Italgas SpA

MIL:IG

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Italgas 2020 first half results. [Operator Instructions] And I must also advise you the conference is being recorded.

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

[Anna Scaglia, executive]

Hi. Good afternoon, ladies and gentlemen, and thank you for joining us. Today, we will walk you through Italgas first half 2020 results. I'm Anna Maria Scaglia, Head of IR team; joined by Mr. Paolo Gallo, our CEO; and Mr. Antonio Paccioretti, our General Manager. We will readdress any questions you might have at the end of the presentation.

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

[Paolo Gallo, executive]

Good afternoon to everybody, and thank you for being today with us. I will start the presentation from Page 2, where you see the major KPI reported for the first 6 months. As you can see, there has been a solid a growth acceleration in the second quarter of 2020 versus the first quarter. You can see this number later on. If you want, we can comment then at Page 27 and 28 of this presentation.

Resulting in a better trend versus the one that we reported in May when we commented in May when we commented the first quarter result. Our focus on efficiencies has allowed us to mitigate all the costs that were induced by the COVID-19. During the first 6 months, there has been 3 major changes. If we compare the 2020 result with the 2019 results. First of all, the full consolidation of Toscana Energia, which positively impacted items about the EBIT. The negative impact, significant negative impact of the resolution that introduced the new regulatory period starting January 1, 2020, for an amount that is in the first 6 months around EUR 22.5 million. And the EUR 11 million of capital gains that were booked in the first semester of 2018 and, of course, not repeated this year.

I want also to underline the fact that in our numbers in the first semester, we have not included, and I'm underlying, we have not included the amount that we -- should have recognized by the regulator. For the residual value of the meter replaced in 2020, that in our estimation should be in the range of EUR 20 million for the full year. So around EUR 10 million for the first 6 months. We have not included into those numbers because we are waiting a detailed indication by the regulator that has not been issued yet, but we have included when we did the guidance for 2020 in our 2020 forecast. At the end of the day, the net income dropped by 7.7%, as you can see, mainly related by the negative impact of the new regulatory cycle that we were able to mitigate, significantly mitigate as you will see later, by our efficiency, by the growth, but I will comment later on this number.

So let's reach to Page #3. In this page, we presented the CapEx and what is very significant is that we were able to reach in the first 6 months of 2020 the EUR 370 million. That is a new record for us, even of the situation created by the COVID-19 and the fact that we have commented several times, we were obliged to interrupt several activities on the ground and due since -- from -- let me say, from March -- from mid-March to mid-May. We see also a significant drop in our operating cash flow in respect to last year. This is the result of several effects that fortunately are on temporary effect. The first one is that we were very close to our supplier to ensure a healthy value chain. And therefore, we were -- we pushed them to release their invoice, and therefore, we immediately paid them.

The second effect are the white certificate that is the change done by the regulator to move the end of the May date as the date in which we were able to sell the white certificate both to the GSE. This date has been postponed to the end of November.

And finally, the third element were taxes. This year, we paid taxes in June as normal, but last year, the taxes were paid in the first 2 days of July, and therefore, were not accounted.

And finally, the regulation. If you remember, we discussed that at least a couple of times that allows the commercial company to pay during the month of April and May, 80% of the total billing. And during the month of June, 90%. These element that I described to you had a temporary impact on the working capital. All the 3 items account for around EUR 110 million, and those items, the white certificate and the regulation will be recovered before the end of the year. So it's just a temporary impact. That's the reason why the operating cash flow show a significant reduction during the first 6 months in respect of last year, and that is also the reason why the net debt increased by more than EUR 200 million.

If we move to Page 4, I would like to spend a few words on CapEx. As I said before, we were able to increase even in a situation like COVID, our overall CapEx by 16% in respect of last year. As you can see, the second quarter of 2020 in respect of last quarter -- of the second quarter of 2019, we show a slightly decrease. So the big increase was in the first quarter, as you can see. So we can see the effect of the COVID-19 situation. And I have to add that is in the EUR 370 million, EUR 370 million there is -- the Toscana contribution is EUR 25 million for the first semester. So you can compare what was in 2018 only Italgas, and in 2020, Italgas plus Toscana Energia.

