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

Welcome to the H1 2026 Results Presentation Conference Call. My name is Gara, and I will be your operator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to Francesca Pezzoli, Executive Director, Investor Relations and Sustainability, to begin the conference. Please go ahead.

Good afternoon, ladies and gentlemen. Welcome to the presentation of Snam's consolidated results for the first half of 2026, which were approved by the Board earlier today. I am here with Agostino Scornajenchi, Snam's CEO and General Manager; and Luca Passa, Chief Financial, Sustainability and International Asset Management Officer. The presentation will be divided into 3 parts. First, Agostino will offer an overview of recent market developments and the main industrial and financial milestone achieved during the period. Luca will then provide a detailed overview of our financial performance. After that, Agostino will provide closing remarks, followed by the usual live Q&A session. With that, I'm pleased to hand over to Agostino.

Thank you very much, Francesca. Good afternoon, everybody. Before commenting our first half results, I would like to start with a broader perspective on the energy system on Slide #3. When discussing energy, it is important to keep a clear view of the facts and the underlying numbers. In Italy, as in many other major European countries, figures state that natural gas is the backbone of the energy system. In particular, in Italy, it accounts for around 37% of the country's primary energy consumption, making it the largest single energy source. Its importance becomes even clearer when looking at power generation. While electricity accounts for only around 1/4 of Italy's final energy consumption, a share that has remained broadly stable over the past decade. Natural gas generates roughly half of the country's domestic electricity production, excluding imports, which account for around 15% of supply. This underscores the critical role of natural gas in ensuring flexibility and system balancing. This contribution is not only essential today, but likely to become even more important in the years ahead. As renewable penetration continues to increase, the need for flexible generation capacity will grow. At the same time, ongoing electrification of final users and new sources of demand, including data centers, could trigger electricity consumption growth after years of stagnation, further reinforcing the need for reliable and resilient gas-fired generation fleet, which is the only flexible generation technology available. This is why we believe the future is not about replacing one technology with another. It's about building an increasingly integrated, diversified and resilient energy system, where electricity, molecules, storage and infrastructure will work together. This is why we consider this as the energy integration era. Moving now to Slide #4. Well, we are living in a world increasingly shaped by competing geopolitical blocks, where access to energy has once again become a source of economic and strategic power. The events of the past few years from the war in Ukraine to the recent escalation in the Middle East have reminded us the importance of resiliency. One lesson stands above all others, energy systems must be diversified and built with redundancy. We need multiple routes, multiple suppliers and sufficient spare capacity to absorb shocks that are unpredictable by definition. The slide clearly illustrates how rapidly Italy has transformed its supply mix, moving from a system largely dependent on pipeline import from Russia to a significantly more diversified one, leveraging both the flexibility of existing gas infrastructure and the addition of new strategic assets. In particular, LNG plays a pivotal role in this transformation. LNG imports have more than doubled since '21 and accounted for 32% of total inflows in the first half of 2026, supported by the commissioning of the Piombino and Ravenna regasification terminals. As a result, LNG has evolved from a complementary source of supply into a structural pillar of Italy's energy security, significantly enhancing the flexibility, resilience and diversification of the country's gas system. In this context, Italy holds a unique position in Europe with 5 entry points by pipe and 5 LNG terminals, diversified sources of supply and strong connectivity with both North Africa and Central Europe. This creates optionality, which has become one of the most valuable assets in today's geopolitical environment. Italy can really help Europe enhancing its security of supply. Such security of supply is built on 2 complementary pillars: diversified import routes and strategic storage capacity. And I'm now on Slide #5. Diversification protects against supply disruption or changes. Storage provides flexibility, meets seasonal demand peaks and acts as a strategic buffer, helping market stabilization during a period of stress. This has become even more evident over the last few years. Through a proactive approach and close coordination with institution and the regulator, Snam has ensured the condition for a timely and efficient storage refill ahead of winter. As of today, storage levels reached around 70% of total available capacity compared with a European average of approximately 55% and this including Italy. Moreover, through actions held in April, it has been allocated sufficient capacity to achieve the target of filling Italian gas storage facility to at least 90%. The coordinated effort of institution in achieving this target has helped minimize overall system cost. This really represents a critical factor in the current context of supply uncertainty, supporting system security while helping to mitigate price volatility and reducing market speculation. While storage filling is a necessary condition, it is not sufficient on its own to ensure security of supply throughout the next winter. Nevertheless, thanks to its storage position, diversified supply portfolio and infrastructure flexibility, Italy is currently better positioned than many, many other European countries. Now it's time for our European peers to accelerate as the rest of Europe continues to lag behind. Moving now to gas demand on Page 6. In the January-June period, Italian gas demand amounted to 33.1 billion cubic meters. The 0.4% increase year-on-year was mainly driven by the thermoelectric sector due to lower hydroelectric