Snam S.p.A. (OTCPK:SNMRF) Q3 2022 Earnings Conference Call November 10, 2022 8:30 AM ET
Company Participants
Stefano Venier – Chief Executive Officer
Conference Call Participants
Javier Suarez – Mediobanca
Jose Ruiz – Barclays
Stefano Gamberini – Equita
Emanuele Oggioni – Kepler Cheuvreux
James Brand – Deutsche Bank
Bartlomiej Kubicki – SocGen
Operator
Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Snam 9 Months 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
Ladies and gentlemen, good afternoon and welcome to Snam 9 months results presentation. Page 1, gas prices, volatility continued with peaks during August, September, followed by a sharp decline from October on the back of mild winter – mild weather, sorry, the end of EU storage infilling campaign and recession fears. Italian demand was down 3% in 9 months, driven by decline of residential demand by minus 5%, due to mild weather and a drop by 9% in industrial demand due to high prices, while thermoelectric sector was up 3% as effect of low hydro production.
Exports to Northern Europe continued reaching 2.7 bcm, confirming Italy’s role as a transport hub. Q3 demand was down by 7% year-on-year, mainly as an effect of industrial demand decline acceleration. This trend was even stronger in October with overall demand down by 20%, also due to mild weather. We have to consider that, not all of this shortfall in demand was – let’s say, in connection to reduction of production because many of these industrial users switched to other kind of fuels, to substitute the gas, due to the cost of this fuel. In 9 months, we experienced an unprecedented swing in gas flows. Volumes from North means, Tarvisio and Passo Gries were down 18% year-on-year, while import from Southern routes like through TAP, Gela and Mazara were up by 18% and LNG volumes increased by 27% again on year-on-year.
Moving to macro conditions; RAB deflator reached nearly 4% in H1 2022, while the tightening of the monetary policy with EU Central Bank 75 bps hike was coupled with the widening on credit spread. Our regulatory framework provides a good cash flow edge against this backdrop over time, even if some short-term mismatch between revenues and financial charges roll over are possible.
With regard to the 2023, all the variables are available. We expect an announcement from ARERA by the end of November to provide clarity in that sense. Over this time period, Snam has performed well and has contributed to the national supply security by, firstly, acquiring 2 floating storage and regasification units, that have been both recently authorized. And second, by taking the role of storage operator of last resort, supporting infilling campaign. Storage facilities are 95% full, a level well above the ambitious national target of 90% before the winter.
The expansion of new businesses continued as well. We added in Q3, 9 biogas plants for a total capacity of 9 megawatts to our portfolio, and the Gigafactory project, the one that we are developing in joint venture with De Nora, was selected in July by the EU Commission, within the IPCEI Hy2Tech Wave. At the same time, we have delivered sound results. Adjusted net profit is broadly in line with the same period of last year, despite the WACC revision impact in 2022, mainly thanks to the resilience of our core business, the contribution of transition businesses and the strong performance of our associates. Net debt reduction was – year-end 2021 was driven by a temporary working capital swing, that we already explained during H1 results, and that we expect to revert by year-end. As for financing, 2022 funding needs were covered in the first half of the year, at a very favorable condition versus current levels. Moreover, a $2 billion credit facility was secured in the H2 2022, as the 2023 pre-funding, providing adequate flexibility to manage current market volatility.
Switching to the following page that regards to security of supply; current energy crisis has reshaped priorities, with an increased focus on security and diversification of supply. Snam, since the beginning of the emergency, has put this experience in building and managing large energy infrastructure, to deliver the shortest possible time to new regasification units with 5 bcm capacity each. Important conditions for the success of this complex project has been the definition of a supporting framework, providing for the full recognition of acquisition cost in RAB, along with a regulated return and 85%, 90% minimum guaranteed.
Second, the appointment of two extraordinary commissioners and the design of a fast-tracked authorization process, that are both completed. The first vessel named Golar Tundra will be located in Piombino onshore for the first 3 years, and then relocated on an offshore site that has still to be selected. We have started in parallel, all the permits, engineering and tendering process, and we received on the October 25, the full authorization to proceed.
