particularly in Q3. Others is also a very strong improvement, plus EUR 1.8 billion and it is mainly driven by the exceptional outperformance on all GEMS activities that I'm just about to detail.

Indeed, a very strong performance from GEMS and let me take you through what's behind that. As an integrated player, ENGIE is operating in energy markets through GEMS, sourcing energy for customers but also selling its own production as well as hedging upstream and downstream positions. That's our core business.

As we have been highlighting since the first quarter, unprecedented market conditions are offering opportunities to this business, which benefits from the strong expertise of its more than 3,000 employees. Let's discuss first the environment in which we operate.

Throughout 9 months 2022 and especially in Q3, we have seen consecutive new highs for prices with huge volatility and geographical spread also winning. This is the reason why the 9 months GEMS performance was outstanding across all activities mainly: one, gas contract optimization, especially in Continental Northwest European market, which was boosted by prices and spreads; and two, customer risk management services.

So what is behind this performance? There are 2 key drivers that you need to take into account. The first one is volatility. And let me give you 2 simple examples. First one, you remember that GEMS is selling the volatility embedded in our industrial and commercial assets and especially the various flexibilities which are embedded in some of our long-term contracts: flexibility in volume, in location, delivery point and time.

And if you take a look to the right-hand side table, you can easily see that volatility increased hugely compared to last year. It does bring, of course, a very significant upside to our business while actually, there is limited downside being only a loss of opportunity.

The second example of leveraging this volatility is that part of our business is also to manage and optimize the cross-border transportation capacity. At the time, the geographical spreads have been -- significantly, also highly volatile.

Let me now move to the second driver of performance of GEMS, which is the commercial activity through risk management and trading that are the operations that we are doing on behalf of our customers. We had much higher volumes traded, a 30% increase of volumes traded with clients for risk management -- both because customers ask for more risk management, more services to hedge their risks but also because there is a flight to quality to operators like ENGIE, which can offer both strong credit and also full access to the market.

And these higher volumes were topped by higher margins as these margins are linked to the level of price. So the absolute level of price is also a driver. And also because we have been -- we're facing this increase in risk, we have been managing increasing the credit risk, liquidity risk. And of course, this is charged to the customers.

So nice tailwinds for sure. But these tailwinds are coming on top of a growing platform, which is leveraging very strong skills, systems and processes.

On the back of these strong P&L items, cash generation has been actually also improving. CFFO increased EUR 3.1 billion to EUR 8.4 billion, compared to the 9 months in 2021. The operating cash flow is up EUR 3.1 billion, which is broadly in line with EBITDA improvement. And as in H1, our working variation is positive, plus EUR 0.3 billion. But if this amount is small, it is made of some very big tickets that we need to look at.

First, the higher stored gas volumes primarily driven by security of supply considerations and supported by warmer temperature are, of course, pushing on gas inventories. Second that's very important, the higher commodity prices are impacting both the gas inventories but also the receivables net of payables. And last, some regulatory measures to support the energy affordability, for example, social ties in Belgium, tariff shields both in Romania and France are a drag to the working cap.

All these negative impacts, which are driven by the price environment, the crisis environment, were more than offset by margin costs with a positive contribution of EUR 3.2 billion. Part of this is due to active management using standby letter of credit being smarter on the structure of transaction and the liquidity swap but also better functioning of clearing houses. It is expected, however, that the margin call contribution will decrease in Q4.

From cash, we can go to the balance sheet and the credit metrics. The net financial debt stood at EUR 27.6 billion, which is up EUR 2.2 billion compared to year-end. This reflects capital expenditures of EUR 5.2 billion, including EUR 3.7 billion of growth CapEx, dividends of EUR 2.6 billion, including EUR 0.4 billion of dividends to minority shareholders, the funding of our nuclear provision, which is increasing in line with both our public commitment and the new Belgian law. And finally, our new rights of use for EUR 1.1 billion mainly following the renewal of the CNR hydro concession. We discussed that already last time.

