Tag: gas

Result of General Meeting

21 December 2018

Investors

RNS Number : 2803L

Drax Group PLC

No.	Brief Description	Votes For	%	Votes Against	%	Votes Total	Votes Withheld
1.	To approve the acquisition of the entire issued share capital of ScottishPower Generation Limited	268,580,494	85.75	44,619,027	14.25	313,199,521	21,841

The resolution was carried. Completion of the acquisition is expected to occur on 31 December 2018.

The number of shares in issue is 407,193,168 (of which 12,867,349 are held in treasury. Treasury shares don’t carry voting rights).

Votes withheld are not a vote in law and have not been counted in the calculation of the votes for and against the resolution, the total votes validly cast or the calculation of the proportion of issued share capital voted.

A copy of the resolution is available for inspection in the Circular, which was previously submitted to the UK Listing Authority’s Document Viewing Facility, via the National Storage Mechanism at www.morningstar.co.uk/uk/NSM.

The Circular and the voting results are also available on the Company’s website at www.drax.com.

Enquiries

Drax Investor Relations

Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763 949

Media, Drax External Communications

Matt Willey
+44 (0) 7711 376 087

Website: www.drax.com

END

Acquisition agreement amended to mitigate risk to 2019 capacity payments

3 December 2018

Investors

^{RNS Number: 1455J}

^{THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION}

The revised contractual arrangements are designed to mitigate the risk to 2019 capacity payments arising from the recent suspension of the Capacity Market.

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“The strategic merits of this acquisition remain unchanged and the Board believes there is a compelling logic in our move to add further flexible sources of power to our offering, which will accelerate our ability to deliver our strategic vision of a lower-carbon, lower-cost energy future for the UK.

“The capacity market is a central pillar of the UK’s energy policy and ensures security of supply while minimising costs to consumers. The Government has stated it is working closely with the European Commission to aid their investigation and to reinstate the full capacity market regime, including existing agreements, as soon as possible.

“To mitigate the risk that capacity payments take time to be restored, we have agreed revised terms which provide protection in 2019. Beyond 2019, while reinstatement of the Capacity Market is the most likely outcome, we considered other outcomes, the more plausible of which would still deliver returns in excess of Drax’s weighted average cost of capital.

“The acquisition makes financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.”

Capacity Market

On 15 November 2018, the General Court of the European Union issued a ruling annulling the European Commission’s 2014 decision not to undertake a more detailed investigation of the UK Government’s scheme establishing the Capacity Market (the “Ruling”). The Ruling imposed a “standstill period” while the European Commission completes a further state aid investigation into the Capacity Market. Payments to generators scheduled under existing capacity agreements and the holding of future capacity auctions have been suspended.

Cruachan Power Station on Loch Awe, Argylle and Bute

Contracted capacity payments make up a significant proportion of the earnings of the Portfolio. For the period from 1 January 2019 to 30 September 2022, the Cruachan pumped storage hydro asset has contracted capacity payments of £29 million, the Galloway run-of-river hydro assets have contracted capacity payments of £5m million, and the Combined Cycle Gas Turbine assets have contracted capacity payments of £122 million in aggregate.

Drax notes the UK Government’s statement in response to the Ruling that it is working closely with the European Commission to aid their investigation and to seek a timely state aid re-approval decision for the Capacity Market. The UK Government also confirmed that the Ruling does not change its belief that Capacity Market auctions are the most appropriate way to deliver secure electricity supplies at the lowest cost and that the Ruling was decided on procedural grounds and did not constitute a direct challenge to the design of the Capacity Market itself.

Based on the information available and legal advice it has received, Drax believes that the most likely outcome is that the European Commission will re-approve the existing Capacity Market in its current or a broadly similar form.

Despite the above, Drax recognises there is some uncertainty whether the contracted capacity payments for the 2018/19 Capacity Market year, which are currently suspended, will be paid by the UK Government. To mitigate the risk that these payments are not received for the 2018/19 Capacity Market year, Drax has agreed with Iberdrola certain amendments to the agreement signed on 16 October 2018.

Arrangements with Iberdrola in respect of 2018/19 capacity payments

Drax and Iberdrola have agreed a risk sharing mechanism in respect of capacity payments for the period 1 January 2019 to 30 September 2019, worth £36 million. If less than 100% of these payments are received and the gross profit of the Portfolio for the full year 2019 (the “2019 Gross Profit”) is lower than expected, Drax will receive a payment from Iberdrola of up to £26 million. The mechanism also gives Iberdrola the opportunity to earn an upside of up to £26 million if less than 100% of these payments are received but the Portfolio performs better than expected in 2019⁽¹⁾.

Under these arrangements, if less than 100% of these capacity payments are received:

Iberdrola will make a payment to Drax if the 2019 Gross Profit is less than £155 million. The payment will be an amount equal to 72% of any shortfall in the 2019 Gross Profit below £155 million. The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received and £26 million; and
Drax will make a payment to Iberdrola if the 2019 Gross Profit is more than £165 million. The payment will be an amount equal to 72% of any amount by which the 2019 Gross Profit exceeds £165 million. The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received by Drax and £26 million.

If subsequently Drax receives any capacity payments in respect of the period 1 January 2019 to 30 September 2019, Drax will pay 72% of those amounts to Iberdrola capped at the amount paid by Iberdrola to Drax under the mechanism above.

Drax and Iberdrola have agreed that capacity payments due to the Portfolio in respect of the period before completion will be passed through to Iberdrola.

Any payments pursuant to the arrangements with Iberdrola will be cash adjustments to the consideration and not included in EBITDA⁽²⁾.

Benefits of the acquisition

Based on Drax’s expectations of the position that is most likely to be achieved in relation to the Capacity Market following the Ruling, Drax believes the Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of Drax’s weighted average cost of capital.

Drax has considered other possible outcomes for the Capacity Market which are less likely but may ensue and if they did the financial effects of the Acquisition may be adversely affected.

Drax believes that if the more plausible of these outcomes were to ensue the returns from the Acquisition would still be in excess of the Drax’s weighted average cost of capital.

Drax has not attempted to quantify the effect if the less plausible of these other outcomes were to ensue – if there were no Capacity Market or similar mechanism or if significant structural changes were made to the Capacity Market. Drax sees these as a remote possibility and notes that in those circumstances it believes the loss or reduction of capacity payments could be mitigated by increases in wholesale power prices.

The Acquisition strengthens Drax’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £42 million of shares purchased to date.

2019 profit forecast

Daldowie Fuel Plant, Glasgow

Based on recent power and commodity prices and assuming that all contracted capacity payments are received, the Portfolio is expected to generate EBITDA in 2019 in a range of £90 million to £110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, ROCs⁽³⁾ and the Daldowie energy-from-waste plant.

If, in light of the Ruling, the contracted capacity payments payable in 2019 in respect of the Portfolio are not received or accrued in 2019, the expected EBITDA for the Portfolio in 2019 would be reduced by up to £47 million (from a range of £90 million to £110 million) down to a range of £43 million to £63 million before considering mitigating factors. Drax believes that the arrangements agreed with Iberdrola mitigate in economic terms the majority of the risk that those suspended capacity payments will not be paid.

Assuming performance in line with current expectations and if all capacity payments due in 2019 are received before the end of 2019, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019. If capacity payments are not received in 2019, net debt to EBITDA is expected to fall to around 2x during 2020.

Drax current trading and 2018 outlook

Following the Ruling, £7 million of contracted capacity payments relating to 2018, principally in relation to Drax’s remaining two coal-fired units, will not be paid as and when expected. Taking this into account, and following Drax’s recent good trading performance and assuming continued good operational availability for the remainder of the year, Drax’s full year EBITDA outlook remains in line with previous expectations, with net debt to EBITDA expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Process

On 1 November 2018, the Competition and Markets Authority informed Drax that it had no further questions in connection with the proposed Acquisition at that stage, which resulted in the competition condition under the Acquisition agreement being satisfied. Completion of the Acquisition is therefore currently expected to occur on 31 December 2018 assuming that the shareholder approval condition is satisfied by that date.

A combined shareholder circular and notice of general meeting containing the unanimous recommendation of the Board to approve the Acquisition will be posted as soon as practicable.

Other matters

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Notes

Arrangements with Iberdrola in respect of 2018/19 capacity payments – only applicable if less than 100% of these capacity payments are received. Any payments pursuant to the arrangements with Iberdrola will be cash adjustments to the consideration and not included in EBITDA.Implied EBITDA is included in the table for reference only and is not a metric included in the mechanism, which is based on gross profit.
The amount of the payment is capped at the lower of the amount in respect of capacity payments due to the Portfolio but not received by Drax and £26 million.

2019 Gross Profit £m	Implied EBITDA based on 2019 Gross Profit £m	Payment made to / (by) Drax capped at £26m £m*
119 or lower	54 or lower	26
129	64	19
139	74	12
149	84	4
155	90	0
165	100	0
175	110	-7
185	120	-14
195	130	-22
201 or higher	136 or higher	-26

^{*Payment made to / (by) Drax will be classified as a cash adjustment to the consideration rather than as gross profit.}

EBITDA means earnings before interest, tax, depreciation, amortisation, unrealised profits and losses on derivative contracts and material or one-off items that do not reflect the underlying trading performance of the business. 2019 EBITDA is stated before any allocation of Group overheads.
Renewable Obligation Certificates.

Enquiries

Drax Investor Relations:

Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763 949

Media

Drax External Communications:

Matt Willey
+44 (0) 7711 376 087

Ali Lewis
+44 (0) 7712 670 888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker)

+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):

+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola

16 October 2018

Investors

RNS Number : 1562E
Drax Group PLC

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

A unique portfolio of pumped storage, hydro and gas-fired generation assets
Compelling strategic rationale
- Growing system support opportunity for the UK energy system
- Significant expansion of Drax’s flexible, low-carbon and renewable generation model
- Diversified generation capacity – multi-site, multi-technology
- Opportunities in trading and operations
Strong financial investment case
- High quality earnings
- Expected returns significantly ahead of Weighted Average Cost of Capital (WACC)
- Expected EBITDA⁽¹⁾ of £90-110 million in 2019
- Debt facility agreed, net debt/EBITDA expected to be around 2x by the end of 2019
- Supportive of credit rating and reduced risk profile for Drax
- Strengthens ability to pay a growing and sustainable dividend

Will Gardiner, CEO, Drax Group

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“I am excited by the opportunity to acquire this unique and complementary portfolio of flexible, low-carbon and renewable generation assets. It’s a critical time in the UK power sector. As the system transitions towards renewable technologies, the demand for flexible, secure energy sources is set to grow. We believe there is a compelling logic in our move to add further flexible sources of power to our offering, accelerating our strategic vision to deliver a lower-carbon, lower-cost energy future for the UK.

