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Edited Transcript of IG.MI earnings conference call or presentation 30-Jul-19 12:00pm GMT

Half Year 2019 Italgas SpA Earnings Call

MILANO Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Italgas SpA earnings conference call or presentation Tuesday, July 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Paccioretti

Italgas S.p.A. - Finance & Services General Manager

* Paolo Gallo

Italgas S.p.A. - CEO, GM & Director

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Conference Call Participants

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* Alberto Gandolfi

Goldman Sachs Group Inc., Research Division - Head of European Utilities Research

* Antonella Bianchessi

Citigroup Inc, Research Division - Director and Head of European Utilities Equity Research

* Bartlomiej Kubicki

Societe Generale Cross Asset Research - Equity Analyst

* Emanuele Oggioni

Banca Akros S.p.A., Research Division - Analyst

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [1]

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Good afternoon, ladies and gentlemen. Thank you for being with us today. We will go through the presentation, myself and Antonio, and then, as usual, at the end of the presentation, we will be available to respond to any questions you may have.

So let's go to Page #2, we start from the structure, reason being is that every quarter, you see a different structure represented. And the reason is because we are going through acquisition, and then once that we have completed the acquisition, we try to simplify the structure. In fact, if you make the comparison with the previous corporate structure at the end of March, first, all our special purpose vehicles in Fontenergia and Sardinia were merged into Medea. That consolidate is natural road to manage all Sardinian operation in the distribution. While you can see that we have established a NewCo, what is called Medea NewCo, that will manage the natural gas sales and the LPG sales in Sardinia according to the unbundling regulation. That company is still not active yet. It will be active in -- during the -- during month of October.

Always -- since April 1, Naturgas and the other special purpose vehicle operating in Campania, Calabria and Sicilia were merging to Italgas Reti. On April 17, the call option we have made, of course, announcement at the time for the remaining 40% of EGN asset was exercised, and we gained full control of the company and this asset. We immediately started, at the time, the merging process into Italgas Reti. That should be completed in, I think, starting from August 1.

We have completed the acquisition of the assets under Conscoop Group on April -- at the end of April. In fact, you can see that we have included into our perimeter, Mediterranea. That is 100% controlled by Italgas Reti, while the branch of the other assets are, of course, already inside Italgas Reti. And the relevant part to Sardinia are included into Medea.

This long explanation is to tell you from one side the continuous effort that we have put in line in order to simplify our corporate structure, with the objective to reduce corporate costs, but even more important, to extend to the new acquired company our contract, our organization, in other terms, in order to maximize the synergies of the M&A activity.

Let's move to the result of the first semester 2019. We could have titled this chart with 10 consecutive quarter of growth since the merging of -- from Snam. In fact, if you take a look in the appendix, where the quarter result are reported, you will have a confirmation of my statement.

I would like you to focus on the EBIT and the net profit result, and I will explain you later why, because it's a better comparison with the previous year. EBIT show an improvement of 8.3%, while the net profit show an improvement of double digits. Revenues increase is mainly driven by the M&A activities, the M&A that were closed and included into our perimeter as well as by our day-by-day life activity. And I'm referring to the work increase and the RAB increase.

From the cost side, and I will tell you more in details the numbers, the like-for-like analysis show a significant cost reduction. So our commitment to continuously reduce the cost is true, and it is demonstrated in the numbers. A very significant element is the CapEx. We were able, during the first semester, to increase by 40% the overall investment in comparison to the previous year. This is a significant number. But even more than that, and I will explain you in the CapEx analysis, there has been a significant increase in our ability to maintain, upgrade, expand our net.

Finally, we had a very strong cash generation. This cash generation in the first 6 months allowed us to control our net financial position that even in consideration of the dividend paid and the M&A closed was only decreased by EUR 44 million in respect to the end of 2018.

Skipping on Page 4, we have an analysis of the CapEx. As I said before, it is very interesting. As you can see, a significant increase is in the distribution perimeter, a further analysis will follow. We have -- you can see starting -- you can see the initial digitization investment. They represent around EUR 8 million in the semester. And then you see a significant number that is the Sardinia development. That represents around EUR 30 million. In respect of last year, that was up. Regarding the meters, we are continuing to install smart meters, replacing the old ones, the traditional ones. The difference in the amount of investment is driven by our ability to reduce the procurement cost.