These elements were only partly offset by a strong CFFO of EUR 8.4 billion and some disposal for EUR 1.7 billion mainly related to GTT actual disposals and the -- operation. It does not include, of course, the net proceed of the EQUANS disposal, which was closed on October 4.

The economic net debt was slightly up to EUR 39 billion and the increase of the net financial debt was indeed offset to a certain extent by lower cost employment provisions. And that has to do with the evolution of the discount rate and also the funding of our nuclear provisions.

Our leverage ratios improved mainly driven by the strong LTM EBITDA increase and notably, the economic net debt-to-EBITDA ratio stood at 2.8, which is down 0.8 compared to 31st of December 2021.

Lastly, no recent change on the rating, which is in line with the strong investment grade we want to stick to. With that, in line with this very strong 9 months, including updated assumptions for the balance of the year, we are upgrading our full year 2022 guidance. We now expect '22 net recurring income group share to be in the range of EUR 4.9 billion to EUR 5.5 billion based on indicative EBITDA range of EUR 13.2 billion to EUR 14.2 billion and EBIT range from EUR 8.5 billion to EUR 9.5 billion.

Some key comments on these figures. They do include risk of potential impact of proposed EU emergency measures mainly in France and Belgium, based on current -- and our current interpretation as Catherine was pointing to. Let's be clear, it is estimated to the best of our knowledge but there are still some moving parts on this provisional draft, so to be factored in.

These figures are also including the reversal of favorable timing effect that we have seen in the first 9 months that we expect to penalize Q4. The other part of the guidance related to rating and dividend remain unchanged.

With that, I will hand over back to Catherine.

[Catherine MacGregor, executive]

Thank you very much, Pierre-Francois. So let me conclude with the main messages. ENGIE has delivered strong financial performance in exceptional market conditions. We have continued to play a leading role in supporting the security of supply in Europe. And we have maintained momentum on the execution of our strategic plan with major progress across all dimensions. The disposal program mostly behind us now. And we are driving forward at pace on growth, particularly in renewables.

Before opening the lines to the Q&A, I would like to let you know that Aarti Singhal will be leaving the group to go back to London. And so I would like to take the opportunity to wholeheartedly thank Aarti for her numerous contributions to the group with a personal note to her as she's been a fantastic support to me personally as I transitioned to ENGIE 2 years ago.

Aarti will be replaced by -- who will be joining the group shortly. And now we can open the lines to the Q&A.

[Operator]

The first question is from James Brand of Deutsche Bank.

[James Brand, analyst]

I have 2 questions. Firstly, on GEMS, I know this is difficult question and it's a bit of unclear these days what normal looks like. But I was wondering if we did get into kind of more normal market conditions, if you can give us any kind of feel for what kind of level of profitability like we should be expecting from GEMS because it's moved around a lot over the years, obviously amazingly good this year. But where could it end up in the medium term?

And then for the regulation on the CCGTs in France. I know you don't have that much CCGT capacity in France. But I was just wondering whether you could explain a bit more about how that -- the price cap on CCGT is going to work.

[Catherine MacGregor, executive]

Okay. So maybe just to comment on James. One thing that is always good to remind everyone is that if you remember, when we introduced our road map 2 years ago, we clearly put GEMS in the center of our strategy and has a very important level of competitive advantage. So for us, today, the numbers are obviously very good and underpinned with a high volatility, obviously, the high prices in absolute terms as well. They were actually -- is exceptional.

But GEMS is critical piece of our strategy. It is what makes our development in renewables so exciting. It is also what makes the renewable presence in a way very, very differentiated. So it will continue to remain very important to our strategy, and in fact, will grow in importance in terms of strategic importance to ENGIE. I think that's very important to underpin that.

