Drax Group - operator of the UK’s largest power station - estimates Covid-19 will inflict a £60 million hit on its business.
Lower power demand and increased bad debt risk in customers’ businesses were listed as the reasons for such a forecast, with the figure revealed as a strong first quarter of 2020 was underlined.
The North Yorkshire giant said the strategic focus remains on biomass supply chain expansion and cost reduction, but short term investment may also be curtailed as a result, the company announced ahead of Monday's annual general meeting.
The AGM saw the dividend proposed in February - equating to £37 million - approved.
Will Gardiner, chief executive, said: “With our strong balance sheet, robust trading and operational performance, and resilient sustainable biomass supply chain, Drax is in a strong position to support its employees, business customers and communities during the Covid-19 crisis, while continuing to generate returns for shareholders.
“As an important part of the UK’s critical national infrastructure, we recognise our responsibility to support the country’s response to Covid-19. We have strong business continuity plans in place and are in close contact with the UK Government. Our dedicated teams across England, Scotland and Wales, supported by our US biomass colleagues and business partners, are working around the clock to generate and supply the flexible, low-carbon and renewable electricity the UK needs, not least to the 250,000 businesses, including care homes, hospitals and schools we supply.
“The group is also providing support for communities and others affected by Covid-19.
“Nevertheless, it is still early in this pandemic. As Covid-19 continues to develop, we remain vigilant in looking to protect all our stakeholders and will report further if there are significant changes to our outlook for 2020.”
Hundreds of lap tops have been donated to aid education, while the cooling stacks have been lit blue to demonstrate support for the NHS and key workers.
Drax anticipates its Customers - energy trading - business to go into the red, but full year expectations for the group remain underpinned by good operational availability for the rest of the year.
“Assuming the continued impact of Covid-19 throughout 2020, Drax now expects a full year adjusted EBITDA loss for the Customers business,” Mr Gardiner said.
It sells power, gas and energy services to the industrial and commercial and SME markets has seen a significant reduction in demand. It has assessed the potential impact of this demand reduction, the increased risk of business failure and bad debt, with the impact expected to be most pronounced in the SME market, which represents 30 per cent of monthly billing. Credit insurance will partly mitigate it.
The group will closely monitor the impact on the Customers business and update the market accordingly,” Mr Gardiner said.
Turning to generation, with Drax announcing it would go coal free by end of the first quarter next year - playing a huge role in the path to Net Zero but also bringing significant job losses - Mr Gardiner said: “The group’s expectations for the full year reflect a reduction in ROC (renewable obligation certificate) recycle prices resulting from reduced power demand. Drax expects to partially offset this through increased activity in system support services across its generation portfolio.
“The performance of the generation business is dependent on the continuation of biomass deliveries to Drax Power Station. Biomass generation is currently the most material area of activity for the group and a protracted suspension of the supply chain could lead to lower levels of biomass generation, resulting in a reduction in the group’s expectations for the full year. At present there has been no impact from Covid-19 and the group has a good supply of biomass throughout the supply chain, which continues to be robust and functioning well.”
The past six weeks have actually seen records and milestones recorded, with the largest ever shipment from its Baton Rouge facility in the US and the 100th ever both received in the period.
Mr Gardiner said: “In response to Covid-19, Drax has implemented robust business continuity procedures across its sites to protect employees and contractors and ensure continued operation. In addition to operating strategically important infrastructure, the components of the group’s UK supply chain are considered key sectors allowing continued operation.”
Port facilities offer capacity over and above the firing demand of seven million tonnes a year, with potential to store 11 million tonnes at Immingham, Hull, Tyne and Liverpool, as well as 300,000 tonnes on site. There’s further visibility of one million tonnes in transit - enough to operate the unit for four months.
“The group’s biomass supply chain has a high level of operational redundancy designed to mitigate any potential disruption,” Mr Gardiner said.
Away from biomass, hydro assets acquired from SSE have performed well, the company said, particularly the pumped storage business, primarily driven by activity in the system support services market - providing quick-generation when renewables drop. Cruachan Pumped Storage Power Station, in Argyll and Bute, Scotland, is about to commence a six year contract, worth up to £5 million per year.
“This was the first tender of its kind and reflects the growing importance of system support services as the generation market becomes increasingly supplied by intermittent renewable power sources,” Mr Gardiner said. The system operator is expected to conduct further tenders over the coming year.
Thermal generation is performing in line with Drax’s expectations.
A final dividend of 9.5p per share in respect of 2019 performance wiill now be paid in May.
Drax reported an earnings hike of 61 per cent, from £250 million to £410 million, for 2019, with operating profit up from £60 million to £62 million. It came on a turnover of £4.7 billion, up around 11 per cent.
Mr Gardiner added: "In determining the continued appropriateness of the dividend, the board has considered a range of factors – trading performance, current liquidity, the outlook for the year in the context of Covid-19, as well as the steps being taken to support all stakeholders.
"The board believes payment of the final dividend remains consistent with the group’s commitment to stakeholders."
