Italgas SpA

MIL:IG

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Italgas 2021 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Anna Maria Scaglia. Please go ahead.

[Anna Scaglia, executive]

Hello. Good afternoon, ladies and gentlemen, and thank you for joining us. I'm Anna Maria Scaglia, and I'm joined by Mr. Paolo Gallo, our CEO; and Mr. Antonio Paccioretti, our General Manager.

I leave now the floor to our CEO, Mr. Paolo Gallo.

[Paolo Gallo, executive]

Good afternoon. Paolo Gallo speaking. Let me start with the presentation, and I will ask -- I would like to ask the people that are using the presentation slide to move to Slide #2, please. This #2 shows the result of the first quarter of 2029 -- '21, sorry. All the KPIs, revenues, EBITDA, EBIT and net income, shows an increase in respect to the same quarter of 2020. And the main reason -- one of the main reason we will go through the details of these results is the growth by the RAB -- the RAB growth.

Even though in the first quarter of 2021, we still have a significant negative impact driven by the delibera 570 that in the quarter represent less revenue by EUR 2 million. So we will have an impact of -- 2021 of EUR 8 million. That should be added, if you remember to the last year impact, that was EUR 45 million. So significant impact -- negative impact by the resolution of the authority. Nevertheless, we were able to achieve a significant increase in our net income adjusted. We will explain you in a moment why we have used the adjusted numbers by nearly 8%.

Let's move to the following slide, Slide #3. CapEx are in line with last year. Even though I should remind you that last year, January, February and March, we have not had significant reduction in investments. The stop of the activities on site really started by end of March, beginning of April. So the 2 numbers are pretty comparable. And it shows that even in a still difficult situation, we were able to continue our investment, in particular in the digital, you will see in a moment. And we forecasted that 2021, we will reach another peak of investment. So we will -- by no doubt, we will be -- the overall investment of the year will be higher than last year.

A significant increase in the cash flow, plus more than 70%, in respect over last year, more than EUR 300 million. Details will be explained later by Antonio. But let me call -- let me remind you that last year, in the first quarter, especially in the March month, when we were in the lockdown and we did everything possible to support our supply chain, especially anticipated payment that was supposed to be paid a little later. So that is not the case of this year. So we are back to normal, and that is the result that you see here. Thanks to this strong operating cash flow, our debt reduced -- was reduced to -- will be reduced to EUR 4.5 billion, if we exclude the impact of the IFRS 16.

Then, move to the following slide, that is Slide #4. In terms of CapEx, as I said, we are still in line with last year, a little bit higher, but significant difference in the mix. Why? Let me say there are 2 elements, drop of Sardinia, the reason being is that we are approaching the end of the investment. So the major effort was done last year. Number of kilometers are nearly -- we reached nearly 900 kilometers. So we are closing the effort to complete the network in Sardinia.

The other significant drop is in the number of smart meter replaced. If you remember, our goal was to complete the replacement of the traditional meters with the smart one by end of 2020. We did not achieve that because of the pandemic situation, even though we continue -- we will finish by 2021. Of course, the number of smart meter replacement in the first quarter is significantly lower than last year. Even though the overall digitalization investment has increased because all the other equipment -- we are replacing all the other equipment and, therefore, the overall amount is going up.

Nearly 25% of the overall investment is devoted to digital transformation. And then we have also an increase in the development and expansion of the new grades. We can say that especially the in expansion side, in respect of last year, there is more 60% in kilometers. So these 2 element have fully compensated the lower spending in Sardinia. In term of number, 260,000 meters have been installed. More than 200 kilometers have been realized, out of which 40 kilometers in Sardinia. Those are the numbers from a physical point of view.

Let's speak to the next page, Page #5. I want to just explain why we are talking about adjusted and reported numbers. Very simple. It's something that Antonio will explain later. In February, we have launched 2 new bonds with a buyback of existing bond. The impact of such buyback acquisition is equal to EUR 6.4 million. That is a nonrecurring item and decreased as nonrecurring items. And there is also an impact on the income taxes as -- equal to EUR 1.5 million. So in the numbers that we are going to show you from now on, you will have -- you will see only the report -- the adjusted number for 2021, not the reported.