I don't know, Pierre-Francois, if you want to say a few comments on the level of -- and what kind of level we can expect in the coming months in terms of financials -- in terms of the price cap on the CCGT team, maybe just a comment that right now, we are really still in the -- trying to see through the details of the draft deals. And so very difficult to the price cap impact on facilities, although our current understanding is that they are being a part of the scope of the law as per our current understanding.

[Pierre-Francois Riolacci, executive]

Yes. I'm not sure I will share with you what is our expectation of earnings for GEMS in the future. But maybe to build on Catherine's point, we are growing the platform. We are growing geographically the platform because it is actually going to further countries within ENGIE that we are not fully addressed yet. So that's going to help.

We are also growing the platform in added value because it's really now moving fast in terms of B2B management and sales. So these dimensions are definitely supportive of earnings.

Then the second key assumption is where do we see the energy market going forward. So there is a sensitivity to price for sure in the absolute level because part of the remuneration is based on price. But I think that the assumption that you will make about the volatility in the market and also the appetite of customers to go for more risk management are also critical. And we can be reasonably optimistic that in the next quarters, if not in the next few years, this volatility could stay at a higher level. And for sure, it is helping GEMS to boost their earnings power.

So very, very careful, of course, not to extrapolate that '22 can be a push in the future but that GEMS is building a platform which is bigger and stronger than what it was before. Yes, definitely because there are some structural improvement and a market overall condition, which are definitely favorable.

[Operator]

The next question is from Arthur Sitbon of Morgan Stanley.

[Arthur Sitbon, analyst]

I have 2. The first one is on renewables. You're saying that you're on track to add 4 gigawatts of renewable capacity this year. Well, this actually looks quite good and in line with your targets, which is not necessarily the case for all companies in the sector. Some of them are mentioning they are struggling with permitting, with supply chain bottlenecks.

So I was wondering what allows you to differentiate yourselves here. Is it that you're present in different geographies. So that's the first question.

The second one is on the assumption that you're making in your guidance on the windfall profit tax, especially in France. You -- I don't think you're mentioning French hydro. So do you think the revenue cap will not impact French hydro and why not? And also on the other plants on the nuclear ones, in particular, do you expect the cap to go to the lower end of the range around EUR 100 per megawatt hour for nuclear?

[Catherine MacGregor, executive]

So let me start just a few comments on our global business unit renewables, which indeed is delivering very, very well. So very, very pleased with the strength of the execution of this platform that we are putting a lot efforts in strengthening. Very happy with the development progress from the global business unit renewables.

And by the way, this includes also our participation and our JV Ocean Winds, which is also doing very well in terms of development.

So extremely pleased. I think what is important to remember is when we set the goal of the 3 and the 4 and the 6 of additional capacity on average, so we are now on the 4 gigawatt space, we've always said that we wanted to be ambitious but also realistic and credible. And so those goals were set underpinned by a very strong project pipeline, project that we have a good size on. We've described our pipeline back in H1.

It was about 71 gigawatts. And I think you're right to say that when you look at the makeup of this pipeline, you will notice that it is very well balanced, both in terms of geography. For example, 30% of our pipeline currently is in North America. So we have about 38% in Europe and then 30% in North America. You have some in Latin America. It's a very good balance from a geographical standpoint and of course, from a technology standpoint.

So from that standpoint, we really like the way our pipeline is made up and gives us indeed an ability to mitigate the risk, which are the execution risk, the supply chain tension, some of the logistics a few years ago, et cetera. But the teams are working through all of these hurdles and are able indeed to deliver. So we said 4 gigawatts on average this year. The team is doing a great job. So both very good in development and in execution.

If you remember, when we set the renewable global business unit up, we also said that we want to move the focus from development. So development is very important but also across the whole chain with a stronger focus on execution that may be what ENGIE used to have. So we're also very much focusing on construction management, supplier management, the choice of the ship contractors, relationship with the technology provider, whether it's a wind turbine on the solar, where we are really looking at how we can engage with our supply chain a bit differently to make sure that we can secure some of our technology.

