Drax Group plc (DRX) Earnings Call Transcript & Summary

Good morning, everyone. Ladies and gentlemen, welcome to the Drax Half Year Results Call. My name is Sabrina, and I will be the operator for your call this morning. I will now hand you over to Will Gardiner, CEO.

Good morning, everybody. Thank you for joining. I hope everyone is getting along all right in the new sort of virtual world that we're all living in. The presentation you'll find is similar to the ones we normally use. Clearly, the format we're using is different, i.e. there's no video. And unfortunately, no one is here with us. So I'm planning to be probably a bit more brief than usual to get us through relatively quickly, and then go to Q&A. Also I'll call out the slides that I'm on as we go. So if I turn now -- we start on Page 3 on our purpose. So our purpose, our strategy and our ambitions are unchanged. And as we worked through the pandemic, we found that they've served us well. Before I get into the detail of a strong set of results, I wanted to give you some of my key thoughts. So we are doing very well. Drax has a business model, which during the crisis of the past 6 months, and over the past 4 years, has proven quite robust. In the first half of the year, we performed well in spite of COVID-19, growing EBITDA by 30% and EPS by over 400% relative to the first half of last year. We continue to deliver strong dividend growth, announcing today a 7.5% increase for the expected dividend this year. And over the last 4 years, we've grown our dividend 11% a year. While at the same time, we've maintained a strong balance sheet. We've invested in an attractive biomass growth story, and we have supported all of our stakeholders. And I'm really pleased with how the business is doing. If I turn to Page 5, the 2020 performance highlights. So during the pandemic, we've had 2 objectives: keeping our employees safe and well and helping to keep the lights on in the U.K. And in spite of all the challenges of COVID-19, I think we've done both of those things well. As we go through, we'll get into the detail, but as I've already mentioned, we've had a strong financial performance, we've also delivered strong operational performance across the business and I'm especially pleased with our pellet business. And we've continued our strategic progress. Drax has got a big role to play in the future energy system as the national grid future energy scenarios has described. I'm very pleased to announce an expected full year dividend of 17.1p per share, growing 7.5% from last year. Turning to Page 6. We wanted to carry on doing the right thing during the COVID-19 crisis. We were very keen to support all our stakeholders through the pandemic. Our flexible generation has been crucial to supporting the system during periods of extremely low demand and high winds. We've supported our customers with managing their debt, which we believe has paid dividends as things are returning somewhat to normal for now. We have not furloughed any of our employees. We are supporting our communities with laptops for learners and other forms of support. And we have maintained our dividend policy and are continuing to grow our dividend strongly. Turning to Page 7 and customers. COVID-19 has created a significant challenge for our customer business as demand has reduced significantly, and we've seen a rise in bad debt. Our portfolio of small and medium-sized business customers was particularly hard hit by COVID-19 and the subsequent lockdown. This has led to a poor financial result with an EBITDA loss of GBP 37 million for the half year. That being said, the team are doing a great job of delivering in a difficult environment. Having sized the risk of approximately GBP 60 million early on, the team, which is now all working from home, led by Paul Sheffield is on track to deliver that result. Although there is still a significant risk if there is a second wave in the U.K. to a further economic slowdown. More importantly, we've been very focused on taking the opportunity to reposition our portfolio, strengthening our credit criteria and focusing on the customers who can add the most value and are aligned with our purpose. Looking beyond the impact of COVID-19, we will monitor the portfolio closely to ensure alignment with our strategy. Turning to Page 8 and Safety and Sustainability and ESG. While we've kept our people largely safe from COVID-19, working from home or socially distancing at our operating plants, we've had more recordable injuries than we would like. We remain focused on this and especially in a difficult environment, our employers are now working in. We have a new head of Health, Safety and Environment, Vanessa Forbes, who joins us from China Light and Power, and she will be leading our efforts in this always important area. We're also doing more on ESG reporting, participating in the carbon disclosure project, which now forms part of our corporate scorecard and developing TCFD disclosure. Our ESG ratings are improving and starting to better reflect the work that we're doing, as evidenced by our improved Sustainalytics' Rating, and we believe there's more progress we can make in this regard. Turning to Page 9. Our carbon production journey has continued through the pandemic, and we are increasingly excited about negative emissions, which I will talk more about in a moment. If I look at our Generation business on Page 10, our operating and financial metrics look good. I am particularly pleased with our availability, given the needs of the system during this time. Mike Mosley, who has U.K. Portfolio Generation Director leads our generation assets and has joined my executive team, has the team properly focused on this. Our coal generation has been modestly higher as we worked through our coal stock. We have not purchased any coal and are bringing our stock down. It's just what we need for the coming winter and to comply with our capacity market obligations. And as we have said, we don't expect to be using coal past March of 2021. And finally, we continue to be very pleased with the performance of our Hydro and Gas assets, especially as they have helped support the system over the last few months. Turning to Page 11 and Trading and Optimization. We continue to have a strong contracted position at levels above the market. Charlotte Rose, our Director of Trading and Optimization and our trading team has done a great job putting a hedge in place in a volatile market. As you'll know, the market has troughed dramatically through the first half of the year but has recently also recovered quite significantly. And as I also mentioned, we've been very active in the balancing market and in ancillary services as a system as needed our dispatchable low carbon generation. And finally, turning to Pellet Production, Page 12. I am very pleased with our power business. Quality is excellent, as good as any of our suppliers. Costs are coming down, in line with our plan and volume is also excellent. The team there, led by Matt White is doing an outstanding job. COVID-19 has been challenging, but they've been managing that well. And this year, we shipped our 100th cargo of sustainable biomass from our report at Baton Rouge. We've also kicked off the next leg of our cost down strategy, having approved a $40 million investment with 3 satellite plants or 40,000 tons each. We expect them to have a significantly lower cost of production than our current finance. And with that, I'll turn it over to Andy, who will go through the financial review.

