Update to GD23 price control review – calculation of interest cover
| Year | 2022 |
| Published date | 28 April 2022 |
| Energy Sector | Gas networks |
To: PNGL, FE and SGN
Introduction
On 9 March 2022 the Utility Regulator (UR) published its draft determinations for
PNGL’s, FE’s and SGN’s GD23 price controls.
We have subsequently identified an error in our calculations of the GDNs’ interest
cover during the years 2023 to 2028. The error is material and affects the
conclusions that we reached about financeability in paragraphs 10.13 to 10.23
chapter 10 of the draft determination. The purpose of this letter is to provide
corrected interest cover calculations and to give our revised assessment of each
GDN’s ability to finance its activities.
Corrected interest cover calculations
The error we identified relates to the computation of the GDNs’ post-maintenance
interest cover ratios (PMICR). Specifically, we have identified that the way in which
we treated each GDN’s Profile Adjustment is not consistent with the way in which the
rating agencies have historically adjusted for this aspect of the price control
calculation. If we adopt the rating agencies’ established methodology, the projections
of interest cover for the GD23 period are as set out in table 1 below.
These figures supersede the PMICR projections that we set out in tables 10.3 to 10.5
of the draft determination document.
Table 1: Revised modelling of PMICR
2023 2024 2025 2026 2027 2028 Average
PNGL 1.3 1.3 1.2 1.1 0.9 1.0 1.1
FE 1.6 1.5 1.4 1.3 1.3 1.2 1.4
SGN 1.6 1.6 1.6 1.6 1.6 1.6 1.6
Financeability
In assessing whether our proposed price controls leave each GDN in a position
where it will be able to finance their activities during the GD23 period, we consider
the ability that the companies will have to utilise both debt and equity finance.
The profile of PMICR for SGN shown in table 1 is comfortably above the 1.4 times
threshold that rating agencies have indicated a GDN will normally need to have in
order to obtain and maintain a BBB credit rating. SGN’s other debt-related ratios,
reported out in table 10.5 of the draft determination document, are also consistent
with a solid investment-grade credit rating. Accordingly, our assessment is that SGN
ought to be capable of maintaining access to debt finance during the GD23 period.
As set out in paragraphs 10.2 to 10.10 of our draft determination document, we have
aligned each GDN’s GD23 return on equity to its estimated cost of capital.
Accordingly, we are also satisfied that SGN will be able to secure equity finance on
an ongoing basis.
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