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

Drax (the “Group” or “Drax Group”) is pleased to announce that it has agreed to acquire Scottish Power’s portfolio of pumped storage, hydro and gas-fired generation (the “Portfolio”) for £702 million in cash (the “Acquisition”) from Iberdrola, subject to Drax shareholder approval.

16th October 2018
RNS Number : 1562E
Drax Group PLC

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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

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).

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.

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

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