On November 9, we will start the construction phase of the 8.5 kilometer of pipeline, with a target to have the asset in place by next April and start operations in May 2023, to support the next storage infilling season. We will soon also start the process for allocating and tendering the capacity for the forthcoming years. The second vessel named BW Singapore instead will be placed offshore of Ravenna. We have received a few days ago, last Monday, the authorization, and we have just completed the acquisition of a non-offshore terminal, under a long-term concession of which we are planning the revamping. Then we will start the construction of the sea line, 8.5 kilometers and an onshore pipeline by 34 kilometers, to connect the terminal to the transport network, aiming to have the infrastructure ready as planned by the end of Q3 2024.
Next slide on gas storage and filling; Stogit, the subsidiary that controls all the storage capacity of the company, have its own storages fulfilled, as I said, by 95%, meaning 11.2 bcm of working gas plus 4.5 bcm of strategic storage. Snam significantly contributed to this achievement, as I mentioned in the beginning, and in detail, in April, given that the infilling curve was low, we stored the operating volume needed for the year, almost 0.8 BCM. Since June, Snam started also to act as a operator of last resort, to overcome as low infilling process from the shippers and trader driven by market conditions, mainly the high prices, and then we contributed to the infilling by 1.3 bcm. It’s worth noting that we have been financed fully for the purchase, and we do not carry any volume or commodity risk for the gas we have stored in the storages. In 9 months, we have had a positive contribution on the other side from the output based incentive, deriving from flexibility services provided on short-term storage auctions. On top of this, in the next 8 weeks, we will offer for the first time also an additional reverse flow service.
Next slide, biomethane is the cheapest and most competitive scalable green gas available. It can decarbonize consumption without changing infrastructure and end-user appliances. Consistently with an increased ambition – EU ambition, we can now rely on a national incentive framework, as the long awaited biomethane decree, filed to EC nearly a year ago, was finally approved and published on the Italian Official Journal on 26th of October. The incentive scheme leverage on €1.7 billion resilience funds, with grants covering up to 40% of the investment for the realization of new plants and the conversion of existing biogas plants. Tariffs will be based on a competitive process, and provide support for both waste and agri plants. Snam has built a sound proposition on this business, with more than 30 megawatts of biomethane and biogas plants in operation or under construction as of today and a strong expertise in both urban and agriculture feedstock production, so creating a strong platform that is among the most largest in the country. The decree will finally provide the needed visibility to go ahead with spending final investment decisions, and ramp-up of the investments.
Now moving to the 9 months results on the following page, let’s go through the bridge on EBITDA. Those numbers have been approved by the board. As you know, EBITDA for the period was €1.706 billion, broadly in line with 9 months of 2021. Despite the effects of the weighted average cost of capital review that is applied from January 1, 2022, which implied an overall cap of €95 million in the period – in the regulated revenues.
The other key changes that allow to asset almost entirely this reduction in revenues are €55 million increase in regulated revenues, mainly attributable to the tariff RAB growth by €34 million, a positive volume effect again by €23 million, which we expect to be partly reabsorbed by year end. Higher output based incentives [Technical Difficulty] €14 million, due to the default and storage flexibility services. In the comparison with 2021, it’s worth noting that 9 months of 2021, revenues benefited from a release of past items related to storage by €17 million, as already explained also in commenting the first half results. €17 million increase in fixed costs mainly related to higher utilities volumes and cost and very vehicle fuel costs, Moreover, and €18 million increase in the EBITDA of energy transmission businesses.
The growth is mainly due to the strong performance of energy efficiency, mainly thanks to the deployment of the residential business pipeline and to the contribution of biomethane, that I just mentioned, that benefited from the [indiscernible] operation of new plants and also the contribution that came from the M&A activity that progressed in this month [Technical Difficulty] significantly. A €33 million one-off contribution also came from the sale of past year’s gas excess inventories.
As we already mentioned, in commenting, the first half results and a €3 million rental fee related to the lease of the Golar Tundra, as you might remember, was both at the end of May and then rented for a few months before getting into the yard for the refurbishment, to be prepared for the Piombino installment. In the year-on-year comparison, it must be taken into consideration that the first half 2021 benefit and a gain from a one-off provision release.
Moving to the adjusted net profit analysis in the following page, adjusted net profit for the period was €932 million substantial in line with last year. D&A increased by €40 million due to the new assets that were put on stream. The increase of net financial expenses is mainly the result of higher interest rates due to the higher gross cost of debt that moved from the 0.8% in the 9 months 2021 to about 1.1% in the 9 months of 2022, substantially in connection with the rise of the interest rates in general. This trend will continue also in Q4, of course.
