Drax Group plc

Good morning, everyone, and thank you for joining the call. I will provide a short introduction and overview, and then I'll hand it over to Andy for the numbers and operations, and then I'll come back to talk more about our investment program and capital allocation, and then we'll take questions. You're all familiar with our purpose, which is to enable a zero-carbon, lower-cost energy future. And I want to start with that, as I always do, as it guides everything about our company. And critically, our people are at the heart of Drax, and I want everyone here to feel a valued member on a winning team with a worthwhile mission. We delivered a strong performance in the first half of the year. We produced more power than last year, reflecting a continued high demand for dispatchable renewable power and compensating for lower renewables elsewhere on the system. We accounted for 5% of UK power, as we have for many, many years now, and 11% of UK renewables. And importantly, in certain periods of peak demand, we have been over 50% of UK renewable generation. I'm very pleased also to say that we delivered a record level of pellet production, 5% higher than last year, which also drove increased EBITDA in our pellet business. We're very pleased with the progression of our CFD agreement, with the government, and I'll come back to that in a minute. And we're continuing to target EBITDA of six to 700 million from flex-gen tele-production and from the Brax power station, post-2027. And we have strong confidence in the earnings and cash flow that we can generate from this high-quality portfolio, which is critical to the UK power system, both today, but well into the future. And delivery of that cash flow and associated earnings are a top priority for my group. We're excited about the opportunities to continue to develop and grow that portfolio. It's well aligned to the energy transition and to providing security of supply. We believe we can continue to deliver value through discipline and capital allocation and a commitment to attractive returns for our shareholders. I wanted to emphasize our continued fundamental commitment through our capital allocation policy. It starts with our balance sheet, which is strong at about 1.1 times leverage. We will continue to invest to maintain our existing assets and also invest in growth where we see attractive returns. We continue to grow our dividend and are proposing an 11.5% increase in dividends per share for 2025. And our current 300 million pound share buyback programs is £272 million conceded. And also importantly, today we're announcing an additional £450 million three-year extension of the current buyback. And that extension is underpinned fundamentally by the working capital inflow associated with the end of the Renewable Obligations Scheme. Turning to the low-carbon dispatchable CFD. Earlier this year, we agreed heads of terms with the UK government for a low carbon dispatchable CFD covering all four units at the Drax power station through March of 2031. This was a strong endorsement of the contribution that the Drax power station and biomass make to energy security and decarbonization, as well as to the value for money proposition that we provide, saving bill payers billions of pounds over the terms of the agreement relative to the next best option. And we've been working with the government over the last six months, and we're making very good progress. Importantly, the legislation enabling this agreement is now in place. The CMA has reviewed the subsidy regime, and that is complete and, I think, in a good place. And we are making good progress on negotiating the final contract, which we expect to conclude later this year. And this is a very critical turning point for our business, as we are now comfortably expecting it to run this business through the 2020s and into the 2030s and beyond. If you look at our portfolio of businesses, we have a high-quality portfolio of assets that support energy security in the UK. Our FlexGen business is doing very well, delivering the flexible generation and system support services so critical to the current power system. And as we recognize that opportunity, we continue to develop new abilities to deliver that through expanding our pump storage assets and building the open cycles, the latter of which we expect to be commissioning from later this year. And again, we continue to look at opportunities to complement the portfolio with investment in adjacent technologies, including batteries and other forms of storage. In our energy solutions business, we've now successfully exited the SME space and are very excited about the IMC portfolio we have, our renewable business, and our EV solutions. As I mentioned, our pellet production business did very well in the first half, and we have confidence in its future, but we also recognize that we have work to do to continue to unlock its full potential. At the VAC power station, which continues to play a key role at the heart of the UK power system, we have strong visibility over contracted power sales and cash flows through 2027. And those will be complemented or extended by the low carbon dispatchable CFD, which we believe will allow us to deliver between 100 and 200 EBITDA per year. So reflecting all those factors, we're confident in the earnings and cash flow we can deliver from that portfolio and are focused on delivering That's $600 to $700 million of EBITDA post-2027. Just to be very clear, that target is stated before accounting for options for growth, the fourth column on this page, where we will continue to apply our disciplined capital allocation policy through opportunities which have the potential to deliver significant value. And I'll talk more about those later. I wanted to give you a bit of an update on sustainability, which, again, is critical to everything that we do. In addition to updating our biomass sourcing policy, we've launched a new climate transition plan, as well as the new sustainability framework, which we discussed at the full year. And the transition plan provides more details on our decarbonization targets through 2040. I think we're making very good progress on delivering tangible results that improve our sustainability, and that's reflected in the ratings that I've included on the slide. There's always more to do, and we will continue to work on improving. We're not complacent, and we welcome the opportunity to engage with all of you, as well as all other forms of stakeholders across civil society to make sure we're moving in the right direction. So I'm now going to hand it over to Andy, and this is his final set of results as our CFO. And I do want to thank him for his contribution over the last seven years, which has been tremendous. I think you all would recognize that the difference between our business between now and where it was when he started in 2019 is quite pronounced, and he's made a huge contribution to that positive change. He's built a strong finance team, and I look forward to continuing to build on what he has achieved with Frank Fleming, our new CFO, who is also a fabulous guy, who will start in September. So, Andy, for the last time, how are you?