So let's move to the following page, that is our profit and loss account. Increase in revenues, mainly driven by RAB growth and some other element that I will explain you later on. Overall expenses are decreasing by 1.3%. We have higher cost and less cost. Overall, we were able to still decrease our cost. D&A is higher by higher RAB. Details of the depreciation will be explained by Antonio, as the same for the tax rate that -- the level is 26.6%, result net profit raised by nearly 8% in respect to last year.

If we move to the next page, and that is the details regarding the revenues. RAB growth, as you can see, nearly EUR 5 million in respect of last year. There are some other tariff component, which were negative by, let me say, EUR 0.5 million. I should remind everybody the impact of the delibera of the new regulation, another EUR 2 million less in the OpEx due to the X-factor application. And then that adequately, the revenues increased by more than EUR 1 million, driven by, and that's a good sign, additional activities in respect to the end customers that we signed because that shows that the -- we are going back near each normal.

Another important element, even if the number is not so significant, is the additional revenues coming from energy efficiency activity by EUR 1 million. And that is the initial ramp-up of the activities performed by the 2 ESCo that now are only 1, especially on the so-called bonus 110%. So in this quarter, we have seen a significant increase in term of activity, not yet as revenues. We will see much more in the next quarter.

Let's analyze -- well, the following page is just a little more what I told you. So nothing to say more about that. Let's analyze the cost. Cost decreased by 1.3% toward last year. There are some elements that should be considered in order to evaluate these -- let me say, [ small reduction ]. We had -- and there is a detail later on labor cost increased by an increase of the holiday fund provision. What does it mean?

It means that last year, if you remember, we started the first day of March with the lockdown, and we agreed with the trade unions to use all the -- say, all the days of the holiday instead of -- as a response to the fact that everybody were locked at home, so they were not able to work on site. That was an agreement that we had with the trade unions for the end of the March month and for the April month. So most of the people enjoy, if you want to use this term, the holidays because they were stick at home. So we didn't use any other allowed, say, instrument to respond to the pandemia and that was nice.

Now we are back to normal. So that is not the normal period of the year in which the people are taking holiday, between January, February and March. So we expect so nevertheless we are back to normal life, and we expect that this amount of money, that is around EUR 4 million, will be recovered through the normal -- through the rest of the year using -- considering the fact that the holiday will be taken during the month of July and August. So it's something that -- let me say, it was not normal last year. This year is more normal. But because we compare year-by-year, that is what we find out.

Then we have increased third-party costs that are linked to the additional activities performed for our end customers. I have already mentioned additional revenues. I should also mention additional cost. As I mentioned, additional revenues in the energy efficiency activity and, of course, we have also additional costs in the energy efficiency activity. Of course, costs were lower than revenues, and that's the reason why the EBITDA increased. So that is the picture of the cost. Let's keep the 1 page, but the other page that only shows you numbers in detail. There are less cost in the white energy certificate that compensate the higher cost that I mentioned to you. And that's for the cost side.

I will leave the floor to Antonio to continue the presentation. Please, Antonio.

[Antonio Paccioretti, executive]

Thank you, Paolo, and good afternoon, ladies and gentlemen. We are now on Slide 11. Our EBIT amounted to EUR 130 million in this quarter, up 5.2%. This is the result of, first, EUR 7.5 million increase in our EBITDA, mainly due to the revenues increase of EUR 6 million and lower cost for EUR 1.3 million already commented. Second, almost EUR 1 million of higher D&A, mainly driven by almost EUR 7 million of higher network and metering depreciation related to the last 12-month investment and accelerated depreciation for meters replacement was close to 0, dropping by EUR 6 million versus last year, as we are now close to complete the replacements of the entire traditional meters pool.

Moving to Slide 12. Adjusted net profit reached EUR 81 million, EUR 5.9 million above last year. This excludes the EUR 6.4 million pretax cost of the liability management. The net financial expenses of EUR 13.6 million, net of the nonrecurring item just said, were the result of the lower cost of debt, around 1% in this quarter, offset by the higher average gross debt. Income from asset sales decreased marginally. We have target for EUR 31 million of adjusted income taxes. Our tax rate was 26.6%. The decrease in the tax rate was mainly due to the positive effect of the fiscal benefit, super and iper depreciation, tax credit on bulk investments.

