Tag: BECCS (bioenergy with carbon capture and storage)

Global collaboration
is key to tackling
the climate crisis

Will Gardiner, Chief Executive Officer, Drax Group

22 April 2021

Opinion

Leaders from 40 countries are meeting today, albeit virtually, as part of President Joe Biden’s Leaders’ Summit on Climate. The event provides an opportunity for world leaders to reaffirm global efforts in the fight against climate change, set a clear pathway to net zero emissions, while creating jobs and ensuring a just transition.

Since taking office President Biden has made bold climate commitments and brought the United States back into the Paris Agreement. Ahead of the two-day summit, he announced an ambitious 2030 emissions target and new Nationally Determined Contributions. The US joins other countries that have announced significant reduction goals. For example, the EU committed to reduce its emissions by at least 55%, also South Korea, Japan and China have all set net-zero targets by mid-century.

Here in the UK, Prime Minister Boris Johnson this week outlined new climate commitments that will be enshrined in law. The ambitious new targets will see carbon emissions cut by 78% by 2035, almost 15 years earlier than previously planned. If delivered, this commitment which is in-line with the recommendations of the Climate Change Committee’s sixth carbon budget will put the UK at the forefront of climate action, and for the first time the targets include international aviation and shipping.

What makes climate change so difficult to tackle is that it requires collaboration from many different parties on a global scale never seen before. As a UK-North American sustainable energy company, with communities on both sides of the Atlantic, at Drax we are keenly aware of the need for thinking that transcends borders, creating a global opportunity for businesses and governments to work together towards a shared climate goal. That’s why we joined other businesses and investors in an open letter supporting the US government’s ambitious climate actions.

Collaboration between countries and industries

It’s widely recognised that negative emissions technologies will be key to global efforts to combat climate change.

At Drax we’re pioneering the negative emissions technology bioenergy with carbon capture and storage (BECCS) at our power station in North Yorkshire, which when up and running in 2027 will capture millions of tonnes of carbon dioxide (CO2) per year, sending it for secure storage, permanently locking it away deep under the North Sea.

Experts on both sides of the Atlantic consider BECCS essential for reaching net zero. The UK’s Climate Change Committee says it will play a major role in removing CO2 emissions that will remain in the UK economy after 2050 from industries such as aviation and agriculture that will be difficult to fully decarbonise. Meanwhile, a report published last year by New York’s Columbia University revealed that rapid development of BECCS is needed within the next 10 years in order to curb climate change and a recent report from Baringa, commissioned by Drax, showed it will be a lot more expensive for the UK to reach its legally binding fifth carbon budget between 2028 and 2031 without BECCS.

A shared economic opportunity

Globally as many as 65 million well-paid jobs could be created through investment in clean energy systems. In the UK, BECCS and negative emissions are not just essential in preventing the impact of climate change but will also be a key component of a post-Covid economy.

Government and private investments in clean energy technologies can create thousands of well-paid jobs, new careers, education opportunities and upskill workforces. Developing BECCS at Drax Power Station, for example, would support around 17,000 jobs during the peak of construction in 2028, including roles in construction, local supply chains and the wider economy. It would also act as an anchor project for the Zero Carbon Humber initiative, which aims to create the world’s first net zero industrial cluster. Developing a carbon capture, usage, and storage (CCUS) and hydrogen industrial cluster could spearhead the creation and support of tens of thousands of jobs across the Humber region and more than 200,000 around the UK in 2039.

Under the Humber Bridge

Additional jobs would be supported and created throughout our international supply chain. This includes the rail, shipping and forestry industries that are integral to rural communities in the US South and Western Canada.

A global company

As a British-North American company, Drax embodies the positive impact that clean energy investments have. We directly employ 3,400 people in the US, Canada, and the UK, and indirectly support thousands of families through our supply chains on both sides of the Atlantic. Drax is strongly committed to supporting the communities where we operate by investing in local initiatives to support the environment, jobs, education, and skills.

From the working forests of the US South and Western Canada to the Yorkshire and Humber region, and Scotland, we have a world-leading ambition to be carbon negative by 2030. At Drax, we believe the challenge of climate change is an opportunity to improve the environment we live in. We have reduced our greenhouse gas emissions by over 80% and transformed into Europe’s largest decarbonisation project. Drax Power Station is the most advanced BECCS project in the world and we stand ready to invest in this cutting-edge carbon capture and removal technology. We can then share our expertise with the rest of the world – a world where major economies are committing to a net zero future and benefiting from a green economic recovery.

If we are to reach the targets set in Paris, global leaders must lock in this opportunity and make this the decade of delivery.

Full year results for the twelve months ended 31 December 2020

25 February 2021

Investors
Water outlet into Loch Awe from Cruachan Power Station

Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)
RNS Number : 2751Q

Twelve months ended 31 December20202019
Key financial performance measures
Adjusted EBITDA (£ million) (1)(2)412410
Continuing operations366371
Discontinued operations – gas generation4639
Cash generated from operations (£ million)413471
Net debt (£ million) (3)776841
Adjusted basic EPS (pence) (1)29.629.9
Total dividend (pence per share)17.115.9
Total financial performance measures
Coal and other asset obsolescence charges(239)-
Operating (loss) / profit (£ million)(156)48
Loss before tax (£ million)(235)(16)

Financial highlights

  • Adjusted EBITDA from continuing and discontinued operations up £2 million to £412 million (2019: £410 million)
    • Includes estimated impact of Covid-19 of around £60 million, principally SME customers
    • Strong performance in Pellet Production and Generation
  • Strong cash generation and balance sheet
    • 1.9 x net debt to Adjusted EBITDA, with £682 million of cash and committed facilities at 31 December 2020
    • New carbon-linked RCF, Eurobond and infrastructure facilities with maturities to 2030 and reduced cost of debt
  • Sustainable and growing dividend up 7.5% to 17.1 pence per share (2019: 15.9 pence per share)
    • Proposed final dividend of 10.3 pence per share (2019: 9.5 pence per share)

