Tag: hydro-electric power

Acquisition agreement amended to mitigate risk to 2019 capacity payments

3 December 2018

Investors
RNS Number: 1455J
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

The revised contractual arrangements are designed to mitigate the risk to 2019 capacity payments arising from the recent suspension of the Capacity Market.

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“The strategic merits of this acquisition remain unchanged and the Board believes there is a compelling logic in our move to add further flexible sources of power to our offering, which will accelerate our ability to deliver our strategic vision of a lower-carbon, lower-cost energy future for the UK.

“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.

“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.

“The acquisition makes financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.”

Capacity Market

On 15 November 2018, the General Court of the European Union issued a ruling annulling the European Commission’s 2014 decision not to undertake a more detailed investigation of the UK Government’s scheme establishing the Capacity Market (the “Ruling”). The Ruling imposed a “standstill period” while the European Commission completes a further state aid investigation into the Capacity Market. Payments to generators scheduled under existing capacity agreements and the holding of future capacity auctions have been suspended.

Cruachan Power Station on Loch Awe, Argylle and Bute

Contracted capacity payments make up a significant proportion of the earnings of the Portfolio. For the period from 1 January 2019 to 30 September 2022, the Cruachan pumped storage hydro asset has contracted capacity payments of £29 million, the Galloway run-of-river hydro assets have contracted capacity payments of £5m million, and the Combined Cycle Gas Turbine assets have contracted capacity payments of £122 million in aggregate.

Drax notes the UK Government’s statement in response to the Ruling that it is working closely with the European Commission to aid their investigation and to seek a timely state aid re-approval decision for the Capacity Market. The UK Government also confirmed that the Ruling does not change its belief that Capacity Market auctions are the most appropriate way to deliver secure electricity supplies at the lowest cost and that the Ruling was decided on procedural grounds and did not constitute a direct challenge to the design of the Capacity Market itself.

Lanark Hydro Scheme, Lanarkshire

Based on the information available and legal advice it has received, Drax believes that the most likely outcome is that the European Commission will re-approve the existing Capacity Market in its current or a broadly similar form.

Despite the above, Drax recognises there is some uncertainty whether the contracted capacity payments for the 2018/19 Capacity Market year, which are currently suspended, will be paid by the UK Government. To mitigate the risk that these payments are not received for the 2018/19 Capacity Market year, Drax has agreed with Iberdrola certain amendments to the agreement signed on 16 October 2018.

Arrangements with Iberdrola in respect of 2018/19 capacity payments

Drax and Iberdrola have agreed a risk sharing mechanism in respect of capacity payments for the period 1 January 2019 to 30 September 2019, worth £36 million. If less than 100% of these payments are received and the gross profit of the Portfolio for the full year 2019 (the “2019 Gross Profit”) is lower than expected, Drax will receive a payment from Iberdrola of up to £26 million. The mechanism also gives Iberdrola the opportunity to earn an upside of up to £26 million if less than 100% of these payments are received but the Portfolio performs better than expected in 2019(1).

Under these arrangements, if less than 100% of these capacity payments are received:

  1. Iberdrola will make a payment to Drax if the 2019 Gross Profit is less than £155 million. The payment will be an amount equal to 72% of any shortfall in the 2019 Gross Profit below £155 million. The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received and £26 million; and
  2. Drax will make a payment to Iberdrola if the 2019 Gross Profit is more than £165 million. The payment will be an amount equal to 72% of any amount by which the 2019 Gross Profit exceeds £165 million. The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received by Drax and £26 million.

A pylon carries electricity transmission lines from Cruachan Power Station above Loch Awe in the mountains of the West Highlands of Scotland

If subsequently Drax receives any capacity payments in respect of the period 1 January 2019 to 30 September 2019, Drax will pay 72% of those amounts to Iberdrola capped at the amount paid by Iberdrola to Drax under the mechanism above.

Drax and Iberdrola have agreed that capacity payments due to the Portfolio in respect of the period before completion will be passed through to Iberdrola.

Any payments pursuant to the arrangements with Iberdrola will be cash adjustments to the consideration and not included in EBITDA(2).

Benefits of the acquisition

Shoreham Power Station, West Sussex

Based on Drax’s expectations of the position that is most likely to be achieved in relation to the Capacity Market following the Ruling, Drax believes the Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of Drax’s weighted average cost of capital.

