3rd Dec 2018 08:41
LONDON (Alliance News) - Drax Group PLC said on Monday it has agreed to amended terms with Spanish electric utility Iberdrola SA for the acquisition of Scottish Power's portfolio of pumped storage, hydro and gas-fired generation assets for GBP702 million.
Both companies have agreed to make payments to each other depending on the portfolio's profit performance in the first nine months of 2019, in the event that capacity payments are not made due to the suspension of the capacity market.
Drax agreed to acquire the portfolio back in mid-October. It consists of the Cruachan pumped-storage hydro facility and run-of-river hydro locations at Galloway and Lanark, all in Scotland.
It also includes four combined cycle gas turbine stations at Damhead Creek, Rye House, Shoreham and Blackburn Mill in south east England, as well as a biomass-from-waste facility in Daldowie in Scotland.
Drax and Iberdrola have agreed to a risk-sharing mechanism for capacity payments in the first nine months of 2019, worth GBP36 million. If less than all of these payments are recovered and the portfolio's gross profit for 2019 is lower than GBP155 million, Drax will be paid GBP26 million by Iberdrola.
However, should the portfolio's profit exceed GBP165 million, Drax will pay an amount equal to 72% of the amount by which the profit is higher than GBP165 million, capped at GBP26 million.
The acquisition amendment is due to a decision by the General Court of the European Union in mid-November to annul the European Commission's 2014 decision to not make a more detailed investigation into the UK government's scheme for the electricity capacity market.
A standstill period has been imposed, where payments to generators under existing capacity agreements and the holding of future auctions have been suspended, while the Commission completes a more-detailed investigation.
The portfolio being acquired by Drax is currently expected to generate earnings before interest, taxes, depreciation and amortisation for 2019 in the range of GBP90 million to GBP110 million. However, should the capacity payments not be received due to the ruling, guidance will be reduced to between GBP43 million and GBP63 million.
The acquisition is expected to be completed at the end of this month.
"The capacity market is a central pillar of the UK's energy policy and ensures security of supply while minimising costs to consumers. The government has stated it is working closely with the European Commission to aid their investigation and to reinstate the full capacity market regime, including existing agreements, as soon as possible," said Chief Executive Officer Will Gardiner.
"To mitigate the risk that capacity payments take time to be restored, we have agreed revised terms which provide protection in 2019. Beyond 2019, while reinstatement of the capacity market is the most likely outcome, we considered other outcomes, the more plausible of which would still deliver returns in excess of Drax's weighted average cost of capital," Gardiner added.
Drax will release its full-year results on February 26, 2019.
Shares in Drax were up 1.0% at 394.60 pence on Monday.