Drax Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2025

Key Takeaways

  • Positive Sentiment: Drax delivered a strong operational performance in H1, producing 5 % more power—11 % of UK renewables—and a record 5 % increase in pellet output that boosted pellet EBITDA.
  • Positive Sentiment: The company upholds a disciplined capital allocation policy with 1.1× leverage, an 11.5 % dividend uplift for 2025, and an additional £450 million buyback over three years.
  • Positive Sentiment: Heads of terms for a low carbon dispatchable CFD through March 2031 are agreed, with legislation in place, CMA approval complete, and final contract talks on track for later this year.
  • Positive Sentiment: Drax remains confident in post-2027 adjusted EBITDA of £600–700 million, underpinned by £2.1 billion of forward power sales hedges at an average £94/MWh.
  • Neutral Sentiment: The group is exploring adjacent growth avenues—including pumped storage, open-cycle gas turbines, batteries, EV solutions, data centers, and carbon removals—to leverage energy transition trends.
AI Generated. May Contain Errors.
Earnings Conference Call
Drax Group H1 2025
00:00 / 00:00

There are 4 speakers on the call.

Speaker 3

Good morning, everyone, and thank you for joining the call. I will provide a short introduction and overview, and then I'll hand it over to Andy for the numbers and operations. I'll come back to talk more about our investment program and capital allocation, and then we'll take questions. You're all familiar with our purpose, which is to enable a zero carbon, lower cost energy future. I want to start with that, as I always do, as it guides everything about our company. Critically, our people are at the heart of Drax, and I want everyone here to feel a valued member on a winning team with a worthwhile mission. We delivered a strong performance in the first half of the year. We produced more power than last year, reflecting a continued high demand for dispatchable renewable power and compensating for lower renewables elsewhere on the system.

Speaker 3

We accounted for 5% of UK power, as we have for many, many years now, and 11% of UK renewables. Importantly, in certain periods of peak demand, we have been over 50% of UK renewable generation. I'm very pleased also to say that we delivered a record level of pellet production, 5% higher than last year, which also drove increased EBITDA in our pellet business. We're very pleased with the progression of our CFD agreement with the government, and I'll come back to that in a minute. We're continuing to target EBITDA of £600 million to £700 million from FlexGen, pellet production, and from the Drax Power Station post 2027. We have strong confidence in the earnings and cash flow that we can generate from this high quality portfolio, which is critical to the UK power system both today, but well into the future.

Speaker 3

Delivery of that cash flow and associated earnings are a top priority for my group. We're excited about the opportunities to continue to develop and grow that portfolio. It's well aligned to the energy transition and to providing security of supply. We believe we can continue to deliver value through discipline in capital allocation and a commitment to attractive returns for our shareholders. I want to emphasize our continued fundamental commitment to our capital allocation policy. It starts with our balance sheet, which is strong at about 1.1 times leverage. We will continue to invest to maintain our existing assets and also invest in growth where we see attractive returns. We continue to grow our dividend and are proposing an 11.5% increase in dividends per share for 2025. Our current £300 million share buyback program is £272 million completed.

Speaker 3

Importantly, today we're announcing an additional £450 million three-year extension of the current buyback. That extension is underpinned fundamentally by the working capital inflow associated with the end of the Renewable Obligation scheme. Turning to the low carbon dispatchable CFD, earlier this year we agreed heads of terms with the UK government for a low carbon dispatchable CFD covering all four units at the Drax Power Station through March 2031. This was a strong endorsement of the contribution that the Drax Power Station and biomass make to energy security and decarbonization, as well as to the value for money proposition that we provide, saving bill payers billions of pounds over the terms of the agreement relative to the next best option. We've been working with the government over the last six months and we're making very good progress.

Speaker 3

Importantly, the legislation enabling this agreement is now in place, the CMA has reviewed the subsidy regime and that is complete and in a good place, and we are making good progress on negotiating the final contract, which we expect to conclude later this year. This is a very critical turning point for our business as we are now comfortably expecting to run this business through the 2020s and into the 2030s and beyond. You look at our portfolio of businesses, we have a high quality portfolio of assets that support energy security in the UK. Our FlexGen business is doing very well, delivering the flexible generation and system support services so critical to the current power system.

Speaker 3

As we recognize that opportunity, we continue to develop new abilities to deliver that through expanding our pumped storage assets and building the open cycle gas turbines, the latter of which we expect to be commissioning from later this year. We continue to look at opportunities to complement the portfolio with investment in adjacent technologies, including batteries and other forms of storage. In our energy solutions business, we've now successfully exited the SME space and are very excited about the Inc portfolio. We have our renewables business and our EV solutions. As I mentioned, our pellet production business did very well in the first half. We have confidence in its future, but we also recognize that we have work to do to continue to unlock its full potential at the Drax Power Station, which continues to play a key role at the heart of the UK power system.

Speaker 3

We have strong visibility over contracted power sales and cash flows through 2027, and those will be complemented or extended by the low carbon dispatchable Contract for Difference (CFD), which we believe will allow us to deliver between £100 million and £200 million of EBITDA per year. Reflecting all those factors, we're confident in the earnings and cash flow we can deliver from that portfolio and are focused on delivering that £600 million to £700 million of EBITDA post-2027. Just to be very clear, that target is stated before accounting for options for growth. The fourth column on this page is where we will continue to apply our disciplined capital allocation policy through opportunities which have the potential to deliver significant value, and I'll talk more about those later. I wanted to give you a bit of an update on sustainability, which again is critical to everything that we do.