Operational highlights

  • Pellet Production – 7% increase in production, improved quality and 5% reduction in cost
  • Generation – 11% of UK’s renewable electricity, strong operations and system support performance
  • Customers – lower demand and an increase in bad debt provisions, principally SME customers
  • Sustainability – sale of gas assets, end of coal generation, CDP Climate A- rating (2019: C) and TCFD Supporter
Train carrying sustainably sourced compressed wood pellets arriving at Drax Power Station in North Yorkshire

Train carrying sustainably sourced compressed wood pellets arriving at Drax Power Station in North Yorkshire [click to view/download]

Will Gardiner, CEO of Drax Group said:

“Drax has supported its customers, communities and employees throughout the Covid-19 pandemic and I want to thank colleagues across the Group for their commitment and hard work over the last year. We have delivered strong results, a growing dividend for shareholders and excellent progress against our business strategy.

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“Our focus is on renewable power. Our carbon intensity is one of the lowest of all European power generators. We aim to be carbon negative by 2030 and are continuing to make progress. We are announcing today that we will not develop new gas fired power at Drax. This builds on our decision to end commercial coal generation and the recent sale of our existing gas power stations.

“The proposed acquisition of Pinnacle Renewable Energy will position Drax as the world’s leading sustainable biomass generation and supply business, paving the way for us to develop bioenergy with carbon capture and storage (BECCS) – taking us even further in our decarbonisation.”

2021 outlook

  • Targeting carbon negative
    • No new gas generation at Drax Power Station, retain options for system support gas in next capacity auction
    • Completion of sale of existing gas generation (January 2021) and end of commercial coal (March 2021)
  • Progressing biomass strategy
    • Proposed acquisition of Pinnacle Renewable Energy Inc. (Pinnacle) – supports long-term options for third-party supply, BECCS and biomass generation
    • BECCS – commencement of DCO planning process, potential FEED study and clarity on regional clusters

Infographic: How BECCS removes carbon from the atmosphere

  • Operations
    • Major planned outage on CfD unit and continued impact of Covid-19 on SME customers
    • Strong contracted power sales (2021–2023) 24.4TWh at £48.5/MWh

Operational review

Pellet Production – capacity expansion, improved quality and reduced cost

  • Adjusted EBITDA up 63% to £52 million (2019: £32 million)
    • Pellet production up 7% to 1.5Mt (2019: 1.4Mt)
    • Reduction in fines (larger particle-sized dust)
    • Cost of production down 5% to $153/t(4) (2019: $161/t(4))
  • Cost reduction plan – targeting $35/t (£13/MWh(5)) saving vs. 2018 on 1.9Mt by 2022 – annual savings of $64 million
    • $28 million of run-rate savings from projects delivered 2019-2020
    • Low-cost fibre, LaSalle (improved rail infrastructure, woodyard and sawmill co-location) and HQ relocation
    • $36 million of additional run-rate savings to be delivered by end of 2022
    • Expansion of Morehouse plant completed Q4 2020
    • Expansion of Amite and LaSalle, increased use of low-cost fibre and improved logistics
  • Additional savings from $40 million investment in three 40kt satellite plants in US Gulf – commissioning from 2021, with potential for up to 0.5Mt – targeting 20% reduction in pellet cost versus current cost

 Power Generation – flexible and renewable generation

  • Adjusted EBITDA up 9% to £446 million (2019: £408 million)
    • Biomass generation up 5% to 14.1TWh (2019: 13.4TWh) – record CfD availability (Q2 2020 – 99.5%)
    • Good commercial availability across the portfolio – 91% (2019: 88%)
    • Strong contracted position provided protection from lower demand and reduction in ROC(6) prices
    • Includes £46 million from discontinued gas (2019: £39 million)
Water cooling tower at Drax Power Station

Water cooling tower at Drax Power Station [click to view/download]

  • System support (balancing mechanism, Ancillary Services and optimisation) of £118 million (2019: £120 million)
    • Hydro and gas – one-off hydro contracts in 2019, offset by higher demand for system support services in 2020
    • Lower level of biomass activity due to higher value in generation market
    • 2019 included benefit of buying back coal generation
  • Pumped storage / hydro – excellent operational and system support performance
    • £73 million of Adjusted EBITDA (Cruachan, Lanark Galloway schemes and Daldowie) (2019: £71 million)
Aqueduct supplying water into the reservoir at Cruachan pumped hydro storage plant in Scotland

Aqueduct supplying water into the reservoir at Cruachan pumped hydro storage plant in Scotland [click to view/download]

  • Coal – 8% of output in 2020 and short-term increase in carbon emissions – utilisation of coal stock by March 2021
  • Covid-19 – business continuity plan in place to ensure continued operation and two major outages completed

Customers – managing the impact of Covid-19 on SME customers

  • Customer service employeeAdjusted EBITDA loss of £39 million (2019: £17 million profit) inclusive of estimated £60 million impact of Covid-19
    • Reduced demand, MtM loss on pre-purchased power and increase in bad debt, principally SME customers
    • Continue to evaluate SME options to maximise value and alignment with strategy
  • Development of Drax Customers Industrial & Commercial portfolio – increased sales to high-quality counterparties providing revenue visibility, while supporting the Group’s flexible and renewable energy proposition
  • Renewable and energy services expand Group system support capability and customer sustainability objectives