Thanks, Will. So I'll start on Slide 14. The first half of 2020 will be remembered for the emergence of COVID, the impact of which continues to develop and evolve. But against this backdrop, our financial performance has been strong, with adjusted EBITDA of GBP 179 million, up 30% from the prior period. This improvement is underpinned by strong operational performance, good asset availability and increased biomass generation. The adjusted EBITDA in the first half of the year includes a GBP 44 million impact of COVID, primarily in our customers' business. We continue to estimate a full year impact of COVID of around GBP 60 million. And our full year EBITDA expectations remain unchanged and are consistent with current EBITDA consensus of GBP 393 million. Following our announcement in February that commercial coal generation will cease at Drax Power Station in March '21, the associated assets have now been fully written down with an impairment charge of GBP 224 million, recognized as an exceptional item. We expect to record a provision of GBP 25 million to GBP 35 million in the second half of the year for other coal closure costs. The cash outflows will be through 2022, and we anticipate run rate savings of GBP 25 million to GBP 35 million per annum once complete. In the first half of the year, we've utilized GBP 49 million of coal inventory, and we expect the balance of GBP 54 million will be used by March '21. The U.K. government's reversal of previously announced corporation tax rate reductions led to a revaluation of deferred tax assets and resulted in an increased current tax charge in the period of GBP 6 million, equivalent to 1.5p of adjusted basic earnings per share. Despite this adjusted earnings per share of 10.8p has grown from 2p in the prior period. We expect the reversed rate changes will increase current tax charge by GBP 15 million for the full year, the equivalent of 4p of adjusted earnings per share. With GBP 226 million of cash generated from operations, closing cash for the period was GBP 482 million and net debt, GBP 792 million. That represents a 1.8x net debt to adjusted EBITDA ratio when you use the last 12 months EBITDA of just over GBP 450 million. Despite the impact of COVID, we still expect to deliver our target 2x net debt to adjusted EBITDA ratio for 2020 as a whole. The Board has resolved to pay an interim dividend of 6.8p per share and expect this is 40% of a full year dividend of 17.1p per share, subject to continued good operational performance and an impact of COVID in line with expectations in the second half of the year. The expected full year dividend represents a 7.5% year-on-year increase. When considering the level of the dividend, the Board has considered trading performance, current liquidity and the outlook for the year in the context of COVID, along with the steps we're taking to support all of our stakeholders. So moving on to Slide 15. Performance in our Pellet Production business has been strong, both in terms of quality and the volume of production. Adjusted EBITDA of GBP 25 million grew GBP 17 million or over 200% compared to the first half of 2019. The volume of pellets delivered of around 750,000 tonnes increased 28%, partly reflecting the challenging weather conditions in the U.S. Southeast at the start of 2019 that restricted commercial forestry activity. We're making good progress with our biomass cost initiatives. The achieved cost of $154 per tonne on our self-supply volumes represents a 9% reduction compared to the first half of 2019 and a 4% reduction compared to 2019 as a whole. In generation, our adjusted EBITDA of GBP 214 million increased GBP 66 million or 45% in the year. Of this, GBP 36 million relates to timing of capacity market income in 2019, when it was recognized in full in the second half upon its reinstatement. Our biomass operations performed well, with strong portfolio availability of 91% and 1 terawatt hour or 16% increase in output compared to the first half of 2019. There were no major planned outages in the period compared to one in the first half of last year, but there is one major planned outage in the second half of the year when Unit 3 will receive a major upgrade to its high-pressure turbine, improving efficiency and reducing future maintenance costs. We expect the cost of this outage will be higher than normal due to implementation of social distancing measures to ensure the work can be carried out safely. As a reminder, a major planned outage for our CFD unit will take place in 2021 with a similar program of works. Our hydro pump storage and gas assets continue to perform well, contributing adjusted EBITDA of GBP 54 million, an increase of 50% from the prior period. Cruachan continues to perform strongly during the period of increased demand for system support services as the system operator seeks to manage the challenges which Will