23 February 2023

DRAX GROUP PLC (Symbol: DRX)

 FULL YEAR RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2022

Strong performance, supporting security of supply, developing a pipeline of projects for carbon removals

Will Gardiner, CEO of Drax Group, said: "Drax delivered a strong performance in 2022, and played a significant role in ensuring security of supply during a challenging year for the UK's energy system.

"Our renewable generation - biomass, hydro and pumped storage - are a major source of power in the UK and during periods of peak demand when there was low wind and solar power, these assets collectively supplied up to 70% of the UK's renewable power in certain periods.

"We believe that BECCS can become a world-leading solution for large-scale high-quality carbon removals and we are seeing increasing global policy support for its delivery.

"Drax stands ready to invest billions of pounds in the development of this technology and, following the introduction of the US Inflation Reduction Act, we are increasingly excited about the opportunities to deploy BECCS in the US. In response, the UK Government should accelerate its policy support for BECCS to make the UK a world leader in carbon removals, while attracting investment and delivering its net zero targets.

"Drax is a growing international business with strong cash returns which we are reinvesting to produce more renewable energy and deliver carbon removals while reducing our own carbon emissions. We aim to be at the heart of the energy transition, creating the jobs, renewable power and large-scale carbon removals that the world needs."

Financial highlights - strong financial performance underpinning investment and a sustainable and growing dividend

·      Adjusted EBITDA of £731 million up 84% (2021: £398 million)

·      Strong liquidity and balance sheet - £698 million of cash and committed facilities at 31 December 2022

-  1.6x Net debt to Adjusted EBITDA - significantly below 2x target

·      Total dividend increased 11.7% to 21.0 pence per share (2021: 18.8 pence per share) 

-  Proposed final dividend of 12.6 pence per share (2021: 11.3 pence per share)

Operational highlights - optimisation of supply chain and generation to support security of supply

·      UK's largest source of renewable power by output - 11% of annualised total, 19% of peak (up to 70% in-day peak)

Strategy highlights - developing a pipeline for carbon removals, biomass and dispatchable, renewable power

·      Ambition to be a global leader in carbon removals

-  Global BECCS - developing a pipeline of projects in the US targeting long-term large-scale carbon removal

-  First new-build site chosen, with over 10 sites currently under evaluation

-  MoU agreed with large timberland owner to develop a pipeline of BECCS opportunities

-  MoU agreed with Respira for sale of 2Mt of carbon removals from new-build BECCS plants

-  UK BECCS - UK Government to confirm shortlisting for "Track 1" UK BECCS projects

·      Ambition to be a global leader in sustainable biomass - targeting 8Mt of capacity and 4Mt of third-party sales by 2030

-  Addition of 0.5Mt of operational pellet production capacity and final investment decision (FID) on 0.6Mt in 2023

·      Ambition to be a UK leader in dispatchable, renewable power

-  Aim to reach agreement regarding long-term incentives for biomass generation not operating as BECCS

-  Planning application submitted for 600MW expansion of Cruachan and connection agreement secured

Future positive - climate, nature, people

·      Exiting gas sales on Customers SME business

·      Drax Power Station sustainability sourcing requirements are compliant with UK law on sustainable sourcing

·      Biomass produced using material from well-established forestry markets in the US, Canada and Europe

·      Subject to national and regional regulation and typically supported by, and independently monitored for compliance by, forest certification schemes such as: the Forestry Stewardship Council^® (FSC)⁽⁴⁾, Sustainable Forestry Initiative (SFI) and Programme for the Endorsement of Forest Certification^© (PEFC)⁽⁵⁾

·      Launch of Drax Foundation to deliver community initiatives that support education and skills development in Science, Technology, Engineering and Maths (STEM), and that improve green spaces and enhance biodiversity within local communities

Operational review

Pellet Production - increased production, flexible operations to support UK generation, addition of 0.5Mt of capacity

·      Adjusted EBITDA up 56% to £134 million (2021: £86 million)

-  Production up 26% to 3.9Mt (2021: 3.1Mt, including Pinnacle since 13 April 2021)

-  Lower than planned production - delays achieving full production at new plants, North American rail restrictions and flexible production

·      Optimisation of supply chain supports value for the Group

-  Flexible production to support generation

-  Sales to third parties under long-term contracts

-  Spot sales and purchases

·      Addition of c.0.5Mt of production capacity - Demopolis, Leola and Russellville - completing commissioning and acquisition of Princeton

·      6% year-on-year production cost increase to $152/t⁽⁶⁾ (2021: $143/t⁽⁶⁾)

-  Inflation impact on utility costs (>35%) and fuel surcharges (barge and rail transport to port (>20%))

