Snam S.p.A. (OTCPK:SNMRF) Q2 2022 Earnings Conference Call July 27, 2022 9:00 AM ET
Company Participants
Stefano Venier – Chief Executive Officer
Conference Call Participants
Javier Suarez – Mediobanca
James Brand – Deutsche Bank
Chris Laybutt – Morgan Stanley
Bartek Kubicki – Societe Generale
Stefano Gamberini – Equita SIM
Emanuele Oggioni – Kepler Cheuvreux
Mafalda Pombeiro – Goldman Sachs
Operator
Good afternoon. This is the Chorus Call Conference operator. Welcome and thank you for joining the Snam First Half 2022 Consolidated Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Venier, CEO of Snam. Please go ahead, sir.
Stefano Venier
Thank you. Ladies and gentlemen, good afternoon and welcome to the Snam’s first half results presentation. Let me apologize first for my voice, but I am just back from the COVID and therefore, my voice is pretty down in these days.
So, let me turn on Page 1st. In the first half of the year, the energy landscape has been dominated by the conflict between Russia and Ukraine. This has reshaped the policy priorities with increased focus on supply, security and affordability. This new context implies a greater need for infrastructure and services, a strong focus on interconnecting energy markets and acceleration of energy transition ambitions. Snam, was then Europe’s largest gas infrastructure operator and a leader on decarbonized gas, has a key role to play in this context. With its strong balance sheet, disciplined investment approach and unparalleled execution capabilities, it can deliver the investments needed to cope with the new scenario.
Taking a closer look at the first half of the year, the market context continued to be extremely volatile characterized by escalating geopolitical risk, high energy prices and rising inflation and interest rates. The energy crisis has had several policy implication, including a focus on filling storage, diversifying supply sources with consequences on gas routine, accelerating green gas and gas infrastructure. In the gas sector, demand was down 2%. Industrial demand was impacted by high prices. While gas-fired power generation was driven by historically low hydro production.
Exports to Northern Europe reached 1.8 bcm, 70% through TAG, confirming Italy’s role as a transport hub. The RAB deflator reached 3.2% in Q1, 2022, which is below CPI, but well above recent levels. Just as a reminder, the average 2022 deflator will have an impact on 2024 revenues. The tightening of European monetary policy drove rates and spread higher, but on our regulatory framework provides a good hedge against this backdrop. Over this time period, the company has confirmed – has performed well. We are contributing to supply, security by acquiring two new floating storage and regasification units, and acting as the operator of last resort on storage. At the same time, we have delivered strong results.
Adjusted net profit is up 1.7% despite the WACC revision impacting 2022, mainly thanks to the resilience of our core business, the contribution of new businesses and the strong performance of our associates. Net debt reduction versus the end of 2021 was driven by a temporary working capital swing that will revert by year end 2022. We have already secured the funding beyond 2022 and reached a 70% of sustainable finance, leading the second part of the year for opportunities of pre-funding activities, where we are working on.
Let’s have a look on the supply of security and the two floating vessels we have acquired in the recent 2 months. With regard to our acquisition of these two vessels, these have a regasification capacity each of 5 bcm per year or around a third of Russian gas supplies, as Italy is concerned and were secured on a highly competitive market. The first one called the Golar Tundra is expected to start operation during the spring of 2023 that is the purpose. And the second one, BW Singapore is expected to be installed in the upper part of the Adriatic sea outside of Albania. Operations are scheduled to start in the third quarter of 2024. As we had the chance to comment on the – on first – first quarter results, these two vessels will operate under a regulated regime, which provides visibility on the return, while increasing the Snam RAB.
Another snapshot on security of supply regard to the gas storage infilling. Looking at our role in contributing to Italy’s storage infilling in April, we have stored the operating volumes needed for the year up to almost 800 million cubic meter. And since June, we started to act as a – to act as the operator of last resort to overcome a slow infilling from shippers. Overall, we added 2 bcm, contributing to achieve a storage level that is around 71% nowadays. Please note that we are invoiced on the purchases, and we do not carry any volume or commodity risk. And moreover, it’s worth noting that in the second quarter, we have had a positive contribution from output–based incentive deriving from flexibility services, provided on short-term storage options.
So, now moving on – on the first half results on Page 6. Looking more closely to those, we can see that EBITDA for the period was €1,155 million, broadly in line with H1 2021 despite the effect of the WACC review applied from January 2022, which implied an overall cap of €64 million in regulated revenues. Other key moving parts compared to the last year were, on one side, the €29 million increase in regulated revenues, mainly attributable to the tariff RAB growth by €24 million and increasing output-based incentives due to the default service and the storage flexibility services providing more short-term options, as explained before.