And finally, I would like to make the comment on the digitalization investment, including smart meter in the first 6 months, we passed the EUR 90 million. If we exclude the smart meter, the remaining CapEx invested in transforming our grid into a digital one was nearly EUR 30 million. And it will grow in the month to come.

Stay on the CapEx for a moment. We move to Page 5. And you can see that the major increase in our CapEx is driven by the network. In fact, out of the EUR 370 million, EUR 280 million was spent for the network increase, mainly in Sardinia. And as I said before, in other investment relevant to digitalization that is, of course, is on the network. We expected a reduction already in the metering component that was already in our plan because you know that in 2020, we expect to finish the replacement of the old meters, but this reduction has been increased by the COVID-19 due to the impossibility in some -- in 2 months and recently in some difficulties in accessing private building to replace the old meters. And in fact, our inter CapEx declined by 35% in respect to the previous year. If we talk about physical numbers, in this semester, we were able to build new pipes for nearly 500 kilometers. It's 486, of which 216 in Sardinia. We replaced more than 0.5 million old meters with smart ones. And what is really, to me important is that we were able to increase our numbers of redelivery point actively delivery point by nearly 15,000 new ones. And even if we exclude the impact of the M&A, the number is still significant because there are more than 10,000 new redelivery points, meaning that there are 10,000 -- more than 10,000 6 month of request of new connection that we were able to satisfy and to connect to our network.

I wanted just to give you a couple of update about the situation after the end of the lockdown so it's in Pages 6, 7, 8 and 9.

Regarding Page 6, you can see the percentage of the sites that are using our proprietary application WorkOnSite. We have reached in the month of June, and we continue to be at 100%, so 100% of our site construction are using our new application. We are in the process to pilot this new obligation into smaller construction sites everywhere in Italy. And therefore, with the objective by year-end, to have all our construction sites, no matter if they are big or small managed by our proprietary application WorkOnSite.

Page 7, you can see the line, the trend of the replacement about the smart meters were close to 0, very close to 0 during the lockdown period. We restarted, we are progressing still with some difficulties in accessing the residential -- the residential -- home residential apartment to replace the old meters. Even though we signed an agreement with the trade unions with an agreement that is fully in line with what was requested by the government in order to access to private apartment, private houses. We expect that this number will grow in the next months, and we have the -- we still think that we will be able to complete the replacement of all our old meters by the year-end.

Regarding the regulated service that we will comment later, has been significantly impacted our total revenues. You can see that there has been a significant progression of the number of services provided to the commercial companies since the reopening since May 18, and we still see the increase. Again, we don't think we will recover completely other requests by year-end. So as in our guidance, we see that the amount of revenues coming from this activity will be lower in respect of last year.

And finally, on Page 9, we can see the trend of the incoming calls for -- in our integrated supervision center that manage the emergency. You can see that there has been an increase in April, not significant. We still are significantly below in respect of last year, and that should be the remaining trend for the remaining part of the year. The reason being is that during -- well, the reason being is, all the investments we have done on our network, all the activity of leakage research that we have continuously carried out also given the lockdown, we now see the significant result in terms of numbers of coal that are relevant to potential emergence.

Now let's move to numbers. So let's move to Page 10. Page 10 is the profit and loss account for the first semester. We will comment -- we will give you some details in the following pages, I would like just to underline the major points here. Higher revenues are mainly driven by Toscana Energia consolidation and the carryover of M&A. And therefore, we were able to increase the revenue despite the significant negative impact of the new regulatory cycle. I want to recall you that this has an impact of EUR 22.5 million for the first 6 months. The fact -- the impact of the COVID-19 that has an impact on the, what we call, the other distribution revenues that are linked to the services provided to the commercial companies. And the EUR 11 million that was the capital gain that we booked at the beginning of last year. There is an increase of our cost, mainly due to the large perimeter, as you will see later, in fact, on a like-for-like basis, the cost especially during the second quarter of 2020 have significantly dropped.