·      Outlook - clear pathway to improved earnings profile

-  Incremental production at existing sites and addition of new capacity

-  Continued headwind from inflation in 2023

-  Development and introduction of new technologies and innovation, including c.£10 million R&D investment in a biomass sugar extraction plant

-  Increased use of residuals and a wider range of sustainable biomass materials

Generation - flexible operations and dispatch to capture value - increased system support and security of supply

·      Adjusted EBITDA £696 million up 87% (2021: £372 million)

-  Optimisation of generation and logistics to support UK security of supply at times of higher demand

-  Summer - lower power demand, lower power generation and sale of reprofiled biomass

-  Winter - maximise biomass deliveries to support increased generation at times of higher demand

-  Higher biomass and system costs reflecting a more challenging energy environment

·      Strong pumped storage and hydro performance - value from increased system support activity and generation

·      Six-month extension of coal at request of UK Government - winter contingency contract for security of supply

-  Units not called other than for testing

-  Closure of coal units in March 2023 following expiration of current agreement

·      As at 17 February 2023, Drax had 23.3TWh of power hedged between 2023 and 2025 on its ROC and hydro generation assets at an average price of £152.8/MWh, inclusive of equivalent gas sales (transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices) and the cost of unwinding equivalent gas sales. Excludes any sales under the CfD mechanism.

Customers - renewable power under long-term contracts to high-quality I&C customers and decarbonisation products

·      Adjusted EBITDA of £26 million (2021: £6 million) - continued improvement in profitability post impact of Covid-19

·      Continued development of Industrial & Commercial (I&C) portfolio

-  14.8TWh of power sales - 24% increase compared to 2021 (11.9TWh)

-  Commencement of new supply contracts to three major high-quality customers supporting generation route to market

Other financial information

Profits

·      Total operating profit from continuing operations of £146 million (2021: £197 million), including £298 million mark-to-market loss on derivative contracts and £25 million of exceptional costs

·      Total profit after tax of £83 million (2021: £55 million profit after tax from continuing operations, including a £49 million non-cash charge from revaluing deferred tax balances)

·      Depreciation, amortisation, impairment, loss on disposal and exceptional items of £286 million (2021: £209 million) reflects inclusion of Pinnacle for a full 12 months, plant upgrades and accelerated depreciation of certain pellet plant equipment in line with planned capital upgrades and asset impairment of £17 million

Capital investment

·      2022 capital investment of £255 million (2021: £238 million) - includes c.£90 million from OCGT projects

·      2023 expected capital investment of £570 - £630 million

-  £120 million maintenance, including two major planned outages on biomass units; £30 million enhancements; £430 million strategic - includes >£200 million OCGT and >£100 million pellet plant developments

Cash and interest

·      Group cost of debt below 4.2%

·      Cash Generated from Operations £320 million (2021: £354 million), inclusive of collateral payments (2021: £168 million inflow) typically associated with higher commodity prices and expected to unwind through 2023 and 2024

-  £234 million of collateral placed in 2022 (2021: £173 million held)

·      Net debt of £1,206 million (31 December 2021: £1,108 million), including cash and cash equivalents of £238 million (31 December 2021: £317 million)

-  1.6x Net debt to Adjusted EBITDA, inclusive of temporary collateral outflows - significantly below 2x target

-  1.3x Net debt to Adjusted EBITDA, excluding collateral

Capital allocation policy - unchanged

·      Maintain a strong balance sheet

·      Invest in the core business and strategy, including new biomass pellet plants, the development of options for BECCS, and the expansion of pumped storage power station at Cruachan

·      Pay a sustainable and growing dividend

·      Return surplus capital to shareholders - if there is a build-up of capital, the Board will consider the most

appropriate mechanism to return this to shareholders

-  Considerations include - timing of capital deployment, leverage profile, prevention of dilution and

divestment of non-core assets

2023 financial and operational outlook

·      Continued optimisation of biomass supply chain and generation to create value for the Group

·      Baseload ROC generation, plus two planned major outages

·      CfD unit held in reserve - operation subject to good ROC unit operational performance and market conditions

·      Biomass generation cost >£100/MWh

·      Forward selling of pumped storage and hydro underpins expectations

·      Electricity Generator Levy applicable to ROC and hydro assets, but not pumped storage, CfD or coal

Notes:

(1)   Financial performance measures prefixed with "Adjusted" are stated after adjusting for one-off exceptional items that, by their nature, do not reflect the trading performance of the Group (revaluation of deferred tax balances reflecting future increases in UK corporation tax rates, acquisition costs, gain on sale of Combined Cycle Gas Turbine generation assets, restructuring costs, debt restructuring costs and certain asset obsolescence charges and impairments), and certain remeasurements on derivative contracts. Adjusted EBITDA and EPS measures exclude amounts attributable to non-controlling interests.