“This acquisition makes great financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.

“We are combining our existing operational expertise with the specialist technical skills of our new colleagues and I am looking forward to what we can achieve together.”

A flexible, low-carbon and renewable portfolio

The Portfolio consists of Cruachan pumped storage hydro (440MW), run-of-river hydro locations at Galloway and Lanark (126MW), four CCGT⁽²⁾ stations: Damhead Creek (805MW), Rye House (715MW), Shoreham (420MW) and Blackburn Mill (60MW), and a biomass-from-waste facility (Daldowie).

Attractive high quality earnings and returns

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs⁽³⁾. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio. Further information is set out in Appendix 2 of this Announcement.

Capital expenditure in 2019 is expected to be in the region of £30-35 million.

For the year ended 31 December 2017, the Portfolio generated EBITDA of £36 million⁽⁴⁾. EBITDA in 2019 is expected to be higher due to incremental contracted capacity payments (c.£42 million), no availability restrictions (Cruachan’s access to the UK grid during 2017 was limited by network transformer works) (c.£8 million), a lower level of corporate cost charged to the portfolio (c.£9 million) and revenues from system support services and current power prices. Gross assets as at 31 December 2017 were £419 million⁽⁵⁾.

The Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of the Group’s WACC and to be highly accretive to underlying earnings in 2019.

The Acquisition strengthens the Group’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £32 million of shares purchased to date.

Financing the Acquisition

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility agreement to finance the Acquisition. Assuming performance in line with current expectations, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019.

Drax expects its credit rating agencies to view the Acquisition as contributing to a reduced risk profile for the Group and to reaffirm their ratings.

Conditions for completion

The Acquisition is expected to complete on 31 December 2018 and is conditional upon the approval of the Acquisition by Drax’s shareholders and clearance by UK Competition and Markets Authority (the “CMA”). A summary of the terms of the Acquisition agreement (the “Acquisition Agreement”) is set out in Appendix 1 to this announcement.

Drax trading and operational performance

Since publishing its half year results on 24 July 2018 Drax has commenced operation of a fourth biomass unit at Drax Power Station, which is performing in line with plan, and availability across biomass units has been good.

Biomass storage domes at Drax Power Station

Taking these factors into account, alongside a strong 2018 hedged position and assuming good operational availability for the remainder of the year, Drax’s EBITDA expectations for the full year remain unchanged, with net debt to EBITDA now expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Biomass generation is now fully contracted for 2019.

Contracted power sales at 30 September 2018

	2018	2019	2020
Power sales (TWh) comprising:	18.6	11.5	5.7
TWh including expected CfD sales	18.6	15.6	11.2
– Fixed price power sales (TWh)	18.6	11.0	5.1
At an average achieved price (per MWh)	at £46.8	at £50.4	at £48.3
– Gas hedges (TWh)	-	0.5	0.6
At an achieved price per therm	-	43.5p	47.4p

Drax intends to hedge up to 1TWh of the commodity exposures in the Portfolio ahead of completion in line with the Group’s existing hedging strategy.

Other matters

In light of the Acquisition and the expected timing of the general meeting to approve it, Drax will postpone the planned Capital Markets Day on 13 November 2018.

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Enquiries:
Drax Investor Relations: Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763949

Media:
Drax External Communications:
Matt Willey
+44 (0) 7711 376087

Ali Lewis
+44 (0) 77126 70888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker):
+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):
+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition presentation meeting and webcast arrangements

Management will host a presentation for analysts and media at 9:00am (UK Time), Tuesday 16 October 2018, at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

Would anyone wishing to attend please confirm by e-mailing [email protected] or calling Christopher Laing at FTI Consulting on +44 (0) 20 3727 1355 / 07809 234 126.

The meeting can also be accessed remotely via a live webcast, as detailed below. After the meeting, the webcast will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 9am (UK time) on Tuesday 16 October 2018 for download at: www.drax.com>>investors>>results-reports-agm>> #investor-relations-presentations or use the link below.

Event Title:	Drax Group plc: Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola
Event Date:	Tuesday 16 October 2018
Event Time	9:00am (UK time)
Webcast Live Event Link	https://www.drax.com/investors/16-oct-2018-webcast
	020 3059 5868 (UK)
	+44 20 3059 5868 (from all other locations)
Start Date:	Tuesday 16 October 2018
Delete Date:	Monday 14 October 2019
Archive Link:	https://www.drax.com/investors/16-oct-2018-webcast

For further information please contact Christopher Laing on +44 (0) 20 3727 1355 / 07809 234 126.

Website: www.drax.com

Acquisition of the Portfolio from Iberdrola

Drax Smart Generation Holdco Limited (“Drax Smart Generation”), a wholly owned subsidiary of Drax, has entered into the Acquisition Agreement with Scottish Power Generation Holdings Limited (the “Seller”), a wholly-owned subsidiary of Iberdrola S.A., for the acquisition of ScottishPower Generation Limited (“SPGEN”), for £702 million in cash.

Strong asset base

The Portfolio principally consists of 2.6GW of assets which are highly complementary to Drax’s existing generation portfolio and play an important role in the UK energy system. The assets include:

Cruachan Pumped Storage Hydro

440MW of large-scale storage and flexible low-carbon generation situated in Argyll and Bute, Scotland.

Cruachan provides a wide range of system support services to the UK energy market, in addition to providing merchant power generation. Cruachan has £35 million of contracted capacity payments for the period 2019 to 2022.

Cruachan, which provides over 35% of the UK’s pumped storage by volume, can provide long-duration storage with the ability to achieve full load in 30 seconds, which it can maintain for over 16 hours, making it a strategically important asset remunerated by a broad range of non-commodity based revenues.

Galloway and Lanark Run-of-River Hydro

126MW of stable and reliable renewable generation situated in South-west Scotland.

Both locations benefit from index-linked ROC revenues extending to 2027 and Galloway, in addition to renewable power generation, operates a reservoir and dam system providing storage capabilities and opportunities for peaking generation and system support services. It also has £4 million of contracted capacity payments for the period 2019 to 2022.

Combined Cycle Gas Generation (CCGT)

1,940MW of capacity at Damhead Creek (805MW), Rye House (715MW) and Shoreham (420MW) all strategically located in South-east England.

These assets provide baseload and/or peak power generation in addition to other system support services and benefit from attractive grid access income associated with their location. The three plants have contracted capacity payments of £127 million for the period 2019 to 2022.

Damhead Creek also benefits from an attractive option for the development of a second CCGT asset, Damhead Creek II, which provides additional gas generation optionality alongside Drax’s existing coal-to-gas repowering and OCGT(6) projects. All options could be developed subject to an appropriate level of support. Damhead Creek II is eligible for the 2019 capacity market auction along with two of Drax’s existing OCGT projects.

Other smaller sites

The portfolio also includes a small CCGT in Blackburn (60MW) and a 50K tonne biomass-from-waste facility in Daldowie, which benefits from a firm offtake contract agreement with Scottish Water until 2026.

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

The UK has a target to reduce carbon emissions by 80% by 2050. The transition to a low-carbon economy requires decarbonisation of heating, transport and generation. This will in turn require additional low-carbon sources of generation to be developed in the UK. As much as 85%⁽⁷⁾ of future generation could come from renewables – predominantly wind and solar. This will lead, at times, to high levels of power price volatility and increasing demand for system support services. Managing an energy system with these characteristics will only be possible if it is supported by the right mix of flexible assets to manage volatility, balance the system and provide crucial non-generation services which a stable energy system requires.

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

Increased earnings potential aligned with generation strategy and UK energy needs

High quality earnings

Two thirds of the gross profits of the Portfolio is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs, in addition to power generation activities. Due to the expected growing demand for these assets and the contract-based nature of many of these services Drax expects to improve long-term earnings visibility through structured non-commodity earnings streams, whilst retaining significant opportunity to benefit from power price volatility.

When combined with renewable earnings and system support from existing biomass generation, the Acquisition is expected to lead to an increase in the quality of earnings.

Diversified generation and portfolio benefits

Wood pellet storage domes at Drax Power Station, Selby, North Yorkshire

The Acquisition accelerates Drax’s development from a single-site generation business into a multi-site, multi-technology operator.

With the acquisition of this portfolio, a fall in gas prices could be mitigated by an increase in gas-fired generation reflecting the relative dispatch economics of the different technologies.

Drax expects to benefit from the management of generation across a broader asset base, leveraging the Group’s expertise in the operation, trading and optimisation of large rotating mass generation.

Drax believes that the team operating the Portfolio has a strong engineering culture which is closely aligned with the Drax model and will enhance the Group’s strong capabilities across engineering disciplines.

Around 260 operational roles will transfer to Drax as part of the Acquisition, complementing and reinforcing Drax’s existing engineering and operational capabilities.

Financing and capital structure

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility to finance the Acquisition, with a term of 12 months from the first date of utilisation of the facility (with a seven-month extension option) and interest payable at a rate of LIBOR plus the applicable margin (the “Acquisition Facility Agreement”). The facility is competitively priced and below Drax’s current cost of debt.

Drax will consider its options for its long-term financing strategy in 2019.

Assuming performance in line with current expectations, net debt to EBITDA is expected to return to Drax’s long-term target of around 2x by the end of 2019.

Drax expects credit rating agencies to view the Acquisition as supportive of the rating and contributing to a reduced risk profile for the Group.

Process and integration plan

Drax is progressing a detailed integration plan to combine the Acquisition as part of the existing Power Generation business.

The transaction is subject to shareholder approval. A combined Shareholder Circular and notice of General Meeting will be posted as soon as practicable.

The transaction is expected to complete on 31 December 2018.

