Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining this Snam First Quarter 2025 Consolidated Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Ms. Francesca Pezzoli, Head of Investor Relations of Snam. Please go ahead, Madam.
Good afternoon, ladies and gentlemen. Welcome to the presentation of Snam Q1 2025 consolidated results, approved by the Board today. The presentation will be hosted by Snam CEO, Stefano Venier, and by Snam CFO, Luca Passa. Stefano will provide an overview of the excellent financial and industrial results achieved, along with regulatory and market updates. Luca will provide a detailed financial performance overview. Then, back to Stefano for closing remarks, and finally, the Q&A session. I will now hand over to Stefano.
Thank you, Francesca. I'm on page two with the key highlights on the first quarter. In Q1 2025, we have delivered another set of sound results despite the market turmoil and the volatility. The adjusted EBITDA of EUR 761 million is up 8.3% year-on-year, driven by growth in regulated revenues. Adjusted net income at EUR 406 million is 21.2% year-on-year up, thanks to the higher EBITDA and greater contribution from associates, only partly offset by higher depreciations and income taxes. Investments at EUR 300,061 are down 22% versus first quarter 2024, following the completion of works related to the Ravenna LNG terminal and higher transport third-party contribution. Net debt was at EUR 16.8 billion, mainly reflecting investments carried out and the payment of 2024 interim dividend for almost EUR 400 million. The average cost of debt was stable at 2.5%. Several updates on M&A, asset rotation, and financing front.
First, in March, we have closed the acquisition of Edison Stoccaggio that contributed to first quarter results for one month. Second, we sold the stake in ADNOC Gas Pipelines to Lunate for EUR 234 million, crystallizing a 14.5 IRR and booking EUR 120 million of capital gain net of taxes. Third, on April 7th, Snam and Infinity Investments, an investment vehicle only owned by Abu Dhabi Investment Authority, entered into a sale-purchase agreement for the acquisition by Snam of the 24.99% stake in the share capital of Vier Gas Holding, which indirectly owns the entire share capital of Open Grid Europe ( OGE) for an equity value of EUR 920 million. At the same time, Snam agreed to sell to Fluxys a stake of approximately 0.5% of the share capital of Vier Gas Holding, so that Snam and Fluxys, upon completion of such transactions, will hold a substantially equal shareholding in VGH .
As a result, Snam will become the first-ever Italian energy player to make a sizable entry into the German energy infrastructure space, so then strengthening end-to-end presence in the South-North corridor and its position as Europe's largest gas infrastructure operator, in line with a strategy to develop a pan-European multi-molecule network located along the key European energy corridors. Today, the Board of Directors approved issuing hybrid bonds by 31st December 2026 for up to EUR 1 billion to finance the deal, maintaining so the financial flexibility, diversifying funding and investors, and optimizing the financial structure. After the deal, both Moody's and Fitch reaffirmed their credit rating, while S&P raised it to A- following the upgrade of the sovereign confirming Snam's strong credit profile. Now, I'll move to page three to dig into the regulatory framework at gas market.
On the regulatory front, the weighted average cost of capital formula was updated for the next three years' period, providing future visibility across all regulated businesses. With the resolution 130, the regulator has finally changed the RAB indexation to the harmonised i ndex of consumer prices (HICP) for the European Union countries relating to Italy, so-called IPCA Italy. At the same time, the deflator for 2024 was updated to 7.9% from the previous 5.3% in order to recover the past adjustments. This effect, as a one-off of EUR 52 million effect related to 2024 recovery, which was fully booked in first quarter, and the positive effect of EUR 10 million per quarter from the first quarter 2025 onward. Considering the application of the ARERA 130 resolution, the 2025 tariff RAB is lifted from EUR 25.8 billion to EUR 26.2 billion.
Moreover, the regulator defined the rules for the sixth regulatory period for storage, confirming the overall setup and introducing a bonus-malus incentive on CapEx spending versus the budget, and the criteria for drafting the single 10-year development plan for the entire gas sector. In the period January-March, European gas demand was 105 bcm, with an 8% growth or 7.5 bcm more compared to the previous year, driven particularly by Germany, the U.K., and Italy. Italy gas demand, then, in particular, was up 10% in the first quarter 2025, mainly driven by higher thermoelectric demand as a fact of lower electricity import and hydro production. Today, there are approximately 130 active points injecting biomethane in the network, with a 15% year-on-year increase in production. Now, I'll turn on page four for some key achievements.
Also, in the first quarter of 2025, we progressed on the key levers of our strategy to build a pan-European multi-molecule operator. Specifically on gas infrastructure, the regasification unit BW Singapore moved 8.5 km offshore Ravenna and successfully completed the commissioning operation within the scheduled time. The regasification activity will begin in the next days, with the capacity being made available through competitive auction procedures in accordance with the current regulatory framework. Second, as of today, Italy received around 60 LNG tankers, half of which are coming from the United States, for a total volume of almost 6 bcm , equal to approximately 30% of the gas volumes imported into the country. Third, at the end of April, the storage level reached 47%, approximately 10% higher than the European average. Furthermore, 90% of the available storage capacity for the year 2025-2026 thermal year was allocated.
