Research Update: France-Based Energy Company ENGIE SA Outlook Revised To Stable From Negative; 'A-/A-2' Primary Credit Analyst: Pierre Georges, Paris (33) 1-4420-6735; pierre.georges@spglobal.com Secondary Contact: Massimo Schiavo, Paris + 33 14 420 6718; Massimo.Schiavo@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 1
Research Update: France-Based Energy Company ENGIE SA Outlook Revised To Stable From Negative; 'A-/A-2' Overview ENGIE SA has almost completed its transformation plan to improve its business risk profile through substantial disposals in its merchant and upstream activities. We believe the group's business portfolio is becoming increasingly regulated or long-term contracted, with a large and diversified portfolio of businesses supporting increased visibility and predictability of cash flows. While 2017 and 2018 are still transition years, we are more confident that ENGIE's credit metrics will improve from 2019, with expected EBITDA growth and a slight debt reduction over 2018-2020. As a result, we are revising our outlook on the company to stable from negative. We are also affirming the 'A-/A-2' ratings. Rating Action On April 30, 2018, S&P Global Ratings revised its outlook on global multi-utility ENGIE SA and subsidiary GIE ENGIE Alliance to stable from negative. At the same time, we affirmed our 'A-' long-term and 'A-2' short-term issuer credit ratings on these companies. At the same time, we affirmed our 'BBB' issue-level rating on ENGIE's deeply subordinated hybrid securities. Rationale The affirmation reflects the progress the group has made on its transformation plan, which we believe improves the predictability of cash flows while reducing exposure to more volatile merchant and upstream activities. ENGIE disposed of these assets more quickly than we had anticipated and is well on track on its cost-efficiency plan. Even though the group is smaller and is no longer present along the full gas value chain, we look favorably on the new business model's greater cash-flow visibility, which also remains while remaining well diversified. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 2
As a result of the company's transformation, French network activities' (including the now-regulated storage activities) contribution to the business portfolio has increased to about 38% from about 25% in 2015. The transformation has also led to continued growth in long-term contracted infrastructure (other regulated networks, gas pipelines, gas storage, and heating and cooling networks collectively accounting for an additional 5%) and long-term contracted generation assets. There is now more of a track record on the group's ability to generate growth and resilience from its customer solutions businesses. We view this activity as being highly diversified by contract and geography, and we consider ENGIE's market positions as particularly strong in a highly fragmented market. Together, these activities will support a more visible and more resilient cash-flow stream, which we view as a positive development for the business risk profile. In 2017, ENGIE reported consolidated EBITDA of 9.2 billion, with upstream operations in particular being discontinued. We consider 2017 and 2018 to be transition years for ENGIE. While 2017's metrics were below what we consider appropriate for the ratings (yet in line with our expectations), we do expect ENGIE's funds from operations (FFO) to debt to be close to 20% in 2018. We also see greater certainty on the group's ability to improve credit metrics in the context of its improved business risk profile. Credit metrics improvement from 2019 onwards will come from more balanced free cash flows, which we expect will be overall slightly positive over 2018-2020. It will stem from: Greater certainty on EBITDA growth drivers (networks, commissioning of projects, growth in energy services, and cost cutting); A reduction in investments from 2019 compared to 2016-2018 once the business repositioning is achieved, with lower maintenance capex and a much-reduced pipeline of investments with long construction periods; and A stabilization of debt post 2018. With a regulated asset base (RAB) of about 23 billion, the French gas distribution and transmission regulated networks are a major driver of our assessment of the company's business risk profile as strong. The French storage activities, regulated since 2018, represent an additional RAB of about 4 billion. We consider France's regulatory framework to be strong, providing a good degree of earnings stability. We expect the RAB to grow moderately in the coming years. These networks are further complemented by expansion into a portfolio of heating and cooling networks and transmission pipelines in Europe and Latin America. Following the disposals over the past two years, ENGIE's share of merchant generation also decreased to the benefit of a growing and more contracted generation fleet (renewables, PPAs on thermal assets). Its merchant generation operations now consist largely of the European thermal fleet as well as the nuclear plants in Belgium and France. ENGIE also still has a large pipeline of WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 3
