Drax Group (LON:DRX) have today announced a £150 Million share buyback programme and Q1 2023 trading update.
Highlights
· Strong system support and generation performance during the first three months of 2023
· Closure of remaining coal units, decommissioning commenced April 2023
· 2023 Adjusted EBITDA(1) expectations in line with analysts’ consensus estimates(2)
· Final dividend of 12.6 pence to be paid subject to shareholder approval at today’s AGM
· Total dividend for 2022 – 21.0 pence per share (2021: 18.8 pence per share)
· £150 million share buyback programme to commence in Q2 2023
Drax Group CEO, Will Gardiner said: “In the first quarter of 2023, we have delivered a strong system support and generation performance, providing renewable, secure, dispatchable power for millions of homes and businesses across the UK.
“We remain excited about the opportunity to do BECCS in the UK. Whilst the project is not currently in the Track 1 process, we have commenced formal discussions with the Government to facilitate the transition to BECCS at Drax Power Station by 2030.
“At the end of March, we formally closed the remaining two coal units at Drax Power Station. This is a significant moment for the business and I’d like to thank the many hundreds of people involved in making this happen and transforming Drax into a global leader in biomass power generation.
“In the US, we continue to make good progress screening options for over 10 BECCS projects which will deliver long-term, large-scale carbon removal.”
Generation
Drax has continued to optimise generation across all four biomass units (ROC and CfD), based on system need and sustainable biomass supply. The Group’s biomass, pumped storage and hydro assets have continued to support UK security of supply, providing a wide range of system support services and renewable electricity generation, which included forward power sales from pumped storage in the first three months of 2023.
Generation contracted power sales
As at 21 April 2023, Drax had 26.2TWh of power hedged between 2023 and 2025 on its ROC, pumped storage and hydro generation assets at an average price of £152.2/MWh(3). This excludes any sales under the CfD mechanism.
| Contracted power sales as at 21 April 2023 | 2023 | 2024 | 2025 |
| Net ROC, hydro and gas (TWh)(3/4/5) | 12.5 | 10.5 | 3.2 |
| – Average achieved £ per MWh | 158.6 | 149.1 | 137.3 |
| Lower expected level of ROC generation in 2023 due to major planned outages on two units | |||
Coal
Following the completion of a “winter contingency” service agreement (October 2022 – March 2023) with National Grid, Drax has commenced the decommissioning of its two coal units. There was no coal generation during the agreement period.
Bioenergy Carbon Capture and Storage (BECCS) – UK
In March 2023, the UK Government provided an update on its plans for the deployment of carbon capture and storage infrastructure and projects. This confirmed that Power BECCS and certain other shortlisted projects were not included in the initial Track 1 process, which relates to projects targeting commissioning in the mid-2020s. The Government confirmed that during 2023 it will set out a process for the expansion of Track 1 and has also launched a Track 2 process. Power BECCS is eligible for both tracks.
Alongside this update the Government confirmed its commitment to support the deployment of large-scale Power BECCS projects by 2030. Drax has now commenced formal bilateral discussions with the Government to move the project at Drax Power Station forward and ensure that the Government is able to fulfil its restated commitment of achieving 5Mt pa of engineered Greenhouse Gas Removals by 2030. Drax believes that BECCS at Drax Power Station is the only project in the UK that can enable the Government to achieve this goal(6). This process will also include discussion of a bridging mechanism for biomass power generation between the end of the current renewable schemes in 2027 and the commissioning of BECCS.
In addition, the Government has now published its response to the Power BECCS business model consultation, which took place in 2022, confirming its preference for the use of a CfD mechanism to remunerate renewable power and carbon removals in BECCS. The Government has also committed to publish its biomass strategy by the end of June 2023 which will set out how the technology could be deployed.
Drax’s plan of record for investment in UK BECCS was based on a first BECCS unit commissioning in 2027 and a second by 2030. Since Power BECCS is not currently in the Track 1 process and Government’s aim is to support BECCS by 2030, Drax has paused further investment in its UK BECCS project in 2023 and will revise its UK BECCS investment schedule subject to further clarity on support for BECCS at Drax Power Station.
Pellet Production
The Group’s sustainable biomass pellet business has continued to support efforts to optimise biomass power generation and security of supply in the UK. In the US, the focus has remained on ensuring the Demopolis plant reaches full capacity and reliable, safe operation.
