Italgas S.p.A. (IG) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Italgas 9-Months 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Anna Maria Scaglia, Head of IR. Please go ahead, madam.

Hi. Good afternoon, ladies and gentlemen, and thank you for joining us. Today, we will walk you through Italgas 9-months results. I'm Anna Maria Scaglia, Head of IR, joined by Mr. Paolo Gallo, our CEO; and Mr. Gianfranco Amoroso, our CFO. We will address any questions you might have at the end of the presentation. I leave now the floor to our CEO, Mr. Gallo.

Good afternoon to everyone. Paolo Gallo speaking. Let me start with the presentation saying that this is the 19th quarter of continuous growth. And I think it's a great achievement. We started that growth back in the first quarter of 2017. We are in the third quarter of 2021, and every quarter, we were able to increase our results. And when I say our result, of course, I'm thinking about the net income, the net profit. Let me give you -- before getting into the numbers, let me give you also an update about the situation of the COVID-19 in our company. We have brought since the beginning of September back to our office all our staff and with the implementation of the Green [ plus ], we even increased the numbers of the person present in our offices. At least, we have personal present at least for 2 days a week, and this number will grow until the end of the year, increasing the presence of our personnel in the company. Now let's take a look at the results. So I'm going to Page #2. And there is a summary of the result revenues, EBITDA, EBIT and net income. And despite the effect of delibera 570, that represent another EUR 6 million reduced due to the factor, we were able to report a strong growth in the first 9 months. And that is mainly thanks -- mainly driven by our significant RAB growth and the RAB growth is mainly thanks to the investment we concluded last year and the year before. We've also noticed higher revenues coming from service to clients, and that is what we expected considering that, last year, we were -- you know very well, we were limited by the services we were able to provide to our customers due to the lockdown. On the contrary, we have recorded very few, very little tariff adjustment in respect of previous year. All in all, that has resulted in a net income growth that is double digit in respect of last year results. Let's slip -- move to Page #3. We recorded, again, an under number in terms of investment, EUR 630 million, higher in respect of last year by 10%, mainly driven -- we will get into details in a moment, mainly driven by digital transformation and network repurposing. Our operating cash flow also was up by 21% in respect of the 9 months of 2020. I should recall, everybody, that during the first 9 months of 2020, we put a big effort in supporting our supplier, and therefore, we had an impact in 2020, negative in terms of cash flow. Now we are back to the normal operation, and that's one of the reasons why our cash flow is higher than last year. Net debt increased. It's a seasonal increase. So it's something that we expect. We reached EUR 5 billion of debt. And of course, that is due to the very high CapEx investment that we put in place in the first 9 months. Before getting into the details of the economic number as -- let me say, we included also number about the ESG KPI. It's the second time. The first time we presented was in June with the result of the first semester. And now we are using this approach every quarter. So every quarter, you will see also the ESG KPI numbers. So we are going to -- in Page 4, there is the Scope 1 and Scope 2 emissions in comparison to the last year. And the following page, we will look at the energy consumption. As -- let me say, as overall, we have seen a slight increase in the Scope 1 and 2 emissions. But we need to look more carefully about this number. The reason being is that we have seen, in the first 9 months of 2021, significantly increase in the gas injected into the grid, plus 11%. That is a huge number, if you think about. So considering the increased volume, we have, in fact, recorded less leakages than last year. It's a remarkable number, the fact that the gas leaked over the gas injected is at 0.92% in reduction in respect of last year by 4%. And in fact, all other KPI relevant, like the gas leaked per km surveyed is down by 7%. So that is the -- so the main driver of the increase of greenhouse gases emission is the fact that the volume of the gas injected significantly increased in respect of last year. Regarding civil industrial consumption and vehicles, the increase is negligible. And regarding the vehicles, the increase is mainly driven by the higher kilometers that our fleet did during the first 9 months, and mainly because, last year, for many months, we were -- everybody were in lockdown. The good thing is that the use of CNG moved from 84% to 92% and the result is particularly significant in the reduction in the particulate per kilometer that is down by 23%. And you know very well, how this dangers the particulate emission, in particular in the big cities. If we look at the energy consumptions on Page 5, again, we see a similar picture. The only driver of increase is the vehicles. As already explained, 15% more of kilometer traveled was reflected into 40% increase of energy consumption. While the other element, either they show negative, so reduction or negligible increase. Again, if we look at the numbers that are considering the volume of the gas injected that is increased by 11%. You will see that the gas heat for freed consumption is the same of last year. Normally, if you increase the volume of gas injected also the increase of gas -- you normally have an increase of gas for freed. But in that case, it didn't happen because we put in place new equipment that was able to reduce the amount of gas needed. And you can see also that the net electricity, despite less smart working in respect of last year, the office management increased in terms of better management, reducing the electricity need. So let's go back to our economic numbers. On Page 6, we show you breakdown of the CapEx. As you can see and this is a trend that it was already clear in the first 6 months of this year, we have an increase investment in digital transformation