new assets that it will commission in the coming years. However, this pipeline has decreased significantly--to about 5 billion of assets under construction at year-end 2017 from about 10 billion three years ago. The remaining part of the portfolio mainly consists of energy services with industrials and energy supply on its large customer base in France and Belgium. The industrials business consists of energy solutions (such as cogeneration or renewables) and facility management. These activities are a large part of the division EBITDA and are a key driver of the group's growth strategy. We understand ENGIE has a much broader spectrum of products and services it can offer to its industrial customer base, including IT systems and data management, which could be an area of future growth. However, we expect this diversification will remain relatively marginal for the coming years. ENGIE was able to grow the customer solutions segment in 2017, and we expect it to be the main cash-flow growth driver for the group going forward, supported by its commercial activity and small acquisitions. Overall, we believe the group remains significantly diversified by business, end-market, and geography, with a historical local presence in its main markets. The latter is a key characteristic of the group, allowing for expansion of its broad range of products and services by leveraging existing activities and market knowledge. Our assessment of ENGIE's financial risk profile as significant is driven by our expectations that ENGIE will improve its credit metrics over the coming three years, with adjusted FFO to debt increasing beyond 20% in 2019 and debt to EBITDA of about 4x. Given the relatively high share of EBITDA generated by regulated network activities, we benchmark ENGIE's credit metrics against the medial volatility table. At this stage, despite the heavy disposals, credit metrics remain constrained by the group's extensive investment program and decreasing but still-high shareholder returns. At year-end 2017, when considering the proceeds from disposals received during the first quarter of 2018 (for about 2.5 billion), pro forma FFO to debt was about 19.5%, and debt to EBITDA was 4.2x. Positive factors also include management's continuous commitment to financial discipline despite the higher-than-anticipated dividends per share announced for 2018. We also view positively the group's good degree of financial flexibility; its proactive and prudent liability management, with a consistently strong liquidity position; and financial debt reduction from further disposals over the next two years. We also factor in our assessment the group's commitment to maintain the credit rating in the 'A' category. In 2017, ENGIE reported consolidated EBITDA of 9.3 billion ( 9.2 billion adjusted) compared to 10.7 billion ( 10.8 billion adjusted) in 2016. The main reason for the difference was assets sold and reported in discontinued operations, particularly in the E&P business. Growth was nevertheless more robust on ENGIE's new core businesses, and we see favorable growth patterns continuing in the years ahead. At year-end 2017, our adjusted debt was 41.4 billion, including 24.5 billion of net financial debt, 9.6 billion of WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 4
asset-retirement obligations (coming mostly from Belgian nuclear), 4.5 billion of pensions, 2.6 billion of operating leases (part of which will disappear when ENGIE disposes of its LNG business in 2018), and 1.6 billion of hybrids, reported as equity. In our base case, we assume: Flat or slightly increasing reported EBITDA in 2018 compared to 2017, with organic growth of 5%-6% afterwards, supported by customer solutions and international expansion; Improving cost of debt over 2017-2019 because of improved market conditions upon refinancing; Reversed working-capital movements in 2018 after significant inflows in 2017; Ongoing execution of the disposal program, with proceeds reaching 5 billion- 6 billion in 2018, including E&P, Loy Yang B coal plant and LNG activities, and a series of smaller assets; Investments (including bolt-on acquisitions) of about 7 billion- 8 billion in 2018, then decreasing to 5 billion- 6 billion over 2019-2020; and Cash dividends of about 2.5 billion in 2018, in line with the new dividend announced of 0.75 per share and increasing with recurring net income afterwards. Based on these assumptions, we arrive at the following credit measures: Adjusted FFO of about 7.5 billion in 2018, growing to 8 billion and beyond from 2019; Adjusted debt decreasing to about 38 billion in 2018 and stabilizing around this level; and FFO to debt close to 20% in 2018 and increasing above 20% thereafter. Liquidity The 'A-2' short-term rating is supported by ENGIE's liquidity, which we consider to be strong. Projected sources of funds exceed projected uses by more than 2.03x over the next 12 months and by more than 2.4x over the subsequent 12-24 months. Our assessment is further supported by the group's ongoing and proactive liquidity and debt management, solid relationships with banks, and ample and proven access to capital markets, even under dire market conditions. Principal liquidity sources: About 8.9 billion in available cash at the group level as of Dec. 31, 2017; About 13.4 billion in available committed credit lines maturing beyond 12 months, of which 10 billion relate to two syndicated facilities WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 5