Drax has considered other possible outcomes for the Capacity Market which are less likely but may ensue and if they did the financial effects of the Acquisition may be adversely affected.

Drax believes that if the more plausible of these outcomes were to ensue the returns from the Acquisition would still be in excess of the Drax’s weighted average cost of capital.

Drax has not attempted to quantify the effect if the less plausible of these other outcomes were to ensue – if there were no Capacity Market or similar mechanism or if significant structural changes were made to the Capacity Market. Drax sees these as a remote possibility and notes that in those circumstances it believes the loss or reduction of capacity payments could be mitigated by increases in wholesale power prices.

The Acquisition strengthens Drax’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £42 million of shares purchased to date.

2019 profit forecast

Daldowie Fuel Plant, Glasgow

Based on recent power and commodity prices and assuming that all contracted capacity payments are received, the Portfolio is expected to generate EBITDA in 2019 in a range of £90 million to £110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, ROCs(3) and the Daldowie energy-from-waste plant.

If, in light of the Ruling, the contracted capacity payments payable in 2019 in respect of the Portfolio are not received or accrued in 2019, the expected EBITDA for the Portfolio in 2019 would be reduced by up to £47 million (from a range of £90 million to £110 million) down to a range of £43 million to £63 million before considering mitigating factors. Drax believes that the arrangements agreed with Iberdrola mitigate in economic terms the majority of the risk that those suspended capacity payments will not be paid.

Assuming performance in line with current expectations and if all capacity payments due in 2019 are received before the end of 2019, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019. If capacity payments are not received in 2019, net debt to EBITDA is expected to fall to around 2x during 2020.

Drax current trading and 2018 outlook

Following the Ruling, £7 million of contracted capacity payments relating to 2018, principally in relation to Drax’s remaining two coal-fired units, will not be paid as and when expected. Taking this into account, and following Drax’s recent good trading performance and assuming continued good operational availability for the remainder of the year, Drax’s full year EBITDA outlook remains in line with previous expectations, with net debt to EBITDA expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Process

The Clatteringshaws Dam in Dumfries and Galloway, built by Sir Alexander Gibb & Partners in 1932-38, it is part of the Galloway Hydro Scheme

On 1 November 2018, the Competition and Markets Authority informed Drax that it had no further questions in connection with the proposed Acquisition at that stage, which resulted in the competition condition under the Acquisition agreement being satisfied. Completion of the Acquisition is therefore currently expected to occur on 31 December 2018 assuming that the shareholder approval condition is satisfied by that date.

A combined shareholder circular and notice of general meeting containing the unanimous recommendation of the Board to approve the Acquisition will be posted as soon as practicable.

Other matters

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Notes

  1. Arrangements with Iberdrola in respect of 2018/19 capacity payments – only applicable if less than 100% of these capacity payments are received. Any payments pursuant to the arrangements with Iberdrola will be cash adjustments to the consideration and not included in EBITDA.Implied EBITDA is included in the table for reference only and is not a metric included in the mechanism, which is based on gross profit.
    The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received by Drax and £26 million.
    2019 Gross Profit £mImplied EBITDA based on 2019 Gross Profit £mPayment made to / (by) Drax capped at £26m £m*
    119 or lower54 or lower26
    1296419
    1397412
    149844
    155900
    1651000
    175110-7
    185120-14
    195130-22
    201 or higher136 or higher-26

    *Payment made to / (by) Drax will be classified as a cash adjustment to the consideration rather than as gross profit.
  2. EBITDA means earnings before interest, tax, depreciation, amortisation, unrealised profits and losses on derivative contracts and material or one-off items that do not reflect the underlying trading performance of the business. 2019 EBITDA is stated before any allocation of Group overheads.
  3. Renewable Obligation Certificates.