Let's turn now to the cash flow evolution. Cash flow from operation amounted to EUR 309 million and was generated by net profit, EUR 81 million, and depreciation and other noncash item of EUR 92 million. Our working capital was positive for EUR 135 million. The working capital contribution is the result mainly of positive demand seasonality for around EUR 150 million. As every year first quarter showed a positive contribution of the net payables, this year demands this amount to EUR 41 million. This was offset by other items, mainly negative contribution for trade payables, leading to a total positive working capital contribution of EUR 135 million. The net cash generated allowed us to more than finance the disbursement for the CapEx, around EUR 190 million, resulting, therefore, in a free cash flow of EUR 120 million. We expect the seasonal working capital evolution to be resolved in the coming quarters.

Moving to our debt structure. In the first quarter, our debt structure confirms low interest rate exposure together with important duration and tenure. This structure was further announced with the refinancing transaction carried out in February, thanks to which we have further increased our fixed rate and tenor. As a result, we further reduced our '22 and '24 refinancing needs. We extended our bond average tenor to 7.3 years from the 6.7 years at the end of last year. On top of this, it's worth remembering our Europe (sic) [ European ] Investment Bank loan expiring up to 2037.

We maintained a significant amount of cash and cash equivalents of around EUR 900 million, really available on bank accounts and time deposits with leading financial institution, which permitted the company to cancel the EUR 500 million committed revolving credit facility with a significant saving. Also, thanks to this financing transaction, the company continued to leverage on one of the lowest average cost of debt of the sector, down 1%. Combined, such a financial efficiency, together with our superior solidity of our debt structure.

Moving on to the balance sheet. Net invested capital amounted to EUR 6.6 billion with a small decrease of almost EUR 35 million compared to the end of 2020. The decrease is mainly explained by the working capital. In the first -- in the quarter, fixed capital increased by EUR 85 million as a result of CapEx of around EUR 200 million and depreciation for EUR 104 million. As commented in the previous slide, consolidated net debt was EUR 4.6 billion, including the IFRS 16 impact of EUR 75 million with a decrease of EUR 119 million compared to the year-end 2020.

I leave now the floor back to Paolo.

[Paolo Gallo, executive]

Thank you, Antonio. I'm just closing with a few remarks. If we look at the result of the first quarter, we feel that they've been extremely positive, showing the resilience and the solidity of our business, and now understanding the continuous impact of the regulator from the 570 and the additional reduction in revenues, we were able to grow revenues and even more important to grow our net profit.

From a CapEx point of view, we have demonstrated our ability to continue to invest. Numbers are significantly more than EUR 200 million in 1 quarter. You can make your math about forecasting the end of the year. To me, even more important than the numbers is the change in the mix in a sense that we see a significant increase in the digital transformation, even though we are nearly close to the completion of the replacement of the traditional meter. But as you know very well, for us, the digital transformation is not only the replacement of the meters. And so the main part is mainly driven by the fact that all the equipment sitting on the network we are replacing with digital ones.

And finally, we have seen the successful bond issue. So we are very proud of that. The liquidity is very high, as Antonio was mentioning. And we are working toward the presentation of the new strategic plan, 2021. That's mistake on the slide, 2021-2027, it's okay, that will be presented in June. Where you will say the additional focus on the -- on sustainability? So we will look at all the action, all the investments, not only with the idea of, let's say, which is the return, which is the impact, but also which is the impact on our sustainability staff. Clear target on CO2 reduction, clear target on methane emission reduction, and you'll see that those action will be fully implemented in the plan, are in implementation already. So you'll see also a different way to present the plan, 2021-2027.

Thank you. So now we are ready to answer to your questions. I will leave the floor to you, and we are ready to answer to any of the questions you will raise. Thank you.

[Anna Scaglia, executive]

Operator?

[Operator]

[Operator Instructions] And your first question comes from the line of Harry Wyburd at Bank of America.

[Paolo Gallo, executive]

We would like to ask you just a favor. If you speak slowly because the line, I have seen when the people are talking, is not so good. So please -- and we are all wearing mask, so we may be not so clear. So we try to also to speak slowly. So if you don't mind. Sorry for that.

[Harry Wyburd, analyst]

Sure. No problem. So it's Harry Wyburd from Bank of America. 3 questions from me, please. The first one is really a repeat question of what we've been asking all of the Italian network companies for a while, which is on the regulatory review. I just wondered if there's been any update in your thinking on the outcome of the regulatory review, especially given that bond spreads have compressed slightly and, mechanically, that would suggest a slightly worsening outcome in the allowed return review. So just interested in your latest thoughts on that. And when you think the next documents will be released from the regulator? So that's the first one.

