SNMRF - Snam S.p.A. (SNMRF) Q3 2023 Earnings Call Transcript

2023-11-11 08:22:05 ET

Snam S.p.A. (SNMRF)

Q3 2023 Earnings Conference Call

November 09, 2023 04:00 AM ET

Company Participants

Francesca Pezzoli - Head, IR

Stefano Venier - CEO

Luca Passa - CFO

Conference Call Participants

Sarah Lester - Morgan Stanley

Javier Suarez - Mediobanca

Jose Ruiz - Barclays

Meike Becker - HSBC

Stefano Gamberini - Equita SIM

Piotr Dzieciolowski - Citibank

Davide Candela - Intesa Sanpaolo

Presentation

Operator

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Snam Nine Months 2023 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 of Snam. Please go ahead madam.

Francesca Pezzoli

Good morning, ladies and gentlemen, and welcome to Snam nine months 2023 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, the key highlights and achievements of the period and an update of the most recently published outlook on energy markets. Luca will walk you through the financial performance; then back to Stefano for closing remarks; and finally, the Q&A session.

And now let me hand over to Stefano.

Stefano Venier

Thank you. Thank you, Francesca and good morning also by myself. I'm on Slide 2 with few key highlights on the first nine months. Gas demand declined by approximately 14% in the nine months. Gas prices were on average 70% below the first nine months of 2022 that were characterized by consistent volatility showing the fragility of the energy system.

Domestic gas flows continued to be impacted by the geopolitical situation. In front of the decline in volumes from the north, these were offset by 20% increase in the LNG import that reached 12 bcm.

On regulatory front, the observation period for the calculation of the weighted average cost of capital parameters ended in September and the trigger level was reached. We expect in between 80 to 90 bps uplift to kick in from January 2024.

On October 31st, the regulator published the resolution for the introduction of the BASE ROSS from 2024. It provides visibility and continuity with some positives such as the reduction of the time lag of the allowed D&A from 2025, an update of the deflator, improvements in work-in-progress revaluation, and the capitalization rates based on historical and prospective average proposed by the companies.

All-in-all, the document is in line with the expectations. We have recently published the 2023 scenario update, which is the basis for the new 10-year gas transmission network development plan, and incorporate some of the indications from the draft of the new Italian Integrated National Energy Plan so-called PNIEC sent to the European Commission before summer

It points to a range of 59-68 bcm of natural gas demand by 2030, of which from four to six bcm of biomethane. Carbon capture and storage emerged as a critical decarbonization enabler in the most mitigation pathways.

Worth mentioning that Eni has recently reached an agreement with the UK government for a first CCS regulated business model for a CCS high net Northwest project and we are jointly progressing on the Ravenna project.

Moving to the results. The nine-month figures are extremely sound. EBITDA adjusted is up by 9% mainly driven by output-based incentives. Net profit adjusted reached €942 million, up 1% year-on-year despite rising interest rates and relative cost of debt.

Investments are topping €1,200 million were down 6% year-on-year. The BW Singapore payment will occur in Q4 bringing full year investment to the guidance of €2.1 billion.

Technical investments are up 29% year-on-year supported by the completion of the first floating vessel in Piombino and the start of onshore and offshore works reaching respectively 24% and 7% completion for the second floating vessel in Ravenna. Net debt reached €14.3 billion as a fact of the already anticipated reversal of regulatory working capital.

Looking at our associate portfolio. We successfully placed the first-ever EU taxonomy aligned transition bond exchangeable into existing Italgas ordinary shares. We have proactively leveraged on our stake in Italgas to contain our cost of debt while keeping voting rights and expected dividend flows. Our interconnection points are performing well benefiting from their strategic position at the crossroad of the key gas corridors.

Now, moving on to Slide 3. Beyond financial performance, we have made further achievement in terms of security supply, energy transition and sustainability. With respect to security of supply, storage facilities are now approximately 99% full at record level.

We have obtained the authorization to run over pressure also two storage fields, which added further flexibility to the last infilling phase with additional 0.2 bcm of gas. For the next infilling season, we could further increase gas volumes in those facility by in between 0.4, 0.5 bcm.