So a long list of things that the team is working really, really hard to make sure that we do deliver on what we promised. And this is again well underpinned by a very strong pipeline and balance from a geographical and technology standpoint.

You want to comment a little bit on the guidance assumption on inframarginal rent cap?

[Pierre-Francois Riolacci, executive]

Yes, a quick one. Again, you need to be very careful not to be too detailed and if we are reasonably confident that we can give some numbers for '22. So because '22 is completed to a large extent. And of course, if you look to '23, the uncertainty is higher, depending -- given the leverage of the full year versus the uncertainties of the current provision.

Now on French hydro, I remember that for our main assets, there is already a royalty which means that beyond EUR 80 a megawatt, we have 80% tax. So the sensitivity to any additional tax is actually quite limited because we are bumping into there already. So please keep that in mind.

And the second point on the infra cap in Belgium, I think pretty transparent that we are betting on EUR 130. Now the tax is not final. So yes, it can move further this part of uncertainty. And you know that in Belgium, there is a case where it would be retroactive for a few months. So that's part of the uncertainties we have to manage.

[Operator]

Next question is from Ajay Patel of Goldman Sachs.

[Ajay Patel, analyst]

Firstly, congratulations on the results from the presentation. I have 2 areas that I'd like to explore in a little bit more depth. Firstly, just on the guidance. You delivered 9-month results that are about 80% up year-on-year. And I recognize the assumptions for the regulatory changes and the favorable timing effects. But -- imply Q4 results of EUR 1.3 billion to EUR 2.3 billion of COI, which seems pretty low relative to last year's numbers, which were broadly at EUR 2.3 billion.

So I just want to understand where the big deltas come from that can create such a guidance. Or is it just conservatism because we have a relatively uncertain world and you want to prepare for that. Attached to that, I just wanted to go to dividend policy. Just broadly taking the midpoint of your guidance would imply just over EUR 2 of earnings and around EUR 1.40 as dividend. Is that -- is it purely as mechanical as that, that I can just literally tell you what the earnings is, apply the midpoint of the policy guidance and that should be the dividend we should expect for the full year? Because relative to current share price, it's almost a 10% dividend yield.

And then lastly, if we just take maybe a little bit more of a strategic mindset. The assumptions that we are now operating in relative to when the presentation of the Investor Day was set are materially more favorable. You have much stronger cash flows. Your balance sheet headroom is much bigger. What is your objective in terms of reinvesting that? Are we largely expecting organic investments to be most of that balance capital utilization? Or is there -- are you open to larger acquisitions or only bolt-ons of asset size? Any clarity there would be really helpful.

[Catherine MacGregor, executive]

So let me maybe start with the last 2 questions. So dividend policy has been reaffirmed. So there is clear policy which will be applied. So I think it's not much more comment on that. I think we've been very clear.

On the last point, reinvestment in the future, I think 2 things. First of all, the macro trends towards accelerating the energy transition are stronger than ever. So we have a very large opportunity set and we are very excited about this. Of course, the financial performance of ENGIE will allow us to look at these macro trends in a very optimistic way. And we feel that we have a very good alignment between investment priorities and what the world is offering us and which -- that is very positive.

It was true, by the way, back 2 years ago. I think it's even more true now. So obviously, we will be looking at ways we can accelerate the transition -- the energy transition towards the low-carbon economy. But it will continue to be very much in line with the principles that we've laid out. So we'll come back in February. We'll update you with a short-term outlook or midterm outlook short to mid-term outlook. But the principles will not be very different. We're going to be very much focused on capital allocation discipline. We want to make sure that the growth that we invest in are return focus. And we will continue to have the clear priorities that we've laid out, which is around the renewables and the decarbonation solutions for our customers.

So not much change in terms of the way we will be investing those euros. Obviously, the numbers will take into account the new reality that we are in today. In terms of M&A versus organic, again, we are very focused on creating value from own capability, so mostly organic, mostly through the hard work that the ENGIE teams are doing and building this expertise and industrial value that we are creating day in, day out.