It’s worth noting that in H1 ‘21 revenues benefited also from the release of past balance sheet items related to storage by €17 million. We had €8 million increase in fixed cost arose, of which €3 million due to higher utility cost and the rest was sundry costs. A €13 million increase in EBITDA of new businesses moving from €4 million contribution last year to €17 million. The growth is mainly due to the strong performance on energy efficiency, mainly thanks to the faster deployment of the residential business pipeline. As you recall that we had a €33 million one-off contribution from the sale of past year’s gas excess inventories, as we explained on the – on comment in the Q1 of 2022 results. In the year-on-year comparison, you have also to take into account that in the first half 2021, we benefited from one-off provision release by €11 million.
Moving to the adjusted net profit for the period, it has been up to €646 million. That is again up €11 million vis-à-vis last year. We have been increasing D&A by €26 million due to the new assets that were on stream. We had interest expenses broadly in line with the first half of 2021. Again, this is a remarkable result in our view because the increase in gross cost of debt that moved from 0.8% in H1 to around 1% in 2022 was mitigated by one-off income from the booking of the fair value associated to the reimbursement to Snam of the shareholder loan by OLT. In spite of the market deterioration, we confirm financial charges substantially in line with the previously indicated guideline. So we are fully consistent with that forecast so far.
Associates contribution was higher by €37 million, mainly due to the strong performance of interconnector. Already that has reached its maximum yearly potential contribution in the first half of the year, thanks to the high export flows supported by gas prices spread and greater LNG availability in UK as already – as we have already seen in Q4, 2021 and Q1, 2022 and as well a good performance on Italian affiliates. The contribution of DESFA was slightly higher than the first half of last year and above expectation, mainly thanks to the release of a litigation provision by €7 million. The new regulatory mechanism approved in June and active from July, which neutralized the effect of the higher energy cost drive to an increase of our expectation for the full year.
Given the strong H1 results and better-than-expected performance of associates, we are increasing our full year net profit guidance to at least €1.13 billion from the €1.1 billion. When making our projections, of course, for the full year, we have to take into consideration that part of the H1 results were boosted by some items that are not repeatable in the second half, such as the disposal of gas inventories we mentioned before or the interconnection contribution, as we commented above.
Let’s focus for a while on the strong performance of associates, and we have dedicated a specific page on that is Page 9 – Page 8, sorry. Our portfolio of associates performed ahead of expectation in H1, and is positioned along key gas H2 corridors. And the core part of current drive to increase supply of security and accelerate the energy transition. TAP has worked at full capacity in the first half, covering approximately 14% of the national demand. Its expansion is endorsed by the European Commission, which recently signed an memorandum with Azerbaijan supporting this corridor. This is likely to happen in 2 steps, with the first one set by Q4, 2022, and the second one in July 2023, with a target to have on stream both then by end of 2027.
As interconnectors, as already discussed in previous slides, the performance in the first half of 2022 has been stronger than expected and having more than 50% of the capacity booked. 2023 should be another strong year for this asset. DESFA continued to benefit from the strong LNG imports going to Bulgaria. We had the new auctions in these days and those went very well. The 10-year development plan to be approved by the regulator before the year and year end entails €855 million of investment. That is up by 60% on previous plan. And as you know, TAG is the asset that is more exposed to Russian flows. In the first half, volumes were broadly flat. And even in case of reduction stopped in the second part of the year, we are protected by the long-term contracts most of which expiring at the end of this year. In the long-term, we continue to see strategic value of this asset, thanks to the reverse flow option and its role on H2 backbone potentially towards Central Europe. Already 5 bcm of capacity on reverse flow were booked for a thermal year 2022-2023, and we had 2 bcm booked for 2023 down to 2025.
Let’s spend a few words about De Nora and the – the recent listing that unlocked to our extent significant value for Snam. We acquired, as you recall 35.6% stake in the company at the end of 2020 for a total value of €450 million. Over the past 18 months, De Nora continued to strengthen its market leadership, while delivering growth and increasing profitability and the outlook for 2022 is very strong. Moreover, it established a prominent position in the H2 ecosystem building on its credibility and track record. De Nora has 2-gigawatt electrodes manufacturing capacity and 1-gigawatt electrolyzer capacity through Nucera, a joint venture with Thyssen Group, which enjoys best-in-the-class backlog on the market with 2.5-gigawatt of green H2 project secured.
