Italgas SpA

MIL:IG

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today Italgas 2019 First Quarter Results Conference Call. I must advise you that this conference is being recorded today, Tuesday, 14th of May 2019. I would like to hand the conference over to your speaker today Mr. Paolo Gallo, the CEO. Please go ahead, sir.

[Paolo Gallo, executive]

Good afternoon, good afternoon to everybody. Thank you to be with us. We are going to walk through the first quarter results, and as usual, after the presentation, we will answer to your questions.

So let me start from Page 2 of the presentation. The first quarter shows a continuous improvement in result. It's a process that started more than 2 years ago now on November 7, 2016 when we did the merger from Snam. This is the 9th consecutive quarter starting from the first quarter in '17 of growth. Double-digit increase at EBITDA, EBIT and net profit levels. During this quarter, we had some positive and negative extraordinary items that we will talk later. But for -- if we consider the like-for-like analogies, we can show a significant cost reduction.

The revenue increase is mainly driven by all the M&As that we closed last year and from which we received contribution in the first quarter.

What is also important to underline is the increase in the CapEx deployment has been impressive, nearly 50% more than last year, and this level is above the CapEx that came into the plan that we did last year in June. As we have already said, it's in line with the objective that was already announced in the past, EUR 650 million of CapEx deployment in 2019.

During the quarter, as usual, we had a generous cash flow from operation that Antonio will explain later in detail. This cash flow has truly financed the CapEx and has generated a positive free cash flow of more than EUR 100 million that allows us to reduce our net debt to EUR 3.7 billion.

Let me move to the CapEx on the following pages, Page 3. We committed last year to increase the CapEx amount in 2019, and we did it, even more important, the nature of the CapEx. While we have continued to replace the traditional meter, the CapEx increase is driven by M&A. You see the contribution is 10% of the total.

Distribution, meters and others. Let me start with the meters. We replaced more than 400,000 meters, in line with last year. But we spend less, thanks to the procurement activity. Just to give you an idea, one installation cost is equal to EUR 111 per meters, in comparison to EUR 142 per meters recognized by the authority. As you know, there is a 60-40 share of the advantage. 40% remains in [ other ]. It's equal EUR 12.4 per unit that represent 5 million additional RAB, as you know, relevant investment.

To give you a progressive number regarding the smart meters, we have replaced if we consider only Italgas nearly 5 million, 4.8 million to be more exactly, representing 63.4% of all of our meters. This percentage increase to 63.9% if we consider our estimate in Toscana Energia. 1.7 million is our target in terms of smart meter to be replaced by the year-end, and it allows us to reach the full replacement of the smart meter -- of the traditional meter -- the smart one in the first half of 2020.

CapEx driven by the M&As are becoming significant, nearly EUR 50 million, mainly coming from Sardinia but also from the network, the concession that we acquired from CPL.

If we switch the page and go to Page 4. This is the page that I like most of the entire presentation. Why? Because not considering the M&A, M&A investment is mainly on the network, we have been able to show an increase, more than 70% increase, with the CapEx devoted to network development, extension and maintenance. We were able to reach 170 kilometers of new pipes for upgrade or maintenance of existing pipe. It is a great achievement in comparison to the last year number that was 40 kilometer. This investment is the most important to increase the safety and the quality of our network, and on top of that, it is the most precious investment for our economy.

Let me go to the corporate structure. As of March 31, there is no -- that is on Page 5. There is no change in respect to the year-end 2018. However, I have to update you about what happened on -- during the month of April. In April 1, all our special-purpose company, Sardinia and Fontenergia, were merged into Medea that will, in this case, consolidate its natural growth and manage all Sardinian operations. Effective from the same date, so April 1, Naturgas and the other special-purpose vehicle that were established by CPL in Campania, Calabria and Sicilia were merged in Italgas Reti. This is a clear demonstration of our continuous effort to streamline our corporate structure with the objective from one side to reduce the corporate cost but even more to extend from the outside to the new acquisition our organization, our contract, in few words, maximizing the synergies.

So if you skip the page, you will see the corporate structure as of April 1, but we will stick to the previous one. It is, of course, more simple.

Last but not least, on April 17, we exercised the call option to acquire the remaining 40% of EGN asset, and therefore, we gained some control of the company. Since then, in the last days -- in the last past days, we have already approved the merging documentation that we bring Ischia in a few months to merge also the EGN companies into Italgas Reti.

Now I will comment the result, the economic results. So let's start from the income statement, profit and loss account. I will underline only a few points. Detail and analogies will follow. First point, higher revenues are mainly driven by the increase in regulated activities that were supported by the recent acquired company and also by a one-off capital gain. I will comment on this in a few moment.

From the cost point of view, the operating expenses are higher by EUR 7 million compared to the same period in 2018, but it is due to the negative impact of the provision accounted for the so-called white certificate. The provision was accounted following the implementation of the government decree by the authority. The provision that we accounted in the first quarter of 2019 include the EUR 8 million -- EUR 7.8 million. This amount represents the expected overall amount of loss for the full year. If we strip out this item and we also strip out the additional cost of deriving from the M&A activity that were not present in the first quarter of 2018, the amount is in the range of EUR 6 million -- [indiscernible] EUR 8 million to EUR 6 million. Our commitment to cost control is produced again for another quarter a remarkable result.

