Snam S.p.A. (SRG) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call Conference operator. Welcome, and thank you for joining the Snam First Half 2024 Consolidated Results Conference Call. [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.

Good afternoon, ladies and gentlemen, and welcome to Snam H1 2024 Consolidated Results Conference Call. Today's 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 key highlights of the period. Luca will walk you through the financial performance, then back to Stefano for closing remarks, and finally the Q&A session. And now I will hand over to Stefano.

Thank you, Francesca, and good afternoon. I'll start on Slide 2. In the first half, we delivered strong growth with adjusted EBITDA up 16% year-on-year at EUR 1,417 million, mainly thanks to the weighted average cost of capital uplift, the ROSS effects and the rapid growth. The adjusted net income at EUR 691 million is up 11% year-on-year. Investments reached EUR 1,159 million, up 60% versus first half 2023, and the net-debt at EUR 16.4 billion with 2.5% average net cost of debt. Last week, we signed the agreement with Edison for the acquisition of Edison Stoccaggio. The deal will further strengthen our industrial and strategic position while creating the net profit. I will provide more details on the deal financials and rationale later on. At the same time, we continue to extract value from our existing portfolio of associates and from our financing strategy. First, the new reference price methodology in Austria was approved after a long negotiation and embed volume risk sterilization. It will bring back to profitability our Austrian associate TAG from 2025, providing visibility throughout the next regulatory period that goes from 2025 to 2027. Second, Enagas, GRTgaz, and our associate Terega in cooperation with OG signed an agreement for the development of the BarMar H2 infrastructure, that is part of the H2Med corridor. Moreover, we continue to optimize our cost of funding. We have issued EUR 1 billion sustainability credit line in May, replacing more expensive credit facilities. We have obtained EUR 100 million from EIB to support our subsidiary Renovit in the energy efficiency projects. And our board of directors today has approved the issuance of up to EUR 1.25 billion hybrid bond to finance Edison Stoccaggio acquisition and the relevant CapEx plan while keeping the full financial flexibility. At global level, as you probably know, gas demand is up 3%, driven by industrial recovery, while in Italy, gas demand declined by 4.3%. This, along with a well-supplied market and historically high gas storage level in Europe contributed to keep average gas prices 34% below last year. Italy has filed the European -- has filed to Europe, the climate and energy plan that envisages about 58 bcm of gas demand by 2030, of which 5 bcm or 9% biomethane and the key role of H2 and CCS to reach the de-carbonization target set for 2030. We are keeping to present updated scenario by September aligned with the climate and energy plan, and we continue to contribute to the working groups set by the Italian Ministry of Energy & Environment, which has the target to release the H2 strategy and to define the carbon capture strategy framework by the next September. Moving now to Page 3. I -- we can highlight the, let's say, progressive deployment of our strategy that is focused on becoming a pan-European multi-molecule operator, leveraging on synergies between gas infrastructure and energy transition businesses. Then starting from the gas infrastructure, we can summarize that the 2025 tariffs has been approved for transport, LNG, and recently, the storage. The storage level, as I mentioned, is at about 86%, well above the historical levels for this period of the year, and with 100% of the 12.4 bcm of storage capacity for the thermal year 2024-2025, already allocated, and we are on track to have the full facilities full by the end of October. For the Adriatic corridor, the backbone to strengthen the south and north capacity, the first phase works have started, and we are progressing with the Ravenna floating vessel terminal works, expected to be operational by the beginning of 2025. The short-term milestone for the assigning of the Repower EU grants to the Adriatic line and export were met in time. The 2 projects have to be completed by the end of 2026. Let's now move on energy transition. The market test result to assess the [indiscernible] industry's appetite were supportive, and we will provide more details in the following pages. The pilot project for CO2 capture and this sequestration in Ravenna is going to start soon. Several progress on South H2 corridor, the Italian, Austria, and German TSOs mapped in Rome, the last 18th of July, and to define the project governance and the next steps along with the 3 different governments. The Renovit backlog is stable at EUR 1.2 billion, and on biomethane, 8 plants won the tariff auctions, equivalent to about 18 megawatt, and we have been successful for 100% of the plans submitted. We will submit a further couple of projects at the end of August and the rest by the end of the year. On the sustainability side, the CapEx aligned to EU taxonomy and SDGs represent respectively the 32% and 52% of the total H1 CapEx 2024. We continue then to reduce the Scope 1 and 2 emissions and the full year 2024 is foreseen being down 17% with respect to the 2022 levels. MSCI has confirmed our AA rating, and we are engaging with current and potential shareholders on our first transition plan that will be published before the year-end with the objective to align in a single document, the Snam climate and biodiversity strategy, key achievements, further targets and key metrics, including physical and transition risk assessments. Finally, explaining how our assets will contribute in securing affordable energy along and beyond the transition to net zero. Let's now spend a few words on the Edison Stoccaggio acquisition on Page 4. As you know, after the submission in June of a binding offer, last week we have reached an agreement for the acquisition of the 100% stake of Edison Stoccaggio from Edison. As known, the perimeter comprises 3 storage sites located nearby our facilities with a total capacity of about 1.1 bcm, operating under a fully regulated regime. The enterprise value for the acquisition is equal to EUR 560 million, subject to adjustment at closing. The last update is, until Q1 2025, following regulatory approval in details refers to antitrust and golden power authorizations. The agreement also provides for an in and out mechanism based on the outcome of the administrative dispute with ARERA relating to the past remuneration of the San Potito and Cotignola assets for an amount up to EUR 45 million, which is a full pass-through. The deal implies a premium on the 2024 RAB of about 12%, that is close to the one at which Snam is trading at the moment and below recent comparable M&A transactions. This acquisition was not envisaged in our strategic plan. To maintain the current financial flexibility, we have decided to finance the deal by issuing hybrid bonds, thus maximizing the net income accretion that is foreseen in between 1.5% to 2% already from the closing, while EPS contribution will be neutral to positive. The strategic rationale is sound as Snam will consolidate its strategic role in securing Italian gas supply, increasing exposure to Italian regulated activity consistently with investment strategy outlined last January and exploiting operating efficiencies, leveraging on Stogit scale, asset proximity, and expertise and know-how. The fit is strong. Also looking at the asset carbon footprint as Edison Stoccaggio plants are already equipped with electric compressors. We have included about EUR 1.5 million of revenues and cost synergies equal to about 3% of the EBITDA in the evaluation that we deem conservative and we will work to extract further value from the deal. Let's now move on Page 5 to have a snapshot on H2 and carbon capture market test results. In the past months, we carried out a market test to assess the appetite for both H2 hydrogen and carbon capture in Italy and neighboring countries. More than 120 companies submitted the questionnaire. We have analyzed the data gathered and the results are very supportive, pointing to and about 37 million of avoided emissions per year in Italy and 11 million in Austria and Germany by 2040, thanks to the use of hydrogen and the carbon capture. With regard to hydrogen, about 80% of expected consumption will come from hard-to-abate sectors and power generation. By 2040, production hubs will emerge in south of Italy, but not enough to fully meet the projected demand. Therefore, Italy will play an important role as transit country from North Africa to north of Italy and Central Europe as the South H2 corridor encompass. As far as CCS is concerned, more than 60 non-binding expression of interest were submitted from 172 industrial sites in Italy, mostly concentrated in the Po Valley clusters and from some industrial districts in the southern part of Italy. Strong interest came from building materials, refining steel, waste-to-energy, and power generation. The results of the market test, along with the ongoing progress on regulatory front, and the strong institutional backing are very supportive to our strategy and the PCI projects just mentioned the south H2 corridor and the so-called Callisto for CC for carbon capture projects in Ravenna that is developed jointly with DNI. Now I'll turn to Luca for more details on the financial results.