and digitization of the network and repurposing of the network itself. Despite -- in the case of digitization, despite the fact that the amount of smart meter replace is significantly lower than last year, we are struggling just to replace the last, let's say, 100,000 of smart meter left, traditional one, that of course can you imagine are probably the most difficult to be replaced because maybe we don't find people available for replacement. Those are maybe in houses that are not for the full year occupied by the person. Sardinia, we show a decrease. Again, the reason being is that the Sardinia network is getting closer to the completion. We have reached 900 kilometers of native digital network. I should remind you that our objective is 1,100 kilometers also. We are very close to that. In general, in terms of new pipes, we were able to add, during the 9 months, more than 500 kilometers of new pipes. The number -- the current number is 545 kilometers. And we replace 645,000 old meters with new smart one. If we look at the -- if we skip the page and move to Page 7, it's a page that you have already seen in the first 6 months. It's the bridge between reported number and adjusted. The difference, again, is the cost of the bond buyback that happened in February. So nothing new in respect of the first 6 months. So I'm not commenting this more than that. Let's look at the overall profit and loss account on Page 8. The comparison is between the first 9 months of 2020 adjusted with the first 9 months of 2021 adjusted. As already anticipated, despite the effect of the delibera 570, EUR 6 million less in respect of 2020, the higher revenues were -- are mainly driven by the RAB growth, nearly EUR 15 million; additional client services, EUR 11 million, and that's new in respect of the first 6 months; higher contribution of the energy efficiency company, Seaside, more than EUR 10 million in respect of last year. Overall operating expenses decreased by 2.7%. We will analyze that in detail. Regarding depreciation and amortization, tax rate, it's an area that will be explained in a moment by Gianfranco. As I said before, all these resulted in a robust increase of more than 10% in reported net profit for the first 9 months. Let's take a look at the revenue that are described in Page 9. As I said, we had a very strong growth driven by the RAB. It is nearly EUR 15 million out of the EUR 21 million that you see in the first column. Then we have other regulated service revenues increased by a combination of factors. The majority -- the major factor is the services to the end customers, EUR 11 million more, and that is -- I would say, was expected compared to the 2020. Remember that we had many, many months in which we were not able to provide any services except the minimum one. The other good element is that the incentive regarding gas leakage increased by more than EUR 2 million. And that is -- let me say, is the economic effect of what I told you before about the fact that the gas leaks per kilometer surveyed significantly decreased by 7%, and that's the reason why our incentive on the other side increased by EUR 2.2 million. The rest of the business contributed by more than EUR 14 million of incremental revenues, out of which EUR 12 million are coming from energy efficiency, so from Seaside and [indiscernible]. It's our company, Sardinia is selling natural gas and LPG. I would underline in particular, the acceleration that happened in the third quarter. So in this quarter by our energy efficiency business is something that we have been working hard during the first 6 months, pushing in particular, what is called the 110% bonus. And now we are starting getting the first results. We will see in the last quarter even bigger result. All these numbers were offsetting by EUR 6 million of the delibera 570 is the X factor application. And the other one is that, in 2020, we recorded very high adjustment tariff that represent -- that -- it represented in 2020 around EUR 15 million. The following page, by Page 10, you see the same description of the revenues as the usual table divided between distribution, tariff contribution for meter replacement that is in line with last year and the other distribution revenue that I have -- and the other revenues that I have just commented. Let's take a look on the cost side. So let's take -- let's go to Page 11. As I said before, overall expenses decreased by 2.7%. So you can say, well, it's a nice result. And I would say that probably it is the result, the sum of 2 different situations. The first one, a significant cost reduction, what is -- what we call like-for-like 4.5% in respect of 2020. So EUR 11.8 million is the reduction we recorded in the first 9 months. And from the other side, we recorded an increase of cost in the energy efficiency business. Remember what I told you before, we had a significant increase in revenues. And of course, we are having also a significant increase in cost. And if you compare the 2 numbers, the significant, there is more -- there is a margin higher than 20%. So significant margin that is, let me say, usual for this industry. Finally, we recorded lower energy efficiency certificate by nearly EUR 4 million. Looking at the following page, that is the table of the cost, it's a different perspective. So you look at this cost based on the sector. So in the upper part, there is the distribution -- the cost related to gas distribution, so either the net labor cost and the net external cost. And as you can see, both of them are showing significant reduction in respect of last year despite the growing perimeter. And then all the other activity, so mainly, let me say, mainly the energy efficiency activity are reported down. And in that case, you see a significant increase. But again, I'm expressing the fact that we have seen a very huge increase in revenues. And then of course, you have the energy efficiency certificate and the concession fees that show a small increase, but this small increase is mainly driven by our investment. Our investment increased the RAB, the RAB increased the revenues, and because our concessions are linked to the revenues, then you expect also an increase on the concession fees. Now I will let Gianfranco to take the floor in providing explanation about the remaining part of the presentation. Thank you.