A decrease in our base -- in our cost base is in the range of 9%, so it's EUR 8 million -- EUR 6 million minus the energy efficiency certificate -- the difference in energy efficiency certificate minus the M&A cost. That brings the like-for-like basis the cost to EUR 77 million compared to the EUR 84 million of last year. But I will comment in detail later in a few moments.

Regarding the higher depreciation and amortization and the tax rate, Antonio will explain following my presentation.

Let's go into a detailed analysis. So let's move to the revenues at Page 8. As I said before, revenues are up by nearly 10% in respect of last year.

Let's go through the major changes line by line. Let's start from distribution line. Nearly EUR 11 million as of change, EUR 3.7 million is coming from the M&A. M&A exclude the Seaside, Medea and Fontenergia that are accounted in the other revenues. So EUR 3.7 million is coming from the M&A, natural gas distribution. Then we have EUR 5 million that is tariff component. That is what we call our day-by-day life. It is made of EUR 3 million of WACC increase; there is RAB increase, thanks to our investment of last year; inflation minus the X-factor. In any way, an additional EUR 2.4 million of negative adjustment that were previously -- that were booked in the previous year. That is the first line.

If we move to the second one, tariff contribution for meter replacement, there is a lower contribution for smart meter rollout plan related to the implementation of the second phase that I want to remind you as the objective, to complete the replacement in the first semester of 2020. The reduction in the tariff contribution, we will see this trend also in all coming quarters.

If we move to the third line of the other distribution revenues, there is an increase due to regulated service to final customers in terms of lower volumes. But even more than, we have increased in respect of last year the incentive coming from gas authorization and gas leakage protection.

If we look at the other revenues line, there is a significant increase of nearly EUR 16 million that is related to, one, the capital gain for the sale of our real estate asset in Torino that represent around a little bit less than EUR 8 million; the contribution of the other M&A, I'm referring to the distribution of LPG in Sardinia and the energy efficiency in respect of cost to the first quarter of 2018.

If we sum up all the contribution of the M&A activities present in the first quarter of 2019 and not present or partially present in the first quarter of 2018, the sum of the revenues in the first quarter of 2018, that equal to EUR 10.5 million excluding the Enerco and Amalfitana that were fully merged already in Italgas RETI. So this is the picture of the revenues.

If we move to the cost, so the following page, Page 9, costs are up by 8.5%, mainly due to the negative contribution of the energy efficiency certificate. The difference between the positive contribution last year of the white certificate to EUR of 1.1 million in respect to the negative contribution of this year of EUR 7.8 million, taking nearly EUR 9 million. If you strip out this effect, we would have been -- we would have seen a reduction in terms of cost by 2% even coming down to business perimeter. The difference is the result of 4 major facts.

The first one, the net labor, as you see, decreased, thanks to the higher capitalization partially offset by the higher cost driven by the personnel coming from the new acquisition.

Second point, next external costs. Reduction of EUR 5.2 million, netting the sum of different facts: we were able to reduce the third-party cost EUR 1 million; we need to thanks our decision to separate our IT system from this [indiscernible]; and we have minus and plus in this element, but the sum of that is negative by nearly EUR 2 million, so we save EUR 2 million in respect of last year; and then thanks to the implementation of Picarro, the innovative laser detection technology, we were able to reduce the penalties by EUR 1.6 million.

The last year number -- last year, we accounted in the first quarter EUR 1.9 million of penalty. This year, we have accounted only EUR 0.3 million of penalties.

Then we have in the other cost an increase mainly due to the lower risk fund release in capital losses.

And finally, the other activity, the external cost show an increase of more than EUR 3 million, mainly due to the Medea, Seaside and Fontenergia cost.

So if you want to make a contribution of the M&A activities, you can see from one side, if you remember, I said that the total revenues, natural gas distribution, LPG distribution, energy efficiency of EUR 10.5 million of revenues, the cost of those activities are EUR 6 million. So we have an EBITDA margin of 43%, so a significant contribution to our total EBITDA.

I'm passing the floor to Antonio, who will take you through the remaining part of the presentation. Thank you.

[Antonio Paccioretti, executive]

Thank you, Paolo, and good afternoon, everyone.

Our consolidated EBIT in this first quarter '19 amounted to EUR 123.6 million, with a solid 10% increase compared to the first quarter of last year. This is the result of, firstly, as Paolo was saying before, the EUR 20.8 million increase of our EBITDA, which is mainly due to the revenues increase of EUR 28 million and with the increase of our operating cost of around EUR 7.2 million, of which around EUR 6 million are related to the enlarged [ plan ] to the asset purchase in -- during our M&A activities carried out last year. Secondly, we have booked an increase in our D&A of around EUR 9.6 million, mainly driven by the accelerated depreciation around EUR 8.8 million related to the reduction of the economic life of the meters to be substituted by 2020. The higher amount compared to the first quarter '18 is due to the fact that in the same quarter of last year, the second phase of substitution on meters according to the company decision to complete the full replacement by 2020 was not yet implemented. And the higher amount that accelerated D&A started to be recognized only in the first half 2019 account.