has already touched on. In July, the 6-year synchronous compensation contract accrued and commenced with a value of up to GBP 5 million EBITDA annually. In customers, the adjusted EBITDA loss of GBP 37 million reflects a GBP 44 million impact of COVID, and I'll talk through that in more detail shortly. On central costs, including innovation, they're consistent with the prior year, but we have an increase in innovation spend, offset by a corresponding reduction in other corporate costs. The increased investment in innovation includes activities to expand our biomass fuel envelope and supporting our efforts on BECCS. So now turning to Slide 16. The impact of COVID has been most pronounced in our customer business with 2 primary drivers: firstly, reduced demand, leading to a mark-to-market loss on the sellback of energy to the wholesale market and an increase in third party costs; and secondly, higher-than-expected business failure rates, leading to a higher bad debt charge. In relation to the demand reduction, we quickly adjusted our customer demand forecast following lockdown. And in the second quarter, we exited previously hedged positions in line with our revised expectations. And we incurred a cost of approximately GBP 15 million. Demand reduction across our portfolio peaked at 27% in April, but demand is now coming back and month-to-date for July is around 14% reduced versus normal. In relation to debt, our expectations of business failure and bad debt are higher in our SME customer base who have been hardest hit by the lockdown and social distancing measures. Overall, the bad debt charge in the period of GBP 26 million has doubled compared to the first half of last year with an increase in our SME business to 6% of revenue from 2%. In our I&C customer base, contracts have greater protection that allow us to pass additional costs through to customers. And we're also able to better mitigate credit risk with insurance cover and by reducing receivables through our securitization facility. To expand on this, following lockdown in March, we had 14,000 additional direct debit cancellations versus our normal run rate and total overdue invoices increased by an excess of GBP 30 million. The situation is improving now with 11,000 of those direct debits currently reinstated and total debt down by GBP 16 million since the peak. We've adjusted our bad debt provision in the period based on our expectation of future losses. As such, the impact of COVID on our customers' business is weighted to the first half. Our demand expectations for the balance of the year assume easing of lockdown in line with the government plans with continued social distancing in place for the remainder of the year. By quarter 4 this year, we expect this reduction to flatten out at 6% due to some businesses not reopening and changes in the way that others operate. Looking forward, we expect to see benefits from our value-versus-volume strategy, which we began implementing prior to COVID, with more stringent credit requirements for new customers, leading to a shift in our portfolio to higher consuming sites in higher quality sectors. During this challenging period, we've strengthened our I&C-committed book by adding 9-terawatt hours of lifetime in volume with a number of significant wins and retained. These include Trent water and Wessex water and includes the provision of electric vehicle fleet services and battery trials. The impact in Generation reflects some reduction in rock recycled prices and additional costs associated with managing the Unit 3 planned outage safely in the context of COVID. That's offset in part by additional balance in market activities driven by the reduced demand on the system. The overall impact in Generation is broadly offset by identified savings in corporate operating costs. So while the impacts of COVID continue to evolve and change, changes in government guidelines and economic policy or behaviors of individuals and markets can still impact these estimates. So moving on to Slide 17. At our Capital Markets Day in November, we announced our target to expand biomass self-supply capacity to 5 million tonnes by 2027 and while at the same time, reducing the cost of biomass by around 30% to GBP 50 a megawatt-hour. As Will has already outlined, delivery of these targets opens up 3 potential business models post-2027. These savings will be delivered through further optimization of existing biomass operations, greater utilization of low-cost wood residues and an expansion of the fuel envelope to incorporate other low-cost renewable fuels. And we remain alert to sector opportunities for organic and inorganic growth. As part of our ambition to reduce the cost of GBP 50 a megawatt-hour, we outlined specific plans to deliver GBP 35 a tonne cost savings on our self-supply capacity by the end of 2022. This equates to GBP 64 million of