Italgas SpA

MIL:IG

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Italgas 9 Months 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Anna Maria Scaglia, Head of IR of Italgas. Please go ahead, madam.

[Anna Scaglia, executive]

Good afternoon. Thank you. Today, we will walk you through Italgas 9 months results. I'm here with Mr. Paolo Gallo, our CEO; and Gianfranco Amoroso, our CFO. We will address any questions you might have at the end of the presentation. Please, Mr. Gallo go ahead.

[Paolo Gallo, executive]

Good afternoon to everybody, and welcome to today's presentation. I will follow the presentation that was sent to you and is available on our website. The closing of the first 9 months include for the first time after a long journey in getting the closing, the debt infrastructure. It has been consolidated for the month of September only. We have a positive impact on earnings regarding the month of September of data of around EUR 3 million. I'm on Slide #2 on Page #2. Operating performance of the Italian part of the business in the first 9 months are fully in line with the guidance that we provided to you in June. If we take a quick look on the revenues, revenues were benefited by the still ongoing RAB growth that was already presented in the first 6 months. As we said, we have included revenues of DEPA for the month of September. And let me say, that the element probably mainly an more important is the strong contribution from our energy efficiency company.

Thanks to this point, we have been able to complete to even more compensate the negative impacts coming from the regulation, and I'm referring to lower WACC and mix factor. I would like to remind you that in the first 9 months, these 2 elements contributed negatively for EUR 47 million. Regarding the cost side, the reduction is significant. We will go through in details. There is an increase of cost, of course, relevant to the energy efficiency activity that we have, I just mentioned, the increase in the revenues, while the remaining part of the cost on a like-for-like basis continue to decline. Overall, our cost of debt, considering also our cost of debt, we were able to achieve in terms of adjusted net income growth of about 5.5% in the first 9 months of 2020 compared to the first 9 months of 2021. If we change and we move to Slide #3 CapEx were down about 11% in respect of last year that is fully in line with what we have announced and was a performance in the first semester. Differently from last year that is quite significant. Gianfranco Amoroso will give you more details and more flavor about that.

We had a significant negative contribution coming from the working capital. It's a temporary one, but it's significant. Gianfranco Amoroso will tell you the amount, and we'll tell you when we expect to recover that increase in net working capital. As a result of that, and that is a result of the fact that we made a payment on the 1st of September for the closing of the infrastructure, our debt was increase in respect of last year and is slightly above EUR 6 billion. So let me just recap on and these on the following page, which is the current situation about our physical perimeter. So for the first time, we include the Greek operations.

Our overall length now is up to 82,000 kilometers, more than 7,000 are coming from Greece. And of course, the remaining part of Italy, there is a slightly move in respect of that. Greece in terms of network represent around 9% of the total. Delivery points were up to EUR 8.3 million redelivery point, nearly 600,000 is the recent contribution of the Greek operation. If we take a look on the investment side, that is shown on Page 5, we invested almost 500,a little more nearly EUR 550 million, EUR 66 million less than last year. And for the first time, we included also the contribution of Greece that for the month of September is only EUR 9 million.

As highlighted already in June for the first 6 months, the effort of digitization remained extremely strong. We invested EUR 156 million with an increase of 3%. So somebody may say it's not a strong increase. But if we [indiscernible] the contribution of the meters that are in reduction in respect of last year, the spending increase in digitization is 20% more over last year. So if we consider the same amount that we spend in 2022 of meters, that is the increase that we recorded in digital investment. Development and repurpose of our network still attracts the majority of our investment. We have added nearly 300 kilometers of new pipelines. And we installed nearly 300,000 smart meters, but that includes the replacement of the faulty ones. Of course, Scaglia, will present the amount that we invested in Sardinia in reduction in respect of last year, also because we are nearly close to the end of the investment. The good news is that we installed 11 small-scale LNG storage year-to-date, in addition to what we have already installed last year.