Associates’ contribution was higher by €38 million with respect to 9 months 2021 as, by the way, was almost achieved in the first half of the year, mainly due to the strong performance of Interconnector, the subsidiary that connects Belgium with the U.K., that has reached its regulatory profit cap. Thanks to the high gas flows supported by the gas prices spreads and the greater LNG capacity available in UK that supports the European demand. We also had a positive Terega contribution by €6 million, thanks to the higher revenues following an increase in bookings of flows towards Spain and lower financial charges, as the effect of bonds rollover and finally, the growth in [indiscernible] months of the Italian subsidiaries.
On the basis over strong 9-month results, we are fully confident on delivering at least €1.13 billion of the full year net profit that we disclosed as a guideline, implementing the first half results. In value in the 9 month results, we should consider that about €90 million were non-repeatable, such as gas inventories disposal of non-recurring items, are subject to phasing, such as the interconnected contribution of gas volume, and gas volume effect, that’s both of which – the first part of the maximum achievable target in terms of return.
Now, let’s make a more – focus on the performance of the single associates that, as I said, did extremely well, also in the first 9 months. Our portfolio performed, as I mentioned, in a very outperforming way, confirming 9 months with lower performance that we already booked on the first half for the reasons already mentioned, that refers to the interconnector performance, but also the TAP short-term volume exceeding contracted capacity. Both will not determine any additional contribution, because of the tax that is in place. The expansion of the latter has been also endorsed by the European Commission and the market test is likely to happen in two steps. With the first one, providing outcome in the first quarter of 2023, for limited expansion and the second one in July 2023, for the so-called full expansion of capacity.
For the interconnect, looking forward, this maximum contribution that has been achieved in 2022, is set to be achieved also in 2023, given that more than 50% of the capacity has been already booked. Terega showed an increase in revenues, thanks to higher bookings towards Spain, as I said, as well as the lower financial changes. Storage capacity was fully fulfilled as [indiscernible]. DESFA continued to benefit from strong LNG imports going to Bulgaria, through the new interconnection. The 10-year development plan approved by the regulator this August entails about €800 million of investments, up by 50% versus the previous plan.
As far as TAG is concerned, the capacity sold under long-term contract is fully offsetting the Q3 shortfall in volumes delivered. For the first time last October, the infrastructure was operated on a physical reverse flow and had a 6.5 bcm of reverse flow capacity was sold for the next thermal year, 2022-2023 and by 2 bcm for 2023, down to 2025. This flexibility is confirming the strategic role that the asset can play, not only in the short term, but also in the long run, with respect to the flows that can serve the Central European market, for [indiscernible] and hydrogen in the future.
2023 potential volume reduction in mid-tier market perspectives, requires a thorough reassessment of the regulatory framework, with respect to both the volume exposure and the enter/exit power scheme, due to the radical change in the operation of these asset. And with that respect, consistently, a specific proposal will be submitted to the regulator in the upcoming months. And finally, EMG and ADNOC performed in line with expectation. The value of the stake of the gas pipeline would be reassessed, by accounting purposes by year-end, with respect to the development of the interest rates, but with no cash impact.
Finally, there is an associate that is not part of the portfolio yet, but was supposed to be part of, by the end of September, that is the so-called corridor, that means the combination of the stakes of TTPC and TMPC, that we agreed to buy from Eni. The process of getting all the full clearance is taking a bit longer, so we agreed with Eni I to postpone Q4 2022 development, to finalize the different steps of – the defining steps of the authorization and the closing of the deal.
Last, the cash flow statement and balance sheet. Cash flow from operations for the period amounted to €2.5 billion, including $1.1 billion of cash generation from change in working capital. The main dynamics behind this are the same explained in the previous quarter, believing basically from balancing and settlement activities, which should be reversed in the next quarters, even if subject to gas market volatility that, of course, will influence the total value of these items. These come from an increase of cash deposits as well and other items, partially offset by an increase in receivables related to the default service we are running for several companies. In addition, we experienced some cash absorption from energy efficiency, due to the growth of sales in this renovation line of business.