The third element that Antonio will explain later is the depreciation and amortization that is impacted by the Toscana Energia consolidation mainly. Antonio will also explain why the tax rate is a little bit higher than last year, and it is at a range of 28.4%. Again, it's mainly linked to the Toscana Energia. And then I have already commented the 7.7% drop in the net profit after minority, and that is the reason that is driven by the new regulation. That was, as you've seen, significantly mitigated by all the action we put in place. We will see the action in the moment.

Let's analyze the revenues, that is we are on Page 11 and Page 12. On Page 11, we can see that the impact is EUR 20 million for Italgas only of the new regulation that goes up to EUR 22.5 million if we include Toscana Energia. You can see a small box on the Toscana Energia that shows that also Toscana Energia as all the companies have impacted by the new regulation.

Let's look at the first mitigation. The first mitigation on the -- of the regulation has been the increase of the RAB, that was the result of our investment of last year. So that is -- and it accounts the RAB growth and some other small components for EUR 14.4 million. And then the M&A, some of the M&A that we have acquired during the first semester of last year, in this semester, our fully consolidated since January 1, 2021, and they represent nearly EUR 8 million. We faced a negative impact of other items for EUR 21.5 million, EUR 11 million are related to the meter rollout, compensated, of course, by lower depreciation. I should recall, again, another time that we have not accounted about EUR 10 million that we estimate being the reimbursement that should be recognized by the new regulation.

And then we have seen -- we will see in more in detail, this is on Page 12. The reduction in services that are regulated services to the final customer. And then there is the EUR 11 million of capital gain that was accounted last year. In fact, if we just take a very quick look to Page 12, you can see that there are a difference in the contribution for meter replacement that is equal to the EUR 10.3 million that if we expect to be fully compensated ones that we will know exactly the details how to account the part of the meter that were not reimbursed earlier. And then on the other distribution revenue, the minus EUR 6 million is there are effects, negative effect by reduced number of regulated services to the final customer and a positive element that is what we call the bonus for identifying the leakages in respect of last year. So we were able also to increase in 2020 the result of our Picarro technology, again, improving another time the result of finding new leakages.

If we look at the cost, here we have again, 2 pages, one in Page 13 and the other one in Page 14. The overall cost increased by nearly 5% in the semester. But one of the major components, as you can see, Toscana Energia, we've fully consolidated the revenues, we fully consolidated the cost. And there is also M&A carryover, similar to what was the revenue M&A carryover. What to me is even more important is the fact that there are net efficiency equal to more than EUR 11 million. But if we look at the cost in order to compare apple with apple, there is a 6.2% reduction in our cost in the -- regarding the -- of 2020 with respect to the previous year. In considering this cost reductions, we have not considered what is being induced by the COVID-19. So either increase of cost in all the stuff that we bought like mask and other stuff for our employees. And also, we are not considering that cost reduction or the induced cost reduction by COVID-19, for example, no transfer cost, travel cost, over time cost that will significantly reduce the use of the holidays we have not considered in this cost reduction, the 6.2% because, of course, they were induced by the COVID-19. So not only we have comparable with apple with the same perimeter, but also we have compared apple with apple not considering the effect of additional costs or cost reductions induced by the COVID-19. And therefore, we confirm our guidance on the cost for the year, like we presented when it was, I don't know, 1.5 months ago.

If you look at the page on Table 14, you can see all the difference between the first semester of 2020, the first semester of 2019. And therefore, you can evaluate a little bit more in details what I told you about -- before about the difference in cost.

And now I will ask Antonio to join me and to continue the presentation. Thank you.

[Antonio Paccioretti, executive]

Thank you, Paolo. We are now on Slide 15. Consolidated EBIT amounted to EUR 253 million in the first half 2020, up 4.6%. This is the result of first EUR 29 million increase in our EBITDA, mainly due to the revenue increase of EUR 37 million and the cost increase of EUR 9 million already committed. Second, almost EUR 18 million increase in D&A, mainly driven by the higher network and metering depreciation related to the CapEx carried out during the last 12 months for EUR 13 million. The consolidation of Toscana Energia, EUR 22 million, those items were partially compensated by the lower accelerated depreciation, EUR 17 million, related to the reduction of the economic life of the meters. As we are close to complete the replacement of the entire traditional meter pool, the accelerated depreciation are lower than last year.

