December 6, 2016 / 12:17 PM / a year ago

UK coal power producer Drax to buy energy supplier, gas plants

LONDON (Reuters) - Britain’s largest coal power producer, Drax (DRX.L), announced on Tuesday that it wants to buy supplier Opus Energy and four gas stations in a move away from its coal legacy that was welcomed by investors.

Drax said it has made a 340 million pound ($434 million) offer for business energy provider Opus Energy, an acquisition that will create Britain’s fifth-biggest business energy retailer in combination with Drax’ existing Haven Power customers.

News of Drax’s planned investments sent its share price up 18 percent, which would be its biggest daily percentage gain ever if it closes the day at that level. The Opus deal is subject to the European Commission approving a UK government contract to support the conversion of one of its coal units to running on biomass.

Drax, whose huge power plant in Yorkshire was once Europe’s most polluting coal plant, has been converting its coal-fired station to biomass, but a government decision to cut subsidies for renewable energy has hampered this strategy.

This triggered a strategic review last year and Tuesday’s announcements show the power producer will shift focus to supplying energy to end-consumers and providing back-up electricity to complement growing wind and solar power output.

Britain faces a supply crunch over the coming winters as nuclear reactors age and coal plants are forced to close by 2025. The government is trying to encourage new gas plants to be built to help plug the supply gap.

“These initiatives mark an important step in delivering our strategy ... through greater diversification of the businesses,” said Drax Chief Executive Dorothy Thompson, adding that five of its biggest shareholders supported the Opus acquisition.

The company was by far the largest gainer on London's FTSE 250 index .FTMC by 1107 GMT.

    Drax said it would pay 18.5 million pounds to buy four open cycle gas turbine (OCGT) projects with a capacity of around 1.2 gigawatts from Watt Power, a unit of Noble Group Ltd (NOBG.SI). The plants, which are yet to be built, will bid to supply back-up electricity in 2020-21 in a government-led auction which starts on Tuesday.

    “We see today’s announcement as a clear positive which goes a long way to addressing some of the concerns that underpin our ‘Underperform’ recommendation (on Drax shares),” said John Musk, managing director of European utilities research at RBC Capital Markets.

    The company said it still expects full-year EBITDA to be around the bottom of the range of current market forecasts.

    Market forecasts in July were for 146-185 million pounds.

    ($1 = 0.7839 pounds)

    Additional reporting by Vidya L Nathan in Bengaluru; Editing by Susan Fenton

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