This will facilitate the achievement of the 90% infilling target before winter. Moving to energy transition, Renovit backlog is stable at EUR 1.4 billion. On biomethane, 14 plants won tariff auctions in January, about 30 MW under percent of plants submitted. This implies that out of the 78 MW 2028 target, 72 MW, so almost more than 90%, are already in operation, under construction, or finally authorized. Looking at the sustainability initiatives, 28% of the CapEx aligns with the EU Taxonomy and 52% with the SDGs in the first quarter of the year. A new Sustainable Finance Framework, including a sustainability- linked bond section assessed by Moody's, was launched. It includes a new 2035 target that implies a - 65% of the Scope 1 and 2 emissions, carbon neutrality by 2040, and 2050 Net Zero goal.
ESG investors make up about 43% of our institutional investor base, above average of the sector and Italy. Finally, Snam is committed to adopt the TNFD framework early to demonstrate the commitment to biodiversity. Let's now focus a bit more on the gas market in Italy. On page five, in the first quarter of 2025, gas demand reached 21.84 bcm , up by 10% compared to the same period in 2024, the highest level in the last three years. This growth was mainly driven by higher consumption, firstly in the thermoelectric sector, plus 1.4 bcm , or 22%, supported by a decrease in electricity imports and lower hydroelectric production due to lower rainfalls, and second, the residential and tertiary sector, up by 500 million after colder average temperatures and the easing of prior energy-saving measures, whilst consumption in the industrial sector remained substantially stable.
If you look at the climate-adjusted gas demand, that amounted to 22.49 bcm , showing an increase of 1.51 bcm , or 7.2%, compared to the same period of last year. In April, natural gas demand reached approximately 4.2 bcm, again up 2% year-on-year. As in previous months, demand from the power generation sector committed to continue to grow, plus 19%, mainly driven by reduced hydroelectric production following last year's exceptionally high rainfall. Residential consumption was decreased 9% due to milder weather than previous year, while industrial demand again remained stable. LNG volumes up by 10% in the first quarter, representing, as we said, about 30% of the total gas inflows in the country. Liquefied natural gas provided a key contribution to the diversification of energy supplies to Italy.
In 2024, just to remind you, LNG met a quarter of Italy's gas demand, with 150 ships from around 10 different countries reaching the four regasification units in Italy, which now, with the entry into operation of the Ravenna terminal, will become five, providing then a fundamental contribution of the Russian gas phase-out, at least for Italy. Export to Austria was 0.5 billion out of 0.6 billion of the total export, which is almost 3x compared to the export we recorded in the first quarter of last year. I will now hand over to Luca for a detailed financial performance overview.
Thank you, Stefano, and good afternoon, everybody. Moving to slide number six, out of the total amount of around EUR 400 million in the first quarter of investments, 28% is EU Taxonomy aligned and includes, with regard to gas infrastructure, H2- ready replacement, dual-fuel compression station, biomethane plant connection.
As for the energy transition businesses, H2 and CCS, a large part of the biomethane depending on the plant's technical standards and energy efficiency, excluding cogeneration. SDG alignment is instead 52%, of which the majority goes towards SDG 7, 9, and 13, respectively, affordable and clean energy, industry innovation and infrastructure, and climate action. Almost 50% of CapEx are development investments underpinning the industrial growth phase of the company. Let's now move to the first quarter 2025 EBITDA analysis on slide number seven. EBITDA for the period was EUR 761 million, + 8.3% compared to last year, or plus EUR 58 million.
The growth is mainly attributable to regulatory items for a total of around EUR 36 million related to the recognition of the 2024 deflator update for EUR 52 million, the adoption of the Italian IPCA for the RAB revaluation starting in 2025 for around EUR 10 million, partially counterbalanced by the WACC decrease for around EUR 26 million. Regulatory revenues increased for around EUR 29 million. Stogit Adriatica that entered into the perimeter from the 3rd of March 2025 and positively contributed by EUR four million to the first quarter EBITDA. In detail, the regulatory revenue growth was driven by transport and storage revenues increased by around EUR 33 million linked to the investment plan execution, higher allowed OpEx mainly due to the inflation. These effects were partially counterbalanced by output-based reduction of around EUR 16 million versus last year, mainly attributable to the storage reverse flow service and by the expected phase-out of the input-based incentives.