equivalent cost savings. And we're making good progress, and we're on track to deliver GBP 27 million by the end of 2020. As we look forward to 2022, we expect the 350000-tonne expansion projects at LaSalle, Amite and Morehouse to contribute approximately half of the additional required savings with other savings being delivered by projects that enable a greater use of low-cost residuals. The expansions are progressing well, and the first of these at Morehouse is expected to commission later this year. Followed by Las Alla and Amite in 2021 and early '22. Beyond this program, the Board has approved an investment of up to GBP 40 million with the construction of 3 new 40,000-tonne satellite plants. And these will leverage our existing U.S. Gulf infrastructure and utilize sawmill residues to deliver further significant savings. And in addition, our R&D team have continued to assess options for widening the fuel envelope. To include other lower cost sustainable biomass materials, including the gas, nutshells and husks. We're running trials at Drax to test combustion chemistry and handling, and these materials could represent a significant amount of the sustainable biomass we require and a means by which we believe we can further reduce the cost of biomass. So moving on to Slide 18. Our plan for 2020 include a capital investment of GBP 230 million to GBP 250 million, with half of it assigned to strategic investment in biomass expansion and cost reduction. Having reviewed the timing of our investment program for the balance of the year, our full year expectations have reduced to GBP 190 million to GBP 210 million. This reflects a delay of some nonessential maintenance works due to COVID and a short delay of some investments in our biomass supply chain. Now on to Slide 19. We've maintained a strong focus on cash flow discipline and maintenance of a robust balance sheet. And this provides protection in times of economic uncertainty and a strong platform from which we can execute our strategy. Our available cash on hand and committed undrawn facilities provides substantial headroom over our short-term liquidity requirements. And at the end of June, we had cash and immediately available liquidity of GBP 649 million, an increase of GBP 34 million from the end of December. As I mentioned, net debt of GBP 792 million represents a 1.8x net debt to adjusted EBITDA ratio, using the last 12 months EBITDA of just over GBP 450 million. And we continue to target a net debt-to-EBITDA ratio of 2x and expect to achieve this for the full year. In addition to cash on hand, the group has access to GBP 350 million revolving credit facility, which can be used to manage low pounds in the cycle. No cash has been drawn under this facility for over 2 years. But we expect to renew it in the second half of the year ahead of its expiry in '21. In the first half, we did complete a 3-year extension to our GBP 125 million ESG facility, and the contractual maturity is now 2025 and the average all-in interest rate for the first year of the extension is less than 2%. Our overall cost of debt remains below 4% per annum. Recognizing the improved credit quality of the group, DBRS awarded Drax a BBB flat investment-grade rating and that goes alongside existing BB+ stable corporate rating and BB+ strong liquidity ratings from S&P and Fitch. So finally, on to Slide 20, we continue to think about our approach to capital allocation in 4 stages. Firstly, the maintenance of a strong balance sheet, which we define as being a target net debt to adjusted EBITDA of around 2x. Next, a continued investment in the core business to deliver our strategy. Thirdly, a sustainable and growing dividend. And in that regard, the 7.5% expected increase in the full year dividend for 2020 and an average increase of around 11% over the last 4 years is consistent with that objective. And finally, consideration of a wide range of development projects across the group, which offer attractive returns but could require significant future investment. As outlined, these are principally in respect to the objective of reducing pellet costs and expanding capacity. Throughout this, we'll maintain financial discipline and ensure a prudent capital structure and maintenance of our credit ratings. So in conclusion, despite the impact of COVID in the period, we've delivered strongly against our financial targets, increasing EBITDA of 30% in the first half of the year. We continue to develop and progress our strategic plans, with a 9% reduction in the cost of pellets compared to the prior period. We've maintained a strong balance sheet with cash and immediately available liquidity of GBP 649 million at the end of June. And we've announced a 7.5% increase in our expected full year dividend. And in so doing, we've been focused on supporting all of our stakeholders. And with that, I'll hand back to Will.