Other financial information

  • Total operating loss from continuing operations of £156 million reflects:
    • £70 million MtM loss on derivative contracts
    • £239 million obsolescence charges, principally coal (includes £13 million associated with decision not to develop new gas generation at Drax Power Station)
    • £34 million of costs associated with coal closure (redundancy, pensions and site reparations), with annual run-rate savings once complete of c.£30-35 million
  • Total loss after tax of £158 million includes £18 million reduced valuation of deferred tax asset resulting from UK Government’s reversal of previously announced corporation tax rate change (adjusted impact of £14 million, 3.5 pence per share)
  • Capital investment of £183 million(7) – continued invest in biomass strategy, some delay into 2021 due to Covid-19
    • 2021 expected investment of £190-210 million (excludes proposed acquisition of Pinnacle), includes expansion of LaSalle and Amite pellet plants and satellite plant development
  • Net debt of £776 million, including cash and cash equivalents of £290 million (31 December 2019: £404 million)
      • 1.9 x net debt to EBITDA, with £682 million of total cash and total committed facilities
      • Expect around 2 x net debt to EBITDA by end of 2022 inclusive of proposed acquisition of Pinnacle

 

View complete full year report View investor presentation Listen to webcast

Sale of gas assets for £193.3 million and trading update

15 December 2020

Investors
Rye House Power Station, Hertfordshire
RNS Number: 6825I
Drax Group PLC (Symbol: DRX)

(“Drax”, “the Group”, “Drax Group”, “the Company”; Symbol: DRX)

Drax is pleased to announce that it has reached agreement for the sale of Drax Generation Enterprise Limited (“DGEL”), which holds four Combined Cycle Gas Turbine (“CCGT”) power stations, to VPI Holding Limited (“VPI”) for consideration of £193.3 million, subject to customary adjustments. This includes £29.0 million of contingent consideration associated with the option to develop a new CCGT at Damhead Creek.

The transaction is subject to certain customary closing conditions, including anti-trust approval, with completion to take place by 31 January 2021.

The CCGTs have performed well since acquisition by Drax in December 2018, but do not form part of the Group’s core flexible and renewable generation strategy. Drax expects to realise a premium on sale, use the proceeds to develop its biomass supply chain and accelerate its ambition to become a carbon negative business by 2030.

DGEL also holds the Group’s pumped storage and hydro assets and is the shareholder of SMW Limited (the owner of the Daldowie fuel plant). These assets, shares and employees are to be transferred out of DGEL prior to completion and will be retained by Drax.

Highlights

  • Sale of non-core gas generation and development assets for consideration of £193.3 million
    • Expected premium on sale to book value, subject to customary adjustments
    • Returns significantly ahead of the Group’s Weighted Average Cost of Capital (WACC)
  • Accelerates decarbonisation – ambition to become a carbon negative business by 2030
    • UK’s largest flexible and renewable portfolio – largest source of renewable electricity(1)
    • 2.6GW of sustainable biomass
    • 0.6GW of hydro – pumped storage and hydro
  • Continued focus on biomass strategy and system support services
    • Development of a long-term future for sustainable biomass – underpinned by biomass supply chain expansion and cost reduction
    • Development of options for negative emissions technology – BECCS(2)
    • Provision of system support services from biomass, pumped storage and hydro
  • Robust trading and operational performance – outlook remains in line with expectations

Will Gardiner, Drax Group CEO, said:

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

 

“By focusing on our flexible and renewable generation activities in the UK we expect to deliver a further reduction in the Group’s CO2 emissions, which should accelerate our ambition to become not just carbon neutral but carbon negative by 2030.

“By using carbon capture and storage with biomass (BECCS) at the power station in North Yorkshire to underpin the decarbonisation of the wider Humber region, we believe we would be creating and supporting around 50,000 new jobs and delivering a green economic recovery in the North.

“We greatly value the contribution that our colleagues in gas generation have made to the Group over the last two years. As we focus on a renewable and flexible portfolio, it is right that we divest these gas generation assets and in doing so create value for our shareholders.”

Between 2012 and 2019, through investment in sustainable biomass and hydro, Drax has reduced its carbon emissions by over 85% and become the largest source of renewable electricity in the UK(1).

In December 2019 Drax announced an ambition to become a carbon negative company by 2030. The negative emissions provided by BECCS will offset carbon emissions within the Group’s supply chain and help to offset emissions in harder to abate sectors of the economy, such as aviation and agriculture.

In February 2020 Drax announced an end to commercial coal generation in 2021 and now, by divesting its existing gas generation assets, Drax will further reduce its carbon emissions.

Drax will continue to provide system support services alongside its decarbonisation strategy through its renewable generation portfolio, other development opportunities and demand-side response within its Customers business. These activities provide renewable electricity and a fully flexible generation and supply portfolio, which can support the UK power system as it becomes increasingly reliant on intermittent and inflexible generation sources.

About the assets and transitional arrangements

Rye House Power Station, Hertfordshire

Rye House Power Station, Hertfordshire [Click to view/download]

Damhead Creek (812MW, commissioned in 2001), Rye House (715MW, commissioned in 1993) and Shoreham (420MW, commissioned in 2001) are located in the South-east of England and Blackburn Mill (60MW, commissioned in 2002) in Lancashire, England.

Drax acquired the CCGTs from Iberdrola in December 2018 as part of a portfolio of pumped storage, hydro and gas generation. The majority of the value in the acquisition was ascribed to the pumped storage and hydro assets, which in the first six months of 2020 provided £35 million of Adjusted EBITDA(3). In the same period the CCGTs provided £18 million of Adjusted EBITDA. Group Adjusted EBITDA for the first six months of 2020 was £179 million.

As at 30 June 2020 the gross fixed assets for the CCGTs were £182 million.

The CCGTs also have £89 million of Capacity Market income between 2021 and 2024(4) which will remain with DGEL on completion.

The CCGT business currently employs 121 people in operational roles who will transfer with DGEL on completion.

Drax has agreed a series of transitional services to support the transition through 2021.

Other gas projects

Drax continues to evaluate options for the development of four Open Cycle Gas Turbines and Drax Power Station following the end of coal operations.

Financial

Total consideration is £193.3 million, subject to customary completion accounts adjustments, comprising £164.3 million for the four CCGT power stations and a further £29.0 million of contingent consideration payable on satisfaction of certain triggers in respect of the option to develop a new CCGT at Damhead Creek.