From November, we have started to provide again the reverse flow service like we did last year. It consisting the availability of daily injection capacity in the next month associated with the corresponding delivering capacity in the period of January, March 2024 so provide further performance in the peak of the winter season.

The floating Golar Tundra started operation in the beginning of July in Piombino. As scheduled, three LNG carriers have already been discharged and thermal year 2023, 2024 slots are fully booked.

We will launch by year-end, beginning in 2024 the capacity auction for a second vessel to be operational in Ravenna by the end of next year. Biomethane sector is ramping up. We have received 300 request of connections for new plants in the first nine months of 2023, which is 50 more than full year 2022.

We are waiting for a possible allocation of Repower EU funds to some of our projects starting with the first Phase 1 of the Adriatic pipeline that is already under construction.

Now, moving to energy transition. As mentioned, carbon capture is gaining momentum. The carbon capture project in Ravenna, which I referred before, that is jointly developed with Eni is on track to start a Phase 1 in 2024.

Then the Acorn project in UK, of which our participator Storegga is the lead developer, has obtained a Track-2 status by the UK government and is going to be one of the cluster that will be supported going forward.

And Centrica through one of its subsidiaries has joined ESB and dCarbonX, which by the way is participated by Snam, in the development of the Kestrel project aiming at the redevelopment of the decommissioned gas reservoir for a large scale energy storage in Ireland.

Greenture, the subsidiary on small scale activities, started the construction of the small scale LNG plant in Pignataro. It will enter in service in 2025 and will be able to liquefy 50,000 tons of biomethane into bio LNG for transportation.

We have so far been awarded approximately €100 million of plan for resilience and relaunch grants for several projects such as the H2 Vale, the H2 refilling stations, and the giga factory we are jointly developing with De Nora.

I'm pretty confident that both the SoutH2 Corridor and the CCS project in Ravenna, of which we are partners, could be qualified as projects of common interest by the end of the month by the European Commission. We are going to launch in Q1 2024 a market test for the transport of H2 and CO2.

Let's now have a look at the progress made in terms of sustainability. CapEx aligned to EU taxonomy and SDGs represent respectively 37% and 53% of the total. Methane emissions, which are part of Scope 1 for Snam, are down a remarkable 25% vis-à-vis nine months 2022. And we joined SBTN Corporate Engagement Program as a first step for a certified biodiversity plan.

Finally, sustainable finance reached roughly 80%, three-year ahead of schedule. And according to a recent shareholder analysis, ESG investors reached 47% of the institutional investors, up from the 43% tracked in January.

Now moving to Page 4. With regard to the gas demand context, Italian nine months demand was down 14%, 12% weather adjusted or 7.1 bcm due to a thermoelectric sector that is down 15.5% year-on-year or about four bcm driven by electricity demand decline, increase of net imports mainly from France by 0.9 bcm and rise in hydroelectric production by about 1.2 bcm equivalent. Decline in industrial sector minus 0.8 bcm is mainly attributable to economic slowdown with an effect particularly on energy intensive sector.

Worth mentioning that in Q3 2023, the industrial gas demand started to show recovery signals with plus 1% growth. Civil sector contracted by 2.8 bcm due to the milder wind temperature that correspond to one bcm, demand containment actions 1.4 bcm and the increase in energy efficiency. The majority of the decline is therefore not structural.

Moving to gas flow. They were impacted by the geopolitical scenario, as I mentioned, with a 58% reduction in volumes from north compensated by an increase in LNG volumes by 20% and, as I said, lower demand. We exported approximately two bcm to Austria and marginally through Switzerland in the first nine months. On the 13th of August, we have reached the physical export level of 40 million cubic per day, which is the maximum technical capacity on daily basis.

Now on Slide 5 where we have summarized two recent reports on energy outlook. What I want to emphasize is that there is an extraordinary high volatility over future energy scenario as comes out from the two studies and the energy crisis have somewhat eased, but there is consensus on the fact that the energy market, geopolitical and the global economy are unsettled.

