26th Jul 2016 13:43
LONDON (Alliance News) - Drax Group PLC Tuesday warned its full year earnings will be dependent on when the contract that will cover its third biomass unit is awarded, as the company reported a steep drop in underlying earnings in the first half that led to its dividend being slashed.
Drax shares were trading flat at 352.30 pence Tuesday afternoon.
The Drax power station in Selby was originally built to burn off coal but the company has been gradually converting the station to burn off biomass, specifically wood pellets sourced from North America, and has currently converted three of the six units that generate electricity.
However, the power generation company was expecting to be awarded the contract for difference that will cover the most recently converted unit by July but has now warned that this is not expected to be received until August.
Contracts for difference is a mechanism to support investment in low-carbon electricity generation. Under the contract, Drax will secure a fixed strike price that it will be paid for electricity generated from the biomass unit, preventing it from achieving a higher spot price but also shielding it from potentially lower prices.
Market forecasts for Drax's full year earnings before interest, tax, depreciation and amortisation have been based on that contract, which is pending on approval from the European Union, being awarded by the end of this month - with current guidance at GBP146.0 to GBP185.0 million.
However, as Drax is not expecting that to be awarded until August the company is now expecting full year Ebitda to be at the lower end of that guidance range.
Drax has stressed that the result of the UK EU referendum will not stop the contract being awarded and is confident it can secure it soon, but admitted that full year earnings hinge on the timing.
"We have received assurance from senior officials in both Whitehall and Brussels that the state aid process currently in progress regarding the awarding of a contract for difference for our third coal to biomass conversion is continuing as planned and will not be affected. We restate our confidence that a positive decision will be reached in the Autumn," said Drax.
In 2015, Ebitda declined 26% year-on-year and totalled GBP169.0 million, meaning Ebitda this year is likely to fall by up to 14%.
The results for the first half of the year met expectations but Ebitda and underlying earnings were both substantially lower year-on-year because of lower power prices and the removal of the levy exemption certificates that excluded companies from paying the climate change levy for electricity generated from renewable energy.
Ebitda in the first six months of the year declined 42% as a result, amounting to GBP70.0 million compared to GBP120.0 million a year earlier, whilst underlying earnings, which excludes exceptional items, fell 59% to GBP17.0 million from GBP41.0 million a year ago.
Drax's dividend policy is to pay out 50% of underlying earnings, meaning the interim dividend has dropped in line with those earnings in the first half of the year to 2.1 pence from the 5.1 pence paid last year. The policy, however, remains unchanged moving forward.
However, Drax's statutory results fared much better in the first half of 2016 thanks to GBP163.4 million worth of unrealised gains that were booked, related to the company's foreign currency hedging programme to support biomass procurement activities for the Drax power plant.
That gain was enough to offset a minor fall in revenue in the half to GBP1.48 billion from GBP1.51 billion and help pretax profit come in at GBP184.2 million, 3.5 times higher than the GBP53.0 million reported a year before.
Gross profit in the first half fell to GBP182.2 million from GBP234.2 million as the fall in revenue was exacerbated by a rise in costs, which totalled GBP1.30 billion in the first half compared to GBP1.27 billion a year earlier, a 2.4% lift.
Net debt at the end of June stood at GBP85.0 million, a huge reduction from GBP187.0 million at the end of 2015.
Capital investment in the first half totalled GBP38.0 million and Drax's guidance for the full year remains unchanged at GBP80.0 to GBP100.0 million.
Operationally, Drax generated 70% of all its electricity from biomass in the first half compared to only 37% this time last year, demonstrating the impact of the ongoing conversion of the coal-fired power plant to burn wood pellets.
"Drax delivered a good operational performance over the last six months, a period during which around 70% of our electricity generation was renewable - enough to power Leeds, Manchester, Sheffield and Liverpool combined - truly a renewable northern powerhouse," said Drax.
However, the amount of power generated in the half fell considerably, declining to 10.9 terrawatt hours from 14.0 terrawatt hours a year ago. Biomass generation totalled 7.5 terrawatt hours compared to 5.2 terrawatt hours a year ago.
The fall in output was solely caused by the remaining coal units as they are being run on a more flexible basis due to the poor operating environment. A similar performance is expected from the power plant in the second half of this year, Drax said.
"As part of a revised coal strategy, in March of this year we commenced a review of our long-term approach to maintenance of our three coal units given that they may not be required to run over future summer periods. We decided that we would reduce our investment programme for the coal unit that is due for its four year major maintenance outage in 2017. This means that we will execute a restricted scope for the outage," said the company.
Drax generates around 8.0% of all the UK's electricity, making the firm a major player in the space, and the ongoing move to renewable energy meant Drax's biomass units generated 20% of all the UK's electricity from renewable sources in the first half of 2016.
Drax said pellet operations in the US, where they are sourced, are performing in line with expectations and the investment into the conversion of the plant remains on budget and on schedule.
"We said at our full year results, that 2015 was a tough year and 2016 would be equally challenging. Whilst there has been some recovery in forward power prices they are still well below what might be considered historic norms. With electricity supply for this coming winter expected to be very tight, there may well be short-term price spikes if there is a cold winter in the UK and continental Europe," said Drax.
By Joshua Warner; [email protected]; @JoshAlliance
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