SSE PLC : ACQUISITION OF ELECTRICITY GENERATION ASSETS
06/15/2012| 02:16am US/Eastern
RNS Number : 4288F
15 June 2012
ACQUISITION OF ELECTRICITY GENERATION ASSETS IN IRELAND
SSE plc, through its wholly-owned subsidiary SSE Generation Ltd., has entered into an agreement with Endesa Generacion SA, to acquire the shares of Endesa Ireland Limited, the assets of which include plant in operation, under construction and with consent for development, for a total cash consideration of EUR320m (GBP256m) plus an estimated EUR43m (GBP34m) for working capital. Adding to SSE's existing assets, this acquisition is a positive step forward in delivering a balanced generation and supply business in Ireland.
The acquisition is subject to, amongst other things, approval by the Irish Competition Authority and SSE expects to complete the purchase later this summer, at which point around 110 employees of Endesa Ireland Limited will transfer to SSE.
Generation assets in operation
The operational assets are at four sites and their principal function is to help maintain security of electricity supply in the all-island Single Electricity Market (SEM) by being available to respond to peaks in demand. They consist of:
-- 620MW fuel oil Tarbert Power Station in Co. Kerry;
-- 240MW fuel oil Great Island Power Station in Co. Wexford;
-- 104MW peaking gasoil Tawnaghmore Power Station in Co. Mayo; and
-- 104MW peaking gasoil Rhode Power Station in Co. Offaly.
The electricity generated is traded in the SEM, where fixed capital costs and plant availability are remunerated via a capacity payment mechanism, and variable costs, including fuel and carbon, are remunerated through the energy market.
CCGT under construction
A 460MW CCGT (combined cycle gas turbine) is currently under construction at Great Island and is expected to be commissioned in 2014, at which time the existing 240MW fuel oil unit will be decommissioned. It features a 460MW Mitsubishi generation plant and has consents for gas and grid connections.
SSE will incur capital expenditure of EUR125m (GBP100m) over three financial years to complete the construction of the new CCGT. This will be included in its plans to incur capital and investment expenditure in the range of GBP1.5bn to GBP1.7bn in each of the years to March 2015.
SSE and Mitsubishi Heavy Industries signed an agreement in 2010 establishing the parties' intention to collaborate in areas such as low carbon energy generation and other technologies. Since signing, the parties have been actively developing their relationship, including working on opportunities presented by SSE's CCGT development programme. This acquisition will utilise MHI's proven CCGT technology and will further develop the SSE-Mitsubishi partnership into a project execution phase.
CCGT with consent for development and other options
The acquisition also includes three options for the future development of electricity generation plant in Ireland. They are:
-- a proposed 450MW CCGT plant at Tarbert, which received full planning permission in 2010;
-- a development site at Lanesboro, Co. Longford; and
-- a development site at Shannonbridge, Co. Offaly.
The two development sites both feature infrastructure that could support future construction of new thermal generation plant later in the decade, subject to planning permission being secured.
Meeting customers' requirements for electricity in Ireland
Following the completion of this acquisition, and including its existing 500MW of wind farm capacity in operation there, SSE will become the third largest electricity generation capacity owner on the island of Ireland with 1,568MW (around 13% of installed capacity).
Over the medium and long term, the completion of the 460MW CCGT at Great Island and the continuing development of its wind farm projects will give SSE a balanced generation portfolio in Ireland and a significantly increased output of electricity that will have a lower CO(2) intensity than the SEM average. In a typical year, the Great Island CCGT and SSE's existing wind farms should generate the equivalent of around two thirds of the electricity needed to supply SSE's customers in Ireland (based on electricity consumption for the financial year ending 31 March 2012).
Along with its power purchase agreements, this means SSE can securely and cost-effectively meet the demand of its rapidly growing Irish supply business, Airtricity, in a way that is sustainable. Following the agreement to acquire the customers of Phoenix Supply Limited, SSE will be the supplier to around 500,000 electricity customers and 250,000 gas customers across the island of Ireland.
Increasing harmonisation of electricity markets in Ireland and Great Britain
The electricity systems in Ireland and Great Britain are already connected by the 500MW Moyle interconnector between Co Antrim and Ayrshire, and the 500MW East-West interconnector between Co. Dublin and Denbighshire is due to be commissioned later this year. This will enable an additional two-way flow of electricity between Ireland and Great Britain and contribute to increasing harmonisation of the two markets.
SSE is currently undertaking a comprehensive programme of upgrade work to support more flexible operations at its Keadby and Medway gas-fired power stations from 2013 onwards. The work being carried out follows a similar and successful programme undertaken at Peterhead power station in 2011.
It is examining the option to construct a CCGT unit of up to 470MW at Abernedd and is currently considering responses to an invitation to tender issued at the end of 2011. As set out in SSE's financial report on 16 May, an investment decision on Abernedd will not be taken until the autumn of this year at the earliest. It will be taken in the context of SSE's wider capital and investment expenditure plans and will depend, amongst other things, on the emerging shape of the electricity market in the light of the UK government's proposed reforms.
Financial impact of the transaction and subsequent investment
The transaction and the subsequent investment will total around EUR488m (GBP390m). Based on a pro forma completion date of end July 2012, this will comprise:
-- EUR320m (GBP256m) for the assets themselves;
-- EUR43m (GBP34m) of estimated working capital; and
-- EUR125m (GBP100m) to complete the construction of the Great Island.
This includes a deferred element of up to EUR10m (GBP8m) which will be paid on completion of an upgrade to the grid at the Great Island CCGT site.
Endesa Ireland's profit before tax, in its audited financial statements for the financial year ending 31 December 2011, was EUR38.1m while the value of its gross assets, the total of current and non-current assets, was EUR490.6m.
The acquisition is expected to enhance SSE's earnings in the first full year and beyond and to improve the risk profile of its business in Ireland and is consistent with the maintenance of a single A credit rating. As stated in its financial report on 16 May, SSE is committed to maintaining financial diversity and will move quickly to take the right financing options, and it expects to issue further hybrid capital securities in the course of the next year.
Gregor Alexander, Finance Director of SSE and its Lead Director for Ireland, said:
"The completion of this acquisition and of the Phoenix acquisition we announced in May will make SSE the third largest energy company across the island of Ireland and will take our total investment in energy on the island to around EUR1.7bn of which half relates to the period since Airtricity became part of SSE in 2008.
"The acquisition will give us substantial and diverse generation assets to help meet the energy needs of our increasing number of customers and give balance to our business in Ireland which will put it on a very strong footing for the long term. Making the most of the opportunities presented by our two acquisitions of recent weeks and in our existing businesses is our priority for the next few years in Ireland.
"I am pleased that our long-standing financial discipline has enabled us to reach this agreement in a timely way and to take such a positive step forward for SSE. Maintaining that discipline continues to be central to our plans for the future."
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