National Grid to buy Western Power in £14.2bn deal

National Grid has sharpened its focus on electricity by buying the UK’s biggest local electricity network company, Western Power Distribution, for an enterprise value of £14.2bn and putting a majority stake in its US gas network up for sale. 

The company on Thursday said it would buy WPD from American utility PPL Corporation. Alongside that deal, it will sell its Rhode Island gas and electricity business to PPL for $5.2bn, including debt.

John Pettigrew, chief executive, said the deals would increase National Grid’s exposure to electricity markets from about 60 per cent to 70 per cent, allowing it to “enhance” its role in helping the UK reach its 2050 net zero emissions target.

The UK utility has been reducing its exposure to gas since 2016, when it started selling off stakes in its former gas distribution business, now called Cadent.

Once seen as a vital transition fuel, gas is increasingly unpopular with investors, although some fossil fuel companies have been arguing they can pivot their assets towards low-carbon hydrogen. Electricity is set to become the main energy carrier globally by 2050 as more sectors of the economy switch away from fossil fuels, according to the International Renewable Energy Agency, an intergovernmental body.

Martin Young, analyst at Investec, said that while the WPD deal made strategic sense, it represented a “significant” premium of 61 per cent to WPD’s projected regulated asset value for the current financial year ending on March 31 2022.

Shares in National Grid were 1 per cent lower by mid-morning on Thursday in London.

WPD owns and manages local electricity grids in the Midlands, south-west of England and Wales and serves about 8m customers. It made a pre-tax profit of £750m for the year to March 31 2020.

Local electricity networks will play a crucial role in helping to support the rollout of electric vehicle charging, as well as adding more renewables to the system and switching homes away from natural gas boilers to heat pumps.

Pettigrew said he felt confident the transactions would deliver “strong” and “longer” growth, despite UK regulator Ofgem saying last week it would crack down on the returns it allows local electricity grid companies — which are effectively monopolies — such as WPD to make from 2023. The transactions would be earnings accretive “from year one”, Pettigrew added.

National Grid admitted it had not intended to part with its Rhode Island gas and electricity business but that it “became clear” during the sales process for WPD that PPL was interested in the US asset.

The business, formally known as the Narragansett Electric Company, became the “key differentiator” that tipped the WPD sale in National Grid’s favour in what was a highly competitive process, Pettigrew said. Other bidders included Macquarie and Spain’s Iberdrola, according to people familiar with the sales process.

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National Grid expects the WPD transaction, which will have to be referred to UK competition authorities, to complete in the third quarter of the year and PPL’s acquisition of the Rhode Island subsidiary to close in the first quarter of 2022. It has agreed bridge financing facilities to fund the WPD purchase, which will be paid off “over time” with the proceeds of the deals.

Pettigrew said the sales process for a majority stake in its UK gas transmission network business would start in the second half of the year.

Young of Investec values the business at £8.4bn, implying it could attract a premium of 29 per cent to its projected regulated asset value at the end of the financial year.

National Grid expects to have a 40 per cent exposure to the US after the transactions, compared with “high forties” at present.


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