Notes:

^{(1) EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business. 2019 EBITDA is stated before any allocation of Group overheads.}^{(2) Combined Cycle Gas Turbine.}^{(3) Renewable Obligation Certificates.}^{(4) 2017 EBITDA is unaudited and based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies.}^{(5) On an unaudited historic cost basis, inclusive of an historic write down and other changes arising from the application of Drax’s accounting policies, and incorporating intercompany debtors which will be replaced by Drax going forward.}^{(6) Open Cycle Gas Turbines.}^{(7) Intergovernmental Panel on Climate Change. In a 1.5c pathway renewables are projected to be 70-85% of global electricity in 2050.}

IMPORTANT NOTICE

^{The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).}

^{J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) (“J.P. Morgan Cazenove”) and RBC Europe Limited (“RBC”), which are both authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the FCA and the PRA, are each acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as their respective clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.}

^{J.P. Morgan Cazenove, RBC and their respective affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Each of J.P. Morgan Cazenove, RBC and their respective affiliates accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.}

^{Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s, the Portfolio’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.}

^{Each of the Company, J.P. Morgan Cazenove, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.}

^{You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group, the Portfolio and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.}

^{Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.}

Appendix 1

Principal Terms of the Acquisition

The following is a summary of the principal terms of the Acquisition Agreement.

Acquisition Agreement

Parties and consideration

The Acquisition Agreement was entered into on 16 October 2018 between Drax Smart Generation and the Seller. Pursuant to the Acquisition Agreement, the Seller has agreed to sell, and Drax Smart Generation has agreed to acquire, the whole of the issued share capital of SPGEN for £702 million, subject to certain customary adjustments in respect of cash, debt and working capital.

Drax Group Holdings Limited has agreed to guarantee the payment obligations of Drax Smart Generation under the Acquisition Agreement. Scottish Power UK plc has agreed to guarantee the payment obligations of the Seller under the Acquisition Agreement.

Conditions to Completion

The Acquisition is conditional on:

the approval of the Acquisition by Drax shareholders, which is required as the Acquisition constitutes a Class 1 transaction under the Listing Rules (the “Shareholder Approval Condition”); and
the CMA having indicated that it has no further questions at that stage in response to pre-Completion engagement by Drax or the CMA having provided a decision that the Acquisition will not be subject to a reference under the UK merger control regime.

Completion is currently expected to occur on 31 December 2018 assuming that the conditions are satisfied by that date.

Termination for material reduction in available generation capacity

Drax Smart Generation has the right to terminate the Acquisition Agreement upon the occurrence of a material reduction in available generation capacity at any of the Cruachan, Galloway and Lanark or Damhead Creek facilities which subsists, or is reasonably likely to subsist, for a continuous period of three months. The right of Drax Smart Generation to terminate in these circumstances is subject to the Seller’s right to defer Completion if the relevant material reduction in available generation capacity can be resolved by end of the month following the anticipated date of Completion.

Break fee

A break fee of £14.6 million (equal to 1% of Drax’s market capitalisation at close of business on the day before announcement) is payable if the Shareholder Approval Condition is not met, save where this is as a result of a material reduction in available generation capacity as described above.

Pre-completion covenants

The Seller has given certain customary covenants in relation to the period between signing of the Acquisition Agreement and completion, including to carry on the SPGEN business in the ordinary and usual course. The Seller will carry out certain reorganisation steps prior to completion.

Pension liabilities

Drax Smart Generation has agreed to assume the accrued defined benefit pension liabilities associated with the employees of the SPGEN group as at the date of signing the Acquisition Agreement. Following Completion, the SPGEN group will continue to participate in the Seller’s group defined benefit pension scheme, known as the ScottishPower Pension Scheme (“SPPS”) for an interim period of 12 months unless agreed otherwise (the “Interim Period”) while a new pension scheme is set up by the SPGEN group for the benefit of its employees (the “New Scheme”).

At the end of the Interim Period, the SPPS trustees will be requested to transfer from the SPPS to the New Scheme an amount of liabilities (and corresponding share of assets) agreed between the Seller and Drax Smart Generation (or failing agreement, an amount determined by an independent actuary) in respect of the past service liabilities relating to the SPGEN group employees. If the amount of assets transferred to the New Scheme does not match the amount agreed (or independently determined), there will be a true-up between the Seller and Drax Smart Generation.

If the SPPS trustees do not make any transfer to the New Scheme within the period of 18 months following the Interim Period (unless this was caused by a breach of the Acquisition Agreement by the Seller), Drax Smart Generation has agreed to pay £16 million (plus base rate interest) to the Seller as compensation for the SPPS liabilities not taken on by the New Scheme.

Seller’s warranties, indemnities and tax covenant

The Seller has provided customary warranties in the Acquisition Agreement. The Seller also has provided Drax Smart Generation with indemnities in respect of certain specific matters, including for any losses associated with the reorganisation referred to above. A customary tax covenant is also provided in the Acquisition Agreement.

Transitional Services Agreement

The Seller and SPGEN will enter into a transitional services agreement effective at Completion. The specific nature, terms and charges relating to the services to be provided will be agreed between the Seller and SPGEN prior to Completion. The Seller will also provide assistance in relation to the extraction and separation of the SPGEN group from the systems of the Seller and integration of the SPGEN group onto the systems of the Drax Group.

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million (“Profit Forecast”), and gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio.

For the purpose of the Profit Forecast, EBITDA is stated before any allocation of Group overheads (as these will be an allocation of the existing Drax Group cost base which is not expected to increase as a result of the acquisition of the Portfolio).

Basis of preparation

The Profit Forecast has been compiled on the basis of the assumptions stated below, and on the basis of the accounting policies of the Drax Group adopted in its financial statements for the year ended 31 December 2017. Subsequent accounting policy changes include the application of IFRS15 and IFRS9 which are not initially expected to change the EBITDA results of the Portfolio. It also does not reflect the impact of IFRS16 which would apply in respect of the 2019 Annual Report and Accounts.

The Profit Forecast has been prepared with reference to:

Unaudited 2017 financial statements based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies
The audited financial statements of the entities forming the Portfolio for the year ending 31 December 2017
The unaudited management accounts of the Portfolio for the nine months ending 30 September 2018
And on the basis of the projected financial performance of the Portfolio for the year ending 31 December 2019

The Profit Forecast is a best estimate of the EBITDA that the Portfolio will generate for a future period of a year in respect of assets and operations that are not yet under the control of Drax. Accordingly the degree of uncertainty relating to the assumptions underpinning the Profit Forecast is inherently greater than would be the case for a profit forecast based on assets and operation under the control of Drax and/or which covered a shorter future period. The Profit Forecast has been prepared as at today and will be updated in the shareholder circular.

The forecast cost base reflects the expectations of the Drax Directors of the operating regime of the Portfolio under Drax’s ownership and the central support it will require.

Principal assumptions

The Profit Forecast has been prepared on the basis of the following principal assumptions:

Assumptions within management’s control

There is no change in the composition of the Portfolio.
There is no material change to the manner in which these assets are operated.
There are no material changes to the existing running costs / operating costs of the Portfolio.
There will be no material restrictions on running each of the assets in the Portfolio other than those that would be envisaged in the ordinary course.
No material issues with the migration of services including trading and information technology from Scottish Power to Drax.
No hedges are transferred as part of the Transaction.
Transaction costs and one-off costs associated with the Integration are not included.

Assumptions outside of management’s control

The acquisition of the Portfolio is completed on 31 December 2018.
There is no material change to existing prevailing UK macroeconomic and political conditions prior to 31 December 2019.
There are no material changes in market conditions in electricity generating market and no change to the UK energy supply mix.
There are no material changes in legislation or regulatory requirements (e.g. ROCs, capacity market, grid charges) impacting the operations or accounting policies of the Portfolio.
There are no changes to recent market prices for clean spark spread, power, carbon and other commodities.
There is no material change from the historical 10-year average rainfall.
There are no material adverse events that have a significant impact on the financial performance of any of the acquired assets, including any more unplanned outages than would be expected in the ordinary course.
Prior to completion, the business will be operated in the ordinary course.
There are no material issues with the transitional services provided by Scottish Power to Drax pursuant to the TSA, including the migration of such services to Drax.
There is no material change in the management or control of the Drax group.

END

Coal comeback pushes up UK’s carbon emissions

Iain Staffell, Imperial College London

17 September 2018

Opinion

10-year high gas prices¹ have prompted a resurgence in coal-fired power across Britain – and with it a 15% increase in carbon emissions from electricity generation.

If coal-fired electricity remains cheaper than gas-fired (as analysts predict), we could see the first year-on-year rise in carbon emissions from Britain’s power sector in six years. This highlights the importance of retaining a strong carbon price if we are to ensure the successful decarbonisation of the power system is not reversed.

After dropping to a historic low of just 0.2 GW during June and July, Britain’s coal power generation doubled in August, and has shot up to 2 GW during the first week of September. The last time coal output was this high was during the Beast from the East, when temperatures plummeted in March.

With these coal power stations running instead of more efficient gas plants, Britain is producing an extra 1,000 tonnes of carbon dioxide (CO₂) every hour.² Carbon emissions from electricity generation are up 15% as a result. These coal plants are not running solely because they are needed to meet peak demand, but because gas prices have risen sharply and carbon prices have not kept up, making coal power stations more economic to run than gas-fired ones.

It became cheaper to generate power from coal than from gas (see thick lines, chart below) in late August. Even though carbon prices now double the cost of generating electricity from coal,³ coal plants are consistently “in the money” at the moment, meaning they can generate power profitably all day and night.

Estimated cost of generating electricity from coal and gas in Quarter 3 (thick lines), and the output from coal power stations in Britain (thin line)

The cost of emitting CO₂ has increased sharply, up 45% so far this year due to the ongoing rally in European Emissions Trading Scheme (EU ETS) prices. Rising carbon prices should make gas more economical to burn as it emits less than half the CO₂ of coal.

However, wholesale gas prices have also risen 40% since the start of the year, as supplies and storage are squeezed in the run up to winter. Gas prices are at a ten-year high, currently 14% above their previous quarterly-average peak back in 2013 (see chart below). These rising costs are feeding through into wholesale power prices, which have risen by a third over the past year to hit £60/MWh.

The cost of generating electricity and carbon cost

The estimated cost of generating electricity from fossil fuels over the last 20 years, along with the cost of emitting CO₂.