Thank you, Paolo. We are now on Slide 13. Looking at the EBIT. EBIT in the 9 months reached EUR 431 million, up 7.3% year-on-year. As you can see, there are 2 main elements in this increase. The first pillar is the increase in the EBITDA of EUR 34.7 million due to an increase in the revenues of EUR 27.7 million and lower cost, lower OpEx for EUR 7 million that we have already commented previously. The other element is an increase in the G&A pillar of EUR 5.5 million, which is mainly driven by EUR 60 million of higher network depreciation, which comes around EUR 12 million. And the remaining is metering and [ ICT ] depreciation in the last 12-month investments. Then we have a drop of EUR 14 million in accelerated depreciation for meters replacement. We move now to Slide 14, commenting the net income. Adjusted net profit after minorities reached EUR 274 million, up 10.5%. Net adjusted financial expenses were EUR 40 million, excluding, of course, the EUR 6.4 million of the liability management upfront costs. This positive change in the net financial expenses compared to the last period is the result of a lower cost of debt that now is a touch below 1%, combined with an higher average gross debt. Income from associates increased mainly of EUR 1.1 million, mainly due to [indiscernible] for EUR 0.8 million. We have then adjusted income taxes of EUR 106, with a tax rate of around 27%. The tax rate is slightly below last year levels, mainly thanks to the positive effect of fiscal benefits related to depreciation of super [indiscernible]. On Slide 15, we can comment on the cash flow. Cash flow from operation amounted to EUR 534 million; generated by a net profit of EUR 282 million, group and minorities; and the net impact of depreciation and other noncash items for EUR 270 million. Working capital was slightly negative for EUR 19 million. About the working capital, the working capital contribution to the cash has been positively impacted by the billing seasonality of our business for around EUR 58 million. On the negative side, we reported lower net debt payable for EUR 44 million and higher by certificate receivable for [ 35 ] As you can see, these effects can be considered as temporary, and we expect a neutral-working capital position at year-end. The net cash generated allowed us to almost cover the effort in technical investment that absorbed around EUR 591 million carried out in the 9-month period. Dividend payment of EUR 241 million explains most of the change in net debt of EUR 302 million as usually absence in this quarter figures. Finally, to explain the net debt change reported in the 9 months, we have to add to the EUR 302 million of net debt EUR 16.5 million of debt assumed with the acquisition of [ isgas 33 ]. Moving to Slide 16 and commenting our debt structure. The debt structure at the end of September highlights a low interest rate exposure together with a very extended duration. I remind that our bonds average tenure is 7 years. And on top of that, we benefit from the tenure of the EIB loans expiring up 2037. As already highlighted last July, our refinancing needs are now very low, thanks also to the liability management of last February. We are currently working to get ready to take advantage of sustainable financing options. As demonstrated by the 2 fixed rate ESG-linked loans, 3 years tenure recently closed for a total of EUR 500 million. On top of that, on the other side of the balance sheet, we maintain a significant amount of cash and cash equivalents for around EUR 700 million evaded on bank accounts and time deposits with a leading financial institution. As a result, notwithstanding the increased volatility in the financial markets, company can continue to leverage on one of the lowest average cost of debt of 1%. Now moving on the Slide 17 and the balance sheet. On that simply, the net invested capital amounts to almost EUR 7 billion, with an increase of almost EUR 365 million compared to the end of 2020. Most of this is due to fixed capital increase of EUR 293 million, driven by CapEx of almost EUR 630 million that we have already commented. On the liability side, consolidated net debt was EUR 4.987 billion, excluding the IFRS 16 impact, which gives us EUR 68 million. So with an increase of EUR 327 million compared to the year-end of 2020. Now I hand over to Paolo.