Speaker 3

In addition to updating our biomass sourcing policy, we've launched a new climate transition plan as well as the new sustainability frameworks which we discussed at the full year. The transition plan provides more details on our decarbonization targets through 2040. I think we're making very good progress on delivering tangible results that improve our sustainability, and that's reflected in the ratings that I've included on the slide. There's always more to do, and we continue to work on improving. We're not complacent, and we welcome the opportunity to engage with all of you as well as all other forms of stakeholders across civil society to make sure we're moving in the right direction. I'm now going to hand it over to Andy, and this is his final set of results as our CFO.

Speaker 3

I do want to thank him for his contribution over the last seven years, which has been tremendous. I think you all would recognize that the difference between our business between now and where it was when he started in 2019 is quite pronounced, and he's made a huge contribution to that positive change. He's built a strong finance team, and I look forward to continuing to build on what he has achieved with Frank Lemink, our new CFO, who is also a fabulous guy who will start in September. Andy, for the last time, over to you.

Operator

Good morning everybody and thank you, Will, for your kind words. It truly has been both a privilege and a pleasure to be the CFO of Drax for almost seven years and I'm very grateful for the opportunity and thankful for the support, guidance, and encouragement that you personally and the board have given me. As I hope to demonstrate over the next few minutes, I believe Drax is very well placed with high quality assets, robust balance sheet, good visibility over our future cash flows, and not least, a great team to deliver on our strategy. One of the first pieces of advice I received at Drax from Mark, our Head of IR, was that when it comes to presenting results, it's good for CFOs to be boring, he said. Leave the excitement to the CEO. Know your numbers and stay scripted.

Operator

Now, before I make Mark too nervous, I will start with the financial summary on slide 9. Continued strong operational and financial performance and our robust balance sheet are supportive of options for growth and returns to shareholders. Adjusted EBITDA of £460 million reflects strong delivery across all segments of our business. The reduction compared to the prior period primarily reflects an expected decrease in the all-in achieved power price for biomass generation. Adjusted basic earnings per share, however, of £0.656 is in line with the prior period and it benefits from a 5% reduction in the number of shares outstanding to 351 million as a result of the ongoing share buyback. We recently published a company-collected consensus for the full year and, reflecting strong first half performance and expectations for the second half, we're comfortable with consensus subject as always to continued good operational performance.

Operator

Our strong operational delivery is generating cash flows which position us well to invest in our core business, take a disciplined approach to options for growth, and support sustainable and growing returns to our shareholders. In line with our capital allocation policy during the period, cash generated from operations of £378 million includes a working capital outflow of £102 million as in prior years. This reflects a buildup of ROC assets in the first half of the year which will reverse in the second half as those ROCs from the last compliance period are settled. During the period, we further strengthened our balance sheet and extended the average maturity of our debt. Our net debt to last 12 months. Adjusted EBITDA ratio of 1.1 times remains significantly below our long-term target of around 2 times.

Operator

At 30 June, available cash and committed facilities of £726 million provided substantial headroom over our short-term liquidity needs. Consistent with our policy to pay a dividend which is sustainable and expected to grow, the Board has resolved to pay an interim dividend of £0.116 per share. This is expected to be 40% of a full-year dividend of £0.29 per share, an increase of 11.5%. As of July 29, we had completed £272 million of the existing £300 million share buyback program and are announcing this morning an extension to the program to repurchase an additional £450 million of shares over a three-year period to follow on from the current program. Moving on to Slide 10 to look at performance by business, overall earnings of £460 million reflect strong renewable power generation and system support performance across the portfolio and further improvement in the pellet business.

Operator

In FlexGen and energy solutions, earnings of £81 million compare with £98 million in the prior period. Our hydro business delivered £64 million inclusive of the impact of the planned outage at Cruachan and reduced volume in our run-of-river assets reflecting low rainfall in the period. The 40 megawatt expansion at Cruachan is progressing and due to complete by 2027 with earnings underpinned by capacity market payments of around £16 million per annum. In the appendix on page 34, we provide five reference points to illustrate the growing need for system support services and the growing opportunity for value from these assets reflecting further delays in National Grid connection timelines. Our first open cycle gas turbine asset at Hirwaun is expected to start commissioning towards the end of this year. Dates for progress in Millbrook have now moved to 2026.

Operator

The open cycle gas turbine earnings are also underpinned by long-term capacity market contracts close to £19 million per annum. The balance of earnings comes from system support services and peak power generation addressing the increasing need for flexible dispatchable power in energy solutions. The adjusted EBITDA of £18 million included £25 million from our I&C business and a loss of £7 million in the SME business during the first half. We completed the sale of the remaining SME meter points and we expect the wind down to be substantially complete by the end of the year. Our INC business continues to perform well with a focus on value from high quality and strategically aligned customers. In pellet production, performance continues to improve.

Operator

Earnings of £74 million grew 14% from the prior period with production volumes increasing to 2.1 million tonnes, and of this, 1.4 million tonnes were sold to Drax Power Station. The margin achieved on our own use supply better reflects the current market value of long-term large-scale supply. The margin achieved on our legacy third-party contracts is lower, combined with a reduced cost of production. The achieved EBITDA margin of £35 per tonne was up almost £3 per tonne from the prior period. We believe that the current level of earnings and pellet production is well underpinned by the low carbon dispatchable CFD at Drax Power Station. In biomass generation, output increased to 7.1 terawatt hours. The reduction in earnings to £332 million primarily reflects, as expected, a lower all-in achieved power price.

