Drax earnings hit by biomass spending as 2015 looks "challenging"

24th Feb 2015 08:11

Despite a significant improvement in revenues and profits during 2014, Drax said its outlook for 2015 was challenging due to the erosion of 'dark green spread' gross margin.Revenues at the power generation company rose 38% for the full year to £2.8bn and profit before tax improved significantly, more than tripling to £194.5m.But underlying earnings per share plunged 33% to 23.7p, resulting in the dividend being cut to 7.2p per share from 8.9p, due to higher depreciation and finance costs from the investment in biomass conversion.Drax said the transformation of three of its six generating units to burn sustainable biomass in place of coal is on track and is expected to be completed by the end of 2016, though it said it was still "awaiting clarity" on the outcome of the European Union's clearance of state aid under the new Contracts for difference (CfD) regime.Cash and equivalents fell from £267.3m to £180.9m driven by an increase in costs. Total cost of sales increased to £2.355bn from £1.62bn over the year.The FTSE 250 group said the market for 2015 remains challenging due to the cost of carbon increases following the carbon price floor trajectory set by the government and the erosion of its dark green spreads, the gross margin from selling a unit of electricity having already bought the fuel required to produce this unit of electricity.Drax said the lower power prices will affect bark spreads, the difference between power price and renewable support and the cost of biomass, but its believes to be on track to complete its transformation into biomass-fuelled power provider in 2016.Chief executive Dorothy Thompson said: "External factors have been challenging, with regulatory headwinds in 2014 exacerbated by the recent major deterioration in commodity markets. In these conditions we are placing particular focus on business efficiencies and cost control measures."On a more positive note, Thompson said to be "pleased that the key activities within our direct control have gone very well indeed. We will deliver our biomass transformation plans, converting three units to sustainable biomass, on time and on budget."Shares fell 1.71% to 396p on Tuesday at 08:47.