Of course, that doesn't prevent us from looking at some opportunities. But we will be looking at mainly the kind that you describe, which is maybe tuck-in, adding value to our existing portfolio. Remember, we did value a lot the fact that we have portfolios in certain markets. And so the incremental value of -- will always be evaluated in relation to an existing portfolio in addition to the value that we can create by applying our expertise, whatever competitive advantage we can have, et cetera, et cetera.

So not much change there in terms of principles. Hopefully, the numbers will be revised as we talked to you back in February.

On the guidance, you want to comment a little bit...

[Pierre-Francois Riolacci, executive]

Yes, a couple of comments on Q4. You remember that last year, Q4, excluding EQUANS, the -- was EUR 2.1 billion. And it was already a strong quarter with some tailwinds on the price environment, also good climate. So that's, let's say, a stronger comp compared to what we have seen so far. And then you're right to mention that we will have in Q4 the timing effect. It is mentioned about EUR 400 million in the guidance page. And also, we'll have the taxes because the taxes they will kick in Q4, part of them being retroactive. So you see that there is also a -- on some earlier profits. And that's what we are factoring in the guidance.

[Ajay Patel, analyst]

Are you able to give us just what that number is? Because the assumption you're putting in there so that we can then compare any release and our own calculations against what you're assuming in the guidance. Or is this something that you want to hold back at the moment?

[Pierre-Francois Riolacci, executive]

Usually, you don't have the turkey to give the recipe for the Christmas dinner. But let's say it's a few...

[Operator]

The next question is from Peter Bisztyga of Bank of America.

[Peter Bisztyga, analyst]

Yes. So for the first one, I just wanted to focus on one potential risk for next year, which is the cash burden of the French retail gas tariff freeze. I'm thinking that could be several billion euros actually. And if that's correct, do you have any concerns about your ongoing ability to securitize that -- working capital financing for that if credit conditions continue to tighten?

And also related to that, the cost of that working capital financing become a drag on net income for next year. First -- my first question.

The second actually just it relates to climate effects. Clearly, telling the structure of gas back to the market was a positive for you in Q1. E.ON was saying yesterday actually, overall, the warm weather was a bit of a negative thus far in Q4. Spot gas prices came under some pressure. I'm just wondering what your experience has been thus far out in November from the warm climate.

[Pierre-Francois Riolacci, executive]

Thank you. On the cash side and the French tariff, I think, of course, a fair question. But I'm pleased to report that so far, we see no reason why we should not be able to extend the securitization process. It was completed, as you know, at the end of June. And we are in good discussion with authorities to make sure that we can actually replicate of course, with some tweaks because as you know, the heating season is at the peak in December. So it triggers a bit of complexity.

But same good spirit in terms of trying to find solution and avoid to transfer a huge burden to operators. So no reason to believe that we should not be able to replicate something similar in '23. Of course, there is no assurance, but again good signals.

And on the climate, I think it's a fair point. It's clear that the market today are different. Now of course, it depends on the mix of your sourcing and the hedges that you have entered into, which are being potentially -- but that's a fair point.

I remember that also given the current market and especially in power because this is very true for gas. But for power, the last thing that you want is to be short. So I think that if there is a mild climate, it's also rather a good story on that side.

But fair point, what happened in Q1 could not necessarily happen again in Q4 when it comes to a long cash position due to mild weather.

[Catherine MacGregor, executive]

Additional comment on climate, Peter, is to remember that in terms of security of supply, obviously, it's important to welcome a warmer climate these days because it will put us in a better situation collectively with storage levels at the end of this winter, therefore, for next winter, just to keep that in mind as well.

[Operator]

The next question is from Vincent Ayral of JPMorgan.