Thanks, Stefano, and good afternoon, everyone. We are now on Slide 6 to comment on first half 2024 EBITDA. EBITDA for the period was EUR 1.47 billion, plus 16% versus last year or plus EUR 196 million. The growth is mainly attributable to regulatory items for a total of around EUR 119 million related to the WACC increase for around EUR 86 million and ROSS effect that factors low money on transport for EUR 33 million. Regulated revenue change was driven by transport and storage revenues increased by around EUR 80 million, a recovery of the 2023 LNG extra revenues for EUR 29 million. Output base rise by EUR 8 million related to the contribution of the output based on storage, partially counterbalanced by the decrease of the output base related to the default services. Higher allowed OpEx due to inflation, partially offset by the expected phase out of input-based incentives. Finally, Piombino FSRU started operation from July 2023 and contributed positively by EUR 32 million of EBITDA. The increase in regulatory fixed costs is mainly attributable to labor costs, mainly inflation and the extension of the employee's health insurance. With regards to the energy transition businesses, the end of the super-ecobonus incentive on energy efficiency, along with the de-consolidation of 8 megawatts of biomethane plants drew to a slightly negative contribution, minus EUR 4 million in the first half of 2024. Moving to Slide 7, adjusted net income for the period was EUR 691 million, plus 11% compared to first half 2023 due to higher D&A by EUR 44 million following a rising investment and EUR 12 million write-down on gas infrastructure. Net financial expense is higher by EUR 43 million, mainly as a result of higher net cost of debt, which moved from 1.7% to approximately 2.5% in first half 2024 as the effect of the increase in interest rates, partially counterbalanced by the increase in capitalized interest and the increase in financial income related to the full service and to the ecobonus. A substantially flat contribution from associates, which was the result of slightly lower international associates contribution, minus EUR 2 million, flat contribution of Italian associates. Finally, higher tax rate due to higher EBIT and tax rate increase from 24.5% in first half 2023, to 26.8% in first half 2024, mainly as a result of the termination from 2024 of the so-called ACE Italian fiscal benefit and the lower rate of associates contribution to EBIT. Moving to Slide 8. Our international associates possibly contributed to group net income by EUR 111 million, almost in line with the same period of last year. In detail, TAP inflation-adjusted tariffs drove a slightly higher contribution compared to last year. In first half 2024, TAP covered 17% of Italian imports, recording a plus 6 increase in total volume of gas transported to Italy due to the higher short-term bookings. Works for the 1.2 bcm expansion running from 2021 market tests are underway. SeaCorridor benefits from the one-off release of a fiscal provision related to TPPC and a better product mix with approximately 11 bcm transported towards Italy, it represents the main source of supply for Italy. Terega performance already reflects new regulatory period starting in 2024, in line with our expectation. Desfa lower contribution is the result of the lower auction premium on LNG imports, and on export towards Bulgaria, now closer to historical trends. Desfa is progressing on its ambitions of EUR 1.3 billion CapEx plan, that will support the domestic lignite phase out and the Southeastern Europe market development. ADNOC performance is in line with expectations. Interconnector's contribution remains in lines with the yearly regulatory adjusted by inflation. The capacity is almost 50% booked until 2026, thus providing medium-term visibility. EMG performance benefits mostly from the recording of positive non-recurring items related to previous years. Moving to Austria, TAG year-on-year delta is due to the slight booking decrease. GCA's performance has been impacted by lower bookings and higher revenues recorded in 2023 to recover previous year energy costs. As mentioned by Stefano, the new reference price methodology in Austria was approved in embed volume re-sterilization, providing visibility for the 2025, 2027 period. However, it has also entailed a risk premium reversal of past revenues that impacted TAG for EUR 8 million, and GCA for EUR 22 million, which is included as special items in our net income adjusted. You will find in the annex a brand-new detailed presentation of all our associates, including description of the business model and key financials. This, along with the disclosure that we provide on a quarterly basis, will help you to better assess their value. Turning now to cash flow on Slide #9. Funds from operations for the period amounted to around EUR 1.124 billion, bringing our EBITDA cash conversion to a very sound 80% and were only partially absorbed by EUR 70 million of working capital. This was driven by a broadly neutral impact from a regulatory working capital with about minus EUR 260 million absorption due to the balancing and settlement activity, of which about EUR 400 million raised by reduction in balancing item payables, approximately minus EUR 270 million related to cash deposits decreased due to the gas price reduction, around EUR 120 million positive related to the default service receivables decrease, and about plus EUR 290 million raised through settlement activity. Partially, all this was counterbalanced by EUR 240 million positive tariff-related items, mainly driven by additional tariff components. Moreover, about minus EUR 320 million of absorption mainly driven by the energy efficiency trade payables decreased in another cash deposit reduction. Finally, about plus EUR 270 million of tax payables temporary increased. Net investments for the period amounted to EUR 1.122 billion and in the first half are purely funded by the FFO generation. Other outflows were related to the payment of the dividend for EUR 937 million, resulting in a change in net debt of about EUR 1.082 billion. Moving to Slide 10, the change in net debt, as I said, amounted to about EUR 1.1 billion, resulting in EUR 16.352 billion of net debt at the end of the period. The average net cost of debt moved to 2.5%, while the fixed to floating ratio stands at about 70% to 30%. Sustainable finance and committed financing is up to about 83%, thanks to the recent funding executed. In terms of financing, during the second quarter we secured EUR 750 million FRN bond, which was swapped to fixed rate and EUR 1 billion of sustainability-linked RCF line, which together replaced the EUR 1.8 billion pre-existing RCF line guaranteed by SACE, the Italian ECA. EUR 200 million of sustainability-linked banking facilities and EUR 100 million of EIB financing to support energy efficiency initiatives promoted by Renovit on public and private buildings and industrial activities. The financing is in line with the objectives of the Repower EU. Financing needs for 2024 are almost covered. Based on the current forward curve, we expect the average cost of net debt for the year to remain stable at 2.5%, which is slightly better than what we forecasted for the year. And now let me hand over to Stefano for the closing remarks.