In the first semester, the procurement cost of a smart meter install has been equal to EUR 107 per meter. If you compare this number with the number recognized by the regulator, it is EUR 142. That means that EUR 40 per each [of these] meters will benefit Italgas, while EUR 21 will benefit the system. The EUR 14 per unit that will benefit Italgas, as you know, will create a CapEx in the RAB without any relevant investments. This amount is around EUR 10 million.

The total smart meter replaced at the end of June is equal to 5.1 million, that is representing nearly 68% of all our meters. If you consider also Toscana Energia mainly, we reach 68.5%. So we are significantly outperforming the minimum indicated by the authority. And we confirm that by next year, 100% of our meters will be smart. And as you know, this is an important factor, an important milestone for our digitization program.

I would like to spend a little bit more time about the CapEx devoted to the network because it's an important step forward. Last year, we -- if you consider extension, new network and maintenance, we were able to [aggress] 91 kilometers. This year, we were able to nearly arrive to 400 kilometers. As you can see, it's not only Sardinia, the major driver. Sardinia, last year, of course, was 0. That is the amount that we -- that is the amount of the network that we were able to deliver in the first semester. We have already passed the 200 kilometers of new network in Sardinia considering also what we have done in the last -- in the second semester of 2018.

But you can also appreciate the effort that we have made on the extension and on the new network as well as the maintenance. All the numbers have been significantly increased. And that is -- that will translate into a benefit, into a positive effect for our economy also in terms of job creation. And we are very proud of that because that means that our organization, starting from authorization and permitting, engineering, procurement and construction have been able to deliver a significant result. Only looking at last year, because last year the numbers were very limited in respect to the numbers that we present in this first semester.

Now let's take a look at the result. So let's take a look at the income statement. Even though, as you know, we have more detailed analysis regarding revenues and cost later on, So I will leave the comments to the major points regarding the income statement.

The increase of revenues are mainly driven by the increases coming from the acquired company and by a one-off capital gain that was already present in the first quarter. The operating expenses are higher in respect of last year by EUR 4 million. And that -- there are many reasons why this is higher.

The first one and the major one is the cost that we have accounted for the so-called white certificate or energy efficiency certificate. Because of the change in the regulation, we were obliged to account a significant amount in respect of last year. That amount is such that if we strip out this item and also if we strip also the additional M&A cost, in other terms, the cost coming from the new companies acquired, we are -- we can show you that our cost control has been extremely effective. The base cost has been reduced by 8% in respect of last year. I will give you comments in the way that you can, of course, check and evaluate this number.

Regarding the depreciation and amortization, that is mainly linked to the smart meters. Antonio will explain you later why. And similarly, relevant to the lower tax rate, Antonio will also explain. But let's go -- let's get into more details about the revenues.

So we are on Page 7. The first line is distribution. We see an increase in -- about EUR 18 million. EUR 8 million are coming from the M&A. The M&A relevant only to the gas distribution. So does not include Seaside. It does not include all the Sardinian operation that are based on the LPG. Those number are accounted in the other revenues. We have another EUR 7 million -- nearly EUR 7 million increase of tariff due to -- mainly driven by the WACC. WACC represent about EUR 6 million. It's an easy calculation, make it just rounded EUR 6 billion of RAB. 20 basis point is EUR 12 million divided by 2 is EUR 6 million. So it's a very easy number to define. And we have another EUR 3 million that is relevant to adjustment that were booked negatively -- that were booked last year and those adjustments that are booked this year. That is the first line of distribution.

You can notice a significant reduction in the tariff contribution for meters replacement, and that is a number that we expected to have because as you know we have decided to consider the old fleet that we are going to replace, and therefore, there is a dynamic that is equal for revenues but also for D&A. You will see a significant reduction in the D&A, driven by the meters replacement. It's a trend that will continue in the second half of 2018 and will be even more evident in the 2020, where all the meters will be replaced.

The third line is the other distribution revenue. You see an increase in respect of last year, mainly driven by additional regulatory services provided to the commercial companies and additional incentives for gas detection and authorization.

In the other revenues, there are many elements. The EUR 22 million are relevant to the capital gain for the sales of the real estate asset in Torino. It's something that we have already announced in the first quarter. As you know, we have also sold all our fleet -- vehicle fleet to transform our vehicle fleet into natural gas vehicle fleet. And then we have, of course, the contribution of the new acquired business of the LPG in Sardinia, that represent [EUR 18 million] and the energy efficiency another EUR 1 million.

