National Grid to appeal part of Ofgem pricing recommendations


National Grid PLC (LON:NG.) has warned bondholders it might have its credit rating downgraded following the latest pricing regime set out by regulator Ofgem.

The grid operator said that after a detailed analysis of the proposals in Ofgem’s RIIO-2 Final Determination it is accepting the overall package for the Electricity System Operator but will launch a technical appeal against the Electricity and Gas Transmission proposals on Ofgem’s proposed cost of equity and outperformance wedge.

On dividends, National Grid said that going forward from 2021/2022 shareholders will receive rises in line with UK inflation, effectively maintaining the real value of the current payment.

For bondholders, National Grid added that its broad acceptance of the RIIO-2 Final Determination and its increasing investment programme will mean its credit metrics remain below the required threshold levels for BBB+/Baa1 debt ratings on an ongoing basis.

“If the rating agencies do take action to downgrade the ratings of the group, we are confident we will retain broad access to debt markets, as we continue to fund our value accretive asset growth programme,” it added.

The utility added it expects to invest around GBP10bn of capex through the course of the 5-year price control across the electricity and gas transmission networks.

“At nearly GBP2bn per annum on average, investment will be substantially higher than the RIIO-T1 price control,” it said.

The technical appeal to the CMA will focus on the cost of equity and outperformance wedge.

“We believe that the methodology Ofgem used to set the cost of equity ignores evidence for higher total market return and risk-free rate levels.

“We also maintain the view that the outperformance wedge, a downward adjustment to allowed returns in expectation of future outperformance, is conceptually and practically flawed. We were disappointed it remained in the Final Determination.”

If an appeal is accepted it would take approximately six months, the FTSE 100 group said, with provisional findings around July and

final determinations in early October.


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