Drax Group plc

Thank you and good morning, everyone. Welcome to our first half 2024 results call. I'm starting on page three. I'll start with our purpose, which is to enable a zero carbon, lower cost energy future. And I always like to do that because it guides fundamentally everything that we do. And we have a business model that aligns shareholder returns with positive outcomes for nature, the climate and people. And critically, our people are at the heart of Drax. We want everyone to feel a valued member on a winning team with a worthwhile mission. Turning to page four. We had a strong first half of the year. And again, as I always like to do, I'll start with safety, which is again at the heart of everything that we do. We pay a lot of attention to safety all the time. It's not really about the statistics, it's about the culture that we are trying to build. But the statistics do tell a story. And compared to last year, we've had significantly fewer incidents. And our TRIR has reduced from 0.47 last year to 0.24 this year. But as we all know, keeping people safe is something we need to do every day, and it's a never-ending battle. Financially, we've seen a 24% increase in our adjusted EBITDA, a 43% increase in earnings per share. So strong financial performance. We continue to deliver returns for our shareholders and we're expecting a 12.6% increase in dividends per share. And we're announcing today a 300 million pound two-year share buyback program, which we expect to start in the third quarter of this year. To enable that during the first half of the year, we significantly strengthened our balance sheet. We've raised greater than 680 million pounds in new facilities that mature in 2027 and beyond, at attractive rates that reflect the market's increasing competence in our long-term business. And with those proceeds, as well as with cash, we've repaid about 950 million pounds of shorter-dated facilities. I'm very excited about our FlexGen and Pellet businesses, which we began to talk about significantly more about at the year end. Both of those are targeting more than 250 million pounds of EBITDA in the long term, and both of them have strong first halves. We've also had great engagement with the new government. I'm excited about the potential for the bridge, about BECCS in the UK, and also about expanding Quirkin, all of which we believe are critical for enabling the government's ambition of delivering a net zero power system by 2030. And finally, the global market for BECCS and for CDRs continues to develop well, as does our own team and plans for delivering that in the US. And I move on to page five, please. So in February, as I mentioned, we began to talk about our business a little bit differently, and I want to share or reiterate that story again. So we have two businesses that we are highly confident will generate attractive returns long-term. come what may. One of them is the flexible generation energy solutions business, and the other one is the pellet production and sales business. For both of them, we're targeting more than 250 million pounds of EBITDA in the long term. Our biomass power generation business, as we all know, is somewhat different. We expect it to generate greater than a billion pounds of operational cash flow between 2024 and 2027. And importantly, it has a very important or key role long-term in the UK power system. And I'm again very encouraged with early engagement we've had with the new UK government. We recognize that importance. It was reiterated by National Grid in the future energy scenarios that it published recently in which all three scenarios have a significant role for biomass power generation as well as BECCS. So we look forward and are working closely with the government to make sure we get the right decisions from them and the right public signals by the end of the year to enable us to make the investments that we want to make. And beyond that, we have other attractive investment opportunities in Crucan II, which again, as the government ramps up its ambitions for more wind power offshore, onshore in Scotland, we believe that pumped storage is going to be ever increasingly important to enable that wind to play its proper role in the system. We have exciting opportunities to expand our pellet business as we get more long-term committed contracts. And we're again excited about delivering VEX in both the US and the UK. And once we have the right long-term certainty to support both of those activities. Turning to page five. Each of our businesses performed well in the first half of the year as we grew EBITDA by 24% over the first half of 2023. And each of our businesses is on track to deliver its long-term targets. And I'm going to let Andy take you through that when he gets to the section on our financials. I'm going to go straight through to page seven now. So we expect to generate 250 million pounds of EBITDA in the long term through the cycle from our FlexGen and energy solutions business. And as you know, it consists of pumped storage, hydro, our open cycles, and Drax energy solutions. We increasingly think of Kruken2 as part of this portfolio. It's an exciting opportunity to grow our flexible generation business, and we'll talk more about that in a minute. And we also believe there's opportunities to expand further in this market. I