Modelling of Infrastructure for Gas Distribution: A Case Study

Scotia Gas Networks, UK.

The story

Scotia Gas Networks (‘SGN’), is Britain’s second largest gas distribution company, managing a network that distributes natural and green gas to 5.9 million homes and businesses across Scotland and the south of England.  As of 2014/15 SGN operates more than 71,000 km of pipes.  In the same period SGN spent £500 million on upgrading the network.

In June 2005 Ontario Teachers’ Pension Plan (‘OTPP’) and Borealis Infrastructure acquire a 50% stake in SGN from national Grid Transco plc, the remaining 50% stake is taken by Scottish and Southern Energy plc (‘SSE’).   In 2016, SSE sell a 16.70% stake to the Abu Dhabi Investment Authority.

SGN (www.sgn.co.uk) is regulated by OFGEM, the UK Office of Gas and Electricity Markets.

The challenge

SGN is a new company, and there is a lack of a common language, both internally and with the new investors, shareholders, lenders and the regulator.

As a result of the privatisation, SGN has three operating entities split geographically and by type and consolidated in a holding company.  Each of these entities produce accounting and cash flows that require careful allocation for finance and operations.  The operational structures are extensive, as is normal for a regulated business.

Partly due to the acquisition and partly due to the nature of large, regulated entities, SGN’s financing structure is also extensive.

SGN needs to allocate responsibility internally to deal with operations, the regulatory complexities, and financing.  Similarly, SGN needs to allocate responsibility to deal with the new external relationships with the regulator, the lenders, the shareholders and investors.

SGN is not able to formulate a long-term strategic plan because the overall picture is unclear.

Furthermore, the acquisition price needs to be referenced by an enterprise valuation agreed between the stakeholders.

The solution

Lazuli Solutions specifies and builds a strategic operating model in Excel for SGN.

The results

The model brings together the operational complexities, the financing requirements, the basis for the negotiations with the regulator and the strategic plan, all within a common agreed language and enterprise valuation.

The new model also creates a common vocabulary for efficient discourse both internally and externally with investors, shareholders, lenders and the regulator.

Accounting flows and cash flows now satisfy the various legal entities that make up SGN through a system of intercompany loans.  The plan agreed with OFGEM, the UK gas regulator, is described within the model, as are the many tranches of finance.  This gives SGN the time and clarity to plot the refinancing of the enterprise, both in terms of quantum and optimisation through type and time.

The model build process gives SGN the opportunity to start allocating responsibility internally.  This process is by no means instant, but rather an evolution that will enable SGN to invest in people for better long-term relationships with investors, shareholders, lenders and the regulator.

The model allows SGN to formulate a strategic vision for the enterprise, through use of the long term forecast in the model and in conjunction with the external stakeholders. The agreed enterprise valuation is the ultimate gauge of the efficiency of the strategic vision.