Moving to Slide 16. The first half 2020 profit reached EUR 153.4 million, down 7.7% versus the first half 2019. Excluding the capital gain of EUR 11 million accounted for the first half last year, the drop in the net profit would have been limited to around 3%. Net financial expenses reached EUR 26 million, with an average cost of debt of 1.1% in reduction versus last year. The slightly lower average cost of debt was offset by higher average gross debt, also due to the inclusion of Toscana Energia for around EUR 0.4 billion. Thus, the resulting higher interest charges versus first half '19. Income from associates decreased by EUR 11 million, mainly related to Toscana Energia full consolidation. We accounted for EUR 65 million of income tax. Our tax rate was 28.4%, in line with our expectation. This is higher than the 27.5% reported last year when Toscana Energia was equity accounted. Net of equity income, the comparable tax rate in the first half '19 was 28.8%. We expect the tax rate at the year-end to be around 27%, 28%. Toscana Energia consolidation also explained the higher minorities.

Let's move to Page 17. In the first half of 2020, the cash flow from operation amounted to EUR 389 million and was generated by net profit of EUR 163 million before minorities, plus D&A and other nonmonetary items for a total of EUR 186 million. The change in working capital reflects the usual business seasonality for the first half. Nevertheless, regulation of revenue collection, which allowed gas sales company to postpone part of the payment and energy certificate whose payment to distributors have been postponed to the second part of this year, had a cumulative negative impact on working capital. And therefore, higher net debt of around EUR 60 million. We also continued in our effort to support suppliers and ensure healthy level change. We expect those impacts to be recovered during the year. Let me remind you that last year, tax payment were delayed from June to July due to the calendar. The net cash generated allowed us to almost entirely finance the significant disbursement for the technical investment, around EUR 390 million, and the M&A activities, EUR 10 million carried out in the first half. The increase in our debt reflects, therefore, mainly the dividend per share payment of last May for EUR 206 million.

Looking at our debt structure on Page 18. The main change versus May is the new EUR 500 million bond we issued in June maturing in 2025. The bond has a coupon of 25 basis points and is part of our pre-funding exercise. Taking this into account, our refinancing needs remain very limited and no major refinancing is due before 2022. Our bond, 7% of the total have a very long average maturity of more than 7 years. And our longest European Investment Bank line expires in 2037. We maintain a significant amount of liquidity of more than EUR 300 million of undrawn committed lines expire at the end of 2021 of EUR 500 million. 92% of our gross financial debt is at fixed rate, and our cost of debt in the first half is close to 1%. We confirm that Italgas access to credit remains healthy. Yet, we believe maintaining a strong financial position, low exposure to interest rate risk and low refinancing risk is the core of our business model.

Moving on to the balance sheet at Page 19. Net invested capital amounted to EUR 6.433 billion at the end of the first half, with an increase of EUR 153 million compared to the end of 2019. The increase in mainly driven by CapEx in the first half of almost EUR 370 million and depreciation of EUR 210 million. As commented in the previous slide, consolidated net debt was equal to EUR 4.6 billion, excluding IFRS 16 impact, with an increase of around EUR 215 million compared to the year-end 2019. We confirm our fiscal year guidance of EUR 4.5 billion, assuming neutral working capital effect, CapEx of more than EUR 700 million, no additional M&A and net of IFRS 16 impact.

Let me now return the floor to Paolo for the closing remarks.

[Paolo Gallo, executive]

Yes, I wanted just to close this presentation with Page 20, and then you can also go from Page 21 to 24, we have reported also some major elements of the -- our sustainability plan that is very linked -- that is extremely linked to our industrial plan. And then as I mentioned before, in the next, we reported guidance and the results of the 2 quarters 2020.