generation and rising power demand. '26, it is the second year in a row, displaying a recovery of volumes, notwithstanding high and volatile prices. Residential consumption was primarily influenced by weather condition and overall demand proved to be quite volatile. Export remained broadly stable at around 1 billion cubic meters, mainly through Tarvisio. So far in Italy, we have not observed any physical disruption to gas flows as all the Qatari volumes affected by force majeure were effectively replaced by cargoes from alternative geographies, mainly from the U.S. Looking more broadly at Europe, gas demand across the sixth largest market has declined by around 1% since the beginning of the year, with the most significant reduction recorded in France and U.K. At the same time, LNG inflows have remained resilient and slightly increased overall. Lower LNG imports from Qatar has been largely offset by higher volumes from the United States. Meanwhile, storage levels in Europe, as previously discussed, remain at the lowest point seen over the last 5 years. While physical flows were unaffected, geopolitical uncertainty drove prices volatility. In order to facilitate the access to updated, trustworthy and neutral data, I'm glad to announce that we have just launched Polaris, Snam new monthly energy market report designed to provide investors and stakeholders with a timely, reliable and data-driven data and analysis on the Italian energy system. Each addition will include key market indicators, gas demand and supply dynamics and storage trends. In addition, every quarter, the report will feature an in-depth analysis of different strategic topics, helping to provide context behind the headlines. Now I'd like to highlight an important dynamic that we observed during the severe heat wave that affected Europe over the past few weeks on Slide #7. The data provide a very clear illustration of the role of gas-fired flexible generation plays in maintaining system stability during periods of stress. During the hottest week of June, we observed a significant decline in wind generation, which is a fairly typical pattern during prolonged heat wave conditions. At the same time, electricity demand remained robust, driven in part by higher cooling needs. Gas-fired power generation stepped in to fill the gap. In some weeks, gas generation almost doubled, effectively compensating for the lower output from wind. This is an important reminder. Gas demand is not only evolving in terms of volumes, but also becoming increasingly volatile. Beyond average consumption level, there are periods where gas is required at very short notice and in significant quantities to offset fluctuations in other sources of generation. On Slide #8, we highlight the key achievement delivered across our industrial growth agenda, which remains the core pillar of our strategy. Progress has been made across all of our platforms, including natural gas infrastructure, carbon capture and storage, hydrogen and market solution. Starting with transport, the Adriatic Line Phase 1 is 90% completed, and the first batch of the Sestino Minerbio line entered in operation. Storage levels reached around 67% at the end of June and are at 75% today, with the 90% filling target before the next winter already secured through the above-mentioned auctions. LNG continues to provide significant volumes and flexibility, accounting for around 32% of total gas imports with 110 cargoes already delivered to Italy. Moreover, we sold 40% of Ravenna capacity forward for the next 10 years. Moving now to hydrogen and CCS. Our projects have been confirmed as project of common interest and project of mutual interest, underscoring their strategic relevance. On the Ravenna CCS project, following the approval of the environmental impact assessment for the first section of the transport network, the permitting process continues to advance. The environmental impact assessment and the single authorization procedure for the storage phase are currently underway. On biomethane, the binding offer phase has been concluded, confirming strong market interest in the asset. We are now close to defined next step of the process, targeting signing by year-end with the business to be classified as held for sale. Moving now to Page 9, some highlights for the period. On the regulatory front, the energy law decree has mandated ARERA to define the regulatory framework and the key principle for CCS. The first consultation document for the 7 gas transportation regulatory period was published during the quarter, and we submitted our comments by the June deadline. There are 2 months remaining in the observation period for the macroeconomic variables underpinning the '27 WACC WACC market. Based on the data observed to date and the forward curves today available, regasification appears to be on the edge of activation, excluding France. However, given the elevated market volatility, we consider still premature to draw definitive conclusions. Moving now to financing. In June, we successfully issued a dual tranche European green bond, a sustainability-linked bond and the Board of Directors today approved a potential U.S. dollar future issuance following last year inaugural one. On sustainability, we continue to progress with sustainable finance reaching 90% of total and Scope 1 and 2 emission expected to decline by more than 30% versus '22. We also renewed the gender equality certification for the group. Results, we delivered a sound H1 '26 figures with adjusted EBITDA of EUR 1,572 million, that is up 9% year-on-year, driven by organic growth and larger perimeter. When adjusted for the one-off related to 2024 deflator update recovery booked in Q1 '25, adjusted net income at EUR 733 million is up 3% year-on-year, net of the above-mentioned one-off, thanks to higher EBITDA, partially counterbalanced by additional depreciation and financial charges. Investments at approximately EUR 1.6 billion include the acquisition control of OLT. Net debt stood at EUR 18.8 billion versus EUR 17.5 billion at the end of '25. After the investment activity carried out during the period, the payment of the dividend, but also the OLT control acquisition and the cash out for Italgas exchangeable refinancing. Net of these nonrecurring items related to OLT and Italgas, net debt remained broadly stable and also the average cost of debt remained stable at 2.6%. And now let me hand over to Luca for additional details. Please, Luca.