(2)   Earnings before interest, tax, depreciation, amortisation, gains or losses on disposal of assets and impairment of non-current assets, excluding the impact of exceptional items and certain remeasurements, earnings from associates and earnings attributable to non-controlling interests.

(3)   Borrowings including the impact of hedging instruments less cash and cash equivalents, excluding amounts attributable to non-controlling interests.

(4)   FSC^® license code: FSC C119787.

(5)   PEFC^© Chain of Custody certification (PEFC/16-37-1769).

(6)   Total $/t cost of production in Pellet Production - raw fibre, processing into a wood pellet, delivery to Drax port facilities in US and Canada, loading to vessel for shipment and overheads - Free on Board (FOB). Cost of ocean freight, UK port and rail cost reflected in Generation business accounts in addition to price paid to Pellet Production for the biomass pellet.

(7)   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: 1.5TWh,

2025: 0.3TWh, presented net of cost of closing out gas positions at maturity and replacing with forward power sales.

(8)   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, expected to result in lower ROC cap versus 2022.

(9)   2023 includes forward selling of pumped storage generation (0.1TWh) resulting in higher captured prices but lower system support availability.

Forward Looking Statements

This announcement may contain certain statements, expectations, statistics, projections and other information that are, or may be, forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans, beliefs, and objectives for the management of future operations of Drax Group plc ("Drax") and its subsidiaries (the "Group"), are not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although Drax believes that the statements, expectations, statistics and projections and other information reflected in such statements are reasonable, they reflect the Company's current view and no assurance can be given that they will prove to be correct. Such events and statements involve risks and uncertainties. Actual results and outcomes may differ materially from those expressed or implied by those forward-looking statements. There are a number of factors, many of which are beyond the control of the Group, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These include, but are not limited to, factors such as: future revenues being lower than expected; increasing competitive pressures in the industry; uncertainty as to future investment and support achieved in enabling the realisation of strategic aims and objectives; and/or general economic conditions or conditions affecting the relevant industry, both domestically and internationally, being less favourable than expected, including the impact of prevailing economic and political uncertainty. We do not intend to publicly update or revise these projections or other forward-looking statements to reflect events or circumstances after the date hereof, and we do not assume any responsibility for doing so.

Results presentation and webcast arrangements

Management will host a webcast presentation for analysts and investors at 9:00am (UK Time), Thursday 23 February 2023.

The presentation can be accessed remotely via a live webcast link, as detailed below. After the meeting, the webcast recording 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 7:00am (UK time) on Thursday 23 February 2023 for download at: www.drax.com>>investors>>results-reports-agm>> #investor-relations-presentations or use the link https://www.drax.com/investors/announcements-events-reports/presentations/

For further information, please contact: rosie.corbett@fticonsutling.com  

Chair's statement

The Group's three strategic objectives - to be a global leader in sustainable biomass pellets; to be a global leader in carbon removals; and to be a UK leader in dispatchable, renewable power - are aligned with a number of global energy policies. Such policies increasingly recognise the important role that sustainable biomass and carbon removals can play in the fight against climate change.

Since 2012, we have reduced our generation Scope 1 and 2 carbon emissions by approximately 99%, principally reflecting our long-term investment in sustainable biomass. And we have continued to progress our ambition to become a carbon negative company by developing opportunities for bioenergy with carbon capture and storage (BECCS) in the UK and North America.

While progressing our strategy, we also play an important role in supporting UK energy security. Using our biomass, pumped storage, and hydro assets, we generate large amounts of reliable, renewable electricity and provide important system support services to the UK power system. This reduces the UK's reliance on expensive fossil fuels like gas and complements the greater use of intermittent renewables such as wind.

In the future, biomass could offer a route to carbon removal using BECCS. But, it must be the right biomass. The Group is committed to this principle, in order to deliver positive outcomes for the climate, nature, and people.

On a personal note, this will be my final year as Chair since I plan to step down by 31 December 2023. By then, I will have served as a director for nine years, having joined the Board in January 2015. In that time, I have seen the continued transition of Drax from coal to biomass generation, the growth of our Pellet Production business and supply chain, the development of opportunities for BECCS, and the growth of the Group internationally. These actions have all been undertaken alongside our continuing commitment to deliver our purpose and contribute to the fight against climate change.

Operations

In North America, our Pellet Production business has continued to support efforts to optimise biomass power generation and safeguard security of supply in the UK. At the same time, the Pellet Production business has added over 500kt of extra production capacity.

