Snam S.p.A. (SNMRF) Q4 2022 Earnings Call Transcript

Snam S.p.A. (OTCPK:SNMRF) Q4 2022 Earnings Conference Call March 16, 2023 5:00 AM ET

Company Participants

Francesca Pezzoli – Head of Investor Relations

Stefano Venier – Chief Executive Officer

Luca Passa – Chief Financial Officer

Conference Call Participants

Fernando Garcia – RBC

Javier Suarez – Mediobanca

Jose Ruiz Fernandez – Barclays

Mark Freshney – Credit Suisse

Marcin Wojtal – Bank of America

Stefano Gamberini – Equita

Davide Candela – Intesa Sanpaolo

Bartlomiej Kubicki – Societe Generale

Operator

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Snam Full Year 2022 Consolidated Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Francesca Pezzoli, Head of Investor Relations. Please go ahead, ma’am.

Francesca Pezzoli

So good morning, ladies and gentlemen, and welcome to Snam full year 2022 consolidated results. Today presentation will be hosted by our CEO, Stefano Venier and by our CFO, Luca Passa. In the presentation, Stefano will provide an overview of the results and the key highlights and strategic achievement of the period. Luca will walk you through the financial performance, then back to Stefano for closing remarks and finally the usual Q&A session.

And now let me handover to Stefano.

Stefano Venier

Thank you, Francesca and good morning also from me. I’m on Slide 2. In 2022 we operated in an extremely volatile environment, both in terms of energy markets and macro situation. However, we managed to deliver another set of solid financial results despite being the year of the weighted average cost of capital review applied since January 1st.

We made significant progress across several business KPIs in both gas infrastructure, as well as energy transition business while improving ESG metrics, the different alignment and ratings. The key strategic milestones achieved along the energy Trilemma paved the way for our long-term strategy that we updated last January.

Finally, we continue to offer a compelling shareholders remuneration with a dividend per share proposal of 0.2751, on which of which €0.11 already distributed in January as interim and 0.1651 per share to be distributed in June. The result in DPS is up 5% versus previous year in line with our dividend policy.

So now, if we move to Slide 3, I will start with a brief overview of the key full year 2022 financial results. Adjusted EBITDA closed at €2,237 million as the WACC review impact applied from the beginning of the year, as I said, by €130 million. That was largely offset by higher [ph] output based incentives and regulated revenues, as well as energy transition business that contributed €24 million, up €15 million versus 2021. The adjusted net income stands at €1,163 million above the guidance we gave last year, mostly thanks to stronger than expected operating results.

Total investments, including the Golar Tundra acquisition for €329 million, were up by a remarkable 52% versus the previous year with 1600 on gas infrastructure. As a result, the 2022 tariff regulated asset base reached €21.4 billion, that is up by 2% vis-à-vis 2021. And finally, the net debt is remarkably down to €11.9 billion euros, well ahead of our guidance, mainly due to a temporary positive working capital effect related to system balancing activity in Q4 2022 when the market was long because of mild weather and gas savings initiatives.

Now let’s move on Slide 4 and where we have some operating KPIs across our gas infrastructure and energy transition businesses. 2022 has been a challenging year from an operational standpoint. We had to cope with an unprecedented reversal of flows, injecting more than 4 BCM of gas into storage facilities versus the previous year while managing a lower predictability on gas flows. This led to a more than 20% increase of the compressing station working hours for transport and storage of gas.

LNG facility has been run close to full annual capacity, providing the much needed flexibility of sources to compensate for the declining Russian supplies. Moreover, as Italy, we contributed to the EU supply approximately for 4.6 BCM through export, mainly via TAG pipe and just to have a reference number, 4 BCM is basically 50% of the Austrian demand.

Moving on the energy transition business, we reach 40 megawatt of installed biomethane and biogas capacity with 19 million cubic meters of production that is well above the previous year as new plants enter into operation or within our perimeter.

Renovit, our energy efficiency company reached 46 megawatt of installed capacity in solar panels and co-generation. In the last mature business of small scale LNG, sustainable mobility and decarbonization projects, more than $35 million of grants has been earmarked to Snam and more than 175 grants to the consortium in which Snam is involved in. Additionally, in June, the De Nora IPO was successfully completed, doubling the value of Snam’s stake since acquisition.

On emissions, gas transport flows material changes and their management had implication on our scope 1 and 2 emissions. Nevertheless, regulated activities regarding gas infrastructure, Scope 1 and 2 emissions were down 0.6% versus 2021, mainly driven by a remarkable reduction of 23% year-on-year in methane emissions.

We have completed a thorough analysis of the 2022 investment which points to a 39% alignment to EU taxonomy, and 62% to SDGs and Luca will provide more details later in the presentation and full details can be found in the annexes. Finally, we continue to be rated by several ESG agencies with excellent results, and I’m happy to share that we are best performer by sustain analytics in the gas utility sector.

