The integration of Western Power Distribution (WPD) into National Grid will bring “complementary strengths” to both sides of the enlarged group, its head has claimed in a call with investors.
Chief executive John Pettigrew was touting the benefits the proposed asset swap announced this morning (18 March) whereby National Grid will acquire the electricity distribution network for £7.8 billion, whilst also selling the Rhode Island based Narragansett Electric Company to WPD’s US owner PPL Corporation for $3.8 billion (£2.7 billion).
“The integration of WPD into National Grid will bring complementary strengths to the group as we move along the energy transition pathway,” he told investors.
“An area where combining WPD within National Grid can help deliver customer and shareholder value, whilst delivering the energy transition, is around renewable connections and the development of smarter networks.”
“Together, our high and low voltage engineers will be able to share their knowledge and experience to efficiently deliver increasing levels of renewable connections, both large and small.”
National Grid chief financial officer Andy Agg said both National Grid and WPD are developing digital platforms to connect new forms of generation more efficiently “by giving them access to the right data, standardising design and providing a smoother, easier customer journey.”
Pettigrew likewise pointed to the rollout of electric vehicle (EV) charging infrastructure: “In our transmission business, we’ve worked with the UK government on the £950 million rapid charging fund, which will help to deliver ultrafast charging infrastructure at a national level across motorway service stations.
“At a local level, WPD is looking to deliver over 200,000 charging points across its territory by 2023 as part of its roadmap to deliver enough connections by 2030 to allow up to 3 million EVs. This is a great example of where we will be able to share best practice across engineering and customer solutions to help drive a more effective EV rollout.”
National Grid also announced plans to sell a majority stake in its gas transmission business as a part of a strategic “pivot” towards electricity.
“This is a one-off opportunity to gain a scale position in UK electricity distribution which is expected to see a high level of asset growth as a result of the ongoing energy transition,” said Pettigrew.
“WPD is the UK’s largest electricity distribution network operator, with a forecast March 2022 regulated asset base of £8.8 billion, having growth by around 5 per cent per annum over the past six years.”
As well as being the UK’s largest, he said WPD is also one of the best performing: “Firstly, it’s demonstrated a great track record of stakeholder engagement and was the only DNO to be fast-tracked by Ofgem in the RIIO ED1 price control.
“Secondly, it’s delivered very strong operational performance, with customer engagement ranked towards the top of its peers throughout the current regulatory period.
“Thirdly, it’s financial performance is strong, consistently delivering best in class returns.
“And finally, it’s led by a strong and highly experience management team.”
Pettigrew said “only time will tell” exactly how much of the gas transmission business will be sold off but denied that the disposal marked the beginning of a full retreat from the sector: “We do very strongly feel that gas has got an important role to play in the energy transition over many decades to come, both supporting electricity generation as well as supporting heat both domestically and business wise, and we are continuing to explore optionality for gas transmission in areas like hydrogen and renewable natural gas.”
Agg declined to offer any predictions as to how much it will sell for: “Obviously, we believe the gas transmission business is an attractive asset and we’re confident it will attract a good valuation but I’m not going to try and speculate on what that might be.”
National Grid said WPD’s net debts stood at £6.4 billion in February, whist its regulatory asset value (RAV) is forecast to reach £8.8 billion in March 2022. On the basis of these figures, the £7.8 billion it has agreed to pay for WPD’s equity would represent a more than 61 per cent premium over the RAV.
Justifying the price tag, Pettigrew said it reflects “the exciting growth opportunity and potential for continued outperformance in the future, WPD’s strong cash flow returns that will be above our cost of capital, our conservative assumptions over future regulatory returns and the benefits we can derive and share with our customers.”
When asked whether the premium might undermine its arguments in its appeal to the Competition and Markets Authority (CMA) against the cost of equity in Ofgem’s final determinations for the RIIO T2 price controls, he said: “I think I take confidence from the fact that the CMA will look at the fundamentals and will look at it in terms of long-term need for investment across these networks.
“We have set out our views where there is evidence that demonstrates that the cost of equity should be higher if Ofgem has considered that evidence.”
Referring to the CMA’s decision to raise the cost of capital for the four water companies that appealed Ofwat’s final determination for PR19, Pettigrew added: “Based on what I’ve read yesterday I remain confident that it was right to make that technical appeal and that the CMA will come to the right answer once they look at RIIO T2 and of course that will influence the returns that we will see in ED2 and going forward as well.”
He said it was “pure coincidence” that the deal to buy WPD was announced just a day later, noting that the CMA had delayed issuing its final decision multiple times.
Pettigrew said he did not expect to see any opposition to the acquisition from the regulator: “Ofgem, as you know, have always been very supportive in the industry of businesses adapting to the changing environments.
“They’ve also been very consistent in their views that utilities should be thinking about whole-system solutions and of course what we’re proposing today is going to help massively as we bring those complementary capabilities together.”