Thank you, thank you again, Luca, for this very detailed explanation of the different components of our results. In conclusion, we have delivered a solid growth in H1, and we are confident to reach our full year guidance that was recently upgraded in May. The CapEx will reach EUR 3 billion driven by gas infrastructure, investments, which include, among others, the start of the Adriatic line that started to be accounted in Q4 of this year and mooring and connection investments for the second floating vessel in Ravenna. Those works will be completed by year-end. The tariff RAB is up around 6% year-on-year to EUR 23.8 billion. The EBITDA in excess of EUR 2.75 billion, driven by the weighted average cost of capital uplift and the deflator impact, ROSS effects on transportation and the RAB growth as we mentioned for the first half. The adjusted net income guidance at approximately EUR 1.23 billion are up 5% year-on-year. And the net debt is expected at EUR 17.5 billion, including EUR 400 million of working capital absorption and the cash out for the increase in stake in the Adriatic LNG. So let me say in conclusion that visibility is high as regulation is set, tariffs has been approved, investments are approved, and policies are evolving in line with our strategy. While we progress in delivering our strategy to become a real pan-European multi-molecule infrastructure, we continue to look for value creation opportunities also through M&A, like the Edison Stoccaggio deal, and we aim at keeping a solid balance sheet to retain financial flexibility even after the recently announced acquisition. So then thank you very much for your attention and the time spent with us, and we are now available to take all your questions.