[Vincent Ayral, analyst]

Thank you for the presentation. So sitting to 2 questions. I'll first touch upon the negotiation on the nuclear life extensions and cap on the nuclear liabilities. We've seen a few press reports here and there. But it seems that -- was expected for September, there's still nothing on there. So could you give us a bit of color -- see that your nuclear provisions are down. They're due to be updated this year. So as rates went up, did you slightly increase your gross cost estimates in order to prepare for that? So that would be the question basically regarding nuclear liability cap and extension. So that's the first one.

And the second is a bit more generic. It's actually bouncing on your comments, Catherine. Looking at European gas supply and demand, could you give us a bit of color on what you see on the ground in terms of gas demand but weather corrected? Because obviously, the weather had been super warm. But if you have any pointers in terms of weather corrected the type of demand trends and what do you expect for the coming winter?

[Catherine MacGregor, executive]

Okay. So maybe starting with an update on where we stand on Belgium. So as you remember -- we signed an Loi at the end of July to lay out the framework under which we would conduct an LTO project to extend 2 of our plants in Belgium beyond 2025. And you're right to say that the Loi highlighted a couple of deadlines -- or not deadlines, dates. One was end of September, one was end of December. And as we said in our press release, today it's fair to say that the process is taking a little bit more time. So I think it's fair to say that it's a bit delayed.

Discussions are ongoing and they are constructive. Obviously, a bit difficult to give you more specific given that obviously something that we are discussing with the Belgium government, again, very constructively. However, the 31st of December day that we are given today is less likely happen as such then more likely. And that would be my comments on Belgium.

And in terms of the revision on the provisions, the process is ongoing. As usual, it's a triennial process. So we'll be giving more color on this when we have, which would be typically by year-end.

In terms of gas supply demand, obviously, we have models and trying to correct for weather. I would say in terms of European customer, what we're seeing is that a very big giant type of customers of ENGIE have shown a demand which is quite high, between 20% and 30%. This demand destruction, by the way, is not just production stopping or suspending. It also includes conversion from gas to fuel, fuel which is not great for climate. So that's the 30% that we've seen in the very, very big customers.

Of course, for smaller customers, it's much less. And here it's between 10% and 15% for the smaller companies B2B. I hope that answers your question.

And of course -- sorry. And of course, this is also important. When we project the security of supply to next winter, this is a big factor to help us anticipate the balancing of physical gas supply for next winter.

[Vincent Ayral, analyst]

And -- to ask last question, apologies for that. E.ON talked about the cap in Romania on electricity having potentially some impact on the supply activities there. Do you see anything on your side? What type of exposure do you have on that? Could this be big? And do you expect a resolution soon on this topic?

[Pierre-Francois Riolacci, executive]

Yes. We have the same kind of regulation. However, we -- again, it goes in Romania with this cap is also coming with some access to gas in good condition, which helps to a certain extent mitigate this impact. And overall, we are, of course -- in our Romanian operations. It's a difficult environment. Also a big of a drag on the cash because we have some indemnification which are a bit behind. But they are coming. So to be -- to make a long story short, nothing material at group level.

[Operator]

The next question is from Piotr Dzieciolowski of Citi.

[Piotr Dzieciolowski, analyst]

Piotr Dzieciolowski from Citi. Two questions from my side please. So firstly, I want to ask about the GEMS good performance. Can you tell us what are the spread exposures in this business? And how are you able to lock in this positive spread going forward? So I mean this number is really much better than market -- of you benefiting from kind of buying a gas simply, let's say -- and selling it in Europe. So what are the main things we should look out for to see the direction of which way this result will go?

And second, on the supply, can you maybe talk us through a possible bridge of the coal development between '22 and '23, which is how much of sell back you are benefiting from versus the potential price cuts you can get on the retail side or any other effects you expect?