Net investments for the period are mainly related to CapEx and tax payables, cash out for the acquisition of Golar Tundra that happened beginning in June 2022, by €329 million, and the cash out for the acquisition of three different plants from Asja, being part of the deal agreed last December 2021. We also had a cash in from the partial reimbursement of the OLT shareholders loan, and the cash in from the De Nora IPO by €153 million. Other outflow of the period was payment for dividend equal to €845 million, while the non-cash item mainly refers to the convertible bond.
As for the full year, we expect net debt in the range of €14.8 billion, depending on the timing of the cash in of the default receivables and the evolution of working capital related to the balancing activity, which is subject to market volatility, as I mentioned before. Because of the highly unpredictable interest rates and credit spread spike, is being managed via first, the frontloading of our funding actions in the first part of 2022: second, the larger recourse to committed credit facilities versus debt capital market, leveraging on our strongly rooted relationship with our core banks. And the shift to bank facility is providing us with one tenure that is more consistent with our tariff framework, and the market consensus expectation of rate hike, market slowdown in the second part of 2023 and second, flexibility in terms of early repayment and management of debt capital market, [indiscernible]. In this regard, in 2022 to date, we have raised about €5 billion of funding, out of which €1.5 billion via BCM at 1% yield for 10-year tenure, and balance via credit facility with a tenure of – from 2 to 5 years at favorable condition.
Let me make final, some very few closing remarks. I think the 9 months results confirm the resilience of the Group against the backdrop of an uncertain scenario, changing cash flows, volatile gas prices and the impact of the revision of the revised leveraged cost of capital on our infrastructure business, [indiscernible] more than €95 million in the first 9 months. We are very satisfied with the authorization on the two storage and regas units, two projects that along with the complete fulfilling of the storage facility, corroborate our commitment to support the country energy security, and is providing definitely support and the development of the company in the coming years.
Thank you for the attention, and I will be pleased to answer your questions. And I turn the floor to you. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Javier Suarez of Mediobanca.
Javier Suarez
Hi, thank you for presentation. Three questions. The first one is on security of supply, second one is the strategic positioning of the Italian network, and then on your managerial increasing. So on the security of supply, the question is in addition to the installation of the two new floating regasification unit, what other measures Snam now intends to undertake to better underpin the security of supply of the Italian gas system? The second question on the strategical position of the Italian network, so after the agreement between the French and the Spanish government that have decided to build a new direct offshore gas pipeline, which are the implications for this – for the development, the future development and design of the Italian gas system? And the third question on your managerial increasing. So there is a significant increase in rates, and the question would be, is this changing your view on how the company should look at capital allocation? Would you intend to accelerate, for example, on the asset rotation of plenty of your subsidiaries in a kind of a back to basic strategy? Thank you.
Stefano Venier
Okay, then. I am starting with the sequence you report the question, the first, how we tend to understand the security of the country? Of course, as you mentioned, the floating vessels is the first step, but we are also working on let’s say, putting forward the project of the new bank loan from south to north, that is called Adriatic pipeline. The importance of this pipeline is not only with respect to the possible additional flows of gas that could come from the TAP development, but it’s also important to guarantee flexibility on the network and put some additional capacity available for additional volumes that would come from Algeria, from Libya and also from the new development of gas plants outside of Sicily. This is something that is extremely important, because I think that in the long run, the strategic security of supply can be achieved, only if we are able to build and develop the infrastructure with certain redundancy, that provides flexibility, and also put us in a position to better manage the flows of gas towards the major consumption areas.
Jointly, we are also working on expanding the gas storage capacity. We have a project that we submitted to the Ministry of Environment, locating a northern part of Italy, that we believe that could add more than 10% of the storage capacity to the country. And we have seen in this month, our imports can be an – the role that can play some additional capacity for the security of the country. We presently have, as I mentioned, the total capacity of 12 bcm, those 12 bcm secured in between 25% to 30% of the demand during winter. But of course, the more we have in terms of capacity, the more – the higher is the flexibility for the system we can put. And also, we also have the opportunity to further optimize the cost of gas, because if you have more space in the storage, you can also plan more, let’s say, wisely, with respect to the gas prices. These are the three main pillars, as far as security of supply is concerned. These are very committing also going forward and will be also the third pillar of the development of the new business plan.