Operator

This was partially offset by a reduction in amounts due for the Energy Generators Levy, or EGL, and further details are included in the appendix on page 25. In Options for Growth, development expenditure of £27 million included £16 million related to Elimina, our carbon removals business. As we noted in our last trading update, we won't participate in the first phase of the cap and floor scheme for the 600 megawatt expansion of Kruken, but we do retain the option for potential future development subject to an appropriate balance of risk and return. We will continue to be disciplined with development expenditure. Turning to slide 11 and the balance sheet, we maintain a strong focus on cash flow discipline and maintenance of a robust balance sheet.

Operator

In the second quarter, our corporate credit ratings were reaffirmed as BB+ by Fitch and S&P and as BBB low by DBRS, and there was a stable outlook in each case. Over the last 18 months, we've moved the balance of maturity significantly. During the period, we extended the maturity of our committed £450 million revolving credit facility to 2028 with an option to extend further to 2029, and no cash has been drawn on this facility since its inception. In addition, during July, we extended the maturity of our £50 million and €135 million term loan facilities to 2028. We expect to repay the outstanding Eurobond and CAD term loan balances during the second half with surplus cash flow. As already noted, the available cash and committed facilities at the end of June provided substantial headroom over our short-term liquidity needs.

Operator

Moving on to slide 12 and strong visibility with free cash flow, we continue to believe that there's growing value from dispatchable renewable generation assets which can complement intermittent renewables and inflexible nuclear and enable the energy transition. Our portfolio of high-quality assets are well placed to deliver the flexible generation and system support services which the power system needs, and we're increasingly confident in the visibility of the cash flows that they can produce. I'll step through the building blocks of these cash flows through 2031. As already noted, we're comfortable that current consensus expectations for the full year provide a good starting point. We have a strong forward power sales book, we're fully hedged on the ROC units in 2025 and 2026, and we're well hedged for 1Q 2027 with almost £2.1 billion of forward sales at an average price of £94 a megawatt hour.

Operator

Since our trading update in May, we've added 1.4 terawatt hours of hedges at £102 a megawatt hour, and further details of the current forward power sales book are included in the appendix on page 22. Beyond 1Q 2027 through the first quarter of 2031, we're targeting an average of £100 million to £200 million of adjusted EBITDA through the low carbon dispatchable CFD with upside potential from merchant generation. This represents less than 30% of our £600 million to £700 million target, which also includes FlexGen and Energy Solutions and pellet production. As noted, the legislation is now in place, the CMA review is complete, and contract negotiation is progressing. Our FlexGen earnings have a strong underpin from capacity market payments. In the appendix on page 33, there's detail of almost £600 million of index-linked capacity market agreements for this portfolio through 2042.

Operator

That total value grows to £1.2 billion if you apply the latest capacity market price to future auctions. The addition of the 900 megawatts of new open cycle gas turbines and the 40 megawatt expansion at Cruachan also provide further opportunity to capture value from flexibility and system support services in our Energy Solutions business. We've exited the SME business, and we're focused on Inc. Renewables and EV Solutions. This provides us with high credit quality customers and a longer duration of contracting in our pellet business. Performance continues to improve, and as I noted, we believe the current level of earnings is underpinned through the low carbon dispatchable CFD. In addition, we believe there are opportunities for sales in existing and new markets such as sustainable aviation fuels.

Operator

Together, post-2027, we're targeting £600 to £700 million of adjusted EBITDA from FlexGen and Energy Solutions, pellet production, and biomass generation before any development expenditure. With the end of the Renewable Obligation scheme in 2027, we expect around £500 million from the sale of ROC assets generated in previous periods. We see this working capital inflow as supporting the buyback extension of £450 million, which we've announced today. If you take an estimated maintenance investment of £100 to £150 million across our portfolio, together with reasonable assumptions on interest and tax, it will point you towards a very attractive level of free cash flow before dividends. Through 2031, we're focused on delivering these cash flows, and we'll be disciplined in how we use them to maintain a strong balance sheet, support options for growth, pay a sustainable and growing dividend, and deliver additional returns to shareholders.

Operator

With that, I hand back to Will.

Speaker 3

Thank you for that, Andy, and I guess it's now my job to get you all excited. Let me start with why I'm excited because I am absolutely excited about the opportunity that we have at Drax, and I was going to highlight four different things. First is really what we've talked about so far, which is the operational excellence that we have within the business to deliver the cash flows that we have so far and that we expect to continue to do well into the future. It's operational excellence. It's also built on a strong foundation of balance sheet compliance and sustainability. The second thing is how well positioned the business is strategically to actually respond to the opportunities being created by the energy transition. I'll talk more about that in a second.

Speaker 3

The third thing is really the discipline with which we expect to go about doing that. I'll talk a little bit about our capital allocation policy to demonstrate that. As you know, we have a four stage policy. It's been in place since 2017, and we stick to it rigorously. We maintain a strong balance sheet, currently defined as our current credit rating and two times net debt/EBITDA. We invest in the core business both to make sure that we maintain our high quality asset base as well as invest in opportunities around our core to extend and expand in areas where we have competitive advantage. We pay a sustainable and growing dividend, which Andy has highlighted, which we've been doing since 2017. Lastly, to the extent there is residual capital beyond our investment requirements, we would look to return those to shareholders.