Good morning, everybody, and Thank you, Will, for your kind words. It truly has been both a privilege and a pleasure to be the CFO of Drax for almost seven years. I'm very grateful for the opportunity and thankful for the support, guidance and encouragement that you personally and the board have given me. As I hope to demonstrate over the next few minutes, I believe Drax is very well placed with high quality assets, a robust balance sheet, good visibility over our future cash flows, but not least a great team to deliver on our strategy. One of the first pieces of advice I received at Drax from Mark, our head of IR, was that when it comes to presenting results, it's good for CFOs to be boring. He said, leave the excitement to the CEO, know your numbers, and stay scripted. So now, before I make Mark too nervous, I will start with the financial summary on slide nine. Continued strong operational and financial performance and our robust balance sheet are supportive of options for growth and returns to shareholders. Adjusted EBITDA of £460 million reflects strong delivery across all segments of our business. The reduction compared to the prior period primarily reflects an expected decrease in the all-in achieved power price for biomass generation. Adjusted basic earnings per share, however, of 65.6 pence is in line with the prior period, and it benefits from a 5% reduction in the number of shares outstanding to 351 million as a result of the ongoing share buyback. We recently published a company-collected consensus for the full year, and reflecting strong first-half performance and expectations for the second half, we're comfortable with consensus, subject as always continued good operational performance. Our strong operational delivery is generating cash flows which position us well to invest in our core business, take a disciplined approach to options for growth and support sustainable and growing returns to our shareholders in line with our capital allocation policy. During the period, cash generated on operations of £378 million includes a working capital outflow of £102 million As in prior years, this reflects a build-up of ROC assets in the first half of the year, which were reversed in the second half as those ROCs from the last compliance period are settled. During the period, we further strengthened our balance sheet and extended the average maturity of our debt. Our net debt to last 12 months adjusted EBITDA ratio of 1.1 times remains significantly below our long-term target of around 2 times. At the 30th of June, available cash and committed facilities of $726 million provided substantial headroom over our short-term liquidity needs. 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 11.6 pence per share and expect this to be 40% of a full-year dividend of 29 pence per share, an increase of 11.5%. As of July 29th, we've completed 272 million of the existing 300 million share buyback programme, and are announcing this morning an extension to the programme to repurchase an additional 450 million of shares over a three-year period to follow on from the current programme. So moving on to slide 10 to look at performance by business. Overall, earnings of $460 million reflects a strong renewable power generation and system support performance across the portfolio and further improvement in the pellet business. In flex-gen and energy solutions, earnings of $81 million compared with $98 in the prior period. Our hydro business delivered $64 million inclusive of the impact of the planned outage of Kruken and reduced volume in our run-of-river assets, reflecting low rainfall in the period. The 40 megawatt expansion at Krookin is progressing and due to complete by 2027, with earnings underpinned by capacity market payments of around 16 million per annum. And in the appendix on page 34, we provide five reference points to illustrate the growing need for system support services and the growing opportunity for value from these assets. Reflecting further delays in national grid connection timelines, our first OCGT asset at Hoan is expected to start commissioning towards the end of this year. Dates for Progress and Millbrook have now moved to 2026. The OCGT earnings are also underpinned by long-term capacity market contracts close to £19 million per annum. The balance of earnings comes from system support services and peak power generation. addressing the increasing needs for flexible dispatchable power. In energy solutions, the adjusted EBITDA of $18 million included $25 million from our IMC business and a loss of $7 in the SME business. During the first half, we completed the sale of the remaining SME meter points and we expect the lines down to be substantially complete by the end of the year. Our IMC business continues to perform well, with a focus on value from high-quality and strategically aligned customers. In pellet production, performance continues to improve. Earnings of 74 million grew 14% from the prior period, with production volumes increasing to 2.1 million tonnes, and of this, 1.4 million tonnes were sold to Drax Power Station. The margin achieved on our own-use supply better reflects the current market value, of long-term large-scale supply. The margin achieved on our legacy third-party contracts is lower. Combined with the reduced cost of production, the achieved EZR margin of £35 per tonne was up almost £3 per tonne from the prior period. We believe that the current level of earnings and