Let me take a look and let me describe to you the significant progress that we have made on Scope 1 and Scope 2 emissions and energy efficiency. The overall emission relevant to Scope 1 and Scope 2 are down in respect of the same period of last year by more than 18%. The main driver of this reduction is the gas leak. So we registered in the first 9 months a significant reduction in terms of absolute numbers on gas leak. Now understanding the fact that the number of kilometer inspected increased for the same period by 18%. But we are on the reason why we registered such a decrease is because if you look at the gas leakage rate per kilometer surveyed, the number dropped to 72.5% standard cubic meter per kilometer that is down 31% in respect of last year. How we've reached this significant target. Well, in the first quarter, we decided to attack the area that according to our evaluation based on the data that we collected in the previous year, we expected more leakages.

So we have already used Arta to prioritize our leakage research. And for that area that we expected greater leakage, we also put a significant effort to reduce either the localization time needed to find eventually potential leakages. But moreover, we put a lot of effort to reduce the time for repair once the leakage has been find out. And in the second and the third quarter, we have accelerated the number of kilometers, and that is the reason why in 9 months, we were able to record such a significant increase in terms of kilometer respect. By the year-end, we expect that the percentage of our network inspected will pass the 100%. So some will be expected twice during the last period during these 2 last months, so November and December. Generally speaking, if we look at the gas leakage rate, we are below 0.1%. That is a remarkable impressively low number.

The other contribution in terms of reduction of greenhouse gases emission came from seal industrial gas consumption. We will talk in a moment because that is a result of the efficiency that we were able to bring into this activity and also by our vehicles. Thanks to the less kilometer traveled, we will see in a moment that is a result of the extensive use of digital application that reduce the need of intervention of physical intervention by our colleagues. So let's look at the energy net energy consumption that is shown on Page 7, that was down by 15%. Here, the major contribution is the reduction of the gas used to treat the system. And of course, as a consequence of this reduced energy, reduced amount of gas consumed and is the result of less greenhouse gases emission that we have seen before. And that is fully in line and probably the slight acceleration of the goal that we have announced in our strategic plan, that show minus 27% in 2028, minus 33% in 2030 . We are already down by more than 15% in respect of 2021 that it's even bigger in respect of 2020.

Regarding the electricity consumption, also this number is down, mainly thanks to the lower consumption of Italgas app. And that is a clear demonstration that an energy efficiency model can be applied quite easily to different industry. So we used our energy efficiency approach to be also brought to one of the area where the energy consumption is significant, and we were able to significantly reduce the consumption. As I said before, vehicles, consumption reductions reflect a number of kilometers lower than the previous year traveler. And that is thanks to the extensive use of digital application.

Now let's get into numbers and the full results. We are facing the 23rd quarter of continues growing and the net profit, as it is shown in this page, grows by more than 5.5% in respect of last year, the net profit after minority. And that despite the negative impact from the regulation, as I already mentioned, EUR 47 million. Thanks to the higher revenues driven by RAB and other tariff components and thanks to the higher contribution of ESCO that represent year-to-date above EUR 70 million. And finally, thanks to DEPA, we will look at the numbers in details in a moment.

Overall, operating expenses increased by EUR 45 million, driven by our ESCO activity. G&A was up by higher CapEx, tax rate, it's a matter of explanation that will be given to you by Gianfranco in a moment and that result is that I have already mentioned to you. So let they give more details about revenues and costs. So the Page 9 shows the increase of revenue in respect of last year. We recorded in the first 9 months EUR 47.1 million less revenue for WAC contribution and the X-factor contribution. It's about, let's say, EUR 40 million, a little bit more than EUR 40 million by the WACC and the remaining is the X factor.

We had a positive contribution of EUR 13 million, mainly driven by the RAB increase. So thanks to the investment we made in the previous year. There is an increase of the revenues by EUR 13 million, mainly Rub and Sardinia. We book around EUR 7 million of additional regulated revenues. You consider that out of the EUR 6.8 million, nearly EUR 7 million, EUR 6 million are linked to the incentive for emission reduction. So if we connected the dots that I mentioned to you, we inspected more kilometers. We reduced the time to make the repair. We reduce the CO2 emitted [indiscernible] the research. We had EUR 77 million more in revenues coming from energy efficiency business that has seen an acceleration in the third quarter. Finally, you can see that the contribution of our Greek operation for the month of September has been equal to EUR 13 million.