The increase in gas infrastructure operating cost of about EUR 13 million is mainly attributable to the labor cost, in large part due to the new hires and labor inflation, and to the FSRUs costs. With regard to the energy transition business, the EUR 2 million EBITDA contribution is mainly driven by biomethane supported by higher volumes and efficiency gains achieved through the reorganization carried out in 2024. Moving to the associates on slide number eight, in the first quarter, our associates contributed to group net income by EUR 107 million, EUR 32 million increase compared to the same period of the previous year. The total contribution is related for approximately EUR 74 million to the international associates and for EUR 33 million to Italian associates. In detail, TAP's slight higher year-on-year contribution is driven by inflation-adjusted tariff and lower net financial expenses.
In the first quarter 2025, TAP covered 17% of Italian imports, confirming its position as the second largest import route via pipeline. The ongoing 1.2 bcm expansion is expected to be operational by the beginning of 2026. Sea Corridor operating performance is substantially in line year-on-year with approximately 5.5 bcm transported to Italy in the first three months of the year, while the higher net income contribution is mainly driven by lower operating cost and the positive effect of the earn-out debt write-down. Moving to Austria in 2025, the new regulatory period started with the stabilization of the volume risk. TAG benefited from higher allowed revenues versus last year, bringing net income contribution to positive it's around EUR 20 million. Also, GCA's performance benefited from the higher allowed revenues, partially offset by the worsening in the booking situation, which will be recovered in the T+2 tariff.
In the first quarter, we also recorded a significant increase of exports to Austria. Teréga's performance in France is substantially in line with the first quarter of last year, despite higher energy costs due to the strong storage withdrawal and higher interest rate expenses after the bond refinancing. Teréga is developing its section of the H2med corridor together with the project partners, including OGE. In Greece, that lower contribution is due to lower auction premium on LNG imports and exports to Bulgaria, now in line with historical trends. However, Greek demand rose by 30% compared to the first quarter last year, driven by a colder winter and higher demand for power generation, which might bring further upsides during the course of the year. Alexandroupolis FSRU is expected to be back in full operations with the next thermal year, 2025-2026.
Also, around the Revithoussa LNG terminal, all the slots have been booked for the period 2025-2029. Interconnectors contribution in the U.K. remains in line year-on-year since we are reaching the yearly regulatory cap, thanks to the capacity almost 50% booked until 2026. EMG, slight lower contribution, is due to the recording of positive non-recurring items in 2024. The asset is operating close to maximum capacity. Regarding ADNOC, in March, we completed the stake disposal. Here, we represent only one month of net income contribution, while you can see that at the consolidated report level, the capital gain benefit, as mentioned by Stefano before. Starting from the third quarter, we expect contribution from the consolidation of the stake in OGE for approximately EUR 10-EUR 15 million in 2025. Finally, Italian associate growth is mainly driven by Italgas overperformance in the first quarter.
Let's now move to the first quarter net income analysis on slide number nine. Adjusted net income for the period was EUR 406 million, + 21.2% compared to last year, due to higher D&A by EUR 6 million following rising investment and the entry into perimeter of Stogit Adriatica , partially counterbalanced by the absence of the write-down on gas infrastructure made in the first quarter of 2024. Lower net financial expenses by EUR 7 million. Financial expenses related to debt recorded a modest increase, reflecting higher financial indebtedness and a marginal increase in the average cost of net debt, which reached approximately 2.5% compared to 2.4% over the same period last year. The increase was more than offset by non-debt-related items, in particular higher capitalized financial expenses.
A higher contribution from associates, as already commented, which was the result of higher international associates' contribution for EUR 22 million and higher Italian associates' for EUR 10 million. Finally, higher taxes due to higher EBT for the period. Turning now to cash flow, slide number 10. Cash flow from operation for the period amounted to around EUR 779 million and was the result of EUR 508 million of funds from operation and EUR 271 million of working capital cash generation. The change in working capital was mainly driven by the regular working capital, with around EUR 450 million positive due to tariff-related items, mainly driven by the additional tariff components, around EUR 140 million negative variation due to the balancing and settlement activities and the full service, and about EUR 30 million negative related to the energy transition net working capital, mainly driven by energy efficiency, trade payables decrease, partially counterbalanced by Superbonus fiscal credit decrease.
Net investment for the period amounted to EUR 975 million, including EUR 564 million of cash-out related to Stogit Adriatica and around EUR 234 million of ADNOC disposal cash- in. Other outflows were related to the payment of the interim dividend for EUR 389 million, resulting in a change in net debt of about EUR 560 million. Moving to slide 11, net debt amounted to EUR 16.8 billion at the end of the quarter. Net cost of debt, which is calculated as financial charges net of liquidity incomes on average net debt for the period, moved from 2.4% in the first quarter of last year to 2.5% in the first quarter of this year, while the fixed floating mix is at 80%/20%. Sustainable finance ratio is at 85%, well on track to reach our long-term target of 90% by 2029.