The first quarter '19 net profit was EUR 86.3 million, up by a remarkable 15.5% versus the same period of last year. In addition to the already commented EBITDA increase, let us highlight the following trends. Net financial expenses amounted to EUR 12.2 million, almost in line with the same period of last year -- of the first quarter of last year, thanks to the significant fixed rate quarter of our debt and to the strict control of our net financial position. Income from associates increased by EUR 1 million, mainly related to the -- to Toscana Energia. Finally, we accounted EUR 30.9 million of income tax, almost in line with the first period of last year -- first quarter of last year as the result of a higher taxable income and a lower tax rate, around 26.4%, which we consider also a reference for the full year.

In the fiscal year, [ free amount ] of 2019, moving to the cash flow, we have a cash flow generation of more than EUR 112 million. The cash flow from operation amounted to EUR 242.2 million and was generated by our net income of EUR 86.3 million, plus D&A and other nonmonetary item equal to EUR 75 million.

The net working capital further supported our cash flow generation with a positive [ resolution ] of EUR 80.9 million, mainly related to, firstly, the billing seasonalities, which according to the current regulation, tracks the gas volumes actually distributed, up EUR 153 million in the period.

Tax accrued in the period and not paid around EUR 20 million, of which EUR 23 million is due to the -- due to reimbursement, and EUR 35 million represent the support of the cash flow for the corporate tax not paid in the period. The positive effect had been partially offset by lower accounts payable EUR 44 million, increase in receivable for smart meter's contribution of EUR 9 million and increase in receivable for energy efficiency certificate for EUR 19 million. For [indiscernible], we follow and confirm an expectation of neutral impact of the change in the working capital.

To sum up, the operating cash flow totaled EUR 242 million and allowed us to fully cover the financial needs associated with the technical investment EUR 129 million and to reduce by EUR 112 million our net debt compared to the level of year-end 2019.

Moving on to our debt strategy. The financial strength of our debt structure and its low exposure to volatility is further confirmed. In particular, our sound structure can leverage on the following 4 main pillars. Firstly, no refinancing needs before 2022. Secondly, very long-term maturity, specifically, EIB loans, 21% of the total of our debt with the final maturity up to 2037 and bonds represented the rest, 78%, with an average maturity of about 6.5 years. Thirdly, a safe and adequate liquidity profile supported by the significant amount of our undrawn committed credit line. Lastly, 87% of our debt at fixed rate with a significant duration of about 6.5 years. Even though the company has invested significantly in fixed rate, duration and tenures for reducing the exposure to financial risk, we can leverage on one of the lowest average cost of funding in the sector at around 1.1%, 1.2%. This average cost of debt can be also considered a reference for the remaining part of this year.

Moving on to look at the balance sheet, the net invested capital amounts to EUR 5.180 billion with a slight decrease of EUR 13 million compared to the year-end 2018. As a result, this is mainly driven by the EUR 70.5 million decrease in our net working capital, only partial offset by EUR 61 million increase of fixed assets. Fixed assets increase of EUR 61 million was mainly related to, firstly, EUR 134 million for CapEx for the current perimeter plus higher CapEx related to the adoption of the IFRS 16 for EUR 80 million, less depreciation for EUR 95.6 million, less subsidies received in that period.

The first quarter of this year consolidated net debt was equal to EUR 3.7 billion -- EUR 3.701 billion with a decrease of EUR 112 million compared to the year-end 2018 as a result of a free cash flow generation in the period without considering debt for operating leases of EUR 65 million according to the IFRS 16.

That's all. We would now like to open the floor to questions.

[Operator]

[Operator Instructions] The first question is coming from the line of Stefano Bezzato from Crédit Suisse.

[Stefano Bezzato, analyst]

Three questions from me. The first 2 are on the recent consultation paper published by the regulator for gas distribution. And first, I wanted to ask the -- and regarding the allowed return from 2020, what is your view in relation to the possibility mentioned by the regulator to increase the gearing target?

Second question is, do you see any risk to your current investment plans emerging from the consultation paper in particularly considering the regulator is starting to talk about stranded assets in the sector?

And third, in relation to the Turin 2 concession, do you expect any material impact on your targets in particularly in relation to allowed OpEx and CapEx?

[Paolo Gallo, executive]

Let me just make a general comment on the documentation on the first of this year published by the authority. First of all, to arrive to the new regulation period that will start next year in January 2020, we expect an additional 2 to be published to have the full picture. Let me say that generally speaking, we have received that documentation document only while -- when we have seen it, so it was Thursday night, the Friday morning. So we have started to review it in detail. We can express a general positive evaluation. We are studying in details. There are elements like you have mentioned that may be considered not so positive, but there are other elements that we consider is even more positive than that.