Speaker 3

I would highlight that all of these objectives are complementary, that is, we're doing all of them, frankly, at the same time. Turn to the next page. I wanted to just remind you of the framework of how we look at the investment opportunities in front of us. First of all, the energy transition is creating a wealth of opportunities over different timescales for investments that have the opportunity or the potential to deliver attractive returns aligned with our capabilities and strategies. This is no accident because while I've been at Drax, we've been positioning the company to frankly be, you know, to have opportunities to invest in the growing need for volatility, for flexibility, and to complement intermittent renewables and inflexible nuclear.

Speaker 3

With the retirement of dispatchable fossil fuel plants, the deployment of more renewables, as well as the expected future increase in demand for power, we're seeing this play out. Let me give you a couple of examples. Over the last six years, we've seen a 50% increase in the terawatt hours of energy or power generated by wind. We've seen a 500% increase in periods of negative pricing, and we've seen a doubling of system costs. We can see that in action because Cruachan is now operating about twice as often or twice as much as it did at the beginning of that period. We're already taking advantage of these opportunities by building the peaking plants, the open cycles, which will begin to commission later this year, by investing in the 40 megawatt expansion of Cruachan. How can we capitalize further on this trend?

Speaker 3

The first thing I would say is, again, our current portfolio is increasingly valuable and will be as this volatility in the system continues to change. We like batteries as a potential attractive addition, as we've demonstrated by looking to buy the Hite portfolio. As we demonstrated then, we will be disciplined in how we approach those investments in pellets. We're not looking, at least currently, to expand our capacity there until we have clear visibility on additional demand. We are working hard and looking at ways to make sure that new markets, which we think will happen, like sustainable aviation fuels, we're doing our part to see those come to fruition. As you know, we have the MOU with Pathway Energy, which has the potential to lead to 1 million tons per annum of sales in the U.S. by the end of this decade.

Speaker 3

At the Drax Power Station, we see opportunities to create value from small incremental opportunities. For example, we've established a small JV to sell the ash that is built up at the power station. We have tens of millions of tons of that ash. That JV could deliver £5 million additional EBITDA per year over the next 20 years. That investment does not require any capital from us and it sells into a market very much structurally aligned with the energy transition and is a great example of how we can create value from our existing assets longer term. We're very focused on creating a definitive future for Drax Power Station beyond the extended CFD. We're working on data centers, which we'll come back to, but clearly with 4 gigawatts of grid connection, we think we have a lot of value and we're looking to monetize that.

Speaker 3

We're looking at carbon removals. Elimina has recently signed a deal with Hofor, a Danish utility, where effectively Elimina will participate in the development of a BECCS project in Denmark. We'll lend our expertise to that project. We'll also lead on the marketing of the associated CDRs and we'll have the option to invest in that project to the extent it does get to FID, and to be clear, there's no requirement of capital from us, but it's an opportunity. Let's take a closer look at FlexGen. The first piece of it, long duration storage, right. As I mentioned, Cruachan is running up twice as much as it did six years ago, which reflects greater demand associated with more intermittent renewables and more balancing actions from a system operator. As you know, we are expanding that by about 40 megawatts.

Speaker 3

It's an £80 million program underpinned by more than £220 million of capacity market revenue, adding visibility to that business out through 2040 and beyond with returns expected in excess of 20%. We continue to look at other ways to invest to maximize value from that side. As a reminder, we continue to have the option to actually expand it much more significantly by 600 megawatts. We'll only do that to the extent we're comfortable with the risk return balance on that investment. The open cycle is expected to come on later this year or to begin coming on later this year and will provide power at times of peak demand. They're again underpinned by capacity market investments. Finally, in that space we have demand side flexibility from our I&C business customers, which gives us another ability to create value for ourselves, for our customers, and to support the system.

Speaker 3

Finally, in terms of the battery space, we're looking carefully at that. There's a very large pipeline, as you all know, of batteries that are waiting to be built in the UK. We're looking at where there might be opportunities there for us to invest, but again on the right terms and things like access to the grid, clear grid connections, there are a bunch of risks that need to be managed there properly before we can get comfortable with those investments. Let me give you a short update on the data center possibility. Clearly AI is changing the world in many ways, right? In order for that to happen, there's a huge need for data center capacity, which has an attendant or complementary need for huge amounts of additional power. The Drax Power Station, to the extent we could participate in that, is a great possible opportunity.

Speaker 3

The way we think about it is before 2030, this is likely to be something like a 100 megawatt development that could ultimately scale to greater than a gigawatt through the 2030s through a long-term behind-the-meter power offtake agreement with the power station. It also could be complemented by BECS. It is very much aligned with the 2027 Contract for Difference (CFD) agreement. We need to make sure that that's consistent, and we think we can do that. Even beyond the data center, or, sorry, beyond the biomass units, the access to the grid we have there, we have 1.2 gigawatts of grid access from the coal units. We are looking at ways that could be monetized.

Speaker 3

One thing that's happened recently is we've partnered with the North Yorkshire County Council and other organizations in the region as part of an AI gross run application, which, if successful, could help accelerate planning for all of those developments. There are other contenders for that, like TSI, for example, but nothing has happened yet, and we believe we have a compelling case. We expect to hear more on that in the second half of the year. In honor of Andy Skelton's last meeting, we thought we would do a little bit of a recap of what's happened over the last few years. I think we've done a pretty good job. The excellence of our operating folks and how well they delivered has meant we've generated significant earnings and cash flow.