Besides our financial and operational, I’m now on page 5. Let me comment on some key strategic achievements in 2022 along the three dimensions of the energy dilemma that we have assumed as a framework. Also, for the strategic guidelines that we presented in in January, they represent relevant milestones on the long-term strategy as I said.

Starting with security of supply, first we have acquired and authorized in record time two new floating vessels of five BCM annual capacity each. The first one, the Golar Tundra will arrive in the next few days at Piombino and will start operations as planned in May. Storage levels reached 95% at the end of October, 2022, well above the previous year, and at targets at the European level, and now we are hovering around 60% as we will comment later on.

In January, 2023, we have closed the acquisition from Eni of 49.9% equity interest in the companies operating the two gas pipelines connecting Algeria to Italy, called TTPC and TMPC that are essential assets in the new environment also in the long-term perspective with respect to the hydrogen backbone.

Moving to sustainability, both the hydrogen backbone as I mentioned, and CCS project has been filed as projects of common interest closed for proposal. And finally, the asset has methodology, in connection with the remuneration mechanism of fully amortized assets has been approved by the regulator, thus testifying our proactive approach toward affordability through new services aligned with the forthcoming [indiscernible] regulatory evolution.

In 2022, we further progressed on the hydrogen readiness analysis across our infrastructure. A third party appraisal that is RINA has already certified 750 kilometer of our transport network as hydrogen ready. And in November, we successfully tested the variable 10% hydrogen blending in our Espana [ph] compression station. At the same time, we continue to run tests on storage facilities with very reassuring results. All the above was delivered in a challenging and volatile environment as I said. None weather adjusted gas demand was down 10% year-on-year, one of the largest annual declines ever and the TTF price average was more than 2.5 times versus 2021.

With regard to macro, we entered in a higher interest rate cycle with European Central Bank tightening by 250 bps in 2022 and further 50 bps added last February, and higher inflation driving the regulated asset base deflator to exceed 4%. Our regulatory framework, as you know, provides a good edge against this higher interest rates backdrop over time, albeit with some time lag.

In 2023, the weighted average cost of capital mark-to-market according to the regulatory formula was below the 50 bps trigger leading to no changes, while we expect an uplift in 2024 as anticipated in our business plan presentation.

Let’s move now on gas demand and injections on Slide 6 with respect to the Italian full year demand. This was down 10% due to building consumption decline by 15.5%, mainly related to a decreasing the fourth quarter consumption due to milder weather. Weather adjusted is down 10.1%, demand containment measures and increase in energy efficiency. The industry demand declined by 13.6%, driven by high gas prices, mainly energy intensive industry and also a sizeable fuel switch.

Thermoelectric demand was down by 3.3%, driven by natural gas replacement with other fossil fuels as for industries in the thermoelectric production and also the government measures to minimize the use of gas in favor of coal consumption.

In particular, over the period Q4 demand was down 26%, which was mainly driven by material residential decline. This paved the way for different initiatives to maintain gas and storage for the next winter. The vast majority of the full year decline is not structural as it was driven by mild weather about 2 BCM containing measures from consumption by another 2 BCM and gas to coal or oil switch for about 3 BCM. Gas injection at 75.4 BCM was almost in line with previous year as the declining gas demand was offset by higher storage injections and increasing export by 3.1 BCM versus previous year.

If we take a look on the gas flows on Slide 7, in 2022, we had to cope with an unprecedented reversal. First volumes from north were down 30% year-on-year, driven by Russian flows decline from Tarvisio that were partially offset by higher volumes from Passo Gries coming from Norway.

Second, imports from Southern routes were up by 15% thanks to higher volumes from Algeria and partly by Azerbaijan. And third, that the LNG volumes almost doubled year-on-year. As we say, the center of gravity of the entire European energy system shifted down towards the Mediterranean area. We could leverage on the eight entry points that our five pipelines from different gas sources and three LNG terminals that soon will become five as the new FSRUs come on stream, able to play a strategic role within the entire European energy system within.

But important to, let’s say, make a focus on gas storage evolution, not only because of, let’s say the development, but also because of the role that it is playing on gas prices development and in the perspective of the next summer and winter. That, and you can find it on Slide 8, as you can see this strategic infrastructure is full for more than 60%, including the strategic gas at the end of February at the level that is well above the 40% of the previous year, and with the last five years average at 45%.

We have managed to get to this result thanks to a 95% level reached at the end of last October, as I mentioned. The reverse flow service provided for the first time ever for about 0.5 BCM up to the end of January, that was reopened in March with more than 350 million cubic meters sold as of today, as well as the decline in demand, mainly driven by the mild weather.