I have already mentioned the negative impact of the regulation. I should also as a much smaller contribution for the meters replacement considering that there are very few left, and that is the explanation of the drop of more than EUR 7 million in revenues. In Page 9, as always, you have a different view of the different revenues and the explanation that I gave you just a moment before. Before giving the floor to Gianfranco, let me spend my last comment on the operating expenses. On a like-for-like basis, that is the most important one, we have been able to demonstrate another significant cost reduction, more than EUR 16 million reduction that represents 6.3%. Of course, we have recorded a significant increase in the ESCO cost that you should connect to the revenues. If you made your math, the margins that we have recorded for the activity in the energy efficiency is slightly above 18%. So it's between 18% and 19%.

So quite an interesting and significant margin. We recorded based on declining of the cost of the energy efficiency certificate, we recorded EUR 1.1 million less. And finally, the contribution for the cost, we have also the cost of the Greek operation for EUR 4.5 million. On Page 12, there is the other pictures of the cost divided between distribution and other activities divided between labor cost, net external cost and other costs. You can see also the line relevant to the infrastructure that for the time being, we will keep it aside just for your convenience to consider being the Italian activities and to compare them with the previous year, considering that the infrastructure from now on will be fully consolidated in our profit and loss account. I will now leave the floor to Gianfranco for the remaining part of the presentation.

[Gianfranco Amoroso, executive]

Thank you, Paolo. We are now on Slide 13, considering the EBIT evolution. In the 9 months, EBIT amounted to EUR 455 million, marking an increase of 5.6%. This is the result of the following elements: an increase in EBITDA of our Italian perimeter of about EUR 28 million as a result of the variance of revenues and OpEx already explained by Paolo before. Almost EUR 10 million higher D&A, mainly related to the network and driven by the CapEx executed in the last 12 months. DEPA incremental contribution of EUR 6.5 million. I remind also the EBITDA contribution of DEPA was $8.5 million in a month. Moving now to Slide 14, commenting adjusted net profit. Adjusted net profit after minorities reached EUR 288.6 million with an increase of 5.5%.

A Net adjusted financial expenses marked a level of EUR 41 million, only EUR 1.5 million higher than last year despite the current volatility in the financial market, thanks to our debt structure. The increase of the average gross debt has been balanced by a lower cost of debt. On the positive side, contribution from associates increased by EUR 1 million driven mainly by GABA capital gain following the disposal of a majority stake of the company.

Finally, we accounted for EUR 112 million of income taxes, marking an increase of $6 million due to a higher taxable income but with a tax rate below 27%, a touch below last year's figure. Now looking at the evolution of the cash flow. Cash flow from operations was close to $455 million, covering the majority of the CapEx executed in the 9 months, but with a gap of EUR 100 million. That is a consequence of net working capital evolution that brought a negative contribution of almost EUR 150 million. Let's see it in more in detail, almost no contribution from billing seasonality due to pass-through items and higher super bonus in the cop-on receivable for EUR 80 million, higher is certificates receivable for EUR 70 million.

The impact of the pass-through items is linked to the bonus gas and other components of the tariffs that have been put in place to ease these pressures on end users. Due to the mechanism, there is not a counterparty risk since the counterpart is [ Seara's ] public entity, but a temporary absorption of working capital. Net CapEx reduced in line with our guidance, we brought a cash outflow of EUR 555 million, explaining a free cash flow at the end of September of EUR 100 million negative. The financial investment and disposal includes the net impact of the cash outflow to acquire deep infrastructure, the stake in [ Pikar ] and the deconsolidation of GAXA debt. Taking into account the dividend outflow, all this resulted in a debt increase of EUR 1.1 billion.

