National Grid commences sale of gas transmission stake

National Grid has begun the formal process of selling a majority stake in its gas transmission business, which is expected to be completed in the summer of 2022.

The disposal will help pay for its acquisition of the electricity distribution network Western Power Distribution that was announced at the same time in March and completed in June.

“We said that we would be launching the formal process in the second half of the year and we formally pressed the button last week,” said Andy Agg, chief financial officer for National Grid Group.

“We expect to now move towards announcing a deal this side of the fiscal year end – so this side of March – and we’re looking to complete over the summer of 2022.”

He continued: “We’re very clear we want to dispose of a majority stake so technically it’s at least 51% but above that we will absolutely be guided by the bids that come in during the process.

“It’s an assumption around a majority stake that gets us to a 70:30 electricity/gas split that we’re very comfortable but ultimately it’s right that we focus on the overall value of the gas business and we’ll guided by the bids that come in and that may change our position on the level of the stake.”

National Grid confirmed the start of formal proceedings in its financial results for the six months to the end of the September, which showed adjusted operating profit rising by 47% when compared to the same period last year to slightly more than £1.4 billion. When excluding the £257 million contribution from WPD, the figure was up 20% to £1.15 billion.

Its statutory pre-tax profit jumped by 86% to £1.08 billion.

The numbers do not include earnings from the gas transmission business.

National Grid said the increases were driven by new income from its IFA2 interconnector with France, which began commercial operation in January, the reduced impact of the coronavirus pandemic when compared to last year, and higher revenues from electricity transmission following the start of the RIIO2 price controls in April.

Underling operating profit from electricity transmission rose by 13% to £552 million, whilst the figure for National Grid Ventures – its unregulated business unit, which owns and operates its interconnectors – more than tripled from £52 million to £161 million.

Speaking to Utility Week, Agg said the fire at the UK substation for the first IFA interconnector in September had a limited impact on the results for the first half of its financial year and the same will be true for the full 12 months: “We don’t expect that to be material. We’ve got insurance arrangements in place, both for the damage to the asset itself and business interruption as well.”

The 2GW interconnector is currently operating at half capacity. National Grid said it expects to bring 500MW back into service from October next year followed by the remaining 500MW in December 2022.

The Competition and Markets Authority (CMA) recently issued its final determination on the RIIO2 appeals by transmission and gas distribution networks, which upheld Ofgem’s reduction to the cost of equity but removed the outperformance wedge – an additional deduction to reflect the information asymmetry between the regulator and networks and their expected outperformance as a result.

Agg said National Grid is still reviewing the decision document, which he noted ran to around a thousand pages, but said the company is “moving ahead on delivering RIIO T2 – the capital programme we need to support the energy transition – and that’s what we’re focused on.”

“I think at this point, we don’t necessarily see strong arguments for taking the debate further but obviously we’ll finish our review in detail and make a final decision,” he added.

On the removal of the outperformance wedge and its implications for the RIIO ED2 price controls, for which distribution network operators will submit their final business plans on 1 December, Agg said: “I hope that sends a very clear message and, obviously we’ll have to wait and see what eventually comes out, but it’s hard to see a route for Ofgem to put it back in terms of the ED2 price controls.

“More broadly, there’s clearly there’s a degree of read across from other aspects of the final outcome on GD2 and T2 although Ofgem have already themselves said they’re starting in their own numbers with a cost of equity of 4.65%, which slightly above where we’ve ended up with T2.”