So to close this presentation, I strongly believe that what we presented today show the resilience of our business. However, continuous and strong focus on efficiency, 6.2% on a like-for-like basis in respect to 2018 is significant. Our effort on digital transformation and CapEx delivery, we were able even in a difficult situation by the COVID-19 to increase our CapEx in respect of 2019.

In generally speaking, our ability to react promptly to any change we may face also something that was completely unprecedented. And in a situation like we all experienced, innovation and digital transformation have proven to be an invaluable asset in order to run the business in continuity and safety. The result of our bond that was mentioned by Antonio earlier, prove the fact that the market appreciates our business model. Why we're reaffirming our 2020 guidance? We are currently working on the new industrial plan that will be presented at the end of October. We did, let me say, to focus, one to increase the digital transformation or to complete the digital transformation of the company in the next couple of years and to create value for our shareholders.

Before moving to the Q&A session, let me spend some few words maybe anticipating some of the questions that you may have. Let me spend a few words on some press report that was reported about Italgas position. And I wanted to do it to make it clear about this subject. I am, of course, referring to the -- to our proposal about -- somebody said about changing the rules of the tenders. That is not correct. Our proposal was that we presented as a clear objective, help the country, help Italy to boost investment. Many other industry, many other operators in other industry have presented their own proposal about how to increase the amount of investment, not 5 years from now, but in the next month. So in 2021 and 2022. We made a proposal. So that was the aim of the proposal. We did that proposal on the tenders because we said it was nearly a couple of years ago, the amount of investment lost because the tenders were not assigned. We identified in EUR 3 billion, even more than EUR 3 billion per year. The total amount not invested because the tender was not assigned. And considering that those investments are extremely precious for the gross national product. We have said that multiplier of that investment is 3.3x. And therefore, the more than EUR 3 billion makes the additional gross national product equal to more than EUR 10 billion per year. We made a clear disruptive proposal in order to accelerate in order to boost, in order to have those investments starting already at the beginning of 2021. I think the Minister of Industry has clearly understood this message that was nothing like somebody said to freeze the tenders, to postpone the tender. Our proposal, the main aim of our proposal was boost the Italian investment. The Minister of Industry has clearly understood our proposal, and we need to thank them and to thank all the people at the Ministry of Industry because they are working around that proposal. And therefore, our proposal was to overcome for a short period of time, giving -- or better, giving to -- for the first 3 months of signing for the first 3 years, a commitment to anyone who was assigned the ATEM, giving to them a commitment for investment because we need to be sure that the investment in that case will be done in waiting for the tenders to be completed. So I want again to stress the point that we are not against the tender. The proposal was a different proposal. It was a proposal to increase and to boost the investment in our industry. I'm still available on the subject to respond to any question you may have.

And therefore, I open the floor to your questions. Thanks.

[Operator]

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

[Harry Wyburd, analyst]

3 questions for me. So firstly, can I take you up on your offer to discuss the tenders a bit more. So what I was just wondering is, so you talked about the proposal you've given, and there's a fairly obvious case from an economic perspective for Italy to accelerate this process. But on a practical level, how do you actually see this developing from here? Can we expect some imminent news which would be a genuine catalyst to accelerate these tenders? And what specific steps are you looking for? And what specific time lines could we see in terms of speeding up the tenders? And how material could that actually be relative to your current expectation? And then the second one, just very, very connected. And I guess you discussed on past conference calls that also the opportunities for M&A could accelerate in addition to the tenders. And I wondered whether there had been any new developments on that front, whether you're seeing on the ground at the moment, increased M&A opportunities, whether there are any transactions, obviously, you're never going to be able to comment specifically, but have you seen an increase in the number of available transactions that you can work on? And then final one, I guess, a fairly obvious one at the moment for any gas-related company, hydrogen, so Snam and several of the other TSOs put out their hydrogen backup plan. And I'd just be interested if you had any views on that and how the distribution network could sort of play into that hydrogen backbone plan, whether there's a role for you as well in that?