Speaker 3

As the market, as demand grows for that, we think that will continue to be, in fact, become more important over the coming years. The second thing we've done is we've allocated that capital, I think, effectively through our capital allocation policy. What have we done? We've delivered about £5 billion of EBITDA since 2017, with an average cash conversion of about 98%. We've invested about £3 billion in the business. We've grown our dividend every year since 2017 at a rate that's now greater than 11% per year. With our focus on shareholder value, we've returned significant capital to shareholders by buying back shares to the tune of about £472 million. That's about 83 million shares. At £5.68 per share, as I've already described, we think there's more opportunity for us to do the same, given the energy transition and where we positioned our business.

Speaker 3

I think it's important to note that we think the UK is an attractive market for investment in the energy transition, especially relative to some of our global peers. Being disciplined and focused on investing where we can add value and earn returns is central to our approach, as our capital allocation policy requires. We'll look at that all in the context of how that compares to the value we see in our own shares, which is why we're announcing today the additional £450 million buyback program, which is underpinned by the working capital inflow associated with the end of the Renewable Obligation scheme. Just to be clear, that doesn't mean we're going to wait until 2027 to begin buying back the shares. That program will begin as soon as the current one finishes.

Speaker 3

Finally, in terms of the summary and the outlook, we're delivering attractive returns for shareholders as a result of strong operational and financial discipline and performance, substantial dividend growth, disciplined capital allocation, and a major multi-year share buyback program. Important to us also is that we're delivering for all of our stakeholders, delivering energy security, decarbonization, and operating in a sustainable and compliant way. The heads of terms for a Contract for Difference at the Drax Power Station is very important. Important inflection points. Taking away all mention of a 2027 cliff around our business, we continue to have a post-2027 adjusted EBITDA target of £600 million to £700 million. We have increasing confidence in our ability to deliver that. We expect to generate strong cash flow, we expect to invest that in attractive growth opportunities, and we will do that in the context of our capital allocation policy.

Speaker 3

Thank you. With that, we'll take any questions that you might have. Thank you.

Speaker 2

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. The first question is from Pavan Mahbubani, JPMorgan Chase & Co. Please go ahead.

Speaker 2

Hi team, good morning. Thank you for the presentation and for taking my questions. Before I ask, I'd also like to congratulate Andy on his work as CFO for the last seven years. Thank you, Andy, for being patient with our questions on the exciting topics including receivables, factoring, working capital, lines, and pellet margins. We really appreciate it. I have two questions for you, team. Even with today's buyback, you still have substantial headroom to your 2x net debt/EBITDA target with a lot of growth options. Can you give us a bit of color over which options you maybe see materializing over the nearer term if we think on a 12 to 18 month view? My second but related question is how you're thinking about Drax Power Station with two parts.

Speaker 2

Firstly, how is the development of UK BECCS progressing and what, if any, conversations are you having with the government there? Maybe some color on where you see the post-2031 future of Drax Power Station, whether you would expect an extension of the bridge or otherwise, how you see the future of the power station post March 2031. Thank you.

Speaker 3

Thanks, Pavan, I appreciate that. I also appreciate your appreciation for Andy, which we all share. I think I can take those as maybe in a combination and maybe a little bit of a preview of where we think we'll get to when we have our capital markets day, which we expect to have in the autumn. I think the way we're thinking about it is that the first most important thing we are doing as a company is delivering the cash flow which we described between now and 2031.

Speaker 3

Right.

Speaker 3

Which I'm probably not supposed to say this, but if you do the math, probably gives you about £3 billion available for dividends, capital allocation, and investment. Right. Making sure we do that, I want to emphasize it takes a lot of hard work and a lot of operational excellence from the guys, and we're very confident we can do it. I don't want to overlook the fact that that's really important. That's the first thing we're going to do. I also should say that there's work to be done to adjust the way we run the business in the context of the bridge, because again, we're going to be running significantly fewer hours than we have currently, and we have plans for doing that, but we need to make sure we're ready for that.

Speaker 3

If you then look at the three areas really that I think of that are interesting or important for us to focus on strategically. The first one is where is the most proximate or immediate opportunity to allocate capital? Again, the first one is really in the FlexGen space in the UK. There's lots of opportunities in the battery space, finding ways to expand what we do, and other types of storage is also interesting. Growing and investing in the DES, the energy solutions business, again, something we're looking at, EV charging business. I think there's interesting opportunities to do that. That's probably the first place that I would think to answer the first part of your question. The next 12 to 18 months is probably where you might see us doing some things.

Speaker 3

I also want to emphasize that it's one of those things that it's interesting, it's attractive, but a lot of other people see it that way as well. We got to make sure that we do things that we can deliver distinct additional value, and we are excited about doing that. The second area of really interesting opportunities is Drax Power Station, as you say, and really the question is how can we build, and we will build, a future for the Drax Power Station that goes well into the 2030s and beyond. If you look at various scenarios that the system operator develops, the Drax Power Station is still in those scenarios. It has some units with BECCS, some units without BECCS.

