OTPP Acquires A Bigger Stake in UK's Scotia Gas Networks
Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced that it is participating in a consortium with Brookfield Super-Core Infrastructure Partners (“Brookfield”) which has agreed to acquire a 50% stake in Scotia Gas Networks Ltd (“SGN”). As part of the transaction, Ontario Teachers’, an existing SGN shareholder, will acquire an additional 12.5% in SGN and Brookfield will acquire a 37.5% stake in SGN. StepStone clients are participating in both the Brookfield and Ontario Teachers’ investments.
The consortium is acquiring the 33.3% stake in SGN owned by SSE and the 16.7% stake owned by the Abu Dhabi Investment Authority (ADIA). Following the close of the transaction, SGN’s direct shareholders will comprise Ontario Teachers’ (37.5%), Brookfield (37.5%) and OMERS Infrastructure (25%).
SGN is the second largest gas distribution network in the UK and is pioneering the repurposing of existing gas networks into renewable hydrogen energy systems. SGN has committed to achieve a net zero climate impact by 2045 and is taking a leadership role in supporting the transition to a hydrogen economy.
Nick Jansa, Senior Managing Director for Europe, the Middle East and Africa of Ontario Teachers’ said:
“Our increased investment in SGN further reflects our commitment to support and capitalize on opportunities created by the transition to a net-zero emissions economy. This investment can contribute to the financial security of our members while also supporting a critical infrastructure asset that will require additional capital to help it transform for a low-carbon future. SGN is well-positioned to play a leading role in helping the UK to transition away from fossil fuels and achieve the nation’s net-zero goal. We look forward to working with our fellow shareholders to support SGN on its journey to create an affordable and sustainable heat and energy network for homes and businesses in the UK.”
Natural gas networks will play an important role in the transition of the energy sector to a net zero future to meet the ambitious carbon emissions targets set by the UK and Scottish governments for 2050 and 2045, respectively. For more information on how SGN is helping to decarbonize the UK’s gas network, visit the SGN website here.
About Ontario Teachers’ Pension Plan Board
Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with C$221.2 billion in net assets (all figures at December 31, 2020). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.6% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region offices are located in Hong Kong and Singapore, and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 331,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.
About SGN
SGN is the second largest UK gas distribution network (‘GDN’) in the UK and owns Scotland Gas Networks plc and Southern Gas Networks plc, two of the eight regulated gas distribution networks in England, Wales and Scotland, operating under a license from Ofgem to distribute gas through their infrastructure network. SGN Natural Gas Ltd provides gas to customers in the west of Northern Ireland. SGN also includes other non-regulated ancillary businesses relating to metering, real estate development, heat networks and renewables amongst others. The derived EBITDA from these non-regulated activities in the year to 31 March 2021 was £21m.
SGN is a leader in the development and use of green hydrogen for heating and is delivering a suite of innovative projects that will help to make hydrogen the backbone of the UK’s future gas network. SGN plans to repurpose its existing gas network for Scotland’s north-east and central belt, as well as its network across southern and south east England, into 100% renewable energy systems, primarily through the use of hydrogen. By 2023, SGN's pioneering H100 Fife project in Scotland aims to put several hundred customers on to its network using hydrogen; this is the neighbourhood part of the UK government's hydrogen programme.
In addition to working to decarbonise the UK’s gas network, SGN is reducing the environmental impact from its own operations and is targeting a net-zero carbon footprint by 2045. Its key initiatives include reducing leakage from its network pipes, using 100% renewable energy and rolling out zero-emission vehicles.
So, OTPP is upping its stake in Scotia Gas Networks Ltd (“SGN”), the second largest gas distribution network in the UK.
Following the close of the transaction, SGN’s direct shareholders will comprise Ontario Teachers’ (37.5%), Brookfield (37.5%) and OMERS Infrastructure (25%).
Those are three impressive Canadian funds that will now own an important gas distribution network in the UK.
Recall, a week ago I discussed how OTPP, IMCO and PSP Investments joined Singapore's Temasek to be meaningful investors in the inaugural Brookfield Global Transition Fund which will scale clean energy and invest capital to catalyze the transformation of carbon-intensive businesses to achieve Paris-alignment.
OTPP and Temasek led that fundraising round, investing the most from all other investors.
A week later we hear OTPP is participating in a consortium with Brookfield Super-Core Infrastructure Partners which has agreed to acquire a 50% stake in Scotia Gas Networks Ltd (SGN).
It just shows you how critical partnerships are to the Canadian pension model, and Brookfield is a top partner to have, especially in infrastructure and renewable energy where they excel (they also excel in credit and other investments).
The press release states the consortium is acquiring the 33.3% stake in SGN owned by SSE and the 16.7% stake owned by the Abu Dhabi Investment Authority (ADIA).
No details were provided on the amounts involved but Mark Lammey of Energy Voice reports SSE finds buyer for SGN stake in £1.2bn deal:
London-listed energy company SSE will sell its 33.3% stake in gas distribution operator Scotia Gas Networks (SGN) for £1.22 billion.
The buyer is a consortium comprising existing SGN shareholder Ontario Teachers’ Pension Plan Board and Brookfield Super-Core Infrastructure Partners.
The deal is expected to complete within the current financial year.
Perth-based SSE initially bought 50% of SGN in 2005 for £505m, before selling 16.7% to the Abu Dhabi Investment Authority (ADIA) in 2016.
The consortium has also agreed to acquire the 16.7% stake in SGN owned by ADIA.