Listing De Nora is a remarkable achievement. It has been the largest IPO in Europe since the Ukrainian war underlying the high quality and uniqueness of the asset. As for Snam, we have nearly doubled the value of our investment within 18 months. We remain strategic shareholder, and we are working with De Nora for realization of the electrolyzer Gigafactory, supporting the creation of a national value chain for green H2. For this project, the European Commission authorized on mid of July, a public funding that is expected to cover approximately two-thirds of the total investment.
Let’s now spend the last chart on cash flows on Page 10. Finally, cash flow from operations from the period amounted to €2,318 million, including €1,384 million of cash generation from change in working capital. This strong effect already explained in Q1, 2022 is temporary, and we expect a reversal on H2. As we have already previously explained, from January 2020, Snam is responsible to cover gaps between intakes and offtakes of the distribution network buying and selling gas on a daily basis at market prices, though the Snam operated as a default service provider meaning that it’s required to supply gas for a limited period of time to customer, whose shippers last the commercial conditions to operate. These activities can generate temporary working capital swings due to the time lag of reimbursements.
I’ll try now to explain you the numbers in more detail, and I do apologize for the complexity of those numbers, but it’s to the benefit of your better understanding. In June 2022, the change in working capital was mainly driven by the results of around €1.2 billion temporary cash generation from balancing and settlement activities that includes the collection of receivables, the increase in payables versus CR, the net balance between receivables and payables versus shippers related to the clearing house services, additional cash in relation to the increase of shippers deposits, a positive balance of the settlement activities and from tariff-related items. This was only partly offset by an increase in receivables related to the default services. Among other changes, we also explained some absorption of cash from energy efficiency due to the growth of sale in deeper innovation or so-called super Ecobonus line of business.
Moving to investments and of the period, these are mainly related to CapEx and CapEx payables. The cash out for the acquisition of the Golar Tundra that happened in June 2022 for €329 million, and the cash out for the acquisition of the two plants from Asja transaction, referring to Anzio and Foligno, as we recalled on Q1 results comments. The cash in from the partial reimbursement of the OLT shareholder loan by €197 million and the cash in from the IPO of De Nora by €150 million. Other outflows of the period have been related to the dividend payment that was equal to €844 million.
Finally, it’s worth mentioning a non-cash item, mainly related to the convertible bond. At the full year, we expect the net debt to reach approximately €15 billion, which is fully consistent with the previous €14.8 billion adjusted for the acquisition of the new FSRU and cash in from the De Nora listing. This forecast assume neutral impact on system balancing, working capital, which given the market volatility is extremely difficult to predict 6 months in advance.
So then, I will leave you the floor to your questions and happy to answer.
Question-and-Answer Session
Operator
This is the Chorus Call conference operator. [Operator Instructions] The first question is from Javier Suarez with Mediobanca. Please go ahead.
Javier Suarez
Hi, good afternoon and thank you for the presentation. Three questions from my side. One is on the geopolitical thing. Obviously, the situation in Europe with regards to gas supply is worsening. And I was wondering your impression on the debate – in the acceleration in the debate for the construction of a new interconnection between the Iberian Peninsula and France, Midcat that may have an impact on Terega, and also the new interconnect – tariff interconnection between Italy and Spain. So any update on how do you see that evolving and the possible and the latest start on possible additional CapEx for Snam both in Italy and also in France through Terega? That would be welcome.
The second question is related to the first one. So in a scenario in which there is higher CapEx down the road, does the company intend to consider an either non-proactive rotation strategy, I am saying this because the company in the past has been very successful investing in activities in other asset out of the core business, but maybe in a period of which there is going to be a higher necessity for domestic CapEx, that asset rotation could be accelerated. Then the third question is on the IRR for the floating regasification and storage unit that you have bought, you can share with us your thought on the profitability for this investment? And the very final question is on the affiliate. I think that the big deviation has been on the UK interconnector, if you can help us to understand the dynamics behind and what we may expect for the full year contribution of the UK interconnector? Many thanks.
Stefano Venier
So, then I take your questions first and then we will leave the floor for additional questions. On geopolitical standpoint, definitely, debates in these days, especially in the last week when the new, let’s say, coordination on let’s say consumption reduction took place and the opportunity to underpin the development between Spain – the development of the interconnection between Spain and in France, took more and more ground. I had to be frank on that. And I think that the perspective – the twofold perspective that this interconnection can have on short-term on gas supply and long-term on hydrogen supply, it’s extremely interesting. If I have to say in these days, I think that – this is the project that has more, more support on this area with respect to other kinds of initiatives of interconnection and come back later on. So I think this debate will move on. It makes sense. It goes in the direction that European the RePower EU affecting both as far as gas is concerned, and hydrogen is concerned, to us as a shareholder of Terega, we strongly support this kind of development. And therefore, we will work in that direction. I am sorry.