The risk of future disruption is therefore possible. If we take the World Energy Outlook published by IEA, explores different pathways for the global energy system up to 2050 with solar production assumed as the key technology to enable an accelerated global decarbonization.

Focusing on gas. From the 2023 Global Gas Report, the key takeaway is that it's important to continue investing in gas infrastructure to secure reliable and affordable supply also considering its balancing role for intermittent renewables increase in generation.

We need to accelerate green low carbon gas and CCS development considering the key role that molecules will play in the energy mix of the near and longer future.

Now, I leave the floor to Luca to comment on the results in more detail. Thank you.

Luca Passa

Thanks Stefano and good morning, ladies and gentlemen. Let's now move to the nine-month 2023 EBITDA analysis on Slide 6. EBITDA for the period was €1.862 billion, plus 9.1% versus last year or plus €156 million. The increase is mainly attributable to €146 million growth in the regulated revenues related to regulatory revenues growth for a total of about €100 million. These effects were partially counterbalanced by a negative volume effect due to the already commented lower gas demand and the usual phase-out of input-based incentives.

The incentives related to the fully depreciated assets of around €30 million; higher contribution from storage flexibility services around €40 million mainly related to the short-term auctions provided in 2022 and booked in the third quarter 2023; higher contribution from flexibility service on transport mainly default services for around €11 million.

Furthermore, a €44 million increase in the energy transition businesses mainly attributable to the energy efficiency and indeed innovation on residential and public administration. With regards to the energy efficiency contribution, we are maximizing the delivery of our backlog on residential businesses.

As already seen in the first half of the year, the difference of the items others is mainly due to the one-off contribution in first quarter 2022 from the sale of gas excess inventory and expiry at the end of 2022 of the fees related to our TLC [Indiscernible] contract leasing partially offset by some positive items.

We confirm our full year guidance of €2.4 billion EBITDA supported by gas infrastructure growth in the last quarter in line with the nine months excluding approximately €40 million of the nonrepeatable 2022 storage flexibility services. Output based contribution is estimated at approximately €120 million on the full year.

As part of the energy transition businesses, nine months 2023 benefited from the full contribution of the super bonus regime, which will end in December. Therefore, its margin contribution has peaked in the nine months.

Moving to Slide 7 on adjusted net income. Adjusted net income for the period was €942 million or plus 1.1% compared to nine months 2022 due to higher D&A by €50 million, following rising investments; net financial expenses higher by €66 million mainly as a result of higher gross cost of debt, which moved from 1.1% in nine months 2022 to approximately 1.9% in nine months 2023 due to the increase in interest rates; a slightly lower contribution from associates for €2 million, which was the result of lower international associates contribution by €8 million driven by the decline of TAG due to the expiry of most of the long-term contracts and lower volumes due to the Russian Ukrainian war; partially offset by the contribution of SeaCorridor and some Desfa results. I will comment in detail in the following slide.

A positive contribution of the Italian associates by €6 million thanks to higher results from Italgas and Adriatic LNG. Higher taxes and minorities; tax rate was 24.4%, slightly higher than nine months of 2022 and we expect it to be approximately 25% for the full year.

As far as full year guidance on adjusted net income, we are fully confident to deliver €1.1 billion guidance as the last quarter below EBITDA in terms of performance will be driven by higher leaner D&A, higher interest cost and lower contribution from associates.

Moving to international associates. I'm now on the following slide. The contribution to group net income was €180 million, about minus 4% versus nine months 2022. SeaCorridor entered into perimeter in January 2023 with a performance in line with budget.

Desfa confirmed the sound performance recorded in the first half supported by auction premia and moderate products on LNG and exports at the connection point with Bulgaria. Year-on-year comparisons also benefited by the pass-through mechanism for energy costs introduced in July 2022.

TAP continued to work at full capacity. The increase versus nine months 2022 is largely due to the CPI-linked tariff. New expansion of plus 1.2 bcm from 2026 is confirmed and further expansion will depend on market test results at the beginning of 2024.

Terega result is up €8 million year-on-year thanks to higher revenues related to storage activities and lower operating cost. ADNOC performance remains in line with last year.