Thank you, Andy. I'm going to turn now to Page 22, our biomass strategy. And having launched our new biomass strategy last year, we've received strong positive feedback from our shareholders. And we're very focused on our targets of 5 million tonnes of self-supply and reducing cost to 50 pounds per megawatt power. If I turn to Page 23, where it has also become clear is that the strategy has attractive optionality. With that lower cost and significant capacity, 3 potential business models were possible post-2027. First, biomass generation in the U.K. without BECCS, delivering GBP 100 million of EBITDA as discussed at our Capital Markets Day last year. The second option would be to produce and sell those pellets to third parties in global markets, which may be quite attractive given our expectations for pricing and pellet market growth. And third is the opportunity to generate in the U.K. using BECCS. We turn to Page 24. As we build our pellet production capability, we are encouraged by the potential for the global market in sustainable biomass. The market, as tracked by Hawkins Wright, was 36 million tonnes in 2019 and is expected to grow to 59 million tonnes by 2029, led by growth in Asia. We already have a significant position in the market as the fourth largest player, and we will grow that position significantly and be well positioned to participate in the market growth. Given the dependence of the market on government support, there is clearly risk to the growth not least of all in the U.K., as we all know. That being said, the growth doesn't take into account the opportunity that BECCS will provide, which would lead to significantly greater growth over time. Turning now to Page 25, so why BECCS? The simple answer is that BECCS is critical for the U.K. and the world to deliver net 0. We will need negative emissions, as highlighted this week by national grid in its future energy scenarios. And as again, they said, BECCS can help the U.K. power sector to become carbon-negative as early as 2033. Now there are several ways to deliver negative emissions. I went into the scale, you have deforestation, afforestation, which will be an important part of the solution, but our challenge when trying to scale them. For example, if you planted trees to cover an area of the size of Wales, that force would absorb about 16 million tonnes of CO2 in a year. And that's the equivalent of what we could deliver in terms of negative emissions at Drax. At the other end of the spectrum are technologies such as direct air capture, which is an exciting technology, we think it has lots of potential, but it's still quite young and also quite expensive. So we believe that BECCS has a unique and important position. It's more cost-effective than many technologies and also more scalable than most. So we continue to make good progress on developing our technology. As you all know, we've announced trials with Mitsubishi to look at a second technology solution for carbon capture. We're also progressing well with C-Capture on the trial that we've been doing for some time now. And we expect to be in a position to start FEED studies next year, which would require an investment on the order of GBP 10 million to GBP 15 million. Before we do that, we'll need more visibility from the government on how they expect to support BECCS on negative emissions. Turning to Page 27 and the BECCS regulatory framework. So that regulatory framework is progressing. As you know, the government has allocated GBP 800 million for carbon capture and storage infrastructure. And we're working with our 0 carbon Humber cluster partners on making sure that, that infrastructure comes to the Humber. The Climate Change committee, in the second quarter, reported to Parliament that they would like the government to define the best support regime by the first half of next year. Thirdly, we expect a significant suite of government papers in the second half of the year on business models for CCS, including transport and storage, as well as the energy white paper, the cost of that 0 review from the treasury, et cetera. So we should see significant developments in terms of government policy and strategy over the course of the second half of the year. There is still a lot to do in this area from the process moving forward. So turning to our 2020 outlook and priorities, I wanted to really close with the same points that I started with, and that is at Drax, we are doing very well. We have a business model, which during the crisis of the past 6 months, and over the past 4 years, has proven extremely robust. We're in great shape. In the first half, we performed very well. In spite of COVID-19, growing EBITDA by 30% and EPS by over 400%. We're delivering strong dividend growth this year of 7.5%. And over the last 4 years, we've grown our dividend by 11% and per year. While at the same time, doing the right thing and supporting all our stakeholders and investing in an attractive biomass growth story. We're on track with a clear vision for the future with exciting options. I am really pleased with how our business is doing. So thank you for your attention, and we are now happy to take questions.