Britain’s carbon price strengthened dramatically through 2014–15 due to the government implementing a Carbon Price Support scheme. This caused gas to become competitive against coal for power generation, leading to carbon emissions from the power sector halving. Unless Britain’s carbon price can once again make up the gap between coal and gas prices, we risk rolling back some of the world-leading gains made on cleaning up our electricity system.

The Committee on Climate Change has made it clear that power is the only sector that is pulling its weight when it comes to decarbonising the UK. Clean electricity could power low-carbon vehicles and heating, but this opportunity will be wasted if the electricity comes from high-carbon coal.

So what can be done? The sharp rise in gas prices hints at a lack of flexibility in the energy system. Britain came uncomfortably close to gas shortages in March, in part due to the closure of the country’s largest gas storage site. With nearly half of the electricity generated in Britain coming from gas, plus five-sixths of household heat, diversifying into other – cleaner – energy sources would help insulate consumers and businesses from price spikes.

No one country has the power to determine international fuel prices. Several factors have come together to push up gas prices, including a lack of transmission capacity, depleted stores of gas after the long hot summer and a lack of wind power increased output from gas-fired stations. Suppliers which don’t wish to be caught short after the Beast from the East, are also stocking up on gas.

Any knee-jerk reaction to try and lower the cost of electricity (for example, slashing the cost of carbon emissions) may only have a short-term impact, and could easily lead to longer-term damage (such as the resurgence of coal) which would require further interventions in the future.

Britain does have control over its carbon price. Its power stations and industry currently pay the Emissions Trading System price (determined on the Europe-wide market) which has fluctuated wildly over the past week between €25 (£22) and €19 (£17) per tonne, plus £18 per tonne in Carbon Price Support which goes to the Treasury. This needs to be maintained or strengthened further to save the power system from backsliding, and to show strong climate leadership on the international stage.

Explore this data live on the Electric Insights website

View Drax Power CEO Andy Koss’ comment

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

^{[1] The three-month average cost of generating electricity from gas exceeded £60/MWh for the first time since 2009. Short-term price spikes have been higher than this, such as the first week of March during the Beast from the East.↩}

^{[2] Extra generation from coal reduces the output from gas plants, which are their main competitors, as nuclear, wind and solar already run as much as possible. Calculation based on 1934 MW of coal generation (the average during the first week of September) emitting 937 gCO2 per kWh (1812 tonnes per hour) instead of gas generation which would have emitted 394 gCO2 per kWh (762 tonnes per hour).↩}

^{[3] The coal that must be burnt to produce 1 MWh of electricity now costs around £31, and the CO2 pollution costs an extra £31 on top. For comparison, producing 1 MWh of electricity from gas costs £50 for the fuel and £15 for the CO2.↩}

The quarter when weather dictated Great Britain’s electricity

16 May 2018

Power generation

As summer arrives in Great Britain, bringing the hottest May Day Bank Holiday on record, it’s hard to believe March saw the coldest spring day since records began. But that’s exactly what happened during the six days the ‘Beast from the East’ hit Europe.

From 26 February to 3 March Great Britain’s weather sunk to a once-in-a-decade level of cold, dipping on 1 March when thermometers dropped to an average of -3.8 degrees Celsius across central England. These extreme conditions drove electricity demand up 10%, as darker days required extra lighting and more people plugged in energy-intensive electric heaters to keep warm.

After successive years of milder winters, January to March made for a period in which the weather played a pivotal role in dictating how the country’s electricity was generated, according to Electric Insights, a quarterly report commissioned by Drax and written by researchers from Imperial College London.

The report highlights how despite the storm disrupting power transmission in parts of the country, and sensationalist headlines suggesting lights could go out at any moment, the electricity system held up well in the adverse conditions.

The Beast from the East tests energy security

The sub-zero temperatures, brutal wind and Siberian-level snow blizzards that hit Great Britain for six days between February and March proved a real test for the electricity system. The evening of 1 March saw demand reach 53.3 GW – its highest peak in three years. This had a knock-on effect on the hour-ahead price of electricity, which was 50% higher during March than the same period in 2017.

The weather had a notable impact on the types of generation needed to power the county, with fossil fuels playing an important role at the expense of carbon emission levels. Over the six-day cold spell, fossil fuels averaged between 20-25 GW of electricity generation.

Coal accounted for almost 10% of the total electricity mix across the quarter, in part because of rising gas prices, which made it a more economical fuel. Gas, however, remained the biggest power source accounting for just shy of 40% of all electricity.

What is most significant about this Q1 2018 fossil fuel usage, is that even in such extreme weather, coal and gas generation was still 16% and 2% lower, respectively, than the same quarter in 2017.

This drop is the result of increased renewable capacity allowing wind generation to grow by almost 40% and make up just short of 20% of the electricity mix.

Read the full articles here:

Rampant wind leads renewable generation

The conditions brought by the storm where particularly favourable to wind generation, which hit new peak-generation levels of 13 GW on 17 January and then 14 GW on 17 March. Over the full quarter wind power production reached 15,560 GWh, 30 GWh more than nuclear, the nearest low carbon source. This increase comes in part as a result of a 19% increase in installed capacity around the country since Q1 2017, but also thanks to the grid getting better at making use of it.

During the six sub-zero days of the quarter, wind contributed a minimum of 4.4 GW, crucial at a time when other power sources appeared vulnerable. For example, heavy snowfall blocked solar panels from the sun leaving it contributing just 2% of the electricity mix over the quarter.

Nuclear power fared better and made up just shy of 20% of generation, but was held back by two routine reactor maintenances while a third shut on the quarter’s coldest day due to seaweed clogging a plant’s cooling system. Biomass ran solidly throughout the cold spell, contributing 4% of the total electricity generation mix.

The opening of a new 2.2 GW cable connecting Scotland – where there is 7.7 GW of installed capacity – to North Wales saved National Grid some £9 million a month in constraint payments across the first quarter.

Read the full articles:

Did the country almost run out of gas?

One of the most headline-grabbing events from the cold spell was National Grid’s decision to issue a ‘Gas Deficit Warning’ on the morning of 1 March, suggesting supplies could run out before the end of the day.

With 83% of British households depending on gas for heating and gas turbines accounting for a significant portion of the country’s electricity generation, the announcement drew considerable press attention.

However, National Grid explained domestic gas users would unlikely be impacted and it would work with industrial partners to make more gas available to meet demand. This clearly had the desired effect, with as much as 19 GW of spare gas capacity ending up available that day. The warning was withdrawn the following morning and gas generation averaged 11 GW, more than any other source, between 26 February and 3 March.

Nevertheless, European-wide demand for gas sent prices soaring and making it more economical to burn coal, which generated roughly 10 GW a day on average over the six-day period of 26 February to 3 March.

Read the full article: Running low on gas

The extreme weather of Q1 2018 highlighted the stability of Great Britain’s overall power system. But even as the country continues to move towards greater renewable generation, fossil fuels continue to play an important part of electricity mix when demand peaks.

Explore the data in detail by visiting ElectricInsights.co.uk. Read the full report.

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

Europe’s kicking its coal habit

19 April 2018

Power generation

From Roman mines to the fuel behind the continent-wide industrial revolution, Europe has a long history with coal. But with reducing carbon and other greenhouse gas emissions, now firmly on the global agenda, Europe’s love for coal is rapidly declining.

Collectively, the EU aims for renewable sources to account for 20% of gross final energy consumption by 2020 and 27% by 2030. Countries in and outside the EU, as well as businesses and organisations, are setting ambitious targets to phase out coal as part of the UK and Canada-led Powering Past Coal Alliance, which Drax recently signed up to.

European Countries	Coal-free date (according to Europe Beyond Coal updated September 2020)
Austria 🇦🇹	2020
France 🇫🇷	2022
Portugal 🇵🇹	2023
UK 🇬🇧	2024
Ireland 🇮🇪 Italy 🇮🇹	2025
Greece 🇬🇷	2028
Finland 🇫🇮 Netherlands 🇳🇱	2029
Denmark 🇩🇰 Hungary 🇭🇺 Portugal 🇵🇹	2030
Germany 🇩🇪	2038
Czech Republic 🇨🇿 Spain 🇪🇸	Phase out under discussion
Bosnia Herzegovina🇧🇦 Bulgaria 🇧🇬 Croatia 🇭🇷 Kosovo🇽🇰Montenegro 🇲🇪 Poland 🇵🇱 Romania🇷🇴Serbia🇷🇸 Slovakia 🇸🇰Slovenia 🇸🇮 Spain 🇪🇸 Turkey 🇹🇷	No phase out date
Belgium 🇧🇪 Cyprus 🇨🇾 Estonia 🇪🇪 Iceland 🇮🇸 Latvia 🇱🇻 Lithuania 🇱🇹 Luxembourg 🇱🇺 Malta 🇲🇹 Norway 🇳🇴 Sweden 🇸🇪Switzerland 🇨🇭	No coal in electricity mix

This movement is not only being fuelled by an increased capacity in wind and solar generation, but also by other low-carbon energy sources enabling countries to kick their coal habits.

Aiming for 100% renewable

As myth after myth is dispelled about renewables, there are countries proving it is possible to power a modern developed nation entirely through renewable energy sources.

Up in the northern-most reaches of Europe, Iceland already generates all its electricity from renewable sources. This is split between 75% hydropower and 25% geothermal power. Geothermal not only offers a renewable source of electricity but also hot water for heating the volcanic island nation.

A geothermal power station steams on a cold day in Iceland

Hydropower is also a key contributor to Norway’s renewable ambitions. With more than 31 gigawatts (GW) of installed hydropower capacity, Norway is able to rely on it as a source of electricity and export its plentiful oil and natural gas reserves to countries still dependent on fossil fuels.

Many parts of Europe are well suited to hydropower, with reliable rainfall and the mountainous topography necessary to construct dams and power stations. Parts of Austria, Romania and Georgia also make substantial use of hydropower as a source of electricity.

Artificial Lake behind the Bicaz Dam at sunset, Romania

For countries without this access to large-scale hydropower, it’s the increased installation of renewables that holds the key to eliminating the need for coal.

Growing renewable generation

Last year saw electricity generation from renewable sources overtake that from coal for the first time thanks to continuous expansion of wind, solar and biomass capacity around the continent.