The payment of £164.3 million in respect of the four CCGTs is payable in cash on completion, with an option to defer the payment of £50.0 million until April 2022. The deferred component would carry an interest rate of four percent and be backed by a letter of credit. In the event that the deferral option is exercised Drax intends to convert the payment obligation to cash upon completion for the face value.

Subject to fulfilment of pre-closing conditions, completion is to take place by 31 January 2021.

The sale price represents an expected premium compared to the book value of the assets, subject to customary adjustments and a return over the period of ownership significantly ahead of the Group’s WACC.

Biomass strategy – investment in capacity expansion and cost reduction

Sustainable biomass wood pellet storage domes at Baton Rouge Transit, a renewable fuel storage and logistics site operated by Drax at the Port of Greater Baton Rouge, Louisiana

Sustainable biomass wood pellet storage domes at Baton Rouge Transit, a renewable fuel storage and logistics site operated by Drax at the Port of Greater Baton Rouge, Louisiana [Click to view/download]

The proceeds from the sale of the CCGTs are expected to be used to support the development of the Group’s biomass strategy, through which Drax aims to build a long-term future for sustainable biomass. Drax aims to do this by expanding its supply chain to five million tonnes of self-supply capacity by 2027 (1.5 million today, plus 0.5 million tonnes in development) and reducing the cost of biomass to £50/MWh(5).

These savings will be delivered through the optimisation of existing biomass operations, greater utilisation of low-cost wood residues and an expansion of the fuel envelope to incorporate other low-cost renewable biomass across the Group’s expanded supply chain.

Drax believes that the additional capital and operating cost investment required to deliver this supply chain expansion is in the region of £600 million, which the Group expects to invest ahead of 2027. Drax remains alert to sector opportunities for both organic and inorganic growth.

The Group has identified three models through which it believes it can deliver a long-term future for sustainable biomass, all of which are underpinned by the delivery of its supply chain expansion and cost reduction plans. These options, which are not mutually exclusive, are summarised below. The delivery of one or more of these models by 2027 would enable Drax to continue its biomass activities when the current UK renewable schemes for biomass generation end in March 2027.

1) Merchant biomass generation at Drax Power Station

Drax believe that biomass has an important role to play in the UK as a flexible and reliable source of renewable energy, supporting increased utilisation of intermittent and inflexible generation across the UK power grid. In March 2027, when the current CfD(6) and ROC(7) renewable schemes end, Drax believes that through a combination of peak power generation, system support services, Capacity Market income and a low-cost operating model for Drax Power Station (including low-cost biomass), this site can continue to operate as a merchant renewable power station.

The four biomass units located in the turbine hall at Drax Power Station have a total capacity of 2.6 GW

The four biomass units located in the turbine hall at Drax Power Station have a total capacity of 2.6 GW [Click to view/download]

2) BECCS

The UK’s Climate Change Committee (CCC) has set out what is required for the country to achieve its legally binding objective of being net zero by 2050. This includes an important role for BECCS to remove CO2 from the atmosphere, creating negative emissions. BECCS is the only large-scale solution for negative emissions with renewable electricity and system support capabilities. Through combining BECCS with its existing four biomass generation units at Drax Power Station, Drax believes it could remove up to 16 million tonnes of CO2 per year – over two thirds of the CCC’s 2035 target for BECCS. In doing so Drax aims to become a carbon negative company by 2030.

The technology to deliver post-combustion BECCS exists and is proven at scale. In September 2020, Drax commenced a trial of one such technology provided by Mitsubishi Heavy Industries (MHI). In addition, Drax is developing innovative technology options, including C-Capture, a partnership between Leeds University, Drax, IP Group and BP, which has developed an organic solvent which could be used for BECCS.

Innovation engineer inspects pilot carbon capture facility at Drax Power Station

Innovation engineer inspects pilot carbon capture facility at Drax Power Station [Click to view/download]

3) Third party biomass supply

Drax expects global demand for wood pellets to increase in the current decade, as other countries develop decarbonisation programmes which recognise the benefits of sustainable biomass for generation. Whilst there is an abundance of unprocessed sustainable biomass material globally, there remains limited capacity to convert these materials into energy dense pellets, which have a low-carbon footprint and lower cost associated with transportation. As a result, Drax expects the global market for biomass to remain under supplied. Drax is therefore exploring options to service biomass demand in Europe, North America and Asia alongside the UK. Establishing a presence in these markets could offer the potential for long-term offtake agreements, providing diversified revenues from other biomass markets.

Trading update

Since publishing its half year results on 29 July 2020 the trading and operational performance of the Group has remained robust.

In the USA, the Group’s Pellet Production business is commissioning 100,000 tonnes of new production capacity at its Morehouse facility in Louisiana as part of its previously announced plans to add 350,000 tonnes across its three existing production sites by 2022. The project is part of the Group’s plan to expand its sustainable biomass supply chain and reduce costs.

The Generation business has continued to perform well in the provision of system support services, responding to both the low and high demand needs of the UK electricity system.

In addition to the successful completion of a major planned outage and upgrade of a biomass unit at Drax Power Station, the Group has progressed its earlier stage development work on BECCS. Alongside the commencement of a solvent trial with MHI, Drax has awarded pre-FEED (Front End Engineering Design) contracts and expects to incur incremental operating costs associated with the development of a full FEED study during 2021.

At its half year results in July 2020 Drax noted that further lockdown measures in the UK in the second half of 2020 could create a small downside risk on the performance of the Customers business, principally in the SME(8) market. Drax is continuing to assess operational and strategic options for this part of the Group.

The Group’s expectations for 2020 Adjusted EBITDA remain in line with market expectations(9), inclusive of the impact of Covid-19, principally in relation to its Customers business. Full year expectations for the Group remain underpinned by good operational availability for the remainder of 2020.