Thank you, Agostino, and good afternoon, everybody. I am on Slide #11. Out of the total investment, around 33% refers to the OLT transaction. Considering only technical investments, over 50% are related to the development. 27% of the investment gross of OLT enterprise value acquisitions are European taxonomy aligned and include H2-ready replacements, dual fuel compressor station, biomethane plant connection, H2 and CCS investment and a large part of the biomethane CapEx and energy efficiency, excluding cogeneration. This figure will be 42% excluding OLT. SDG alignment is calculated only on technical investments, excluding the OLT business combination and is 52%, of which the majority goes towards SDG 13, 9 and 7, respectively, climate action, industry innovation and infrastructure and finally, affordable and clean energy. Let's now move to the EBITDA analysis on Slide #12. Adjusted EBITDA for the period was EUR 1.572 billion, plus 5% compared to last year and plus 9% netting the EUR 52 million deflator one-off recognized in the first quarter 2025. The growth is mainly attributable to regulated revenues increased for about EUR 47 million, mainly related to tariff RAB and output-based growth, partially counterbalanced by past money effects. Perimeter effects related to Stogit Adriatica growth for EUR 8 million that entered into perimeter from March 2025. Ravenna FSRU for EUR 8 million that started operating from May 2025, OLT consolidation for EUR 32 million consolidated from March 2026. On top, revenues from biomethane connections to our network for EUR 10 million. The slight increase in regulated costs, about EUR 6 million, is mainly attributable to labor cost and new hires. With regards to the Market Solutions businesses, the EUR 10 million EBITDA contribution increase mainly is driven by biomethane following higher business volumes and to the energy efficiency for energy performance contracts in the Public Administration segment. As for the full year 2026 guidance, we confirm adjusted EBITDA to reach around EUR 3.1 billion, driven by RAB growth, OLT consolidation and the full year contribution of Stogit Adriatica and Ravenna FSRU. Moving to Slide 13. Our associate portfolio once again demonstrated strong resilience in the first half of 2026 despite the ongoing geopolitical volatility affecting global energy markets. Overall contribution from associates reached EUR 212 million, up 4% year-on-year. The positive and negative drivers broadly offset each other, highlighting the benefits of a diversified portfolio and its ability to deliver stable earnings even in a challenging market environment. Let me now walk you through the main movements during the period. Starting with TAP, the assets delivered another very strong performance, supported by additional 1.2 bcm per year of transport capacity and a continued focus on cost efficiency and financial optimization. As a result, TAP was the main positive contributor to the portfolio's performance during the period. Looking ahead, we expect its contribution to be more than EUR 15 million, 1-5, above 2025 levels by year-end, driven by both incremental capacity and by a stronger financial profile. Turning to SeaCorridor. The performance reflected additional revenues during the second quarter, highlighting its role as a major import and diversification routes in time of uncertainty in the global LNG markets. Terega delivered a much stronger second quarter, partially recovering the weaker start of the year, thanks to cost rephasing and some additional bookings. However, lower cross-border bookings at the Spanish interconnection point are expected to weigh on the full year results. EMG was the only associate directly impacted by the conflict in Iran. Flows have fully resumed in April, and it's now running as expected. Finally, among the Italian associates, we recorded a lower contribution from Italgas due to the absence of a regulatory one-off recorded last year, combined with the dilution of our participation to 11.4%. We expect it to be more than compensated by year-end by the full year contribution of gas. Building on the excellent performance delivered in the first half, we expect around EUR 365 million contribution from the overall associate portfolio for the full year. To provide a more detailed view on our associates and better understanding of their values, we have included a dedicated section in the appendix of this presentation. Let's now move to