Speaker 3

We absolutely will work to keep those options attractive and exciting and make sure that we work, I would say, in conjunction with the UK government, but also, I think importantly, in conjunction with private sector counterparties who are looking to access high quality CDRs. If you think about the hope for deal that we're looking at or the work we're doing with them, the Danish market has attracted quite an attractive model where the developers put their projects together, they get private sector participants to effectively buy the carbon removals, and then the government's role is to be the last piece of the puzzle. People bid for the subsidies from them, and the one who's got the most attractive project, either one that requires the least support, wins.

Speaker 3

I think that's an interesting model to think about in terms of how you combine private and public capital in delivering both renewable power and carbon removals. Again, working on the long term future for the power station, whether that's through a data center, other forms of generation using the 1.2 gigawatts of tech that's available, or extension of some sort of bridge-like mechanism. All of those things are important activities that we're undergoing. I would say it's less likely that we would be allocating significant capital in that space over the next 12 to 18 months. We will do a lot of development work, a lot of intellectual work there. The third area is really carbon removals and the future of biomass, the future of pellets.

Speaker 3

I think of that as one world where we have a very significant capability in accessing sustainable fiber, turning that into, in the current state, pellets and turning that into power. We have excellent experience in that space, probably more than anyone, but our expectation is that the uses for those pellets and that fiber will be changing over time. Unabated power generation may continue, but carbon removal is probably more interesting. Sustainable aviation fuel is another exciting opportunity in the future. We are doing lots of what I would call business development work, looking at other ways of using that fiber, looking at carbon removals through Elimina, looking at biochar, for example, and looking at effects. Again, probably more in this space, business development, not large scale capital deployment. I think the hope, for example, is a good way to think of the way we are approaching that space.

Speaker 3

Right. Lots of opportunities and lots of interesting things for us to do. As I said, I think we're very well aligned with the way the energy transition is going, and hopefully that gives you a sense of our priorities.

Speaker 3

That's great. Thank you very much.

Speaker 2

The next question from Dominic Charles Nash, Barclays Bank PLC, please go ahead.

Speaker 2

Good morning, everyone. I'd like to reiterate, wishing the best for Andy on his next adventure. Can I ask three questions, please? The first one is on the £600 to £700 million EBITDA split post 2027, which is no change from previous numbers, but previously you gave us some granularity. I think £150 million was hydro, £50 million retail, £50 million OCGTs, £100 to £200 million for the DPS. Then you've got the £250 million, which I think is a swing factor for pellets. The question I've got here is, are you still confident that that's broadly going to be the mix, or do you think that pellets are probably going to be under pressure? That leads on to the second question, which is the pellets.

Speaker 2

Could you remind us again that you're producing—I think you're going to be producing 5 million tonnes of pellets, of which I believe 2 million tonnes goes to Drax Power Station. What does it look like for pellet demand coming from Asia and European and other markets? As we go to 2027, what do you think the pellet production profile of Drax will do when we step down from your 15 terawatt hours to 6 terawatt hours in Drax? The third one, you piqued my interest a little bit on what to do with the coal units or potentially other biomass units. You've crossed the Rubicon a little bit by—I think historically you always wanted to be a zero fossil fuel company. The OCGTs are clearly here to stay.

Speaker 2

Can you convert your coal units to gas, or could they be run as inertia products, or what sort of options could we actually see with those two units? Thank you.

Speaker 3

Maybe I'll take those back to front. In terms of how we will best make use of the grid connections, which used to be effectively in putting coal onto the system, I'm going to hold fire on answering that question, Dominic, because we're doing a lot of work on that area and we probably can give you a better answer later in the year when we have a capital markets day. I would say, yes, I think it's more likely than not that we keep the open cycle gas turbines, but if you actually, I know you've read our climate transition plan in some detail and in there we have commitments that, if we do keep them, we need to make sure that it's aligned with that program.

Speaker 3

That's work that we will be doing to make sure that we maintain our commitments to sustainability, which are as strong as they ever have been. Thinking about the pellet business, the first thing I would say is that we did about 4 million tons last year. We were expecting to do a bit more than that this year. One of the things we're doing now is that in the context of having a bridge, which frankly is quite a bit less generation than we do now, and in the context of which basically means that just from ourselves, the demand goes from about 8 million tons to about 3 million tons. There are 5 million tons of pellets that will be coming into the market on a global basis. There are other generators around Europe that also will be coming off.

Speaker 3

Our own view is that the 2028 market will probably be long pellets and we need to make sure we're ready for that. We're looking carefully at our own portfolio. I think getting to 5 million tons is now less likely unless we see additional grant coming on stream in that time period. We're looking at what we're investing in now. We're looking at where we'll get those pellets. It creates both a risk and an opportunity for us. A million tons of third party pellets, we plan to buy again. We have good options for that and we feel pretty good about that. In terms of producing more pellets, relatively unlikely. In terms of actually being able to reprice some of our contracts, we're trying to do that now in a world where there's probably more clarity that the market is long pellets than there was before.

Speaker 3

Very comfortable with the $600 million to $700 million. Directionally, feel comfortable about how the hydro is doing. I think there's probably good opportunities there. I think on the pellet side we're going to have to work hard to hit that number. As a portfolio, I think we're in good shape.

Speaker 3

Thank you. On the split for the EBITDA.

Speaker 3

I think we'll stick to the £600 million, £700 million and I think, directionally, we're comfortable with the broad picture. As I described, risk on the one side on pellets probably and maybe more downside risk on the pellets, upside risk on the others, but overall that's basically where we are. Right.

Speaker 3

Thank you very much.