Between 2010 and 2017, generation from wind, solar and biomass installations in EU countries more than doubled from 302 terawatt hours (TWh) to 670 TWh, according to Eurostat, driven primarily by an increase in wind capacity. As a source of renewable electricity wind has already proved capable of generating major portions of a country’s demand –managing to meet 44% of Denmark’s overall demand in 2017. This was after previously producing a 40% electricity surplus one day for the country, allowing it to export the emission-free electricity to neighbours.

Wind turbines on the east coast of Sweden

Across the EU, generation from wind more than doubled from 150 TWh to 364 TWh from 2010 to last year, while solar generation grew five times from 23 TWh to 119 TWh and biomass jumped from 129 TWh to 196 TWh. By contrast, coal and lignite fell from 818 TWh to 669 TWh.

These renewable electricity sources, along with hydropower, now account for 30% of EU countries’ collective electricity generation. And while coal generation continues to drop, other low carbon energy sources, particularly nuclear, still play essential roles in many European energy systems.

From coal to low carbon

Sweden is one of the leaders in renewable electricity generation, setting 2040 as the date to move to totally renewable energy. However, while it currently counts 6.5 GW of wind capacity installed and has already exceeded its 2020 renewable generation goals, the country’s 10 nuclear reactors still make up 40% of its electricity output. Sweden aims to phase-nuclear out of its energy mix, but this will force it to import more power from neighbours to meet demand.

France is even more dependent, with nuclear making up 75% of its electricity production and earning more than €3 billion a year for the country in exports. It aims to reduce its nuclear generation to 50% with president Emmanuel Macron claiming continued nuclear generation offers “the most carbon-free way to produce electricity with renewables.”

Fessenheim Nuclear and Hydroelectric Power Plants in Alsace, France

As a reliable and low-carbon source of electricity, the most modern nuclear power stations add a certain amount of flexibility to grids enabling greater adoption of intermittent renewable sources. Across the EU nuclear made up a quarter of electricity generation in 2017.

Gas in the transition

Much more flexible than nuclear, gas plays an essential role in many countries. It accounted for 19% of electricity generation in the EU last year and produces around half the CO₂ and just one tenth of the air pollutants of coal. Gas turbines can begin generating electricity at full power in just 30 minutes from a cold start, or 10 minutes from warm standby, allowing it to plug any gaps in demand left by intermittent renewables. Its ability to provide many system services such as reserve power and frequency response will see it play an important transition role over the coming decades, until cleaner technologies are able to take over.

Artist’s impression of a Drax rapid-response gas power station (OCGT) with planning permission

Coal is not gone yet, making up 11% of EU’s electricity generation in 2017, but the momentum behind decarbonisation is keeping Europe on track to meet its ambitious emissions target and take the final step away from coal.

Chief Executive’s review

Will Gardiner, Chief Executive Officer, Drax Group

21 March 2018

Annual report

Market background

The UK is undergoing an energy revolution – a transition to a low-carbon economy requiring new energy solutions for power generation, heating, transport and the wider economy. Through our flexible, lower carbon electricity proposition and business to business (B2B) energy solutions, the Group is positioning itself for growth in this environment. More details can be seen on page 4 of our annual report.

Our strategy

Our purpose is to help change the way energy is generated, supplied and used.

Through addressing UK energy needs, and those of our customers, our strategy is designed to deliver growing earnings and cash flow, alongside significant cash returns for shareholders.

Our ambition is to grow our EBITDA to over £425 million by 2025, with over a third of those earnings coming from Pellet Production and B2B Energy Supply to create a broader, more balanced earnings profile. We intend to pay a sustainable and growing dividend to shareholders. Progression towards these targets is underpinned by safety, sustainability, operational excellence and expertise in our markets.

Summary of 2017

We made significant progress during 2017, but were below our expectations on the challenging scorecard targets we set ourselves in pellet production and biomass availability, the latter reflecting the significant incident we experienced on our biomass rail unloading facilities at the end of 2017, which extended into January 2018. Energy Supply performed well with Opus Energy in line with plan and Haven Power exceeding its targets. Through a combination of this performance and the progress of our strategy we have delivered EBITDA of £229 million, significantly ahead of 2016 (£140 million) and with each of our three businesses contributing positive EBITDA for the first time.

The Group scorecard is reported in full in the Remuneration Report (pp. 81-107 of our annual report) and the KPIs are also shown below. They reflect the diversity of our operations and our need to maintain clear focus on delivering operational excellence.

On a statutory basis we recorded a loss of £151 million, which reflects unrealised losses on derivative contracts, previously announced accounting policy on the accelerated depreciation on coal-specific assets as well as amortisation of newly- acquired intangible assets in Opus Energy. We also calculate underlying earnings, a profit after tax of £2.7 million, which excludes the effect of unrealised gains and losses on derivative contracts and, to assess the performance of the Group without the income statement volatility introduced by non-cash fair value adjustments on our portfolio of forward commodity and currency futures contracts.

During the year we refinanced our existing debt facilities, reducing our debt cost. We also confirmed a new dividend policy which will pay a sustainable and growing dividend (£50 million in respect of 2017), consistent with our commitment to a strong balance sheet and our ambitions for growth. At year end our net debt was £91 million below our 2x net debt to EBITDA target, providing additional headroom. There is more detail on our financial performance in the Group Financial Review on page 46 of our annual report.

In the US, our Pellet Production operations recorded year-on-year growth in output of 35%, with our first two plants now producing at full capacity. During the second half of 2017 we also completed the installation of additional capacity enabling our Morehouse and Amite facilities to handle a greater amount of residue material, supporting efforts to produce good quality pellets at the lowest cost.

As part of our target to expand our biomass self-supply capability we completed the acquisition of LaSalle Bioenergy (LaSalle) adding pellet production capacity. LaSalle commenced commissioning in November 2017 and due to its close proximity to our existing US facilities, once complete, will provide further opportunities for supply chain optimisation.

As in 2016, we benefited from the flexibility of self-supply. This often overlooked attribute of our supply chain enables us to manage biomass supply across the Power Generation business’ planned outage season and to benefit from attractively priced biomass cargoes in the short-term spot market.

In Power Generation, we experienced a significant incident on our biomass rail unloading facilities, including a small fire on a section of conveyor. We fully investigated the incident and following repairs over the Christmas period have now recommissioned the facility, with enhanced operating procedures. This is a timely reminder of the combustible nature of biomass and the need for strong controls and processes to protect our people and assets.

Our biomass units continued to produce high levels of renewable electricity from sustainable wood pellets for the UK market – Drax produced 15% of the UK’s renewable electricity – enough to power Sheffield, Leeds, Liverpool and Manchester combined. In doing so, we are making a vital contribution to the UK’s ambitious targets for decarbonisation across electricity generation, heating and transport – an 80% reduction by 2050 vs. 1990 levels.

We benefited from the first year of operation of our third biomass unit under the Contract for Difference (CfD) scheme which provides an index-linked price for the power produced until March 2027. The unit underwent a major planned outage between September and November, with a full programme of works successfully completed.

The flexibility, reliability and scale of our renewable generation, alongside an attractive total system cost, means we are strongly placed to play a long-term role in the UK’s energy mix. To that end we continue to see long-term biomass generation as a key enabler, allowing the UK Government to meet its decarbonisation targets and the system operator to manage the grid.

The UK Government recently confirmed support for further biomass generation at Drax Power Station and we now plan to continue our work to develop a low-cost solution for a fourth biomass unit, allowing us to provide even more renewable electricity, whilst supporting system stability at minimum cost to the consumer.

Our heritage is coal, but our future is flexible lower-carbon electricity. We are making progress with the development of four new standalone OCGT plants situated in eastern England and Wales and our work to develop options for coal-to-gas repowering with battery technologies. If these options would be supported by 15-year capacity market contracts, providing a clear investment signal and extending visibility of contract-based earnings out to the late 2030s.

In B2B Energy Supply, we completed the acquisition of Opus Energy, a supplier of electricity and gas to corporates and small businesses. The transaction completed in February 2017 and Opus Energy has continued to operate successfully within the Group, achieving its targets and making an immediate and significant contribution to profitability. Alongside this good performance we have also implemented the operational steps necessary to realise further operational benefits of the acquisition, and we now source all of Opus’ power and gas internally.

Haven Power delivered a strong performance with the sale of large volumes of electricity to industrial customers. Through our customer focus and efficiencies, margins have improved and the business generated a positive EBITDA for the first time.

Together, our B2B Energy Supply business now has over 375,000 customer meters, making it the fifth largest B2B power supplier in the UK.

We are delivering innovative low-carbon power solutions, with 46% of our energy sold from renewable sources. As the power system transforms, we will be working closely with our customers to help them adapt to a world of more decentralised and decarbonised power. We see this as a significant opportunity for the Group in the medium to long term.

In October 2017 we completed the sale of Billington Bioenergy (BBE) to Aggregated Micro Power Holding (AMPH). Consideration for the transaction was £2.3 million, comprised of £1.6 million of shares in AMPH and £0.7 million of cash.

The sale of BBE is aligned with our strategy to focus on B2B energy supply. However, through our shareholding in AMPH, we will retain an interest in the UK heating market, whilst gaining exposure to the development of small-scale distributed energy assets.

Political, regulatory and economic background

We continue to operate in a changing environment. The full impact of the UK’s decision to leave the EU is still unknown.

The immediate impact on the Group was a weakening of Sterling and an associated increase in the cost of biomass, which is generally denominated in other currencies. Through our utilisation of medium-term foreign exchange hedges the Group protected the cash impact of this weakness. In 2017, Sterling has generally strengthened, and we have been able to extend our hedged position out to 2022 at rates close to those that we saw before Brexit.

In terms of UK energy policy, the Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. SVT are not a common feature of the B2B market. At the microbusiness end of this market, which is closer in size to domestic, most of our customers are on fixed price products and are active in renewing contracts.

The UK Government’s response to its consultation on the cessation of coal generation by 2025 has confirmed an end to non-compliant coal generation by October 2025.

We believe our assets, projects and ability to support our customers’ electricity management will support the Government’s ambition to maintain reliability when coal generation ceases.

Running a resilient, reliable grid is not simply about meeting the power demand on the system; there are also system support services which are essential to its effective operation. As the grid decentralises and becomes dependent on smaller, distributed generation, the number of plants able to provide these services is reducing. Biomass generation, our proposed OCGTs and our repowering project would allow us to meet these needs, but this will not come for free. A reliable, flexible, low-carbon energy system will require the right long-term incentives.