[Paolo Gallo, executive]

Hopefully, I will be able to respond to you because the line was going up and down. So I tried to catch your -- the core of your question. So if I'm not able to respond, so please reply to me and say what I have not responded. For the first point about the tender, we made a clear proposal that is not for the tenders. The proposal that we made was for boosting the investment. Let me say, boosting 3 -- more than EUR 3 billion of investment per year is a significant number. How we were able to do that assigning each of the ATEM based on a certain objective criteria with a commitment for yes, to complete -- to carry on a certain level of investment, a minimum certain level of investment for the first 3 years. So it has been seen and it has been even published our presentation by some strange journalist that did not even ask our permission to publish our documents. So you can have all the details in that we present to the task force of Colao and into the government. I think the goodness of this proposal is that has brought around the table, and that's the reason why I mentioned before the Minister of Industry, a number of stakeholders to discuss how to accelerate the tenders. So we said that let's do another way in order to focus on investment. Maybe we are not able to get there, but at least we have moved significantly. We have increased significantly the discussion around the tenders and the fact that the tenders will create a new investment, new job opportunity. So hopefully, all the discussion will result in the next decree to issue in something, maybe not what we are looking for, maybe it will not be our complete proposal. But at least, there will be some significant step forward in the tenders process.

The second question on the M&A. We are working on the M&A. We have something that is in negotiation right now. But as always, we cannot tell you until we close and we arrive at a final point with the other counterparty. I confirm that we expect that either the new regulation from one side and this COVID-19 situation, we expect to see an increase in terms of, let me say, persons that are willing to sell their concession more than before. Currently, we have discussions going on. As always, we are not willing to disclose that.

The last point on hydrogen. We are looking at the hydrogen in a very similar way as the TSOs are looking around Europe. In 2021, I'm the Chairman of the GD4S that is the European Association of Gas Distributor. We have added during the lockdown in the first 6 months, several virtual meetings. In the last one, we discussed about the hydrogen, and we discussed to conduct the European level studies about the use of hydrogen in the gas distribution network, and we have also idea that we hopefully will become reality in the next months to launch a pilot project about the production and the use of hydrogen in the gas distribution network. I hope I have responded to you on all 3 questions. If not, please reply.

[Operator]

This question comes from Enrico Bartoli from MainFirst.

[Enrico Bartoli, analyst]

The first one is related to Sardinia. Recently, there have been several discussions on the gas supply model in the island. I was wondering if you -- if these discussions can affect the investment plan that you have in the island. And if you can update us on the amount and the timing that you have in the current business plan for the completion of the CapEx there?

Second question is related to the -- again, to the tenders. It seems that also other stakeholders, local authorities have been actually making some proposals for some freezing of the process, some change in the rules. Can you share with us your opinion on this? If this rumor again, once again, on the rules, can determine some additional delay in the start of the process. The last one is on cost efficiencies. Actually, you were very clear on the numbers. It seems just to clarify, actually, the EUR 11 million that you had in the first half were also net of the impact of the COVID cost. So I was wondering, in the second half, maybe there will be an acceleration in the implementation of the cost efficiencies, if you can confirm that, give me some flavor on where are still the room for further improvement in the cost base?

[Paolo Gallo, executive]

Okay. Regarding Sardinia, I think that all the discussion that is going on right now given to Sardinia, I think it was also created by us. In a sense that with the acceleration, we impressed to the investment in Sardinia, we were able to bring at the right level the discussion about -- the supply of natural gas in Sardinia. That's the reason why we are seeing in the regulation issued on January 1, 2020, for the first time the approach of the regulator to regulate the natural gas supply, transportation and distribution to Sardinia. We think that all the discussion is extremely useful. Finally, we will talk about Sardinia as one of the region in Italy that can receive natural gas similar to what happening in Sicily, in Calabria, in Piedmont, in Lombardy, everywhere else. So finally, Sardinia is becoming one of the region, not the only region that has not received natural gas. And therefore, we feel extremely confident that our CapEx will be absolutely necessary to provide to all Sardinia citizen natural gas at the same level of price as any other Italian citizen can receive this natural gas where regularly they are from north to south. And we are very happy that there is such a discussion because finally, the regulation in Sardinia will become more clear. And also the 3 years in which for the time being, the regulator has limited the balance between the Sardinia distribution cost in the remaining part of the Italia will probably disappear. We also should be absolutely correct, also considering that the people that are living in Sardinia are Italian citizen, like all the others.