[Pierre-Francois Riolacci, executive]

Maybe I'll take GEMS first. I think I tried to highlight what are the key drivers of the performance. So you should definitely keep a close eye to it. Volatility in the market is clearly 1 driver. Your views about how big will be the appetite of customers to ask for transactions. And of course, the higher the price, the higher the volatility, the more you can figure out that they will come to us and deal.

I think you need to keep also an eye on the geographical spreads in energies because that's also part of the optimization. When you are a global player, you can actually, of course, optimize your item. So I think that's the kind of drivers that can help you to figure out in '23, '24 what else -- how much of that could still be around.

No, I'm not sure about your point on supply. But if you are referring to the tariff yield and what's happening in France, you know that we are rather immune in terms of P&L. It's a cash impact but which is, as we discussed, managed for securitization. So in terms of EBIT impact, we -- it's not seen as a key driver.

[Operator]

The next question is from Louis Boujard of ODDO. I apologize you -- his question. We have the next question from Thibault Dujardin of Societe Generale.

[Thibault Dujardin, analyst]

I have a question concerning the Russian gas exposure and to know if you could give little bit more color concerning the residual exposure, both from a physical and financial exposure -- for this year and potentially in the midterm 2023, 2024.

[Pierre-Francois Riolacci, executive]

It's completely insignificant. I mean -- sorry, there is some noise. But we are still taking delivery of -- volumes going through Ukraine. But it's completely insignificant both physically and financially.

[Operator]

The next question is from Louis Boujard of ODDO.

[Louis Boujard, analyst]

I have 2. The first one would be related the investment plan. In fact, we see here definitely that there is maybe a much -- framework in the U.S. with -- at the same time, we have a bit feeling in that in Europe, it's a bit lagging behind. What is pointed here is mostly the administrative burden. But is there also eventually other topics to unlock more investment in Europe particularly in the energy transition?

And if yes, could you elaborate when do you think that we could have this kind of framework that could be more attractive and that could eventually trigger an upside revision into the potential investment that could be made considering the balance sheet -- way that you have, of course, you would be part of this. And it could be interesting to see when eventually the timing and when it could trigger some additional return on investment potential and options here.

My second question would be regarding the network division. We know that the network division was supposed to be a bit difficult considering the regulatory framework that we have more likely more specifically in France. It's clear that it has been well offset by your South America performance and also by the storage business since the beginning of the year. At the same time, there is lower volumes than anticipated.

So my question would be, how do you see this evolving in the future considering up in terms of volumes that could be eventually taken into consideration next year and the year after and also considering the inflation environment that, of course, is going to have some impact top line? Could you give us an update on how it should evolve going forward in the current environment? More likely it's different than what you expected 12 months ago.

[Catherine MacGregor, executive]

Yes. Maybe just to say a few words on our geographical focus. So you're right to point out that the U.S. actually quite favorable before becoming obviously very attractive for renewable projects on the basis of the IRA.

In terms of EU, administrative and permitting has always been a theme. On the other hand, you can see governments, first of all, at the EU level, upping their ambition to 2030 in terms of the renewable mix in the final in terms of the renewable portion in the final mix. So that's one thing which is very encouraging. And then each country is trying to give itself the means for this ambition.

I want, for example, to point out the accelerated renewables law in France that is going through a legislation process and also increased ambition in France in terms of wind power and solar power to 2030 and then to 2050. So there is a lot of ambition, a lot of wanting to debottlenecking the permitting processes. Of course, acceptability on the ground continues to be a bit of an issue.

But as you know, we are really working through that as well through our label in France here where we have actually a label to characterize the methodology that we use to develop projects to make sure that they are getting through the right appropriation process, which is so important for acceptability purposes, which is why you can see that even in France, we are able to develop projects. It is a bit more complicated sometimes but we are able to see these projects in a big quantity.

And so every one of those legislative measures are seen as positive today to our investment plans but always keeping a balanced approach. As I said earlier, we're not putting all our eggs in the European basket. And today, our pipeline has about 30% of projects targeting the U.S. and North America presence, which is also very positive because of the good dynamics that we have there.