Looking at Interconnector, operating performance remained strong, but profit cap mechanism kicked in while last year benefited from the recovery of past year underperformance. Capacity booked was 50% till 2027 providing medium long-term visibility.

Moving to Austria. The negative contribution from TAG is due to the expiry of long-term contracts in 2022 only partially offset by higher reverse flow bookings. Reverse flow is booked for approximately 90% to 95% until 2025 and about 50% for 2026. GCA performance benefited from the recovery of the previous year's energy cost.

Finally, EMG performance is in line, slightly above due to the lower D&A and no impacts on 2023 figures are foreseen due to the outbreak of the conflict in Israel.

Turning to our cash flow, Slide 9. Cash flow from operations for the period amounted to nine months due to the working capital absorption for around €1.5 billion. This was mainly driven by about €800 million absorption due to the balancing activity, of which about €600 million related to the balancing item receivables, about €500 million related to the cash deposit decrease due to the gas price reduction, about €400 million related to the full service receivables increase and were partially compensated by about €700 million positive in settlement items. This is a temporary effect as it is a payment by the energy system [indiscernible] that then will reimburse to the shippers.

And finally, about €400 million negative for the energy efficiency networking capital solution driven by the fiscal credits related to the super bonus revenues. As for the full year, we expect working capital absorption of about €2.2 billion with some uncertainty over the evolution of the balance activity in the last quarter.

Net investment for the period amount to €1.439 billion mainly related to net CapEx and CapEx payables for €1.173 billion, the cash-out for the acquisition of SeaCorridor for €410 million partially offset by the cash-in of €144 million for the disposal of the stake in De Nora. Other outflows were related to the payment for the full year dividend for €933 million resulting in a change in debt of about €2.4 billion.

Moving to Slide 10. Due to the previous commented cash flow evolution, the increase in net debt amounted to €2.4 billion resulting in €14.3 billion of net debt at the end of third quarter 2023.

The average cost of debt moved to 1.9% and the fixed to floating ratio stands at 78%. Sustainable finance on committed financing is about 80% thanks to the recent funding secured close to our long-term target 3 years in advance.

In September, we issued the first EU taxonomy aligned exchangeable transition bonds into Italgas shares for €500 million, which will enable a saving on the cash coupon of about 1% annually versus a [Indiscernible] bond.

Considering the funding executed so far, financing need for 2023 are fully covered leaving the remaining part of the year for prefunding activities for 2024. To-date, we have already secured €700 million via banking facilities as 2024 prefunding.

We confirm a net guidance of €15.5 billion at the end of 2023 assuming a working capital absorption of €2.2 billion mainly driven by balancing activity, which is subject to a degree of uncertainty as mentioned before on prices and on cash deposit withdrawn in the last quarter. In terms of financing cost, based on the current forward curve, we expect the average gross cost of debt to increase to approximately 2% for the full year.

And now, let me hand over to Stefano for his closing remarks.

Stefano Venier

Thank you. Thank you, Luca. We delivered what we judge to be sound nine months result in a volatile environment characterized by still reshaping gas flows, high volatile gas prices and rising interest rates. As stated before, we are fully confident to achieve the 2023 targets.

In detail, €2.1 billion of total investments that are up 10% year-on-year driven by the CapEx in our gas infrastructure and the acquisition of the second floating vessel, €22.4 billion tariff slab that is up 5% year-on-year, net income of €1.1 billion and dividend per share up by 2.5% versus 2022 in line with our dividend policy.

And by the way, yesterday the Board approved the interim dividend of €0.1128 per share that is still again in line with the policies. And finally, the net debt of €15.5 billion as Luca just explained.

We face 2023 winter in a better position, but volatility persists that depends by external factors. Gas market are in a fragile equilibrium and there is high uncertainty over the future scenarios.

For this reason, energy planning and the strengthening of the energy system remains crucial to avoid new supply crisis. It's important to continue investing in gas infrastructure to secure reliable and affordable natural gas supply and accelerate the development of the green low carbon gas platform and CCS, which is fully in line with our strategy.