Contracted power sales

Electricity pylons take flexible power generated from water stored in a reservoir at Cruachan Power Station in the Highlands into the national grid

Electricity pylons take flexible power generated from water stored in a reservoir at Cruachan Power Station in the Highlands into the national grid [Click to view/download]

As at 15 November 2020 the power sales contracted for 2020, 2021 and 2022 were as follows:

202020212022
Fixed price power sales (TWh)18.215.26.5
Contracted % versus 2019 full year output1.060.860.38
Of which CfD (TWh) (10)4.81.7-
Of which CCGT (TWh)2.53.10.2
At an average achieved price (£ per MWh)54.848.248
Average price for CCGT (£ per MWh)53.246.554.7

Balance sheet

As announced on 19 November 2020 the Group agreed a new £300 million ESG(11) Revolving Credit Facility (RCF). This replaces an RCF which was due to mature in 2021 and provides increased liquidity, enabling the full facility to be drawn as cash (the previous facility restricted cash drawn to support liquidity to £165 million). The ESG RCF is currently undrawn for cash.

In addition to the ESG RCF, the Group has agreed new infrastructure facilities (£213 million) and a Euro denominated bond issue (€250 million), which replace an existing RCF, Sterling bond and ESG term-loan, reducing the Group’s overall cost of debt and extending its maturity profile to 2030.

As at 30 November 2020 Drax had adjusted cash and total committed facilities of £643 million.

Capital allocation and dividend

The Group remains committed to its capital allocation policy, through which it aims to maintain a strong balance sheet; invest in the core business; pay a sustainable and growing dividend and return surplus capital beyond investment requirements.

Subject to the continued good operational performance and overall impact from Covid-19 remaining in line with the position Drax set out in April 2020, the Group continues to expect to pay a dividend for the 2020 financial year of 17.1 pence per share (approximately £68 million), a 7.5% increase on 2019. This is consistent with the policy to pay a dividend which is sustainable and expected to grow as the strategy delivers an increasing proportion of stable earnings and cash flows.

Enquiries

Drax Investor Relations:

Mark Strafford

+44 (0) 7730 763 949

Media

Drax External Communications:

Ali Lewis

+44 (0) 7712 670 888

Website: www.drax.com

ENDS

Notes

Half year results for the six months ended 30 June 2020

29 July 2020

Investors
LaSalle BioEnergy (centre) and co-located sawmill (right), Louisiana

RNS Number : 3978U
Drax Group PLC (Symbol: DRX)

Six months ended 30 JuneH1 2020H1 2019
Key financial performance measures
Adjusted EBITDA (£ million) (1)(2)179138
Cash generated from operations (£ million)226229
Net debt (£ million) (3)792924
Interim dividend (pence per share)6.86.4
Adjusted basic earnings per share (pence) (1)10.82
Total financial performance measures
Coal obsolescence charges-224-
Operating (loss) / profit (£ million)-3234
(Loss) / profit before tax (£ million)-614
Basic (loss) / earnings per share (pence)-141

Financial highlights

  • Group Adjusted EBITDA up 30% to £179 million (H1 2019: £138 million)
    • Includes estimated £44 million impact of Covid-19, principally in Customers SME business
    • £34 million of capacity payments (H1 2019: nil) following re-establishment of the Capacity Market
    • Strong biomass performance in both Pellet Production and Generation
  • Strong cash generation and balance sheet
    • £694 million of cash and total committed facilities
    • Extended £125 million ESG CO2 emission-linked facility to 2025
    • DBRS investment grade rating
  • Sustainable and growing dividend
    • Expected full year dividend up 7.5% to 17.1 pence per share (2019: 15.9 pence per share), subject to good operational performance and impact of Covid-19 being in line with current expectations
    • Interim dividend of 6.8 pence per share (H1 2019: 6.4 pence per share) – 40% of full year
Biomass storage dome with conveyor in the foreground, Drax Power Station, North Yorkshire

Biomass storage dome with conveyor in the foreground, Drax Power Station, North Yorkshire [Click to view/download]

Operational highlights

  • Biomass self-supply – 9% reduction in cost, 15% increase in production and improved quality vs. H1 2019
  • Generation – 11% of UK’s renewable electricity, strong operational performance and system support services
  • Customers – lower demand and an increase in bad debt provisions, principally in SME business

Progressing plans to create a long-term future for sustainable biomass

  • Targeting five million tonnes of self-supply at £50/MWh(4) by 2027 from expanded sources of sustainable biomass
    • Plan for $64 million ($35/t, £13/MWh(4)) annual savings on 1.85Mt by 2022 vs. 2018 base
    • Investment in new satellite plants in US Gulf – targeting 20% reduction in pellet cost versus current cost
  • BECCS(5) – developing proven and emerging technology options for large-scale negative emissions
  • End of coal operations – further reduction in CO2 emissions and lower cost operating model for biomass

Outlook

  • Full year Adjusted EBITDA, inclusive of c.£60 million estimated impact of Covid-19, in line with market consensus
  • Evaluating attractive investment options for biomass growth: cost reduction and capacity expansion
  • Strong contracted power sales (2020–2022) 34TWh at £51.4/MWh and high proportion of non-commodity revenues

Will Gardiner, CEO of Drax Group said:

“With these robust half-year results, Drax is delivering for shareholders with an increased dividend while continuing to support our employees, communities and customers during the Covid-19 crisis.

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“As well as generating the flexible, reliable and renewable electricity the UK economy needs, we’re delivering against our strategy to reduce the costs of our sustainable biomass and we’re continuing to make progress pioneering world-leading bioenergy with carbon capture technologies, known as BECCS, to deliver negative emissions and help the UK meet its 2050 net zero carbon target.

“National Grid stated this week that the UK can’t reach net zero by 2050 without negative emissions from bioenergy with carbon capture and storage. BECCS delivers for the environment and also provides an opportunity to create jobs and clean economic growth in the North and around the country.”

