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UTILITIES: Southern Gas Networks (SGN Baa1/BBB/BBB+): Credit Background

UTILITIES
BulletCredit Bullets
  • Gas pipeline business, no commodity price or volume exposure. The issuing entity is the Southern England gas network, with a Scotland network and other small assets in the group.
  • SGN is a regulated GDN as a natural monopoly. Revenue comes from gas shippers who pass on cost to customer bills and is inflation protected. The regulatory ringfence around GDNs requires investment grade ratings.
  • The current 5-year price control regime end in March 26. Ofgem has begun consultation on the next period along similar lines to the current one. There will be a move to semi-nominal WACC, indexing the equity and inflation-linked funding.
  • Financial resilience requirements are expected to tighten with more than one IG rating required, dividend lock at 75% gearing and demonstrated financial resources across the regulatory period and a minimum of 3 years ahead. Gearing has been steady at 65% for the past 2 years. BBB- watch negative ratings will also trigger the lock.
  • Mixed performance on output deliverables, with emergency response times and scope 1 and 2 emissions tracking on target; it’s missing on unplanned interruptions, mains and service and commercial fleet. Ofgem is investigating emergency response times in 2023 which were below target as well as competition in connections. SGN has not been fined by Ofgem to date. HSE are investigating two incidents from 2023 including a fatal explosion which the police are also investigating. It was fined £1.2m following a fatal accident in 2018.
  • The obvious risk to consider is around the energy transition. It sees gas as an important component of the UK energy mix, with low uptake of domestic heat pumps and the intermittent nature of renewables; gas currently makes up a large percentage of the UK energy mix. It sees biomethane, hydrogen blending and heat networks contributing to reduced emissions. Ofgem acknowledges the uncertainty and is looking to align depreciation schedules to the government’s net zero target date of 2050. It has a flexible approach to accommodating decommissioning mechanisms in future once detailed by the government.
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  • Gas pipeline business, no commodity price or volume exposure. The issuing entity is the Southern England gas network, with a Scotland network and other small assets in the group.
  • SGN is a regulated GDN as a natural monopoly. Revenue comes from gas shippers who pass on cost to customer bills and is inflation protected. The regulatory ringfence around GDNs requires investment grade ratings.
  • The current 5-year price control regime end in March 26. Ofgem has begun consultation on the next period along similar lines to the current one. There will be a move to semi-nominal WACC, indexing the equity and inflation-linked funding.
  • Financial resilience requirements are expected to tighten with more than one IG rating required, dividend lock at 75% gearing and demonstrated financial resources across the regulatory period and a minimum of 3 years ahead. Gearing has been steady at 65% for the past 2 years. BBB- watch negative ratings will also trigger the lock.
  • Mixed performance on output deliverables, with emergency response times and scope 1 and 2 emissions tracking on target; it’s missing on unplanned interruptions, mains and service and commercial fleet. Ofgem is investigating emergency response times in 2023 which were below target as well as competition in connections. SGN has not been fined by Ofgem to date. HSE are investigating two incidents from 2023 including a fatal explosion which the police are also investigating. It was fined £1.2m following a fatal accident in 2018.
  • The obvious risk to consider is around the energy transition. It sees gas as an important component of the UK energy mix, with low uptake of domestic heat pumps and the intermittent nature of renewables; gas currently makes up a large percentage of the UK energy mix. It sees biomethane, hydrogen blending and heat networks contributing to reduced emissions. Ofgem acknowledges the uncertainty and is looking to align depreciation schedules to the government’s net zero target date of 2050. It has a flexible approach to accommodating decommissioning mechanisms in future once detailed by the government.