We have made sound progress, as explained, to deliver the strategic plan growth targets. We are planning to present the updated industrial plan the last week of January in Milan and invitations will be out in the coming weeks.

Now, we turn to you for questions. Thank you.

Question-and-Answer Session

Operator

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions]

The first question is from Sarah Lester with Morgan Stanley. Please go ahead.

Sarah Lester

Thank you. I've just got one high level question, please, on regulation. So this new ROSS BASE regime that moved the strategic framework. I'm interested in how you see this impact in the sector as a whole in the longer term, you mentioned a couple of positives earlier.

But for instance do you think that spending amount could be harder to justify under this new regime and do you think it would result in a more or a less nimble framework? Just generally speaking, I'm wondering if you think this is a net positive for network spending in the space or really no change at all? Thank you.

Luca Passa

Hi Sarah, this is Luca. I mean on the ROSS introductory regime, as we mentioned, first of all is in line with expectation. There are, I would say, certain positives. Clearly the D&A recognition at T minus 1, which is an improvement for transport and will start in 2025.

Second, the deflator that will be used for the calculation of the revenues related to the first year will be adjusted taking into consideration the inflation of year 2023, which again is a positive. The improved remuneration on work in progress again.

And as far as the overall OI level question, capitalization rates will be calculated as the average of the past two years and the estimation on the forward three years, which will be basically given by operators to the regulator.

So, clearly it's a positive in terms of future spending for regulated companies overall and we deem is a positive, I would say, event for the sector going forward.

Sarah Lester

Thank you.

Operator

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

Javier Suarez

Hi, good morning and thank you for taking my questions. Two questions. The first one is on the general gas outlook. On the Slide number 4, you are showing significant decreases across the board, but mainly in the residential area and also in the industrial area which are quite significant. So, the question for you is going into 2024, what are your expectations maybe by activities in terms of gas consumption for next year?

And then the second question is on the guidance and what you are including in current guidance? So, when you are talking about €2.4 billion of EBITDA, you can help us to understand what are you including in terms of output based incentive? I think that in previous conference call you were mentioning €100 million. During third quarter, you have been accounting something like €40 million related to activities provided during 2022.

So, the new guidance includes €140 million or it's a different number? And also I think that you mentioned last conference call €80 million from the energy efficiency business, if you can confirm that? And also in terms of net income guidance, you can share with us that €1.1 billion of net income, what is included in terms of contribution from associates? Thank you.

Stefano Venier

With respect to the general outlook, I can say that of course this year is reflecting different events that happen. I mean the mild winter that affected the first quarter of the year of course had a significant impact. Of course when we made the projections we referred to average temperature over the past periods.

So, it's extremely difficult to make a projection of course -- a projection on what is going to happen and anyhow what we take as a reference is the average of the last 10, 20 years to let's make projections in.

With respect to the industrial sector, I think here depends on the development of the industrial production we're going to have looking forward. As a matter of fact in the Q3, we saw some rebound on the consumption as I mentioned.

And also we will see progressively some return on consumption on the energy intensive sectors that because of the high prices and the volatility, they worked on a stop and go basis.

And therefore, I think with the stabilization of the prices at €0.40, €0.45 per cubic meter, we will see some of those consumption coming back. The third is the thermal generation.

We have to consider three major aspects we have had this year. The first one, in the first part of the year, we had the coal production that was under a full capacity regime that now this is over.

The extremely significance of the rainfalls that happened during summer and this months that increased remarkably the idle production and the strong contribution that came from France because of the spread in prices. Also these kind of events should stabilize going forward.

Therefore, I think we expect to see a consumption for 2024 in the region of 55, 67 bcm just with a slight recovery of the gap that we have seen in this year because of the reason I mentioned.

And looking forward the different scenarios, as I said during my presentation, see that by 2030 consumption in between 58 bcm and 63, 64 bcm depending on the speed of development of the renewables we're going to have in the country. Of course these numbers with respect to the total volume shipped in our pipelines do not take into consideration the export volumes. That of course goes on top of the consumption.

