Drax raises dividend and earnings outlook in bet on supply crunch

LONDON (Reuters) - British power producer Drax raised its dividend payout to shareholders and set a target to more than triple earnings by 2025 as it banks on higher rewards for its conventional power plants to back up renewable energy output.

Drax, whose huge Yorkshire coal-fired power plant was once Europe’s most polluting station, said on Thursday it would pay shareholders 50 million pounds in dividends this year, up from 10 million in 2015 and the first payout rise in seven years.

It pledged to continue increasing dividends annually.

The power producer also said it expects to be able to deliver earnings before interest, tax, depreciation and amortisation (EBITDA) of 425 million pounds by 2025, more than three times its core earnings in 2016.

Most of these profits, or around 300 million pounds, will come from Drax’s power generation business, it said, the core part of the company that has been hit hardest in recent years by weak electricity prices and sudden changes in government subsidy payments.

Drax has been modernising its coal-fired power plant to run on wood pellets instead as Britain has imposed a coal plant shutdown by 2025 to curb carbon emissions.

The power producer is now banking on the need for its biomass units and flexible gas plants, which it intends to build in the coming years provided they obtain contracts to produce back-up electricity, to complement solar plants and wind turbines.

“These are very, very competitive plants in the capacity auction and we believe there are a number of factors that could lead to an improvement in the conditions of the capacity auctions going forward as the market is tightening,” Drax Chief Executive Officer Dorothy Thompson told Reuters.

Despite the bullish update, Drax’s shares fell 2.4 percent by 0750 GMT, with analysts at RBC Capital Markets saying the lack of a definitive dividend trajectory was a disappointment.

editing by Jason Neely and Susan Fenton