According to our estimates, based on the current stock and the projected withdrawals, we will reach 4.5 BCM to 5 BCM, that is around 55% level at the end of March, which is a good, very good starting point for the next injection season, not only on volume side, but also because of the effects on price side.

I will now handover to Luca to comment on the financial results. Please, Luca.

Luca Passa

Thank you, Stefano, and good morning everyone. I will start on the — with the full year 2022 investments on Slide 9, that reached €1.9 billion, up 52% versus 2021, including the cash out for the acquisition of the Golar Tundra floating vessels with the second vessels, while the second vessel is secured, but the payment will take place only in 2024. Out of the €1.9 billion 39% is EU Taxonomy aligned and includes as far as transport is concerned H2 ready replacement investment to reduce methane leakage and emissions at the electric compressors replacing as five compressors, new valves with better productive standards, and biomethane Plants connections.

With regard to the energy transition business, 100% of CapEx for biomethane H2 CCS energy efficiency excluding co-generation. This percentage moves to 62% alignment with SDGs, of which the majority goes toward SDG 7, 9, and 13 respectively affordable energy, innovation and infrastructure and climate action. The investment related to the FSRU are considered aligned to SDG number 7 as promoting affordable energy and security of supply in the current extremely volatile scenario.

Let’s now move to the full year 2022 EBITDA analysis on Slide 10. EBITDA for the period was €2,237 million, which is substantially in line with last year minus 0.6% despite the effects of the WACC review applied from January, 2022, which implied an overall cut of €130 million in the regulated revenues. We managed to almost completely offset this negative impact through €93 million increasing regulated revenues, mainly untreatable to the tariff RAB growth for plus €58 million, a positive volume effect for €9 million due to increase in volume, redeliver and export growth.

Higher output based incentives for plus €37 million, mainly due to the default and storage facilities services. €50 million increase in the EBITDA of energy transition business is €11 million in the energy efficiency, mainly residential business innovation and €8 million in biomethane new plants and larger perimeter. As far as others, for €25 million, we reduced €33 million one off contribution from the gas excess inventories sale, €4 million rental fee as to the Golar Tundra lease as the LNG carrier pending the final installation, and €12 million capital losses related to the assets replacement.

Finally, we had a €60 million increase in fixed cost, about 5.5%, mainly attributable to high utilities, vehicle fuel for €12 million and labor cost for €6 million. Adjusted net income for the period and I’m now on Slide 11, was €1,163 million minus 4.5% compared to the full year 2021, mainly due to higher D&A and the increase in net financial expenses.

In particular, D&A increased by €53 million due to higher investment effort as commented before. Net financial expenses increased by €21 million, mainly as a result of the higher gross cost of debt, which went from about 0.8% to about 1.1% in full year 2022 due to the increase in interest rates.

The contribution from associates was higher by €14 million mainly due to the positive Terega contribution, €9 million, thanks to higher revenues following an increase in booking to Spain and lower financial charges due to bonds rollover. The sound performance of interconnector plus €42 million, thanks to high export flows supported by gas price spreads and greater LNG availability in the UK. This contribution also reflects the asset reevaluation given the high visibility thanks to the significant booking until 2026.

There is positive results thanks to the higher revenues due to increased LNG import and export to Bulgaria, negative contribution from the Austrian GCA for €35 million, which despite our performance level expectation was impaired due to the increase in discount rate. Reported net income for the period was €671 million.

The difference versus the adjusted net income is mainly attributable to the impairment of TAG stake for €340 million, then ADNOC contribution adjustment for €179 million, both of which were non-cash items, partially offset by the De Nora stake disposal capital gain for €73 million. The TAG write-down reflects future expectation of volumes following the obstruction in Russian supply decline. We expect a regulatory framework reassessment with respect to both the volume exposure and the entry exitary scheme given a strategic role in allowing us flows from south.

The ADNOC contribution adjustment was driven by the higher discount rate impacting the assets for value and its net income contribution, which however, will be fully recovered in the coming years.

Turning now to cash flows, and I’m now on Slide number 12, cash flows from operation for the period amounted to €4,109 million, including €2,337 million of exceptional cash generation from positive working capital evolution. This was driven by about €300 million due to the tariff related items in particular net over charges on the back of the tariff review, about €1.9 billion regarding balancing activity of which around €800 million was related to the loan position in the balancing system, and about €900 million related to 2021 balancing credit cushion and cash deposits increase and €200 million for [indiscernible] and about €200 million of other regulated cash deposits. All of the above positive effects are partially offset by about negative €400 million of energy efficiency fiscal credits increase driven by the eco bonus revenues.