Speaker 2

The next question is from Alexander Wheeler, RBC Capital Markets. Please go ahead.

Speaker 2

Morning. Thanks for the presentation. Two from me, please. Both I think for Andy. Fitting for the Swan Song, first one, how should we think about the timing of the £450 million buyback? Is it fair to assume a linear profile here as you've been pretty quick on the current buyback, and does the £500 million ROC cash inflow in 2027 have a part to play here? My next question is just on the EBITDA and how we should think about that for H2 given the strong H1 and a run rate that probably puts you a bit ahead of the current consensus, which you've confirmed you're comfortable with. Any thoughts there? Appreciated. Thank you.

Operator

On the buyback, I think you can assume a relatively even spread across the three years. A couple of reasons for that. One, as you know, we have our AGM approvals. We need to renew each year that give us up to 10% of our share count. Two, also the liquidity on the stock as the number of shares continues to reduce. We do intend to run that from the end of the existing program, which should come to a completion during the second half of this year. The way I think about the ROC unwind is that surplus working capital that's been on the balance sheet for a number of years and will come out in 2027. As Will said, we're not waiting to start the buyback until that comes. We will start as soon as the existing one finishes on the second half numbers.

Operator

If you look in the appendix at the hedge book and the details of sort of average price achieved for this year, you'll see that when I explained the actual results were lower as we expected because the captured price is lower than it had been in the prior period, the second half of the year our locked-in hedge book is at a lower rate compared to the first half. That simply means that you shouldn't take the first half volume and rates and double it. That leaves us comfortable with where consensus is.

Operator

Okay, perfect, thank you.

Speaker 2

The next question from Hamid Barman at Jefferies, please go ahead.

Speaker 2

Yes, thank you. Firstly, Andy, thank you and congratulations from my side as well. I just have two quick questions. Firstly, on balance sheet capacity, a lot of you talked a lot about the work that you have done to build the visibility to 2027 and beyond, and there's also the points about the value of the site with 4 gigawatts of grid connections. I'm just wondering, have you had any conversations with rating agencies about whether the 2x net debt/EBITDA is still the appropriate target or could you support a higher leverage factor as a company given how visibility and some of the outlook has emerged? That's my first question. My second question is on the data center opportunity. I wanted to come back to the 100 megawatt potential behind-the-meter opportunity which we have discussed before.

Speaker 2

I'm just wondering if there has been any progress on that that you could share with us, and if not, maybe talk a little bit about what are the constraints that need to be solved to commercialize that opportunity. Thank you.

Speaker 3

Yeah, why don't I take both of those. I think on the balance sheet question it's a very fair question because as you described, the business is changing. I think what we need, what we're going to do is as part of this again sort of look at our strategy in the context of the bridge again, we'll come back to that probably again in the capital markets day and confirm where we are. I guess I would say that I think that target has served us well and sort of in absence of a strong view that either there's a strategic reason to have a different target, that is, that having either a different credit rating would be beneficial and or a strong view that the nature of the cash flows is fundamentally different.

Speaker 3

One of those two things we have to change in order for us to make a change on that. We'll come back to you on that, I would say in the fall. In terms of the data center, we continue to do a lot of work on that. The thing for me, which is the different things that have to line up, are what types of data centers are people building in the UK. My sense of it is that most of the larger data centers training the large language models probably are not going to be in the UK. Most of those will be probably U.S., China, maybe some in the Middle East. We'll need edge data centers that actually are the ones that respond to queries and those will be more national, generally useful for those to be near customers or that's the historic trend.

Speaker 3

We need to get people comfortable with that. Clearly biomass power, getting people comfortable with that. The cost base, either, yes, we think behind the meter power for biomass is attractive relative to wholesale prices, but you have other options for behind the meter power. We need to make sure we get people comfortable with that. There's a bunch of things that have to go into it. The final point is that in order to actually make it happen, it's a very significant capital contract, capital commitment. Making sure that you've got the right partners ready to commit capital is something that we're also looking at doing.

Speaker 3

Right.

Speaker 3

I would say a bunch of things need to line up. There's a lot of work still happening on that. As we learn more, we'll make sure that we share that with you.

Speaker 3

Okay, thank you.

Speaker 2

The next question from Jenny Ping, please go ahead. Hi, thanks very much. A couple of questions from me please. Just following on Ahmed's question on data centers. I also wanted to just check in terms of some of the progress and challenges that you just outlined. I presume this is something that you're going to be working on over the next couple of years. Obviously the bridge gives you the time to do that, but I just wondered are you really going to have anything concrete to share with us by 2024 or is this really kind of like a three year view just to give us some sense of whether we should really be looking to sort of looking at the financials of some of these opportunities. Now secondly, I wanted to ask about the bridge itself.

Speaker 2

Obviously FX was the only piece in the head of terms that the government had left open for market to market. If I look at what the FX was at the time of the heads of terms versus where it is now, it shades off around £4, £5 per megawatt hour to the headline price. I wondered what you can comment around that and whether there's any other elements which could potentially offset that we should be taking into account. Thirdly, just on Longview, some of the pellet growth. Just a technical point but obviously that's one that has been under construction but now paused because of some of the permitting delays. If that project doesn't get the permit to go ahead, is any write-off that's coming from that investment. Thank you very much.