And we expect we'll have some benefit primarily with the put onstream of the Ravenna facility that is exactly in the corridor toward Austria and southern part of Germany. So, that I think going forward we will see an increase on the volumes on export side that will be shipped in the pipeline system. Luca?

Luca Passa

As far as assumptions for the full year guidance at EBITDA level. You asked about the output base and we are basically estimating a contribution of €120 million approximately for the full year, which includes also the €40 million basically nonrecurring that we booked in the third quarter this year on flexibility.

As far as the energy transition, as I mentioned in the call, the contribution has peaked for the deep renovation both residential and public administration mainly because of basically the end of the super bonus cycles by December of this year.

We actually confirmed a guidance of €70 million contribution in the last conference call, which we confirm here basically depending on how this ending of the super bonus period will basically perform by the end of this year, but that is confirmed. And then going below EBITDA for the €1.1 billion guidance, you have basically two effects.

As I said, interest cost is increasing to 2% on average for the full year. So, we will have a higher interest basically payment towards the fourth quarter for a higher average overall debt for the full year.

And in terms of associates in terms of the contribution, we expect just below €300 million overall for the full portfolio, which for the international is just above €200 million in terms of contribution for the full year.

Javier Suarez

Thank you.

Operator

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

Jose Ruiz

Yes, good morning. Thanks for taking my questions. The first one is if you can confirm that your M&A activity is in standstill, if anything has changed?

The second question is you have increased the average cost debt guidance for 2023 and I guess this is related to refinancing at a higher cost. Can you kind of set up a path of increase into 2024? Thank you very much.

Stefano Venier

Hi. With respect to the M&A, we are not in standstill frankly speaking. I mean there are some possible opportunities that are going on. Let me list them first. As you know, Exxon and Qatar Energy are negotiating with BlackRock the acquisition of a stake on Adriatic LNG, that is the LNG facility offshore the North Adriatic, and we have a preemption right or we have the right to increase our stake that is presently at 7.3%.

That kind of negotiation is not ended yet so we don't know the final terms and conditions that will be agreed by the three parties. When those will be available and notified to us, we will evaluate whether or not to increase that stake of course creating and further strengthening the presence of the company in the LNG facility and the LNG capacity.

The second that is well-known is Edison Stoccaggio. The Edison Group and EDF Group started the sounding of the market just a month ago and as other players said, we expect to submit a non-binding offer by beginning December. That means that after that first phase, we will see if there will be ground to go forward.

But as I said, in other situation, this is an asset of our interest. Of course it's going to be an opportunity depending on the price that will come up. And these are the two major titles I'd like to mention.

So, we are not in a standstill. We are looking around, of course we have for time being a major focus on the investments. But asset rotation or strengthening of the asset on strategic areas is still at the top of the attention of the management.

Luca Passa

And then as far as average cost of debt, Jose, we have not changed our guidance for this full year, which was and has always been 2% average cost for the full year which we confirm by the end of the year. We're currently at 1.9% and we will finish at 2% by the end of the year.

Now, in terms of evolution in the following years, clearly we will have a more, I would say, ground discussion when we will present the plan in January. But interest rates are higher, the scenario is higher so you could point to an average cost of debt for 2024 which is closer to 2.5%, which is clearly higher than what we expect in the current approved plan presented last January.

Jose Ruiz

Thank you. Very clear.

Operator

The next question is from Meike Becker with HSBC. Please go ahead.

Meike Becker

Yes, thank you very much for taking my questions. I have two on the progress of your business wins, the newer ones so to speak. On the energy transition and specifically the energy efficiency, how confident do you feel about your 2024 to 2026 outlook? I mean on the energy efficiency, 2023 seems to have gone very well. So, I'm just wondering what your outlook is for that business specifically longer term?

And the second question is some of your peers have made comment that maybe the expectations for hydrogen project development might be going slower than expected. So, it would be great to hear how your CCS and hydrogen projects are progressing? And if you're sort of like how your expectations have changed over the year if they have changed at all? That would be great. Thank you.

Stefano Venier

With respect to the energy efficiency, as you said, I mean 2023 performed very well. Of course the change in the incentive schemes related to the Super Ecobonus, as we used to call, was expected also when we set up the current business plan.