Enquiries

Drax Investor Relations:

Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763 949

Media

Drax External Communications:

Matt Willey
+44 (0) 7711 376 087

Ali Lewis
+44 (0) 7712 670 888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker)

+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):

+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola

16 October 2018

Investors
RNS Number : 1562E
Drax Group PLC
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

  • A unique portfolio of pumped storage, hydro and gas-fired generation assets
  • Compelling strategic rationale
    • Growing system support opportunity for the UK energy system
    • Significant expansion of Drax’s flexible, low-carbon and renewable generation model
    • Diversified generation capacity – multi-site, multi-technology
    • Opportunities in trading and operations
  • Strong financial investment case
    • High quality earnings
    • Expected returns significantly ahead of Weighted Average Cost of Capital (WACC)
    • Expected EBITDA(1) of £90-110 million in 2019
    • Debt facility agreed, net debt/EBITDA expected to be around 2x by the end of 2019
    • Supportive of credit rating and reduced risk profile for Drax
    • Strengthens ability to pay a growing and sustainable dividend

Will Gardiner, CEO, Drax Group

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“I am excited by the opportunity to acquire this unique and complementary portfolio of flexible, low-carbon and renewable generation assets. It’s a critical time in the UK power sector. As the system transitions towards renewable technologies, the demand for flexible, secure energy sources is set to grow. We believe there is a compelling logic in our move to add further flexible sources of power to our offering, accelerating our strategic vision to deliver a lower-carbon, lower-cost energy future for the UK.

“This acquisition makes great financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.

“We are combining our existing operational expertise with the specialist technical skills of our new colleagues and I am looking forward to what we can achieve together.”

A flexible, low-carbon and renewable portfolio

The Portfolio consists of Cruachan pumped storage hydro (440MW), run-of-river hydro locations at Galloway and Lanark (126MW), four CCGT(2) stations: Damhead Creek (805MW), Rye House (715MW), Shoreham (420MW) and Blackburn Mill (60MW), and a biomass-from-waste facility (Daldowie).

Clatteringshaws Loch and dam, part of the Galloway Hydro Scheme

Attractive high quality earnings and returns

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs(3). Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio. Further information is set out in Appendix 2 of this Announcement.

Capital expenditure in 2019 is expected to be in the region of £30-35 million.

For the year ended 31 December 2017, the Portfolio generated EBITDA of £36 million(4). EBITDA in 2019 is expected to be higher due to incremental contracted capacity payments (c.£42 million), no availability restrictions (Cruachan’s access to the UK grid during 2017 was limited by network transformer works) (c.£8 million), a lower level of corporate cost charged to the portfolio (c.£9 million) and revenues from system support services and current power prices. Gross assets as at 31 December 2017 were £419 million(5).

The Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of the Group’s WACC and to be highly accretive to underlying earnings in 2019.

The Acquisition strengthens the Group’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £32 million of shares purchased to date.

Financing the Acquisition

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility agreement to finance the Acquisition. Assuming performance in line with current expectations, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019.

Drax expects its credit rating agencies to view the Acquisition as contributing to a reduced risk profile for the Group and to reaffirm their ratings.

Conditions for completion

The Acquisition is expected to complete on 31 December 2018 and is conditional upon the approval of the Acquisition by Drax’s shareholders and clearance by UK Competition and Markets Authority (the “CMA”). A summary of the terms of the Acquisition agreement (the “Acquisition Agreement”) is set out in Appendix 1 to this announcement.

Drax trading and operational performance

Since publishing its half year results on 24 July 2018 Drax has commenced operation of a fourth biomass unit at Drax Power Station, which is performing in line with plan, and availability across biomass units has been good.

Biomass storage domes at Drax Power Station

Taking these factors into account, alongside a strong 2018 hedged position and assuming good operational availability for the remainder of the year, Drax’s EBITDA expectations for the full year remain unchanged, with net debt to EBITDA now expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Biomass generation is now fully contracted for 2019.

Contracted power sales at 30 September 2018

201820192020
Power sales (TWh) comprising:18.611.55.7
TWh including expected CfD sales18.615.611.2
– Fixed price power sales (TWh) 18.611.05.1
At an average achieved price (per MWh)at £46.8at £50.4at £48.3
– Gas hedges (TWh)-0.50.6
At an achieved price per therm-43.5p47.4p

Drax intends to hedge up to 1TWh of the commodity exposures in the Portfolio ahead of completion in line with the Group’s existing hedging strategy.

Other matters

In light of the Acquisition and the expected timing of the general meeting to approve it, Drax will postpone the planned Capital Markets Day on 13 November 2018.