Operational review

Pellet Production – capacity expansion, improved quality and reduced cost

  • Adjusted EBITDA up 213% to £25 million (H1 2019: £8 million)
    • Pellet production up 15% to 0.75Mt (H1 2019: 0.65Mt) – impact of adverse weather in H1 2019
    • Cost of production down nine per cent to $154/t(6) (H1 2019: $170/t(6))
    • Reduction in fines (larger particle-sized dust) in each cargo
  • Cost reduction plan – targeting $64 million ($35/t, £13/MWh(4)) annual savings on 1.85Mt by 2022 vs. 2018 base
    • Expect to deliver $27 million of annual savings by end of 2020 – a saving of $18/t vs. 2018
    • Greater use of low-cost fibre, LaSalle (improved rail infrastructure, woodyard and sawmill co-location) and relocation of HQ from Atlanta to Monroe
    • Savings from projects to be delivered in 2020-2022
    • 35Mt capacity expansion (LaSalle, Morehouse and Amite), increased use of low-cost fibre, improved logistics and other operational enhancements
  • $40 million investment in three 40kt satellite plants in US Gulf – commissioning from 2021, potential for up to 0.5Mt
    • Use of Drax infrastructure and sawmill residues – targeting 20% reduction in pellet cost versus current cost
Power lines and pylon above Cruachan Power Station, viewed from Ben Cruachan above

Power lines and pylon above Cruachan Power Station, viewed from Ben Cruachan above [Click to view/download]

Power Generation – flexible, low-carbon and renewable generation

  • Adjusted EBITDA up 45% to £214 million (H1 2019: £148 million)
    • Limited impact from Covid-19 – strong contracted position provided protection from lower demand, reduction in ROC(7) prices offset by increased system support services
    • £34 million of Capacity Market income (H1 2019: nil; £36 million in relation to H1 2019 subsequently recognised in H2 2019 following re-establishment of the Capacity Market)
    • £54 million of Adjusted EBITDA from hydro and gas generation assets (H1 2019: £36 million)
    • System support (Balancing Market, ancillary services and portfolio optimisation) up 8% to £66 million (H1 2019: £61 million)
    • Good commercial availability across the portfolio – 91% (H1 2019: 87%)
  • Covid-19 – business continuity plan in place to ensure safe and uninterrupted operations
  • Biomass generation up 16% to 7.4TWh (H1 2019: 6.4TWh)
    • Strong supply chain (impact of adverse weather in H1 2019) and record CfD availability (Q2 2020 – 99.5%)
  • Pumped storage / hydro – excellent operational and system support performance
  • Gas – excellent operational and system support performance, Damhead Creek planned outage underway
  • Coal – 10% of output in H1 2020 – utilisation of coal stock before end of commercial generation (March 2021)

Customers – managing the impact of Covid-19 on SME business

  • Adjusted EBITDA loss of £37 million (H1 2019: £9 million profit) inclusive of estimated £44 million impact of Covid-19 – reduced demand, MtM loss on pre-purchased power and increase in bad debt, principally in SME business
  • Covid-19 – implemented work from home procedures to allow safe and continuous operations and customer support
  • Good performance in Industrial and Commercial market – new contracts with large water companies providing five-year revenue visibility, while supporting the Group’s flexible, renewable and low-carbon proposition
  • Monitoring and optimisation of portfolio to ensure alignment with strategy

Other financial information

  • Total financial performance measures reflects £108 million MtM gain on derivative contracts, £224 million coal obsolescence charges and £10 million impact (£6 million adjusted impact) from UK Government’s reversal of previously announced corporation tax rate reduction resulting in revaluation of deferred tax asset and increased current tax charge
    • Additional c.£25–£35 million for coal closure costs expected to be reported as exceptional item in H2 2020 when coal consultation process is further advanced
  • Capital investment – continuing to invest in biomass strategy, some delay in investment due to Covid-19
    • H1 2020: £78 million (H1 2019: £60 million)
    • Full year expected investment £190–£210 million (was £230–£250 million), includes 0.35Mt expansion of existing pellet plants and $20 million initial investment in satellite plants ($40 million in total)
  • Net debt of £792 million, including cash and cash equivalents of £482 million (31 December 2019: £404 million)
    • Remain on track for around 2.0x net debt to Adjusted EBITDA by end of 2020

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Robust trading and operational performance; 2020 Adjusted EBITDA currently in line with consensus; delivering for all stakeholders

22 April 2020

Investors
Drax employee in PPE in front of biomass storage dome

RNS Number : 4161K
Drax Group plc
(“Drax” or the “Company”; Symbol: DRX)

Highlights

  • Robust trading and operational performance in first three months of 2020

  • Strong contracted forward power sales supporting 2020-21 earnings visibility

  • 2020 full year Adjusted EBITDA(1) currently in line with consensus(2) inclusive of £60 million estimated potential impact from Covid-19

  • Principally lower power demand and increased bad debt risk in Customers business

  • Lower ROC(3) recycle prices in Generation, partially offset by system support services

  • Strong balance sheet at 31 March 2020 – net debt: £818 million, available cash and committed cash facilities: £663 million

  • 2019 final dividend of 9.5 pence per share (£37 million) to be paid in respect of 2019 performance, as previously announced – subject to shareholder approval at AGM

  • Strategic focus remains on biomass supply chain expansion and cost reduction

Electricity pylon near Cruachan Power Station, Argyll and Bute

Electricity pylon near Cruachan Power Station, Argyll and Bute [Click to view/download]

Will Gardiner, Drax Group CEO, said:

“With our strong balance sheet, robust trading and operational performance, and resilient sustainable biomass supply chain, Drax is in a strong position to support its employees, business customers and communities during the Covid-19 crisis, while continuing to generate returns for shareholders.

Drax Group CEO Will Gardiner

Drax Group CEO Will Gardiner in the control room at Drax Power Station. Click to view/download.

“As an important part of the UK’s critical national infrastructure, we recognise our responsibility to support the country’s response to Covid-19. We have strong business continuity plans in place and are in close contact with the UK Government. Our dedicated teams across England, Scotland and Wales, supported by our US biomass colleagues and business partners, are working around the clock to generate and supply the flexible, low-carbon and renewable electricity the UK needs, not least to the 250,000 businesses, including care homes, hospitals and schools we supply.