mean, just think about the market opportunity, think about the skills and capabilities that we have, and we look forward to looking for further opportunities to grow in this space. Turning to page eight. So you all in the market in general have been asking for a bit more granularity about what's driving our strong performance in the flex generation, specifically in pump storage and hydro. And we want to try to give you that over the course of the next few pages. So on this page, you see two graphs. The one on the left shows the growing cost of managing the system in the UK. And effectively, what we see over the last sort of six or seven years is a 18% growth in the costs of growing that system. On the other side of this chart, you'll see the growth in our earnings. from pumped storage. And what we've done is we've split out the earnings that come from forward power sales or effectively dependent upon higher power prices as they were in the first half of 23 and 24. And again, you can see about 18% growth there as well during that period. So our earnings are fundamentally driven or the growth in our earnings fundamentally driven by the increasing costs of managing the system. If I give you a bit more details on that on the next page, page nine, you can see a little bit of what's been driving that. So on the upper left, you can see the growth in the terawatt hours from offshore wind, again, strong growth. And again, we expect that to continue as the system adds more wind power to it. On the right, this is one signal or one example of how this volatility is increasing is the hours of negative pricing. And you can see those are growing very significantly as well, right? And those are all, those create the need for Krookin to run and they create opportunities to create value from pump storage. So on the bottom of that page, you see, again, we sort of show what actually then has happened at Krookin. So we've generated more, we've pumped more, and we've operated a significantly further amount of the time. Now, there are other pieces of this story that, again, you're all familiar with, the decline in other forms of large-scale dispatchable thermal generation, the increasing amount of volatility that that all drives. So there's lots of positive elements. And all of that, or all of the drivers that we've seen for the last four, five, six years, we expect to continue and accelerate over the next decades as the system becomes more dependent on sort of intermittent renewable power. And for those of you who want more detail, we've got additional information from the National Grid's future energy scenarios included in the appendix. Finally, on page 10, we're excited to be continuing to invest in the FlexGen business. As we announced last year, we are refurbishing and expanding two of the units that we already have at Krookin. It's an 80 million pound project. It will add two times 20 megawatts of power or power generating capacity. That is all underpinned by more than 220 million pounds of capacity market revenue over 15 years. in addition to the 60 million pounds of existing one-year agreements that we have for Kruken. We also, as you know, have the option to expand Kruken 2. It's a 600 megawatt expansion, as you know. Just as a reminder, we have received our planning permission. We're in the midst of doing detailed design works. We expect clarity from the government on the cap and floor mechanism that support long-duration storage next year. enabling us to make a final investment decision in 2026 and be online again in 2030 to help enable the UK government's ambition of delivering a net zero power system by 2030. The project that we are actually delivering now in the UK on page 11 is the open cycle gas turbines. We expect to be commissioning the first of those later this year. They're also underpinned by 270 million pounds of capacity payments We have had challenges with the timing of these projects and getting our grid connections online with National Grid. So there is still some risk to the timetable on a couple of those units. But fundamentally, we're very excited about these assets. They're completely consistent with the market drivers I've just been discussing. And as you know, we're continuing to evaluate options for them, whether we keep them or whether we sell them. Let me make it clear that whatever we do with them, It needs to be consistent with our ambitions, our own decarbonization ambitions, which you all know to be carbon negative by 2030. And the final piece of the energy solutions business is our customer business, which is performing very, very well. There's two pieces to this. There's the SME piece of it, which I'll just quickly remind you, we've announced earlier this year the sale of 90,000 customer meters in that space. We're exiting that business, following a strategic review, and we're in the midst of an employee consultation process that will reflect the reduced size of that part of the business. But we're very excited about what remains. That business is a low-risk business with large, high-quality credit customers. It's a business where we don't take power price risk in any significant way. Part of it is supply of power, but part of it is also It comes from Opus as well, which is the part of it is bringing to market smaller scale renewable generators. We have an attractive