[Operator Instructions] The first question is from John Musk with RBC.

Yes. Maybe I can ask 3 questions. Firstly, on the system support earnings that you've seen in the first half, you've highlighted GBP 66 million, obviously, benefiting from some of the volatility post-COVID. Where do you see that number for the second half? Secondly, on the customers business, you've talked around some of the reshaping you've done on the customer book, perhaps scaling back a bit on SME and adding some more I&C. But we used to talk about a medium-term target there of GBP 80 million of EBITDA. I know that was some time ago and perhaps in a different world, but can you give us some indication of where you think this business is earning power will be in a post-COVID world? And then finally, here, we did have some stories on takeovers a few weeks back. I don't know whether you're willing to confirm or deny any of those but perhaps, if not, obviously, someone is potentially thinking that there is some additional value in your business, perhaps some optionality in the business around things such as BECCS. I mean what do you think you have to do further to try and get some of that recognized into the share price?

Okay. Thank you, John. I'll take those, I think, in line. So if I talk about the system support earnings, GBP 66 million, the first half was a very strong performance. And I think that was driven by, frankly, very extreme conditions. The first quarter was quite windy, although I think, again, that's probably more in line with normal, but as you all know, demand was extremely low. So -- but in our view, the types of conditions that we saw were very much in line with what our forecasts had been. But probably earlier, than what we thought they might be. So I would expect -- we expect that growth to continue. And I think it's hard to say exactly where this will be in the second half. It's obviously sort of fundamentally, it's a function of volatility. But again, we see the long-term trends in that market being very strong. And I think the first half was good evidence of what we expect to be happening as we go forward. In terms of the customer business reshaping, really, the interesting thing about customer business is that the -- when you look beyond COVID-19, the -- we really see an interesting opportunity to focus that business on probably a tighter set of customers, more aligned with our purpose in terms of customers that we can really help with their own sustainability ambitions, customers that are potential future users of energy services like demand-side response, again, that we can help them with, and we can actually support the system, both on the generation side but also on the customer side. So we continue to sort of see there's real opportunity in that business. Now we'll spend sometime in the second half of the year, looking at where we think things will go post-COVID and looking at what that portfolio will look like. And probably best, we'll come back to as we develop those plans, right. Now in terms of the sort of the stock price, sort of what people value that people see, I mean, frankly, I would say that really, the comments I made at the beginning are what I think we should be doing. At the end of the day, it's all about delivery. We've proven we have a robust business model. I think we have -- we are in the process of proving that we have a sustainable, long-term and growing dividend story. We're committed to delivering that while maintaining a strong balance sheet and investing for growth. And I think, frankly, as a management team, that's what we need to do, continue to deliver that and then see what happens in the market.

The next question is from Mark Freshney with Drax.

It's Mark Freshney from Crédit. I have 3 questions. Firstly, Andy, can you talk about factoring and receivables financing. What was the delta on those things in the first half, just so we can see what the impact from working capital would have been? Secondly, Will, looking at the treasury funding review for CC U.S. I mean they were hoping to put something out later this year. What is your feeling of how they're progressing with that time line? And also, anything you can give us on the content. And just thirdly, on bad debt provisions. I mean clearly, as you've alluded to, we've yet to really see the insolvencies come through and balances be written off. What is it that gives -- and I'm guessing a lot of the bad debt, the GBP 14 million is actually just provisions rather than write-offs. How confident can you be that that sit for this year and that you've got bad debts under control and fully provided for?