In November 2017, the Government confirmed that the UK will maintain a total carbon price (the combined UK Carbon Price Support – CPS – and the European Union Emissions Trading Scheme – EU ETS) at around the current level. CPS has been the single most effective instrument in reducing the level of carbon emissions in generation and we continue to support the pricing of carbon, a view echoed in a report prepared for the UK Government by the leading academic Professor Dieter Helm.

Against this backdrop we continue to make an important contribution to the UK economy. According to a study published by Oxford Economics in 2016, Drax’s total economic impact – including our supply chain and the wages our employees and suppliers’ employees spend in the wider consumer-economy was £1.7 billion, supporting 18,500 jobs across the UK.

Safety, sustainability and people

The health, safety and wellbeing of our employees and contractors is vital to the Group, with safety at the centre of our operational philosophy. We also recognise the growing need to support the wellbeing of our employees and their mental health.

During the year we continued to use Total Recordable Injury Rate (TRIR) as our primary KPI in this area. Performance was positive, at 0.27, but we expect this to improve in the coming year.

The incident at our biomass rail unloading facilities in December did not lead to physical injuries but was nonetheless a significant event and caused disruption into 2018.

We consequently launched an incident investigation to ensure our personal and process safety management procedures are robust.

To promote greater awareness around wellbeing we have embedded this in our new people strategy and expect to focus more energy and resources on this important area during 2018.

Strong corporate governance is at the heart of the Group – acting responsibly, doing the right thing and being transparent. As the Group grows the range of sustainability issues we face is widening and recognising the importance of strong corporate governance, we have published a comprehensive overview of our sustainability progress in 2017 on our website. This also highlights future priorities to broaden our approach to sustainability and improved reporting of environment, social and governance (ESG) performance. We have also completed the process which allows us to participate in the UN Global Compact (UNGC) – an international framework which will guide our approach in the areas of human rights, labour, environment and anti-corruption.

During 2017 we published our first statement on the prevention of slavery and human trafficking in compliance with the UK Modern Slavery Act. We have added modern slavery awareness to our programme of regular training for contract managers and reviewed our counterparty due diligence processes.

We have continued to maintain our rigorous and robust approach to biomass sustainability, ensuring the wood pellets we use are sustainable, low-carbon and fully compliant with the UK’s mandatory sustainability standards for biomass. The biomass we use to generate electricity provides a 64% carbon emissions saving against gas, inclusive of supply chain emissions. Our biomass lifecycle carbon emissions are 36g CO₂ / MJ, less than half the UK Government’s 79g CO₂ / MJ limit.

Our people are a key asset of the business. Through 2017 we developed a new people strategy. The strategy focuses on driving performance and developing talent to deliver the Group’s objectives. We have established Group-wide practices, including a career development and behaviour framework focused on performance and personal development.

Research and innovation

A key part of our strategy is to identify opportunities to improve existing operations and create options for long-term growth. To that end we have established a dedicated Research and Innovation (R&I) team led by the Drax engineers who delivered our world-first biomass generation and supply chain solution.

We are actively looking at ways to improve the efficiency of our operations, notably in our biomass supply chain.

Biomass is our largest single cost and as such we are focused on greater supply chain efficiency and the extraction of value from a wide range of low-value residue materials.

In B2B Energy Supply we are using our engineering expertise to help offer our customers value-adding services and products which will improve efficiency and allow them to optimise their energy consumption.

In the following sections we review the performance of our businesses during the year.

Performance review: Pellet Production

Our pellets provide a sustainable, low-carbon fuel source – one that can be safely and efficiently delivered through our global supply chain and used by Drax’s Power Generation business to make renewable electricity for the UK. Our manufacturing operations also promote forest health by incentivising local landowners to actively manage and reinvest in their forests.

Operational review

Safety remains our primary concern and we have delivered year-on-year reduction in the level of recordable incidents.

Output at our Amite and Morehouse pellet plants increased significantly, although was below our target for the year.

We have remained focused on opportunities to improve efficiencies and capture cost savings as part of our drive to produce good quality pellets at the lowest possible cost. We still have more work to do in this area to optimise quality and cost, as our performance was below target for the year.

As part of our plans to optimise and improve operations we added 150k tonnes capacity at our existing plants, bringing total installed capacity to 1.1 million tonnes and increasing the amount of lower cost sawmill residues we are able to process and used in our pellets.

CASE STUDY

Low-cost, high-impact capacity increase

By-products of higher value wood industries, such as sawdust from sawmills, offer a low-cost source of residues for use in our pellet production process and during 2017 we added an additional 150k tonnes of capacity at our pellet plants to allow us to use more of this material. By investing in giant hydraulic platforms known as ‘truck dumps’, operators at Amite and Morehouse can unload a 50-foot truck carrying either sawdust or wood chips and weighing 60 tonnes in less than two minutes, increasing processing capacity, reducing the cost of processing and increasing the use of lower cost residues.

Find out more: www.drax.com/truckdumps and www.drax.com/sustainability/sourcing

At our Baton Rouge port facility greater volumes of production from our facilities drove higher levels of throughput with 17 vessels loaded and dispatched during the year (2016: 11 vessels).

In April, in line with our strategy to increase self-supply, we acquired a 450k tonne wood pellet plant – LaSalle Bioenergy (LaSalle). Commissioning of the plant began in November 2017 and we expect to increase production through 2018. LaSalle is within a 200-mile radius of our existing facilities. By leveraging the locational benefits of these assets we aim to deliver further operational and financial efficiencies.

CASE STUDY

Locational benefits of Gulf cluster

The location of our operations allows us to leverage benefits of multiple assets and locations for operational efficiencies

All sites within 200-mile radius

Operational efficiencies

Common plant and joint strategic spare parts
Maximise reliability, minimise capital outlay
Flexibility through outage cycle
Human capital

Shared logistics to Baton Rouge

Rail and road
Increased port throughput

Complementary fibre sourcing

Optimisation of supply between plants

Find out more: www.draxbiomass.com

Financial results

There was a significant improvement in 2017, with EBITDA of £5.5 million (2016: £6.3 million negative EBITDA), driven by increasing volumes of wood pellets produced and sold to the Power Generation business. Sales of pellets in the year ending 31 December 2017 totalled £136 million, an increase of 84% over 2016.

Gross margin increased, reflecting higher production volumes. Raw fibre procurement, transportation and processing comprised the majority of cost of sales and as such this remains an important area of focus and an opportunity for the business. Through incremental investment in plant enhancements we expect to see further benefits from efficiencies and greater utilisation of lower cost residues.

Total operating costs have increased, reflecting an increase in operations at Amite, Morehouse and the Port of Baton Rouge, alongside the addition of LaSalle.

We acquired LaSalle for $35 million and have invested an additional $27 million as part of a programme to return the unit to service.

Pellet Production financial performance

	2017 £m	2016 £m
Revenue	135.7	73.6
Cost of sales	(96.7)	(55.5)
Gross profit	39.0	18.1
Operating costs	(33.5)	(24.4)
EBITDA	5.5	(6.3)

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Fines at disport	%	9.6	7.6
Operations	Output	,000 tonnes	822	607
Financial	Variable cost/tonne	$/tonne	77	82

Looking ahead

Through 2018 we expect to continue to deliver growth in EBITDA from our existing assets. Our focus is on the commissioning of LaSalle alongside opportunities for optimisation and efficiencies in our processes, to deliver good quality pellets at the lowest cost.

We remain alert to market opportunities to develop further capacity as part of our self-supply strategy.

Performance review: Power Generation

Drax Power Station remains the largest power station in the UK (almost twice the size of the next largest). During the year the station met 6% of the UK’s electricity needs, whilst providing 15% of its renewable electricity, alongside important system support services.

With an increase in intermittent renewables and a reduction in the responsive thermal generation historically provided by coal, the system of the future will require capacity which is reliable, flexible and able to respond quickly to changes in system demand and provide system support services. These long-term needs inform our biomass generation and the development of options for investment in gas – Open Cycle Gas Turbines (OCGTs) and coal-to-gas repowering.

STRATEGY IN PROGRESS

Gas power station development

We are developing options for four new OCGT gas power stations, two of which already have planning permission and could be on the system in the early 2020s, subject to being awarded a capacity agreement.

A high-tech new control room at Drax Power Station will allow engineers to have real time remote control of our OCGT assets via a fibre-optic cable network. Able to fire up from cold and produce power in minutes rather than hours, our OCGTs will help maintain system security as intermittent renewable sources of power increase and older thermal plants close.

Investment case

Option to develop 1.2GW of new OCGT gas
Investment decisions subject to 15-year capacity agreement
Multiple revenue streams, with high visibility from capacity contract
Low capital and operating cost
Attractive return on capital
Broader generation asset base and location

Find out more: www.drax.com/about-us/#our-projects

Regulatory framework

In October the Government published its Clean Growth Plan, setting out its plans for delivery of its legally binding target to reduce 2050 carbon emissions by 80% versus 1990 levels across electricity generation, heating and transport. This reinforces the Drax proposition – flexible, reliable, low-carbon electricity.

In November the Government updated its intentions regarding the future trajectory of UK Carbon Price Support (CPS), indicating that the total cost of carbon tax in the UK (the total of CPS and the EU Emissions Trading Scheme) would continue at around the current level (the tax is currently set at £18/tonne) whilst coal remains on the system.

We believe that CPS has been the single most effective instrument in reducing carbon emissions from generation and that having an appropriate price for carbon emissions is the right way to provide a market signal to further reduce emissions in support of the UK’s long-term decarbonisation targets.

The UK Government has now confirmed an end to non-compliant coal generation by 2025. We support this move subject to an appropriate alternative technology being in place. With this in mind we have continued to develop options for our remaining coal assets to convert to biomass or gas, to provide the reliable, flexible capacity which we believe will be required to manage the increasingly volatile energy system of the future.

Most recently with confirmation of Government support for further biomass generation at Drax Power Station we plan to continue our work to develop a low-cost solution for a fourth biomass unit, accelerating the removal of coal-fired generation from the UK electricity system, whilst supporting security of supply.

Generation capacity and system support

2017 saw the first full year of operation of our biomass unit under the Contract for Difference (CfD) mechanism, which provides index-linked revenues for renewable electricity out to 2027.