PPA business in that space. And we're making very good progress in growing new parts of that company. So we, as you know, we bought PPMM, an EV installation business last year, and they continue to win new customers. For example, we've just begun a new long-term partnership that will see Drax delivering EV charging infrastructure for Kier. So again, very excited about that part of the business. Moving on to page 13. So as I've said, we're also targeting greater than 250 million pounds in the long term for our pellet production business. We made good progress in the first half of the year. We increased our output from 1.9 to 2 million tons, and we improved our margins. And we're also increasing capacity with the expansion of our Aliceville site, as well as the new project in Longview in Washington state. We're currently working through our air permit process there to make sure we have the right permit that allows us to have a simple but robust regulatory framework. We're increasingly encouraged by the development of third-party sales opportunities, both renewing legacy contracts at attractive prices, as well as entering new markets, including SAF. In the biomass generation space, Drax Power Station, which for a long time has been at the core of the company, will generate greater than a billion pounds of operational cash flow in 2024 and 2027. And much of that, as you know, is underpinned by strong forward power hedges, the CFDs and the ROCs. But it also depends on strong operational performance from trading and optimization, generation, logistics, and pellet productions. And our capabilities in that area underpin the crucial role that DPS plays in UK security of supply. Turning to page 15. The UK needs the Drax power station for security of supply. As I mentioned, National Grid's future energy scenarios have made that very clear. All of its pathways rely on DEX as well as biomass power generation. And we've had very good engagement with the new government on making sure that we're working together to deliver the signals that we need by the end of the year to deliver the investment that will enable us to be a key part of that 2030 net zero power systems. So frankly, given the delays that have happened in the government thinking to date, we can't really wait much longer. We are looking at other options, but we're most excited about investing in the UK. Finally, on page 16, We have attractive options for growth and our ambitions remain the same as ever to do BEX in the UK, to do BEX in the US, and to have our first sites online by 2030. And we're actively building our team in the UK, sorry, in the US, looking at our first sites there, and I've already talked about the UK. So with that, I'll turn it over to Andy to give you a bit on the financials.

Thanks, Will, and good morning, everyone. So we'll start with a financial summary on slide 18. We've delivered strong financial performance, strengthened our balance sheet, and we're announcing additional returns to our shareholders. The adjusted EBITDA of 515 million grew 24% over the prior period. This reflects a strong renewable power generation and system support performance across the portfolio, as well as an improvement in the pellet business with an increase in production volumes and the achieved EBITDA per tonne produced. We've made considerable progress with refinancing activities, extending the group's debt maturity profile beyond 27, and we expect to increase the size of our RCF and extend its maturity beyond 26 during the third quarter. Last week, we published a company-collected consensus for the full year, and reflecting strong first half performance and expectations for the second half, we're comfortable around the top end of the consensus range. subject to continued good operational performance. Our closing net debt of just over 1 billion gives leverage of sub one times on a last 12 months basis. This strong financial performance is generating cash flows, which is supportive of our capital allocation policy. They position as well to invest in our core business, progress strategic growth plans and support sustainable and growing returns to our shareholders. Consistent with our policy to pay a dividend which is sustainable and expected to grow, the board has resolved to pay an interim dividend of 10.4 pence per share and expect this to be 40% of a full-year dividend of 26 pence per share. This represents an increase of 12.6%. We are also announcing a £300 million two-year buyback programme to commence in the third quarter. So moving on to slide 19 to look at the strong financial and operational performance in the first half. Starting with FlexGen and Energy Solutions, where we delivered adjusted EBITDA of 98 million in the period. As Will noted, system support earnings in pump storage hydro have grown at a five-year compound growth rate of 18%, broadly in line with the increased cost of managing the system. In the first half, FlexGen EBITDA from system support totaled 60 million, with the remaining 16 million related to forward power sales. In the prior period, earnings from forward power sales of 75 million reflected higher captured prices and a higher volume of hedges. In energy solutions, we recently announced the sale of the majority of the customer meters in our non-core SME business. The SME loss of 14 million reflects a high