“The Group is also providing support for communities and others affected by Covid-19.

“Nevertheless, it is still early in this pandemic. As Covid-19 continues to develop, we remain vigilant in looking to protect all our stakeholders and will report further if there are significant changes to our outlook for 2020.”

Trading, operational performance and outlook

The trading and operational performance of the Group has been robust in the first three months of 2020.

While the impact of Covid-19 is still unfolding, the Group’s expectations for 2020 Adjusted EBITDA are currently in line with consensus inclusive of an estimated potential impact from Covid-19 of £60 million, principally in relation to its Customers business.

Full year expectations for the Group remain underpinned by good operational availability for the remainder of 2020.

In the Customers business, the consequences of Covid-19 are only now starting to become visible. It is expected to result in reduced demand and a potential increase in bad debt, which represents a major sensitivity, particularly in the SME(4) market. As a result, Drax has significantly increased its expectation of potential customer business failures and higher bad debt.

Assuming the continued impact of Covid-19 throughout 2020, Drax now expects a full year Adjusted EBITDA loss for the Customers business. The Group will closely monitor the impact on the Customers business and update the market accordingly.

In Generation, the Group’s expectations for the full year reflect a reduction in ROC recycle prices resulting from reduced power demand. Drax expects to partially offset this through increased activity in system support services across its generation portfolio.

The performance of the Generation business is dependent on the continuation of biomass deliveries to Drax Power Station. Biomass generation is currently the most material area of activity for the Group and a protracted suspension of the supply chain could lead to lower levels of biomass generation, resulting in a reduction in the Group’s expectations for the full year. At present there has been no impact from Covid-19 and the Group has a good supply of biomass throughout the supply chain, which continues to be robust and functioning well.

Engineer climbs cooling tower at Drax Power Station

Engineer climbs cooling tower at Drax Power Station [Click to view/download]

Generation

During the first three months of 2020 Drax’s generation portfolio performed well with good asset availability and optimisation of generation underpinning a strong financial performance.

The business benefits from a strong forward power sales position through 2022 which, combined with index-linked renewable schemes and capacity payments, provides a high level of earnings visibility, helping to protect the business from the current weakness in UK power prices.

In response to Covid-19, Drax has implemented robust business continuity procedures across its sites to protect employees and contractors and ensure continued operation. In addition to operating strategically important infrastructure, the components of the Group’s UK supply chain are considered key sectors allowing continued operation.

The Group’s biomass supply chain has a high level of operational redundancy designed to mitigate any potential disruption. Drax sources biomass from suppliers across North America and Europe, including the Group’s own facilities in Louisiana and Mississippi. In the UK, Drax utilises dedicated port facilities at Hull, Immingham, Tyne and Liverpool, with a capacity of eleven million tonnes, providing supply chain capacity in excess of the Group’s annual biomass usage of over seven million tonnes.

Sustainable biomass wood pellets destined for Drax Power Station unloaded from the Zheng Zhi bulk carrier at ABP Immingham

Sustainable biomass wood pellets destined for Drax Power Station unloaded from the Zheng Zhi bulk carrier at ABP Immingham [Click to view/download]

Drax Power Station has 300,000 tonnes of biomass storage capacity. Taken together with volumes throughout its supply chain the Group currently has visibility of over one million tonnes of biomass in transit – enough to operate the CfD(5) unit on its own for over four months, subject to managing deliveries to Drax Power Station.

Biomass generation has performed well in the first three months of 2020. Whilst Covid-19 has not had any measurable impact on biomass generation to date, a sustained reduction in electricity demand could result in a reduction in ROC recycle prices in the current compliance period. The Group has adjusted its expectations for the full year but the precise impact will be dependent on the depth and duration of any reduction in demand. Drax expects to partially offset this through increased activity in system support services across its generation portfolio.

Engineer at Cruachan Power Station

Engineer at Cruachan Power Station [Click to view/download]

The Group’s hydro assets have performed well, particularly the pumped storage business, primarily driven by activity in the system support services market. As previously disclosed, Cruachan Pumped Storage Power Station was successful in a tender process run by the system operator to procure inertia and reactive power services. The contract is worth up to c.£5 million per year over six years and is expected to commence during the second quarter of 2020. This was the first tender of its kind and reflects the growing importance of system support services as the generation market becomes increasingly supplied by intermittent renewable power sources. The system operator is expected to conduct further tenders over the coming year.

Thermal generation is performing in line with Drax’s expectations.

Pellet Production

LaSalle BioEnergy wood pellet manufacturing plant in Louisiana

LaSalle BioEnergy wood pellet manufacturing plant in Louisiana [Click to view/download]

Pellet Production has performed well in the first three months of 2020.

At present there has been no disruption to production caused by Covid-19, although the State of Louisiana is experiencing a high number of cases. The semi-automated nature of the pellet production process limits the need for individuals to be in contact with each other and this has been enhanced by robust business continuity procedures to further reduce the risk to employees and contractors.

Drax continues to monitor developments closely and notes that energy, rail, port and forestry are designated key sectors in the USA allowing continued operation.

Customers

The Group’s Customers business, which sells power, gas and energy services to the I&C(6) and SME markets has seen a significant reduction in demand as a result of Covid-19. The Group has been working to assess the potential impact of this demand reduction, the increased risk of business failure and bad debt. The impact is expected to be most pronounced in the SME market, which represents c.30 percent of monthly billing. The impact is expected to be partially mitigated by credit insurance in respect of certain customers.

Balance sheet

At 31 December 2019 Drax had £404 million of cash, which increased to £454 million at 31 March 2020.