As anticipated for the financial expenses evolution, let me now make an update of our underlying debt structure at the end of September. We are on Slide 16. In the 9 months, we have drawn a new ESG loan of EUR 250 million. We have signed a new loan of EUR 150 million, 18 years [indiscernible], supporting energy efficiency project, and we have signed also new financial package with the pace borrower, securing a long-term support for its development plan. The current split of our debt is fixed at 89%, floating 11%. The liquidity position at the end of September was $350 million following DEPA payment. As you can see, our debt maturity profile remains very comfortable. -- next bond repayment is due in '24 together with EUR 500 million of bank loans.

Despite the current volatile financial markets, we continue to rely on one of the lowest average cost of debt of approximately 0.9%, a very limited exposure to interest rate volatility, thanks to the fixed percentage and still long average trend. Finally, Moody's confirmed its rating last September. Moving on the balance sheet on Slide 17. Net invested capital amounts to almost EUR 8.5 billion, with an increase of almost EUR 1.4 billion compared to the end of 2021, mainly related to the consolidation of the Infrastructure. Fixed capital increased by EUR 960 million, mostly related to the account DEPA. On the liability side, consolidated net debt was $6.1 billion, including the IFRS 16 impact of almost EUR 70 million with an increase of EUR 1.1 billion compared to year-end 2021. I leave now the floor back to Paolo.

[Paolo Gallo, executive]

Thank you, Gianfranco. I would like just to close this session to open the question ,the Q&A just with a few remarks. First of all, finally, you see the infrastructure that contributes for only 1 month, but at least you start appreciating the contribution of our Click operation. From the Italian activity, I mean, the only point that I would like to remark is the ESCO growth that has been growing in respect to the first 6 months with higher speed. We continue to demonstrate our ability to reduce cost and the ESG performance according to me, are absolutely outstanding, considering the reduction that we were able to bring in respect over the first 9 months. We confirm the guidance that we have announced in. So I will let open the floor for questions. We are here to respond to any question or curiosity you may have.

[Operator]

[Operator Instructions] The first question is from Javier Suarez with Mediobanca.

[Javier Suarez Hernandez, analyst]

Three questions on my side. The first one is on the company's ability to deal with higher inflation I think that you mentioned during the presentation that the EBITDA margin from that are giving a very good contribution to the growth of the company stayed at 18%, which is the EBITDA margin that you saw during the first half of the year. So I was wondering if you can elaborate on the capacity of Italgas of maintaining profitability down the road in a scenario of higher inflation in that activity in that service-related activity. That will be interesting.

The second question is on Greece. Greece should be an area of significant CapEx allocation for the company going forward. So can you give us an update on the discussion on the new regulatory framework that should be in place from 2023, where we should have clarity on return allow OpEx and also CapEx plan there. And related to Greece as well, you can update on negotiations with ENI for the possible acquisition of the minorities in some of the subsidiaries there. And the third question is on the overall capital structure of the company. So obviously, because of financing for Italgas is very competitive, interest rate has moved very quickly. So the question for you, I guess, to down is do you see a necessity for Italgas and in general for the sector to reconsider capital extractor in a scenario in which cost of capital and inter-rates are going to be higher than the road and that has any implications for your business plan.

[Paolo Gallo, executive]

Okay. Let me talk about the first question, if I well understood how we deal with high inflation in the energy efficiency activity. Let me say that we are acting as a general contractor. And because of the limited time that we have in front of us to complete it.

[Operator]

Excuse me, this is the operator. We cannot hear you.

[Paolo Gallo, executive]

Yes, because there was down by the micro. So let me start. If I well understood the question is how we deal with on inflation in the energy efficiency activity. We are acting as a general contractor, as you know. So the majority and considering the time frame between now and, let's say, 1 year from now, 1 year from now because our goal is to complete all the activity in the last quarter of 2023 to complete the all the intervention on the so-called super bonus. We have already placed all the contracts.

So we should not do the majority of them. We will not have any surprise in front of us, considering and therefore, I would probably guess that the margin, we remain in the range between 18% to 19%. On the other side, high inflation, especially high inflation in the energy prices because we see more inflation in the energy prices than not in the material. High inflation on the energy prices are pushing different industry to be much more effective in the energy efficiency improvement in the energy efficiency action. So from that point of view, we see more opportunity for us, and we can bring to them what we were able to do in a very few period of time, a few months in Italgas.

