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National Grid to acquire WPD as it shifts from gas to a more electrified asset base

Image: National Grid.

Image: National Grid.

National Grid is looking to acquire Western Power Distribution (WPD) as part of a strategic transformation that will see the company's assets more focused on electricity transmission and distribution.

The company announced today that it has agreed to acquire PPL WPD Investments Limited, the holding company of the UK's largest electricity distribution business, WPD, for an equity value of £7.8 billion.

As part of the transaction, National Grid is also selling the US based Narragansett Electric Company (NECO) to PPL Energy Holdings, another subsidiary of PPL for an equity value of US$3.8 billion (£2.7 billion).

The move will help pivot the company further towards electricity, increasing its share of assets from c.60% to c.70%. Additionally, it announced today that it will start the process of selling a majority stake in National Grid Gas plc towards the end of 2021, further shifting it away from gas, in line with its predictions for the energy transition.

National Grid’s acquisition of WPD will help strengthen its long-term growth outlook the company said, by ensuring its scale in the electricity distribution sector which is expected to see lots of asset growth in the near future. It will therefore help to underpin National Grid's 5 to 7% asset growth target.

John Pettigrew, chief executive of National Grid, said the transactions announced today were “transformational for our UK portfolio”.

"The acquisition of WPD is a one-off opportunity to acquire a significant scale position in UK electricity distribution. WPD has a high quality, fast growing asset base and an excellent track record of customer satisfaction, operational performance and financial returns.

National Grid is expecting a £8.8 billion Regulatory Asset Value (RAV) for 2022, with a 5% compound annual growth rate over the next six years. WPD has seen its RAV consistently increase over recent years, from £7,355 million in 2018, to £7,698 million in 2019 and £8,000 million in 2020.

The company’s revenue has also consistently increased over recent years, hitting £1,724 million in 2020, a jump from £1,621 million in 2018.

Additionally, it has had 9.9% rate of retained earnings on operational performance over the ED1 price period to date – this started 1 April 2015 and is set to run to 31 March 2023 – and has a strong regulatory track record with Ofgem. Investment is set to increase by c.20% as it moves into the next price control period, to deliver a cleaner, smarter energy system.

The acquisition along with the US sale, shifts National Grid’s portfolio not just towards electricity but also geographically, with its UK assets increasing from 45% to 53% while its US assets fall from 46% to 39%. It remails balanced the company asserted however, maintaining regulatory diversity.

Given the similar role NECO plays in the US electricity sector, the divestment does not materially change National Grid's US asset mix. It is the largest electricity transmission & distribution service provider as well as a natural gas distribution company in Rhode Island, with a FY2020 revenue of £1,207 million.

The sale of NECO for $2.6 billion rate base ($1.8 billion distribution, $788 million transmission) as of March 2020, will help partially repay the cost bridge facility put in place to enable the acquisition of WPD. The UK DNO has an assumed net debt of £6.4 billion, and NECO has an assumed net debt of £1 billion ($1.4 billion).

National Grid is expecting shareholders to approve the WPD acquisition by the end of April, followed by technical filings being submitted with FCA and Guernsey equivalent, and a voluntary CMA filing within the next four months.

The relevant regulatory approvals required for the sale of the Rhode Island arm are expected to be completed by Q1 2022.

Finally, National Grid ESO is intending to launch a process for the sale of a majority stake in its UK gas transmission business in Q3 2021, which should compete within a year.

Pettigrew added: “As we move our portfolio to higher growth assets, we have taken the decision to sell a majority stake in NGG. Given the strategic nature of its business coupled with its central position in a transition towards a hydrogen economy, it will continue to play a vital role in the UK's energy system. We expect strong interest when the sale process begins, likely to be in the second half of this year.”

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