With respect to this positive evolution of working capital to be largely reabsorbed in 2023. Net investments for the period amounts to €1.4 billion and are mainly related to CapEx and CapEx payables for €1.3 billion. The cash out for the acquisition of the Golar Tundra in June for €329 million and related to our biomethane platform for about €100 million. The cash-in from the partial reimbursement of the OLT shareholders loan for about €200 million and the De Nora IPO cash-in for €153 million. Other outflow from the period was related to the payment of the dividend equal to €866 million, while the non-cash item mainly refers to the convertible bond conversion.

Moving to Slide 13, due to the previously commented cash flow evolution, the change in net debt amounted to €2.1 million positive resulting in a 11.9 net debt at the end of 2022 well ahead of our guidance. Average cost of debt moved from the 0.8% in 2021 to 1.1% this year, and the fixed to floating ratio moved to 80%. Sustainable finance and committed financing increased from 60% to 70%, making progress towards the target of 80% that we have in 2026.

Financing activities in 2022 included €1.5 billion in sustainability-linked bond, €350 million of liability management exercise, €400 million of convertible bond conversion, and €1.2 billion ESG revolving bank facilities. We also executed €2.2 billion prefunding for 2023, including €1.9 billion of banking facilities and €300 million of the inaugural EU Taxonomy aligned bond fully compliant with the European Taxonomy for sustainable activities. Such prefunding is already included in the 1.1% cost of debt reached at the end of 2022.

Given the previously commented working capital evolution and the prefunding already executed, financing needs for 2023 are almost covered and we expect a net evolution in a range of €15 billion to €15.5 billion at the end of 2023, clearly depending on working capital volatility. Finally, in terms of financing cost, based on the current forward curve, we expect the average gross cost of debt to increase to just below 2% for 2023.

On Slide 14, as a result of the better expected net debt evolution, our credit metrics displays a significant improvement versus 2021 and are well inside the rating threshold that’s leaving our financial flexibility. Following our business plan presentation, both S&P and Fitch already affirmed their long-term credit rating of BBB+ both and the stable outlooks. The current maturities profile is well spread over time with an average €1.4 billion per year up to 2027, thus with very limited refinancing risk over the period.

And now I will hand over the floor to Stefano for the 2023 outlook and guidance.

Stefano Venier

Thank you. Thank you so much, Luca. Now we are approaching the end of the presentation and we are on Slide 15. As we said 2023 continues to be characterized by high level of volatility from a geopolitical and macro standpoint. Also our business model is well resilient with long-term visibility, allowing us to comfortably confirm our guidance.

We target €2.1 billion of total investment, which is up 10% year-on-year, driven by the CapEx in our gas infrastructure and the acquisition of the second floating vessel. The tariff regulated asset base is set to reach €22.4 billion, which is up 5% year-on-year. A strong acceleration versus recent years, thanks to the deflator effect and rising investments.

Moving on to the profit and loss evolution, a higher contribution from output-based incentives along with the ramp up in the energy transition businesses will boost the EBITDA growth, but it will be offset by rising financial charges since the WACC reset will only take place in 2024. This leads us to a comfortably confirming, as I said, our net income guidance of around €1.1 billion. Not forgetting that 2022 benefited from some positive non-recurring items for more than €40 million.

As Luca mentioned, we expect 2023 net debt to fall within a range of €15.5 billion. And finally, dividend per share is planned to be up by a minimum of 2.5% versus 2022. That is in line with our dividend policy we introduced and reconfirmed last January.

So to conclude, in 2022 while successfully managing unprecedented risks around security of supply, we had a solid financial performance and paved the way for a new investment cycle and visible 2023 financial targets.

And now we are open to take your questions. Thank you so much.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Fernando Garcia with RBC. Please go ahead.

Fernando Garcia

Hey, good morning. Thank you for taking my questions. I have three. My first question is on the working capital €2.3 billion positive in 2022. So what do you expect for working capital in 2023 within your net debt of €15 billion to €15.5 billion guidance? I guess that what I am looking here is the recording net debt number. My second question is on TAG. So can you tell us there, what is the book value following the impairment?

And then if you can provide a little bit of your assumptions on the north to south gas flows for these investments and sensitivity there please? And I will like as well too a question there on the, if you can expand on your comment of reassessment expectations for this asset, that you were making in the call? The third question is what do you expect for gas demand in Italy in 2023? And there if you can split between electricity, retail, and industries, that will be great. Thank you.

Luca Passa

Okay, I’ll take the first question. In terms of working capital for our guidance of €15 billion debt in 2023, we are assuming networking capital basically there is absorbing for in the region of €2 billion. So all the positive effect that we experienced this year will be almost fully absorbed throughout 2023. And that’s basically how we get to the €15 billion to €15.5 billion evolution over the year.

But remind also that in this guidance, we also include the cash disbursement for the acquisition of the south corridor that actually happened in January this year, which was not previously included in the guidance.