Thanks, Mark. And why don't I -- I'll take the middle one and then maybe I'll turn it over to Andy to take the other 2. So I think that 2 things have happened in the first half of this year. One is that the government has clearly been very focused on figuring out how to respond to the COVID-19 challenges. And that's -- as we all know, in the first instance, how to react immediately to what they need to do to keep people safe. And now how do they respond to get the economy moving again, right. As they've thought about how to get the economy moving then, again, I would say we have had very good engagements with quality park in the energy, minister with [indiscernible] bays. And it's been very, very good. I would commend the government on the way they've handled things with the energy sector. A couple of things will become clear. One is that a lot of the resources are devoted to deal with COVID-19. And so that is sort of fundamentally that probably we should expect things to possibly be slower than we might have hoped, given that, that's just a logical outcome of all the extra work that's been required. So the energy white paper, as we all know, is -- continues to be later than we would have all hoped. But the other side of this, which I think is maybe fundamentally more important, is the idea that the recovery should be a green recovery, the country should bounce forward and invest more in next-generation renewable technologies, it is fundamental to what they're thinking. So I would be a very brave or maybe foolish man to put a timetable on what's going to happen. I think that's really for the government to tell us. But I am very hopeful that the approach that they are taking is one which will be good for the climate and for the U.K. and ultimately good for Drax, right. Final point I would make is that the other thing that's very interesting about where the government is going is that they were brought in on a platform of leveling up, wanting to support parts of the U.K. that maybe in the past had not done as well as other parts. And that's, I think, very much part of their sort of bounce forward strategy in the energy sector to try to make sure that they make investments in places that need them. So again, we think that's a positive. Andy.

So on your first question, Mark, at the end of June, we'd utilized around GBP 156 million of the working capital facility and customers, and that's just a small outflow, around GBP 6 million compared to the end of December. So not a big change there in working capital. On the bad debt, I mean the -- it is a provision, as you say, rather than write-offs in the period. It's an estimate of our future expected losses. I mean clearly, we only have 2 or 3 months of data since the lockdown kicked in. But I think I mentioned the cash collections that had originally dropped off, are now starting to come back and that the direct debit cancellations, we've seen a significant reinstatement of those since the initial reaction to lockdown. But clearly, COVID continues to evolve, and it continues to develop, and it's something that we need to remain focused on an alert. I'd also point out, though, that in our I&C business, we have a customer base with fundamentally different sort of credit risk. So the risk is really in our lower end of our portfolio in our SME business. And again, they've been most impacted by the lockdown and social distancing measures, and those are only just really easing off now. So clearly, it's something we need to watch. But I think that's our best estimate right now of what the impact will be.

The next question is from Martin Young with Investec.

Just a few questions, if I may. Getting back to the retail business. If you put the GBP 44 million COVID impact in the first half to one side on an adjusted basis, that would be EUR 7 million EBITDA versus EUR 9 million in the first half of this year. Just wanted to understand why things were going slightly backwards on an underlying basis? And also, what's your expectations for the second half of the year in the retail business net of the GBP 16 million impact of COVID. Can you turn a profit in the second half of the year? And then the second question is around the strategic options. Obviously, you've outlined again, your biomass cost reduction strategy. You've outlined your aspirations around BECCS and CC U.S., but what about the gas CCGT and OCGTs that you previously have talked about and perhaps also expansion of the pump storage facility? If I look at the ESO [indiscernible] in 2020, it's only in steady progression that you have anything by way of fossil fuel output in 2050. So it strikes me that you might quietly be shelving your aspirations in gas. Just wondered if you could comment there.