Second, question was about the whole of the channel network, if I answer directly with respect to the European scenario, and in the movement – and an area in relation to the announced project of the so-called BarMar, Barcelona and Marseille connection. Let me say first that, it’s not clear to me entirely, if this pipeline will be purely dedicated to hydrogen or will be used partly also for gas. And here, there is like – it’s matching the communication between the French government and the Spanish government. I think that however, even this infrastructure will be used for some years to ship some gas, this will not influence the competitiveness and the role of the Italian infrastructure also, in the perspective of supporting some of the Central European demand, for simple reason. Because I think, for the floating vessel, we can let’s say, offer to the market. almost a third 30 bcm of LNG capacity, that of course is a sizable capacity, that will be definitely more competitive than having LNG delivered to Spain and then ship that through a pipeline into France and Central Europe. And that makes a clear, let’s say, competitive advantage.
The second, I think, relates to the possible perspective toward the new opportunities and new developments in the Eastern Med, means outside Israel and South Cyprus, where new capacity and new giant fields has been discovered and will be developed in the coming years. And the LNG facilities we have on the Adriatic Sea and also in the Mediterranean Sea, beyond the 2, 3 days journey from that sales, making those assets, the most, let’s say, favorable approaching gate point for Central Europe, being also in the Northern Part of Italy. The third was about the capital allocation. As I told you in the last conference call, we are working on the new business plan that we will introduce to the market in next January, If I do recall correctly, and we are still making some ways to understand how we can optimize the funding of this new wave of investments. And also, if any, let’s say, asset rotation will be, let’s say, in the interest also of the current shareholders, because we don’t have to forget that, of course, this asset rotation can provide cash proceeds to fund the investments, but also all these assets, even the performance I showed to you, provides a very attractive return in terms of earnings per share. So we have also to balance, in the perspective of managing the asset portfolio, the impact that possible disposals can have on EPS of the company going forward.
Javier Suarez
Thank you.
Stefano Venier
Thank you.
Operator
The next question is from – excuse me. The next question is from Jose Ruiz of Barclays.
Jose Ruiz
Yes. Good afternoon, and thanks for taking my questions. I have only two. The first one is if you see any possibility of improvements in terms of outlook-based incentives for 2023, I mean, given that the generosity regarding Terna and considering the importance of Snam in terms of managing the gas system, if there would be a little bit of a balance there? And secondly, related to the previous question from Javier, if you can share with us how much investment is this Adriatic Pipeline Project connecting the North with the South and the expansion of the gas storage? Thank you very much.
Stefano Venier
With respect to the first, yes, in 2023, we expect let’s say an enlargement in the kind of output based we can get. And the first and most important will be the one related to the asset out there. Let me give you an update on this process. We have been asked by the authority to prepare a methodology to, let’s say, support and define the mechanism and the advantages for the final customers and the system in, let’s say, optimizing the substitution of part of the network that expire this technical life. We have done the job. We have been asked for. We submitted the methodology that has been published at the end of October, if I do recall correctly, was it first and – is are now under the consulting phase. According to the time plan that the authority, we should have the final decision by year-end, beginning next year to see the methodology and the approach applied from January 1, 2023 and this should provide a sizable contribution. I can’t say that this contribution will be in line with the astonishing number that in output based but will be definitely a sizable contribution with respect to the numbers we have achieved so far. The second is about the Adriatic Pipeline. Of course, this infrastructure is going to take roughly 5 years to be built. The total cost is €2.7 billion. The part will fall into the next business plan and at 2023 is about €1 billion. The new pipeline is planned to be on stream the end of 2027.
Jose Ruiz
Thank you very much.
Operator
The next question is from Stefano Gamberini of Equita.
Stefano Gamberini
Yes. Good afternoon, everybody. A few questions also from my side. The first, regarding the asset rotation among the other assets, there is also De Nora. Could we expect we can say, a reduction of the stake at the end of the – if I’m not wrong expires at the end of the year? And what could be a level of stake that you consider core in this company? The second, regarding the investment in biomethane, you underline that €59 million were – have been invested in the first 9 months in energy transition, what is the target for year-end, including also the acquisitions? And which kind of acceleration could we expect next year? In particular, I am also wanting to understand what is the return that you expect for the investment in biomethane plants considering that the decree has been disclosed? Finally, I have a question regarding the current scenario of rising interest rates in the last 6 months, the interest rate increased by around 300 bps and considering what could be a likely along with WACC in 2024 or ‘25, we will see, but more or less, this should improve by just 100 basis points. So, do you consider to invest in this scenario, the returns could be higher than your cost of capital? And the very final question, if you can repeat how you can finance or what are the measures that you put in place during this month in order to reduce your cost of debt in 2023? Many thanks.