SGN includes Scotland Gas Networks and Southern Gas Networks, two of the eight regulated gas distribution networks in England, Wales and Scotland, in addition to SGN Natural Gas, which provides gas to customers in the west of Northern Ireland as well as other non-regulated ancillary businesses.
This deal will conclude SSE’s £2bn plus disposals programme announced in June 2020, with total proceeds amounting to over £2.7bn.
The disposal proceeds will reduce net debt in the short term and will help support the delivery of SSE’s capital investment plans.
In total, Ontario Teachers’ will acquire an additional 12.5% of SGN and Brookfield will acquire a 37.5% stake in SGN.
StepStone Clients are participating in both the Brookfield and Ontario Teachers’ investments.
This means following completion of both transactions, SGN’s direct shareholders will comprise Ontario Teachers’ (37.5%), Brookfield (37.5%) and OMERS Infrastructure (25% unchanged).
The transaction does not require SSE shareholders’ approval.
At March 31 2021, SGN had a regulated asset value (RAV) of £6bn, and SSE’s interest in SGN had a carrying value of £744m and contributed £88.6m to the group’s profits after tax for the year then ended.
SSE finance director Gregor Alexander said: “SGN has been a hugely successful investment for SSE during the past 16 years.
If SSE initially bought 50% of SGN in 2005 for £505m, I'm guessing it's worth double if not more now.
Regardless of how much OTPP paid to increase its stake, this is a great long-term investment and it allows Teachers' to reduce its carbon footprint.
Recall, at the beginning of the year, I had a chat with OTPP's CIO, Ziad Hindo, on how they will achieve net zero emissions by 2050.
It's not through divesting, it's through massive investments in infrastructure, renewable energy and clean technologies, but mostly through the former two (OTPP's CEO Jo Taylor recently said they are pushing ahead aggressively into international private markets).
When OTPP first came out and stated 2050, many were wondering why so far out.
I can tell you with a great degree of confidence, they are under-promising and will over-deliver on this front.
How do I know? Because actions speak louder than words. And OTPP's actions tell me they are fully committed to achieving net zero as soon as possible.
It's also worth noting that OMERS Infrastructure owns 25% of SGN.
In fact, OMERS and OTPP acquired their stake in SGN back in August 2004 along with SSE and the acquisition was completed in June 2005:
In other words, both OTPP and OMERS have been invested in SGN for a very long time and they know this asset very well.
Gas distribution is a regulated utility, you clip regular payments, much like coupons on bonds but with a better inflation-adjusted yield.
Here in Quebec, CDPQ recently announced a substantial increase in its majority interest in Énergir through the acquisition of Enbridge’s 38.9% interest in Noverco Inc. by Trencap L.P.
Why are Canada's large pensions investing in these assets?
Because they can clip better returns than bonds where yields are at historic lows and they can significantly lower their carbon emissions which is something they are all committed to doing.
It's also worth noting this part of the press release above:
In addition to working to decarbonise the UK’s gas network, SGN is reducing the environmental impact from its own operations and is targeting a net-zero carbon footprint by 2045. Its key initiatives include reducing leakage from its network pipes, using 100% renewable energy and rolling out zero-emission vehicles.
So you have three winning elements in this investment: scale, bond+ returns, and a focus on ESG investing.
That, in a nutshell, is why OTPP is increasing its stake in SGN.
Nick Jansa, Senior Managing Director for Europe, the Middle East and Africa of Ontario Teachers’ said it well:
“Our increased investment in SGN further reflects our commitment to support and capitalize on opportunities created by the transition to a net-zero emissions economy. This investment can contribute to the financial security of our members while also supporting a critical infrastructure asset that will require additional capital to help it transform for a low-carbon future. SGN is well-positioned to play a leading role in helping the UK to transition away from fossil fuels and achieve the nation’s net-zero goal. We look forward to working with our fellow shareholders to support SGN on its journey to create an affordable and sustainable heat and energy network for homes and businesses in the UK.”
Another thing worth reading is SSE's press release on the sale of this asset where I read this:
“SGN has been a hugely successful investment for SSE during the past 16 years. It is a strong business delivering consistently for customers and will have a key role to play in the future development of the hydrogen economy. However, it has become purely a financial investment for SSE as we have sharpened our focus on our low-carbon electricity core, and it is therefore the right time for SGN to continue to thrive under new ownership.
Below, learn more about what SGN does.
Also, the UK’s four gas distribution networks have an important role to play in combating fuel poverty. Working together with our partner organisations, we identify affected households and provide suitable solutions, such as funded connections to our gas networks under the Fuel Poor Network Extension Scheme. This scheme is a commitment gas networks have to Ofgem and customers for the next five years.
Lastly, in 2020, SGN stated it is preparing to deliver a world-first research project using green hydrogen to heat homes if proposals are approved by regulator Ofgem. Its H100 Fife project is intended to provide critical evidence for a potential zero carbon energy source, helping to inform the UK’s long-term policy decisions for decarbonisation.
Update: After reading this comment, one expert shared this:
It's interesting that ADIA is selling. I wonder what motivated that. Maybe they thought the price was right! Also, I find it a somewhat risky when a regulated utility trades at a meaningful premium to RAB (in this case, 1.3x RAB), as it implies that the regulated cost of equity is too high. This is a risk in regulated assets (i.e., that the regulator tries to reduce charges in favour of ratepayers) that is difficult to predict/manage, as it ebbs and flows with the change in government.
Fair point, regulatory risks always weigh on valuations of these assets. However, Brookfield also acquired a 37.5% stake in this business and I'm sure they factored in regulatory risks.
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