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Enquiries:
Drax Investor Relations: Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763949

Media:
Drax External Communications:
Matt Willey
+44 (0) 7711 376087

Ali Lewis
+44 (0) 77126 70888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker):
+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):
+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition presentation meeting and webcast arrangements

Management will host a presentation for analysts and media at 9:00am (UK Time), Tuesday 16 October 2018, at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

Would anyone wishing to attend please confirm by e-mailing [email protected] or calling Christopher Laing at FTI Consulting on +44 (0) 20 3727 1355 / 07809 234 126.

The meeting can also be accessed remotely via a live webcast, as detailed below. After the meeting, the webcast will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 9am (UK time) on Tuesday 16 October 2018 for download at: www.drax.com>>investors>>results-reports-agm>> #investor-relations-presentations or use the link below.

Event Title:Drax Group plc: Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola
Event Date:Tuesday 16 October 2018
Event Time9:00am (UK time)
Webcast Live Event Linkhttps://www.drax.com/investors/16-oct-2018-webcast
020 3059 5868 (UK)
+44 20 3059 5868 (from all other locations)
Start Date:Tuesday 16 October 2018
Delete Date:Monday 14 October 2019
Archive Link:https://www.drax.com/investors/16-oct-2018-webcast

For further information please contact Christopher Laing on +44 (0) 20 3727 1355 / 07809 234 126.

Website: www.drax.com

Acquisition of the Portfolio from Iberdrola

Drax Smart Generation Holdco Limited (“Drax Smart Generation”), a wholly owned subsidiary of Drax, has entered into the Acquisition Agreement with Scottish Power Generation Holdings Limited (the “Seller”), a wholly-owned subsidiary of Iberdrola S.A., for the acquisition of ScottishPower Generation Limited (“SPGEN”), for £702 million in cash.

Loch Awe and Cruachan Reservoir from Ben Cruachan, Argyle and Bute

Strong asset base

The Portfolio principally consists of 2.6GW of assets which are highly complementary to Drax’s existing generation portfolio and play an important role in the UK energy system. The assets include:

Turbine hall at Cruachan Power Station

Cruachan Pumped Storage Hydro

440MW of large-scale storage and flexible low-carbon generation situated in Argyll and Bute, Scotland.

Cruachan provides a wide range of system support services to the UK energy market, in addition to providing merchant power generation. Cruachan has £35 million of contracted capacity payments for the period 2019 to 2022.

Cruachan, which provides over 35% of the UK’s pumped storage by volume, can provide long-duration storage with the ability to achieve full load in 30 seconds, which it can maintain for over 16 hours, making it a strategically important asset remunerated by a broad range of non-commodity based revenues.

 

Galloway Hydro Scheme, River Dee

Galloway and Lanark Run-of-River Hydro

126MW of stable and reliable renewable generation situated in South-west Scotland.

Both locations benefit from index-linked ROC revenues extending to 2027 and Galloway, in addition to renewable power generation, operates a reservoir and dam system providing storage capabilities and opportunities for peaking generation and system support services. It also has £4 million of contracted capacity payments for the period 2019 to 2022.

 

 

 

Combined Cycle Gas Generation (CCGT)

1,940MW of capacity at Damhead Creek (805MW), Rye House (715MW) and Shoreham (420MW) all strategically located in South-east England.

Shoreham Power Station, West Sussex

These assets provide baseload and/or peak power generation in addition to other system support services and benefit from attractive grid access income associated with their location. The three plants have contracted capacity payments of £127 million for the period 2019 to 2022.

Damhead Creek Power Station, Isle Of Grain, Kent

Damhead Creek also benefits from an attractive option for the development of a second CCGT asset, Damhead Creek II, which provides additional gas generation optionality alongside Drax’s existing coal-to-gas repowering and OCGT(6) projects. All options could be developed subject to an appropriate level of support. Damhead Creek II is eligible for the 2019 capacity market auction along with two of Drax’s existing OCGT projects.

Other smaller sites

The portfolio also includes a small CCGT in Blackburn (60MW) and a 50K tonne biomass-from-waste facility in Daldowie, which benefits from a firm offtake contract agreement with Scottish Water until 2026.