maturing in 2021 and 2022; Our forecast of unadjusted FFO of about 7.8 billion over the next 12 months; and Asset sales of 5.8 billion over the next 12 months. Principal liquidity uses: Long- and short-term debt of about 7.2 billion, including 4.0 billion of outstanding commercial paper (debt maturities for 2019: 1.4 billion); Our estimate of gross capital expenditures (with no flexibility) not exceeding 8 billion in 2018 and 6 billion onward; Dividend cash payments of about 2.6 billion (including dividends of the group's subsidiaries to minority shareholders); and Working-capital outflows of about 800 million due to a 2017 margin-calls reversal. Outlook The stable outlook reflects our greater confidence that ENGIE has a more predictable cash-flow base and sustainable growth trajectory going forward. We believe that this--together with the proceeds from announced disposals and a reduction in investments from 2019--will support improving credit metrics over the next two years. We expect FFO to debt of about 20% for 2018, increasing beyond this level from 2019, which we deem as commensurate with an 'A-' rating under this business scenario. We believe now that the material portfolio rotation has largely been complete, divergence potential on future earnings has now reduced. The stable outlook also takes into consideration our expectation that management will maintain a high level of financial discipline and will tap some of material financial flexibility if needed. The stable outlook also factors in our view that at least a third of the consolidated EBITDA will come from regulated activities, while a large part of the remaining activities will continue to focus on diversified contracted activities. Downside scenario We could lower the rating if ENGIE struggles to effectively demonstrate growth in cash flows from its newly defined portfolio, if adverse regulatory measures are implemented, or if the group becomes more aggressive in investments so that credit metrics deteriorate again. We believe ENGIE has no significant headroom for a large debt-financed acquisition beyond the projected investment plan. We could also consider a downgrade if our adjusted funds from operations to debt remains below 20% after 2018. A more aggressive financial policy, notably from a material increase in shareholder remuneration, could also pressure the ratings. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 6
Upside scenario Given the still-stretched credit metrics, we do not see rating upside potential at this stage. Nevertheless, we could consider an upgrade if the business profile remains broadly unchanged and credit metrics improve, with FFO to debt being sustained above 23%. Ratings Score Snapshot Issuer credit rating: A-/Stable/A-2 Business risk: Strong Country risk: Low Industry risk: Intermediate Competitive position: Strong Financial risk: Significant Cash flow/leverage: Significant Anchor: bbb Modifiers Diversification/Portfolio effect: Moderate (+1 notch) Capital structure: Neutral (no impact) Liquidity: Strong (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Positive (+1 notch) Stand-alone credit profile: a- Group credit profile: a- Entity status within group: Parent Sovereign rating: AA Likelihood of government support: Low Related Criteria Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018 General Criteria: Methodology And Assumptions: Assigning Equity Content To Hybrid Capital Instruments Issued By Corporate Entities And Other Issuers Not Subject To Prudential Regulation, Jan. 16, 2018 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 7
General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: Guarantee Criteria, Oct. 21, 2016 General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Midstream Energy Industry, Dec. 19, 2013 Criteria - Corporates - Industrials: Key Credit Factors For The Oil And Gas Exploration And Production Industry, Dec. 12, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Criteria - Corporates - Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Ratings List ; Outlook Revised To Stable To From ENGIE SA Issuer Credit Rating A-/Stable/A-2 A-/Negative/A-2 GIE ENGIE Alliance Issuer Credit Rating A-/Stable/-- A-/Negative/-- ENGIE SA WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 8
Senior Secured A- Senior Unsecured A- Junior Subordinated BBB Commercial Paper A-2 GIE ENGIE Alliance Senior Unsecured A- Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 9
Copyright 2018 by Standard & Poor s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. STANDARD & POOR S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor s Financial Services LLC. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 30, 2018 10