Drax Gains to Four-Year High on Faster $1 Billion Biomass Plans

Drax Group Plc, operator of the U.K.’s largest coal-fired power station, rose to a more than four-year high in London trading after accelerating a 700 million-pound ($1 billion) plan to convert the plant to biomass.

Drax advanced as much as 5.6 percent to 638.5 pence, the highest since January 2009, on plans to switch a first unit to biomass in April instead of June. It will convert a second unit next year and said it was feasible to modify a third from 2015.

The company, based in Selby, England, said in July it would become a predominantly biomass-fired power generator, initially converting three of its six units to burn wood chips. It follows Germany’s RWE AG and Danish utility Dong Energy A/S in switching to cleaner fuels as they strive to meet European Union pollution standards. As taxes on carbon output begin this year, costs at the company’s remaining coal-fed units are set to rise.

“Our earnings over the next two years will be lower as we expect to incur higher carbon costs,” Chief Executive Officer Dorothy Thompson said today on a call. “We are now in a period of substantial capital investment and we are extremely confident this investment will deliver attractive returns for our shareholders with earnings growth resuming as we increase our biomass generation replacing our coal.”

Drax climbed 4.5 percent to 631.50 pence by 10.45 a.m. in London, giving it a market value of 2.5 billion pounds.

‘Risky Stock’

Last year, earnings before interest, tax, depreciation and amortization fell 11 percent to 298 million pounds from 334 million pounds on higher operating costs from the biomass plans.

“Drax is a risky stock, although we expect biomass investments to transform the outlook for the company, and drive strong earnings growth through to 2017,” Deutsche Bank AG analysts wrote in a note. The company this year expects to incur a 20 million-pound cost to convert the first unit. The full three-unit conversion will require 650 million pounds to 700 million pounds of investment, according to Drax.

The company has biomass contracts to feed two converted units from providers including Enviva LP and Green Circle and is negotiating supplies for a third. Drax decided to invest in a pellet plant in Mississippi and one in Louisiana where it will also develop a port facility to export 3 million metric tons a year. It also has agreements with U.K. ports for the shipped biomass and has designed bespoke wagons to transport the fuel.

Drax’s power station generated a record 27.1 terawatt-hours in 2012, from 26.4 terawatt-hours a year earlier, and the plant was available 86 percent of the time. Net cash at the end of December rose to 311 million pounds from 225 million pounds. It will pay a total dividend of 25.3 pence, down from 27.8 pence.

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