Earnings soar as business strengthens but Drax returns a loss after currency and coal collapses
By Hull Daily Mail | Posted: 27 Feb 2018
REGIONAL power giant Drax has reported strong earnings in 2017, up 64 per cent to £229 million – driven chiefly by biomass generation.
All areas of the business contributed for the first time, from pellet production to energy supply, however, a statutory loss of £151 million recorded, as a weak pound hit raw material costs and coal assets plunged in value as the UK announced it was taking it off the system.
The huge power station, which sits between Goole and Selby, is fed directly by the world’s largest biomass reception facility at Port of Immingham, with further operations in Hull, as well as Liverpool and Tees.
Will Gardiner, the new chief executive of Drax Group Plc, having stepped up in the year from chief financial officer following long-serving figurehead Dorothy Thompson’s retirement, said: “We continued to transform the business in 2017, delivering a strong EBITDA performance, in line with expectations. This was delivered by all parts of the business making positive contributions for the first time.
“We also made good progress delivering our strategy (to deliver £425 million EBITDA in 2025), which is clear and unchanged. We are increasing biomass self-supply, developing projects to diversify our generation mix and growing our B2B energy supply business.
“The UK is undergoing an energy revolution, starting with a significant reduction in carbon emissions, and to support that we are helping to change the way energy is generated, supplied and used.”
NEW ROLE: Will Gardiner.
Addressing the losses, Mr Gardiner said: “On a statutory basis we recorded a loss after tax of £151 million, which reflects unrealised losses on derivative contracts and the previously announced accelerated depreciation on coal-specific assets as well as amortisation of newly-acquired intangible assets in Opus Energy (the challenger brand in the energy market bought for £367 million). We also calculate underlying earnings, a profit after tax of £2.7 million, which excludes the effect of unrealised gains and losses on derivative contracts to assess the performance of the group without the income statement volatility introduced by non-cash fair value adjustments on our portfolio of forward commodity and currency futures contracts."
As reported, it has received Government support for a fourth biomass unit conversion at Drax Power Station, as it explores gas re-powering for the final two, which would see it become coal-free. They are to enter the capacity market auction in 2019, and if successful, could be generating by 2023.
Chairman Philip Cox CBE told how significant progress with the strategy had been made, including the acquisition of a third biomass pellet plant in the US, LaSalle Bioenergy, significantly increasing pellet production capacity, and representing a £48 million investment.
It is currently in commissioning phase, ahead of schedule, while a low-cost expansion of the original US Amite and Morehouse plants – the starting point of the transatlantic supply chain for which £750 million was invested – has also completed, with a 35 per cent increase in pellet production to 800,000 tonnes from 2016’s 600,000 tonnes, with both operating at full capacity.
Electricity was up 0.4 TWh to 20, from 19.6, with 65 per cent of generation from renewables, as had been 2016.
Mr Cox said: “We have a major role to play in supporting the UK energy system, as it becomes increasingly ambitious in decarbonising the electricity sector and subsequently transport and heating. In doing so, through our flexible, low-carbon and customer-focused approach we aim to deliver higher quality earnings, with a reduction in commodity exposure alongside opportunities for growth.”
Headline earnings of £229 million were significantly ahead of 2016’s £140 million. The board is proposing to pay a final dividend in respect of 2017 of £30 million, equivalent to 7.4 pence per share.
In addition, Drax has announced a £50 million share buy-back programme, which will take place during 2018.
FOND FAREWELL: Dorothy Thompson CBE at Drax's rail reception facility.
Reflecting on the senior management change, Mr Cox said: “In September, Dorothy Thompson CBE announced her intention to stand down as group chief executive officer. I would like to thank Dorothy for her enormous contribution over the last 13 years. During her tenure she led the transformation of the business and leaves the group in a strong position with a clear strategy that lays the foundations for further success in a changing energy sector.
“Dorothy is succeeded by Will Gardiner, who was previously group chief financial officer and a key architect of the strategy. His appointment follows a thorough review of internal and external candidates and is a natural progression after two years working alongside Dorothy developing a strategy which I am confident will create significant benefits for all Drax’s stakeholders.”
A recruitment process for a permanent chief financial officer is now underway, with Den Jones appointed in the interim. He is described as highly experienced, having previously served as CFO of both Johnson Matthey and BG Group.
Two non-executive directors have also been appointed, David Nussbaum, “whose in-depth knowledge of sustainability will support our continued focus in
this area,” Mr Cox said, and Nicola Hodson “whose experience in technology, business transformation and energy, will provide real value as the group delivers its strategy,” he added.
HUMBER ports continue to play a vital role in providing the feedstock to Drax.
Andy Koss, chief executive of Drax Power, described performance as “really good and very positive,” as strong earnings were led by biomass generation.
Looking forward to the work beginning on unit four’s conversion, he said: “We are really pleased we got Government support for the fourth, and the ports of Immingham and Hull have a key role to play in that. Having a fourth unit gives us a lot more certainty around the biomass we are going to need at the station.
“I was with ABP only yesterday, and talking this through, as we want to use their facilities as much as possible. Hopefully it underpins our business and businesses in he region, right the way through.”
Original plans built in capacity for four units, so there is no requirement for additional infrastructure on the UK end of the supply chain.
However, Mr Koss said the aim was for 30 per cent of biomass self-sourcing, hence the purchase of the LaSalle plant in Louisiana, close to the existing facilities.
“That was an opportunistic buy at a price that represented a significant discount on a new build cost, and with the location it was a perfect opportunity really,” he said of the £48 million acquisition.
“We are looking to build self-supply to 30 per cent, anywhere between 2 million and 2.5 million tonnes, and it will come in to UK ports.”
Learnings from a small fire in the rail reception facility late last year are also being shared with ABP and others in the supply chain. “No-one was injured, but there has been some repair work, for about four weeks in total,” Mr Koss said.
Looking ahead, he said there was a “big piece of work to get biomass viable without any government support”. “We want to be running way beyond 2027,” he said, referring to when biomass conversion support ends.