In the UK, our generation portfolio has continued to support the UK power system and deliver high levels of flexible, dispatchable, renewable electricity. In 2022, the Group was once again the UK's largest source of renewable electricity by output, providing 11% of the total from its biomass, pumped storage, and hydro generation assets. At the UK Government's request, we agreed to make available our two coal-fired units for the winter of 2022-2023, if required, as a response to the European energy crisis following Russia's invasion of Ukraine.

Our Customers business, which supplies electricity to businesses and other organisations in the UK, has continued its recovery from the impact of Covid-19.

Results and dividend

Adjusted EBITDA in 2022 was £731 million. This was significantly higher than 2021 (£398 million), reflecting a strong performance across the Group. The balance sheet also remains strong, with Net debt at £1,206 million significantly below our target ratio of 2.0 times Net debt to Adjusted EBITDA.

At the 2022 Half Year Results, we confirmed an interim dividend of £34 million (8.4 pence per share). The Board proposes to pay a final dividend in respect of 2022 of £50 million, equivalent to 12.6 pence per share. This will make the full year 2022 dividend £84 million (21.0 pence per share) (2021: £75 million, 18.8 pence per share). This represents an 11.7% increase on 2021. It is also consistent with our policy to pay a dividend that is sustainable and expected to rise as the strategy delivers stable earnings, cash flows and opportunities for growth.

The Group has a clear capital allocation policy. In determining the rate of growth in dividends from one year to the next, the Board will take account of cash flows from contracted income, the less predictable cash flows from the Group's commodity-linked revenue streams, and future investment opportunities. This includes new biomass pellet plants, the development of options for BECCS in the UK and North America, and the expansion of our pumped storage power station at Cruachan. If there is a build-up of capital, the Board will consider the most appropriate mechanism to return this to shareholders.

Safety and sustainability

The safety, health and wellbeing of our colleagues and contractors, together with our environmental impact, remain priorities for the Group and the Board. We believe that safe, compliant, and sustainable operations are integral to the delivery of our strategy and crucial for sustained long-term performance. These fundamentally underpin the continued success of the Group. Safety and sustainability underpin our operational philosophy. We continue to work across the Group to identify, implement, and maintain high standards supported by a positive safety culture.

Sustainability is at the heart of the Group, and we believe that achieving a positive economic, social, and environmental impact helps us create sustainable long-term value. Throughout 2022, we have continued our work as a Taskforce on Climate-Related Financial Disclosures (TCFD) supporter. For example, we have submitted science-based targets and identified opportunities for further reductions of carbon emissions in our supply chain.

Delivering positive outcomes for climate, nature and people are at the core of the Group's business model, and ensuring that Drax only uses biomass which is sourced sustainably in the generation of electricity is central to this ambition.

Biomass, when sustainably sourced, supports good forestry, is a renewable source of energy, and we believe, is an important part of both UK and international renewable energy policies. The Group sources its biomass from well-established forestry markets, primarily in the US and Canada.

We support responsible forestry practices by providing incremental, secondary revenues to forest landowners through the purchase of material which is not otherwise merchantable to a sawmill. These materials are principally sawdust and sawmill residues, bark, branches, low-grade roundwood, and woody material from forest management activities. In addition, the markets we source from are subject to national and regional regulation. We supplement this regulation through our own biomass Responsible Sourcing Policy and supply chain checks, with third-party verification under the Sustainable Biomass Program in respect of woody biomass used at Drax Power Station.

People and values

The Board remains committed to building a supportive, diverse, and inclusive working environment where all colleagues feel they belong. We continue to engage with, and listen to, our colleagues. Will Gardiner, our CEO, and I met regularly with the chairs of our workforce engagement forums during 2022, and we will continue to do so in 2023. These meetings provide valuable ongoing insights and feedback for the Board.

We monitor and challenge management on the steps being taken to address diversity, and the Board receives regular updates at Board meetings on the work being done. In recent years, we have made progress on diversity, particularly in senior roles. By the end of 2022, our female representation at Board level was 44% and 40% for the Executive Committee.

Summary

In 2022, we used our generation assets and our supply chain to provide large volume, reliable and flexible power; we enhanced security of supply in the UK; and we continued to deliver strong financial performance with a sustainable and growing dividend.

At the same time, we have made good progress with our strategic objectives. Our biomass growth strategy is clear and underpins our plans for biomass sales, opportunities for BECCS, and renewable power generation. Through these complementary opportunities, we believe we can deliver sustainable long-term value to our stakeholders as we realise our purpose of enabling a zero carbon, lower cost energy future and become a carbon negative company.

Philip Cox, CBE

Chair

CEO's review

2022 saw a significant increase in gas prices, leading to concerns about energy costs and security in the UK and beyond. At Drax we have continued to play our part. We are the UK's largest source of renewable power by output, a leading source of reliable and flexible generation, and our ambition is to become a carbon negative company by 2030.