Our other biomass units are supported by the Renewable Obligation Certificate (ROC) mechanism which, similar to the CfD, is also index-linked to 2027. This acts as a premium above the price of power we sell from these units. We sell power forward to the extent there is liquidity in the power markets which, combined with our fuel hedging strategy, provides long-term earnings and revenue visibility.

Lower gas prices, higher carbon costs and the continued penetration of intermittent renewables have kept wholesale electricity prices subdued.

With increasing levels of intermittent renewables we are continuing to see opportunities to extract value from flexibility – short-term power and balancing market activity, the provision of Ancillary Services and the value achieved from out-of-specification fuels. To capture value in this market we continue to focus resource on optimising availability and flexibility of both coal and biomass units. This whole process requires a high level of teamwork between the operational and commercial teams across the Group to capture and protect value.

Over the period 2017 to 2022 we expect to earn £90 million from a series of one-year capacity market contracts for our coal units, demonstrating that they still have a role to play. The first of these contracts commenced in October 2017, adding £3 million to EBITDA.

Lastly, we continue to source attractively priced fuel cargoes – out-of-specification coals and distressed cargoes, which help keep costs down for the business and consumers. We do this for both coal and biomass. This is a good example of how our commercial and operational teams work together to identify opportunities to create value for the business, as these fuels typically require more complex handling processes.

You can follow the market and see prices at electricinsights.co.uk

STRATEGY IN PROGRESS

Repowering away from coal

Options for Drax Power Station to operate into the late 2030s and beyond moved up a gear in 2017 with the development of an option to repower two coal units to gas. Drax gave notice of the nationally significant infrastructure project to the Planning Inspectorate in September 2017. One of the units could be eligible for the capacity market auction planned for December 2019.

Local community consultations began in November 2017 and continued in February 2018 on options including up to 3.6GW of new gas generation capacity, a gas pipeline and 200MW of battery storage in line with Government plans to end non-compliant coal generation by 2025 and Drax Group’s strategy of playing a vital role in the future energy system.

Find out more: repower.drax.com

Operational review

Overall, we delivered a good performance during 2017 and maintained a strong safety performance.

We completed a major planned outage on the unit supported by the CfD contract. This unit provides stable and reliable baseload renewable electricity to the network and long-term earnings visibility for the Group. The safe and efficient completion of these complex works is a credit to those involved and reflects our continued focus on opportunities for improvement and efficiencies.

The entire organisation has responded to a number of challenging unplanned events. Most notably, in December we experienced a fire on a section of conveyor at our biomass rail unloading facility and consequently an unplanned outage from late December 2017 to mid-January 2018. Following investigation and recommissioning, the facility has returned to service with enhanced operating procedures. Although this issue did not relate to the operation of the biomass-generating units, the resulting restriction on fuel deliveries by rail required the optimisation of generation across our biomass units, resulting in lower EBITDA and full year biomass availability than our target for the year.

Financial results

Financial performance has significantly improved, with EBITDA of £238 million (2016: £174 million), principally due to the CfD mechanism.

Value from flexibility was below our target for the year, principally reflecting a lower level of Ancillary Service payments versus 2016.

Our operational performance drives the results. The financial impact of the unplanned outage on the rail unloading facility was mitigated by optimisation of our available biomass and the use of additional generation capacity retained for self-insurance purposes. However, this incident is a reminder of the need to invest appropriately to maintain a high level of operational availability and flexibility.

At the operating cost level, we have reduced costs reflecting the efficient single outage and our focus on the implementation of lean management techniques.

Power Generation financial performance

	2017 £m	2016 £m
Revenue	2,719.6	2,490.9
Cost of power purchases	(891.2)	(904.4)
Grid charges	(62.9)	(69.4)
Fuel and other costs	(1,367.1)	(1,180.1)
Cost of sales	(2,321.2)	(2,153.9)
Gross profit	398.4	337.0
Operating costs	(160.9)	(163.2)
EBITDA	237.5	173.8

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Biomass unit technical availability	%	Below target	Below target
Operations	Value from flexibility	£m	88	N/A

Looking ahead

We aim to optimise returns from our core assets, through reliable, flexible, low-carbon energy solutions which provide a long-term solution to the UK’s energy needs. Alongside this, value in the generation market will be created from an ability to execute agile decisions and capture value from volatile short-term power markets.

We will also continue to explore opportunities for lower carbon generation, to exploit our strengths and create opportunities for the long term. To that end we will continue to develop options for gas and pursue efficiencies through our biomass supply chain.

Performance review: B2B Energy Supply

Our B2B Energy Supply business – comprised of Opus Energy and Haven Power – is the fifth largest B2B power supplier in the UK. As the power system transforms, we will be working closely with our customers to help them adapt to a world of more decentralised and decarbonised power. The key factors influencing our business are regulation, competition and our operational performance.

Regulation and competition

The UK Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. The Government will take forward legislation which will provide the regulator Ofgem with the authority to cap these domestic tariffs. SVTs are not a feature of our business. Our focus remains on the B2B market. At the microbusiness end of the market, which is closer in proximity to domestic, most of our customers are on fixed price products and are actively rather than passively renewing their power supply contracts.

The B2B market remains competitive with 65 different suppliers across the market. Our Haven Power and Opus Energy businesses offer customer-centric power, gas and services. We offer simplicity and flexibility across our products and actively engage with customers to help them manage their energy requirements and reduce carbon emissions.

STRATEGY IN PROGRESS

An innovative energy supplier

90% of the electricity that Opus Energy supplied last year came from clean, renewable sources, at no extra cost to their predominantly small and medium-sized business customers. For those customers who want it, 100% renewable energy contracts are also available.

This was exactly what All Saints Church in Ascot was looking for to power their business.

Assistant Church Warden, Chris Gunton, commented:

“We wanted to move to a greener energy supplier, without paying a premium, so approached an energy broker for guidance. They advised us that Opus Energy were a reliable company with a good reputation, and when we asked for a quote they were the most competitive.”

It was a similar story for the Salisbury Museum, in Wiltshire. Nicola Kilgour-Croft, Finance Manager, said:

“We were looking for an energy supplier that offered great value, combined with the right length of contract and good ethics. Opus Energy ticked all these boxes for us.”

Alongside supplying customers, Opus Energy has Power Purchase Agreements with over 2,300 independent UK renewable energy generators. These could be anything from a single wind turbine owned by a village community, to Europe’s greenest zoo, Hamerton Zoo Park.

Commented Andrew Swales, Director of Hamerton Zoo:

“Working with Opus Energy has given us competitive prices, considerably better documentation and a highly efficient service. We’d happily recommend them.”

Operational review

We have remained focused on delivering an excellent standard of customer service, which is central to our proposition.

February 2017 saw the completion of the acquisition of Opus Energy, which has made good progress integrating into the Group supported by a dedicated team, who have been working on systems, people and commercial projects to ensure our processes work effectively together.

In March we completed the purchase of a new office facility in Northampton, enabling the consolidation of four Opus Energy offices into one and the centralisation of the operational teams.

Sales volumes at Opus Energy were lower than target, reflecting our focus on margin which has remained strong and customer renewal rates were towards the high end of expectation. This reflects the continued commitment to a strong level of customer service and in recognition of this Opus Energy was awarded Utility Provider to Small Businesses of the Year 2017 at the British Business Awards.

At Haven Power we have continued to focus on value-adding flexible products and services particularly to Industrial & Commercial customers whose needs extend beyond commodity supply.

This is demonstrated through our ability to help customers manage and optimise their power consumption profiles through collaboration with our carefully selected partners. Through better systems and services, customer targeting and a keener focus on cost to serve we are driving efficiencies and improved margin at Haven Power.

Following the acquisition of Opus Energy the major Enterprise Resource Platform (ERP) system upgrade was re-planned which has led to a revised timeline from Q2 2018 onwards.

We continue to actively manage credit risk by assessing the financial strength of customers and applying rigorous credit management processes, with a strong focus continuing to be placed on billing and cash collection.

Health and safety remains an area of focus for the business and we continue to target a reduction in the level of recordable incidents.

Financial results

Financial performance has significantly improved, with EBITDA of £29 million in line with our guidance (2016: £4 million negative). This was principally due to the acquisition of Opus Energy, which added 10 months of EBITDA, but also improved financial performance from Haven Power, which was ahead of plan.

Third Party Costs (TPCs) include grid charges, the cost of meeting our obligations under the Renewable Obligation (RO) and small-scale Feed-in-Tariff schemes. Grid charges include distribution, transmission and system balancing costs. TPCs have continued to increase and now account for 50% of revenue.

Total operating costs have risen with the acquisition of Opus Energy. We remain confident that over time the benefits of common platforms and knowledge sharing will lead to efficiencies.

B2B Energy Supply financial performance

	2017 £m	2016 £m
Revenue	1,999.0	1,326.4
Cost of power purchases	(883.7)	(688.9)
Grid charges	(435.8)	(310.4)
Other retail costs	(562.1)	(303.6)
Cost of sales	(1,881.6)	(1,302.9)
Gross profit	117.4	23.5
Operating costs	(88.0)	(27.8)
EBITDA	29.4	(4.3)

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Implementation of new ERP (Haven Power)	Date	Q2 2018	N/A
Operations	Sales volume (Opus Energy)	TWh	5.7	N/A
Operations	Renewal rate (Opus Energy)	%	Above Target	N/A

Looking ahead

In 2018 we will focus on Opus Energy on-boarding, systems development and the roll out of smart meters.

We continue to see opportunities for EBITDA growth in the B2B markets, which we will deliver through our customer-focused supply proposition.

Outlook

Our focus in 2018 remains on the delivery of our strategy and long-term ambitions for earnings growth, underpinned by safety, sustainability, operational excellence and expertise in our markets. We also recognise that being the most efficient operator in each of our markets is a key factor in our success.

Our objective in Pellet Production remains the commissioning of LaSalle, the production of good quality pellets at the lowest cost, cross-supply chain optimisation and identifying attractive options to increase self-supply.

Our biomass proposition is strong – reliable, flexible, low-carbon renewable electricity and system support which, combined with an effective fuel hedging strategy, will provide long-term earnings visibility. We remain focused on ways to increase supply chain efficiency and make biomass competitive beyond 2027. As part of this we remain focused on the optimisation of our assets in the US Gulf and reduction in pellet cost. To support this focus we are moving our US headquarters from Atlanta to Monroe, Louisiana, which benefits from a much closer proximity to these assets.

