23rd Feb 2016 12:38
LONDON (Alliance News) - Drax Group PLC Tuesday said its strong operations partly mitigated a severe deterioration in its markets and difficult regulatory challenges in 2015, but the power generation company still reported large falls in profit and earnings and slashed its dividend.
The company said its pretax profit in 2015 plummeted to GBP59.0 million from GBP165.9 million in 2014 despite revenue almost rising 10% to GBP3.06 billion from GBP2.80 billion.
Although revenue rose, Drax's gross margin was squeezed as the gross profit fell to GBP408.8 million from GBP449.8 million, leading to earnings before interest, tax, depreciation and amortisation of only GBP169.0 million compared to GBP229.4 million last year.
The power generator said the removal of levy exemption certificates, as part of the UK government's changes to the climate change levy, alongside a "severe deterioration" in commodity prices, both hampered Ebitda in 2015.
"During the year the government applied the climate change levy to renewables and announced a potential timeline for the closure of coal generating plant. The former had a significant negative impact on our 2015 results, reducing Ebitda by an estimated GBP30.0 million, and this impact will be double for 2016," said Chairman Phil Cox.
A GBP19.3 million rise in charges related to depreciation and amortisation and a GBP109.0 million asset obsolescence charge that wasn't present in 2014 also dragged down profit. However, this was partly offset by a rise in contract gains to GBP123.7 million, from only GBP65.8 million a year ago.
The unrealised gains on derivative contracts were principally related to a foreign currency hedging programme to Drax's support biomass procurement activities, whilst the asset obsolescence charge was booked against assets previously used for coal generation but which are now no longer needed as Drax continues its transition to biomass.
As a result of the earnings fall, Drax slashed its dividend for the year to only 5.7 pence from 11.9 pence - in line with its policy to pay 50% of underlying earnings, which dropped to GBP46.0 million in 2015 from GBP96.0 million, to shareholders.
Drax said its ongoing capital investment remains on track, as it continues to edge ever closer to finishing the conversion of its third of six coal units to burn biomass, specifically wood pellets. The cost of converting the three units, alongside securing a supplier of the pellets and other related issues, remains on budget to be between GBP650.0 to GBP700.0 million.
Of that total budget, GBP174.0 million was spent in 2015, down from GBP201.0 million in 2014.
Net debt at the end of the year stood at GBP187.0 million, a large rise from GBP99.0 million at the end of 2014. Drax currently has cash on hand amounting to GBP134.0 million.
The power generation division saw electricity output remain flat in 2015 but the amount of biomass generation has significantly increased thanks to its conversion programme toward biomass from coal.
Of the total electricity output in 2015 of 26.7 terrawatt hours, 11.5 terrawatt hours came from biomass generation compared to only 7.9 terrawatt hours in 2014. Drax said the contracts-for-difference scheme will "underpin acceleration" of the long-term supply chain development moving forward.
"The operational performance across the business was strong and in 2016 we will complete the transformation we began some 10 years ago. The business we have today is more diverse, built on a dedicated supply chain and backed by world-leading innovation and technology. It continues to deliver around 8% of the UK's electricity needs, while providing an excellent service to our retail customers," said Cox.
"With the right policy frameworks we could become 100% renewable through the full conversion of our three remaining coal units and we could do this well before 2025. We will continue to work closely with the government to help them quickly reduce the UK's reliance on coal," he added.
The retail division, Haven Power, saw an increase in sales to GBP1.30 billion from only GBP1.10 billion last year as it sold 13.8 terrawatt hours of electricity compared to 11.8 terrawatt hours last year.
Drax conceded 2016 will be as "equally challenging" as 2015, but said it plans to focus on specific areas during the year.
"The plan addresses three specific areas: a laser sharp focus on cost control including capital expenditure; revenue optimisation (especially in changing the way we manage our coal units to provide system support to the grid) and downstream development of the retail renewable power market. At the same time we continue to evaluate a range of longer-term strategic options," said the company.
Drax shares were down 3.5% to 249.40 pence per share on Tuesday afternoon.
By Joshua Warner; [email protected]; @JoshAlliance
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