the first half 2026 net income analysis on Slide #14. Adjusted net income for the period was EUR 733 million, minus 2% compared to first half 2025 and plus 3% net of the deflator one-off recorded in the first quarter 2025, net of fiscal effect. The trend is attributable to higher EBITDA already commented, higher D&A for EUR 45 million following new assets entering into operation and perimeter effects related to Stogit Adriatica, Ravenna FSRU and the OLT consolidation. Net financial expenses increased due to higher average net debt with an average net cost of debt substantially stable at approximately 2.6% compared to 2.5% in the same period of 2025. Higher contribution from associates for EUR 8 million as a result of higher international associates for EUR 10 million, counterbalanced by a decrease of EUR 2 million in the Italian associates. Finally, higher income taxes due to the increase in the IRA rate. As for the full year guidance, we confirm an adjusted net income above EUR 1.450 billion, which reflects the EBITDA performance, partially counterbalanced by higher D&A and higher net financial expenses. It includes around EUR 40 million of IRA increase related to the energy decree. Turning now to the cash flow on Slide #15. Cash flow from operations for the period amounted to around EUR 1.832 billion and was the result of EUR 1.232 billion of funds from operations and about EUR 600 million of positive working capital. The change in working capital was mainly driven by about EUR 400 million of tariff-related items, mainly related to the additional tariff components and about EUR 200 million of Superbonus fiscal credit decrease. Net investment for the period amount to EUR 1.154 billion, including the cash out related to the OLT transaction net of cash acquired. Outflows were mainly related to the payment of the dividend for EUR 1.04 billion. On top of that, we accounted the impact of the Italgas bond refinancing for EUR 432 million, while other items are largely attributable to the OLT debt consolidation, resulting in a change in net debt of about EUR 1.294 billion, of which EUR 913 million of nonrecurring transaction related to OLT and Italgas. As for the full year 2026, we expect the change in working capital to remain broadly stable at around EUR 600 million. The unwind of tariff-related items should be substantially offset by a further reduction in the Ecobonus receivables and by the positive working capital effect stemming from the disposal of a portion of the gas volumes acquired in 2022 under the strategic storage scheme earmarked for the liquidity corridor. Moving to Slide #16. Net debt at the end of June stood at approximately EUR 18.8 billion. The average cost of debt remained broadly stable at 2.6%, while the fixed to floating mix stood at 65%, 35%. This reflects a tactical rebalancing towards floating rate exposures aimed at preserving flexibility and optionality for future refinancing opportunities in a still volatile interest rate environment as well as in the view of the upcoming new WACC period starting in 2028. Sustainable finance reached 90% of committed financing, up 5% versus December 2024 closing. Following the refinancing in January of the EUR 500 million exchangeable bond into Italgas shares, we completed in June a dual transaction consisting of a 4-year European green bond and a 10-year sustainability-linked bond for EUR 750 million each. In parallel, we secured approximately EUR 1.2 billion of additional bilateral bank facilities, and we signed a second tranche with the European Investment Bank for EUR 124 million to finance the biomethane connection projects. In addition, we strengthened our liquidity profile and funding flexibility by extending and upsizing our core sustainability-linked revolving credit facility to EUR 5.1 billion. Our credit profile further improved during the period. Moody's upgraded Snam to Baa1 with stable outlook. Fitch reaffirmed BBB+ with stable outlook, highlighting metrics close to a single A category. And finally, S&P confirmed the A- rating while improving the outlook from negative to stable. Overall, these developments confirm the strength of our sound investment-grade profile. As for the full year 2026, we upgrade our net debt guidance from the previous EUR 19 billion to EUR 18.9 billion, mainly thanks to the expected better working capital evolution. And with that, I conclude, and I will hand over to Agostino for the closing remarks.

