Tuesday preview: Drax reports first half interims

Power generation company Drax Group is expected to report a decline in first half earnings on Tuesday, reflecting low power prices and regulatory challenges.

The group, which owns the Drax power station in North Yorkshire, has said trading conditions have remained challenging due to a slump in power prices, severe market deterioration and tough regulation. In February Drax reported a fall in full year earnings before interest, tax, deprecation an amortisation (EBITDA) to £169m from £229m, due to the adverse impact of removing levy exemption certificate and a drop in commodity prices.

Deutsche Bank expects EBITDA in the first half of 2016 to drop to £70m from £120m the same period a year earlier. Earnings per share is expected to fall to 1.4p from 10.1p.

“We expect a weak set of first half results, although we expect an improvement in the second half.

“Drax should start to receive income from its fixed price biomass contract in H2; its black start contract with National Grid is second half weighted; and we also expect Drax to benefit from power market tightness over the coming winter.”

The bank added that power prices have started to rise, in part due to a weaker pound after the UK’s vote to leave the European Union.

Meanwhile, Drax is still waiting for EU state aid approval for its fixed price biomass contract. The power plant is in the process of switching from burning coal to biomass. It was awarded a £1.7bn government subsidy contract in April 2014 for the third of its six units, which was subject to state aid approval. If the contract is approved, Drax would be paid a fixed price of £105 for every megawatt-hour of biomass-fired power the unit generated until 2027.

“Assuming Drax receives state aid approval it should be in a position to lock in medium-term contracts for further biomass supplies,” Deutsche Bank said.

Tuesday July 26

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