fixed cost base, serving a reduced customer base following the decision to exit gas supply in the first half of 23. Our INC business continues to perform well, with earnings of 36 million up over 30% from 27 in the prior period. In pellet production, the adjusted EBITDA grew 50% to 65 million with increased production volumes and an improved EBITDA per tonne produced. Our earnings from biomass generation grew over 70% to 393 million, reflecting a 32% increase in generation volume to seven terawatt hours in the period and an increase in captured power prices at Drax power station. So moving on to slide 20, I'd like to walk through in more detail how performance in the period is supportive of delivering our target future earnings. So firstly, in flex gen and energy solutions, adjusted EBITDA for pump storage and hydro of 76 million includes 7 million pounds of EGL payments, which will cease in 28. That suggests a simple annual run rate of 160 to 170 million. The 40 megawatt crew can upgrade, which will complete in 27 is underpinned by capacity market payments totaling 220 million or 15 million pounds per year from 2027. We also expect incremental earnings from the additional 40 megawatts of capacity. Taken together, this is supportive of greater than 150 million of recurring post 27 earnings from hydro and pump storage. Our INC Energy Solutions business continues to perform well. We see further opportunity for growth in energy services with the recent acquisition of BMM Energy Solutions, an installer of electric vehicle charge points, which strengthens our end-to-end EV charging proposition. With the agreement for the sale of the majority of our SME customer meetings, Meeters, earnings from the INC business alone are supportive of greater than 50 million of post-27 earnings from energy solutions. The first OCGT asset will start commissioning in the fourth quarter. Grid connection timelines have pushed commissioning dates for the second and third assets into 2025. But earnings from the OCGTs that have combined capacity of 900 megawatts underpinned by 15 year capacity market contracts totaling £275 million or £18 million per year. The remaining earnings from these assets will come from system support services and peak power generation. An exercise to back cast the value of these assets over the three years from 21 to 23 showed that on average they would have contributed earnings of greater than £70 million per year. The increasing need for flexible dispatchable assets, the increasing cost of balancing the system, and the strong underpin from capacity market payments are supportive of 50 million of post-27 recurring earnings from the OCGTs. As Will noted, we do continue to assess options for these assets, including their potential sale. Slide 28 in the appendices provides details of the already secured capacity market contracts for this portfolio. In the period to 2042, they total almost 600 million. It also shows the annual value of capacity market agreements growing significantly with the additional agreements for crew can expansion and the OCGTs, but also an increase in the clearing price from the 18 pound in the 24 numbers The total value of capacity market payments would grow to around £850 million if you use an illustrative £35 clearing price for future auctions. And these values are in 23 terms and they're subject to indexation with UK CPI. Overall, we consider current performance together with these future developments is supportive of delivering greater than £250 million of recurring post-27 earnings from FlexGen and Energy Solutions. Moving to pellet production, we're targeting 250 million of recurring post-27 earnings. These targets are based on reaching 5 million tonnes of production and require increased output from our existing plants and the addition of new capacity. During the period, our production volumes increased to 2 million tonnes, including a small benefit of the Aliceville expansion, which commissioned during the period. The full run rate of this expansion together with the development of our Longview pellet plant will add around 600,000 tons of production. So with improved output across our existing plants, we're continuing to target this future production of 5 million tons. Our current third party sales book includes a portion of legacy contracts that were signed when market prices were lower. And while price escalations apply, cost inflation has reduced margins over recent years. Around 1 million tons of these contracts expire over the next five years. And we expect to expand our margin on renewal or on the sale of these volumes into existing markets or sale into new markets, which is well noted includes sustainable aviation fuels. Market forecast show growth in demand as markets such as BEX and SAF develop. And we believe our pellets have increasing value and we have a healthy pipeline of opportunities. In biomass generation, our RO units are fully hedged for 24 and 25, with over 20 terawatt hours locked in at attractive prices. We expect the CFD unit to run at a high load factor for the coming years, subject to securing the biomass. We also anticipate additional longer term value at Drax Power Station from the bridging mechanism, BECCS, and other opportunities. So turning to slide 21 and the balance sheet. We maintain a strong focus on cashflow discipline and