Regarding the first question that you raised on gearing the target, we know, because that was announced already in the previous year that the authority will make a 2-step forward to arrive to a 50-50 gearing. They have already done the first step with the new WACC in place since this January. We expect that some time in the next regulatory period when this WACC will end, so we have '19, '20, '21. So from January 1, 2022, we will probably see the final adjustment to the 50-50.

Regarding stranded asset, really, I have not seen any reference. I do not have any comments on stranded asset. Didn't -- you didn't see any stranded asset in the gas distribution. Let me say again, maybe we can help you also to read some other elements. Maybe you are referring to the fact that, for example, the smart meter installation and the authority may evaluate to recover the depreciation amount that has not been depreciated because we had replaced the smart meter earlier than the end of the life of the traditional one. With that, the stranded cost, to me, is a positive opening.

We have requested several times the authority to recognize the fact that with the obligation set by them to replace that given point in time the traditional meters, some of the traditional meters may have not reached the final -- the full life, and therefore, some depreciation amount has been lost. And we know that because when you compare our revenues for contribution and our depreciation, the results have negative impact. And therefore, we see that if that is the trend in cost, we see that positive. So then it may, eventually, let us recover what we have not been able to get from a depreciation point of view.

Finally, I mean, finally, we are glad that ATEM tender in Turin has been awarded to us from another extended year. As you know, we will enjoy for the first 3 years an increase in the OpEx recognition. In our presentation, we have always compared the OpEx recognition by the authority based on a 3x3 metrics, that is the size of the company and the density of the population, moving into a matrix of 3x2. That is the 2 sides, the 2 different sides of the ATEM more than 300,000, less than 300,000 delivery point. We have the density of the population.

If we look at the [indiscernible], we will get really EUR 2 more in term of recognition for the OpEx, and we will enjoy that for the first 3 years, and then X-factor that for the first 3 years will be set equal to 0. That's quite understandable. It's like the starting of integration of all the ATEM in one single operator. As you know, we are going to acquire some concession owned -- previously owned by 2i Rete Gas.

Regarding the CapEx on sales, as you know, that will be included into the -- into our next industrial plan, EUR 200 million -- EUR 190 million to EUR 200 million is the range of the additional CapEx that we are going to invest in Torino 2 most probably in the first 5 to 6 years of the 12 years concession. Okay. That's it.

[Operator]

The next question is coming from the line of Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, analyst]

I have 2. The first one is a follow-up after Stefano's question on the late consultation document by the government. I think that there is a reference on the document on the [indiscernible] recognition despite the size of gas -- of the gas and the different gas distributor. I just wanted you to elaborate if you believe that, that is a measure is turning off to boost for consolidation and to accelerate consolidation? That is the first question.

The second question is obviously related. We are suffering again and again delays on different auctions in the new gas distribution areas. Can you give us a comment on what needs to happen to see an acceleration in that auctioning process? I mean do you still believe that 2000 -- by 2024, we see most of those auctions completed? And that's the second one.

The third question is on the cost cut, and I think it's significant and is remarkable, the underlying cost cutting that the company has completed during the first quarter 2019. I think that you have given a fairly detailed explanation on the reason for that. The question for you would be, how much space do you see to continue reducing because of the company because the effort that has been done has been remarkable [indiscernible] what has been left behind?

[Paolo Gallo, executive]

So let me try to respond to you. The line that you are connected, it was very bad. So we get, let me say, 70% of your words. So let me see if I am able to answer to all your questions. If not, please reply. If I well understood, the first question is relevant to the difference -- or better, is relevant to the consultation document and the effort that the authority is trying to teach on dwindling at the same level or nearly at the same level the OpEx recognition to the large and small operator. If it is the question, of course, we welcome that because we know that the regulator would love to see the consolidation of the market. Because it's -- looking at us, for example, they saw some advantages, some saving that we are able to pass to the system. So I'm sure that they will try to do that, but we must be careful with the way that we are going to structure the point because, of course, I'm sure that the small operator would probably challenge any push in that direction toward the court.

Regarding the tenders, really, I don't have any more words about the tenders. As you know, okay, Turin has been awarded. We -- on the [indiscernible], we know that the evaluation of the documentation has started. We don't know when the process will end. But we know that is the other one. They just opened the documents. So again, it would take probably months before being awarded the tender.

Regarding the cost reduction, thanks for the commission of the effort of the company to reduce our cost. It's a continuous effort, and I believe we have been successfully. We will continue to do that. Of course, we will not continue forever. We expected the digitization process that we just started will bring us more fuel to continue to reduce our cost of, one, improving our services.

I hope I responded to you to all the questions. Please if not, reply.

[Operator]

The next question is coming from the line of Enrico Bartoli from MainFirst.

[Enrico Bartoli, analyst]

First one is if you can spend a few words on the outlook for next quarter. This quarter was very strong in terms of comparison with last year. There was a one-off and the revenues related to the replacement of meters. They were slightly down compared to last year. What kind of plan can we expect for the next quarters?

Also considering that you accounted all the provisions related to white certificates in the first quarter, if you can remind the guidance, if you have, for the year both EBITDA and net profit.