The numbers that we have seen before about the reduction in the energy consumption can demonstrate how we can be very efficient in reducing gas consumption and electricity consumption. So going back to the point, I didn't see impact regarding very much impact. We have already, let me say, accounted for because of the contract that we have already placed in the energy efficiency business. Regarding Greece to questions, well, we have already submitted to the regulator the development plan of the 3 DSO. Those development plans are already in consultation right now. We should receive feedback from different stakeholders quite soon. In the meantime, we will start talking with the regulator about the WACC because that is also part of the new regulatory period that will start the 1st of January 2023. We have carried out studies with external consultants about building and demonstrating what according to us should be the new WACC.

We are going to, of course, to share those studies with the regulator. Once we will receive the results of the consultation from the regulator back, we will then elaborate this so-called business plan that is not the metaxallocation, but also all the other costs in order to let the regulator to establish the tariff. So we are on track. We would like, of course, to be more quickly, and we will do it as soon as the consultation on our development plan will close. Regarding ENI, it's not a matter of negotiation, just a matter to complete the different steps. We are not in are hurry to parties, so we should complete this acquisition in the next weeks. Regarding the last question, capital structure, I will let Gianfranco answer it .

[Gianfranco Amoroso, executive]

Yes. About the point you raised, Javier, about our cost of debt going forward. I do not see our cost of debt growing as if somebody could expect looking at the current situation of the market because of the structure of our debt, considering that having a fixed portion more than [indiscernible] and also a tenor of 6 years. Our cost of debt is very slow in terms of adaptation to the market condition. On the other side, also the cost of debt embedded in the work form is very low to adapt to the current market condition. So matching the duration of our debt with the mechanism implied in the formula, we can say that we don't see in our business plan and need of reassessing the cost of debt that we have planned.

[Operator]

The next question is from Stefano Gamberini with Equita SIM.

[Stefano Gamberini, analyst]

A few questions also from my side. First of all, regarding the macro scenario, the situation and the risk related to the unpaid deals in the energy sector particularly in the gas sector in next year. What could the regulator decide if there is a significant growth in the unpaid bills in the gas sector during next year? And what are your solutions for this problem or you can welcome some proposal for face this program? The second regarding the situation with the new government, there were some delays in the tenders for the gas tenders. And so what you could expect right now after the approval of competition law, if some other measures could be introduced or are you asking for to the government? And the third one, just as usual, an update on the situation on gas tender now in place or from the regulators that are coming from the regulator as well as the M&A situation? Are there some deals that could arrive? Or at the end also this market is frozen.

[Paolo Gallo, executive]

So thanks, Stefano, for the question. Regarding the pad build, you have said if the regulator will decide, you should ask the regulator honestly, I don't have the answer. We have already taken our part as it was explained by Gianfranco a few minutes ago. We have an significant increase in the net working capital. There is no, of course, counter risk because we move from the commercial company TOSEA that is a government entity. So honestly, you should raise this question either to the regulator or to the commercial company to ask what could be the solution. Honestly, I don't have anything to tell you about that. Similar on the second question, the new government and the tenders, we have not started to talk with the relevant person in the ministry about the gas tender. I think the competition law has been already issued.

So let's see the results. As I have anticipated already in July, we should see some signal in the next month. You cannot have an immediate signal about something that will change the speed of the tenders. And now moving to the third question. As for this year, we have only one tender that we are going to submit that is the offer that we are going to win that is the mini miniate where we are not present and that is the only tender that remains open and it should be unless there would be some delay additional delay as of today, is expected the submission of the offer by year-end. Regarding other M&A, I think we have announced the acquisition of the a [indiscernible] we are expecting the closing openings in the next weeks. And that is the only then that is already new. It's already has been already announced at the market when we signed the SPA. For us, it's also an important acquisition because it will complete our Sardinia strategy covering the last of the biggest cities in Sardinia because that covers the Olbia distribution. Ergewas the only one big cities in Sardinia that was not covered by our operations.