The revenue contribution, if you add up all the revenue contribution coming from the new M&A that we have closed, M&A that excludes Enerco and Amalfitana that were already merging with Italgas Reti are equal to nearly EUR 20 million. [indiscernible] revenue contribution from the M&A was equal to EUR 3 million. So we move from EUR 3 million to EUR 20 million in 1 year.

Let's take a look at to the cost. Cost are up by 2.4%. As I told you, and it is evident that the negative contribution coming from the energy efficiency certificate. Last year, the first semester of last year, this item was positive, EUR 1.6 million. So was contributed as a positive margin to the final result. This year, it's a negative margin of nearly EUR 8 million, thanks to the new regulation that was issued last year. Because you know, we have appealed this new regulation in the court, similar to other companies, and we expect to have, hopefully, in the coming month, some results.

But on our profit and loss account, the delta has been nearly EUR 10 million as an effect. The EUR 7.8 million that you see is the cost for the full year 2019 of the buying and selling the energy efficiency certificate. So if you take out this EUR 10 million, you will see that even just considering the EUR 10 million, our total cost would have been decreased. Even with an [larger] perimeter would have been decreased by 3%, even with an larger perimeter. And that is thanks to the decrease of the net labor cost, mainly driven by higher capitalization. And the higher capitalization has been driven by the higher CapEx that I show you before.

We have lower net external cost of EUR 8 million. That is third-party cost, but we have reduced third-party cost by EUR 2 million. We have received positive contribution in term of cost reduction by the fact that we have separated our IT infrastructure from Snam, and that represent EUR 3 million, so it's the first outcome of the decision to move all of our application to cloud. And finally, thanks to the new system that we have now in place to detect leakage, we were able to pay -- or to estimate lower penalties around EUR 3 million. So the EUR 3 million plus the EUR 3 million of the ICT cost plus the EUR 2 million makes the EUR 8 million less cost in terms of net external cost.

Concession fees, you see a significant increase, driven by the change of perimeter, but also to the fact that some concession, first of all, the Rome concession that -- as you know, the concession of Rome has been renewed at the end of 2012. The amount of concession is linked to the amount of revenues [of that concession. And because of the increase of revenues mainly due to the increase in WACC, we are going to pay IAS concession fee to the Roma Capitale. The other cost decrease by EUR 3.2 million mainly due to lower net risk fund provision, lower severance, partially compensated by higher capital losses. And finally, the other activities show an increase of cost. It is mainly due by the activity of Medea.] You should recall that Medea was acquired in April, 2018, 1st of April or I think 5 of April 2018, while in 2018 has been in our perimeter since the beginning of the year.

Just to give you an idea of the contribution from an EBITDA point of view of the M&A, I told you that the overall revenues coming from the new companies that were acquired includes LPG gas distribution in the Italian Peninsula and the energy efficiency amount to EUR 20 million. We have not considered Enerco and Amalfitana because they were already merged in Italgas Reti. That perimeter -- traditional perimeter that drives EUR 20 million revenues is also EUR 12 million of additional -- of cost. So the EBITDA margin of those M&A that I recall you includes the LPG in Sardinia, the energy efficiency and the additional gas distribution in the Italian Peninsula generate an EBITDA margin around 40%.

Now I will let Antonio take the floor and continue the analysis and the comments of the results.

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Antonio Paccioretti, Italgas S.p.A. - Finance & Services General Manager [2]

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Thank you, Paolo, and good afternoon, everybody.

Our consolidated EBIT first half this year amounted to around EUR 242 million, with a solid 8.3% increase compared to last year. This is the combination of both higher EBITDA and lower D&A. In particular, firstly, a EUR 9.7 million increase of the EBITDA is mainly due to the revenues increase of EUR 13.8 million and a EUR 4.1 million increase of operating cost, of which EUR 10 million are related to the [large] perimeter for the asset purchase with our M&A activities carried out during '18 and in the first part of this year, which has been partially offset by a decrease of both net labor cost and external cost.

Secondly, the EUR 8.9 million decrease in D&A is mainly driven by the lower acceleration -- accelerated depreciation, around EUR 26 million related to the reduction of the economic life of the meters, which will be substituted by the end of 2020. The lower amount compared to last year is due to the fact that we are close to completing the replacement of the entire traditional meter scheduled for next year. This positive effect was partially offset by higher network depreciation, EUR 7.5 million; higher depreciation related to the asset, which is in our M&A activity, around EUR 4 million; and finally, a decrease (sic) [increase] in the D&A related to the application of the IFRS 16, EUR 3 million.