Thank you, Gianfranco. And we are toward the end to open the -- to open the questions -- the floor for the questions. But before doing that, I would like just to close with few remarks. The first one, that is a great remark. You have already read it several times on the newspaper is that we have been selected as a preferred retail for the infrastructure that happened in early September, the process of -- that will get us to closing is moving on. And we expect -- we hope to have the closing by year-end, maximum, beginning of January. Results that we have just showed to you has shown for another time or better for 19x our strong industrial capability. And it is the second quarter in which we reported the environmental performance that is not very usual in the market in particular, in our industry. We are waiting to receive -- to -- we are waiting for the publishment of the second consultation document by ARERA. This should happen in the next couple of weeks. And of course, we confirm our overall targets for 2021.

We are now open for the Q&A. Operator, please.

[Operator Instructions] The first question is from Harry Wyburd of Bank of America.

Three of them. So firstly, and I apologize if you've mentioned this before, but I don't think it was covered on the call. Could you give us an expected level of net debt at year-end this year, assuming that the depo transaction closes by then? I don't recall whether you mentioned that on the [indiscernible], but I don't think you did. The second is what's your appetite like for domestic acquisitions after depo? So does your balance sheet still have headroom to pursue small bolt-on acquisitions in distribution? And then the third one is on the regulation. So I just wondered whether you'd had any updated discussions with the regulator and when you expected the next regulatory update to be published, I believe it was due to be in October and then whether you think the gas crisis will alter the potential outcome here. So do you think the regulator is going to be more reluctant to give you a good allowed return just because of the focus that we have on affordability everywhere in Europe at the moment?

So if I well understood your question, which is our expectation for the net debt, not considering the acquisition of [indiscernible]. We...

Including the acquisition, if it closes by year-end. which I believe, is the [ game ].

Let me say, okay, I will tell you and then if it's not satisfied, you can reply. We expect to stay below EUR 5 billion by year-end, not considering the expenditure for data because even though the closing will happen by year-end, maybe. I said maybe by the other end, beginning of June, which is our appetite for domestic acquisition. The appetite is there. We still have room in our balance sheet to provide domestic acquisitions. So we confirm our interest, we confirm our interest in domestic M&A. Also considering the fact that -- and that will be updated in the next industrial plan. The fact that tenders are another time, the time schedule has been delayed. So we don't see what we expected to happen in 2021, '22, may probably be further delayed. So the domestic acquisition, we are very much interested, and we have room in our balance sheet. Regarding the regulation, as I said before, we expect the second consultation document in Maxim in a couple of weeks, maybe a week time. The second consultation document, as you know, reflect the first consultation document issued by the ARERA and all the comments evaluation provided to ARERA by the different stakeholders. So not only by the gas distribution operator, but also by customers, by institution whoever wants to write about that. It is welcome and the regulator will consider and will issue its point of view based on that. You connected and the connection does not exist, the regulation decision with gas crisis. I have to remind you what was the weight of the distribution use cost into the gas bill. It was before the gas crisis, or better before the increase of the gas price commodity, it was around even probably less than 10%. So it's the -- with the previous gas commodity price, we have not made the calculation now, but with the increase of gas commodity price, that percentage is going even down. So honestly, there is no connection. First of all, let me say, from an official point of view, there is no connection between the two. Honestly, I don't see, let me say, any significant impact on the gas bill just by the cutting of the WACC. That is what you didn't say, let me say, straightforward. That is what I understood. There is no benefit from that point of view. On the contrary, a significant cut in the WACC may result in -- may result in all the sector, not only ours, so gas distribution, electricity distribution, gas transportation, electricity transportation and maybe a significant investment plan reduction. And let me say, I have mentioned, the delibera 570 that started to produce effect at the beginning of 2020 has already accrued only for Italgas. If you remember, in 2020, we recorded revenue reduction by EUR 45 million, combination of all was contained in the delibera. And then this year, we are going to record another EUR 8 million reduction. So the EUR 45 million, it's already, let me say, also in the number of 2021. So the effect of the delibera, only of ours, in 2 years has been EUR 45 million, 2020; EUR 53 million 2021, and the X factor will continue to produce effect in 2022 and onwards up to 2025. So I think we are giving back to the system our ability to reduce the cost. So we have -- I think, we have already given what we achieved in 2018 and before, we are giving back to the system in reducing our revenues.