[Operator]

The next question is from Bartlomiej Kubicki with Societe General.

[Bartlomiej Kubicki, analyst]

Two areas of discussion, I would like to open please. First, on CapEx, namely, if you can tell us what CapEx inflation you are seeing and whether you -- if we can confirm that all this inflation will be passed on to RAP, meaning the regulator will approve all the increased CapEx versus, for instance, your plans to 1 or 2 years ago? And consequently, think this inflation will actually have a positive impact on your next CapEx plan you will announce. On the other hand, we will also speak about CapEx. Do you think there are any risks that the high elevated gas price could somehow slow down or rationalized or cut on gas distribution CapEx investment, both in Italy and Greece. So that would be the first thing. And the second thing on the allowed WACC, on my estimates, there will be no reset of the allowed work for FY '23 if you look at the mark-to-market and the threshold imposed by the regulator.

But I wonder if there is anything else and sort of think you can somehow negotiate with the regulator that look, I mean, the yields have massively increased the cost of financing, at least on the spot market has massively increased. Maybe we can renegotiate the formula for FY '23 to capture that increase. And in a similar fashion, you mentioned you described perfectly how your cost of debt will gradually and slowly increase. Although also if we look at the regulatory framework in FY '25, you will most likely have a cut in the allowed cost of debt. So consequently, the gap will widen. But I also wonder if there is anything you can renegotiate with the regulator saying that the current cost of that formula is too much focused on historical debt and whether this get between actual potentially, assuming yields stay where they are, the actual cost of debt and the allowed cost of that sort of the underpayment whether this could also have a negative impact on your future investment.

[Paolo Gallo, executive]

Quite complicated questions. let me say, mainly related. On the first one, on the CapEx inflation, if I well understood, so if not otherwise interrupt, I mean that is not in the flat that applied to the RAB, I think is going to be applied starting from January 1, 2023 on our RAB at the end of 2022 is for 4.1%. As you know, there is a delay as well as the inflation on the OpEx, but we are capturing, let me say, these are inflation in our RAB. So our RAB will increase by the amount that I told you about deflator.

[Bartlomiej Kubicki, analyst]

If I may, because what I meant precisely is the inflation in CapEx. So let's say, the steel prices are up, whatever, 50%, and your pipe costs are up 50%, whether everything will be approved by the regulator and will be added on up or actually in the high inflationary scenario.

[Paolo Gallo, executive]

I understand. Okay. We stopped you otherwise, you put too many, and I cannot -- the point is very clear. And probably I was not. I thought that you were talking about the flatter on the [indiscernible]. Let me say, first of all, and I'm underlining 3 times, we have not experienced such big inflation in our contracts. So first of all, I don't have that problem. In other terms, whatever activity I'm doing right now, intermedia material or other activity, we have not experienced such big inflation, like you mentioned. You need to look at details of what activity we are doing. They are not so related to the energy consumption.

The second one is if the investment is relevant to the RAB to our network is we will flow into the net well flow into the RAB. So we don't have that problem. So we don't have the problem of inflation, and we don't have the problem to have a recognition from the regulator. As long as our investment respect the rules of our regulation they will flow in the RAP. Then you have mentioned another element that is linking, I don't know the inflation to our future investments. Honestly, what we do when we plan our investment is that we plan our investment based on the need on network based on the need of our the digital transformation. As I told you, we still have not experienced such big inflation on our investment.

The last one, it's true that the we have always breadth we will not have any trigger for 2023, what we're mainly saying. I don't like, honestly, really, I don't like to renegotiate or to go and renegotiate a structural former that has been issued by the regulator. Because today, I negotiated to increase, but tomorrow we asked to negotiate to decrease. So I prefer to stick on the rules. Rules are those one. You may like it, you may don't like it, but those are the rules. And to me, what is important is that we are consistent with the rule. So if the inflator is 4.1%, we apply for 4.1% on the RAB.

