National Grid’s chief financial officer has promised a “light touch” approach to integrating Western Power Distribution (WPD) into the wider business after the deal completes in July.
Andy Agg told Utility Week that WPD will become a distinct unit within the wider company and that the focus will be on supporting the business plan for the RIIO ED2 price control. He added that “further down the track” there will be opportunities for cost efficiencies arising from the merger.
The deal has received shareholder approval and is awaiting the greenlight from the Financial Conduct Authority, which is expected in July. The process is also subject to Competition & Markets Authority (CMA) merger clearance, which is likely to come in September.
National Grid updated on its parallel transaction processes as it revealed its full-year financial results this morning (20 May), in which it also confirmed it expects the sales process for a majority stake in its gas transmission arm to launch this year and to conclude in 2022/23. Agg told Utility Week he expects a “range of strategic and financial buyers” to express an interest.
The company also announced a partnership with RWE to jointly develop offshore wind projects in the coastal region of the Northeast USA.
The results for the year to 31 March 2021 show a lower than expected impact from the Covid pandemic. National Grid now estimates a £355 million hit to underlying profit compared to the £400 million previously guided.
Overall group operating profit was up 4 per cent year-on-year, at just under £2.9 billion, with a 19 per cent rise in pre-tax profit to just under £2.1 billion.
WPD deal
Responding to Ofgem’s comments that the “whopping” premium on the regulatory asset value paid for WPD undermined National Grid’s argument to the CMA that returns are set too low, Agg told Utility Week: “We believe that for the WPD opportunity we paid a fair price.” He cited the growth opportunity and WPD’s market-leading performance as important factors in the price. He also stressed that the deal reflected the sale of assets back to WPD owner PPL Corporation.
Ofgem’s submission to the CMA said the 61 per cent premium to RAV National Grid paid proved “even the appellants consider substantial outperformance to be all but guaranteed under the RIIO-2 framework”.
Agg rejoined: “Ofgem have not surprisingly gone there in their response. They have said themselves that their methodology should be based on CAPM (Capital Asset Pricing Model) and our appeal to the CMA is very focussed on demonstrating where there are errors in what Ofgem have done in their returns methodology.
“They have said themselves that the multiples that might exist in M&A transactions should be taken into account as a potential read-across in one small part of the process but it shouldn’t be the main driver.”
ESO separation
There have also been suggestions that the WPD deal should accelerate the process to complete the full legal separation of the Electricity System Operator (ESO) from National Grid. Agg dismissed this, citing the “very significant degree of separation” that already exists between the two. He said there were likely to be conversations further down the line about the distribution system operator (DSO) model and how that impacts on distribution network operators (DNOs) but stressed this was currently a very small part of a bigger picture.
National Grid is currently in the process of preparing the gas transmission arm for sale. Agg said the work was mainly focussed on how to separate back office an operational functions read for sale.
He said: “We absolutely expect it to be an attractive asset and to get a good degree of interest.
“I wouldn’t be surprised if we see a range of strategic and financial buyers interested in the asset.”
Asked about the wider significance of the group’s shift away from gas, Agg said: “There is a lot of focus on the energy transition and the future of gas but we fundamentally believe the role of gas is important in a decarbonised future as well.
“We see electricity distribution as delivering more certain and clearer growth over the next few decades. We absolutely believe that gas has growth but part of this is switching to more sustainable, higher growth assets.
“We still have a gas business in US so it will remain a significant part of our total assets.”
Today’s announcement also revealed that UK executive director Nicola Shaw would be leaving the business.