pellet production is well underpinned by the low carbon dispatchable CFD at Drax power station. In biomass generation, output increased to 7.1 terawatt hours. The reduction in earnings to $332 million primarily reflects, as expected, a lower all-in achieved power price. This was partially offset by a reduction in amounts due to the Energy Generators Levy, or EGL, and further details are included in the appendix on page 25. In options for growth, development expenditure of $27 million included $16 million related to Illimini, our carbon removals business. As we noted in our last trading update, we won't participate in the first phase of the cap and floor scheme for the 600 megawatt expansion of Kruken, but we do retain the option for potential future development, subject to an appropriate balance of risk and return. We will continue to be disciplined with development expenditure. So turning to slide 11 and the balance sheet. We maintain a strong focus on cash flow discipline and maintenance of a robust balance sheet. In the second quarter, our corporate credit ratings were reaffirmed as BBB plus by Fitch and S&P and as BBB low by DBRS. And there was a stable outlook in each case. Over the last 18 months, we've moved the balance of maturity significantly. During the period, we extended the maturity of our committed 450 million revolving credit facility to 2028, with an option to extend further to 2029. And no cash has been drawn on this facility since its inception. In addition, during July, we extended the maturity of our 50 million pounds and 135 million euro term loan facilities to 2028. We expect to repay the outstanding Eurobond and CAD term loan balances during the second half with surplus cash flow. As already noted, the available cash and committed facilities at the end of June provided substantial headroom over our short-term liquidity needs. So moving on to slide 12 and strong visibility free cash flow. We continue to believe that there's growing value from dispatchable renewable generation assets. which can complement intermittent renewables and inflexible nuclear and enable the energy transition. Our portfolio of high quality assets are well placed to deliver the flexible generation and system support services which the power system needs. And we're increasingly confident in the visibility of the cash flows that they can produce. So I'll step through the building blocks of these cash flows through 2031. As already noted, we're comfortable that current consensus expectations for the full year provide a good starting point. We have a strong forward power sales book. We're fully hedged on the ROC units in 25 and 26, and we're well hedged for the first quarter of 27, with almost 2.1 billion of forward sales at an average price of £94 a megawatt hour. Since our trading update in May, we've added 1.4 terawatt hours of hedges at 102 pounds a megawatt hour. And further details of the current forward power sales book are included in the appendix on page 22. Beyond the first quarter of 27 through the first quarter of 2031, we're targeting an average of 100 to 200 million of adjusted feed start through the low carbon dispatchable CFD. with upside potential from merchant generation. This represents less than 30% of our 600 to 700 million target, which also includes flex-gen and energy solutions and pellet production. And as well as melted, the legislation is now in place, the CMA review is complete, and contract negotiation is progressing. Our flex-gen earnings have a strong underpin from capacity market payments. And again in the appendix on page 33, the detail of almost $600 million of index-linked capacity market agreements for this portfolio through 2042. That total value grows to $1.2 billion if you apply the latest capacity market price to future auctions. The addition of the 900 megawatts of new OCGTs and the 40 megawatt expansion at Kroeken also provide further opportunity to capture value from flexibility and system support services. In our energy solutions business, we've edited the SME business and we're focused on INC, renewables and EV solutions. This provides us with high credit quality customers and a longer duration of contracting. In our pellet business, performance continues to improve. and although noted, we believe the current level of earnings is underpinned through the low-carbon dispatchable CFD. In addition, we believe there are opportunities for sales in existing and new markets, such as sustainable aviation fuels. So together, post-27, we're targeting 600 to 700 million of adjusted EBITDA from flex-gen and energy solutions, pellet production and biomass generation, before any development expenditure. With the end of the Renewable Obligation Scheme in 27, we expect around 500 million from the sale of ROC assets generated in previous periods. We see this working capital inflow as supporting the buyback extension of 450 million, which we've announced today. If you take an estimated maintenance investment of 100 to 150 million across our portfolio, and together with reasonable assumptions on interest and tax, It will point you towards a very attractive level of free cash flow before dividends through 2031. We're focused on delivering these cash flows, and we'll be disciplined in how we use them to maintain a strong balance sheet, support options for growth, pay a sustainable and growing dividend, and deliver additional returns to shareholders. And with that, I'll hand back to her.