Therefore, if we look at the new projections that we are working on for, as I said, the new business plan will be presented in January; there are no major news that changes the expectations and projections.

Of course, as Luca said, the Super Ecobonus created a sort of peak in 2022 and specifically in 2023. This is going to be over in 2024. But we have strong fundamentals especially on the industrial business and the public sector we can leverage upon with a very long-term backlog of contracts that will provide and will underpin the projections we already presented with the existing business plan.

So, we are not seeing, in the discussion we are having with the management, major changes in the period between 2024, 2026, 2027. With respect to H2 development, yes, it's true. I mean some of the projects are taking some delay.

But as a matter of fact, we are not linked much to a single project. We are working on the infrastructure. And as we always said, this repurposing of the infrastructure will happen in the -- will start and happen from the second part of the decade and the first part of 2030 and this is the period when we will see exactly how the progress will come.

We have to say that to that extent, we also have 1 angle of flexibility that is related to the fact that we can develop this South H2 corridor end-to-end through the pipe, but also having several ports that can receive some of the green molecules along the way that could make and provide an optimization in the development. I think that one important step will happen very soon with the conclusion of the process of the PCI. This will open the window to a request for the full support.

And on the other side, I have to say that discussions with the German, Austrian, and Italian companies to create sort of projections between demand and production on a long-term basis is progressing. We had the large meeting in January a month ago. Next one is going to be in Vienna beginning of January and the next one in Rome.

So, things are progressing not as fast as originally figured out. But I have to say that the commitment especially from the large consumer auto-based industry is strong and will be confirmed as far as Italy is concerned by a sounding survey we're going to take on Q1 2024 that will involve not only the potential hydrogen demand, but also demand for CO2 capture. So, the two solutions probably will come in complementary way for the auto-based industry.

Luca Passa

And just on the first question just to give you some numbers underlying. We're going to finish the year on the energy efficiency with a backlog of €1.3 billion, which has a duration of 11 years. So as Stefano pointed out, clearly some slowdown due to the end of the Super Ecobonus, but enough visibility for the following years.

Meike Becker

Thank you. Very helpful.

Operator

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

Stefano Gamberini

Good morning everybody. I have two questions. First regarding the situation in the country of higher interest rate. Could you still find the strong acceleration of CapEx you have in the coming years or are you working on some measures in order to sustain your capital structure like for example what you issued as convertible bond? Could we expect something in the long run?

And if you can confirm that the dividend policy will be anyway confirmed. What I'm interested in is to understand what is your financial flexibility for all these projects that you are mentioning like CCS that could arrive in forthcoming years?

Then the second regarding your comment about the ROSS regulation on the RAB deflator. If I'm not wrong in 2024, you should apply so the fleet of gross fixed investment of 2022 which was around 4%.

But if you now move with the new regulation applying the 2023 expected gross fixed investment, this was just in the region of 1% in the first quarter and second quarter 2023. So, do you see the risk of lower RAB deflator for 2024 due to the introduction of the new ROSS? Many thanks.

Stefano Venier

Okay. I'll take the second and I'll leave the first for Luca. The matter of the deflator need to be treated very carefully because I mean in the setup, the year zero or year one as you want to call it that is 2024 will have to consider also the readjustment on the deflator that happened with respect to 2021 and 2022 that in total was 1.5%, okay? And this we expect is going to be part of the definition of the deflator to be adjusted for 2024. So, that will to our extent offset partly the risk that you were mentioning.

Luca Passa

And as far as basically the higher interest rate scenario, clearly yes, it's higher than our assumption in the business plan. But this higher interest rate scenario also will affect our expectation on basically the remuneration through tariffs.

So, I think we have a more balance actually approaching or going forward. We don't have any risk in terms of refinancing. We're talking about between €2 billion and €3 billion of refinancing per year, which includes existing refinancing plus financing of the new CapEx, which is something very feasible basically for our credit rating in the current market. Clearly, if we have the flexibility to use instruments like we used for the recent exchangeable bond, we will do so.