Thank you. Thank you very much, Luca. I'm now on Slide 18 for my conclusion. Well, natural gas plays a key role in the Italian integrated energy system. It remains the country's largest primary energy source while also supporting around half of domestic electricity generation. In this specific context, security of supply is the main priority. Through our infrastructure, we contribute to national energy security in 2 key ways. First, providing a highly flexible and diversified system where pipelines and LNG terminal work together to ensure access to multiple sources and routes of supply. In recent years, LNG has evolved from a complementary source into a structural component of Italian energy mix, significantly strengthening the system resilience. And second, by supporting the timely replenishment of our gas storage facilities. As said, today, our storage sites are around 70% full, well ahead of the European average, with the 90% level for next winter already contracted. While this is not by itself a guarantee against all potential challenges in the coming season, it is certainly the right place to start. In the first half of the year, we delivered across all our priorities and advanced the execution of our clear strategy. This is translating into a strong financial performance, underpinned by the strength, visibility and stability of our regulated business model. Looking ahead, we confirm that we are fully on track to achieve our 2026 financial targets while improving our net debt outlook, reflecting once again our continued focus on financial discipline, balance sheet strength and long-term flexibility. With that, we are now happy to take your live questions. Thank you very much for your attention.

[Operator Instructions] And the first question comes from the line of James Brand of Deutsche Bank.

And also for the additional disclosure on the associates, that's kind of interesting to see. Just had a couple of questions. Firstly, on the seventh regulatory period consultation document. Just wondering whether you had any thoughts on that? Does that seem to be kind of heading in a similar direction to current regulation? Or are there any major changes that are worth highlighting? And then secondly, on TAP, obviously see quite a nice step-up in profitability this year based on the expansion that you've done. Are there any more opportunities for expansion of the TAP pipeline? Could we see another one in a few years? Or is it kind of maxed out now in terms of where you can get to?

Okay. James, thank you very much.

Well, on consultation document, the ARERA that was the new Board recently appointed started the consultation around the seventh regulatory period. And they published half May, on the 14th of May, the relative consultation document. Well, we see both positive elements and also area of attention about that. A key positive aspect is that they have proposed a simplification of the ROSS framework, which could reduce fast low money volatility through the application of the current capitalization rate. There are, of course, areas of attention that are related to the potential increase in gearing that us in the WACC formula, which ARERA considered more consistent with our current leverage profile. On this point, of course, we have a very different view regarding the methodology to be used to calculate the leverage ratio. And therefore, we have submitted all our comments that is, let me say, the standard process in this consultation framework. There is another point of attention that this is a potential revision of the remuneration of work in progress. And again, we submit our observation on this given that we consider the remuneration of work in process a structural element of the remuneration profile of an infrastructure player as we are. There are a lot of other details that are under discussion. We do expect that the authority will adopt a final resolution in the fourth quarter of '27. We just had a public hearing from the authority. We were yesterday with them. Let me say, on top of the standard, let me say, negotiational approach that you have to take each time there is a new Board that is planning to introduce a new regulatory framework, let me appreciate the spirit of transparent, proactive cooperation among the different parties. We have taken difficult decision with the authority and with the Ministry of Energy this year. I've mentioned what we did on storage. I think that this is an important element of the discussion. Of course, we will do our job in negotiating as best as we can all the regulatory, let me say, tools, but we will do that in the spirit of cooperation, having clear in mind that our main task is to ensure security of supply and energy security to the country. On TAP expansion, please, Luca.

James, on TAP, I mean, TAP is obliged to conduct market test basically on expansion of the capacity every year. We did a test last year, which didn't provide any binding, let me say, request for additional capacity. However, we're starting with a binding market test in the first quarter of 2027, which has a full level of potential long-term capacity if clearly are requested by the market. And this will be Level 1, which is 1 bcm additional; Level 2, which is 2 bcm, Level 3, which is 3.6 bcm and finally, Level 4 for 7.4 bcm, with operations to basically be in place by 2031, 2032. So clearly, we will expect next year to understand whether there is additional need for additional capacity.