[Operator Instructions] The first pair of questions is from Jose Ruiz with Barclays.

Just 2 questions. The first one is if you could provide us the mark-to-market of WACC for the observation period? I know there are 2 months left, but if you could share with us what calculations you're getting? And secondly, I heard and I think I'm right that bond wrote off some of the stake in GCA, Gas Connect Austria, is something you would be considering?

Regarding the mark-to-market WACC, yes, you're right, only 2 months observation are left currently on transport, which is the main one we point -- the mark-to-market points to a 5.5% WACC for the next regulatory period, which is similar when we announced the first quarter results and is 20 basis points lower vis-a-vis our assumption in business plan. As I mentioned when we presented the first quarter results, clearly, we expect to offset this WACC decrease vis-a-vis our expectation by a lower cost of debt because clearly this is impacted by lower interest rates. When it comes to GCA, yes, you're right. Verbund, which is the majority shareholder of GCA took an impairment on GCA. Currently, we only recorded in the first half for the reversal of the risk premium in total for our share. In total, 100% was EUR 190 million, which is what actually Verbund recorded. We recorded our share, which is EUR 22 million in basically special items adjusting basically in our net income adjusted. Our current book value for GCA is EUR 112 million. We will run the impairment test once we have the business plan finalized on the new regulation, which currently is not done yet. But let me say that having already taken this impact, this is a mitigant in the sense that we expect the impairment test to be neutral.

The next question is from Javier Suarez with Mediobanca.

Two questions related to the Edison deal. So the question is if you can elaborate on the synergies, the operational synergies that you're expecting to extract from the acquisition of this asset, and how important this is for the stability of the overall Italian system and for the operations of Snam. And related to this question among the options that you are considering to finance this deal, obviously, you are considering a division of hybrid. And the question is taking into consideration that the closure of the deal is going to be during first quarter 2025, the issue of new hybrid is going to be after the completion of the Edison deal or we could see hybrid issues during the second half of 2024.

