New Drax-Iberdrola deal mitigates risks to capacity payments

Author: U.S. Army Corps of Engine. License: Creative Commons, Attribution 2.0 Generic.

December 3 (Renewables Now) - Drax Group Plc (LON:DRX) and Iberdrola SA (BME:IBE) have added a risk-sharing mechanism to the asset sale deal they reached in mid-October in view of the recent suspension of the capacity market scheme in the UK.

Under the terms of the adjusted agreement, either party could receive a payment of up to GBP 26 million (USD 33.1m/EUR 29.2m) depending on the performance in 2019 of the asset portfolio being divested.

In October, Drax agreed to buy the traditional generation assets of Iberdrola-owned Scottish Power Ltd, including gas-fired, pumped storage and hydro facilities, for GBP 702 million in cash. A significant proportion of the earnings this 2,566-MW portfolio generates come from contracted capacity payments, which have now been suspended as the European Commission is undertaking a further state aid investigation into the capacity market regime.

Drax CEO Will Gardiner commented that the company still sees a compelling logic in executing the transaction. The purpose of revising the terms of the original deal was to mitigate the risk that capacity payments take time to be restored, he noted.

“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 stated. Drax though believes that the EC will re-approve the existing scheme in its current or a broadly similar form.

The revised deal calls for Iberdrola to pay Drax up to GBP 26 million if less than 100% of the due payments for the period January 1, 2019-September 30, 2019 are made. A key condition is that the gross profit of the portfolio for the full 2019 is lower than expected. Otherwise, Iberdrola will be the one to get a payment of up to GBP 26 million if the portfolio exceeds expectations.

Drax estimates that the portfolio will generate earnings before interest, tax, depreciation and amortisation (EBITDA) of GBP 90 million-110 million in 2019 from gross profits of GBP 155 million-175 million. About two thirds of the gross profits are expected to come from non-commodity market sources such as system support services, capacity payments, renewable obligation certificates (ROCs) and the Daldowie energy-from-waste plant. If not all capacity payments are made, the EBITDA range for 2019 is seen at GBP 43 million-63 million, before considering mitigating factors.

(GBP 1.0 = USD 1.274/EUR 1.122)

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Ivan is the mergers and acquisitions expert in Renewables Now with a passion for big deals and ambitious capacity plans.

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