The first half 2019, net profit was EUR 166 million, up by 10.3% compared to the same period of '18. [In addition to the already commented EBIT increase, let us highlight the following trends.] Firstly, the net financial expenses, which amounted to EUR 24 million, almost in line with the same period of 2018, thanks to the significant fixed-rate quarter of our debt and also to the strict control of our net financial position. Secondly, income from associates increased by EUR 2 million, mainly related to Toscana Energia. Finally, we accounted EUR 63 million of income taxes, with a slight increase compared with the first half 2018, which were EUR 58 million as a result of a higher taxable income.

The tax rate in the first half this year was around 27.5%. For the full year, we expect the tax rate almost in the range of 27%.

In the first 6 months of 2019, the cash flow from operation amounted to EUR 507 million and was generated by the net income of EUR 166 million plus D&A and other nonmonetary item equal to EUR 164 million. The net working capital further supported the cash flow generation, with a positive evolution of EUR 177 million, mainly related to the following: the [billing] seasonality, which according to the current regulation, [reflects] the gas volumes actually distributed for EUR 187 million; tax accrued in the period, EUR 72 million and paid in July. The positive effects have been partially offset by lower accounts payable, EUR 36 million; the increase of receivables for smart meters contribution for EUR 16 million; and higher inventories, EUR 9 million.

The operating cash flow for the first 6 months allow the company to finance the dividend distribution for the full fiscal year '18, EUR 189 million; the M&A activity, EUR 110 million; and the significant technical investment, EUR 253 million, keeping under control the evolution of our net debt position, which at the end of the 6 months, totaled at EUR 3.858 billion.

Moving on to our debt structure. The financial strength of our debt structure and the low exposure to volatility is further confirmed. In particular, our sound debt structure can leverage on the following pillars: firstly, as you know, no financial needs before 2022; very long maturity for bonds, 75%, with a average maturity of more than 6 years for the European Investment Bank funding loans, which represents 20% of our debt, with a final maturity up to 2037; a safe and adequate liquidity profile, supported by significant amount of [not just] committed credit lines; and a significant 84% of our gross financial debt represented by fixed rate, which -- with a significant duration of more than 6 years.

Even though the company has invested significantly in fixed rate in duration and tenure for reducing our financial risk, we can leverage on one of the lowest average cost of funding of the sector. It's around 1.2% in this semester. This can be also considered a reference also for the remaining part of this year.

This was the situation at the end of June. More recently, in the last weeks, we decided to take advantage of the favorable market conditions, both in terms of spread and rates with the following actions: Firstly, we launched a new bond at a very competitive yield and maturity -- and loan maturity, EUR 600 million with a coupon of 0.875% and with a tenure of 11 years; Secondly, to execute a 10-year interest rate swap transaction for -- transforming our European Investment Bank loan of EUR 300 million from floating rate to fixed rate at a level below 0. Therefore, considering the contractual margin, that EUR 300 million financing will have an annual fixed cost of around 0.4% for the next 10 years.

Moving on to look at the balance sheet, the net invested capital amounts to EUR 5,234 million, with an increase of EUR 40 million compared to the year-end 2018. The increase is mainly driven by the EUR 172 million increase of fixed assets, only partially offset by the reduction of our net working capital of EUR 122 million.

Fixed assets increase was mainly related to the following elements: EUR 363 million for the capital deployment for M&A; EUR 77 million in CapEx; for the traditional perimeter of EUR 286 million; EUR 31 million of higher asset-related adoption of the IFRS 16; and EUR 23 million of higher payable for investments; and EUR 192 million of D&A; EUR 10 million -- around EUR 10 million for subsidies and [disposal.]

The first half 2019 consolidated net debt was equal to EUR 3 billion -- EUR 3.8 billion, with an increase of EUR 44 million compared to the year-end 2018, maintaining the leverage ratio in line with our guidance.

That's all. Now we would like to open the floor to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Javier Suarez from Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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I have 3. The first one is on the cost cutting. In the first half of the year, the adjusted cut on your cost basis is significant. I was wondering if you can give us an indication on if the cost base during the second half of 2019 could suffer an acceleration as a consequence of your effort on digitalization. And a related question is again a clarification in this minus EUR 8 million of additional cost from white certificate. Is this the total cost that you expect for the year 2019? When do you expect clarification on your claim against this increase on the cost of white certificate? That's the first question.