Then I have a question regarding Ascopiave. It was in the press that you submitted a proposal for, I understand, for a JV in the distribution business in the Veneto region. If you can provide some more details on this and, let's say, the rationale for Italgas of a possible integration with Ascopiave.

And the last one is on M&A. If you also in this case spend a few words on how confident you are to reach the target of [ PDA, PDR ] that you have for the full year and if you see some opportunities to accelerate the M&A activities.

[Paolo Gallo, executive]

Regarding the first quarter result, you, I think, already pointed out that there has been some one-offs like the value of the sale of the Torino real estate. There has been also, like you said, some negative one-off. And the -- we accounted the full year negative impact of the white certificate. So I mean those 2 in term of number are really similar because we accounted EUR 7.8 million of negative loss for the full year of white certificate. In the meantime, we have accounted EUR 7.7 million, I think, if I remember well, of the one-off coming from the sales of the real estate in Torino. So the 2 effects are neutralizing each other.

I am expecting that, thanks to the M&A, we will continue to grow also in the remaining part of the year because the acquisition that were closed the second half of last year, or for example, the one that we recently closed at the end of April will [indiscernible] will bring their contribution during the year. So I'm expecting a nice year. We don't give guidance as usual. We feel that we can provide to our shareholder enough satisfaction like we provided last year.

Regarding Ascopiave, we cannot get into details. We are, of course, bound by the confidentiality. What we can tell you very clearly and very straightforward is that we made an offer for an industrial corporation with Ascopiave in the 3 Veneto region, so not only in Veneto but also in the nearby regions. I think the Ascopiave management is evaluating positively our proposal. That is not only to combine our concessionary area, but is also that we are willing to extend our synergy -- industrial synergy, industrial efficiency, industrial best practice to them. And therefore, it's more of a comprehensive alliance between Ascopiave and Italgas. We will wait Ascopiave management to decide how and when to proceed.

Regarding the M&A, as you know, we still like to buy 60,000 redelivery point. It is our target. We feel we can achieve that during 2019. We are working on that. As always, we will not disclose anything until we sign a binding agreement between ourself and the counterpart. The reality is that if -- and I'm going back to the comment that was made by Javier before regarding the effort of the authority to bring the same level the OpEx recognition between the larger operator and the small operator. If the authority will be successful in doing and implementing that, I'm quite confident that the opportunity of new M&A will come because, in that case, the smaller operator will probably evaluate differently the option to sell their own concession.

[Operator]

The next question is coming from the line of James Brand from Deutsche Bank.

[James Brand, analyst]

Well done on the good results. I'm afraid -- 3 question for me. Afraid I'm going to ask just another one on the cost cutting, and it's one that's certainly around whether cost cutting can be sustained at this kind of level in the medium term, but it's obviously very strong results from the cost-cutting in Q1. And given that you don't give guidance for the full year, I was wondering whether you could give us an indication as to whether that kind of schedule of cost cutting that we've seen in Q1 could at least continue for the final 3 quarters of this year. Because I think that will probably be better than what's incorporated to most people's expectations at this stage.

The second question is on the consultation, again, on the CapEx and the idea that you could have stranded cost allowances for CapEx and keep a degree of the outperformance around that. I was wondering whether you could -- admittedly it's early stages still, as you say, to the consultation papers left to come. I was wondering whether you could give us any view [indiscernible] view on the mechanics of how that might work and whether you're optimistic that you can outperform potentially significantly on those incentives. And obviously, you've done a very good job in terms of outperforming on the CapEx incentives for the metering installations.

And then, thirdly, it seems like the contribution from the M&A is potentially a little bit higher than maybe people had anticipated as well. So I was wondering whether you could either give us an indication of the level of EBIT contribution from -- an annualized EBIT contribution from the M&A that you've completed so far or maybe just give us a bit of an indication as to whether or not the returns that you're earning from the M&A that you've done comparable or potentially above the level of return that you're earning from the existing operations.

[Paolo Gallo, executive]

The problem we see in your second question, so it was -- your voice was going up and down, so I will answer to the first and the last question, and then you can be more synthetic about the second question we will answer to you. Regarding the cost-cutting, it's true. That's been a very nice quarter on the yearly basis. We think we can have cost-cutting around 3% in respect of last year cost. That is our target, and we are confident that we will be able to reach this objective. The final objective to [ where our net ] nonprofit that is going to be higher than last year. I mean there's no doubt that is our final goal.

Regarding the M&A, we know that the M&A that we have -- for which I have provided to you the numbers of -- in term of revenues, in term of EBITDA, it is composed by components that are not homogenous in a sense that we have, in certain case, the natural gas distribution. So their real terms are very similar to ours in term of EBIT, so we are taking not more than 7% over the RAB. Then we have the LPG distribution phase. So where LPG distribution is probably very soon enough to the natural gas distribution in term of returns, but we have this phase of the LPG whether, of course, the margin are different. And finally, we have the energy efficiency that are linked to the price that are linked also to the price of the white certificate. So we have put together everything. What we can tell you is that as long as we stay on the gas distribution, once that the gas distribution is fully merging Italgas -- for example, we are usually seen as an M&A. More Enerco, that was the previous acquisition that was made in December '17. More Amalfitana, the growing concern that was completed in January in 2018. You don't see that anymore separated because they are fully included into Italgas Reti. But no problem to say those business were just in line with our expectation, with our standard churn. No main difference. You will see as long as EGN and the other company will survive because distribution are separate accounting that normally stops at the EBITDA level. But then during the year, they will be fully merged into Italgas Reti so they will disappear.