As far as the interconnection between the study, the preliminary study about the interconnection between Italy and Spain, we haven’t had – we haven’t received yet the study when we – we talked about that beginning of May, we were saying that the study would have taken 3 months to be completed for those preliminary indications. We have had also Enagas that provided some general figures on the initiative. We don’t have major updates in that sense to release you today. I think we have to wait for September to have something more consolidated in that sense. In terms of asset rotation or, let’s say, portfolio management of the investments we have, definitely is something we will look carefully, and we will consider as an option to fund the additional investments we expect to have in the new – in the next 5 years that are part of the new business plan we are working on. As we said – as we anticipated, we are planning to introduce to the market the new business plan by January next year. We are working on this recycling of investments also because as we have been seeing in these days, there are new initiatives popping up every day, and we need to be, to a certain extent, we need also to be selective in those investments. But definitely, the asset rotation is something that we will consider carefully not only with respect to the, let’s say, diversified activity has been implemented in last year, but also with respect to the affiliates that, of course, can have a different strategic perspective with respect to the new, let’s say, security of supply scenario we are stepping into.
In terms of UK, just to stay with the affiliates, we have – as we have said, the mechanism has set the sort of ceiling of revenues. And therefore, those ceiling is defined with respect to the revenues that are obtained for the use of capacity. Of course, this year, we have had massive use of this facility because of the large availability of LNG capacity in UK, the significant flows of gas that were delivered to UK to the benefit of Europe. And to that extent, in the first half, the total revenues we have reached is just above the ceiling that has been set by the regulator. And therefore, we don’t have much options to add additional profitability in the second half of the year. By the way, the good news is that also the booking for 2023 has been very strong so far. So we counter to replicate next year the good performance we are achieving in this year.
Last question was on the IRR on floating vessels, since those assets are regulated by 64% gets the regulated return, plus we have the add-on, as you recall, by €30 million per year over a period of 20 years that drives the return – the guaranteed return up to 85%, 90%. So the return is going to be consistent with this mix of coverage. Having said that, we think that in the first years, we will get the full utilization of capacity given the situation we have in the market and the new contracts that some of the sizable player, sizable shippers in Italy and Europe has signed on LNG all across the world.
Javier Suarez
Many thanks.
Operator
The next question is from James Brand with Deutsche Bank. Please go ahead.
James Brand
Hi, thanks for taking my questions. Apologies for asking them in spite of your voice being a bit patchy. So, I just wanted to that the math and data on Slide 14 is pretty interesting in terms of the overall flows. I guess three questions kind of related to that. Firstly, I am sure you are in discussions with the Italian government about risks going through this winter. Firstly, I wanted to ask if there was a full Russian gas cutoff. Do you – I mean, maybe it’s just very uncertain, but do you have an idea of how much gas you might be able to get through those pipelines from Gorizia, Passo Gries and Tarvisio, if I’m pronouncing that correctly, how much might still flow through those pipes or maybe – maybe not very much? And then secondly, we did see a full Russian gas cutoff, do you think, given the storage levels have got up to the levels they are at now that the winter would be okay or do you think that need to be industrial curtailment? I appreciate, but that’s a very difficult question to answer? And then thirdly, given that we’re seeing the flows change a bit, particularly with the floating LNG terminals that you’re going to be putting in place, do you need any reinforcement of the pipelines within Italy? And if so, maybe you could give some details on what that might look like? Thank you very much.
Stefano Venier
Okay. First of all, as far as the Russian supply is cutoff, of course, let me say, it depends on when it’s going to happen and if it’s going to happen down to zero, okay. Because we also have to take into consideration that there are long-term supply contracts in force. So what we might see probably is a swing in supply your – sorry, day by day all across the winter. What I think it’s important to stress with respect to the Italian situation is the position the country is building up on the storage capacity. I wanted to give you a number that sets or gives you an idea of the overall situation. And then of course, on a daily basis, it can be slightly different. But on the big picture, I mean, during the winter and in starting October 1, ending March 31, we have a general consumption of 40 billion, okay. Out of this 40 billion, 10 billion is the total amount of gas that we extract or we put in the storage and we take off – we take out from the storage. So 25% of the global demand after 6 months winter is covered by the storage. That makes the storage extremely important to guarantee a sort of the sale cash on security, okay. That is the first part.