Second is on the next-generation stimulus plan, which Italy submitted. So I'm interested in which Italgas projects are included there? And also, you mentioned in the press release this morning that, that plan could include an acceleration in the ATEM tender process. So it would be useful to get a bit more detail on that. And then finally, and thirdly, I think that the transmission operators published an update to their Hydrogen Backbone report in April. And I'm interested if you have any updated view on that and, in particular, if you think that the end game here is that the distribution network is converted to hydrogen in the same model that the transmission operators are suggesting.

Sure. No problem at all. So I'm not sure whether any of them got through to you. So shall I start from the beginning? Okay. I'll start from the beginning. So 3 questions from me. The first one is on the allowed return review. And just interested in your latest thoughts on the potential outcome of that, especially given that bond spreads have narrowed, and that would mechanically imply a worse outcome. So just interested if there's been an update to your thinking since we last spoke at your full year results on the outcome of that?

The second question is on the stimulus plan, next-generation stimulus plan. So I'm interested which Italgas projects are within that plan? And also, you mentioned in the press release this morning that, that plan could include an acceleration of the tender process. So it would be useful to get a bit more color on how that might work in practice. And then the final question is on the updated European Hydrogen Backbone Report that was published by the transmission operators in April. And I'm interested if you have, again, an updated view there since they last published a reports. Whether you have any updated thinking on whether there could be a full hydrogen transformation of the distribution grid in the same way that the transmission operators are proposing for the transmission grid?

[Paolo Gallo, executive]

Honestly, the line is terrible. So fortunately, Anna Maria, she is very smart in getting all the words. And I may excuse to all the analysts for the problem we had with the operator. We were out of the room for 5 minutes. And that should not happen never.

Regarding the allowed return, there are several discussions and consultation going on with the regulator. There are multiple -- for which I cannot disclose now, multiple auctions on the table. I think the regulator is listening the major operator like us, like Terna, like Snam, like Enel that are involved in that review. There are multiple auction. The reason being is that we are in a very peculiar situation. We are still in the pandemia. We don't know when we will get out from that. Liquidity is very high, sustaining the economy. We see some initial signal of the inflation somewhere in the world. So the situation is really difficult, especially for the regulator to take a decision. We are not in the normal days. So the regulator is evaluating different option. And that's the maximum that I can tell you. No more than that.

So regarding the impact that we can have from the recovery fund, I think we can have a very significant positive impact on some of our -- more than project, I would call activities. We see positive impact on the energy efficiency. There is -- as you know, there is a discussion about moving up to the end of 2023 the application of the bonus, 110%. That is one of the major area of our energy efficiency activity. So we will be welcome that. We see advantages on all our digital investment because the digital transition is one of the pillar with the energy transition of the -- our recovery fund. And we were happy to see that in the recovery fund there has been an element, positive one, regarding the acceleration of that tender.

If we have understood the third question, that is relevant to hydrogen. I mean it is -- to me, it is very clear -- then we need to look at the details coming from the European Commission. It is very clear that the gas infrastructure -- distribution is one of the part of the gas infrastructure to be, let me say, seen as an important instrument toward the energy transmission. They are only -- if they will be flexible, smart, in other words, digital, so that is something that we are doing. We approached that transformation much earlier, back in 2018.

We will continue to do that. The investments are showing that direction. And our pilot project in Sardinia will show that our network are able to manage different gases, low carbon gases, zero carbon gases, synthetic gases. So that is the way -- that is our way forward toward the hydrogen, let me say, era that is not going to happen in this decade. It's going to happen next decade. But this decade, we will see -- and that's another area where the recovery fund is clear. We will see an increase in the raise of the volume market. I hope that I responded to you. Sorry, but the line was really bad.

[Operator]

And your next question comes from the line of Javier Suarez at Mediobanca.

[Javier Suarez Hernandez, analyst]

3 questions from my side as well. The first one is a follow-up from your previous answer. And that, I guess, is for you, as Chairman of the European gas distribution association. So the decision by the European Commission to include gas distribution on the EU taxonomy, I guess, is relevant. So I just wanted for you to elaborate on what you think are the implications for that for a company like Italgas? Then the second question is on the recovery fund and the timing for the next depending gas distribution auctions. I think that the document makes a general statement on the necessity to put the conditions for the acceleration on that auction and is moving that into another decree.