If the rule says that the trigger is not working because we have not passed the 50 basis point, it's not working. I share, for example, your point of view that the cost of the debt is too much linked as an evolution to the past and not to the future. But still, I mean, we have expressed during the consultation period, many doubts about this way. But at the end of the day, we need to accept the rules today. So I'm not and I will not encourage any one of our organization to try to renegotiate something that has been agreed and approved and put on the market. Those are the rules of the regulator. Now, for example, on the inflation, we didn't have in 2022 any significant increase, both on the RAB and 0 on the cost, we will recover because there is a time delay. So my point to you is very simple. I prefer to stick on the rules and to be consistent with them. That is the basis for a regulation that would be recognized also as a stable one over the years.

[Bartlomiej Kubicki, analyst]

This is super clear. And one maybe question, which was not answered, on your view whether high gross gas prices could somehow put at risk future investment into gas distribution because...

[Paolo Gallo, executive]

Yes, you're right. You're right. I would note, but I correct. I will respond to you with a single number that has been recorded in the first 9 months of this year. Gas reduction in the first 9 months has been minus 2.6%. I was fairly say 0 because that is not even being corrected by the temperature, so by the degree ,o what I'm expecting, first of all, gas prices are going back. We are below EUR 100 per megawatt hour on TTF. So we are going back. Our, let me say, sector has been extremely resilient in terms of gas consumption, and the numbers are demonstrating that. So of course, we consider all that, and we think that our best reaction to what you said is to be as much as efficient as we can, and we have demonstrated to be able to do that because always remember that this efficiency that we are recording our costs sooner or later will be passed to the final tariff.

[Operator]

The next question is from Emanuele Oggioni with Kepler Cheuvreux.

[Emanuele Oggioni, analyst]

The first one is on Greece. Maybe it was already partially answered, but I'd like to understand better what is your feeling on the new regulatory framework in Greece to be set up by the grease regulator by year-end to be applied from 2023 onwards. So we could expect a confirmation or an increase in the allowed WACC or I don't know, other positive or negative regulatory items such as auto basics, et cetera. So if you put out more color on that, is possible? This is the first. The second question is still on Greece included in the Epadel, you get also not regulated in noncore assets. I wonder what is the value you paid for this and could be also the value you could extract from them? I suppose you will sell these assets as soon as possible next year.

[Paolo Gallo, executive]

Okay. Let's start from the regulatory framework. Let me say that the studies that we conducted with the support of external consultants shows us that the WACC should increase, then there will be a matter of how much. But considering that the work in Greece is different from the Italian WACC because it contains the inflation sorry, again, it went out. So let me start the again. We have problem with microphones. So I was saying, with the answer to the question about the new regulatory framework.

All the studies that were conducted separately by the 3 DSO with the support of external consultants show us that the new WACC should increase in respect of the existing one because you need to consider that the WACC in Greece contains the inflation, and therefore, with an inflation situation like we are in with increased interest rate cost that should bring a higher work in respect to the previous one. How much that is the matter of discussion with the regulator. You probably know there will be some also discussions with the difference between the revenues accrued with the revenues that were supposed to be accrued, and then it's going to flow into the new 4-year tariff.

So the regulation is different, of course, from the Italian one. But let me say that as of today, the initial discussion with the regulation, we saw with the authority has been extremely positive. And therefore, we will see the numbers. For example, one of the first element that we will see is the result of the consultation. So what the stakeholders in Greece are thinking about the development plan that were submitted in the by the 3DSO. Let me say, honestly, there are you say noncore assets, and I'm referring mainly to the optical fiber that they have. How much we evaluated them during the offer, I would probably say 0.

I mean it was too small and too difficult to make an evaluation. They will create value in the years to come. I would probably say, yes, how much, honestly, we don't know. I mean, today, in Greece, we are focusing on what is important for us, that is the development plan, the business plan to elaborate the tariff and the WACC. Those are the 3 pillars in which we are focusing ourselves because that will determine the tariff for the next 4 years. It is more important. Then probably few months down on the road, we will probably consider how to extract value for any other noncores that these 3 DSOs have in their perimeter of activity.