Second part refers to the new Algerian flows that are coming into the country. And as you know, we have – and not we, as Snam, I mean, as a country, as the shippers of the country, we had – those volumes has been increased and will end up next winter up to €26 billion, €28 billion means that during winter, we have roughly 8 bcm – sorry, 15 bcm coming from Algeria and that makes another core pillar. And some in the tools, we have already 25 bcm out of the 40 bcm. Then we have the flows from TAP and all the other infrastructure that on LNG, the existing LNG that has been fully booked for the winter. So I am not saying that to say that we cannot – that we will not have any problem during winter in case of total shutdown of Russia supplies, but definitely, it has to be a very, let’s say, full reduction to zero down to zero on one side and a very, let’s say, extreme winter during the demand of January. We are playing – or we are supporting the Ministry of Transaction for preparing several scenario to that extent. And I will say that in case, we reached the total storage capacity of 10.5 bcm as we are targeting for, I think we have reduced significantly the risk of curtailment of gas during the peak demand months like January and February.
Yes, as far as the floating vessel is concerned, we have to build some infrastructure onshore that goes into the national transportation system. As far as the first floating vessel that is going to be located in the Tyrrhenian Sea, we are planning to realize the first €50 million of investment on – for the onshore pipeline that goes from the floating vessel to the main infrastructure. As far as the Ravenna floating vessel instead that amount is €150 million, because it relates to the sea line and the onshore part. This will go into the regulated asset base for the transportation system.
James Brand
Thanks very much.
Operator
The next question is from Chris Laybutt with Morgan Stanley. Please go ahead.
Chris Laybutt
Good afternoon and thank you very much for the presentation and for those comments. They are very useful. If I could follow on, you have provided a lot of context for this winter. How do you see the scenario playing out for next winter, if we have reduced, curtailed or even no gas from Russia during the filling season? I know that’s a very broad question, but your thoughts would be very useful. Secondly, in terms of the WACC revision that you highlight coming through in a couple of years’ time, I am just wondering whether you can comment on your conversations – recent conversations with ARERA. Has ARERA provided any thoughts or indications as to how they view the appropriateness of a real return allowance, particularly with respect to debt, where you have a nominal portfolio of funding instruments? I guess, the reason that question arises is the UK regulator, OFGEM has brought this up and is consulting on this very issue at the moment. And I had one more, but it wasn’t very good. So I will leave it there. Thank you very much.
Stefano Venier
Okay. What about next – when you say next winter, you mean the winter 2023-2024, I guess?
Chris Laybutt
Yes, that’s correct. Yes.
Stefano Venier
Yes, yes. The point is and here comes the strategic value of the first floating vessel because the purpose is to putting on stream by, let’s say, April next year. And the – and one of the reason for accelerating and speeding up the process to respect this deadline is specifically because in that sense, we will have this infrastructure available for all summer. That means we can have almost 0.5 billion available per month, that means in 4 months, 5 months, you have more than 2 bcm of gas available for the storage capacity. And here comes one of the strategic reasons why ourselves, but the government first is pushing other to respect this deadline. Of course, again, we will – next summer, we will count on the expanded flows from Algeria that will be stabilized, not only for the winter, but also for the next summer and the following years. And we should reach by end of next year, the 29 bcm of gas of supply mainly on that stream.
Third, as I mentioned, the entire – almost the entire capacity of the floating vessels like the Adriatic floating unit, the old and our facility in Panigaglia has been fully booked till next summer. So it means that we will have 100% use of the available capacity on the floating vessels. So I think, of course, that I want – I don’t want to pass the message that there are no problems. I just want to tell you that we have some, let’s say, diversified means for trying to cope with possible shutdown, prolonged shutdown from Russian supplies, when a prolonged shutdown, it means month by month. Otherwise, I think we have a full flexibility on managing this kind of, let’s say, limited shortfalls.
Last point, we have also to consider is what is going to be the total amount of gas that will be left in storage at the end of the winter season means on March. This year, we started almost from zero because all gas was used. But the years before, we always started with 1 bcm, 2 bcm on storage that makes, of course, the first step towards the target that we will have also next year. Looking on the Snam side, of course, the strategic role that we will play the storage next winter, but also the next winters, of course, determine an opportunity for the company in terms of output-based services. In terms of WACC revision, I mean, the system, in fact, last year by the authority has been extremely articulated, okay? We have a mechanism that makes an update on yearly basis. What we see right now on mark-to-market conditions that there is a trigger for 2024 and 2025. And I think we will see how this trigger will completely realize going forward. Of course, now it’s a bit early to say, because of course, it’s something that has to come next year or the year after, but now we have those kind of conditions.