And as far as you know, the two other questions, I don’t know whether you want to comment, okay. Regarding to TAG, basically the impairment reflex, basically what we have in terms of gas expected flows in our business plan and that’s why actually impaired assets of €240 [ph] million. Now, it also reflects the expectation that the regulator by 2026 i.e. the last year of the plan will address both volume in terms of fixing the volumes as well as entry exit-tariff review. And that is where we stand as of now. We do not expect, given our assumption in the business plan of flows, which are just above the 10 BCM in terms of flows to have further sensitivities around these impairments.

And on the third, Stefano, if you want to comment?

Stefano Venier

Yes, I’ll take it. I’ll take it. So what do we do expect for this year, I think we are planning to see in between let’s say 68 BCM to 70 BBC M for the year. This is based of course, on some assumptions. First one that is, that the, let’s say the incentives to reduce the consumptions will be prolonged for the entire year, as well as the possibility or let’s say the use of coal for power generation or at least till the end of the year. If I can give you couple of numbers that can help you to understand the situation, let’s say that in Q4 2022, demand was down by 6 BCM whilst in the first two months of the year, January and February, demand is down by 3 BCM.

So at the end of March, we expect something lower than a reduction, lower than the Q4 2021, as well as, as we said out of the 8 BCM decline we envisaged in 2022, only 2 BCM can be, let’s say linked to real restructuring and restructural reduction in demand. All the rest is related to the initiatives to, let’s say, reduce consumptions or switch to other fuels, part of this could come back or stay at the same level.

Of course, the last thing to be considered is what is going to be the weather condition in Q4 2023 that can influence within a range of 2 BCM and that’s the reason why in our estimate, we set a range in between 68 BCM and 70 BCM. That is then expected progressively to recover in 2024 with let’s say, the curtailment of some of those initiatives I was mentioning before, because as it is clear the allowance to use at full capacity, the coal production is providing a sizeable impact on emissions of the country.

Operator

The next question is from Javier Suarez with Mediobanca. Please go ahead.

Javier Suarez

Hi, good morning, and thank you for the presentation. Three questions from me as well. The first one is on the guidance. If you can share with us also the guidance for 2023 in terms of EBITDA and what you are including into that guidance for EBITDA from output-based incentives and how this assumption compared with the output-based incentives achieved in 2020 and 2022? That will be the first question. Then the second question is on the equity accounted investment that on an adjusted basis are €308 million. So if you can share with us your expectations for 2023 from this investment, and what are the moving pieces that you are expecting here?

And then the third question is on the contribution to the EBITDA from the energy transition business. And we start to see a positive contribution, so if you can share with us your expectations for 2023 in terms of revenues and then EBITDA contribution from this activity? Many thanks.

Stefano Venier

I’ll take the first Javier. In terms of, let’s say expectations guidance, we have on the EBITDA, it’s about €2.4 billion and the contribution from output-based is about €100 million. That is up roughly €50 million with respect to the 2022 actuals. The last one was the contribution we expect energy transition is about €70 million. I’ll leave Luca the second.

Luca Passa

Okay, thanks Stefano. Regarding the second questions on the contribution of basically associates and evolution in 2023, Javier basically here, we expect contribution, which is slightly lower than what we had in 2022. And, the two major obviously moving pieces is clearly the performance of TAG reflecting the volumes. That was answering in the Q&A before where we expect volumes below obviously the historic volumes around TAG, but also the positive contributions from the consolidation of the South corridor, which should bring an additional €50 million within the period. So all-in-all slightly lower contribution as the portfolio in 2023, 2024.

And let me now be more specific than that, but clearly there are many different contributors. You can imagine all the other participation. We have a normalization of interconnect to UK, some normalization of in OLT, as well as, some positive outlook from the Despa [ph] stake, given the performance in 2022 as well as what we expect for 2023.

Javier Suarez

Thank you.

Operator

The next question is from Jose Ruiz Fernandez with Barclays. Please go ahead.

Jose Ruiz Fernandez

Yes, good morning everyone, and thanks for taking my questions. I only have two. The first one is, if you can share with us an outlook for winter 2023, 2024 at European level, not Italian level. And second question, maybe it’s not very relevant, but I saw in your balance sheet you have assets held for sale. I think it’s for €63 million. I was wondering what that is. Thank you very much.

Stefano Venier

I’ll take the first about the let’s say outlook for next winter. It’s difficult to say, of course, as you know. There are couple of pieces that the site can contribute to the thoughts about the perspective. The first one is the storage fulfillment. That is a benefit for all across Europe. As you know, the percentage of fulfillment of the storages in the different main, in the main countries across Europe is well about 50%. So at the end of the season that will hover around I think on average about 50%, 55%.