The new sustainable finance framework has been published, including new targets on carbon neutrality for Scope 1 and 2 by 2040 and net zero for all scope by 2050. Demonstrating the company's strong and ongoing commitment to sustainable finance, Snam has been honored with the prestigious Sustainable Issuer of the Year award by IFR, International Financing Review. This recognition highlights the company's unwavering dedication to energy transition and its adoption of innovative sustainable financial instruments. Credit ratings were affirmed by Moody's and Fitch following the OGE acquisition announcement, while S&P rated Snam's positioning to A- following the upgrade of the sovereign, which is a recognition of Snam's strong credit metrics.
Based on the first quarter 2025 economic and financial performance, we are comfortably on track to deliver the full year guidance that we will be updated in the first half to reflect, among others, the ARERA 130 resolution, which has lifted 2025 tariff RAB from EUR 25.8 billion to EUR 26.2 billion and recognized EUR 52 million of extra revenues related to the 2024 deflator adjustment. On net debt, the guidance is confirmed, assuming the issuance of hybrid instruments to finance the 24.9% OGE stake acquisition with the hybrids that was approved in the board today. I will hand over now to Stefano for the closing remarks.
Thank you, Luca. In conclusion, we have made, I think, further strategic progress on our strategy to build a pan-European multi-molecule infrastructure at the crossroads of the main European energy corridors.
Significant milestones include the agreement to acquire, just recalled by Luca, of the 24.99% stake in OGE, the largest independent German gas TSO, the closing of the Edison Stoccaggio acquisition, the Ravenna regasification terminal operations launch, and the award of 14 projects in the last GSE auctions for biomethane production. We have delivered solid first results in the first quarter of the year, despite an environment marked by high uncertainty and volatility. We enjoyed strong visibility and are very comfortably on track to deliver the full year 2025 guidance. We are achieving growth while maintaining a strong balance sheet and sound financial traceability, as reflected in our credit rating upgrade to A- by Standard & Poor's. Finally, let me slightly diverge from the standard protocol.
As you know, this is my last presentation as CEO, and I would like to sincerely thank you all for the attention, credit, and time spent to follow the company and its last three years' development journey. For me, it has been a pleasure to serve as CEO of this real, unique company. And now we are available to take your questions.
Thank you. This is the Chorus Call conference operator. We will now begin the question- and- answer session. Anyone wishes to ask a question may press star and one on the touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. We will pause for a moment as participants are joining the queue. First question is from Sarah Lester, Morgan Stanley, please go ahead.
Thank you very much, and thank you, Stefano, first of all, for all you've done for Snam over your time there. I've got two questions, please. Firstly, related to today's result, wondering if you can please quantify or provide just a little bit more color on a forward-looking basis on how the associates' portfolio income that you did talk about on slide eight, how this is expected to evolve over the rest of the full year. And then a high-level question, please, on regulation in Italy. Something we've, of course, heard loud and clear from investors for a long time is the desire for simplicity in regulation. So my question is, given your unique perspective as a regulated business and your conversations with ARERA, do you see that there is an understanding and recognition of this within the regulatory circles in Italy?
And so I'd be interested in your views on anything ARERA is doing or could do better in order to simplify regulation in Italy. Thank you very much.
Okay, Sarah, thanks for the question. So for the first one, in terms of associates' performance or expectation of performance throughout the year, let me say that excluding OGE contribution, which is expected, as I say, starting from the third quarter, we're expecting a contribution overall of over EUR 350 million for the full year. The majority of the delta vis-à-vis last year, as we mentioned also in the business plan presentation, is driven by Austria. Now, including also the OGE contribution, if we basically execute on the closing of the transaction, we will be approaching just shy of EUR 370 million of contribution for the full year.
That's regarding associates, where the increase clearly comes for both the international portfolio as well for the Italian one that will contribute in the region of EUR 110 million for the full year. On regulation, probably just commenting, ARERA has basically board renewal expected by the end of July this year. Therefore, we need to expect a new board in order to assess how much simplification can be done. But let me also stress the fact that, notwithstanding the Italian regulation across the different, I would say, regulated businesses, not only gas, but also including clearly electricity, waste, and water, is, as you know, one of the most reliable across Europe.
Therefore, even if some simplification can be done or can be achieved, probably will take some time, and it will be part of the ROSS full introduction when it will be taken, at least for the two major businesses, which are clearly gas and electricity.
Thank you very much.
Next question is from Javier Suárez, Mediobanca. Please go ahead.
Hi all, and many thanks, Stefano, for your job at Snam these three years. And now three questions. The first one, high-level questions, is that on the security of supply for Europe. So the European Union has recently presented a plan to fully end dependency from Russia in 2027. So the question for you is, which are the implications for the EU security of supply and the design of the future European gas transmission networks? And probably a related question is, we have seen a massive blackout in Spain.
From your point of view, which are the lessons to be learned in terms of EU energy policy? And then the second and third question are both related. So you can help us to understand the implications of the new deflator with respect to your assumptions in your latest business plan, and also the performance of the international activities continues to be very solid. You can help us to understand again how this performance compares with your expectations at the latest business plan. Many thanks.