Stefano Venier
Okay. Let’s start with the asset rotation. I mean you mentioned reference to the De Nora. Yes, we have the low cap period ending after 6 months as usually, but that doesn’t mean that we are eager to sell part of the stake at least during this period. I think that in spite of the fact that the share price bounced back today by more than 4%, thanks to the very good results that we released, we think that the real value of this company is much higher. So for time being, unless the price goes up rapidly and rapidly, we don’t see, I mean, the opportunity to sell at these current prices that stake. That is one point. The second point, of course, refers to the funding needs. Presently, we don’t have funding needs. So, why should we sell part of the stake right now? It can be this part of pool we are doing with respect to the in-car business plan, okay, but not in the let’s say very much future. And that works as I said also for the other associates because the performance that we have posted in 2022 and the looking we have for 2023 makes this asset extremely, let’s say, extremely rewarding in terms of return. Of course, the ramp-up in investment that we have done in 2023, 2024 and 2025, will drive some thoughts about how to optimize the portfolio, considering that, as I said last time, there are strategic stakes. We want to retain entirely and can be some stakes that might be less strategic.
The second, the question was on biomethane and the projection of CapEx year-end, including the M&A. I had – the total number is going to be for the 12 months, €300 million. And that is the total CapEx we are planning in the energy transition. And the question about the internal rate of return of rate of biomethane investment, on the basis of the new decree, we value it in-between 8% to 10%. The IRR, we have posted so far in the acquisitions, it’s going to be released in between 7% to 8%, yes, 7% to 8%. About the third question that how we are we tackling with the rising interest rates. As I mentioned, we have done 40,000 in ‘22, a sizable pre-funding for €5 billion in total. And then we also secured through the bond we did in the beginning of the year and the credit lines we arranged in the following months, recovered entirely the need for 2022, and we also have prepared and made some pre-funding for 2023 for a total number of €2 billion. Going forward, of course, mainly will depend on the interest recourse. What we do expect is softening in the mid-term, means 2 years, 3 years’ time. So, we will go for optimizing in between debt capital markets and let’s say, credit market to try to optimize the cost.
Stefano Gamberini
Thanks. Just a quick follow-up, if I may. Regarding 2021, you have more or less an idea what could be the cost of debt next year and/or we can say a magnitude of the increase that you expect versus 2022?
Stefano Venier
I think we are still finalizing because, of course, the cost relates to the additional funding we took over for 2023. And this will depend on some decisions. We have still to take and will be, let’s say, finalized for the industrial plan we will present to you in January. So, that we make a change because, of course, this will be funded with additional new lines or sources and therefore that we change the total cost – the average cost of debt for 2023. Just be patient a few weeks.
Stefano Gamberini
Okay. Many thanks.
Operator
The next question is from Emanuele Oggioni of Kepler Cheuvreux.
Emanuele Oggioni
Good afternoon. Thank you for the presentation. I have two questions left. The first one is on associates. When we assume a stable contribution in Q4, stable, I mean year-on-year, Snam could record roughly €330 million from associates compared with roughly €300 million in 2021, which was already a market in history record for the group. So, my question is, if you have read my forecast for the full year. And the second question is on the deflator. What are your expectations for the deflator on 2023 after you mentioned in the slides, 3.9% recorded in H1? Thank you.
Stefano Venier
As far as the associate is concerned, don’t forget that as I stressed the two largest contributor to the growth of the four months with respect to last year, has reached the cap. In fact, if you look at the first half result, the lower performance was exactly in line with the over-performance we are posting in the first nine months, okay. And that is something that cannot additionally contribute to the production of the year. The second, I made the note in my speech that refers to the ADNOC. ADNOC is a source of industrial/financial assets. And for the way we have to account it, we have to, let’s say, reassess the fair value of the fore coming cash flows and dividends for years going forward and given the increased interest rates. At the end of the year, we will have to reassess the fair value of the stake, and we do expect, given the higher interest rates that we require a reduction in the value of the fair value of that stake that will bring the first net-net total contribution of the sources more in line with the number we have had last year. The second one is the deflator, okay. The question is…?
Emanuele Oggioni
Your expectation for 2023, for deflator of 2022, which will be applied to next year up?
