SSE plc
GAS ASSETS ACQUISITION
SSE plc, through its wholly-owned subsidiary SSE E&P UK Limited, has entered into an agreement with Total E&P UK Limited to acquire: a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas Plant.
Following completion of the acquisition later in this financial year, Total E&P UK Limited will continue as operator of, and will own a 60% stake in, these assets. The remaining 20% is owned by DONG Energy.
The value of the transaction will comprise consideration of £565m for the assets (which reflects their value based on an effective economic date of 1 January 2015, including associated UK capital allowances) plus additional forecast investment of £350m in the period to 2018 to complete the entire development.
Estimated reserves
SSE acquired gas production assets in 2010 and 2013 and has regularly set out its intention to seek new opportunities to increase its asset base to help meet gas demand requirements. The acquisition will be in line with that and completes SSE's portfolio of gas production assets for the foreseeable future.
Following completion of the acquisition, and based on the most up to date analysis, SSE now estimates it will hold reserves and resources of over six billion therms or over 100 million barrels of oil equivalent over the life of all of the fields in which it has, or will have, an ownership interest. There is also the possibility of additional reserves being extracted.
Forecast output
The fields to be acquired by SSE from Total E&P UK Limited are new and will have relatively low operating costs. They are not yet producing gas, but the Greater Laggan Area development is expected to commence production later this financial year and peak production - at around five million therms of gas per day (SSE share one million therms per day) - is expected to be achieved during 2016. Production from the acquired fields is expected to be sustained at that level until around 2020, before declining over the following 10 years without further development, making this a long-term investment.
The agreement comes at a time when SSE's existing fields' production volumes are expected to decline. In 2014/15 the output resulting from SSE's ownership of gas production assets was just under 400 million therms. The acquisition should allow SSE's average annual volumes of gas produced to be at a higher level than those it reported in 2014/15 until around 2020/21; and to remain above 200 million therms until around 2024/25.
Shetland Gas Plant
The new Shetland Gas Plant, in which SSE will also have a 20% stake, is located close to Sullom Voe and will process and export produced gas and condensate from developments in the west of Shetland for onward delivery to the St Fergus Gas Terminal, making it one of the most important infrastructure developments in the UK. It is expected to become fully operational in the course of this financial year and is expected to process and export gas and condensate for producers west of Shetland well into the 2030s.
Investment and financial impact
The transaction will be financed by a future bond issue and by proceeds from SSE's ongoing programme to dispose of assets to support a range of future investments.
As a result of the acquisition, SSE expects to invest a total of around £350m in further development of the assets in the period to 2018, including around £170m for the current calendar year, and that this will be accommodated within its existing plans to invest around £5.5bn net of disposals across the four years to 2018, although, as previously stated, the phasing of capital expenditure and the value of disposals may vary.
The contribution of the gas production output in the years ahead, together with the acquisition taking place following a period of relatively low wholesale gas prices, and the importance of the Shetland Gas Plant, mean the acquisition of these assets is expected to create value over the long term. It is expected to enhance SSE's adjusted earnings per share by up to five pence from 2016/17 onwards and to be positive in terms of its impact on SSE's credit ratios over the medium term*.
As set out in its trading statement on 23 July, SSE is continuing to target adjusted earnings per share of at least 115 pence and an increase in the full-year dividend of at least RPI inflation for 2015/16, with annual increases thereafter of at least RPI inflation also being targeted.
*Based on current market forecasts of gas prices
Alistair Phillips-Davies, Chief Executive of SSE plc, said:
"As we have regularly said, most recently in our trading statement last week, we are focused on maintaining a balanced range of energy businesses, and we have regularly set out our wish to seek new opportunities to increase SSE's presence in the upstream gas sector where assets can be acquired for a fair price, and that is exactly what this deal represents.
"Following extensive due diligence, we have agreed to acquire a series of very good assets and entered into a partnership with one of the world's leading gas and oil companies. The acquisition means we will be able to introduce further diversity across our investment programme. It comes following a period of relatively low wholesale gas prices and is therefore timely. It completes our portfolio of gas production assets for the foreseeable future.
"The acquisition, including the Shetland Gas Plant, represents further investment in the UK energy infrastructure that gives access to gas from northwest Europe to help secure energy for customers and to help meet the needs of our gas-fired power stations, which will have an important part to play in supporting security of electricity supply."