Our portfolio generated over 4% of the UK's electricity between October 2021 and October 2022 (the most recent period for which data is available). We also generated 11% of the UK's renewable electricity over the same period, making Drax the largest renewable generator by output. In addition, our assets produced on average 19% of the UK's renewables at times of peak demand across the year and up to 70% on certain days. This underlines the important role that Drax plays in security of supply in the UK.

At the same time, we remain focused on our purpose - to enable a zero carbon, lower cost energy future - and our ambition to become a carbon negative company by 2030. This purpose and ambition drive our commitment to address climate change. Since 2012, the Group's actions have reduced our generation Scope 1 and 2 carbon emissions by approximately 99%.

The world must act now to address the climate crisis and limit global warming to 1.5^oC above pre-industrial levels. We need more renewable energy, more flexible energy systems to make the best use of intermittent wind and solar energy, and crucially, carbon removal technologies, like BECCS, to remove carbon from the atmosphere.

We believe that Drax is a world leader in sustainable biomass and that BECCS can become a world leading, UK-led, exportable solution for large-scale carbon removals, subject to the right regulatory and investment framework. Reflecting this belief, we are continuing to develop an option for our UK BECCS project and opportunities to invest in BECCS in North America. We believe this could be the world's leading market for these types of technologies.

These benefits will only be possible with the right biomass - biomass that is sourced sustainably. At Drax we are committed to using the right biomass, that can deliver positive outcomes for the climate, nature, and people, and we have put in place policies, controls, and reviews to support this.

Through our strategy we are creating exciting opportunities for growth aligned to global decarbonisation efforts. Our investments in these areas are underpinned by high quality earnings and cash flows, which continue to support our commitment to a sustainable and growing dividend.

Summary of 2022

Safety remains a primary focus and, in 2022, the Total Recordable Incident Rate was 0.44 (2021: 0.22). This is not where we want our safety performance to be. However, as reported at the half year, the increase is explained in part by two developments. Firstly, a widening of the scope to include contractor incidents. Secondly, improvements in the recording of incidents in our Pellet Production business, including the Pinnacle sites we acquired in 2021.

Since the acquisition we have implemented a health, safety and environmental (HSE) improvement plan across our North American operations and invested in training, human resource, and capital projects to deliver improved performance. We are committed to a strong safety culture across the Group and remain focused on embedding these improvements to uplift performance accordingly.

Adjusted EBITDA of £731 million represents an 84% increase compared to 2021 (£398 million). This reflects increased pellet sales, a strong system support and renewable power generation performance across the portfolio, and improved profitability in our Customers business.

Our balance sheet is strong, with total cash and committed facilities of £698 million and Net debt of £1,206 million.

Operationally, the Group's biomass, pumped storage, and hydro assets have continued to support UK security of supply, providing power system stability at a time of higher gas prices and volatility on the power system.

We have used our pellet production and international supply chain to reprofile biomass from the summer to winter, maximising generation when it is most needed, based on system need and sustainable biomass supply.

While supporting UK security of supply, we have also progressed our options for BECCS in the UK and continued developing new opportunities for the technology in North America.

Drax is a signatory to the UN Global Compact (UNGC) and we are committed to promoting the UNGC principles concerning respect for human rights, labour rights, the environment, and anti-corruption.

Electricity Generator Levy

In December 2022, the UK Government confirmed the details of a windfall tax - the Electricity Generator Levy (EGL) - on renewable and low-carbon generators, due for implementation in 2023. The levy will apply to the three biomass units operating under the Renewables Obligation (RO) scheme and our run-of-river hydro operations. However, it does not apply to the Contract for Difference (CfD) biomass unit, pumped storage hydro, or coal generation.

Through the second half of 2022, we engaged with the UK Government on the issue of windfall taxes, and their impact on the industry, to ensure a balanced approach. While we do not believe a levy on renewables is appropriate, we welcome clarity and the recognition that the cost base for biomass is different to intermittent renewables such as wind. This is an important distinction, as it means the EGL should not have an adverse impact on biomass generation.

Operational performance

Pellet Production

In North America, our Pellet Production business reported Adjusted EBITDA of £134 million, up 56% (2021: £86 million). This primarily reflects higher levels of production and sales, as well as revised transfer pricing in the second half of 2022.

Pellet production was 3.9 million tonnes (Mt), an increase of 27% (2021: 3.1Mt). This reflects a full 12 months' worth of production from Pinnacle's plants following the acquisition in April 2021. It also reflects increased capacity at Morehouse and LaSalle, both in Louisiana, following their expansion.