The point I wanted to make to you is that gas distribution, same with LPG distribution, very similar. LPG sales, of course, lower, and lower EBITDA contribution also from the energy efficiency. But in these 2 elements, you don't have capital investments. In the LPG sales, you don't invest nothing. In the energy efficiency, you just phrase energy efficiency certificate, so it's difficult to make a conversion on return in term of EBITDA by RAB. I hope that was enough long but enough clear to make -- to explain and to give you the right answer.

Regarding the second question, if you can repeat in a few words your question, please.

[James Brand, analyst]

Yes. So I'll just repeat again the second question, but then I may -- if I may just ask a follow-up on one of your answers there because it's quite an interesting answer. But the second question, it was on the introduction of -- the planned introduction of incentives around CapEx spend in the next regulatory period. And I was just asking whether you're in a position to give any more details around how you see that working because you've done very well in terms of outperforming your surrounded cost allowances for the metering replacement. So just any more details you could provide on that. It is starting to get a clearer picture on how that might work would be really interesting.

And then the follow-up is just on your answer that you're earning a similar -- maybe higher but a similar type of return from the acquisitions that you're earning from your existing business. I was under the impression that you were looking to pick up assets and then deliver efficiencies to get the returns up to the kind of levels that you're earning on your very efficient operations now. But you're saying you're already earning similar returns from acquisitions as your existing operations. Is that because the acquisitions that you've made have already been very efficient businesses or because you've been able to take the costs out very, very quickly following the acquisition?

[Paolo Gallo, executive]

If I well understood, we feel -- on the second question, we feel that in the consultation document a positive position of the regulation in order to recognize what we lost in term of depreciation. Because as you see, as you -- and as Antonio has commented there, we have accounted more depreciation than not contribution coming from the smart meters. So we are losing something replacing meters that have not been fully depreciated. So we feel that we may have some positive news coming from the new consultation.

Regarding the other one, regarding the -- as soon as we are able to merge the new position into Italgas Reti, the new acquired business into Italgas Reti, they will immediately align the return to our return -- standard return. The reason being is that we have acquired up to now concessions that are similar to ours, and the number of personnel has been very limited and has been mainly the ignition for which we need so we don't have any additional return to our cost. I hope that is clear to you.

[Operator]

The next question is coming from the line of Antonella Bianchessi from Citi.

[Antonella Bianchessi, analyst]

Just a small comment on what you think about the recent decision in the Netherland fund in the U.K. to digitally form the new gas connection and why you think Italy will be different.

And then coming back as to the consultation document, I was wondering because I think I understood that the regulator intend to allocate the OpEx more to the specific area rather than on a more national base, that's coal and nat gas. And I just wonder if this could be kind of a challenge for the expansion of the network in the south of Italy and in Sardinia if this is going to happen?

[Paolo Gallo, executive]

Okay. Well, I have -- let me say, I can give you only one comment to the recent, well, idea because it is not allowed to -- I am referring to U.K. to ban in years to come the connection of the gas to the household. Well, I'll make one comment. Maybe it's wise. Maybe it's wrong. I'm referring probably to the signature that there's been made many years ago by the U.K. government with EDF to have a new nuclear power plant that will be recognized at a very high price for the energy, but not only are they high priced, but also very high quantity in volume of energy produced. So maybe that is the reason why we are trying to commune to some gas consumption into the electricity consumption. When you committed to buy a lot of energy volume, in the future -- also to that cannot be modulated because nuclear energy cannot be modulated, we have also to committed to provide a significant amount of demand. So maybe that's one reason why.

And if you read the Italian -- not only National Energy Strategy but also the Clean Act, so the last one that was released in January, we don't see anything of that. On the contrary, we see a significant support to the use of natural gas as a way -- as a transition way from the current situation to a bit organized environment. So we see it's actually the opposite in Italy. So we don't see that. Sardinia is one of the example, and we should connect. So the national update, there is a clear indication that the natural gas distribution should be developed in Sardinia, and we are following that up.

Can you remind me, Antonella, of your second question? Because the line is very bad today. I don't know why, but we will lose your 50% of the question.

[Antonella Bianchessi, analyst]

Yes. Basically, the consultation document, it seems to me that it was hinting to the fact that the OpEx commission should be more specific of the ATEM rather than -- so in order not to subsidize a different region and so on. I was wondering that is the regulator go down in this direction of allocating the cost reserves of Sardinia to Sardinia, if the Sardinia cost reserves would be still feasible?