Okay, let me address the first one. Thank you, Javier. The first one regarding the security of supply and implication from the phase-out of the Russian gas. I think we have to frame it with respect to the total contribution that still Russian gas is providing to Europe after the, let's say, stop of the transit through Ukraine.
I mean, generally speaking, it's something that hovers around 10%-15% of the total consumption. And I think that thanks to the most recent new infrastructure that has been put on stream, like the Ravenna LNG facility, like the new Wilhelmshaven facility, Europe has further strengthened the, let's say, the options can have to source the gas that is required to fulfill the total consumption of the country. We don't have to forget that if you look on, let's say, wide perspective, the level of utilizations of the LNG terminals that we have had in the last 12-18 months, you see that apart from Piombino and the Rovigo infrastructure that were fully utilized, almost 100%, the rest of Europe has a certain percentage with some spare capacity available. So I think Europe can progressively commit to phase out the Russian gas.
Of course, let me also stress the point that this is something that relates to the existing current conditions and situation with respect to the conflict between Ukraine and Russia. We have to see within the next two years what is going to happen with respect to that situation, also to understand if this decision we will stick with. But I wouldn't be so concerned with respect to, let's say, reaching that level. But then we know that there are a couple of countries in Europe that are contrasting this decision that is part of, of course, the discussion that takes place all across Europe. With respect to the situation in Spain, I mean, as you know, being Spanish, Spain has a very peculiar situation.
It's almost an island with respect to the rest of Europe in terms of, let's say, interconnection with the rest of Europe, both with respect to electricity and gas. So in some way, also the implication or the lessons we can learn from that experience that need to be fully understood in the causes and, let's say, in the chain of consequences we have had in the system, we have to consider the real peculiar position they have. But in general, I mean, I feel comfortable in reaffirming something that we also pointed out during the presentation of the business plan. This transition is not linear. We need to really understand the implication and how to create or to find the new safe balancing in the electricity system.
And for that reason, we need to maintain certain redundancy and certain mechanisms that can back up some effects that we are not prepared to tackle with or we were not expecting could happen so to guarantee the stability and the business continuity that is required. That means, again, to frame properly the thermal capacity that can properly back up the system in this new, let's say, situation that we never faced before and that is applied into a system that was originally designed to have a different, let's say, mechanism with respect to production and distribution and consumption.
When it comes to the second question on the deflator, Javier, basically the impact for 2024 is EUR 52 million on revenues, and that is because we were estimating in our business plan 5.3% of this index, while with the recent resolution, it is 7.9%. When it comes to 2025, in the first quarter, we have recorded EUR 10 million. So if you analyze this, the contribution will be EUR 40 million higher with an indexation which is 1.1%, which is the index for Italy. For the rest of the business plan, you should assume, I would say, an annual contribution from this index in the region of EUR 35 million-EUR 40 million each year, and that's the impact for the deflator.
When it comes to the international associate performance, let me say that this was, at least for this year, exactly in line with budget, but with a slightly different mix. First of all, we didn't assume in our business plan the exit from ADNOC that you might recall was expected to contribute in the region of basically EUR 25 million for the year. We are expected to substitute that contribution with up to EUR 50 million for the third and fourth quarter when we basically close the OGE transaction. Plus, I would say, minus and plus of other associates which are marginal with a very strong performance from the Austrian, in particular, TAG, which was expected and is actually slightly better than expected, at least for this first part of this year.
Therefore, overall contribution for 2025 is expected to be including OGE contribution shy of EUR 370 million, which was, again, what we had in budget when we presented the business plan. For the remaining of the year, clearly, we will assess going forward. Many thanks.
Next question is from James Brand, Deutsche Bank. Please go ahead.
We can't hear you.
James Brand with Deutsche Bank. Your microphone is open. James Brand from Deutsche Bank. Your microphone is open. Next question is from Emanuele Oggioni, Kepler Cheuvreux. Please go ahead.
Good afternoon, and thank you for the presentation. And thank you, Stefano, for your work, both Snam and together. My first question is on the guidance, 2024 guidance, 2025, sorry, 2025 guidance. As it seems that after the deal, OGE deal, and also the moving parts in Q1, they seem quite the guidance is quite prudent. So if you can add some color on these. Then, as regards the net cost of debt, you mentioned 2.6%, so basically aligned with the previous year. I suppose that this figure, this guidance, does not include the issue of the hybrid for up to EUR 1 billion, if I'm correct. Thank you.
With respect to your first question, so 2025 guidance, let me say, I think, I personally think, and the Board agreed on that, it's more appropriate to leave the decision to eventually review the guidance to the next Board and let them to complete an adequate forecast and projection for the year so to release you what is their opinion and what will be their commitment for the year. For the second question, I leave Luca.