The next question please.

The next question is from Javier Suarez from Mediobanca.

Three questions. The first one is on the recently-signed ready-for-hydrogen initiative. And most of the European largest gas DSO has signed this initiative. So you can give an update on the reason why this initiative has been signed, the role that this may have to promote the higher investment on the gas distribution network to help with the carbonization, the impact that this may have in a company like Italgas, and any conversation with the European Commission on this? Any update on that would be very helpful. The second one is on the Italian regulation or modern regulation discussion with the new administration, I think that the CEO has mentioned that during his presentation. Still, there is no action in the tender -- so significant actions in the tender. So the question for you is on your conversation with the government and administration, what is likely -- what do you think is more likely to happen that could materialize in a significant increase or acceleration in the optional process? And if it does not happen, and that is maybe linked to the one of the previous questions, if you may substitute that lack of tenders with a more proactive M&A strategy? And the final thing is on cost cutting. I think that you mentioned during the presentation that operating costs are down by minus 2.7%, that I think is significant. You can give us a guidance by the year-end?

I mean it will be surprised to hear from the first question, why we should be enrolled in the hydrogen? Come on. I mean the gas distribution network is by far the most extensive one, by far in respect of transportation. If you don't involve the gas distribution network, you will never be able to develop [Audio Gap] These renewable has -- well, has to be, can be converted into hydrogen production. And normally, you don't ever centralize hydrogen production. On the contrary, you have a decentralized hydrogen production. You need to have the gas network distribution ready to accept hydrogen. Third and last, just to be very short, that is the position of the European commission. We have several times with Kate symptom. We have talked with France, Timmermans cabinet. We have talked with different other European Commission representative. And all of them are just saying by 2050, 40% of the energy will be supplied by gas, different gases, low-carbon renewable gases, hydrogen. But they also said to do -- to achieve that objective, we need to have networks, talking about gas distribution network, flexible, smart and digital to be able to handle all those gases. And that's the reason why. So those are the reason why all the DSOs in Europe have signed an agreement, the one that you mentioned, because we are working all together to study and to test the hydrogen in our net source to be ready by the time or by the year in which either we will be in the hydrogen economy. But we will never be there if the gas distribution network will not be ready to accept hydrogen and other gases. On the tenders, honestly, I can always repeat my answer that I gave many times. There is -- there are blocking elements about the tenders we know very well. And until those blocking roads are not removed, then the tenders process will go slow and slow. I imagine that the application of the delibera 570 that is in place already by the second year, and any kind of reduction of work that the regulator will put in place will increase the pressure towards the small operator, and therefore, we expect some M&A opportunity to happen. Regarding the cost cutting that you have mentioned, we have reduced, on a like-for-like basis, as I said before, our cost by nearly EUR 12 million, 4.5% less. I mean you look surprised about our ability to reduce the cost, but we have been able to do that for 19 quarters. And as I explained, this is the result of the digital transformation we put in place. The fact that we are able to handle the smart meters remotely, the fact that, thanks to the digital equipment we put in place and thanks to the heavy investment we made in the last year, now our network request less maintenance than before, even if it is even more safety than the past years. So I mean, we cannot identify one single element to explain the cost cutting. The list is very long, and the list is driven by the fact that our attention on the cost is extremely high. And digital transformation that we put in place is helping to even further reduce the cost. So there is no -- I mean, we have not said, okay, we have cut, I don't know which one thing in our company. That is not true. That is what we have done at the beginning of this journey. Now we are working hard on any element of our cost, and we are supported by the digital tools that we put in place. I will give you just a small example. Just to give you the idea where all this cost reduction is valuable. When we have replaced all our personal computer with the MAC. We have seen the first quarter -- in the first, let me say, 3 months, an incredible decrease in terms of calls in our center to help our internal customer. And that has been a result in cost reduction. We didn't have to add so many calls to fix the problem on the computer. So again, that is maybe it's a very small example. But in an example, how the digital stuff that we put in place is helping us to reduce the cost.