That means that the total values that need to be injected during summer will be half of the amount of last year. That will, of course, relax the demand in terms of volume will make the, say the projections during summertime. In terms of prices I expect in line with the ones that we are envisaging right now, that will mean that the spread between summer-winter will stay there, let’s say creating conditions for fulfilling the storages, even from the economic standpoint.

On the other side, all the facilities that were expected to come on stream on being connected for the — for receiving additional volumes on LNG are on track. I mean, the Germans started three vessels. We will start the first vessel mid of May. So part of the contribution will be in line with. Of course, there will be some, let’s say, unpredictable events like, let’s say, the weather and the temperature, the average temperature during next winter, that can influence a significant demand.

And I think the second aspect that you, we all know is, how will evolve the demand, the Chinese demand with respect to the winter. So in general, what I have to say is that we overcome this winter successfully, not only because of the mild weather, but also because of all the initiatives that were put in place. This is providing an advantage for next summer, preparing for next winter. I think next winter will have still a degree of uncertainty that will be overcome during next summer when we will complete large part of the initiative to secure and to pave the way for the full route situation.

Luca Passa

As far as the second question, the €60 million of assets held for sale, Jose relates to initiative Iniziative Biometano which is one of the companies we have in our biomethane developments which we are restructuring together with the other shareholders, and we are going to basically reduce our stakes from control to non-controlling in two assets while gaining control on other assets, which currently we don’t have control. So it’s just, I would say a restructuring of part of our biomethane business. But we should not expect to have major impacts from a financial standpoint in that restructuring.

Jose Ruiz Fernandez

Thank you very much.

Operator

The next question is from Mark Freshney with Credit Suisse. Please go ahead.

Mark Freshney

Hello. Thank you for taking my questions. Firstly, can we just go back to TAG, is it possible that if the remuneration is adjusted as you would hope, would you be able to write back the impairment? Are you — will there be no risk to the economics if you can get the contract changed? And just secondly, with regards to Gas Connect Austria, it’s interesting that I believe your partner of a bond [ph], which bought more recently, I think a higher price than you, has impaired their stake in the asset today, and I believe they may fully consolidate it. Can you talk about why you’re not impairing Gas Connect Austria as well? Thank you.

Luca Passa

Okay, Mark. This is Luca. Regarding TAG, first of all you are asking whether with the expecting change from a negative perspective, we will, might have reevaluation of the assets, clearly depends on how this discussion with the regulator will basically end. But clearly it’s a possibility. I mean, if we have impaired assets and let’s say future flows are expected to be better than what we expect in the current evaluation for the impairment, clearly we might have a reevaluation of these assets.

So to your questions, the answer is yes. When it comes to GCA, actually we have impaired the GCA stakes for about €35 million into these results. And that is, within basically the contribution of our associates there has been probably less evident because it’s offset by a reevaluation in this case of the Interconnect UK, which is another asset for around more than €30 million, €35 million when it comes to Interconnect UK. But to your question, GCA has been impaired by €35 million within the 2022 results at Snam.

Mark Freshney

Okay. Thank you very much.

Operator

The next question is from Marcin Wojtal with Bank of America. Please go ahead.

Marcin Wojtal

Yes, thank you so much for taking my questions. Firstly could we please get an update on your refinancing strategy? I think you mentioned that some of the maturities for 2023 already are prefunded, but what about 2024? Are you looking to issue euro bonds or perhaps you’re looking to switch to bank financing? And I was also wondering if you are planning to switch more of your debt from floating rates into fixed, because I noticed that that has already increased in the last 12 months.

And question number two, if I may very quickly, just to come back on working capital, just on the numbers. So you had the positive impact €2.4 billion in 2022, and you mentioned €2 billion will reverse in 2023. So are you going to keep the balance of 400, 500 or there could be some further results in 2024? And I appreciate it’s very difficult to predict those. Thank you.

Luca Passa

Okay, Marcin thanks for your two questions. On the first one, so as I commented basically for 2023 we are almost covered in terms of financing needs. Therefore, we don’t have to basically access the market in order to fulfill some of the needs because of the net debt evolution. So starting point at any point that we are currently estimating. In terms of basically how we are targeting 2024, you’ve seen in the chart or the presentation that the financing need for 2024 in terms of bonds is just over €1 billion, so very limited. Then we have some bank facilities, but let me say that it’s really limited. So we might consider to start some prefunding for 2024 at the end of this year, depending obviously on market conditions.

And, in terms of obviously the markets, again we are basically heavy user of the Euro market. We’ve been heavy user of the Euro market. We might look at other markets, if there are any, let me say, arbitrages in that respect and we might consider also other markets. But clearly, we are in a very comfortable position given the fact that in March we are basically fully done for 2023, and we only need to look at 2022 with very limited referencing risk.