[Paolo Gallo, executive]

Well, I don't really see your view on that front. We feel -- I mean in the first reading of the consultation document, we feel that the authority, as I said before, is trying to make a very similar level of OpEx recognition between the small and the larger operator, and that's a good news because we will consolidate -- we will probably consolidate the market.

Regarding your comment on Sardinia, I think we have a continuous discussion and interaction that we and the regulator fully understood what was the intention of the government, of the issue, the issuance of the Clean Act. And therefore, we expect, as I said, that there would be an equity treatment of the Sardinia citizen with respect to the other guardian citizen from the peninsula.

[Operator]

The next question is coming from the line of Meike Becker from Bernstein.

[Meike Becker, analyst]

I have 2. One more on the consultation paper, regarding the potential increase in OpEx for the small players. You already mentioned that there might be pushback, potential court case. I was wondering whether you can elaborate how strong the platform from the small players is. How much pushback you can expect? Maybe how much the current proposal could be watered down in iteration number 2 and 3? That is question number 1.

And the question number 2 is the D&A of EUR 96 million that we have seen this quarter. Is that a run rate that we should also expect in Q3 to Q4?

[Paolo Gallo, executive]

Hopefully, I got the right question. If not, please reply. On the first one, if the regulatory is trying to reduce -- is going to reduce the OpEx recognition to the small operator, of course, I'm expecting them to react in some way. So it will mainly depend how the regulator will build this -- will put together this approach. Maybe it's going to be still by factor. Maybe it's going to be through different approaches. So really, it's too early to say that. We need to see in details the intention of the regulator.

From a general point of view, we see a positive approach, the one that used to make homogenous [indiscernible] recognition to the whole system. But more than that, it is difficult to say now.

Antonio, if you could...

[Antonio Paccioretti, executive]

In relation to the D&A question, in the first part -- in the first quarter of the year, we have a significant part of the increase sustained by the accelerated depreciation for the second phase, which anyway is not linear. So do not expect the same evolution for the full year of this important element. All in all, we expect that at the end of this year, the level of our depreciation will be in the region of EUR 317 million.

[Operator]

The next question is coming from the line of Emanuele Oggioni from Banca Akros.

[Emanuele Oggioni, analyst]

There are 3. The first 2 always on the consultation document just published by the authority. It's reasonable about it could speed up the acquisitions starting from next year from 2020 due to the fact that basically, at the end of the day, these measures could deploy -- could affect the smaller players and that the more efficient one like Italgas to consolidate the factor. In the latest conference call, you mentioned that it's increasingly difficult to find sellers as on account of [indiscernible]. There's no reason to sell. Maybe after this document, could be easier to find some sellers in the mid-term. I don't know if you share my view.

The second question is on the authority proposal to reduce the unleveraged data for metering sellout return. It should be reduced to the distribution level by 2020. So we charge your counterarguments on that issue. Technologically, it's different, it's totally different from bypass.

And the third one if there is any update on Toscano Energia on the 2% capital and the withdrawal and the 3% of the capital put on sale?

[Paolo Gallo, executive]

Okay. On the first one, I mean you asked the question and you respond to yourself. I'm fully grateful for you. We need to see the way that the consultation document will become a regulation, and if that is. And there will be a pressure, if not, on the smaller operator. We may see some additional M&As coming. So we are still discussing about something that these are consultation document that we received comments from main stakeholders, and finally, the authority will make their own decision. So I think we have said more than probably what is needed.

Regarding the way -- regarding the problem you mentioned about having the same WACC for distribution meeting. I think on the meeting a long run is probably correct. Today, the technology made to the meters is such that it needs to add a higher return or a shorter depreciation. Whatever you want to look, they are on the same part. So we feel that on the medium and long time frame probably make sense to have the same level. Today, the technology is different. The risk associated at the meters, for example, battery life is such that we need to have a higher return as was recognized by the authority. So we will discuss that. We -- the authority -- we recommend that point to the authority. We think that the authority will understand the risk profile -- the different risk profile between meters and pipes.

Regarding Toscano Energia, the news is that we have received -- or better, Toscano Energia has received the evaluation from the Florence tribunal -- from the Florence tribunal experts, the court expert were appointed. The value that was indicated by those expert is in line with the offer that we made for the 3%. So now we are waiting 2 things. The first one is that the 2% of the shares of the company that wanted to exit the company would be offered to the existing shareholders at the price that was determined by the expert of the Florence court, and so we will see if it's going to exercise the option to buy those 2%. And the second one, following that, we will see what the owner of the 3% will decide if they wanted to use the same price recommended by the experts or do something else. We don't know about what their intention about the sales of the 3%.

[Operator]

The next question is coming from the line of Dario Michi from Fidentiis.

[Dario Michi, analyst]

The first question is regarding the recently announced Turin 2 awarding. I was wondering if the EUR 200 million CapEx refer to the 190,000 redelivery points can be considered as a benchmark for the other tenders. And to be more concrete, are there dispute with the offers for the [indiscernible]?