The next question comes from the line of Javier Suarez Hernandez of Mediobanca.

Three questions from me as well. The first one is a question on the European context. So the question for the CEO would be, how do you see the security of the European gas system ahead of the winter season? I know that it's a very broad question, but just interesting to see from your perspective, the difficulties the European natural gas supply may be facing ahead of the next winter season. That would be the first question. The second question is a follow-up on your latest views on the impact on the company and its profitability from the implementation of the full ROSS system or the full ROSS framework from 2028. And the third question is if you can update us on the -- where we are in the definition of the CCS framework instrumental for the capital -- for the CapEx acceleration on that area. Any significant discussion with ARERA or any feedback from the regulator would be appreciated.

Well, thank you very much, Javier, for your question. Well, let me say, I think that we did properly our part of the job accumulating storage capacity for the coming winter. I said before, it is important for our national balance that, of course, it's not enough to solve the European problem. The European problem can be solved only with the cooperation of all other involved countries. Having said that, we see that there is a lot of physical flexibility on gas market. So there are a huge amount of volumes increasingly available, mainly from the U.S. So in normal condition, we do not see any physical constraint. The problem is that we are not in a standard framework. We are in the middle of a war. We were expecting the war ended somewhere before summer, that is not the case. So normally, we do expect, for sure, additional price volatility and let me say, potential price pressure, given that at a certain point in time, the other countries will have -- they must accelerate on storage refilling for next winter. So for sure, we see pressure -- potential pressure on price. But I think the flows will be enough. But again, my statement is related to standard framework. We are not in a standard framework. So we cannot exclude that in case of, let me say, escalation of the conflict and also extension of the conflict, something could also affect in terms of physical availability. But we are not there for the moment. Lucas, on ROSS implementation, please?

So when it comes to the full ROSS implementation, I need to basically refer you still to the publication of what they did, what ARERA did back in August 2025, which is basically the bonus-malus mechanism that has been provided officially to operators and to the market, whereby we submit a 4-year industrial plan of the company, which is part of our 10-year development plan. And there is a bonus miles incentive mechanism that correct for CapEx estimate. Basically, you have an incentive of 0.3% on CapEx if the CapEx is lower of 1% versus the baseline submitted. There is no incentive in case the deviation is between 1% and 5%, and there is a malus of 10% of the difference in case of a deviation of more than 5%. Now as you know, this applies to the years 2026 and 2027, but will not affect basically remuneration. Now in the latest consultation around the seventh regulatory period regarding basically the potential evolution to ROSS, they only mentioned the possibility of simplified the fast/slow mechanism, basically disconnecting from the 5-year average that has been introduced in 2024 that for us will be clearly beneficial. But I cannot give you any impact as of now because it's very difficult. I can only refer you that in the first half of this year, we actually had a negative impact on the fast and slow money effect because clearly, we have evolution when it comes to the growth and decrease of investment year-on-year. So applying the 5-year average, this has a negative impact.

Okay. Regarding evolution of the CCS framework, we confirm that the government assigned to ARERA the responsibility to define a regulatory framework for CCS, and we confirm that on the basis of the information that we have access to, this regulatory framework will be based on the same principle that today is applied for natural gas.

The next question comes from the line of Bartek Kubicki please, of Bernstein.

A few questions from my side or more like topics to discuss. And firstly, I would like to start with your, let's call it, relatively bullish on the gas demand, and I have 2 questions related to that. First of all, in your modeling, what do you assume will happen to gas demand coming from gas-fired power plants once Italy deploys all the batteries they want to deploy. As you can imagine, there's quite a lot being under construction and will be under construction in the country. And secondly, I know it's not a discussion point today about the stranded asset risk, but we are wondering according to today's regulation and regulatory framework, what happens to the asset -- gas asset, which is stranded? Is it somehow compensated via the regulatory recovery mechanism? Or is it the cost you are going to fully cover? That would be kind of the first topic. And the second topic will be on your fixed floating cost strategy. And firstly, if you can maybe provide us a difference between your fixed cost level and floating cost level right now. So what is the benefit of moving more into the floating costs? And consequently, also, how do you compare it with your allowed cost of debt? So what is the potential outperformance you are getting from the fact that you are moving towards the -- towards having more floating debt on your book?