Drax shares slump as it cancels its refinancing plans

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The Independent Online

Shares in Drax plummeted yesterday after the operator of the UK's largest coal-fired power plant said the ongoing global credit crisis had forced it to cancel a planned refinancing.

Analysts had expected the owner of the giant North Yorkshire plant to pay out a special dividend of up to 80p per share once it had carried out the debt refinancing. In its trading update yesterday, however, the company said it was forced to call it off, because "debt markets have continued to deteriorate since the interim statement was issued", leading it to "not proceed with a refinancing at the present time". It added that it "will cont-inue to keep the position under review".

The dividend could now be as little as 14p per share. Drax shares finished the day more than 6.8 per cent lower at 623.5p. UBS reiterated its "sell" recommendation on the stock yesterday on the news and expressed disappointment about the company's cash position. The bank said that even adjusting for the reduced dividend, Drax's expected cash balance of between 55m and 60m would be well below expectations.

An analyst speaking on condition of anonymity branded the cancelling of the refinancing a "management error more than anything else. They had the financing available to them." He added: "They seem to have misjudged the fact that the stock really trades on the cash they give back to shareholders."

The share slump was also due to the company's revelation of expected earnings before charges of about 500m, below the analysts' consensus of 521m. Those figures were less surprising, however, given that the company has been squeezed on one end by a coal price that had doubled in the past 18 months to near-record highs, while at the same time power prices have fallen from the records reached in 2006.

In a separate move, the chairman Gordon Horsfield announced he was stepping down, to be replaced by Charles Berry, an energy industry veteran who already sits on the board as a non-executive director. He has his work cut out. Drax, capable of producing up to 7 per cent of the UK's electricity and the country's single largest emitter of carbon dioxide, is seen as particularly vulnerable to the second phase of the European Union's emissions trading scheme, which comes into force on 1 January and runs until 2012.

Under the scheme, industries are issued emission permits that are lower than those currently in force as the bloc tries to curb CO2 emissions. It also sets aside up to 10 per cent of permits that can be auctioned by the Government to those that exceed their allowances.

The EU is set to reveal new details of the phase three of the scheme next month, with some hints from Brussels that all permits could be auctioned rather than given away. As Europe's single biggest carbon emitter, having to pay for all of its permits could cause financial pain to Drax.

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