Speaker 3

On the data centers, I think your question, Jenny, is focused on whether we see any sort of near-term milestones or things that we would explicitly want to lay out as points where we would come back to you explicitly. I think the answer to that is no. Those are sort of complex negotiation discussions, multiple people involved. I think the best thing is that I don't want to put specific dates on that where we actually expect to come back to you. I think the best way to think about that is as and when things happen that we think are important to share with the market or are relevant, we'll bring those back but not tied to any specific dates.

Speaker 3

In terms of FX on the bridge, the way that the heads of terms are structured is that those changes in FX rates before the actual signing of the final contract will effectively go into determining what the final strike price will be. We're still in that phase. The third one on Longview, effectively where we are on that is that the permitting process continues. As you would expect, we're looking carefully at that project to determine whether we need those pellets. When we have a decision on that, we will let you know whether that's going to continue or how we plan to handle that. That one's yet to come.

Speaker 2

Thank you. Can you say at this stage how much you've invested on Longview?

Speaker 3

Yeah, I think there's about £150 million on the balance sheet for that. Yeah.

Speaker 2

Okay, thank you very much. As a reminder, if you wish to register for questions, please press Star and one on your phone. The next question is from Charles Swabey, HSBC. Please go ahead.

Speaker 2

Hi, good morning everyone. Yes, adding congratulations to Andy for all your achievements and wishing you all the best. Just a quick follow up on the data centers. In terms of the commercial terms you're discussing at the moment, can you provide an update on the ballpark figure, the long term PPA prices you're discussing with developers, and the duration of the contracts under discussion? Thanks.

Speaker 3

I don't want to be too direct, but unfortunately the direct answer to your question is no, we can't really provide that. I think maybe a bit more color. I guess the simple answer is that in order for us to enable or develop a data center, there's going to be quite a significant amount of investment required both in the data center itself and also in our own infrastructure to enable us to connect it.

Speaker 3

Right.

Speaker 3

In order for us to do that, we need to have a high level of confidence in the earnings that we would generate from that. I think the sort of foundational part of your question is, you know, will there be a long term PPA with a reasonable price in it? I think the answer is there would. We believe that it would need to be in order for this to work. We're working on that as the best way to think about it. Charles.

Speaker 3

Great, thank you.

Speaker 2

The next question from Harrison Williams, Morgan Stanley, please go ahead.

Speaker 2

Hi there.

Speaker 3

Morning.

Speaker 3

Thanks for taking my questions first. I just wanted to ask on Corgan, I know you walked away from the first round and we're seeing some of the peers similar on the terms. Can I ask about what the conversations have been with Oxygen since then? Are they receptive to your concerns with how the initial framework designed? I guess the follow up, if that was to be developed, when could we expect to hear on that one? The second question I had was we saw recently that the UK ETF scheme was going to allow carbon removals. How significant could this be in terms of making BECCS a more feasible option?

Speaker 3

Maybe just to help us understand if we are seeing this linkage between the UK and European ETF schemes, is it feasible for the UK only to allow carbon removals or do we need to see similar movement in Europe as well? Thanks.

Speaker 3

On the sort of expansion of Kruken, I guess the way I would respond to that, I think there's a series of different things that are part of our decision making there. One is the duration of the project, another one is the cap and floor, another one is the timing of how it worked for us. For example, the second round might be more effective for us, but the third one for me is also the fundamental fact that that project would change the duration of the power station or reduce the duration of the storage we could provide quite significantly. All of those come into it and we'll continue to look and see whether we can get comfortable with that. I'm not. I think that the off churn piece is one part of it and I'm sure they're looking at how to make that more attractive.

Speaker 3

I don't think that's the only issue for us, right. In terms of the ETS, I think the answer to that is including carbon removals in European and or UK ETS and or a combined system is fundamental.

Speaker 3

Right.

Speaker 3

It actually will make a significant change to the ability of those projects to go forward. It provides a much bigger pool of buyers for carbon removals and becomes a compliance issue as opposed to a voluntary one. I think that's a very, very significant development. How it actually plays out, where the carbon price is, what the format of it is, what the structure of it is, is obviously very important. We're very involved in both of those processes and I think they're both quite fundamental. Also, not immediate, right? They need to be determined, then you can work through, and anything that comes into play there is probably not until near the end of the decade.

Speaker 2

At the moment, there's some questions.

Speaker 3

Okay, I'll take one more and then I think we'll wrap up with this last question. I'll read it out from the webcast. First, it says I want to say a big thank you to Andy and wish him all the very best. Secondly, with zonal pricing rightly abandoned as a REMA option, reformed national pricing is now the preferred option. Could you share some high-level thoughts as to possible risk to new office charges for your assets coming from market? I think it's nice that we have more clarity, nice that we have more certainty around that. You're right, they are going to be reviewing generous charges as part of this and I think our own position is that we have quite a good geographic spread of assets. Some in Scotland, obviously, some in Yorkshire, some across the Midlands in terms of the open cycles.

Speaker 3

I think we believe we have quite a good balance in terms of the risks, any movements in grid access, costs.

Speaker 3

Right.

Speaker 3

We won't know definitively until it all happens, but currently our expectation is it's a reasonably balanced position for us. I hope that helps. Maybe I'll just wrap up by one more time thanking Andy for all his good work. Really, it's going to be a different set of results next time. There will be some nostalgia. I'm sure it'll be a good one as well. Thank you all for your questions and I hope everybody has a good day.

Speaker 2

Ladies and gentlemen, the conference call is now over. Thank you for participating. Goodbye.

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