Second question is on regulation. The latest consultation on gas distribution was mentioning [for an] incentive for consolidation. I think that it was yesterday that the regulator issue a document on electricity distribution, also introduced incentives to consolidation. So the question for you is that in that document, if you do see some [profit] -- interesting profit for you from the document on electricity distribution?

And the third question is on the -- on Sardinia, the increase in CapEx is significant. I think that represent 10% of your total CapEx. The question for you is that if you can update us on the -- any discussion -- ongoing discussion with administrations, politicians, et cetera, et cetera on that (inaudible) because still the news flow looks to be -- on the news flow in the local newspaper seems to be [some kind of off the base.] So any update on that would be helpful.

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [3]

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Okay. First question, regarding on the cost-cutting side, you mentioned a possible acceleration during the second semester of 2019 thanks to the digitization. I have to remind you that as we said in our press release that by the year-end, we should have completed around 400, 450 new grids, fully digitized and we will expect benefits coming from digitalization only in 2020.

Apart from the already accounted advantages coming from the new leakage system, leakage capability to -- our capability to find the leakage that we have already accounted the benefit in term of higher revenues and less penalties, the benefit coming from the all data of the digital network will probably see some result next year because we will completed a significant number of networks only by year-end.

Regarding the white certificate, the -- as I said during the presentation, we have estimated the overall cost for the overall year of 2019 in EUR 7.8 million. That is our cost as of today. If you think about -- is about -- is a little bit less than EUR 10 per white certificate, multiply, we have a little bit less than EUR 1 million -- 1 million certificates. So if you make the calculation, you come up with EUR 8 million of loss.

We don't know yet the date at which the court will discuss the argument because we have not requested any suspension of the current decree as the other 2. The other 2, I just remind you, are Enel, [Energia.]

The third question is relevant to the similarity between electricity distribution and gas distribution. We would love to be in the electricity distribution system, and we would love to be the equivalent of Enel. Enel, as you know, owns about -- Enel distribution owns about 80% of the market share. We only own 1/3. So the electricity distribution is already very well concentrated. Probably, there are still a lot of very small electricity distributor in the country.

It's completely different the situation in the gas distribution. We have seen a positive indication given by the authority in the first document of consultation. As you know, that the authority may support the consolidation, may support in terms of benefit a consolidation. So hopefully, what they have said, in general term, in principle will become a reality, starting from January 1, 2020.

Finally, on Sardinia, we don't have any news, except that the regulator established all comments about the different stakeholders. And regarding Sardinia, we had 100% of the comments were in favor of putting together this gas distribution in Sardinia with the other part of Italy, and it is absolutely fair. So there is nothing unfair. On the contrary, it is fair to put together a gas distribution network of Sardinia with the [Italians wants] in order that everybody will pay the same amount relevant to the component of the gas distribution.

We have also presented -- it was also presented a study in which a very well-qualified professor has evaluated the impacts of the distribution system on the overall tariff in Italy. And the overall impact is EUR 3 per year on an average tariff of EUR 1,100 per year. So it's nothing. It's EUR 3 out of EUR 1,000, so nothing. So -- and I think it is everybody from trade unions, Confindustria, politician, anybody supported the idea that Sardinia, the cost of the distribution should be shared among all the Italians.

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Operator [4]

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And your next question comes from the line of Enrico Bartoli from MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [5]

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And the first question is regarding M&A. In the press release, you mentioned potential additional acquisitions in the second part of the year. Can you give us some hint on how advanced you are with the possible -- discussion with possible counterparts and the potential that you see in terms of number of PdRs to be acquired by the end of the year?

And second question is related to your cost of debt. I got right, if you say that you have fixed at 1.4%, an average cost of debt for the next 10 years, so if you confirm that. And I was wondering if, considering the very favorable conditions in the bond market, if you could have some additional room for optimization of your cost of debt.

And the last one is related to net debt at the end of the year, if you can give us the guidance and particularly some indication on the evolution of the EUR 177 million positive evolution of working capital, how you think that would evolve by the end of the year.

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [6]

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Regarding the M&A, as you know, we don't give any indication of any transaction that we are currently negotiating. So I mean, you have asked several times, and we are always reluctant, and we will not provide any information until the deal is closed.

As you recall, we have a target that we feel we should be able to achieve by the year-end of 60,000 redelivery point to be acquired by the end of 2019. We feel that target should be achievable, maybe we may do something better, but we don't know yet. So I don't -- I mean, that is the information that I can give to you, that I know that is very limited, but it is our policy. It has been always our policy since the beginning. I pass the answer to Antonio regarding the other 2 questions.