Next question, please.

The next question is from Enrico Bartoli of Stifel.

I have 2 left. One is related to the revenues increase that you reported in 9 months related to the energy-efficient business. If you can provide us some details of the drivers for this increase. And what you expect over the coming quarters and particularly the opportunities that you see in this business for Italgas? And if you are considering also some additional M&A in terms of increasing the size of the energy efficiency within your business portfolio? And the second one, I would like to go back to the question of Javier regarding the gas concessions. Actually, as you mentioned, the process for the tenders is -- actually is not starting again despite the simplification decree that was approved by the government. If you can give some flavor of the discussion on you and the industry as a whole is having with the government for additional measures, considering that, I think that, on many sides, there are complaints that, so far, the measure approved that were not effective.

So on the first one, on the energy efficiency. 2021 as representative for us a big change in the energy efficiency business. The previous year, we had a significant titles, let's call, energy efficiency certificates still available from the coming -- from the past years. In 2021, they went practically to 0, so they ended up their life. On the other hand, we didn't have any of the, let's call, super bonus, let's call it, super bonus activity in 2021, and the majority of that materialized in third quarter. Just to give you an idea that we had, in the first 9 months, mainly in the third quarter, more than EUR 11 million of revenues coming from the super bonus activity. We still in our pipeline, a lot of activity. Just to give you an idea, our portfolio consists of about more than EUR 150 million of potential contracts. So it's a significant number. We will see which are the -- it's a portfolio that have -- will not materialize completely because maybe the time needed to get to the -- to respect the time line given by the government may not be met. So we will abandon that project maybe the project will be abandoned by the promoters. But still, if you think about that, we have EUR 150 million, EUR 160 million of potential portfolio, they give you the idea of the magnitude of the activity created by the super bonds. And we are focusing on that. With -- regarding the M&A, as you know, we are getting close to the closing of the [indiscernible] transaction that will add another, let me say, piece of the energy efficiency, tool we call the condominium. [indiscernible] is a well-established energy efficiency company in the Northwest of Italy, and the main customers that [indiscernible] has are the condominium that was, let me say, something that we didn't have either in Seaside or Toscana Energia Green. So they are adding a new, let me say, business area and the condominium are the kind of customer to which the super bonus is particularly -- for which the super bonus is particularly interest. Regarding the tenders, really, I don't have any more words to say. It's difficult because, let me say, the key elements to be -- the key elements that are blocking the tender process is clear. It was also clear the solution. We need to wait to have the solution in place before saying something more. Really, to me, honestly, I don't have -- I cannot add any flavor in respect to what I have told you several times.

Next question, please.

The next question is from Stefano Gamberini of Equita.

Three questions also from my side. The first, according to the press recently, it meant that several countries supported the possibility that the gas might be included in the taxonomy regulation and probably the European Commission should issue a new document by [indiscernible]. I don't know if you have some thoughts about this, and what you expect on that. The second question regarding also regulation topic. The regulator, the Italian regulator said that had many meetings with the operators on the WACC. So I don't know if you could share with us what were your main comments on the first consultation paper with the regulator in order to have an idea of what could happen in the next consultation paper. And the last one is just an update on Naple, the situation on Naple 10, what is happening after your challenge to the administrative court?