So, thank you for that, Andy. I guess it's now my job to get you all excited. Let me start with why I'm excited, because I am absolutely excited about the opportunity that we have at Grax, and I was going to highlight four different things. So first is really what we've talked about so far, which is the operational excellence that we have within the business to deliver the cash flows that we have so far and that we expect to continue to do well into the future. Operational excellence is also built on a strong combination of balance sheets, compliance, and sustainability. The second thing is how well positioned the business is strategically to actually respond to the opportunities being created by the energy transition. And I'll talk more about that in a second. And the third thing is really the discipline with which we expect to go about doing that. And I'll talk a little bit about our capital allocation policy to demonstrate that. So as you know, we have a four-stage policy. It's been in place since 2017, and we stick to it rigorously. We maintain a strong balance sheet, currently defined as our current credit rating, and two times net debt EBITDA. We invest in the core business, though, to make sure that we maintain our high-quality asset base, as well as investment opportunities around our core to extend and expand in areas where we have competitive advantage. We pay a sustainable and growing dividend, which Andy has highlighted, which we've been doing since 2017. And lastly, to be set, there is residual capital beyond our investment requirements. We would like to return those to shareholders. And I would highlight that all of these objectives are complementary, i.e. we're doing all of them, frankly, at the same time. So, to turn to the next page. So, I wanted to just remind you of the framework that how we look at the investment opportunities in front of us. First of all, the energy transition is creating a wealth of opportunities over different timescales for investments that have the opportunity or the potential to deliver attractive returns aligned with our capabilities and strategies. And this is no accident, because while I've been at Drax, we've been positioning the company to have opportunities to invest in the growing need for volatility, for flexibility, and to complement intermittent renewables and inflexible nuclear. And with the retirement of dispatchable fossil fuel plants, the deployment of more renewables, as well as the expected future increase in demand for power, we're seeing this play out. But let me give you a couple of examples. So over the last six years, we've seen a 50% increase in the terawatt hours of energy or power generated by wind. We've seen a 500% increase in periods of negative pricing, and we've seen a doubling of system costs. And we can see that in action because Kruegen is now operating about twice as often or twice as much as it did at the beginning of that period. So we're already taking advantage of these opportunities by building the beacon plants, the open cycles, which we'll begin to commission later this year, by investing in the 40-megawatt expansion How can we capitalize further on this trend? So the first thing I would say is, again, our current portfolio is increasingly valuable and will be as this volatility in the system continues to change. We like batteries as a potential attractive addition, as we've demonstrated by looking to buy the height portfolio, but again, as we demonstrated then, we will be disciplined in how we approach those investments. In pellets, we're not looking, at least currently, to expand our capacity there until we have clear visibility on additional demand. But we are working hard and looking at ways to make sure that new markets, which we think will happen, like sustainable aviation fuels, we're doing our part to see those come to fruition. So as you know, we have the MOU with Pathway Energy, which has the potential to lead to 1 million times per annum of sales in the U.S. by the end of this decade. At the Drax Power Station, we see opportunities to create value from sort of small incremental opportunities. So, for example, we've established a small state, small JV, to sell the ash that is built up at the power station. We have tens of millions of tons of that ash. We leave that JV to deliver 5 million pounds of additional EVPA per year over the next 20 years. That investment does not require any capital from us. And it's held into a market very much structurally aligned with the energy transition and is a great example of how we can create value for our existing assets. Longer term, we're very focused on creating a definitive future for direct power station beyond the extended CFD. We're working on data centers, which we'll come back to. But clearly, with four gigawatts of grid connection, we think we have a lot of value, and we're looking to monetize that. We're looking at carbon removals. You know, Elimini has recently signed a deal with Kofort, a Danish utility, where effectively Elimini will participate in the development of a BEX project in Denmark. We'll lend our expertise to that project. We'll also lead on the marketing of the associated CDRs, and we'll have the option to invest in that project to the extent it does get to FID. And as you can see, there's no requirement of capital from us, but it's an opportunity. Let's take a closer look at FlexGen. The first piece of it, long-duration storage. As I mentioned, Krookin is running twice as much as it did six years ago, which reflects greater demand associated with more intermittent renewables and more balancing actions from the system operator. As you know, we are expanding that by about 40 megawatts. It's an 80-million-pound program underpinned by more than 220 million pounds