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Antonio Paccioretti, Italgas S.p.A. - Finance & Services General Manager [7]

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In relation to the cost of debt, the average -- the guideline for this year is 1.2%. It is in line with the 1 of the first 6 months. In relation to the possible additional activities that we could execute, capturing the current market condition, I would say that what we have done was not to reduce our cost but for making even more robust our cost of debt. We have extended tenure. We have extended the fixed rate proportion, and we have extended duration of the fixed rate. We will continue to monitor the market for understanding if there would be any other opportunities for reaching such objectives.

For the final question, the net working capital evolution and our net financial position at the end of this year. I would say that in general, in principle, we would confirm the evolution, the neutral evolution of our net working capital, which is typical of our business. Having said that, also for this year, we expect that -- for the net financial position at the end, I would expect something between, I would say a bit less than EUR 4 billion.

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Operator [8]

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And your next question comes from the line of Alberto Gandolfi from Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [9]

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It's Alberto Gandolfi, Goldman Sachs. I have 3 questions, please. The first one is I was wondering if you can elaborate what you see as a medium-term risk to your allowed returns. You talk about a 1.2% cost of debt [falling,] and we are seeing other regions where, like, for instance, Spain is moving to a 4% real allowed return. U.K. and Sweden are moving actually at about 2% real. So I know that sovereign bonds are higher in Italy, but what do you see as a chance of maybe rethinking a bit of the review to capture lower for longer rate?

The second question is on M&A. Could you give some color on the multiples paid in the recent past? And if there has been an evolution -- our multiples base going up because of rates, how -- I don't know, however you want to express it. Or if you can't -- you don't want to disclose that, can you maybe tell us how you value target companies? What are the criteria, the parameters?

And the last one is do you worry about the whole discussion about net 0 emissions by 2050 in European Union, as stated by the incoming new president of the EU? And are you already seeing that some new homes in Italy are going full electric on heating? Can this be quite like a long-term headwind to your long-term investments and RAB evolution?

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [10]

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On the first one, I will let -- then Antonio. I wanted just to make one thing that always the people are forgetting. The current very low cost of debt of Italgas is being paid by [counting] EUR 100 million in 2016 to terminate all the previous finance. So we are enjoying today a very low cost of debt because we were able to refinance completely our debt at the beginning of 2017, terminating all the previous financing. And we were obliged to do that because of the demerging that cost us EUR 100 million. So any discussion about our lower cost of debt should take into consideration that we spent in '16 EUR 100 million to completely refinance our cost of debt.

I don't know if Antonio want to add something about that, but I think that is the point. So I will not just make a strict comparison between our cost of debt with the average cost of debt recognized by the authorities. We are -- we are a very peculiar position that was quite expensive, and everybody are forgetting about what we paid for in '16.

Second question on the M&A criteria, as I said before, I don't -- we don't -- our policy is not to give any indication about current transaction, current negotiation going on. Our -- but I can tell you the criteria, criteria is we normally target small operator, private-owned. Geographically is not a target because we are present all over Italy, so we don't care about where. Up to now, we have paid RAB or a slightly -- a very low premium of RAB. That is our policy. We have been successful. We've been acquire 190,000 redelivery point, spending with a RAB that was more than EUR 300 million. And we've been successful, and we'll continue on that pace.

Last question, I mean, is a question that I've been -- it was raised to me many times. I'm talking for Italy, I'm not talking for other European country. If you consider Italy, I think everything is reaching to electrical. It's something that's probably very cool to say, but is on the other side very ambitious, and to me, not realistic.

And I don't want to further comment, but I would like to tell you, you should read it yet where it is clearly said that the 2 pillar to reduce -- to move forward to a decarbonized society, the 2 pillars are the use of natural gas, biomethane; and the use of electrical, expanding the electrical.

I should recall you that the electricity distribution in the big cities already today without putting additional demand is already in during the summer time -- and I'm talking not all year round, but during the summer time because of the heavy use of air conditioning, it's already under pressure. So the only way to make the best use of the existing infrastructure is to use as the (inaudible) said the 2 pillars, natural gas and biomethane, from one side and the electricity from the other side.

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Operator [11]

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And your next question comes from the line of Emanuele Oggioni from Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [12]

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I have 2. The first one is on the second consultation document on gas distribution. We expected it by as of July, but the document has not been disclosed. So do we have any clue on the timing on the release? This is my first question.