And then on your second question regarding, you also the fixed to float, we are fixing a little bit more than before. Clearly, we ended that 80% for 2022. But the evolution of rates basically give us the possibility to fix a little bit more than before. We don’t have a clear target, but we have a metric that we need to be at least 30% evolution in terms of fixed to floating for the coming couple of years. I don’t know whether you had the other question Marcin.

Marcin Wojtal

What’s the working capital?

Luca Passa

Working capital evolution, sorry. On the working capital evolution, yes as I said, we are expecting 1.9 negative and about 500 million of balancing. Can we retain that, towards the year? It will depend on the evolution, but clearly it’s a possibility for us, so lending to something better than what we expect in the business plan in terms of that net debt evolution.

Marcin Wojtal

Thank you.

Operator

The next question is from Stefano Gamberini with Equita. Please go ahead.

Stefano Gamberini

Good morning, everybody. I have just two questions. First, regarding the situation of the authorization about Adriatic backbone, if I’m not wrong, you should receive some important authorization shortly, as well as, I don’t know if there are some novelties about also the Alfonsine new storage? And the second question is regarding the TAP situation. If I’m not wrong, there was an auction for award new capacity, and this was just the request, just 1.5 BCM out of the 10 BCM more further. So if you can elaborate a little bit if this could cause some postponement of the investment or not?

The second question, sorry the third one, is regarding if I understood correctly, your BDI will grow to €2.4 billion so €140 million up. There were also €40 million one-off in 2022. While on the other, the net profit will decline by around €60 million. Could you help us to understand if at the end of the day there is also higher financial charges or where are the difference considering in the such improvement in EBITDA and declining in net profit? Thanks.

Stefano Venier

Okay, I’ll take the first two. The first one is on Adriatic backbone. As you know, we consulted the initiative in between December and January. We delivered to the authority all the outcomes and the comments on the, say the questions raised and the support that was raised for the infrastructure. I can say that within the next couple of weeks, definitely by the end of March, we expect the outcome, final outcome from the ARERA with the final authorization. That also will pave the way for submitting part of this infrastructure for let’s say, European support in case.

The second question is about TAP, yes we had this preliminary, this first auction few months ago that ended, as you said. The most important one will come full this year when there will be the new open season up to the major expansion. As you know, that could be, let’s say, up to in terms of input capacity for Italy up to 18 BCM, 20 BCM, as was mentioned by the CEO of TAP few days ago. This open season will land beginning 2024 with the biding offering at the end. So within the next 12 months, we will see how will be the next step up. This first step up for 1.5 BCM will be on stream beginning 2025.

The second is about Alfonsine. Yes in Alfonsine we are preparing the project to be submitted. We are making a check with Terna because we want to let’s say set up this new infrastructure, not with traditional compressing stations, but with the electromechanical compressing stations, so to have zero impact for this new facility. So I think that in next month, we will submit this new design of the Alfonsine to the ministry for the full authorization process. In the meantime, we are bringing on the process for getting some, the authorization for running couple of the storages with let’s say an higher pressure with respect to the past performance that will, can contribute the next winter for in between 0.5 BCM to 0.7 BCM additional capacity.

Luca Passa

When it comes to the final questions, EBITDA and I think evolution for 2023 as Stefano commented, basically we have an EBITDA guidance of €2.4 billion for 2023 that is driven by clearly the solid contribution from the RAB growth, widening of the business perimeter, i e, the floating vessels, and higher ARPU based incentives that Stefano pointed to just over a €1 million in terms of output base, as well as the energy transition business. We expect an EBITDA to basically land in around €70 million contribution by the end of 2023.

Now why this does not translate to an increase in net income level? Clearly, as you just said, the financial charges arising given the rising interest rates and cost of debt, we gave an estimate of net debt evolution, to 15 to 15.5, and an estimate of cost of debt for 2023 at around 2%, which means that our financial charges from around €120 million of this year basically have an increase to around €250 million next year. So that’s the reason why you don’t have, let me say, I think an attrition at least for 2023. And then, starting from 2024, we expect the worker set [ph] which will allow us to basically offset a part of this effect.

Stefano Gamberini

Very clear. Many thanks.

Operator

The next question is from Davide Candela with Intesa Sanpaolo. Please go ahead.

Davide Candela

Hi, good morning and good morning gentlemen and thank you for taking my question. I just have two. The first one, I was wondering if you can comment on the rumors about ExxonMobil and Qatar Energy potentially exiting from the Adriatic LNG, and if this is the case, you — if now will be interested in increasing its stake in the company or it will be more comfortable to stay with the current 7% in the Adriatic LNG?

