Naturgy’s Moat Upgrade to Narrow Reflects Efficient Scale in Regulated Businesses

Naturgy owns and operates around 70% of the gas distribution network, and it’s the third largest electricity distributor operator in Spain. In the gas business, the company has historically generated economic profits, delivering double-digit returns that consistently exceeded the regulator’s allowed levels. Naturgy has been unable to replicate this return profile in its electricity distribution activities, where it has a more limited scale. In addition, rising capital investments in Spain’s power grid are inflating the accounting value of its regulated asset base, narrowing the spread between book returns and those permitted by the regulator.