Drax, which runs a coal-fired power station in North Yorkshire, disappointed its investors on Monday with a reduction in its dividend following a decline in profits which were pressured lower by additional domestic coal and biomass fuel cost pressures.
Pre-tax profits were in line with expectations at £141.2m (2011: £168.7m) on revenues of £867.9m (2011: £866.3m). The total cost of sales rose from £585.8m to $613.6m. Underlying basic earnings per share were 29p compared to 32p the previous year.
Earnings before interest, tax, depreciation and amortisation (EBITDA) were lower at £154m compared to £190m in the same six months ended June 30th 2011.
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Chief Executive of Drax, Dorothy Thompson, said: "Our operational performance has continued to be good during the first half of the year, and we have achieved high availability and output. This has supported both our contracted position and our ability to take advantage of market opportunities. The reduction in underlying profits in the first half of 2012, compared to the same period last year, reflects contracts placed in 2011, when margins available to coal-fired generators were weaker.
"Commodity market conditions for coal-fired generators improved in the first six months of this year. In response we have more than doubled our forward sales for 2013, taking advantage of the improved margins. At the start of the year we had already secured a hedge for over 85% of 2012 production, providing us with protection against adverse commodity price movements. We are now virtually fully hedged for 2012 and well advanced for 2013."
International coal prices were significantly lower in the first half of the year, driven by excess supply. The combination of this and high gas and oil prices has resulted in significant financial challenges for the UK's domestic coal producers, with Drax warning that is remains cautious in its outlook for domestic coal deliveries and prices.
The firm warned that there remains little visibility beyond 2013 in the commodity markets in which it trades and said it will also face the increased cost of the carbon price support mechanism from April 2013.
During the period the company spend around £15m more in biomass research and development costs that originally planned, but said these have been invaluable, with the results confirming that it can fully convert Drax units to burn biomass. The firm expects to incur an additional £5m for further trials in the second half.
The company said the reduction in profitability compared to last year reflects the timing of its forward sales, with higher margins captured on power sales delivered in the first half of 2011.
The dividend at the mid-year point was reduced from 16p per share to 14.4p per share.
The share price fell 0.29% to 481.40p by 10:34.
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