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

The UK has a target to reduce carbon emissions by 80% by 2050. The transition to a low-carbon economy requires decarbonisation of heating, transport and generation. This will in turn require additional low-carbon sources of generation to be developed in the UK. As much as 85%(7) of future generation could come from renewables – predominantly wind and solar. This will lead, at times, to high levels of power price volatility and increasing demand for system support services. Managing an energy system with these characteristics will only be possible if it is supported by the right mix of flexible assets to manage volatility, balance the system and provide crucial non-generation services which a stable energy system requires.

Pylon and electricity transmission lines from Cruachan Power Station above Loch Awe

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

Increased earnings potential aligned with generation strategy and UK energy needs

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

High quality earnings

Two thirds of the gross profits of the Portfolio is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs, in addition to power generation activities. Due to the expected growing demand for these assets and the contract-based nature of many of these services Drax expects to improve long-term earnings visibility through structured non-commodity earnings streams, whilst retaining significant opportunity to benefit from power price volatility.

When combined with renewable earnings and system support from existing biomass generation, the Acquisition is expected to lead to an increase in the quality of earnings.

Diversified generation and portfolio benefits

Wood pellet storage domes at Drax Power Station, Selby, North Yorkshire

The Acquisition accelerates Drax’s development from a single-site generation business into a multi-site, multi-technology operator.

With the acquisition of this portfolio, a fall in gas prices could be mitigated by an increase in gas-fired generation reflecting the relative dispatch economics of the different technologies.

Drax expects to benefit from the management of generation across a broader asset base, leveraging the Group’s expertise in the operation, trading and optimisation of large rotating mass generation.

Drax believes that the team operating the Portfolio has a strong engineering culture which is closely aligned with the Drax model and will enhance the Group’s strong capabilities across engineering disciplines.

Around 260 operational roles will transfer to Drax as part of the Acquisition, complementing and reinforcing Drax’s existing engineering and operational capabilities.

Financing and capital structure

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility to finance the Acquisition, with a term of 12 months from the first date of utilisation of the facility (with a seven-month extension option) and interest payable at a rate of LIBOR plus the applicable margin (the “Acquisition Facility Agreement”). The facility is competitively priced and below Drax’s current cost of debt.

Drax will consider its options for its long-term financing strategy in 2019.

Assuming performance in line with current expectations, net debt to EBITDA is expected to return to Drax’s long-term target of around 2x by the end of 2019.

Drax expects credit rating agencies to view the Acquisition as supportive of the rating and contributing to a reduced risk profile for the Group.

Process and integration plan

Drax is progressing a detailed integration plan to combine the Acquisition as part of the existing Power Generation business.

The transaction is subject to shareholder approval. A combined Shareholder Circular and notice of General Meeting will be posted as soon as practicable.

The transaction is expected to complete on 31 December 2018.

Notes:

(1)    EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business. 2019 EBITDA is stated before any allocation of Group overheads.
(2)    Combined Cycle Gas Turbine.
(3)    Renewable Obligation Certificates.
(4)    2017 EBITDA is unaudited and based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies.
(5)    On an unaudited historic cost basis, inclusive of an historic write down and other changes arising from the application of Drax’s accounting policies, and incorporating intercompany debtors which will be replaced by Drax going forward.
(6)    Open Cycle Gas Turbines.
(7)    Intergovernmental Panel on Climate Change. In a 1.5c pathway renewables are projected to be 70-85% of global electricity in 2050.

IMPORTANT NOTICE

The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).

J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) (“J.P. Morgan Cazenove”) and RBC Europe Limited (“RBC”), which are both authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the FCA and the PRA, are each acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as their respective clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.

J.P. Morgan Cazenove, RBC and their respective affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Each of J.P. Morgan Cazenove, RBC and their respective affiliates accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.

Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s, the Portfolio’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

Each of the Company, J.P. Morgan Cazenove, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.

You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group, the Portfolio and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.

Appendix 1

Principal Terms of the Acquisition

The following is a summary of the principal terms of the Acquisition Agreement.

  1. Acquisition Agreement

Parties and consideration

The Acquisition Agreement was entered into on 16 October 2018 between Drax Smart Generation and the Seller. Pursuant to the Acquisition Agreement, the Seller has agreed to sell, and Drax Smart Generation has agreed to acquire, the whole of the issued share capital of SPGEN for £702 million, subject to certain customary adjustments in respect of cash, debt and working capital.