And the second one, it’s a more broad question. I’m aware about the fact that you have priorities on the organic development and infrastructure, but looking at connecting by — as an end-to-end process, the backbone from Italy to South Africa. And I was wondering if a potential involvement in the EastMed-Poseidon project, that could be finalized at least in the engineering process by the end of this year. If a potential involvement in the future will be, would you consider to get there and to participate in the project? Thanks.

Stefano Venier

As far as the Adriatic LNG, of course, generally, we do not comment press rumors, as you can easily figure out. Of course, in case ExxonMobil and Qatar Energy will decide to go on with the sale of their stake, we will carefully follow the process, not only because we are a shareholder of the company, but also because, as we mentioned during the Capital Market Day with the two additional floating vessels, we will become the second largest player in the LNG infrastructure, and that infrastructure is, of course, core for the Italian security of supply. So we might consider eventually to round our stake.

The second question about EastMed-Poseidon, I think apart from the finalization of the engineering, what counts is what is going to be the decision from — of Chevron and the other partners that are planning to develop Leviathan and the other gas fields that has been discovered offshore Cyprus, offshore Israel and offshore Egypt, because of course, in case they decide to ship out to send out the gas via LNG, of course, it’s met — it’s an alternative in terms of infrastructure.

So I think what comes first is the decision of those developers on what is the solution they intend to implement for, let’s say, shipping out that gas and then comes, of course, eventually the evaluation of this EastMed-Poseidon infrastructure. Could we be interested in? Frankly, I don’t know. Not right now. I don’t know the cost of the infrastructure. I don’t know if the gas is going to flow through that infrastructure. I don’t know what is going to be the final investment decision of the E&P developers. So it’s too early to make a comment or to, let’s say, figure out the possible involvement of Snam in this prospect.

Davide Candela

Thank you very much.

Operator

The next question is from Bartlomiej Kubicki with Societe Generale. Please go ahead.

Bartlomiej Kubicki

Hello, good morning. Thank you for taking my questions. Two please, both are related to associates again. Firstly, on the accounting treatment of the revaluations and devaluations, some of the associates you include revaluation and devaluation, I’m talking about interconnector and GCI, you included into recurring income, while the others, TAG and ADNOC was treated as nonrecurring. So I wonder what is — how did you look at this while deciding what is recurring, what is not recurring and how should we look at this in the future as well?

And secondly, on Italgas, as you can imagine, there is plenty of discussions on the market regarding your stake on Italgas. So if you could again clarify your view on the Italgas stake and perhaps outline the key points of the shareholders’ agreement between you and CDP regarding the 13.5% stake in the company? Thank you very much.

Luca Passa

Okay. Thanks, Bartek. Regarding, let me say, the accounting, whether some adjustments are recurring or nonrecurring, let me be very specific. So TAG is an impairment driven by the change in flows for the Ukraine war, therefore really something not part of, let me say, the business or expectation of the business given a very, I would say, a sudden and not expected event.

When it comes to ADNOC, ADNOC is not an impairment per se, is a fair value reevaluation of the asset given the change in interest rates. So clearly, it’s part of our current business even because those cash flows will be recovered in the following years. I mean, the cash flows are basically fixed. This is just an adjustment on the NPV or the cash flows to the date as of today. While for the revaluation of interconnector and the impairment on GCA, there are no specific items for which we could consider them as nonrecurring.

However, given that, clearly, the volatility in the market seeing is pausing also for us the questions of what is recurring, what is not recurring, we are working on a policy that we are –we would like to implement towards basically this year so to have full year 2023 with this policy basically available, so that you have clarity on what actually goes into recurring and nonrecurring. And then for the Italgas stake, I’ll leave the word to Stefano.

Stefano Venier

I tried to be clear with regard to Italgas stake. We have a shareholder impact with CDP network that covers 50% of our stake. We are extremely happy with the return that this stake is providing. We are not planning to sell the stake.

Bartlomiej Kubicki

Very clear. Thank you very much. Thank you.

Operator

[Operator Instructions] We have a follow-up question from Stefano Gamberini with Equita. Please go ahead.

Stefano Gamberini

Yes. If I can have a follow-up regarding the same question on De Nora, considering the prices now are very better than a few months ago. So what is the environment that could give you the opportunity to reduce your stake considering that both of them are considering not a strategic stake. Thanks.

Stefano Venier

First, we are in blackout period since next 2023 there will be let’s say, a Board that will examine the new business plan. We are extremely happy for the performance and then we are convinced that we did the right thing in listing the company last year. So the prices so far, I think, more adequately reflecting the value of the company that we think can be even higher with respect to the good performance it is delivering also in 2022.

Stefano Gamberini

Thanks.

Francesca Pezzoli

Okay. Then if there are no more questions, I’d like to thank you all, all of you for taking part to this conference. Thanks for the questions, and have a good day. Bye.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.