Drax sees profits fall by two thirds as market conditions bite

Drax Group has blamed deteriorating market conditions and changes to government policy for a two thirds fall in its pre-tax profits to £59 million (2014: £166 million).

EBITDA fell by just over a quarter to £169 million (2014: £229 million) according to the firm’s preliminary results for the 2015 financial year. Reported earnings per share fell to 11.3p (2014: 23.7p).

Drax Group chief executive Dorothy Thompson told Utility Week: “The biggest single factor is a dramatic fall in the commodity market, and particularly power prices… We are now in a market where the margins we make from coal generation are the lowest we’ve seen for over a decade.”

She added: “We have put in place a number of mitigating measures and that includes a programme of cost cutting.”

Thompson said profits also took a big hit from the removal Levy Exemption Certificates (LECs) over the summer: “It hit our earnings in 2015 by £30 million and because it was only applicable to half a year, in 2016 it will hit our earnings by £60 million.”

Alongside Infinis Energy, Drax recently lost a legal challenge in the High Court against the government’s decision to remove LECs with just 24 days’ notice.

Meanwhile, Drax’s retail arm Haven Power outperformed the rest of the group reaching its long term target of £1.3 billion in sales (2014: £1.1 billion). Thompson said Drax would neither make deliberate efforts to expand nor shrink the business, and would instead respond to market conditions.

Drax has been working in recent years to convert at least three of its six units to run on biomass. Two are running fully on biomass and the third is using it for a majority of its fuel. Thompson said: “We would expect to convert it full to biomass later this year and we stand ready to convert a fourth unit.”

The European Commission is currently conducting a State Aid investigation into a Contract for Difference (CfD) granted to Drax for the third unit. Thompson said she was confident the EC would rule in their favour as it had already approved subsidies for two similar biomass conversions. Asked whether Drax had any back-up plans in case the ruling went against them, she responded: “We’re working on the basis it will be approved.”

The preliminary results for 2015 include a £109 million write down for the depreciation of assets no longer needed for coal generation.

Analysts at investment firm Jefferies said: “The volatility seen in Drax’s share price in recent months reflects the very tough market conditions the company faces. The management continues to deliver strong operating performance and this gives the company at least the chance of weathering the commodity hurricane that it now faces.

“We view Drax as two distinct power stations, coal and biomass. The biomass valuation is highly sensitive to the decision on the CfD support and the absolute wholesale power price. The coal station value depends upon dark spread assumptions and the remaining asset life.”