The Group’s plan for 2020 included capital investment of £230-£250 million, with half of this assigned to strategic investment in biomass expansion and cost reduction. Whilst the Group continues to see its biomass strategy as both a primary long and short-term source of value, Drax is reviewing the timing of its investment programme in 2020 and in the short-term investment is expected to be lower.

At 31 March 2020 net debt had reduced to £818m million and Drax continues to target around 2 x net debt to EBITDA for the full year.

The Group has available cash and committed facilities of £663 million including a cash line available within a £315 million Revolving Credit Facility (RCF), which is currently undrawn and matures in April 2021. The Group has an ESG facility with final maturity in 2022 and a £350m sterling bond which matures in 2022. The Group has a further $500 million fixed rate USD bond maturing in 2025 and infrastructure private placement loans maturing through 2024-2029.

The Group’s facilities include a maintenance covenant which, if triggered, requires a minimum EBITDA level requirement around 40% of 2020 current consensus Adjusted EBITDA. Customary covenants apply to all other facilities.

The Group’s rolling five-year foreign exchange hedge book continues to provide protection from the recent weakness in sterling to 2025. The Group actively manages risk limits with counterparties providing forward foreign exchange contracts and the current weakness in sterling has led to the rebasing of a number of contracts, resulting in the acceleration of cash flows from these contracts to the benefit of Drax.

Contracted power sales

As at 16 April 2020, the power sales contracted for 2020, 2021 and 2022 were as follows:

202020212022
Power sales (TWh) comprising:16.79.64.3
– Fixed price power sales (TWh) 17.110.14.3
Of which CfD unit (TWh)3.8
At an average achieved price (£ per MWh)53.249.448
– Gas hedges (TWh)-0.4-0.5-
At an achieved price (pence per therm)1.732-

Merchant power prices remain an important part of the Group’s earnings, but by focusing on flexible, renewable and low-carbon generation, which includes index-linked renewable schemes, capacity payments and system support services, the impact of power prices has reduced.

Exposure to merchant power prices by generation asset class

  • Biomass CfD – power produced by this unit is remunerated based on an index-linked strike price and underpinned by a private law contract which runs until March 2027. At baseload the unit is expected to produce over 5TWh per year. The current strike price is c.£116/MWh and taken together with a biomass cost at or below c.£75/MWh gives a margin of over £40/MWh and an annual contribution to gross profit of over £200 million, with daily cash settlement in 30 days
  • Biomass ROC – ROC buyout prices are index-linked and extend to March 2027, acting as a premium on UK power prices. The buyout price for the current compliance period is £50.05 per ROC. Annual generation is in the region of 9-10 TWh, with the associated power sold up to two years forward, providing strong earnings visibility over the period 2020-21
  • Hydro – a small but profitable volume of merchant power generation (144MW) with zero fuel cost
  • Pumped storage – operates in the system support services market and carries little net exposure to merchant power prices
  • Coal – commercial generation will end in March 2021, ahead of which date Drax will utilise its residual coal stock to realise further cash flows
  • Gas – the Group’s mid-merit CCGT(7) assets have power forward sales for 2020. To the extent that gas prices continue to set the price of power, the clean spark spread from these assets is expected to be maintained at or around current levels in future periods
Engineer working in PPE at Rye House Power Station in Hertfordshire

Engineer working in PPE at Rye House Power Station in Hertfordshire [Click to view/download]

Investment in biomass to increase capacity and reduce cost

Biomass sustainability remains at the heart of the Group’s activities and building a long-term future for sustainable biomass remains the Group’s strategic objective. Drax remains focused on reducing biomass costs to a level which makes biomass generation in the UK economically viable when the existing renewable schemes end in 2027.

Innovation engineer looks up at flue gas desulphurisation unit. The massive pipe above him could be used to transport more than 90% of the carbon captured in the BECCS power generation process.

An engineer looks up at flue gas desulphurisation unit (FGD) at Drax Power Station. The massive pipe would transport flue gas from the Drax boilers to the carbon capture and storage (CCS) plant for CO2 removal of between 90-95%. [Click to view/download]

The Group is targeting five million tonnes of self-supply capacity by 2027 (1.5 million today, plus 0.35 million tonnes in development), with greater scope for operational leverage and cost reduction. These savings will be delivered through further optimisation of existing biomass operations, greater utilisation of low-cost wood residues and an expansion of the fuel envelope to incorporate other low-cost renewable fuels across its expanded self-supply chain. Drax remains alert to sector opportunities for organic and inorganic growth.

By 2027 these activities would enable Drax to develop a biomass generation business operating without the current renewable schemes and potentially the development of BECCS(8), subject to the right support from the UK Government. Drax notes the incremental progress and support announced for carbon capture and storage at the UK Government’s Budget in March 2020.

These efforts support the Group’s ambition to become a carbon negative company by 2030.

In addition, the Group is exploring options to service biomass demand in other markets – Europe, North America and Asia.

Capital allocation and dividend

The Group remains committed to its capital allocation policy established in 2017, through which it aims to maintain a strong balance sheet; invest in the core business; pay a sustainable and growing dividend and return surplus capital beyond investment requirements.

A final dividend of 9.5 pence per share in respect of 2019 performance was proposed at the 2019 Full Year Results on 27 February 2020 and, subject to shareholder approval at today’s Annual General Meeting, will be paid on 15 May 2020.

An interim dividend of 6.4 pence per share was paid in October 2019, making the total dividend in relation to 2019 performance 15.9 pence per share.

In determining the continued appropriateness of the dividend, the Board has considered a range of factors – trading performance, current liquidity, the outlook for the year in the context of Covid-19, as well as the steps being taken to support all stakeholders. The Board believes payment of the final dividend remains consistent with the Group’s commitment to stakeholders.

Drax will update on its expectations for the 2020 full year dividend at the 2020 interim results on 29 July 2020.

Enquiries:

Drax Investor Relations: Mark Strafford

+44 (0) 1757 612 491

Media:

Drax External Communications: Ali Lewis

+44 (0) 7712 670 888

Website: www.drax.com

END