As outlined in the 2022 Full Year Results (February 2023), inflationary pressures, primarily in transportation and utilities have contributed to an increase in pellet production costs. Taken together with costs incurred in providing supply-side flexibility, Drax continues to expect production costs to be higher in 2023.
While continuing to optimise its supply chain to maximise value for the Group, Drax remains focused on opportunities to reduce the cost of biomass.
Full Year Expectations
Reflecting these factors, Drax continues to expect full year Adjusted EBITDA(1) for 2023 to be in line with analysts’ consensus estimates(2), subject to continued good operational performance.
Reflecting the reprofiling of investment in UK BECCS, Drax now expects capital investment in 2023 to be in the range of £520-580 million (was £570-630 million).
Capital Returns and Share Buyback Programme
In line with its capital allocation policy and reflecting (a) a strong net debt to Adjusted EBITDA position, (b) the revised timing of UK BECCS investment and (c) the mitigation of equity dilution associated with the vesting of share schemes(7), the Group plans to return up to £150 million to shareholders via a share buyback programme. The programme is expected to commence in Q2 2023 and be completed by the end of 2023.
The programme is not expected to have any impact on the Group’s medium and long-term growth plans which continues to include UK BECCS, US BECCS, pellet plant and pumped storage hydro expansion.
The Group remains committed to its current capital allocation policy, which remains unchanged and, beyond the current buyback programme, will continue to assess its capital requirements in line with the current policy.
Other
Drax will host a Capital Markets Day on 23 May 2023, updating on its plans for growth with a focus on BECCS.
Drax will report its half year results on 27 July 2023.
Notes:
(1) Earnings before interest, tax, depreciation, amortisation, excluding the impact of exceptional items and certain remeasurements.
(2) As of 21 April 2023, analyst consensus for 2023 Adjusted EBITDA was £1,156 million, with a range of £1,100 – 1,200 million. The details of this company collected consensus are displayed on the Group’s website.
(3) Includes structured power sales in 2023 and 2024 (forward gas sales as a proxy for forward power), transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices. 2024: 1.1TWh,
2025: 0.8TWh, presented net of cost of closing out gas positions at maturity and replacing with forward power sales.
(4) Typical estimated annual biomass generation from ROC and CfD units c.13-14TWh based on estimated biomass availability,
incrementally lower in 2023 due to major planned outages on two ROC units, resulting in lower ROC cap versus 2022.
(5) 2023 includes limited forward selling of pumped storage generation resulting in higher captured prices but lower system support availability.
(6) Biomass is the only large-scale source of dispatchable, renewable electricity and Drax power station in Yorkshire is the largest provider of secure supply in the UK’s electricity system. Its renewable biomass generation provides 2.6GW of electricity, representing c.4% of the UK’s dispatchable capacity and supplies millions of homes and businesses with dispatchable, reliable power.
BECCS at Drax Power Station is expected to be one of the world’s biggest engineered carbon removal projects, permanently removing 8Mt of CO2 from the atmosphere every year by 2030.
The project would see the addition of post combustion carbon capture to two of the existing biomass units, using sustainable biomass and technology from Drax’s technology partner, Mitsubishi Heavy Industries. Captured CO2 would be transported and permanently stored by the Group’s partners in the East Coast Cluster.
Vivid Economics concluded that it could deliver £370 million of economic benefit for the UK during construction, creating and supporting more than 10,000 jobs during peak construction.
Recent Baringa research also demonstrates that Drax is the UK’s largest source of energy security and will continue to play a vital role in the UK security of supply in to the late 2020s.
Drax aims to source 80% of materials and services for the project from British businesses and is also working with British Steel to explore opportunities for its UK production facilities to supply a proportion of the steel needed for BECCS.
(7) Of the total share options outstanding as at 31 March 2023 (18.6 million), an aggregate number of approximately 9.4 million are expected to vest in 2023 under the Company’s various share plans. This includes approximately 6.8 million under the all-UK employee Sharesave Plan which matures in June 2023 when the three-year savings contract period concludes for approximately 900 participating employees. More information on outstanding awards and associated share-based payments can be found in note 6.2 to the Consolidated Financial Statements in the Annual Report and Accounts for the year ended 31 December 2022.