Stefano Gamberini, you don't believe me.

Yes, I believe you.

I always told -- no, I always told you that the gas is going to be part of the taxonomy. Now you're asking me my comments about -- the fact that you have read. I would say, I told you many times in the past, you did not believe me, and now you're asking me a question. I always said that gas is essential in the transition -- in the energy transition, and infrastructures are essential in the transition, of course, but also in the future. So -- and I already told you many times talking about taxonomy that based on the conversation that I had with the European Commission, if we do the investment, the right investment in the gas infrastructure, they should be recognized as a taxonomy compliant because those investments will help the infrastructure to support the energy transition. On the regulation, there has been one meeting open to everybody between the regulator and all the stakeholders. We provided to the regulator all our comments. My position is that if the regulator will reduce the WACC with a significant number, we may have effect on our investment. And we are just waiting for the second consultation document to be published to read what they have received as a comment by -- not only by us, but by our industry, by other stakeholder and see how they have reacted to the comments that I received. To Napoli, they just told me that there should be -- the first round has been issued -- the first, let me say, yes, the first round has been issue, has not been in favor of us. But for me, it is like a football match, football match, they have a first time, and the first time is finished. We are going to have a second time. Then, normally, if you end up to be 1:1, you will continue with supplementary and then there will be the [indiscernible], the extra time, and then there will be the final penalties to be -- so it's going to be long. I'm still confident, and I -- and maybe you don't believe me like in the past, Stefano Gamberini. I'm still confident that our offer is the best. But then I will let -- I'm waiting for the final judgment. I'm not commenting the interim one.

Okay. Just a clarification because your challenge was the regional administrative court. So there were some issues from them because I think -- if I understood correctly, yes, we're waiting for...

Yes, we just received from the court of Naples the documents. It's 40 pages, so I didn't read it at all. I just read -- I normally go to the top, to the end to say, which is the result that is not in our favor. Having said that, that is just the first time of a long football match.

Next question, please.

[Operator Instructions] The next question is from Robert Ranieri of Intesa Sanpaolo.

A very quick question on the M&A outlook in the regulated business in the gas distribution business, in particular. My question is, if you see any changes of opportunities, I mean, the delibera on the X factor probably could be very negative for small operators. But probably the small operators will need time to realize that on the P&L and also other drivers could be also some -- like probably the difference between the industrial value and RAB value, if any. So I'm wondering, firstly, if there are also other drivers like [indiscernible] revisions, for instance, which could make some shake on the small operators, opening opportunities for you in the M&A. And if you -- and my second question is, if you are experiencing a kind of change scenario in this period.

Let me say, we had -- I got the first question. The second one, the line was terrible. And so I get, let's say, 50% what you said. So maybe I'm going to explain the first question and then the second one, maybe you can repeat.

Okay. Okay. I will repeat the...

No, no. I will respond to the first question first. On the M&A gas distribution, as I said before, let's see also the outcome of the WACC of the regulation. So of the revision of the WACC. It may have a significant impact on the small, medium operators. And that will -- if you remember that the small operator, they have x factor equal to 7-point-something percent reduction every year. So 2021, minus 7% and 7-something. I don't remember exactly the numbers in comparison to our 3.53%. So 2x our cost X factor reduction. And then in 2022, there will be another 7-point-something reduction. If you add that also a potential WACC reduction, then, to me, is going to create significant potential opportunity in the M&A. On the second question, I have lost your question. So if you can repeat it would be easy.

Yes, of course. No, actually, the first question is there are any -- you answered my first question, which was about any additional drivers for an M&A new season also for Italgas and that's very clear. My second question is if this new season for an M&A higher activity in Italy is started or not, let's say?

No. the answer is no. In regard your question before it was very easy. We didn't see any of that.

Okay. And so basically, you mean that probably everyone is waiting for the new [indiscernible] for the WACC revision. Is that correct?

Yes. Also because when considering some M&A activity, today, with the WACC review by the regulator, you should take into account that. I mean, it is clear that something will be changed. How much will be changed and how it will be changed? That is not clear. So that -- you need -- doing an M&A transaction today means that you need to take a position about -- I mean, to take your internal position about what is going to happen to the WACC to make your own evaluation. And I am with you. Probably, they are waiting to have a clear picture about WACC before moving forward.

