Drax (LSE: DRX) encouraged investors this morning by reporting continued strong performance as the low cost of coal and high energy prices translate into higher profits. The company said it expects to materially exceed market expectations for full-year results.
The company also announced another 3.4TWh (terawatt hours or 3.4 billion kilowatt hours) of contracted power sales for next year bringing the total contracted sales for 2014 to 20.4TWh. For reference, in 2012 Drax generated a total 27.1TWh.
While enjoying low-cost inputs as demand for coal around the world drops, Drax does face heavy penalties from carbon taxes.
The big change-up
Drax is in the middle of a conversion of its plants from coal-burning to biomass-burning in order to address the rising concerns — and costs — associated with carbon-heavy fuels like coal. The company’s first biomass unit fired up in April and has been delivering as expected since.
The company expects to spend £250 to £300 million this year on the conversion and have a second converted unit by the middle of next year. The entire transformation from coal to biomass is expected to cost £650 to £700 million.
Trading at 7 time earnings before interest, taxes, depreciation and amortisation, Drax is priced nicely between its power-generating peers SSE — which trades at 9 times — and Centrica – which trades at 6 times. However, Drax’s expected dividend yield of 2.1% is well below its peers.
Investing in a lower carbon future comes at a price and the company’s cash flow is needed to fund the transformation, which means investors looking for income are going to be disappointed.