Let me say that there are other potential. We have already helped one of the 3 DSO, the one that is called data. We have helped them to engineer and then we will soon to build an LNG tank to support gas distribution in an area where the transportation is not available. So there are already areas where we can create value, bringing our knowledge and competence to them think about also Biomet and can be another area where we can support them in case there are biomitamplan to be connected to the grid and other things like that, I think that is the area where we will probably create value, bringing what we have already done in our company. Think about smart meters. They have a very limited number of smart meters in operation. We can bring our experience in the last technology about the smart meters. So I think that we can create more value leveraging technologies and competence that we have developed in Italy to help them to move forward much quicker towards the digital transformation. And then as an add-on, maybe there are some noncore from which we can extract some value .

[Operator]

The next question is from James Brand with Deutsche Bank.

[James Brand, analyst]

I just have one question and that's on deeper. I remember that at the time of the acquisition, obviously, I think I remember, hopefully, I'm not misremembering. I think you said that you expected to get to outperformance in that country, to outperform your allowed return. And obviously, there's the question as to what your allowed return is going to be. I was just discussed in some of the earlier questions, but I was just wondering whether you still felt that you could outperform your on return and how long that would take? And then also what the risks are around that? Because I used to cover PPC actually, but I don't quite understand as well as in the Italian market, what the rest are in achieving that in Greece, maybe you could flesh out if there are any risks what they are.

[Paolo Gallo, executive]

Well, it's difficult today to say that we will outperform the, let me say, the current return on DEPA, how much I can tell you that we will outperform then honestly, to say the number is difficult is absolutely difficult to say. Why I'm saying I'm quite sure that we will outperform for the reason that I told you before in the previous question, we can bring technologies competence. Let me make another example that I did not mention to you. In the second half of September, we have already sent our cars with Picato Technology to start leakage research in the area of Alten. And then will bring our performance in a sense, they don't have the technology. They are using all the terminology, so we can help them to reduce the leakages to improve the efficiency of the system. And there are many areas where applying our new technology to them, they will outperform the results. You need also to consider the way that is set the regulation, they fixed the tariff for 4 years.

And then based on CapEx allocation CapEx development, CapEx based on investment and based on the costs that were, let me say, agreed between the regulator. The outperformance of the return is based on our ability as in Italy to spend to have costs that are lower than the amount recognized. And then the sooner that you will be able to do it and the longer you will keep it for you. Because then after the 4 years, the regulatory period will again, will go through again to make the account what you have recorded in the first 4 years.

So again, our objective today is to put in place as soon as possible, what every tool that we have in order to make them more efficient already in 2023 in order like you said, to outperform the return. We are quite confident to be able to do that, but we have just started working. So let us work in for a few months. And maybe we can give you more numbers of flavor one that we have already some experience some onto the experience down there.

[Operator]

The next question is from Davide Candela with Intesa Sanpaolo.

[Davide Candela, analyst]

I just have one actually, and I was wondering if management could share it's view about what has been proposed in Europe for as the energy crisis. So what basically are the solution for the management if they are going to prepay or not.

[Paolo Gallo, executive]

No, I think that's really a general question. As I already said, and that probably the best measure, unfortunately, is not yet used is the price cap on the gas. And the demonstration that was the right measure that every time that we were close to then the price of the gas immediately fall and to me, this should be the most effective way, is the most effective way to reduce not only the gas price, but as you know very well, because of the system marginal price in place, they will immediately have a positive effect in terms of reduction on the electricity price. Unfortunately, at the European level, they have not reached this agreement yet. Hopefully, it will be reached. It's should have been already applied since a few months when our government proposed many months ago that is unfortunate, but it's still late than never. So I'm still convinced that it's the best option that we have as a European Union in order to keep, let me say, a cap on the -- not only on the gas price, but also on the electricity price.

[Operator]

[Operator Instructions] There are no more questions registered at this time. I'll turn the conference back to you for the closing remarks.

[Anna Scaglia, executive]

Okay. So thank you very much for everyone attending. As a team, we will be available whatever you might need. And thank you, and have a very nice day. Bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.