Naturgy Energy S A : 1H 2023 Results presentation

Contents

Executive summary

The results report includes a classification of the economic and financial information between "Networks" and "Markets" which simply represents a grouping or sum of the operating segments described and broken down in the consolidated accounts for the fist half of 2023, following the structure that would result from the execution of the Geminis project, currently under ongoing analysis. The purpose of this classification is to facilitate the understanding of the evolution of these segments in the context of the project. Therefore, the groups called "Networks" and "Markets" do not correspond to operating segments as defined by IFRS 8 "Operating Segments".

Summary - 1H23 results

Naturgy EBITDA reached €2,849m in the first semester of 2023, up 39.2% when compared to the first half of 2022. Overall, international liberalized activities continued to benefit from the energy scenario experienced over the last twelve months, while regulated activities experienced a modest increase compared to the first half of 2022.

Networks businesses posted an EBITDA of €1,261m in the period, an increase of 5.3% when compared to 1H22. Networks Spain was mainly affected by lower remuneration and demand, particularly in gas, as a result of mild temperatures and lower industrial demand; Networks LatAm for its part, mainly benefited from tariff updates reflecting inflation from prior periods. Networks businesses contributed 43% of the Group's EBITDA for the first half of 2023.

The liberalized activities or Markets businesses, were responsible for the bulk of the Group's outperformance when compared to the first half of 2022. Markets businesses posted an aggregate EBITDA of €1,677m, an increase of 84.1% when compared to 1H22, with Energy management and Supply activities contributing most of the growth in the period. Markets businesses contributed 57% of the Group's EBITDA for the first half of 2023.

The first half of 2023 experienced a decrease of energy prices with lingering volatility, and in this context, Naturgy continued to play a key role to secure energy supply in Spain, both in terms of procuring gas to the Spanish economy, as well as ensuring continuity of energy supply in the Spanish power system, with CCGTs playing an essential role. Moreover, Naturgy continued to offer stable and competitive prices to its customers both in gas and electricity, supporting its clients to navigate uncertainty.

Prudent financial management and capital discipline remained a priority during 1H23 in the face of lingering volatility and regulatory uncertainty.

Naturgy reduced its Net debt position from €12,070m at the end of 2022 to €10,752m as of 30 June 2023, while deploying €839m in capex and delivering on its shareholder remuneration commitments of

1.2 €/share on 2023 results. Net debt to EBITDA has as a result decreased from 2.4x as at the end of 2022 to 1.9x in 1H23. Naturgy maintains an ample liquidity buffer, with €10.1bn in available cash and equivalents and undrawn credit lines as at the end of the first half of 2023. On 30 May 2023, the rating agency S&P revised Naturgy's outlook to stable from negative and affirmed its BBB credit rating.

Total capex during 1H23 stood at €839m, an increase of 16.4% vs. 1H22. The Company has continued to increase its investments in renewable developments and envisions an acceleration of its capex program in the coming years.

In Spain, Naturgy is engaged in the construction of some 30 wind farms and PV plants, equivalent to nearly 1GW of additional renewable capacity expected to come in operation during 2024. Additionally, during the first half of 2023, Naturgy reached an agreement with Ardian for the acquisition of 100% of ASR Wind, a portfolio of 12 renewable energy projects in Spain composed of: i) 422 MW regulated operating wind assets, and ii) 435 MWp solar PV hybridization projects. The transaction ascribed an equity purchase price for ASR Wind (100%) of €536m, translating into an Enterprise Value of €650m, equivalent to approximately 8x EV/ EBITDA 2023E. The transaction completion is expected in 3Q23.

In Australia, Naturgy has begun to operate its third wind farm, Berrybank II, increasing the company's total installed capacity in the country to 386MW. Naturgy envisions to reach an operating renewable capacity of approximately 1GW in 2024, with the start of wind operations of Ryan Corner in Victoria (218MW), the Hawkesdale wind farm (97MW), the Crookwell III wind farm in New South Wales (58MW) and the Cunderdin hybrid solar (128 MW) and battery (55MW/220MWh) plant in western Australia.

Investments in renewable energies confirm the company's strategic ambition towards a more sustainable energy mix and its commitment to the energy transition.

Naturgy strives for a balanced solution to the energy trilemma, contributing to the decarbonization of the economy, while ensuring security of supply, as well as competitive and affordable energy for industrial and residential demand.

In this context, the EU Commission has established ambitious targets for renewable gases as part of the REPowerEU plan, which are expected to represent 10% of the gases circulating in Europe by 2030. The EU Commission has also established biomethane production goals of 35 bcm by 2030 in Europe, confirming renewable gases will play an essential role in the energy transition.

Spain is deemed as a country with highly attractive prospects in biomethane and a production potential of approximately 160TWh per annum, which is roughly equivalent to 40% of Spanish gas demand. The recent draft of the PNIEC (National Integrated Energy and Climate Plan) has doubled renewables gases objectives to 20TWh by 2030, recognizing its important role in the energy transition. Biomethane is already a mature and scalable technology at affordable cost, which also has important positive externalities, such as waste optimization, job creation and the development of rural areas.

Naturgy aims to play a key role in renewable gases and has decided to provide greater disclosure of the "Renewable gases" business segment, which encompass the development of biomethane production and distribution in Spain, as a viable and feasible option in the short term, and hydrogen, an energy vector with a promising future, which will have a significant impact on the energy mix over the medium term. Naturgy is well positioned to take advantage of the renewable gases opportunity and is willing to deploy significant capital and resources in this arena.

Finally, in terms of shareholder remuneration, the 2022 final dividend of 0.50 euros per share was paid on 4 April 2023, completing the 1.20 €/share dividend commitment for 2022. The Naturgy board approved a new annual dividend floor for the period 2023-2025 of 1.40 €/share, subject to maintaining a BBB credit rating by S&P. The first interim dividend for 2023 has been established at 0.5 €/share and is payable on 7 August 2023.

Energy demandand commodity prices

The first half of 2023 experienced mixed demand evolution across markets with declines mainly in Spain and Brazil. Electricity and gas demand in Spain decreased on average 6.9% and 12.5% respectively vs. 1H22, affected by macroeconomic uncertainty and mild temperatures throughout winter. Similarly, average demand on gas distribution activities in Chile and Brazil experienced a decrease of 1.5% and 34.0% vs. 1H22 respectively. On the other hand, gas and electricity demand in the remaining LatAm countries where the Group operates experienced some growth, 1.9% in Mexico, 9.6% and 3.9% in Argentina gas and electricity respectively, and 5.9% in Panama electricity.

During the first half of 2023, the evolution of LatAm currencies had a very minor negative impact on the Group's financial performance of €-4m and €-3m in EBITDA and Net income respectively, compared to the first half of 2022. In particular, the Mexican peso, the Brazilian reais, the Chilean peso and the USD experienced appreciations vs 1H22, whereas the Argentinean peso continued to depreciate vs. EUR.

Following the unprecedented rise of gas and electricity prices in 2022 linked to the ongoing Russia- Ukraine conflict, the first half of 2023 has experienced a decrease of energy prices, albeit with persisting volatility and high sensitivity to geopolitical events and risks of potential supply outages. Gas prices in Europe were mainly affected by lower demand and mild temperatures in Europe, translating into high storage levels, as well as subdued gas demand from Asia. In this context, average Brent prices were 25.8% lower than in 1H22, while gas prices on major hubs showed an important correction, with the TTF and JKM comparing -41.8% and -38.1% below respectively on average vs. 1H22. Wholesale electricity prices for their part compared 57.1% below on average vs. 1H22.