And the second one is on your recent proposal to overcome the delay on -- in the gas tenders process such as introduced by [Energiza] to reduce (inaudible) of municipalities, et cetera. So if you add some color on that and if you can expect some government support to simplify the concession rules for the gas tenders.

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [13]

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Regarding the first question, it's true, the original time frame relevant to the issue of the second consultation document was July. We expect it probably to be issued early September. We -- I think we feel absolutely confident that the time schedule, the overall time schedule will be met. So by January 1, 2020, we should have the new regulatory framework in place.

Regarding the second question that is relevant to the tender, there are -- the reality is that the power to issue the tender are in the hand of the municipality. In order to support the municipality to issue the tender, there are many ways. Something can be seen as a bonus, some other as a penalty if you don't meet the dates. But still, that decision is in the end of the government to make a decision if they want to further push the municipality to issue the tender. More than that, I mean, there are many, many ways in which you can support, provide help and support in order to have all the tenders to be released. Unfortunately, as of today, the situation is still lacking of these new tenders to be issued. I don't -- really, I don't have any other words to say about it. Hopefully, it is enough for you.

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Operator [14]

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And your next question comes from the line of Bartlomiej Kubicki from Societe Generale.

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Bartlomiej Kubicki, Societe Generale Cross Asset Research - Equity Analyst [15]

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Just a question on Toscana Energia. It looks like this will be consolidated. It looks like you are the only one executing the rights. My question would be related to the sort of financing of Toscana where -- while consolidating this there are chances to actually impose your sort of financing policy, funding policy on Toscana, and as a result, being able to decrease the cost of debt of Toscana and [for them] accretive impact on your EPS.

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [16]

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Regarding Toscana Energia, as you know, the withdrawal shareholders -- the shares of the withdrawal shareholders have been offered to all the shareholders, and there was the time until July 22. Nobody else, except Italgas, decided to exercise this option. And we have also said that we were willing to buy any unopted shares by the others. So we are going to buy this 2%. We have to, first of all, notify the antitrust because we changed from a joint control to an exclusive control by Italgas, so we have notified that. We do not expect specific items. And so we feel that by the year-end, we should have been able to consolidate Toscana Energia.

Regarding the financing, I think is not -- we have never thought about that for the time being. It's a matter that will be discussed inside the Board of Directors of Toscana Energia, if and when it will be decided by the Board itself. Of course, we'll be able to support Toscana Energia in any decision they may take in order to have Toscana Energia benefit from this particular scenario but it's a discussion that should start from the Board itself. And so if they will need some help from us, of course, we will be ready to give them any support they need.

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Operator [17]

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And your next question comes from the line of Stefano Gamberini from Equita.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [18]

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A few questions, if I may. First of all, if we can come back regarding to the incentives that you -- that you should like could arrive from the government. The government said that they discussing, if I'm not wrong, again, the Secretary of Development Minister of new incentives for municipalities in order to accelerate these tenders. What is your desiderata?

The second, regarding the guidance for the full year, do you confirm the guidance on EBITDA? And why, considering this trend of first half EBITDA? If you can help us to do some math, what is the decline of metering revenues for full year? And the other, what is the underlying increase of EBITDA?

The same question regarding the debt. You said debt should be slightly below EUR 4 billion. What is the level of investments or acquisition that you are considering in this guidance?

Last question, still regarding the possible change of returns. Clearly, it is in 2022, but what is your idea considering that in Spain, France and other countries, the regulators are reducing the returns. Our mechanism is different because we have this floor at 0.5% real risk-free, but could be -- what are your thoughts regarding these returns in 2022? If you can share with us what are the risk or the opportunities.

Sorry, very last thing regarding the OpEx that the regulator will recognize you from 2020. Do you see some risk? The regulator said they want to reduce the recognized OpEx for small operators. But on the other side, do you see some risk also for the main operators like you or the other big ones which still have some margins on debt costs?

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [19]

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Gamberini, you made too many questions, but I'm going to respond all of them, don't worry. The first one, one of the point of the municipality is for the network that they own themselves, the discussion between RAB and VIR it's a discussion. So one of the incentive may be to recognize to the municipality, loans, their own network, and they are going to sell maybe a number that is not [exactly their] RAB. Maybe is the deal, so and in that case, we -- of course, we are positive, if it -- that incentive will help the municipality to issue the tender. Then, I mean, there are many incentive that you can think about. But again, we have provided different suggestion to the government. Let's see what they are going to decide.

