UPDATE 1-Drax issues profit warning on weak power, subsidy prices

Fri May 9, 2014 3:27am EDT

(Adds details on profit warning, new analyst forecast, share price, background)

By Karolin Schaps

LONDON May 9 (Reuters) - UK power producer Drax issued a full-year profit warning on Friday, forecasting weaker-than-expected power and subsidy prices for its mainly biomass-fuelled power plant in Yorkshire.

Drax is in the process of converting most of its coal-fired power plant, one of the most polluting stations in Europe, to run on more environment-friendly biomass.

The energy company said it has been hit by low power prices due to the mild weather, eating into profit it makes from generating electricity, while it is also expecting lower prices for renewable obligation certificates it receives for using biomass in its power plant.

"We now anticipate that, unless markets improve in the coming months, full year EBITDA and underlying earnings per share (EPS) for 2014 will be below current market forecasts," the company said in a market update.

Shares in Drax opened 4 percent lower on Friday.

Whitman Howard analyst Angelos Anastasiou said he now expected EBITDA to fall to 210-220 million pounds, 20 percent lower than the high-end of previous market expectations, and EPS of 21-23 pence.

Utilities across Europe have been hit hard by a collapse in electricity prices and Drax' profit warning comes a day after competitor Centrica issued its own warning.

Britain currently rewards renewable energy production by allocating Renewable Obligations Certificates (ROCs) to generators. ROCs are traded on the open market and a recent surge in wind power production has caused ROC prices to drop, affecting subsidy income for all renewable energy generators.

Drax also said its first converted biomass unit has been performing well since commissioning last month and another unit has been running on at least 85 percent biomass fuel since the beginning of May.

But it warned that its biomass supply and logistics development for the conversion of its second coal-fired unit to biomass would be delayed due to a government decision not to grant it an early investment contract.

"Legal advice confirmed that Drax has a good foundation to challenge the Government's decision," Drax said, confirming its decision to start legal proceedings.

Despite Friday's profit warning and setback following the government's decision against an investment contract for its second unit, Drax said it was fully committed to completing its conversion programme which remains on time and budget. (Editing by Brenda Goh. Editing by Jane Merriman)

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