Let me just add on the first part. As I mentioned, the deflator impact is EUR 52 million on 2024 recorded in this quarter. Plus, you have an expected EUR 40 million higher contribution from the IPCA index on Italy for this year. So we have EUR 90 million of additional revenues coming from the resolution that was approved a few weeks ago. For the cost of debt, the expected cost of debt for the year is 2.5%, and it does not include nor the potential issues of a new hybrid for the OGE acquisition, neither the existing hybrid cost. Because, as you know, from an accounting perspective, when it comes to hybrids, IFRS allows you to basically account them as full equity for both the notional as well as the interest payment.
Thank you.
Next question is from Alberto D' Antonio, BNP Paribas Exane. Please go ahead.
Hi. Thank you so much for taking my questions, and thank you so much, Stefano, for your work on Snam. And thank you for still taking live questions from analysts. My first question would be on your expectations based on the macro market valuation or update of WACC and the deflator for the next year. What do you expect and if you expect the trade mechanism to be applied? My second question would be regarding the potential reverse integrated regulation. What are your expectations in terms of timing, given that, as far as I know, there is no consultation paper published yet, and it should be in place from next year? And finally, apologies because I know they have already repeated a couple of times, but could you repeat again the expected contribution from the acquisition of Open Grid Europe in the last quarter? Thank you so much. Thank you.
So for the WACC mark-to- market, according to current forwards and the period already basically recorded for the calculation of the formula, we currently are at 5.4, which is very far away from the trigger of 30 basis points. You know that today is 5.5; therefore, we do not expect the trigger to happen. Then, for our mark-to- market starting in 2028, when there is the new basically WACC reset period, we still stick to 20 basis points increase in the formula based on a risk-free rate above 3%, is 3.1%, and a country risk premium, which is at 1.1%. And this, again, is according to current forwards. When you asked about timing for regulation, to be honest, it's part of what I answered before.
With the change of the board of our regulator in July, it's very difficult to assess timing, and I confirm there is no public consultation yet when it comes to the full introduction of the ROSS mechanism. Therefore, it will take some time before it is discussed and then clearly applied. Then, for the contribution of OGE expected for the year, again, for the third and fourth quarter, we expect between EUR 10 million and EUR 15 million of net income contribution for the stake. The range depends on exactly the date in which we will close the transaction.
Thank you.
Next question is from Bartek Kubicki, Bernstein. Please go ahead.
Thank you very much, and good afternoon, and Stefano, it was a real pleasure to work with you over the last few years, so thank you very much for all that. Two issues I would like to discuss. First, regarding a potential inorganic growth in two aspects. First, I wonder if you still see opportunities to consolidate the gas storage business in Italy because I think there are still some more assets outstanding where it's possible to actually buy them as well. Also, on inorganic growth in the energy efficiency business, last year was very difficult. This year, it doesn't seem to be super good, at least in the first quarter. Do you think there are struggling players willing to sell the assets, and you may actually manage to consolidate the energy efficiency activities as well?
That's the first one. Second one, technical on the financial costs. Here, I have two sort of sub-elements. Firstly, you are mentioning the increase in capitalization of financial costs. I just wonder what is the basis for that, given the fact that the cost of debt is roughly flat, okay, small increase, but the CapEx has decreased. What is the basis for increasing the capitalization of financial costs? I also wonder, given the performance of Italgas share price in the first quarter, how do you actually treat this, and what's the impact on your financial costs given the convertible outstanding on Italgas shares? Thank you very much. You've been very patient.
Okay. With respect to the inorganic development and the possible further consolidation on the storage capacity, I don't think we will consider to buy the residual asset that is left in the country. It's a small storage unit owned by Ital Gas Storage. We are much more now concentrated on, let's say, optimizing the asset utilization and increasing the flexibility on those assets in terms of injections and the performance because we think we can create much more value working on that, including the installation of the electric compressors that will let us increase exactly the flexibility of the performance of the units.
With respect to energy efficiency, it's exactly as you said. I mean, the sector, partly last year, also this year, is suffering from, let's say, the conclusion of the incentive scheme for the residential refurbishment. I think many of the players are suffering from, let's say, some underperformance results. We haven't seen yet options coming to the market for consolidation. We are actively looking around in case there are interesting and fitting options because making this unit to grow, I think it's the best way to value it. Luca.
Yes. When it comes to the financial cost, the increase in capitalized, basically, expenses is driven exactly by the CapEx deployment and timing of CapEx deployment. That is affecting the first quarter, but will affect also the full year. Therefore, for the full year, we expect roughly, I would say, a similar overall financial expenses line with slightly higher financial expenses related to debt. Those are driven not by the cost, but by the volumes or average volumes of debt throughout the year, while we expect higher basically capitalized cost throughout the year vis-à-vis last year. And the two effects basically net each other.
