Drax hikes dividend and unveils buyback as biomass power surges

Drax's underlying profits surged ahead last year and core earnings beat expectations, but the Yorkshire power station reported a swing into a statutory paper loss due to currency hedging.

Consolidated revenue of £3.7bn for 2017 was up £735m on the year before, driven by higher power generation sales and the acquisition of Opus Energy. Electrical output of 20.0TWh was generated in power generation, of which 65% was from biomass units and 35% from coal.

Earnings before interest, tax, depreciation and amortisation grew 64% to £229m thanks to improving earnings quality from biomass generation and Opus. This beat the average analyst forecast of £225m.

Power generation grew despite maintenance outages for two biomass units and the impact of low load factors on coal units during the summer. But 2017 saw the first year of generation under the government's contract for difference (CfD) programme, which contributed £248m of revenue.

Power generation EBITDA increased £64m to £238m, while Opus saw B2B energy supply EBITDA of £29m, while pellet production EBITDA came out at £6m thanks to 35% growth in production.

Net debt at the year-end was £367m, which was better than the consensus forecast of £462m, thanks to strong cash conversion and working capital inflows of £166m in the year.

A total dividend of 12.3p per share was accompanied by the announcement of a £50m share buyback programme which analysts at RBC Capital Markets estimated will be 5% accretive to future EPS.

A statutory loss before tax of £183m was principally driven by unrealised losses related to foreign currency hedging of £156m

"The immediate impact on the Group was a weakening of sterling and an associated increase in the cost of biomass, which is generally denominated in other currencies," Drax said.

"Through our utilisation of medium-term foreign exchange hedges the group protected the cash impact of this weakness. In 2017, sterling has generally strengthened, and we have been able to extend our hedged position out to 2022 at rates close to those that we saw before Brexit."

Chief executive Will Gardiner said 2017 was the first time all parts of the business making positive contributions.

"We also made good progress delivering our strategy, 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."

Looking forward, Drax expects to accelerate energy supply growth from Opus Energy, increased biomass self-supply through acquisition and commissioning of third biomass pellet plant, LaSalle Bioenergy, and has UK government support to convert a fourth biomass unit at its Yorkshire site.

Future generation will be boosted by a coal-to-gas repowering option, with two open cycle gas turbines (OCGTs) to enter next capacity market auction in December 2018.

Based on the results and our discussions with the company RBC said analysts said they believed Drax "remains comfortable with consensus EBITDA in 2018 of ~£250m".