In addition, we commissioned three new plants during 2022: Demopolis in Alabama, plus Leola and Russellville (both in Arkansas). In September 2022, we acquired a 90 kiloton (kt) pellet plant in Princeton (British Columbia) from Princeton Standard Pellet Corporation. These four plants combined will add over 500kt of production when at full capacity.

In December 2022, the Group took a FID to develop two new pellet production projects. The first is a 450kt new-build pellet plant at Longview (Washington State) that includes the development of a new port facility at the location. The second is a 130kt expansion of our Aliceville site (Alabama). The combined investment in these projects is expected to be in the region of $300 million, inclusive of the effect of inflation on construction costs.

The development of the new plant at Longview will provide the Group with access to a new fibre basket and we will also develop port infrastructure at the Port of Longview, adding a fifth port to the Group's North American supply chain, with the opportunity to consolidate additional capacity in the future.

The US Pacific North-West will be the Group's fourth major area of fibre supply alongside the US South; British Columbia; and Alberta. The new facility is expected to support further diversification of the Group's fibre sourcing production and export capacity, supporting sales into Asian and European markets, as well as own-use.

Taken together, existing operations and developments will give Drax a network of 18 pellet plants, with access to five deep-water ports on the East Coast and West Coast of North America.

In addition to our own-use of biomass, the Group also has contracts to supply 22Mt of biomass to Asian and European counterparties. These contracts extend into the 2030s, with total revenues of over $4.1 billion.

Inflationary pressures, primarily in transportation and utilities in North America during 2022, contributed to an increase in our pellet production costs. Together with costs incurred in providing supply-side flexibility, production costs for the Pellet Production business are expected to be higher in 2023. These increased costs have been considered in an adjusted transfer price implemented in the second half of 2022.

We remain focused on opportunities to reduce the cost of biomass but will balance this against the need to optimise our supply chain to deliver value for the Group.

Generation

Adjusted EBITDA of £696 million from continuing operations was an increase of 87% on 2021 (£372 million, inclusive of £20 million from discontinued CCGT operations). This reflects a strong system support and renewable power generation performance across the portfolio, providing high levels of dispatchable renewable and low-carbon electricity and system support services, more than offsetting incrementally higher biomass costs and grid charges. In addition, there was no major planned outage undertaken in 2022, compared to one in 2021.

Against the backdrop of increasing concern around European energy security, we have optimised our biomass generation and logistics, buying back positions in the first half of the year and reprofiling to the second half. These actions provided additional security of supply to the UK at times of expected higher demand.

The process of moving generation between lower and higher demand periods has resulted in an incremental increase in achieved power prices - although this has not been without cost. We have incurred direct logistics costs associated with changing our delivery programme and managed an increased number of rail delivery cancellations in the UK due to driver availability.

Over the past 12 months, the cost of biomass in the European spot market has increased significantly, making it more challenging to procure and generate additional power with a margin. As a result of higher biomass prices, this created opportunities for the sale of biomass in addition to generation.

Most of the biomass we use is under long-term contracts. However, as we flagged during 2022, inflationary pressures in certain aspects of our supply chain have led to some cost increases and we expect this to continue in 2023.

Our pumped storage and hydro operations - Cruachan Pumped Storage Power Station and the Lanark and Galloway hydro assets - performed strongly helping to provide system stability. Together with the Daldowie energy from waste plant, Adjusted EBITDA was £171 million (2021: £68 million).

To move towards net zero, the UK needs to reduce its reliance on fossil fuel generation from unabated gas. It also needs to increase the amount of renewables, likely from intermittent wind and solar. In this context, the role of flexible, dispatchable renewables like biomass, pumped storage, and hydro has never been more important. They are dispatchable and dependent on neither the weather nor the price of gas. As such, we believe they represent a long-term part of the UK power mix.

This underpins our plans for a potential investment in the expansion of Cruachan Pumped Storage Power Station, and we continue to expect to take a FID in 2024.

In July 2022, at the request of the UK Government, Drax entered into an agreement with National Grid, to provide a "winter contingency" service to support the UK power system via its legacy coal units. The units will not generate commercially for the duration of the agreement and will only operate if, and when, instructed to do so by National Grid. To date National Grid has not instructed the units to run, other than for testing. The contract, which covers the period October 2022 to March 2023, provides a fixed fee for the provision of the units with National Grid remunerating Drax for costs, including the coal and carbon associated with any generation.

The winter contingency service agreement is not expected to interfere with our plans for developing BECCS at Drax Power Station. Site preparation works for BECCS are ongoing and will continue following formal closure of the coal units at the end of March 2023 on conclusion of the contract with National Grid.

