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Rating Action:

Moody's assigns (P)Baa1 rating to Southern Gas Networks Plc's and Scotland Gas Networks Plc's EMTN programme; stable outlook

17 Oct 2014

London, 17 October 2014 -- Moody's Investors Service has today assigned a provisional (P)Baa1 rating to Southern Gas Networks plc's (Southern GN) and Scotland Gas Networks plc's (Scotland GN) new GBP5 billion euro medium term note (EMTN) programme. The outlook assigned to the rating is stable.

RATINGS RATIONALE

The provisional (P)Baa1 rating of the new programme is aligned with the (P)Baa1 rating of the previous programme and the Baa1 issuer ratings of Southern GN and Scotland GN.

Southern GN and Scotland GN's Baa1 ratings reflect (1) the natural monopoly position and low business profile of their gas distribution businesses; (2) the stable and predictable regulatory framework under which they operate; (3) the companies' ability to operate within the expenditure allowances and performance targets for the current regulatory period to March 2021 (RIIO-GD1), as demonstrated by their outperformance in the first year; and (4) the flexible approach of the companies' shareholders, SSE Plc (A3, negative), Borealis Infrastructure Europe (UK) Limited (not rated) and Ontario Teachers' Pension Plan Board (not rated) in respect of dividend payments.

However, the companies' ratings also more negatively reflect (1) the financial policy of the companies' common management and shareholders to maintain a relatively high level of financial leverage, between 70% and 75% net debt to Regulated Asset Value (RAV); (2) the downward trend in allowed regulatory return, resulting from the impact of sustained low real interest rates on the calculation of the return, which is reset on an annual basis.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that both Southern GN and Scotland GN will maintain credit metrics in line with guidance for the Baa1 rating level with net debt to RAV below 75% and adjusted interest coverage of at least 1.4x.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's see little potential for upward rating pressure given the financial policy at both Southern GN and Scotland GN to maintain high levels of leverage close to 75% net debt to RAV.

Conversely, downward pressure for either company could arise as a result of (1) poor operating performance or a change in financial policy that meant that the company persistently failed to maintain financial metrics consistent with Moody's guidance for the Baa1 rating, with net debt to RAV higher than 75% or the adjusted interest coverage ratio lower than 1.4x; (2) a currently unforeseen material adverse change in the gas distribution regulatory framework in the UK.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in London, England and Edinburgh, Scotland, Southern Gas Networks plc and Scotland Gas Networks plc are the monopoly owner and operator of the low pressure gas distribution network in Scotland and in the South of England. Owned by a common parent, Scotia Gas Networks Limited, the two companies reported revenues totalling nearly GBP1.1 billion in the year to 31 March 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew David Huxham
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)Baa1 rating to Southern Gas Networks Plc's and Scotland Gas Networks Plc's EMTN programme; stable outlook
No Related Data.
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