Drax Group Holdings Limited has agreed to guarantee the payment obligations of Drax Smart Generation under the Acquisition Agreement. Scottish Power UK plc has agreed to guarantee the payment obligations of the Seller under the Acquisition Agreement.

Conditions to Completion

The Acquisition is conditional on:

  • the approval of the Acquisition by Drax shareholders, which is required as the Acquisition constitutes a Class 1 transaction under the Listing Rules (the “Shareholder Approval Condition”); and
  • the CMA having indicated that it has no further questions at that stage in response to pre-Completion engagement by Drax or the CMA having provided a decision that the Acquisition will not be subject to a reference under the UK merger control regime.

Completion is currently expected to occur on 31 December 2018 assuming that the conditions are satisfied by that date.

Termination for material reduction in available generation capacity

Drax Smart Generation has the right to terminate the Acquisition Agreement upon the occurrence of a material reduction in available generation capacity at any of the Cruachan, Galloway and Lanark or Damhead Creek facilities which subsists, or is reasonably likely to subsist, for a continuous period of three months. The right of Drax Smart Generation to terminate in these circumstances is subject to the Seller’s right to defer Completion if the relevant material reduction in available generation capacity can be resolved by end of the month following the anticipated date of Completion.

Break fee

A break fee of £14.6 million (equal to 1% of Drax’s market capitalisation at close of business on the day before announcement) is payable if the Shareholder Approval Condition is not met, save where this is as a result of a material reduction in available generation capacity as described above.

Pre-completion covenants

The Seller has given certain customary covenants in relation to the period between signing of the Acquisition Agreement and completion, including to carry on the SPGEN business in the ordinary and usual course.  The Seller will carry out certain reorganisation steps prior to completion.

Pension liabilities

Drax Smart Generation has agreed to assume the accrued defined benefit pension liabilities associated with the employees of the SPGEN group as at the date of signing the Acquisition Agreement. Following Completion, the SPGEN group will continue to participate in the Seller’s group defined benefit pension scheme, known as the ScottishPower Pension Scheme (“SPPS”) for an interim period of 12 months unless agreed otherwise (the “Interim Period”) while a new pension scheme is set up by the SPGEN group for the benefit of its employees (the “New Scheme”).

At the end of the Interim Period, the SPPS trustees will be requested to transfer from the SPPS to the New Scheme an amount of liabilities (and corresponding share of assets) agreed between the Seller and Drax Smart Generation (or failing agreement, an amount determined by an independent actuary) in respect of the past service liabilities relating to the SPGEN group employees.  If the amount of assets transferred to the New Scheme does not match the amount agreed (or independently determined), there will be a true-up between the Seller and Drax Smart Generation.

If the SPPS trustees do not make any transfer to the New Scheme within the period of 18 months following the Interim Period (unless this was caused by a breach of the Acquisition Agreement by the Seller), Drax Smart Generation has agreed to pay £16 million (plus base rate interest) to the Seller as compensation for the SPPS liabilities not taken on by the New Scheme.

Seller’s warranties, indemnities and tax covenant

The Seller has provided customary warranties in the Acquisition Agreement.  The Seller also has provided Drax Smart Generation with indemnities in respect of certain specific matters, including for any losses associated with the reorganisation referred to above.  A customary tax covenant is also provided in the Acquisition Agreement.

  1. Transitional Services Agreement

The Seller and SPGEN will enter into a transitional services agreement effective at Completion. The specific nature, terms and charges relating to the services to be provided will be agreed between the Seller and SPGEN prior to Completion. The Seller will also provide assistance in relation to the extraction and separation of the SPGEN group from the systems of the Seller and integration of the SPGEN group onto the systems of the Drax Group.

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million (“Profit Forecast”), and gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio.

For the purpose of the Profit Forecast, EBITDA is stated before any allocation of Group overheads (as these will be an allocation of the existing Drax Group cost base which is not expected to increase as a result of the acquisition of the Portfolio).

Basis of preparation

The Profit Forecast has been compiled on the basis of the assumptions stated below, and on the basis of the accounting policies of the Drax Group adopted in its financial statements for the year ended 31 December 2017. Subsequent accounting policy changes include the application of IFRS15 and IFRS9 which are not initially expected to change the EBITDA results of the Portfolio. It also does not reflect the impact of IFRS16 which would apply in respect of the 2019 Annual Report and Accounts.