Chris Laybutt
And just to follow-up, the UK regulator is really questioning the role of the inflation element, which is in addition to the real WACC allowance. Have you had any discussions about that inflationary benefit that you get – or is it just – is it too early at this stage and you consider yourself in the clear?
Stefano Venier
No, we haven’t had discussions on that point. I mean it’s something that is part of the regulated system since I think 20, 25 years we have this mechanism that is called deflator, investment deflator. That is not exactly the CPI index. And also, there is one thing we should consider that in the Italian system, we have the adjustment of the deflator happens 2 year after. So you don’t have a sort of direct effect of the deflator on the current year. And therefore that is postponed on the revenues to year after that typically happens – that is to say that this effect typically happens when some of the, let’s say, stressing situation on CPI is overcome.
Chris Laybutt
Okay, thank you very much. Very helpful.
Operator
The next question is from Bartek Kubicki with Societe Generale. Please go ahead.
Bartek Kubicki
Good afternoon. Thank you for the presentation. Three issues, I would like to discuss, please. Firstly, on the FSRU, just to clarify a couple of things. You paid already in the second quarter this year, while the assets will be operating in the first – second half next year. So I wonder if until then, you already get some remuneration for instance, work in progress or the full RAB remuneration for those for the year or it will simply be a sort of a shadow RAB, which will be not remunerated until the second half of next year? And also, as I saw on your – in your press release, you have €360 million of spending probably on an FSRU, while the price was €329. So I wonder if you can somehow help me to reconcile this €31 million of difference between the spend and the price for the terminal. That will be the first thing.
Second thing on non-regulated new business activities, there is a certain level of acceleration. We saw something similar last year, although not to the same extent. And I wondered whether this is a sort of a good base to see more EBITDA from new business coming in the second half of – or we would have the same situation as last year, but there we had a peak in the second quarter, and then again, the contribution was relatively low in the third quarter and the fourth quarter? And thirdly, as far as I am concerned, the regulator has published a consultation paper on totex. And maybe if you can share with us your views on what the paper is actually pointing to? Thank you very much.
Stefano Venier
Okay. About the FSRU, the first part of the question is, of course, we have, as far as the Golar Tundra is concerned. We have bought the ship on January 1. As we said – as we said, we are not still this asset on our regulated asset base, because unless – unless this asset is not operating on stream, we can’t have this – the investment recognized. But in the meantime, what we have done is to sign a contract of [indiscernible]. Therefore, the vessel is operating for third parties. So with the revenues that we get from the [indiscernible], we pay all the costs related to the assets. So for us, in the meantime, before the date of full operation, it’s almost neutral in terms of P&L impact.
With respect to the CapEx, I mean, the €360 million you said on the report refers for €326, if I do recall correctly to the ship and the rest refers to the two biomethane assets that we bought from Asja, as part of the transaction agreed end of last year. That makes the difference between €360 million and the cost of the [indiscernible]. I have to be frank also in saying that, that both will be subject to some workover to, let’s say, upgrade the facilities that are on board, and we are now signing a contract for those kind of upgrades that is going to cost us about €20 million, €22 million for what we expect. So that will be part of the total cost of the assets, along with the facilities that will be required to interconnect the assets from the mall to the national transmission network. New businesses, yes, I do know that I’ve been told that last year, we had a very performing first half of the year, and then a second – a slower performance in the second half. Also this year, I have to say, frankly speaking, I have to say that some of the return we had on the deeper innovation was extremely performing in the first half of the year. Anyhow, what we do expect is a projection for the full year by €25 million – around €25 million for all the new businesses.
Last question was on the consulting documents on totex. It’s something that is not exciting much, I have to say, simply because it’s going – it’s something that is going to be applied from 2026. What excites me more is the second consulting documents that they refers to the so-called substitution of our asset health that was just released a few days ago that this – first of all, because it’s in line with our expectations. And as you probably recall, our expectations were to have the system in place by January 1, 2023. And second, because I mean, the framework of the proposal that has been put on table by the authorities, I think that is consistent with the discussion we have had with the authority during the last 18 months. So looking shorter-term, with respect to the options we have on regulatory side, I would say that this second consulting document is much more promising in terms of contribution to the Company profitability in the short-term, as I said.
Bartek Kubicki
Thank you very much.
Operator
The next question is from Stefano Gamberini with Equita SIM. Please go ahead, sir.
