Drax secures £75 million loan towards financing coal to biomass conversion

The UK Treasury would underpin a £75-million loan for the Drax power station in North Yorkshire, making it the first project to be financed using the government's £40 billion infrastructure guarantee scheme.

Drax, which operates the largest coal-fired power plant in the UK, said in a statement, that it has agreed a £75 million amortising loan facility maturing in June 2018 with Friends Life, underpinned by a guarantee from HM Treasury issued under the Infrastructure UK Guarantee Scheme."

Friends Life is a life assurance company formed in 2011, comprising the merged UK operations of Friends Provident and the life assurance businesses acquired from Bupa and AXA UK.

The loan would go towards part-financing a £700 million project for conversion of three of the six plants at the 4000 MW Drax plant to greener biomass fuels. The plant is the UK's biggest power station, supplying 7 per cent of the UK's electricity needs.

Further financing for the project would come from a £190 million share placing last October, a £100 million term loan with the Prudential, a £50 million loan from the Green Investment Bank as also the £400 million revolving credit facility of Drax.

Danny Alexander, chief secretary to the treasury, hailing the Friends Life deal as ''the first project of many to be enabled by this radical, innovative approach'', said the government's door was open for investors looking to finance infrastructure projects.

As anticipated, this loan facility replaces £50 million of the £100 million amortising loan facility agreed with the UK Green Investment Bank, which was signed in December 2012.

This facility enhances the financing structure executed last year by providing additional liquidity to the Group, securing HM Treasury support for our plans to convert three generating units from coal to biomass and ensuring a smoother profile of debt maturities across the structure. Furthermore, the all-in cost of the new loan facility is very competitive.

The amended funding programme now includes the following:

• £190 million (gross) proceeds from an equity placing in October 2012 
• £100 million amortising term loan facility agreed with the Prudential/ M&G UK Companies Financing Fund in July 2012
• £50 million amortising term loan facility agreed with the UK Green Investment Bank 
• £75 million amortising term loan facility agreed with Friends Life, underpinned by a guarantee from HM Treasury
• £400 million revolving credit facility maturing in April 2016 (note 2)

Commenting on the new facility, Tony Quinlan, finance director of Drax said, ''This further strengthens our balance sheet, as we progress our project to transform the largest coal-fired power station in the UK into an electricity generator fuelled predominantly by sustainable biomass.

''The benefits are multiple, from securing jobs at Drax and across the UK in the supply chain to providing low carbon, cost effective and reliable renewable power for the consumer. We are delighted to secure the support of Friends Life and Infrastructure UK.''

Mark Versey, chief investment officer at Friends Life said, ''We are pleased to work together with Drax and HM Treasury and support the Infrastructure UK Guarantee Scheme as an institutional investor.

''This investment demonstrates Friends Life's ability to explore infrastructure and other alternative investment opportunities to ensure Friends Life remains competitive and nimble in a changing market.''