Regarding our CapEx plan and our CapEx investment plan. As you have seen, we are -- we have already passed the 700 kilometers of new pipes. And therefore, you will take another, let's say, 1 year, 1.5 year to complete them. In the meantime, as I have already said, we are planning to start selling the gas immediately after summertime, either in the new grids, in the new networks that we have built and completed, either in 3 other basin that are currently under distribution of LPG and will be converted starting in November from LPG to natural gas. So the people that are living in Sardinia will see the first natural gas supply and use already in, let me say, after the summer and in -- by the year-end.

Regarding the tenders, again, this discussion around the tender, and we have seen many other proposals coming from the different stakeholder and the operator have been driven by our proposal. So when our proposal was published by one of the -- by a couple of newspaper, everybody were rushing against making different proposals. So the goodness of that is there is a debate. Hopefully, the debate is -- will bring some good results, and we feel that is -- that will be the outcome because the Minister of Industry has decided to put around the table all the stakeholder to solve the major problem that we have seen up to now on the tender. I mean, more than that is slow than the tender, I think it's impossible. We are nearly close to a speed that is 0. Therefore, I don't think there will be any negative speed in the tenders. So we can only expect a better situation than today following that discussion.

Regarding cost efficiency, I mean, your interpretation is correct about the cost efficiency that we recorded in the second quarter of 2020. I think we confirm our guidance on cost and of course, in confirming our guidance, our target is to be -- is to arrive at the end of the year on the lower side of our guidance.

[Operator]

And your next question is from Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, analyst]

One is on regulation. I think it has been the Chairman of Ferrara that has mentioned a new possible consultation to favor a consolidation on the sector. And the question for you is that if you believe that, that document and consultation document is going to have any implication for Italgas or is it likely to be more concentrated on the consolidation among the smallest gas distributors in Italy. That is the first question.

The second and third question are follow-up after the question from my colleagues. The first one is on the cost cutting. Again, that, obviously, your guidance is between EUR 360 million to EUR 380 million of total cost. But obviously, the company is accelerating a lot in that cost cutting. Do you think that there is something there that is indicating that the potential that the lesson learned from the lockdown period has been material enough maybe to make the company be more aggressive in the cost cutting? I'm not intending to have a different guidance than the one that you have just given, just my sense that maybe the company discovering more areas of cost cutting that initially sought.

And the final question is on, again, back on hydrogen. That is obviously something very -- looks very important these days. It seems that the debate is more led by the TSO. I was just questioning from the point of view of a relevant TSO, if you see hydrogen as a potential game changer for a company like Italgas when you are company, you are looking at the next 10 years or so.

[Paolo Gallo, executive]

Okay. On the regulation side, I know that during the consultation document, the regulator has proposed incentive for aggregation or small operator. Our position is very clear on that. I think if any incentive about aggregation between operators should be given to everybody. You cannot give only to small, medium or large size. You have to get this incentive to everybody if you feel that it's necessary. Our position on that is, let me say, slightly different. One of the way to make consolidation up in our sector is to conclude the tenders. So the more that we are able to move into the tender, the less we need an incentive to make -- to consolidate the operators.

On the cost efficiency, I think it was also clear to everybody that in the cost-cutting percentage, we have not considered negative and positive effect of the COVID-19 that more or less are a big balance. So the negative effect is being balanced by the positive effect on our cost. So I think the question was, did you discover added area in accelerating the cost cutting. I think one element that we clearly discovered during the lockdown was that the use of digital transformation, the use of digital application that we developed. That was clearly accelerated. The example is the one that I'm making always is the WorkOnSite application, that initially we thought it was deployed. We started the deployment in February, and we were thinking to conclude the deployment by the third quarter of 2020. The COVID-19 has clearly accelerated deployment. We were able to deploy 100% already in June, beginning of June. So what new would drive our ability to further reduce the cost is the digital applications. So not only one that we have developed that will be deployed much faster than we did in the past. So that's clearly an area that will drive our cost down.