Stefano Gamberini
Good afternoon, everybody. Three – two questions and a clarification, if I may. The first regarding the situation, the current situation and the crisis of the gas, do you see some risks for payments from shippers during this season, mainly during this winter or not? The second question regarding the expectation from TAG. You said that, that in some way, this will be offset by the reverse flow from Italy. When this should happen? And in particular if the slowdown of contribution from TAG will be significant already from 2023 and how you can offset this trend? The last is just a clarification. If I understood correctly during this winter, the total consumption should be in the region of 40 bcm, 10 bcm should derive from storages, 25 bcm from – sorry, 15 bcm from Algeria and the remaining 15 bcm should derive from LNG plants? Or are there some other sources of gas that should arise? And the very last one, sorry, the third is relating to the TAP. What is the increase of contribution on P&L that you expect from the doubling from TAP and when this should happen? Thanks a lot.
Stefano Venier
Okay. Let me start from the sources of gas you listed. I mean, of course, the one, you are missing – the two you are missing, one is exactly the TAP because we are running at full capacity. That means on a yearly basis is more than 8 bcm. So it means that over a period of 6 months, that is the winter I was referring to, means more than 4 bcm. The second is, of course, through Passo Gries that is the other interconnection we have through Switzerland, that adds up to the floating vessels. So as I always say, we have the sole country in Europe that has eight gates for supplying gas to the country. And I think that is the most valuable mean for trying to guarantee the best of the security of supply because we also have differentiated suppliers on one side; and on the other side, of course, has Snam. It do represent the best site position we might have due to this, let’s say, trained set of interconnections. TAP, the – of course, the profitability we can get from the expansion depends on the expansion by definition and depends on the length of the capacity contracts we can sign. of course, the existing one, and last, if I can recall correctly, 25 years. Of course, if we do replicate the same period of time, it can – we can get a certain contribution. If in case the new round of additional capacity will last shorter, let’s say, 15 years, 20 years, of course, you have a slightly lower contribution. If I have to pull the number on the table, I would say – I would say, €10 million per year since the capacity increase, the doubling in capacity is realized, that means 2028
Then you had a question on TAG – and – about the crisis and the possible bad debts from the shippers. The first one, for those, who are running the regular business, there are guarantees and the cash deposits that are providing a contribution to the working capital, as I mentioned during the comments on the first half results. On the other side, instead if we are referring to those shippers that went bankrupt, and we – we provide the full service, we have the full guarantee by the ARERA [indiscernible] sources that cover entirely the revenues we have or the cost of gas we have burned for the supplies. Of course, those kind of – those kind of, let’s say delays in cash in, also see a recognition on interest rates for the cash exposure.
TAG, I’m not sure, if I do recall the question. The lower – the lower volumes, I don’t know. And in fact again, I have a crystal ball because as I said, if this would be only in one direction, of course, we might make some, let’s say, scenarios with respect on how the long-term contracts will be fulfilled and what will be the swing in this fulfillment. There are two, three basic pillars I have in mind. First one is all the long-term contracts will expire in 2032, 2035 okay? Part of the capacity, of course, that were used in the past by Gazprom, of course, is subject to this utilization. While on the other side, we have a very strong demand on reverse flow. I mean we are – we have full capacity booked for next winter. That means 5 bcm of gas – 5 bcm of capacity that has been booked on reverse flow for entire infrastructure. The third pillar is and refers to a new framework, a new discussion to be carried out with the regulator, the Austrian regulator because now it’s in the interest of the Austrian authorities to see this infrastructure to be used in a more proactive way, not as a transit towards Italy, but as a mean in reverse flow for supplying Austria. And that can make a difference in the, let’s say, in the conversations with the regulator with respect to the approach they have applied so far in terms of recognized revenues and tariff system. We have had the – we had the first, let’s say, clue on this time and this change of perspective because we have had discussions in the past months on the recognition of the additional cost for energy. And whilst in the past, we were just having a conversation with the world. This time, we had a conversation with someone that recognized the importance of seeing this cost to be recognized.
Stefano Gamberini
Many thanks. Just a follow-up, if I may, on the topic of bad debt. You said you will be fully supported by ARERA, but do you see this risk considering the current price of gas, probably there are some shippers that are short of gas in this moment or not. What is your feeling, even if you will be fully supported by ARERA and with no risk for Snam?
Stefano Venier
I don’t see risk because the reason in regulation that says that we should be fully protected on the recovery of the revenues we have or the cost we have had for buying and supplying the gas. In case we see this mechanism deteriorating, I mean of course, we are not obliged to provide the gas if we are not paid for. But to just to give you a number that helps you to understand the situation, I mean in the last – in the first half of the year, we have had roughly €450 million of revenues for the default mechanism. So, we are not talking about billions of euros, but we are talking €0.5 million – €0.5 billion, so far, of course. And to that extent, of course, the strategic role that we are playing in fulfilling the storage, of course, to certain extent, is reducing the risk of – for some of the final user not to see or not to have the gas available because in one way or the other, this gas is available for the system. Of course, they might have a different supplier, they might have a system supplier, but the gas is available for the system. So, it’s not something that would disappear and those players not having the gas. Of course, the more – the larger is the business in default has been a crucial business for Snam.