The Profit Forecast has been prepared with reference to:

  • Unaudited 2017 financial statements based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies
  • The audited financial statements of the entities forming the Portfolio for the year ending 31 December 2017
  • The unaudited management accounts of the Portfolio for the nine months ending 30 September 2018
  • And on the basis of the projected financial performance of the Portfolio for the year ending 31 December 2019

The Profit Forecast is a best estimate of the EBITDA that the Portfolio will generate for a future period of a year in respect of assets and operations that are not yet under the control of Drax. Accordingly the degree of uncertainty relating to the assumptions underpinning the Profit Forecast is inherently greater than would be the case for a profit forecast based on assets and operation under the control of Drax and/or which covered a shorter future period. The Profit Forecast has been prepared as at today and will be updated in the shareholder circular.

The forecast cost base reflects the expectations of the Drax Directors of the operating regime of the Portfolio under Drax’s ownership and the central support it will require.

Principal assumptions

The Profit Forecast has been prepared on the basis of the following principal assumptions:

Assumptions within management’s control

  1. There is no change in the composition of the Portfolio.
  2. There is no material change to the manner in which these assets are operated.
  3. There are no material changes to the existing running costs / operating costs of the Portfolio.
  4. There will be no material restrictions on running each of the assets in the Portfolio other than those that would be envisaged in the ordinary course.
  5. No material issues with the migration of services including trading and information technology from Scottish Power to Drax.
  6. No hedges are transferred as part of the Transaction.
  7. Transaction costs and one-off costs associated with the Integration are not included.

Assumptions outside of management’s control

  1. The acquisition of the Portfolio is completed on 31 December 2018.
  2. There is no material change to existing prevailing UK macroeconomic and political conditions prior to 31 December 2019.
  3. There are no material changes in market conditions in electricity generating market and no change to the UK energy supply mix.
  4. There are no material changes in legislation or regulatory requirements (e.g. ROCs, capacity market, grid charges) impacting the operations or accounting policies of the Portfolio.
  5. There are no changes to recent market prices for clean spark spread, power, carbon and other commodities.
  6. There is no material change from the historical 10-year average rainfall.
  7. There are no material adverse events that have a significant impact on the financial performance of any of the acquired assets, including any more unplanned outages than would be expected in the ordinary course.
  8. Prior to completion, the business will be operated in the ordinary course.
  9. There are no material issues with the transitional services provided by Scottish Power to Drax pursuant to the TSA, including the migration of such services to Drax.
  10. There is no material change in the management or control of the Drax group.

 

END

The 8 biggest things in renewable energy

18 July 2018

Power generation

Powering a whole country is a big task. The equipment that make up power stations and electricity systems are measured in tonnes and miles, and pump gigawatts (GW) of electricity around the country. With the world’s electricity increasingly coming from renewables, this big thinking is key to powering long-term change.

From taller wind turbines to bigger batteries, these are the massive structures breaking energy records.

Germany’s giant wind turbine and the plan to beat it

As wind power becomes ever more prevalent, one of the key questions that needs answering is how to get more out of it. One way is to build taller turbines and longer blades. Putting turbines higher into the air sets them into stronger wind flows, while longer blades increase their generating capacity.

The world’s tallest wind turbines are currently in Gaildorf, Germany and stand at 178 metres with the blades tips reaching 246.5 metres. Built by Max Bögl Wind AG, the onshore turbines house a 3.4 megawatt (MW) generator that can produce around 10.5 gigawatt hours (GWh) per year.

However, turbines continue to grow and GE has announced plans for the Haliade-X turbine, which will ship in 2021. At 259 metres in total the offshore turbine is almost double the height of the London Eye and will spin 106 metre blades, generating 67 GWh per year.

China’s ‘Great Wall of Solar’

China has pumped substantial investment into solar power, including the world’s biggest solar plant in electricity generation and sheer size. Dubbed the ‘Great Wall of Solar’, the Tengger Desert Solar Park has a capacity of more than 1.5 GW and covers 43 km2 of desert.