So the question for you is really on what do you expect from -- on the timing of this? When do you see that we are going to see real action, on which the companies and the market are going to have the indication that the gas distribution auctions are gaining steam? So the second question is on the timing. And the third question is on the cost cutting. I have noticed that during the first quarter of the year, again, because of the companies are down, so something that is positive. The question for you is how much of that cost-cutting reduction is a short-term thing linked to the pandemia? And what is structural and is linked to managerial measures to put the cost of the company under control?

[Paolo Gallo, executive]

Okay. On the first one, Javier, as gas distribution association -- European gas distribution association, we met several -- in the last few months we met several representative of the European Commission of the -- Frans Timmermans and his cabinet. And let me say that the message that we received was very unanimous in the same direction that the full electrification is a nonrealistic scenario. And I underline it's a nonrealistic scenario. Everybody agreed that if we want to reach the decarbonization target by 2050, we should use and we should leverage gas infrastructure and electrical infrastructure. And I'm sure that you have read about Mr. Cingolani, our Minister of Ecological Transition, the same approach.

So the point is that once the jury realize that, so first of all, people should realize -- like because otherwise, we will always talk about, well, everything will be electric. That is not real. I mean that is not going to happen for many reasons. And then we can elaborate for that, but I've elaborated several times. But the point is, one that you should realize that, and I think our industry should work toward the goal to make our infrastructure ready for the energy transition. And ready to the energy transition means that you should be ready, our infrastructure should be ready to set and manage different gases, biogas, natural gas, hydrogen gas. I mean those are the variety. To do that, you need to do mainly 2 things. The first one is you need to transform your infrastructure into a digital one, a true digital infrastructure. I mean smart meter are -- you know very well. I'm not going to have to do that. It's much more than that. That is what we are doing.

The second point is to do, and that is what we will do next year in 2021, to start testing the blending of the different gases. That's the reason why we decided to launch the pilot project in Sardinia on -- and use our net digital infrastructure to start testing blending of different gases. So mixing biogas with natural gas, mixing biogas with hydrogen, mixing biogas with egas, egas with natural gas, hydrogen with natural gas. That's the only way in which you can test the material, and we feel quite confident that we should not find any significant surprise from that. But moreover than that, you can -- we should test to control and to know exactly which is the blending in a defined moment. That is extremely important if you want to manage different gases. That's our view. And that's -- it has been a debate that's been shared with the European Commission, let's say, the people that we met recently.

On the gas standard, we were welcome to see that statement in the recovery fund as it is important. Again, it's going back to what I said before. If you want to add a true gas infrastructure, able to manage different gases, able to face energy transition, you need to do investment. You can go on and say, how many of the other companies are doing what we are doing? Very few. So the only way is to go through the tenders and have a consolidated situation. And then you can have, let me say, the positive outcome, that is additional investment but towards the digital transformation of the network. We need -- and that was said also by the Minister of our -- Minister of Ecological Transition. We need to simplify the procedure -- he was talking about authorization. But he's saying here, we need to simplify the procedure to go through gas standard if we want -- if Italy wants to proceed toward ecologic -- energy transition.

Regarding the cost cutting. Cost cutting are significant because in the first quarter of 2021, we still have costs related to the pandemic situation. Think about all the masks that we wear today, for example and all the other stuff that we provide to our personnel to operate in a safe condition. Those are additional costs significant that last year we did not have because we started to spend last year -- it goes back in April, not in the first quarter. So the cost reduction is managerial, is not due to the pandemic. On the contrary, we are in the first quarter of this year. Cost is still related to the pandemic situation. We feel that those costs will remain by sure by 2021, the whole year, and probably even by 2022, because we don't know when the things will be over. So we feel that those costs are consistent with the current situation. But again, the cost cutting is mainly driven by all the activities that we performed during the first quarter and the digital transformation.

[Operator]

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

[Emanuele Oggioni, analyst]

The first one is always on the WACC revision. I wonder what measures can we expect the Italian regulator, ARERA, to take to mitigate the cutting the large return due to the BTP bond spread? And how many this year could come out in the next few months? Maybe the first one will be in the short term. And the second question is on the Naples gas tender litigation. If you could update us on your next steps in litigation over the Naples gas tender.