The second question is regarding the Sardinia investments and recently published today with Mr. Gallo. Mr. Gallo referred to the hypothesis of introducing the position mechanism for the Sardinia investments. Could you please explain this view?

[Paolo Gallo, executive]

Regarding the first question, I think the level of EUR 200 million versus 190,000 redelivery point is a value that is applicable for an area that is not high density, that is nearby the city. Because if you look at the Torino 2, Torino 2 is the area all around the city of Torino. So medium high density but not high density. So when we say that this is our representative of, let's say, medium high-density situation, it's in other area in Italy. For example, Belluno, just to give you an example or [indiscernible]. These are area where density is much lower than Torino 2. You will see a number in term of, let me say, euro per or EUR 1,000 per PDR in term of investment, much higher. If I remember well, the Belluno, the amount of investment requested by the [indiscernible] was in the range between EUR 150 million, EUR 180 million. Redelivery points -- the current redelivery points were 70,000. So we are 2.5x even more -- 2.5x redelivery points. So in other terms, the more you move into a low density, the more it would be investment redelivery point. The more you move into high-density situation and the amount of euro per redelivery point in term of investment is going down.

Regarding the Sardinia, my proposal is very simple. I mean similar to what happened in the rest of the peninsula, there is a sharing of the cost we call the [indiscernible]. That is a sharing between all the citizen that are using the natural gas distribution. I mean it's very simple. Nothing magic. We need just to attach Sardinia to one of the macro region in Italy or north, central, south. The impact would be negligible on the tariff.

[Operator]

The next question is coming from the line of Anna Maria Scaglia from Morgan Stanley.

[Anna Maria Scaglia, analyst]

One question from me. Can you just clarify the EUR 200 million of CapEx versus on the related to the Torino?

And the second, they don't seem to be in the CapEx plan. I'm quite surprised because, in a way, this was in ATEM, where you had already control of. Therefore, in a way, can we believe that as well for the future? I mean even in ATEM, where your degree of control is very high when you win them and therefore is more CapEx assigned, that's not part of the current plan?

[Paolo Gallo, executive]

The -- let me say, maybe I was wrong or just not clear before. The EUR 200 million at the time of the previous investor plan were not clearly allocated in term of time because we didn't know at time the tender was awarded. There is an incremental amount of investment linked to the new redelivery point acquired that are, of course, not significant. We are talking about 3,000 redelivery point over the 90,000 redelivery point. So what I wanted to say before is that the EUR 200 million CapEx in these industrial plant -- industrial plan will be allocated more precisely in term of the number of years, in term of when, and I'm referring to the next 5 to 6 years. Before, we didn't know exactly because we didn't know when the allocation -- when the tender was supposed to be awarded.

[Anna Maria Scaglia, analyst]

Okay. So it's not new CapEx on top but is more like a -- more precise allocation because you already own the ATEM?

[Paolo Gallo, executive]

Partially yes, partially no. So the new that is linked to the 3,000 is not -- was not part of that.

[Operator]

The next question and last question is coming from the line of Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Two quick questions, if I may. The first regarding the CapEx in 2019. If I'm not wrong, this was in excess of EUR 600 million, which part is related of the new acquisition, mainly I refer to Ichnusa and city of Concordia. And if you can remind us what is the total amount of investments from listed acquisitions related to Sardinia and the south of Italy. It was something of EUR 550 million, EUR 500 million during the last presentation.

The second question is regarding the consultation paper on the part where the regulators stressed that they want the cost benefit analysis for new development investments. So do you think you have some risk regarding your business plan in investments in Sardinia for these constant analysis or you already made some in the operation, and you do not see any risk?

[Paolo Gallo, executive]

On the first question, regarding the yearly CapEx, as we said, more -- we -- the overall CapEx for the year is going to be between EUR 650 million, EUR 700 million. That is the amount that we have already announced. And we feel we are absolutely on track in line, and we're reaching this point. How much is going to be Sardinia? Sardinia will be around EUR 80 million, between EUR 70 million to EUR 80 million. Of deals, let's say, EUR 650 million. And that's -- the remaining, it's really difficult to identify because we're running to the gas distribution, and therefore, it's difficult to clearly identify. They are not like the Sardinia large project. They are a small project in different parts of Italy.

What I wanted to underline to you is the number of kilometers that we were able in particularly the new development that we were able to develop in the first quarter. That will continue in the next 4 quarter. Then to allocate to the acquisition of coming from CPL or the acquisition from EGN is we can do it. I don't have that in mind because it's all mixed. It's much more clear the amount allocated to Sardinia.

Regarding the cost benefit analysis contain in the documentation is not so -- I mean there is a general principle that we have factored, that we have done our evaluation in all our investments and for which we feel that we would comply with that cost benefit analysis.

[Operator]

As there are no more questions, I will hand it back to today's speakers for any closing remarks.

[Paolo Gallo, executive]

Thank you, everyone, for asking these series of Q&A. And if you need an additional follow-up, please contact the IR department. Thank you, everyone, for participating to the call.

[Operator]

Ladies and gentlemen, so that concludes our conference for today. Thank you for participating. You may all disconnect.