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Derivative Contracts Boost Drax Group Plc

The shares of Drax (LSE: DRX) climbed 3% to 650p during early London trade this morning after the coal-fired power supplier revealed underlying profits dropped to £70m in the first-half of the year, in line with the market’s expectations.

The firm’s headline profits of £164m were boosted by £122m in unrealised gains on derivative contracts, financial instruments designed to protect Drax against currency movements, such as the dollar strengthening against the pound this year.

Drax lost its free carbon allowances as part of changes in EU and UK law during the period, which accounted for roughly £46m of the company’s drop in profitability.

Drax continues to make strides in converting some of its power generation to biomass, away from coal. The company confirmed it had completed the transformation of its first unit in April, the largest of its kind in the world, and that a second unit could be converted by next summer.

Dorothy Thompson, Drax’s chief executive, commented:

“We are investing significant capital this year and next to transform our business, with earnings during this period impacted by the increasing costs of carbon. However, as we move beyond this investment phase and replace substantial quantities of coal with sustainable biomass, we are confident that we will deliver attractive returns for our shareholders.”

With a market cap of £2.5bn, Drax’s shares trade at 26 times expected earnings, and offer a prospective dividend yield of 1.8%.

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> Mark does not own any share mentioned in this article.