[Paolo Gallo, executive]

On the -- I understand that your -- I mean you feel -- you don't feel wary if there is some uncertainty in front of you. So that's the reason why you're asking about the WACC. But my position to you is what kind of solution the regulator will find out? Well, I told you, there are several options for which I cannot disclose, but I invite you to be creative about that. How many consultation document we are going to receive? Probably 2, as always. The first one should be expected in June. But the fact that the regulator is talking to the major player to understand the position that means that they are thinking also in some creative way in order to face an unprecedented situation. We are reviewing the allowed return in a situation that none of us never experienced before. So with an unprecedented situation, you should use unprecedented solution. And that's why I invite you to be more creative about that.

On the Naples tenders, we feel very focused on that. But with a difference of 0.3 points out of 100, we feel we still have the best offer. That was not correctly evaluated by the commission. So we will do all our efforts to demonstrate that our offer was the best, and we still feel confident that it's the best. So it will take time. But we are not in a hurry. We will do all the arbitrage to demonstrate that our offer was the best, the difference in points of 0.3. If I were them, I would have done a recalculation because 0.3 out of 100 is 0.3%, so 3 out of 1000. That is very, very small. Having said that, we will continue to look at -- we're still confident that our offer, especially on the energy efficiency project, was the best by far, and we will do whatever it takes to demonstrate that.

[Operator]

[Operator Instructions] And your next question comes from the line of Stefano Gamberini at Equita Group.

[Stefano Gamberini, analyst]

3 questions my side. The first, regarding the new changes that could be introduced by the government regarding the acceleration in tenders. I'm a little bit worried about the topic of the challenge or the appeals after the submission of these tenders. So do you expect -- or are you in talk with the government also to find a solution for this problem? Now once an acceleration will arrive, could we still expect wait, sorry, for 1, 2 years before designation due to this problem? Are there some solutions?

The second regarding Greece. Could you update us regarding this bid? And why you're going ahead alone? If I'm not wrong decent amount of investment EUR 3,600 million. So this means that you prefer to accelerate in this kind of investment waiting for the tenders when they will arrive, having a low visibility still now. And the third regarding the new -- sorry, regarding M&A scenario. Last time, you said that you are seeing some -- acceleration of some dossier. This could be interesting because if I'm not wrong, in this scenario with an acceleration of tenders, the small operators probably could decide to dispose the asset before the tenders. Or am I wrong on this topic?

[Paolo Gallo, executive]

On the tenders acceleration, which are the modification the government should implement to accelerate the tenders? Honestly, I mean we have gone through last year, if you remember, with the previous government, identifying the major roadblock. We identified the solution and major one was to give to the comune same recognition as a private owner, so there are not only the other. We have agreed on that. Everybody were in accordance with that. It's just a letter to implement. The point is that today the tenders process is in the end of the local municipality. And sometimes, they are not so quick so to move forward.

Even though I should say that in the first quarter, we have seen a numbers of new tenders to come on the surface. In other terms, requesting the offer by year-end. So I've seen some movement. And I'm sure if the government will approve the change, for example, in the regulation moving from roughly a year to the network owned by municipality, we'll see some acceleration. We have already identified the roadblocks. And we have already identified the solution. We expect that those option, if implemented, will accelerate the tenders.

On the Greece -- on the Greek project, the date of submission is mid-July. It has been recently confirmed of mid-July, so it should be mid-July. Why we should go along? I mean we feel that -- first of all, we are the only industrial bidder. That could be an advantage or not, but we feel that is an advantage. We want to be the lone -- I mean to use all our industrial advantages against the others that are private equity fund. We may consider -- we will consider any alliance probably after the bid if we are the winner, not before. I mean it is evident that we are in May. We have only 2 months ahead of us. And now we are concentrating ourselves to make the best offer. We are always open to fact other partner only if they bring something to be more competitive. If not, we are not interested to have any partner today. Once and if we will be doing that, we may consider again to the other partners later.

On the M&A, we have done something. So probably we were not so able to communicate what we were able to do it in the first quarter. We bought in January a small network that is in the provincially Salerno. RAB was around EUR 2 million, so it was not big. I think -- and then we should have -- let me say, by end of June, July, we should be able to finalize the acquisition of the fully converted network in Sardinia by Cagliari called Isgastrentatrè. That is running today already on natural gas as our other networks. We should buy them say over the summertime. That was also announced.