On networks, I think the question was really around evolution in France. I think I would just summarize the situation on networks to say that it is a favorable regulation in the sense that there is a good protection on the inflation standpoint. And so we actually quite like the contribution of networks. The framework is positive and favorable to inflation and volume, of course, as well. So it's a good regulation and we are quite positive about the networks contribution to our results.

[Operator]

The final question is from Sam Arie of UBS.

[Samuel Arie, analyst]

I'm way down at the end of the queue today. But if you forgive me, I say, I can just make a short comment and then ask just one question. The comment I wanted to make is just -- I mean I think we're all in a habit of saying thank you for the presentation and congratulations on the results. I think we often say that out of politeness as much as anything.

But I wanted to just step back and think you guys are still a relatively new management team. You've taken over quite a complicated large organization in a very, very difficult market environment. And every time we hear from you, you beat expectations. And I think you're doing an amazing job. And anything that mystifies me here is how reluctant the market seems to be to price that in and how conservatively the market is trading the shares.

So I'm not sure what else you can do than what you're already doing but I'll say congratulations. Thank you for the presentation and I just want to underline that I think really it is very impressive what you guys are delivering. So forgive me, that was just my squeezing in my comment.

And my question I wanted to ask is just moving on from the kind of questions about earnings and so on. I think most of the key points have been covered at this point. But I did want to take the opportunity to ask you about Russian gas. And probably the question I'm going to ask will make everybody -- because it seems to make consensus is that we'll never get any more Russian gas into Europe. And in any case, it's prudent for Europe, Western Europe to plan on the assumption that there's no Russian gas anymore.

But when I'm talking to traders and people in the industry, I mean I'm not seeing 150 Bcm of contracts getting signed with the U.S. or with the Middle East or we're not rushing to replace the Russian gas with other long-term contracts. And when I'm talking to trade, as I'm hearing a lot of questions about actually will the Russian gas come back at some point.

So I suppose my question that I wanted to ask here is, if you look not 2, 3 months forward but 2, 3 years forward, do you think it's still right to assume that, that will be effectively no or negligible Russian gas volumes coming into Europe. And what's your best guess there?

And secondly, if there was, for some reason, an unexpected resumption of gas loads at least initially through Ukraine and then in the long term, if any of the Nord Stream pipeline came back into play. Would that -- what kind of effect would that have on you? Are your positions kind of neutral to that? Or would that be a negative surprise? So sorry, it's a bit of an -- question but I'd love to hear your thoughts on that.

[Catherine MacGregor, executive]

Thank you. Okay. Thank you, Sam, for the kind words. We were a bit speechless here but thank you very much. And we do think that ENGIE has upside and has a lot of -- that need to be fully recognized.

You're asking us to forecast the geopolitical situation in a few years, which obviously is very, very difficult. In my mind, there are some lessons that will be drawn from forever from what has happened in Europe, which is the need to avoid any over dependency on any given counterparty. I think that is the key one lessons learned that will have to be integrated by every player with a company with their space.

So what that means is that there will be diversification and there will be a better use of LNG because LNG when it is supported, of course, with the right network and particularly with the right infrastructure gives you the flexibility that you need to not be overdependent from -- on any 1 actor. And I think for me, that is going to be really the key lessons. Not to say whether or not there will be Russian gas coming to Europe. I think it's no over dependency and a big reliance on LNG with the consequences in terms of course, of infrastructure.

And I think your last question, I think it's fair to say that we are also working through a diversification of suppliers and that is something that we are actively working on. And if at some point, there was to be some merchant gas available to us, we'll have to look. But right now, we are really diversifying. And I think the key point is that we've managed very nicely exposure to Russia gas, which to remind everybody, was about 20% at group level. And then of course, it has become insignificant. Thank you.

[Aarti Singhal, executive]

Thank you very much, everyone, for dialing in, and that concludes our call today. Many thanks.