When it comes to Italgas, as you know, convertibles are basically two instruments together, a bond option and a bond component and an option component. Therefore, the bond component is assumed as debt. The option component has been very volatile, driven by the performance, as you said, of Italgas, and it's non-cash items. Therefore, it's adjusted in our net income.
Thank you.
Next question is from Piotr Dzieciolowski, Citi. Please go ahead.
Hi. Good afternoon, everybody. I wanted to follow up on this capitalized interest element. Is there a difference how this capitalized interest when you capitalize interest on your P&L, does this capitalized interest go into a RAB, or these are the two separate metrics? So when you spend investments, the regulatory accounts don't treat it. Is there a difference on this one? So that's the first question. Second question, I wanted to ask you, how do you think about the implication of the country and Snam rating upgrade for the WACC and for the financial kind of for the earnings generation power? Is there any implication for the WACC and cost of funding on the going forward basis? And then finally, I wanted to ask you about the hydrogen prospects. Part of your business plan for the next 10 years includes the hydrogen investments. We've just seen the Statkraft cancelling the hydrogen investments.
So even though there's a cheapest power in Norway, they don't see the economics work. That's how I would interpret it. Do you still see your hydrogen investment going through? And if they don't go through, or there's a lower probability of them, what's the growth rate of the RAB without these investments?
I'll take the last, and I'll leave Luca for the first two. I mean, with respect to the hydrogen, of course, now the economics makes the hydrogen too costly, even with respect to the low cost of energy in the Nordic. But as you know, the project for the hydrogen development looks forward to beyond 2030. So at that time, we expect some developments on the demand side with exploiting the opportunities of leveraging on the economies of scale to reduce the cost.
Also take into consideration that the location of the production is expected to be in the northern part of Africa, where you have plenty of sun and wind available. Also, I think the step into the OGE that is the main player in the German market in the development of the hydrogen backbone in the country will give us even more visibility on the development in the core market for the global European demand of hydrogen. Also, the decision of the recent decision and the appointment of the new economic and energy minister on the Merz government pulls into the direction of reconfirming the commitment of the German market, Germany, to develop the option of hydrogen in terms of green molecules for the decarbonization of the industrial sectors and part of the power generation.
I think we have to rely on this perspective demand also with respect to Italy to underpin the development of the SoutH2 Corridor. What happened in case this solution doesn't fly up is exactly the way how we structure the business plan and create different options. I mean, if we stick with certain targets in terms of decarbonization and we don't have the option of hydrogen for all the consumption that requires the molecules, either you keep on using gas with the carbon capture or you can keep on using gas, let's say, paying the ETS of the offsetting mechanism for the carbon emissions. So I think, and that links also to the question that Javier Suárez made with respect to the evolution of the, let's say, appropriate equilibrium in the energy system.
So, I think saying what is going to be the growth in the business in 10 years without any contribution from the hydrogen. I think it's stretching too much the thoughts. But I think it's appropriate to consider that if we don't have that option, we have to keep and exploit the other options for all the consumptions that have to rely on the use of molecules.
So for the first and second question, regarding capitalized financial expenses, for storage and regasification, they fully go into the regulated asset base, while from transport, only 0.8% of the CapEx goes as basically RAB when it comes to capitalized financial expenses. Regarding the WACC, I didn't get exactly the question.
I think you were basically asking what do we expect in the change of the formula, which is basically nothing between, I would say, this WACC period up until 2027 and the following WACC from 2028 for basically three years. Besides the debt component, which moves from 66% to 100%, that is not finally confirmed by the regulator, will be confirmed when we get closer to the WACC reset, and in terms of, I would say, main variables for that year, as I mentioned before, we are expecting, according to current forward curves, a risk-free rate of 3.1% and a country risk premium of 1.1%.
Okay. No, that's fair enough. Thank you very much.
Next question is from Davide Candela, Intesa Sanpaolo. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. And also thank you, Stefano, from my side for your great work and the opportunities we have together. Coming to the questions, I have one related to your answer in relation to the potential Russian gas ban. It's related to prices. I was wondering if you can share your view about that because this potential reduction in supply, in my view, could put pressure on gas prices, also looking at what oil prices are doing currently with the associated gas and investment that could be delayed. So taking all the things together, if you can share your view about that. And second question related to CO2, I was wondering if you can share the talks with Eni, at which stage they are, particularly after Eni reached a milestone in the U.K. for a project. So also sharing your view will be helpful. Thank you.
With respect to the Russian ban, let me say, I mean, of course, this phase-out has to go consistently with the availability of other flows. I mean, we don't have to forget, and we don't have to exaggerate to a certain extent the complexities to substitute 20, 30 bcm of gas for the entire European market, also taking into consideration what's going to be the development of demand throughout that period. The second point to look at the prices, I mean, we have to consider how the gas storages will be managed throughout the period because, as you know, the more we have in the gas storages, the lower tends to be the flexibility in the market. I think that the additional capacity that has been put on stream for the LNG can, let's say, cope with this reduction of Russian gas.