In March 2022, the Group signed a development agreement with Engineering, Procurement and Construction (EPC) contractor Mytilineos for the development of three 299MW Open Cycle Gas Turbines (OCGTs). Each plant is expected to require investment in the region of £100 million across the period 2022 to 2024. This investment is underpinned by a 15-year Capacity Market agreement for delivery between 2024 and 2039. We are continuing to evaluate options for these projects, including their potential sale.

Customers

Our Customers business has performed well in 2022 with Adjusted EBITDA of £26 million (2021: £6 million). The performance is an improvement on 2021, when Covid-19 had an impact - principally in the area of the business working with SME customers.

Over the past two years, we have restructured the Customers business. This has included streamlining operations, with the closure of offices in Oxford and Cardiff, and rebranding the Haven Power Industrial & Commercial (I&C) business to Drax Energy Solutions. These changes will support the development of our core I&C supply business, which has performed well with growth in the contracted sales position to high-quality customers.

We see an important role in supporting the decarbonisation of I&C businesses through the supply of renewable energy, asset optimisation, electric vehicle services, and carbon offset certificates, which we believe could evolve in the future to the provision of carbon removals.

Our Customers business has seen some increase in bad debt, reflecting the impacts of higher prices. We have robust processes in place to manage this.

Strategy

Our strategy is designed to realise our purpose of enabling a zero carbon, lower cost energy future and our ambition to be a carbon negative company by 2030.

The strategy includes three complementary strategic pillars, closely aligned with global energy policies. These pillars are to be a global leader in sustainable biomass pellets; to be a global leader in carbon removals; and to be a UK leader in dispatchable, renewable power.

A global leader in sustainable biomass pellets

We believe the global market for sustainable biomass will grow significantly, creating international opportunities for sales to third-parties, BECCS, generation and other long-term uses of biomass.

To support this expected growth in demand for biomass products, Drax is targeting 8Mt of pellet production capacity by 2030. This will require the development of over 3Mt of new biomass pellet production capacity to supplement existing capacity and developments. We are developing a pipeline of organic projects, principally focused on North America, which includes the recently announced Longview project. We will also look at other opportunities where appropriate.

Drax is differentiated as a major producer, supplier and user of biomass, active in all areas of the supply chain, with long-term relationships and 20 years of experience in biomass operations. The Group's innovation in coal-to-biomass engineering, together with the development of a leading position in carbon removals, can be deployed alongside its large, reliable and sustainable supply chain to support customer decarbonisation journeys with long-term partnerships. We expect to sell all the biomass we produce at an appropriate market price (both for own use at Drax Power Station and to third-parties), typically under long-term contracts.

A global leader in carbon removals

BECCS - UK

We continue to develop options for BECCS. We plan to transform Drax Power Station, through 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 (MHI). Captured carbon dioxide (CO₂) will be transported and stored by the Group's partners in the East Coast Cluster. By 2030 the project aims to permanently remove 8Mt of CO₂ per annum. An investment decision could be taken in 2024, subject to the right investment framework.

In addition, Drax awaits the outcome of its bid into the "Track 1" Power BECCS submission process and publication of the Government's Biomass Strategy. Alongside MHI's technology, we are supporting other innovative options for carbon capture. For example, Drax is an equity shareholder in C-Capture Limited, which is developing a solvent technology that could be used for BECCS and other applications. We believe this could deliver significant long-term cost savings for future projects.

BECCS - North America

We want to capitalise on our belief in the global need for BECCS and the technical expertise gained from our Drax Power Station project. Our ambition is to deliver 4Mt of carbon removals each year from BECCS outside of the UK by 2030. Accordingly, we are developing models and locational preferences for global BECCS developments, with a primary focus on North America.

Opportunities under consideration include new-build BECCS power stations, as well as developing options for a pellet plant with carbon capture, and using BECCS as an exportable solution, for example in coal-to-biomass-to-BECCS on non-Drax assets.

Key considerations for these opportunities include proximity to sustainable biomass fibre, carbon capture and storage (CCS) infrastructure, regulatory support, commercial potential, and technology.

We are currently evaluating a range of potential financial models for these projects. These could include long-term Power Purchase Agreements (PPAs), long-term Carbon Dioxide Removal (CDR) offtake agreements, and government investment frameworks. In September 2022, we announced a Memorandum of Understanding (MoU) with Respira, which could see the largest volume of CDRs traded so far globally. Under the MoU, Respira could purchase up to 2Mt of CDRs over a five-year period from our North American BECCS projects.

The regulatory environment for BECCS in the US continued to develop in 2022, with the inclusion of BECCS as an eligible technology under the Department of Energy climate goals funding scheme and the increase in 45Q support to $85 per tonne of CO₂ captured, under the Inflation Reduction Act (2022).