of capacity market revenue, adding visibility to that business out through 2040 and beyond, with returns expected in excess of 20%. And we continue to look at other ways to invest to maximize value from that side. As a reminder, we continue to have the option to actually expand it much more significantly by 600 megawatts, but we'll only do that to the extent we're comfortable with the risk-return balance on that investment. The open cycle is expected to come on later this year. or to begin coming on later this year, will provide power at times of peak demand. They are then underpinned by capacity market investments. And finally, in that space, we have demand-side flexibility from our INC business customers, which gives us another ability to create value for ourselves, for our customers, and to support the system. Finally, in terms of in the battery space, and we're looking carefully at that, there's a very large pipeline, as you all know, of batteries that are waiting to be built in the U.K., We're looking at where there might be opportunities there for us to invest, but again, on the right terms. And things like access to the grid, clear grid connections, there are a bunch of risks that need to be managed there properly before we can get comfortable with those investments. Let me give you a short update on the data center possibility. So clearly, AI is changing the world in many ways, right? And in order for that to happen, there's a huge need for data center capacity, which has an attendance or complementary need for huge amounts of additional power. So again, we have the Bogota Power Station. If we can participate in that, it's a great possible opportunity. The way we think about it is before 2030, it's likely to be something like 100 megawatt developments that could ultimately scale to greater than a gigawatt through the 30s through a long-term behind-the-meter power offtake agreement with the power station. And it also could be complemented by BECCS, It's very much aligned with the 2027 CFD agreement, so we need to make sure that that's consistent and that we think we can do that. But even beyond the data center, or sorry, beyond the biomass units, the access to the grid we have there, we have 1.2 gigawatts of grid access from the coal units. Again, we're looking at ways that that could be monetized. The one thing that's happened recently is we've partnered with the North Yorkshire County Council and other organizations in the region as part of an AI growth zone application. which, again, is successful to help accelerate funding for all of those developments. There are other contenders for that, like T-Style, for example, but nothing has happened yet, and we believe we have a compelling case. We expect to hear more on that in the second half of the year. So maybe in honor of Andy's last meeting, we thought we would do a little bit of a recap of what's happened over the last few years, right? So, again, I think we've done a pretty good job. So, the excellence of our operating folks and how well they've delivered has meant we've generated significant earnings and cash flow. And as the market, as demand grows for that, we think that will continue to, in fact, become more important over the coming years. And the second thing we've done is we've allocated that capital, I think, effectively through our capital allocation policies. What have we done? We've delivered about $5 billion of EBITDA since 2017 with an average cash conversion of about 98%. We've invested about $3 billion in the business. We've grown our dividend every year since 2017 at a rate that's now greater than 11% per year. And with our focus on shareholder value, we've returned significant capital to shareholders by buying back shares to the tune of about $472 million. And that's about 83 million shares at £5.68 per share. And as I've already described, we think there's more opportunity for us to do the same, given the energy transition and where we've positioned our business. I think it's important to note that we think the UK is an attractive market for investment in the energy transition, especially relative to some of our global peers. But again, being disciplined and focused on investing where we can add value and earn returns is central to our approach. As our capital allocation policy requires, we'll look at that all in the context of how does that compare to the value we see in our own shares, which again is why we're announcing today the additional 450 million pound buyback program, which again is underpinned by the working capital inflow associated with the end of the RO scheme. Just to be clear, that doesn't mean we're going to wait until 2027 to begin buying back the shares. that program will begin as soon as the current one finishes. So finally, in terms of the summary and the outlook, we're delivering effective returns for shareholders as a result of strong operational and financial discipline and performance, substantial dividend growth, disciplined capital allocation, and a major multi-year share buyback program. Important to us also is that we're delivering for all of our stakeholders delivering energy security, decarbonization, and operating in a sustainable and compliant way. The heads of terms for a CFD at the Drax power station is a very important inflection point, taking away all mention of the 2027 cliff around our business. We continue to have a post-2027 adjusted EBITDA target of $600 million to $700 million, and we have increasing confidence in our ability to deliver that. We expect to generate strong cash flow. We expect to invest that in the track of growth opportunities, and we will do that in the context of our capital allocation policy. So thank you, and with that, we'll take any questions that you might have. Thank you.