The next largest, by comparison, is India’s Kurnool Ultra Mega Solar Park, which covers just 24 km2 and generates 1 GW. However, rampant investment by the country means there are several projects in the pipeline that will break the 2 GW mark and will set new records for solar power plants.

Morocco takes solar to new heights

Concentrated solar power (CSP) takes the technology skywards by using thousands of mirrors, known as heliostats, and focusing the sun’s rays towards a central tower. This heats up molten salt within the tower, which is then combined with water to create steam and power a turbine – like in a thermal power plant.

Morocco’s Noor Ouarzazate facility (pictured in the main photo of this article) is home to the world’s tallest CSP towers. At 250 metres tall, 7,400 heliostats beam the sunlight at each tower, which have a capacity of 150 MW and can store molten salt for 7.5 hours. Its record will soon be matched by Israel’s 121 MW Ashalim Solar Thermal Power Station when it begins operating this year.

However, never one to be outdone when it comes to tall structures, Dubai plans to build a 260 metre CSP tower in 2020 as part of the Mohammed bin Rashid Al Maktoum Solar Park, which at 700 MW will be the world’s largest single-site CSP facility.

Three Gorges Dam

China’s monster mountain dam

The Three Gorges Dam on China’s Yangtza river might be the world’s most powerful hydropower dam with its massive 22.5 GW capacity, but a different Chinese dam holds the title of the world’s tallest.

Jinping-I Hydropower Station is a 305-metre-tall arch dam on the Yalong River. It sits on the Jinping Bend where the river wraps around the entire Jinping mountain range. The project began in 2005 and was completed with the commissioning of a sixth and final generator in 2014, which brought its total capacity to 3.6 GW.

Itaipu Dam and hydropower station

Brazil and Paraguay’s river arrangement

While it may be tall, at 568 metres-long, Jinping-I is far from the longest. That mantle belongs to the 7,919 metre-long Itaipu Dam and hydropower station that straddles Brazil and Paraguay and has an installed capacity of 14 GW.

The power station is home to 20, 700 MW generators, however, as Brazil’s electricity system runs at 60Hz and Paraguay’s at 50Hz, 10 of the generators run at each frequency.

Biomass domes that could hide the Albert Hall

Using a relatively new material, such as compressed wood pellets as a renewable alternative to coal in large thermal power stations creates new challenges. Biomass ‘ecostore’ domes help tackle storage problems by keeping the materials dry and maintaining the right temperatures and conditions.

Unlike cylindrical, concrete silos, domes also offer greater resistance to hurricanes and extreme weather. This is important in areas such as Louisiana where this low carbon fuel  is stored at the Drax Biomass port facility in 35.7 metre high, 61.6 metre diameter domes before it is shipped to Drax Power Station.

The power station itself is home to four of the world’s largest biomass domes. Each is 50.3 metres high and 63 metres in diameter – enough to hold the Albert Hall, or in Drax’s case 71,000 tonnes of biomass.

South Korean coastline takes the most from the tides

Beginning operation 1966, the Rance Tidal Power Station, in France was the first and largest facility of its kind for 45 years. The power station made use of the 750 metre-long Rance Barrage on France’s northern coast with a 330-metre-long section of it generating electricity through 24, 10 MW turbines.

It was overtaken, however, in 2011 with the opening of the Sihwa Lake Tidal Power Station in South Korea. The facility generates power along a 400-metre section of the 12.7 km Sihwa Lake tidal barrage and generates a maximum of 254 MW through ten 25.4 MW submerged turbines.

The battle to beat Tesla’s giant battery

South Australia has become a battlefield in the race to build the world’s biggest grid scale storage solution. Tesla constructed a 10,000 m2, football pitch-sized 100 MW lithium-ion battery outside of Adelaide at the end of 2017 which is connected to a wind power plant and can independently supply electricity to 30,000 homes for an hour.

However, rival billionaire to Tesla’s Elon Musk, Sanjeev Gupta plans to take on the storage facility with a 140 MW battery to support a new solar-powered steelworks, also in South Australia.

The excitement around battery technology’s potential means the title of world’s biggest will likely swap hands plenty more times over the next decade. This contest won’t just be confined to batteries. As countries increasingly move away from fossil fuels, bigger, wider and taller renewable structures will be needed to power the world. These are the world’s largest renewable structures today, but they probably won’t stay in those positions for long.