Stefano Gamberini
Thank you. Okay. Thanks a lot again.
Operator
The next question is from Emanuele Oggioni with Kepler Cheuvreux. Please go ahead.
Emanuele Oggioni
Hi. Good afternoon everybody and thank you for the presentation. I have one question left on the fully depreciated assets. Italian regulator has published recently a second consultation document. So, I wonder what are your opinion on that, also compared to the – considering the current business plan, already, partially includes a contribution from output-based incentives? Thank you.
Stefano Venier
As I said before, this consulting document is broadly in line with what we expected and what were the conversations or discussions because probably conversation is not the right word. I mean the discussion we had with the technical structure of the ARERA. So, it’s reflecting properly those kind of discussions. I have to say that the outcome we read in this document is again also fully consistent with the projections we did in the former business plan. So, we are not – we don’t see any negative effect. Eventually, there might be a slight round up on that sense. Of course, I do prefer to make, let’s say, final comments when we will have the final document. And I will be fully reassured that the system will be applied starting January 1, 2023, that we – is what we are working on since months and months.
Emanuele Oggioni
Thank you. If I may, a quick follow-up on the – do you see a risk of delays in the implementation for the operation of the first floating vessel in Piombino. Of course, we see on the – in the local press, quite opposition, quite strong opposition to this re-gasified plant, to see this risk.
Stefano Venier
To be frank, if I – if you let me, I would say that I would be surprised not to have any opposition, okay. It’s now part of the planning culture. Of course, in the case of Piombino, there is an animated opposition. I think and I hope that the, let’s say, general interest, national interest will finally prevail. And I do hope and we are working as much as possible to contribute to a final settlement between the local authorities, the commission that has been appointed and the government with respect to the so-called compensations for hosting for 3 years this floating vessel. We are working desperately to respect the deadline because of the importance and stress with respect also to the next winter, not this winter, but next winter. And unless there is something that stop us, we will go ahead. Then, of course, there is the final judgment that has to come from the commissioner and the government, and of course, probably it’s a bit early to say whether or not we will be consistent with the timeline – with the timing that we have set. I would say, we hope for the best, and we will be prepared for the worst in case.
Emanuele Oggioni
Thank you. Very clear.
Operator
The next question is from Mafalda Pombeiro with Goldman Sachs. Please go ahead.
Mafalda Pombeiro
Hi everyone and thanks for taking my question. I have one on my end more on EU policies, if that’s okay. So, on this EU gas reduction plan that as far as I understood, was approved earlier this week. Do you have any insights on how exactly these measures could be implemented at a country level in the sense there would be something voluntary on a corporate-by-corporate basis, or would this actually be mandated by the government? Any details on this actual design in case you have would be very helpful. Thank you.
Stefano Venier
As far as this agreement is concerned, firstly, as you know, there are – there has been set different options available for different countries. These options also refer to the situation of these – of those countries. In the case of Italy with respect to the different clauses that has been included in the agreement, those will apply to Italy. So, the reduction eventually is not going to be 15% as for some of the country in Europe, but it’s going to be maximum 7%. Globally speaking, it means something that is below – lower than 4 bcm and take into consideration that according to the statistics we have seen in terms of industrial use of gas, we have already achieved part of this target because of the natural activity industries has. There is another point that we have to bear in mind, I mean initially, this kind of decision are, so to a certain extent, voluntary, not compulsory. So unless there is a clear emergency situation that is decided by the European Parliament with a majority vote. So, it means that for the time being, each country is, let’s say, invited to. And in the case of Italy, the span of implicated the size of this reduction is half of the total reduction that works for other countries like Germany. In terms of Italy, this – in terms of Snam, this shouldn’t have a significant impact because, I mean we are inside of the, let’s say, swing that is typical in the market in terms of overall consumption, we have seen also in 2020 in case of the pandemic situation. And second, we have to recall that Italy works in a system, where you had recognized revenues. That again, protects you even with a delay of time on possible swings in volumes.
Mafalda Pombeiro
Thank you.
Operator
Mr. Venier, there are not – there are no more questions registered at this time. Back to you for any closing remarks.
Stefano Venier
Okay. Thanks to everybody for your patience. Happy to have answered your questions and enjoy your vacation.
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