I'll take the second question first. Clearly, on the financing of the deal, as we mentioned and you recall that perfectly, we are thinking of issuing an hybrid. You know that from signing to closing, we need to complete both anti-trust as well as the Golden Power approval. So we will see whether we're going to be in a position to actually anticipate the financing towards the closing or not, but it will depend on our basically discussion with both the antitrust as well as the government for the Golden Power rules.

With respect to the questions about what is the strategic role those assets can have in existing Stogit -- Snam portfolio. I think it's important to consider a couple of things. First, the location of those assets that are very near by the ones that we manage. So they are located in the corridors used also for our assets. I think the coordinated the management of these additional 3 sites will provide benefits to the overall security and the availability of the storage capacity. Of course, as you know, these assets requires from time to time maintenance activities and the coordination and the best -- let's say, settlement of this, let's say, maintenance plans can give and guarantee the adequate storage capacity available. The second, I think we will have opportunities to exploit some of the flexibility in allocating the capacity in selling the capacity, in the reverse flow mechanism and all that stuff that helped to guarantee a fulfillment of the storages at the end of the thermal season at a very high level that is now guaranteeing the full completion and the fuel use of the available capacity by the end of October on one side. And on the other side, of course, lower demand during summer period that means, let's say, more competitive prices. So I think that from the operational side and also from the security of the Italian system, this can provide a tangible contribution. In terms of synergies, of course, first comes the part related to, let's say, the cost synergies to coordinate and exploit the economies of scale, the practices know-how and the way how we do manage the largest asset portfolio we have. And on the other side, as I mentioned, the potential revenue synergies driven by the more flexible approach in the use in the allocation of capacity. The total amount that we have been considering, as I mentioned during my presentation, ranges on about EUR 1.5 million, EUR 2 million per year, that makes a cumulative impact over the period of use of these assets up to EUR 37 million.

The next question is from Stefano Gamberini with Equita SIM.

First, regarding the Slide #6. Could you repeat if there is a one-off among their revenues? If I understood correctly, there is something in the region of EUR 30 million of LNG premium related to 2023. And on the other side, regarding the OpEx, I would like to understand if the capitalized costs increased during this year due to the higher CapEx that you have? And the second question is regarding your approach, regarding the financing of the acquisition of -- is through the issue of a hybrid bonds. So this means that you increase your cost of capital and you issue more than a double of the price you paid. So this means that you are increasing your flexibility -- that if I remember well, was in the region of EUR 2 billion, and so this means that this will increase more. Why you do not choose to dispose part of your associates at the time in the region of EUR 4 billion in this moment, and you prefer to -- we can say, increase capacity for further future growth, and where this growth should arrive?

So on the first one, yes, we recover in revenues basically 2023 LNG extra revenues for EUR 29 million, which is clearly a one-off. When it comes to cost, basically, the increase, which is EUR 14 million, 1-4, as I said, is mainly attributable to labor cost, which is driven by inflation in order to basically align our collective contracts with a new inflation -- and to the extensions of employee health insurance, which is actually a management decision. We do not have an increase in capitalization of cost, if that was the question. On question number three, we have the authorization for acquisitions up to EUR 1.25 billion. It doesn't mean we're going to utilize all the authorization, and generally, when you insert a new capital layer in our capital structure, we don't have to be -- to match exactly what is actually the acquisition cost of the assets, even because the assets will require further CapEx going forward. And again, the reason behind it is clearly to maintain the existing financial flexibility of the company. Bear in mind that we will update our industrial plan in January next year. And clearly, we see basically organic opportunities to increase our investment. Therefore, we want to maintain that kind of flexibility. Let me also add that in terms of efficiency, hybrids at the moment are very efficient being just slightly above cost of debt. And as you know, they are recorded in the equity from an accounting perspective. Actually is one of the best, I would say, period in terms of the differential between vanilla debt and hybrids, and are very efficient because also they are tax deductible. So from a blended cost, actually the increase in cost is very marginal.

And we also made certain assessments about options with respect to, for instance, the possible disposal that you mentioned, and we thought that this could be the best -- the most efficient way to finance this type of acquisition. Because as you know, when you have to sell is not the best time for selling and to get the best return.

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