maintenance of a robust balance sheet. Year to date, we've signed over 680 million of new facilities with three to five year maturities and repaid over 820 million of 24 to 26 maturities. As a result, our weighted average maturity date is now in the fourth quarter of 27. Our available cash and committed undrawn facilities of 515 million provide substantial headroom over our short-term liquidity requirements. Our 300 million ESG linked revolving credit facility provides further committed liquidity out to 26. No cash has been drawn on this since inception. And as I noted earlier, we expect to refinance it in Q3, increasing the size and extending the tenure. Net debt to adjusted EBITDA significantly below the group's long-term target of around two times. On the last 12 months basis, our leverage ratio at the end of the period is around 0.9. During the second quarter, our credit ratings were affirmed as BBB plus by Fitch and S&P and as BBB low by DBRS with a stable outlook in each case. And finally, cash generated from operations of 400 million in the period is broadly in line with the prior period, despite a working capital outflow of 93 million. So slide 22, I'm looking at capital investment. With capex spend of 147 million in the first half, we now expect capex to be in the range of 360 to 400 million for the full year. Growth capex of around 270 million includes the OCGTs, Longview and the Crookham 3 and 4 refurbishment projects. Our maintenance capex of around 100 million for 24 is lower than in 23, primarily reflecting that there was one major planned biomass outage compared to two last year. The major planned outage is progressing well and Unit 3 is expected to return to service in August. Other CAPEX includes investment in systems, controls and processes to support continuous improvement and compliance. The first of our three OCGT projects will commission in the fourth quarter. And as I noted, commission of the remaining projects is delayed into 25 due to delays in the grid connections. The construction of Longview will continue throughout the year and expected spend is reduced as progress is slower than anticipated as we proceed with air permitting processes. There's no change, however, to the expected medium-term volumes or profit targets for pellet production. We expect around 30 million of capex on Kroeken 3 and 4 this year, with total capex on the project around 80 million. The investment's underpinned by 220 million of capacity market payments through 2042, along with earnings from power generation and system support services. We continue to carefully manage our further investment in UK BECs, pending additional clarity from the UK government. So on to slide 23, and capital allocation. Our capital allocation policy launched in 2017 and remains unchanged. Strong financial performance and cash generation is supportive of maintaining our credit ratings, paying a growing and sustainable dividend, but it also positions as well to invest in our core business and progress strategic growth plans in the UK and globally. Our policy is to pay a sustainable and growing dividend. And over the last seven years since the policy commenced, dividend growth has averaged 11%. Timing of capital deployment is a key consideration when we think about the fourth leg of our policy, which is to return surplus capital to shareholders We have attractive options for long-term growth in BECs and pumped storage, but final investment decisions are targeted for 26. We will continue to consider other investment opportunities which are complementary to our portfolio. But with high quality operating cash flows underpinned by a strong hedge book and leverage already below our long-term target of two times, we will return a further 300 million over the next two years through a share buyback programme that will commence in the third quarter. With that, I'll hand back to Will.

Thank you, Andy. And just to wrap up on page 24. So we had a very strong operational and financial performance in the first half of the year, which supports the improved outlook that Andy has described for the rest of the year. We're increasingly excited about our FlexGen and energy solutions, as well as pellet production businesses, and are targeting greater than 500 million of recurring adjusted EBITDA into the 30s. Our biomass generation business will deliver very strong cash flows, greater than a billion pounds of operating cash flow over the next three years, and has a very attractive and important long-term role in the UK power system. And we're, again, increasingly encouraged by our early engagement with the new government. As a business, we have long-term options for growth, whether that's in pump storage, whether that's in vaccine, whether that's in pellets, all of which are aligned with our purpose of enabling a zero carbon, lower cost energy future, as well as the energy transition and enabling security of supply here in the UK. And finally, we take a disciplined approach to capital allocation. We significantly strengthened our balance sheet. We continue to invest in our core business and our growth opportunities while delivering a sustainable and growing dividend to shareholders. And we've announced again today that we will be beginning shortly at 300 million pound share buyback. With that, we're happy if you take any questions.