But let me say, to a certain extent, it is nothing new in the sense that since the beginning, I mean, of the Russian invasion of Ukraine, the target for Europe was to get rid of Russian gas. We haven't been able to do it so far because we hadn't enough capacity to substitute completely that flows with other flows from LNG. And if you consider nowadays, apart from some volumes that come through the TurkS tream, all the rest of the Russian gas that is delivered to Europe is LNG. So to a certain extent, apart from the cost of transportation and longer, I mean, the different distance between the source of Russian LNG with respect to, let's say, America U.S. LNG or Qatar LNG or African LNG, you have basically the same mean of production of that gas. So I don't think that that can influence much of.
But then, as I said, I mean, we have also to consider what is going to be the situation within the next two years, in two years' time, in terms of, let's say, peacekeeping or possible peace in Ukraine that will reshuffle eventually some of the positions in the different markets. With respect to CO2, we are still in the process that has been launched by Eni, the project called Glacier. As you know, our purpose is to be part of that project, contributing the 50% of the project we have in Ravenna. Definitely, the FID that was taken for the HyNet project will speed up the process. And about the timing expected for the process, who is leading the communication is definitely ENI that stated some deadlines and some expectations to that respect.
What I can say is that I see more and more the solution of carbon capture gaining momentum all across Europe, but not only across Europe. And there is a strong pressure for, let's say, developing this type of solution, especially for industrial clients and industrial sectors and power generation. And I think to that extent, it's extremely significant the position, the stand that was taken by the German government with respect to the development of CO2 as an option for that market that was not considered so far. Okay? And I think when the German market, U.K. market, let's say, Benelux market, Italian market, Greek market are looking at that solution, especially for cement production, for steel production, it makes sense to create the critical mass for developing this type of solution.
Thank you very much.
For any further questions, please press star and one on your telephone. Next question is from James Brand, Deutsche Bank. Please go ahead.
Good afternoon, and also from me, Stefano. Thank you for your service over the last few years. A couple of questions. Firstly, on the WACC, I know there's been a few questions already in the WACC, so hopefully, I'm not rehashing what's been gone through already, but there's been quite big moves in bond yields, and I was wondering if you were to kind of mark to market the WACC today, what would that imply for next year? Would it imply a cut or a similar WACC or an increase, and then secondly, just circling back on the Italgas converts, obviously. In the money. What do you expect in terms of conversion timeline for those?
Do you think that the convertible bondholders will wait until the end of the period, which I think is in 2028, to exercise, or do you expect them to exercise earlier? Thank you.
Thanks, James. Regarding the WACC mark-to-market, I've addressed it already before, but just to repeat it. So looking at the observation period, which is already gone from October last year up until now, and the forward curves, the mark-to-market for next year is 5.4 vis-à-vis the 5.5 on transport today. Therefore, only 10 basis points of basically reduction, which doesn't basically affect the trigger, which is 30 basis points, and then going forward for the next regulatory period for WACC, which is 2028 and onwards, we are expecting, according to the current forward curves, 5.7 on transport, i.e., 20 basis points higher based on a country risk premium of 1.1% and a risk-free rate of 3.1%.
This has materially moved basically since we presented the business plan. Then for the Italgas convert, you know how convert works. If the bondholders, the convert holders, try to convert before, even if the bond is in or the convertible is in the money, they will lose the time value of basically the option. Therefore, we do not expect any convert holders to basically require conversion. Additionally, as you know, Italgas will be on the market with a capital increase in the coming couple of months, which means that there will be also a revision or a stabilization around the stock price of the company, therefore making the convert less in the money than it is today.
Great. Thank you. I'm sorry for asking a question there that I've been asked already, but it was helpful to go over the answer. Thank you very much.
Next question is from Marcin Wojtal, Bank of America. Please go ahead.
Yes. Good afternoon. First of all, also a big thank you to Stefano for his service and for interactions with the analyst community. I wanted to ask you, if you don't mind, about regulated returns linked to green hydrogen. So do you still expect to eventually obtain a premium return versus other types of activity? And is there already any process ongoing with ARERA that is supposed to determine the methodology and the returns? Could you just please remind us what are the timelines here?
The process for defining the allowed return for green hydrogen has not started yet. There are some, let's say, steps to be taken with respect to that, let's say, entitles them to fully dig into.
With respect to the expectation, also confronting the situation in Germany, that is the most advanced market to that respect, it's reasonable to expect a premium vis-à-vis the gas situation simply because of the implicit risk that there is in the new development of this new molecule market, the market of this new molecule. So it's reasonable to expect. We always said that we might expect something in the region up to 100 basis points with respect to gas market. We don't all have other, let's say, data points that can help to set up a different expectation.
Ms. Pezzoli, gentlemen, there are no more questions registered at this time.
So then, thank you all.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.