Stefano Venier
It’s not a number that has been published by the authority. What we do expect is something above 3%.
Emanuele Oggioni
Okay. Thank you.
Stefano Venier
Thank you.
Operator
The next question is from James Brand of Deutsche Bank.
James Brand
Hi. Thanks for the presentation. I was hoping you kind of help us understand a bit better some elements around the overall gas outlook for Italy, given how plugged in you are? So, I have kind of two or three elements to the question. The first is, it looks like there wasn’t any more Russian gas flowing to Italy, but I haven’t actually seen a confirmation of that anywhere. So, I was wondering whether you could confirm that there wasn’t any more Russian gas flowing to Italy? And then in fact, continues to be the case, I think everyone expects that this winter looks fine, but maybe the winter after looks a bit tighter. So, I was wondering whether you can maybe share your thoughts on whether that’s the case? And if that is the case, whether there is anything extra you can do to try and improve the situation, for instance, maybe trying to bring forward your second floating LNG terminal that’s coming online? Thank you very much.
Stefano Venier
Okay. The Russian gas, one thing is the physical volumes that are entering into the country and the other thing is the volumes that could be available in October. I am talking about the most testing numbers, of course. In October, due to the mild weather, okay, and the strong flows from South, the Italian market was longer. And therefore, as I mentioned, we operated or we swapped the close from Russia, okay, towards the Central European market. We also had some days with the physical regas flow from Italy to Austria. And the largest majority of the 2.9 billion cubic meter of gas that was exported was exported towards Austria. So, the Russian flows are still coming in the region of 20 million cubic meters, 25 million cubic meters per day, okay. That is about 10% of the normalized demand in this period. And but physically, they are not delivered in this weeks to Italy because of exceeding – the exceeding offer of gas. So, we still have the contribution from Russia. Second question is about the outlook for the winter. Let me refer for a while to the role of the storages can play. Of course, let me start first considering, let’s say, a normal winter, okay. When we have a peaking demand in January that is between 340 million cubic meter, 350 million cubic meter per day. With this kind of shape, the total gas we have stored there will be fairly sufficient to guarantee the coverage of the demand. In case, there is a more freezing winter mainly will depend if it’s going to happen in January or February. And the reason why it depends on – and the reason why there is a difference is simply because the pressure and the total amount of gas in the storage is higher in January than February and how long this freezing period stays in the country because if it is for a few days, for a week, we can given the very strong very – full storage of the storages, we can guarantee an over-performance in the, let’s say, supply of gas, okay, by 10%, 20%, even 30% for a few days. And to guarantee – further guarantee this over-performance, we introduced for the first time this reverse flow for November and December, when we will re-inject some gas to, let’s say, preserve the total amount stored and therefore the pressure in the storage for January. These are let’s say, the things we are technically doing. Then on top of that, we also requested the authorization to expand the capacity of the OLT terminal from 3.7 bcm to 5 bcm. This request has already obtained the local authorization and now is in process for getting the national authorization that we expect to be obtained by year-end, therefore leasing for 2023 since January to sell additional volumes. Last, we are also operating to optimize the capacity through the Southern corridor. As far as Algeria is concerned, of course, that takes the majority of the share, the lion’s share of the contribution. But we are also testing these days and adapt in the flows of TAP that used to be to run at 28 million cubic meter to 29 million cubic meter per day and now going around 30 million cubic meter, and we are expecting to test 32 million cubic meter per day. That on yearly basis, it’s equivalent to 1 bcm more. So, of course, I am playing with small numbers, but the tight balancing between supply and demand relates exactly to these kind of numbers. So, that is in general, the leverage we are playing with. Of course, on the government side, it’s also has been set a procedure to be finalized the procedure to say, have a possible reduction in industrial demand in case of very strong shortage in the supply due to very freely and prolonged period during winter or sizable shortfall in electricity production.
James Brand
That’s very, very helpful. Can I just confirm on your first answer about the flows commercial. Say, your position is that you could get the gas if you wanted. It’s just not – it’s just not kind of needed at the moment, or is needed more elsewhere in kind of Eastern Europe because there was the whole quite public press reports around Russia halting close to Austria and then there seems to report that they are resuming and then when you actually look at the data, it seems like they don’t regimen, or at least not on the net basis, but you are saying that you could – if you wanted to get that gas in December or January, then you could get it?