Finally, on hydrogen. I mean just leaving the discussion of hydrogen at TSO level, it's really -- would see the application of hydrogen in a limited area because you cannot say, I mean, the TSO network is clearly connected to any DSO network. That's the reason why we are talking about hydrogen, a DSO distribution company at the European level because we feel that it is not enough to talk about hydrogen at TSO level. Hydrogen will flow eventually also in the gas distribution network. I clearly view your point about being -- is the hydrogen can transform the company. I think what we are doing is that we are transforming our network in order to be able to accommodate any fuel by -- or hydrogen then may be injected into our network. So that's the major difference. We are working on the network in order to make our network able to receive different fuel, different from the natural gas.

[Operator]

And your next question comes from Stefano Gamberini from Equita SIM.

[Stefano Gamberini, analyst]

Three questions, if I may. First of all, regarding Sardinia. Could you remind us what is the stake of Marguerite Fund when they will enter in the project? Because you said that in 1 year, 1.5 years, you should complete the investment. And out of the EUR 500 million RAB that should be created through investment in Sardinia, what is the share of this fund? And what is your share? Just to understand what could be the potential minorities in this project.

The second regarding the escalation in tenders. We should expect an amendment from the government, if I'm not wrong on the rumors -- on the press what's rumored this morning. And then some other measures that should arrive in a second moment. Could you help us to understand what is the steps that could be for the acceleration of the tenders? Or on the other side of the investment, as you stressed, in the sector that should arrive to EUR 3 billion per year, if not wrong, from the current EUR 1.72 billion per year.

And the third is during your talk with the government, you underlined that the minister understood very well your project. What is the position from the government -- from the minister about the relation of investment in the gas distribution versus the green deal, how these investments could be -- this acceleration of investment could be justified also in this prospect of huge acceleration for energy transition and the green deal in the forthcoming years?

[Paolo Gallo, executive]

In relation to the first question, the interest acquired last year by the fund in our project is around 48%. So today, we have in Medea a stake of 52%. The company is fully consolidated. The amount of the investment, as you know, we expect from this project is in the range of EUR 500 million. And therefore, according to the regulation, we will have the RAB is to be calculated accordingly.

On the second question, I think the position of the Minister of Industry, just to -- from what we have understood is that there is several topics that have to be agreed. For -- let me say, for the blocking, let me call it, the gas tender. Some of them were probably all the stakeholders agreed on will be part of the new decree that will become -- will be issued in a short period of time. And on the remaining part, the objective of the Minister of Industry is to solve them and maximum, I think, in next 6 months, let's say, by the end of the year. So that is the -- our interpretation of what you have read this morning on the newspaper.

On the third element, let me say, make one comment. The EUR 3 billion are additional to the existing and even more than EUR 3 billion. The EUR 3 billion are additionally per year on the existing investment. So it's not the one point that you mentioned that will move to EUR 3 billion. It's the one point that you mentioned, plus EUR 3 billion. That is the amount that we have estimated if all the tenders will be -- once the tenders will be all assigned. So just to make that difference in numbers that you mentioned.

On the third element. So the investment on gas distribution and the green deal. I think it is clear in the national strat and the [indiscernible], and I mean all the different documents that have been shown by the government that the gas will play a significant role, a central role in the new green deal. And therefore, all the investment that will flow into the transportation and distribution are seen positively from that sense. Let me add that one of the elements that you should consider is that most of the investment will be used to convert a traditional gas network into a digital one. And only if the gas network is a digital one you can accommodate hydrogen, biometal and all the stuff. If not, you will never be able to accommodate. So in a view of a green deal, the investment on the gas network in to make it digital, of course, have seen very positively.

[Operator]

And there are no further questions at the moment. [Operator Instructions] And no more questions requested have come through.

[Anna Scaglia, executive]

Okay. So if there are no further questions, we thank you all. The IR team is available to answer any questions that might come, and we wish to everyone a very nice holiday season.

[Operator]

Thank you. That does conclude our conference. Thank you for joining. You may now disconnect.