November 8, 2018 / 7:41 PM / 8 months ago

SSE, Innogy delay UK retail tie-up as price cap looms

LONDON (Reuters) - A deal to create the UK’s second biggest retail power provider has been delayed to beyond the first quarter of next year, with SSE (SSE.L) and Innogy (IGY.DE) renegotiating merger terms after Britain’s regulator proposed a cap on energy bills.

FILE PHOTO: A sign hangs outside an npower building in Solihull, Britain March 7, 2016. REUTERS/Darren Staples/File Photo

The merger, a major shake-up of the UK power market that would cut the dominant big six firms to five, comes after the government ramped up scrutiny of Britain’s big energy suppliers, which it has accused of ripping off customers.

SSE said the two firms were discussing changes to the terms of the planned tie-up of their British retail units, and that the deal was unlikely to be completed until after the first quarter of 2019.

It did not give a new timeframe for when talks might be concluded.

It said the talks were expected to take place over several weeks, with an update on progress to be given by mid-December. Innogy said adjustments could include additional financial contributions by each party.

“The impact of some recent market developments means that the commercial terms associated with the proposed combination will need to be reconsidered,” SSE said in a statement.

Such developments include the potential impact of the regulator’s cap on the most commonly used tariffs on the new company’s requirement to post collateral against its credit exposure, and its ability to obtain and retain an appropriate credit rating, SSE said.

Regulator Ofgem proposed the price cap on default energy bills - those to which customers default once fixed price periods end - to save households about 1 billion pounds ($1.31 billion) a year.

The regulator said it will cap average default electricity and gas bills at 1,137 pounds a year from Jan. 1, a level well below the most-used tariffs set by the country’s big six suppliers.

SSE and npower, Innogy’s British unit, won final regulatory approval for the tie-up last month, clearing the way for the creation of a new entity with around 23 percent market share, the second largest in the UK market behind Centrica’s (CNA.L) British Gas, with 27 percent.

Analysts said the delay was a surprise, since both companies have known of the impending price cap for many months.

“We believe (a) cash injection into the new entity is the key driver for this need to adjust commercial terms,” analysts at Bernstein said in a research note.

SSE issued a profit warning in September after the company was hit by lower output from its wind farms and high gas prices.

Npower has struggled to make money from its UK retail business. An Ofgem report last month said the company’s margin for supply energy was -5 percent.

Shares in SSE were down 3 percent while shares in Innogy slipped 0.5 percent by 1040 GMT.

Assessing the broader implications of the delay is complicated by the convoluted nature of the European energy market.

A planned asset swap between Innogy’s German parent RWE and peer E.ON (EONGn.DE) would see Innogy’s assets, likely including npower, divided between the two companies.

E.ON said on Friday the delay in the SSE/npower tie-up would not lead to any material impact on the Innogy transaction.

Additional reporting by Noor Zainab Hussain in Bengaluru and Christoph Steitz, Editing by Alexandra Hudson and Jan Harvey

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