Regarding the guidance, we confirm the guidance we gave in June about the EBITDA. So we don't see any -- the guidance was between EUR 840 million and EUR 860 million. Maybe Antonio may add something about the evolution of the [smart meter] revenues and the relevant depreciation because we have always to consider that these 2 numbers are going in parallel. So the amount of the revenues that we expect by the year-end is -- they're linked to the amount of depreciation to the -- of this [smart meters]. So maybe Antonio you have...

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Antonio Paccioretti, Italgas S.p.A. - Finance & Services General Manager [20]

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I mean, the evolution of both of these items for the end of this year is consistent with what we have already done, some numbers, anyway, for at the end of this year. I mean, for the full 2019, we expect to have around EUR 22 million of revenues for the substitution and something around EUR 30 million of accelerated depreciation.

For the other question in relation to the net financial position, I told you something less than EUR 4 billion, actually. It considers a level of CapEx of around EUR 700 million. If we do not consider some estimate additional M&A activities, such a number is to be considered more close to EUR 3.950 billion.

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [21]

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And then let me bring the first -- the fourth questions. You raised the point about the revision of the asset return in France, in Spain, I think, and you know him very well, [Jorge Armando] has made a very good job in analyzing that return, so you may refer to him about the details.

But I will tell you in extreme -- in summary, the result. The result is that if you compare apple with apple, so if you consider our return that has been just reviewed last December, with the return reviewed in May in Spain and France, and you compare and you make homogeneous comparison, at the end of the day, you see that the return is the same. [Armando] would probably say that in France it's slightly higher.

And that means, I think, very clearly that before the review, the returns enjoyed by the distribution company in Spain and France were higher, and therefore, they have been reduced to our level. So I don't really say -- having said that, I don't really see significant risk. We will see what is going to happen in 2020, 2021, in particular, in 2021 because that is going to be the year in which there will be the -- all the data will be collected to reset the return that will start from January 1, 2021.

Regarding the final question you raised on the OpEx. In the first consultation document, we have seen a proposal by the regulator to reduce the OpEx recognized to the smaller operator, probably. We review also our OpEx. We don't feel it. I mean, we are not particularly worried about it because we feel we will be able, as we have demonstrated in the last 3 years, to stay below the OpEx recognized by the regulator. And in the meantime, as I said before, we expect some significant cost reduction coming from our digitization process starting from next year. So we are equipping ourselves with all the ammunition to be able to face a reduction in the OpEx, maintaining a profitability in line with what we have demonstrated to be able to achieve this year.

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Operator [22]

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(Operator Instructions) We will now take your next question. It comes from the line of Antonella Bianchessi from Citi.

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Antonella Bianchessi, Citigroup Inc, Research Division - Director and Head of European Utilities Equity Research [23]

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Just a question, if the Sardinia CapEx would be somehow stopped because over the next few years they find a new solution for the Sardinia energy system, which is the risk for Italgas? The CapEx that you have already deployed, could they be stranded or -- which is the risk at the moment?

And my other question is related to the 13.5% stake that Snam has of Italgas that they -- [indiscernible] is expiring. Did you have any type of negotiation, of discussion over the fact if they want to be the -- your shareholders in the long run? Or if this -- they might consider an exit from your shareholder structure?

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Paolo Gallo, Italgas S.p.A. - CEO, GM & Director [24]

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Regarding the [first question, it looks like you like the stranded costs because that is not the first time that you mentioned. I want to just tell you, first of all, we have concession in Sardinia. So we are not investing without an underground framework. The second, I would like to invite you to read all the comments that were given to the first] consultation document by all the stakeholders, and I'm saying all the stakeholders in Sardinia. They are all in favor of bringing the natural gas to -- into the island, and they are all in favor, in particular, to the gas distribution. So I really don't see any risk at all about what you mentioned.

Regarding the second question, I think you have the possibility, I don't know if it's later today or tomorrow, to ask this question to Snam. Snam is I think is presenting today -- is presenting -- is approving today the first half, semester, and they will -- probably tomorrow the conference call. Or after tomorrow the conference call, so you may ask them. We don't normally discuss with our shareholder about their stake, so I don't have any answer for that. Thank you.

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Antonio Paccioretti, Italgas S.p.A. - Finance & Services General Manager [25]

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Thank you, everyone, for participating to the first half conference call. If you need any follow-up, please contact as usual the IR department, and we wish you a very good rest during the summer vacation.

Thank you, everyone.