Stock Story: Italgas

While debt and political crises have swirled around it, one of the world’s more stable and attractive regulatory regimes has continued to operate in Italy.  One key beneficiary of this stability has been gas utility Italgas. While Italgas re-emerged as a stand-alone listed entity in 2016, following its spin-off from then-parent company Snam, the business has a long operating history – originating in the 1800s as a public lighting company in northern Italy before transitioning to natural gas distribution. 

Today, the business remains centred on its core gas distribution operations but has expanded across several strategic pillars: 

• Italian gas distribution: Provision of pipeline gas distribution services across numerous concession areas in Italy, serving residential, commercial and industrial users. 

• Greek gas distribution: Operations like those in Italy, giving Italgas a larger geographic footprint to apply its operational expertise. 

• Water services: Delivery of water utilities across various territories in Italy. 

At the heart of the investment appeal lies a combination of structural strengths: 1) a stable regulatory framework where Italgas benefits from well-established regulation, offering predictable, inflation-protected returns; 2) growth opportunities through both organic investments and strategic acquisitions; and 3) operational efficiency – where the company has a proven track record of improving performance through digitalisation and disciplined cost management. 

Regulatory framework 

The demand for Italgas’s services is essential—especially in winter, when heating needs peak.. Given the nature of its business, within its territories, Italgas operates as a monopoly. This is why the business is governed by economic regulation rather than market forces. Regulation allows the company to earn a fair return over time but in exchange it agrees to limitations on the levels of prices it can reasonably charge users. 

The regulatory regime, overseen by Italy’s ARERA, plays a central role in investment assessment. We evaluate such frameworks based on: 

1. Return reasonableness 

2. Transparency and accountability 

3. Predictability and consistency 

On these dimensions, ARERA scores well, having demonstrated a willingness to allow investors to earn a reasonable rate of return that has been predictable, reasonable and with the underlying methodology clearly articulated to investors. 

Another strength of the regime is its mitigation of inflation and real interest rate risk (or interest rates adjusted for inflation). Capital invested is indexed to inflation and the rate of return is updated periodically to reflect the prevailing interest rate environment, providing further stability. 

Growth opportunities 

Italgas has several growth engines within its business. 

Total investment is forecast to reach €15.6 billion over 2024–2030, nearly doubling prior plans.  

A major portion is allocated to the acquisition of 2i Rete Gas, Italy’s second-largest operator, expected to be completed this year. This follows the 2022 acquisition of Depa Infrastructure in Greece, giving Italgas both scale and a second regulated geography. The Greek business is expected to converge with the profitability of Italian operations over the medium term. Beyond gas, Italgas is diversifying into water and energy efficiency. It now has a growing footprint of water services after acquiring Veolia’s Italian assets. The ageing water network presents substantial opportunities for improvement, where Italgas can apply its existing technologies (e.g. smart metering, leak detection). 

Meanwhile, its energy efficiency subsidiary expands its capabilities further into energy services. 

We see scope for Italgas to grow its business further as the government continues to push for consolidation of the numerous operators in the market to drive more efficiencies – something for which Italgas is well positioned. 

Cost focus and discipline 

Since listing, Italgas has delivered substantial operational savings. Between 2016 and 2023, it reduced opex by 40% in its Italian gas business – equivalent to 15% of 2016 EBITDA – driven by internalising services and digitalising processes. 

The regulatory regime encourages such efficiencies, offering cost-sharing mechanisms that reward long-term value creation for end users. 

Now, Italgas plans to extend its cost leadership to 2i Rete Gas. The newly acquired network, with more rural and less digitised operations, presents a runway for improvement. Planned efficiency levers include centralised procurement, knowledge sharing and best practices, and comprehensive digitalisation of services. 

By Ben McVicar, CFA - Portfolio Manager and Sector Head Infrastructure and Industrials
Sources: Company disclosures