In Power Generation, we continue to explore ways to optimise our existing operations, whilst meeting the needs of the changing UK electricity system.

We remain supportive of the UK Government’s decarbonisation targets and will continue our work to deliver four OCGTs and a low-cost biomass unit conversion utilising existing infrastructure at Drax Power Station, alongside developing the option to repowering the remaining coal units to gas.

In B2B Energy Supply, we will continue to grow our B2B offering, with significant opportunities to grow market share. At the same time, we will invest in supporting infrastructure to ensure we can continue to grow, offer market-leading digital propositions and smart metering services.

2018 priorities

Pellet Production

Commissioning of LaSalle Bioenergy
Development of options for optimisation and efficiencies
Consistent production and quality of pellets
Continued cost reduction and improvement in EBITDA

Power Generation

Reliable biomass generation
Development of fourth biomass unit
System support services
Development of OCGT options
Development of coal-to-gas repowering option
Continued cost reduction and growth in EBITDA

B2B Energy Supply

Development of value-added services
Continued cost reduction and growth in EBITDA
Investment in systems to support growth and Smart compliance

We have made good progress on the delivery of our strategy and will continue to build on this as we progress our targets for 2025, whilst playing an important role in our markets and helping to change the way energy is generated, supplied and used.

Read the Drax Group plc annual report and accounts 2017

Listening to local communities

Sustainable business

Over the course of the year, we held many meetings and outreach events with the communities living in proximity to our gas-fired power station projects, including:

Millbrook Power, Bedfordshire: 160 people attended public exhibitions hosted by Drax in the villages neighbouring the project: Marston Moretaine, Stewartby, Ampthill and Lidlington. We also held a series of briefings with local elected representatives and interest groups. The feedback we received helped to inform the application we subsequently submitted to the Planning Inspectorate.
Progress Power, Suffolk: We held two roundtables with local landowners and politicians in Eye Community Centre in July and October to introduce Drax Group and better understand the community’s perception of the project. Further roundtables will take place in 2018 to involve local people in the design of the power station and sub-station.
Repower project, Drax Power Station: 120 people attended informal consultation events in Selby Town Hall, Drax Sports and Social Club and Junction in Goole. The sessions provided an opportunity for the Drax project team to discuss our plans with the community and identify the key issues of interest to them, ahead of the formal statutory stage of public consultation taking place in Q1 2018.
Rapid-response gas plants in Wales: We worked with Rhondda Cynon Taf Country Borough Council to discharge our planning obligations in relation to the Hirwaun Power project. We also started meeting with local stakeholders ahead of our statutory consultation on the Abergelli Power project in 2018.

Understanding the pounds behind the power

Will Gardiner, Chief Executive Officer, Drax Group

26 July 2017

Opinion

Editor’s note: On 21^st September 2017 the Board announced that Will Gardiner would replace Dorothy Thompson as Chief Executive, Drax Group as of 1^st January 2018. Read the announcement to the London Stock Exchange. This story was written by Will two months prior to that announcement and remains unedited below.

The UK electricity market used to be simpler. Coal, gas and nuclear plants generated energy and fed power into the National Grid. Retail companies then delivered that power to homes and businesses across the country thanks to regional distribution network operators. Today, it’s not as simple. The energy system of Great Britain has grown more complex – it needed to.

The push to lower carbon emissions led to the introduction of an array of different power generation technologies and fuels to the energy mix. These all generate power in different ways, at different times and in different conditions. Added to this are government schemes that have changed how this is all funded. In short, our electricity market is now more complex.

Drax Group has transformed itself to align with this new system. It is now an energy company with complementary operations across its supply chain – sourcing fuel, generating 17% of Great Britain’s renewable power and then selling much of that electricity directly to business customers in the retail market. This has fundamentally changed both how we do business and the financial mechanisms behind the business.

Where are we now?

Drax’s financial and operating strategies are very much inter-linked. Shifting how we generate energy changes how we generate revenue. The company is structured according to a set of distinct business segments, each of which is treated in a slightly different way.

The generation business

Drax has adapted its business model to the UK government’s regulatory framework, which through successive administrations has broadly promoted investment in renewable and low carbon power generation. Three of our six electricity generation units – accounting for 68% of our output in the first half of 2017 – have been upgraded from coal to produce renewable electricity from sustainable compressed wood pellets. These units are a core part of Britain’s renewable energy mix. Guaranteed income from the third unit conversion has given us a significantly higher degree of earnings visibility and reduced our exposure to commodity prices.

H1, 2017: 10.7 TWh total generation; 7.3 TWh biomass generation

Our coal generation units no longer provide 24/7 baseload electricity. This means we primarily use our coal generation as a support system. When the grid needs it we can ramp up and down coal generation responding to demand and ancillary service needs. Our renewable generation units do this too. Ultimately, however, our long-term goal is to convert the remaining coal units – either to renewables or to gas. Our Research and Innovation team is currently looking into how we might be able to do this, but early indications show that coal-to-gas conversion could be an attractive option for delivering flexible and reliable generation capacity for the UK.

Drax Power is doing well and generated £137m of EBITDA in the first half of this year, a £51m increase compared to the first half of 2016.

We are confident about the projected growth of our power generation business to £300 million EBITDA by 2025. That plan is aided by our move into rapid response gas – a technology that can meet urgent needs of a power system that includes an increasing amount of weather-dependent renewables. Two of the four rapid response gas projects we’re developing are ready to bid for 15-year capacity market contracts this coming February. They are designed to start up from cold faster than coal and combined cycle gas turbine (CCGT) units. These small-yet-powerful plants will respond to short-term power market price signals and be capable of providing other, ancillary services to further enhance security of supply.

These projects should add an attractive additional source of earnings to our generation business. They also will have attractive characteristics, as a significant element of their earnings will come from the capacity market – guaranteed government income for 15 years.

The retail business

We directly serve the retail market through Haven Power, which supplies renewable electricity primarily to industrial and commercial customers. Last week we announced that Haven Power was able to break-even six months ahead of schedule. Retail is an area we’re growing, and in February 2017 we acquired Opus Energy, the largest non-domestic UK energy company by meters installed outside the Big Six. This has had a marked effect – today we’re the largest challenger B2B energy retailer in the UK.

There is a healthy and regular annuity coming in through the existing retail business, and we believe this can generate £80 million of EBITDA by 2025, which, together with our growing biomass supply business, will make up a third of our earnings. We demonstrated good progress in the first half of the year, earning £11m of EBITDA.

The biomass business

Our two operational wood pellet manufacturing plants in Louisiana and Mississippi are progressing well. They are both still ramping up to full production and have seen marked improvements in pellet quality and production.

We are looking to grow our US business and as part of this we’ll need to build on the recent addition of LaSalle BioEnergy with further acquisitions. Expansion will grow our capacity for the self-supply of pellets from 15% to 30% of Drax Power Station’s requirements, adding an additional one million tonnes of production.

In the second half of 2017, we expect the profitability of Drax Biomass to increase. LaSalle will be commissioned in the first half of 2018 and reach capacity in 2019.

What’s next?

The energy landscape continues to change and we’ll need to change with it. Phasing out coal entirely is priority number one. For this we’ll continue to look at options. How and when we can convert more units to sustainable biomass depends on trials that we are conducting at Drax Power Station during 2017-18. The right government support would also make further conversions cost effective.

We also recognise that it’s important to look at alternative possibilities for our remaining coal units. This is why we are seeking planning permission to convert one or more of our 645 MW (megawatt) coal units to 1,300 MW of gas. Such an upgrade would be at a discount to a new-build, combined cycle gas turbine (CCGT) power station of equivalent capacity. And that’s simply because we would use much of the existing infrastructure and equipment.

Another major prospect is in the technology space and so we’re continuing to invest in research and innovation. Batteries and storage are a huge opportunity for us – both in how they could benefit our retail customers, and how they could provide solutions for large-scale centralised energy systems. In short, it’s an area with huge potential. We welcome the government’s recent initiatives designed to stimulate the development of battery technology, as well as encourage the use of electric vehicles.

Drax has gone through a period of considerable change and that will continue as we meet the UK’s low-carbon energy demands. We are improving the quality of our earnings, reducing our exposure to commodities, and positioning to take advantage of future opportunities. As we told investors in June, if we deliver on these plans, we can expect >£425 million of EBITDA in 2025.

Pellet Sales

Energy Solutions

Resources

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Enquiries

Drax Investor Relations

Media, Drax External Communications

RNS Number: 1455J

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

Capacity Market

Arrangements with Iberdrola in respect of 2018/19 capacity payments

Benefits of the acquisition

2019 profit forecast

Drax current trading and 2018 outlook

Process

Other matters

Notes

Enquiries

Media

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker)

Royal Bank of Canada (Joint Corporate Broker):

RNS Number : 1562E Drax Group PLC

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

A flexible, low-carbon and renewable portfolio

Attractive high quality earnings and returns

Financing the Acquisition

Conditions for completion

Drax trading and operational performance

Contracted power sales at 30 September 2018

Other matters

Acquisition presentation meeting and webcast arrangements

Acquisition of the Portfolio from Iberdrola

Strong asset base

Cruachan Pumped Storage Hydro

Galloway and Lanark Run-of-River Hydro

Combined Cycle Gas Generation (CCGT)

Other smaller sites

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

Increased earnings potential aligned with generation strategy and UK energy needs

High quality earnings

Diversified generation and portfolio benefits

Financing and capital structure

Process and integration plan

Notes:

IMPORTANT NOTICE

Appendix 1

Principal Terms of the Acquisition

Acquisition Agreement

Parties and consideration

Conditions to Completion

Termination for material reduction in available generation capacity

Break fee

Pre-completion covenants

Pension liabilities

Seller’s warranties, indemnities and tax covenant

Transitional Services Agreement

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

Basis of preparation

Principal assumptions

Assumptions within management’s control

Assumptions outside of management’s control

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

The Beast from the East tests energy security

Rampant wind leads renewable generation

Did the country almost run out of gas?

Aiming for 100% renewable

Growing renewable generation

From coal to low carbon

Gas in the transition

Market background

Our strategy

Summary of 2017

Political, regulatory and economic background

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Drax Group PLC