Furthermore, a recent National Renewable Energy Laboratory report highlights that, by 2035, the US could need around 100Mt of carbon removals from BECCS to offset remaining carbon emissions in the power sector. In addition, recent State level developments in Louisiana and California have both been supportive of the development of BECCS.

Research by the Intergovernmental Panel on Climate Change (IPCC), the world's leading authority on climate science, is also supportive. The IPCC's research states that CDR methods, including BECCS, are needed to mitigate residual emissions and keep the world on a pathway to limit warming to 1.5oC.

The illustrative mitigation pathways assessed by the IPCC use significant volumes of CDRs, including BECCS, as a tool for mitigating climate change. IPCC modelling shows that between 0.5 and 9.5 billion tonnes of CDRs, including BECCS, could be required annually by 2050 to reach global net zero. The UN-backed Principles for Responsible Investment estimate that the CDR market could be worth over a trillion dollars by 2050.

We believe there are significant growth opportunities linked to BECCS in North America. To progress these opportunities in 2023, the Group expects to invest in development expenditure in the region of £30 million with a view to progressing these opportunities to a FID. We expect to update on progress with these opportunities in 2023.

A UK leader in dispatchable, renewable generation

The UK's plans to achieve net zero by 2050 will require the electrification of sectors such as heating and transport systems, resulting in a significant increase in demand for electricity. We believe that intermittent renewable and inflexible low-carbon energy sources - wind, solar and nuclear - could help meet this demand. However, this will only be possible if the remaining power sources can provide the dispatchable power and non-generation system support services required to ensure security of supply and to limit the cost to the consumer.

Long-term biomass generation and pumped storage hydro can provide these increasingly important services and we are developing an option for new pumped storage - the expansion of Cruachan Power Station - to provide an additional 600MW of dispatchable long-duration storage to the power system. A planning application was submitted in May 2022, and any investment remains subject to the right investment infrastructure and support.

The location, flexibility and range of services Cruachan can provide makes it strategically important to the UK power system. A FID could be taken in 2024 and the development operational by 2030. Any investment decision will depend on the right regulatory framework.

Biomass sustainability

Delivering positive outcomes for climate, nature and people are central to our plans. Ensuring that we only use biomass that is sourced sustainably is key to this ambition.

Biomass, when sustainably sourced, supports good forestry, is a renewable source of energy, and we believe represents an important part of both UK and international renewable energy policy.

Drax sources its biomass from well-established forestry markets mainly in the US and Canada, as well as Europe. The main output from these markets is sawlogs, which are processed for use in construction and manufacturing. When used in this way, these materials represent a source of long-term carbon storage and, when the forest regenerates or is replanted, the growing trees absorb carbon from the atmosphere.

Drax supports these forest economies by providing incremental secondary revenues to forest landowners through the purchase of material which is not otherwise merchantable to a sawmill and has limited alternative uses. These materials include bark, branches, low-grade wood and woody matter from forest management activities (thinning), in addition to purchasing sawmill residues. This reduces the risk of wildfire and the spread of disease, and allows for replanting of the forest. Where there would otherwise be no demand for these materials, they are sometimes burned at the roadside, as happens in British Columbia.

In the US South, the periodic thinning of a forest helps improve the size and quality of sawlogs when the trees reach maturity, the economic value of the timber produced and the carbon absorbed and stored, as well as forest health and biodiversity.

If forests were not thinned, the revenue from sawlogs would be reduced and landowners may consider other uses for their land, such as agricultural crops and livestock farming. The management of forestland to produce sawlogs ensures forests are growing vigorously and absorbing carbon, which means forests remain a carbon sink.

Forests in the areas where Drax sources material are subject to national and regional regulation and typically supported by, and independently monitored for compliance by, forest certification schemes. These include the Forestry Stewardship Council (FSC^® C119787), the Sustainable Forestry Initiative (SFI), and the Programme for the Endorsement of Forest Certification^© (PEFC) (PEFC/16-37-1769).

We supplement this regulation through our own Responsible Sourcing Policy and supply chain checks, with third-party verification under the Sustainable Biomass Program (SBP), in respect of woody biomass used at Drax Power Station.

Outlook

The Group is continuing to play an important role in supporting energy security of supply in the UK, using our supply chain and flexible, renewable generation portfolio to provide large volumes of reliable renewable power and system stability at a time of higher gas prices.

Our long-term focus remains on progressing our strategy and our ambition to become a carbon negative company by 2030, underpinned by the development of BECCS. The potential for the growth in carbon removals, the opportunity this could afford BECCS in the UK and our plans for North America is significant, and we expect to make further progress on these options during 2023.

Through these strategic objectives, we expect to create opportunities for long-term international growth underpinned by strong cash generation and attractive returns for shareholders, and to deliver value for our other stakeholders.

Will Gardiner

Chief Executive Officer