Power company Drax Group PLC (LON:DRX) today reported a 17% decline in 2016 earnings, blaming challenging commodity markets and changes to climate change regulations.
The owner of the UK’s largest power station said underlying earnings (EBITDA) fell to £140mln in the year to 31 December 2016, in line with guidance, down from £169mln the same period a year earlier.
Consolidated revenue fell to £2.9bn from £3.0bn in 2015. Electrical output from the Generation business dropped to 19.6 terawatt-hours (TWH) from 26.7TWH in 2015, as the company’s coal-fire units were out of merit for most of the summer due to lower market power prices.
Chief executive Dorothy Thompson said the year started with “some of the most challenging” power and commodity markets she has seen in her career, which dragged on profitability.
Earnings were also affected by new regulations, which meant renewable energy that includes power from biomass would no longer be exempt from the Climate Change Levy. The company’s plants, whose pellets are considered a renewable fuel, lost income from its levy exemption certificates (LEC). The LECs accounted for just over 6% of onshore wind generators’ revenue.
Operational improvements ...
However, Drax said it achieved strong operational performance in 2016 as the group improved the operation of its coal units to provide flexible support services to the power grid.
The group’s biomass units also delivered a record level of renewable energy, driven by generation in the Netherlands and Japan.
“A growing proportion of our earnings are now based on system support, pellet supply and retail sales, rather than pure commodity spread earnings from generating electricity,” Thompson said.
“This will be even more evident in 2017, as a third of our biomass generation is supported under a contract for diffence, which is not subject to movements in commodity prices.”
Net debt was cut to £93mln as at 31 December, down from £187mln in 2015, supported by cash flows arising from the "efficient" use of working capital.
The group is paying a total dividend of 2.5p, down from 5.7p in the previous year, which Drax said was in line with its policy to distribute 50% of underlying earnings.
During the period, Drax announced it was buying supplier Opus Energy for £340mln as part of a strategy overhaul, creating Britain’s fifth biggest non-domestic energy retailer.
That deal was completed on 10 February 2017 following shareholder approval. Drax said it believes the acquisition will make a significant contribution to earnings in 2017.