Stefano Venier
Yes. I am just trying to answer your question with the information I do have because I do not manage the portfolio and the contract of Russian gas that the different shippers have. What I can tell you is the fact that if I look the so-called nominations in days in where there was the need for the internal demand, we have had supply and don’t forget that the entire the total supply of Russian gas that is delivered in [indiscernible] comes through Ukraine and that is the sole pipeline that has been never, let’s say, affected by sizable reduction in flows. Of course, if we compare it to the first half of the year, there has been a remarkable reduction in the flows by say, 60%. But still – but from let’s say, June-July forward, we have seen a stable flow in between 20 million cubic meters to 25 million cubic meters per day. That is the rate of flows we see still coming. My comment was with respect to the physical flows that are delivered to Italy. And in these weeks, we haven’t, if you go on our website, and you see in real time the flows trying to towards Austria, you will see zero because simply there is an oversupply in the country, and those flows are rooted through the other subsidy GCA towards Central Europe.
James Brand
Okay. Very interesting. Thank you very much.
Operator
The next question is from Bartlomiej Kubicki of SocGen.
Bartlomiej Kubicki
Hey. Good afternoon. Thanks for taking my questions. Just three quick things to discuss, please. Firstly, on the regulation and the allowed WACC and most specifically, the allowed cost of debt and the formula which is in place, which will be sort of lagging the increase in the actual cost of debt. I wonder if you see a necessity to renegotiate with the regulator the framework for calculating the allowed cost of debt because it will definitely not increase over the next couple of years, given how the formula is established? So, that’s the first thing. Secondly, I wonder if you see any change in the payment behavior from gas distribution companies because they have been simply hit quite hardly with lower allowed OpEx or allowed WACC re-pricing for the financing, maybe various issues from supply companies. I wonder if you see any attention in the payment system from especially the smaller gas distribution companies right now? And thirdly, just curiosity, given the fact that gas flows or the flows directions have changed in Italy, do you see also any change in cash flows related to tariff collection because, obviously, I guess you are collecting entry and exit fees and obviously exits and entries are a bit different right now than they were a year ago? Thank you very much.
Stefano Venier
Okay. With respect to the regulation and the tariff scheme, I think we have the mechanism with the figures that allows to recognize both the adjustment for the inflation or the so-called deflator that, by the way, checking backwards that tends to be largely consistent. And also with respect to the interest rates, I mean we expect if interest rates will remain at the current levels, we will trigger in 2024 and so we have this kind of, let’s say, hedging the sole issue is that this hedging operates with a mismatching timing, and mismatching timing. So, we will recover, okay, 2 years later, the effects we see today. So, that is basically how the mechanism works. And this is organized on the basis of the looking forward with the regulatory [ph] mechanism. I think this is significantly perfecting the kind of business we have. The second is about possible, if I understood correctly possible sort of credit crunch or impact on the activities we have with respect to distributors. I have to say with respect to the companies that manage the distribution of gas [ph] and then the supply to final customers, we haven’t seen any impact, having in mind that we are fully guaranteed on the revenues recognized by the regulation. The second aspect refers to the default that we manage. That is the last instant service we provide to those kind of clients, that use the gas supply. Again, since we provide the service on behalf of the national system, we are fully protected on credit risk. So, if we don’t cash in, we will reimburse entirely within roughly 12 months. And where do we stand, nowadays, we have the credit outstanding of €0.5 billion that refers to the first nine months of the year for this kind of service. As I have said, that year will be just notified to the national system operator by year-end and then we will be reimbursed for the part we have not cashed in. So, of course, this kind of service, this kind of service and activity that, by the way, provides some output revenues, additional output revenues being a service that goes on top of our, let’s say, regulated activities might have an impact on working capital, but the impact is limited in time. I can also tell you that we are in conversation discussion with the national authority and the government to guarantee eventually, resources in anticipation on the reimbursement in case the total amount of outstanding credits overcome physiological level. I think I have answered both the second and the third if I understood correctly.
Bartlomiej Kubicki
Yes. Okay. Thank you.
Operator
Sir, at this time, there are no questions registered. Would you like to make some closing remarks.
Stefano Venier
So then gentlemen, thank you so much for the time you devoted to the nine months results of the company. And I am pleased to say, talk to you again in January, then we will introduce the new business plan of the company. Thank you so much.
Operator
Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephone.
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