Next question, please.

The next question is from James Brand of Deutsche Bank.

I only have one question, and that's kind of on the review, but the one aspect of the review that obviously everyone is focusing on is what happens to the base returns. But the other aspect to your regulatory framework is absolutely key is the incentives. And I understand that [ Snam and Turner ] are expecting some new incentives to be coming through by year-end. And I just wondered what's your expectations are there? Are you also expecting the regulator to introduce some new incentives for gas distribution by year-end or not? And is there anything coming up that you think could be meaningful around incentives ahead of say, obviously, we're going to be expecting [indiscernible] to be coming in, in maybe 2024 or so in a few years' time. But is there anything else we should have our eye on that might be coming up or that you might be able to benefit from?

Regarding the incentive, honestly, we don't have the clear time frame. It should be there by year-end or most probably by early 2022. The regulator as with consultation document as identified a number of incentive to be given to certain project, for example, relevant to digital transformation or relevant to flow -- inverting the flow of better projects that are studying the inversion of the flow in the gas distribution, just to give you a couple of examples. So there are certain areas that will be -- that may be incentivized. They will be incentivized by the regulator. We don't know if it's going to happen by year-end. But for example, on the digital, we have already applied. I mean we are -- we have developed so many projects in the digital transformation that we have a long list that we have applied to the regulator. That's it.

Can I just ask -- that's very interesting. Is it too early to really say anything about how material those incentives could be? We just need to wait for those? Or should we expect them to be meaningful incentives that could make a tangible difference to the bottom line or not?

Those incentives are for what is referring to gas industry are referring to projects. So we are talking about a few million. We are not talking about a huge impact on our economic and profit and loss accounts.

Operator, are there any further questions?

[Operator Instructions] We have another question from Bartlomiej Kubicki from Societe Generale.

Three questions, I think, from my side. Firstly, I mean, something which is now being a concern to investors is the supply chain, and I wanted would like to ask you whether you have any issues with the supply chain right now in Italy. Secondly, if I look at the meters, you are still replacing, there's a lot of faulty meters you are replacing. And I wonder if you may change your view on provisions on the faulty meter replacement you did at the end of last year. And lastly, there should be 2 things, at least ongoing in terms of sort of negotiations, court issues. One is on the X factor and the OpEx cut as of the beginning of 2020. I remember you were supposed to actually, I think, go to the court with this one. I wonder what is the result. Or where are we with this respect? And secondly, how are your negotiations with the regulator with respect to receiving additional compensation for the faulty meters replacement?

Regarding the first question, honestly, we didn't have any significant supply chain problems, maybe for the kind of material we are procuring. Some limited delay on some digital equipment, but very limited. I mean not really -- I would probably say negligible. So as of today, and we do not expect anything in the future, we didn't see any impact on the procurement side about what you can see, for example, in other industries. On the second question, faulty meters. The numbers that we replaced -- that we replaced this year is in line with the provision that we allocated last year, so it's consistent. So we -- nothing better, nothing worse. Regarding -- we are going to request to the regulator additional compensation for them is something that we are putting to together the number. And once that we will have a complete picture, we can -- we will analyze that complete picture, and then we will make a decision about that. Regard the -- the challenge that we brought to the quarter about the delibera 570 is progressing very slowly, but is progressing. There are, let me say, third-party experts that have been appointed by the court to examine all the documentation. So we expect to receive some position by this third-party expert. So the things are moving as not very fast, but even they are not stopping. So the expert -- the third-party expert appointed by the court are working with the expert from our side and with the expert, of course, from the regulator side and from the other operators that are involved in this challenge. So let's see. We don't have a deadline for the court to reconvene and analyzing the results of this work carried out by the third-party expert.

Operator, are there any further questions?

At the moment, we don't have other questions. [Operator Instructions] Ms. Scaglia, gentlemen, there are no more questions registered at this time.

Okay. So many thanks. As are -- we thank you for participating in the call, and we will be available if you have any follow-up of [indiscernible] Thank you.

Ladies and gentlemen, the conference is now over. You may disconnect your telephones, thank you.