Iberdrola Asset Sale to Drax Revised

Iberdrola’s planned £702mn ($895mn) cash sale announced mid-October of 2,566 MW of its UK power plants to Drax has been revised in order to mitigate risk over 2019 capacity payments.

Drax said December 3 that terms have now been revised, because of the uncertainty of whether contracted capacity payments for the 2018/19 capacity market year will be paid by the UK government following a significant EU court ruling Nov.15. The UK last month last month suspended its payment of 2018/19 capacity payments, because of the EU ruling.

CEO Will Gardiner said the strategic merits of its planned acquisition from Iberdrola - which includes 2,000 MW of gas-fired CCGT plants - “remain unchanged.”

Nonetheless Drax and Iberdrola have agreed a risk-sharing mechanism in respect of the £36mn of capacity payments that were due for the first nine months 2019. If less than 100% of these payments are received and the gross full year 2019 profit of the portfolio is lower than expected, Drax will receive a payment from Iberdrola of up to £26m. Iberdrola though has the opportunity to earn upside of up to £26mn from Drax if less than 100% of these payments are received but the portfolio nonetheless performs better than expected in 2019.

The Iberdrola/Drax revision does not include any revisions covering the period after October 1 2019. Gardiner noted that capacity payments for the 2,566 MW assets during the period January 1 2019 to September 30 2022 add up to £122mn in aggregate for the CCGTs and £34mn for hydro assets. 

Ratings agency Moody’s said last month that British generators could lose up to £4.3bn in scrapped capacity payments during 2018-2022, if the UK government were not to pay these out.