And in terms of financial flexibility, we still maintain financial flexibility because we are well below the 70% threshold from the rating agencies. If you want to quantify that, we're talking in terms of financial flexibility more than €1 billion in terms of financial flexibility. That doesn't mean we would like to basically feel, i.e. we want to maintain this flexibility. Therefore, our approach to nonorganic will be also driven by these metrics.

Bear in mind that the two deals that Stefano mentioned before are for the second one clearly regulated and a lever type of transaction so clearly will contribute to RAB if successful. And for the first one is an equity ticket, which is very minor given the size of our balance sheet.

Stefano Gamberini

Thank you.

Operator

The next question is from Piotr Dzieciolowski with Citibank. Please go ahead.

Piotr Dzieciolowski

Hi. Good morning everybody. I have two questions. So, the first one I wanted to ask about, I was listening to the course of one other pipe operator and they mentioned that essentially they've seen a big decrease of the cost of a compressor station because of the cost of gas purchases and that fed into their financials. So, I just wanted to ask you how is that accounted on your side, whether you benefit of it or that's a full pass-through element on your financials?

And the second question I wanted to ask you about the TAG, which is now not utilized in Austria. So, is there any update on your discussion with the regulator how the issue could be resolved? Thank you.

Stefano Venier

As far as the TAG is concerned, I mean we have this discussion ongoing with the regulator. I think we will have some official outcome beginning next year. So, I hope to give you some more detailed results during the presentation of the business plan.

So, the only thing I can say those discussions are progressing and are progressing in the direction we were hoping for. That means find a way to sterilize the volatility of the results linked to the volume shipped and switch to a more strategic perspective that takes into account not only the role as a vehicle for the gas security of supply, but also the hydrogen opportunities.

And the second, regarding the cost of compressing stations. Those being technical investments on the infrastructure goes into the RAB and are fully covered by the return on RAB on the regulatory framework. I have to say that the increase in cost for the compressing station has not been so remarkable as probably you were referring to.

Piotr Dzieciolowski

Apologies. I was asking more about the cost of shipping the gas, like OpEx cost of the gas you have to burn for the compression segment to push the gas around.

Stefano Venier

Sorry, okay. That is a pass-through cost.

Piotr Dzieciolowski

Okay. Understood.

Operator

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

Davide Candela

Hi, good morning and thank you for the presentation and taking my question. I actually have just one. And I was wondering if you can comment a bit on the draft of the Energy Decree that is under discussion with the Italian government and the draft was mentioning about the new regasification facilities to be built in Italy in order to ensure the supply.

And I am aware that you may comment this and the final outcome will be out and maybe in the plan. But just to know if your current plan was envisaging those investments related to potential new regasification facilities and if these facilities should be built in the next few years. This would imply an additional strengthening of the infrastructure in south of Italy or you saw at the end further investment on gas infrastructure? Thank you.

Stefano Venier

The two facilities you are referring to of course are developed by two prime players. As I mentioned and as part of the strategic infrastructure to strengthen the Italian system, there is the Adriatic Backbone. The Adriatic Backbone will be built by 2028. The first one will be ready by the end of 2026 to be compliant with the Repower EU and possible proceeds from EU commitment.

And the second phase will be by the end of 2027 so to have this 10 billion cubic meter of additional capacity available from 2028. This is the additional transportation capacity South to North that we will offer to the market and that will be potentially fulfilled by these new units.

Of course additional capacity can come in case there is a reduction in flows from the current sources. That means primarily Algeria. Otherwise new additional transport capacity will be required with the consequent time for authorization and construction.

There is another number I'd like to recall is the fact that with this 10 bcm of additional capacity, total transportation capacity South to North will increase up to 55 billion cubic meter. That has to be added to the 28 billion cubic meter of the LNG capacity that will be available on the northern part of Italy through the LNG infrastructure that makes the total input capacity for the country.

Davide Candela

Many thanks.

Operator

Gentlemen, there are no more questions registered at this time.

Stefano Venier

So, thank you to everyone for participating in this call and see you soon.

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Snam S.p.A. (SNMRF) Q3 2023 Earnings Call Transcript