And I think the major new agreement that we reach is with Energie Rete Gas in Valle d'Aosta. We will buy from them existing network, and we will buy from them the network that they are going to build in the next years. That's for us is extremely important. It's a RAB that can go up to EUR 85 million. So we will done already something this year and it will accelerate. There is a positive impact of that. It's not only the new RAB that we are going to buy, but it's also the acceleration of our development plant in Valle d'Aosta. But as you know, today, we have won all the court appeal, including the one that was done by Energie Rete Gas. So now there is no more obstacle to sign the contract with Valle d'Aosta and to implement the development plan.

The acquisition from Energie Rete Gas will help us to accelerate the deployment of our CapEx. Just to make an example. In our plan, there was a network between -- for the people who knows Valle d'Aosta, of course, from [indiscernible] has a connection distribution network. Energie Rete Gas has already completed 50% of that connection. So we are going to buy that connection, and we accelerate the connection. Therefore, the final connection toward [indiscernible] is on the border to the French side.

So I mean you are right. We have not seen any other small operator. Just to tell you, we have been -- I told you the EUR 2 million coming from the X-factor that is, for us, is 3.53%. For the smaller operator it's about 7% as of last year, so a significant number. They will realize that. They will see that there will be better revenues within the wood and significant buy irrespective of last year. Let's see if somebody that will -- it will move. But if we see an acceleration in the tender, we will not see an acceleration on the M&A impact.

[Operator]

There are no further questions at this time. Therefore, I would like to hand back to the speakers. Sorry, there's just -- another question has just come through. It is from the line of Bartek Kubicki from Societe Generale.

[Bartlomiej Kubicki, analyst]

This is Bartek Kubicki. Two questions, if I may. Firstly, on the -- coming back to your 2020 results and the provisions you've made on your faulty meters replacement. Are you actually running any conversation with the regulator to get any reimbursement for the additional costs? That would be my first question. And secondly, if you think about the regulator and how he thinks with relation to the potential WACC decline, do you think the regulator will be more motivated to actually to cut the WACC and to force a consolidation of the sector by sort of deteriorating the working conditions of the small players?

Or do you think the regulator may be actually more motivated to take a more balanced approach? What do you think the thinking of the regulator could be? I mean with the allowed OpEx cut in 2020, we saw what actually -- they may want to accelerate the consolidation by imposing a much higher X-factor for the small players. So I wonder if the same story we can see with WACC. I would be glad to hear your thinking about this.

[Paolo Gallo, executive]

I mean always the line I don't know why is always bad. Regarding the first question on the faulty meters, we know that the faulty meters are mainly related to the meters that were installed back at the beginning, 2014, 2015 and '16, so at the initial of the program. We know the magnitude. That's the reason why we put a significant provision in the balance sheet of last year. The provision is based on our estimation. So we don't have any positive nor negative surprise by the first quarter of 2021. We will talk soon with the regulator because that is something that is affecting us because being the first operator, but is affecting also all the other operators. So we need to start the discussion with them.

Provision that we have accounted last year demonstrate that there is a small problem or problems relevant to the meters, especially at the beginning of the program when we were probably a little bit forced to replace traditional smart meters. So I mean nothing new on that. Are we going to talk with the regulator? Yes. We need to collect a little bit more data about that. And then once that we will have quite a stable data, we will go back to the regulator and talk about the faulty meters.

Let me say, the approach of the regulator toward the WACC, I mean, is not -- I will not say that is toward -- to push the consolidation that, that is not the way to do it. I mean the view in which the regulator is considering the WACC is -- as I said before, is considering the review of the WACC based on the current situation on the fact that there are a lot of investment to be done, either on the electrical side, either on the gas side. And then the fact that we are in a very, very unpleasant situation and known situation for everybody. So I don't think they would decide to reduce the WACC to force the consolidation.

I think the consolidation will be done by the tenders to happen. That's probably the easiest and the most effective way to push the sector toward consolidation, but more over than that to push the sector toward investment, to transform the gas infrastructure. That to me is even more important than not the consolidation. I would love to see everybody, even the small operator, investing in digital upgrade, investing in smart meters, investing in digital equipment, investing in digital management of the grid. The problem is that very few are doing that. That's the problem.

[Operator]

There are no further questions at this time. Therefore, I would like to hand back to the speakers now.

[Anna Scaglia, executive]

Okay. So we really thank you for your time today. The IR team is available for whatever you might need. And sorry for the inconvenience caused by the call operator's dealing, and sorry about that. And we are available. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.