So starting on the customer side. I think that clearly, the first half of the year was difficult in lots of different ways. So actually, one of the things that's probably difficult to distinguish between whether it's COVID or underlying business is how it's bringing in new customers. So for example, a lot of customers, and this is true for us as well as true for actually across the industry, retention rates were very high. So we had very sort of stronger retention rates than usual. But on the food flip, that meant that winning new business has been more challenging. So growth there has not been as good as it normally would be. Another thing I would point to is we are very much moving our strategy towards ultimately higher value thus volume. And as we move through that process, that also would impact sort of our in-period growth profitability. But again, I think the key thing we will be doing over the second half of the year is looking at that portfolio, making sure we understand where it best aligns with our strategic ambitions. And then as we develop sort of those plans, we will get back to you and let you know where those stand. Second question, in terms of strategic options. I mean we put the various gas projects we had into the capacity options at the auctions earlier this year. As you know, we didn't -- the auction did not clear at a price that we thought was attractive. We continue to work on those projects to try to improve the economics, whether by making sure we understand all the potential revenue flows. I mean as you all know, the stability pathfinder tenders at National Grid has been running, I think, provide potential additional sources of revenue. So we're looking at those. We're also looking carefully at the cost base, and we would expect to enter the Damhead Creek 2 and the 4 open cycles into the auctions next year, at least that's currently our plan. The only thing I would say is that the judicial review, looking at the DCO for repowering. Clearly, there was a positive ruling on that in the first half of the year, but now that ruling has been appealed. So again, we're working with government to make sure that we address that appeal appropriately. And so depending on the timing of that, that could have an impact on whether or not we can enter that project into the auctions next year.

The next question is from Dominic Nash with Barclays.

A couple of questions for me, please. The first one is on pelleting. On your presentation, you're looking at very strong growth in the Asian demand for pellets. Do your existing plants on the sort of Southeast United States, can they sell for that market? Or if you wanted to pivot to that market, would you have to develop plants on the sort of Western Seaboard or Canada? And then the second question on contracting forward. You're obviously using the pellets for self-supply at the moment. If you end up getting more involved in, say, the Asian market, will that not put pressure on you and government as to how many pellets burned in the U.K.? Will you be cannibalizing your ability to actually have a big strategy and sort of like the time frame to when that starts to sort of eat in. That's actually one question, sorry. And then the second question, it's just a simple one. Listen, on the positive side of COVID-19, it looks like you got your operating costs down GBP 15 million. Could you just give an example of that? Is it possible that some of this or all of this could be a permanent cost advantage? Or is it a truly reversible one when everything reverts back to normal EBITDA?

Thanks, Dominic. I will take questions 1a and 1b, and then maybe I'll give the question to Andy. So in terms of the pelleting, the -- I guess the simple answer, I think, on whether we could sell from the southeast of the U.S. to Asia if we were to so choose, the answer would be, yes. Pricing is attractive in Asia. Some of our peers do today, sort of have contracts to sell pellets from the southeast of the U.S. into Asia. So that's something that's absolutely feasible. I think your second question is a very inappropriate one. I mean it is going to be something we need to watch quite carefully. I mean we have the ability, we still have 7 years before a decision would be to -- 7 years before we need to have those pellets in one place or another. But again, you need to make sure you prepare for those things quite early. So a lot of things will align in the early '20s for us to be making decisions on BECCS, right. We'll need to start investing significantly in the early '20s. So we need to make sure we have the right confidence in government to do that. We'll need to start replacing our pellets. So we'll need to make sure we know where they are going to go, and we'll need for several years lead time order to do that. So again, we are very, very excited about the opportunities that BECCS will provide, but we're also quite conscious we need to make sure we make decisions in the appropriate time frame.

And on the question of costs, so there's GBP 5 million of savings in the first half of the year, and with estimated GBP 15 million for the full year. And we've tightened our belts across the board, as you would expect, so looking at discretionary spend and nonessential projects and things given the current environment. Some of that will naturally bounce back. So for instance, travel costs, although we don't expect that it will probably return to where it was pre-COVID. But we did guide last year on corporate costs that we expected that we would maintain those broadly as they were but that we would reduce -- increase the amount of spend on innovation, but keep the total the same. And you'll actually see that in the first half, and that's a trend we expect to see for the full year that as we invest more in support in our BECCS strategy, and -- but we'll do that, but we'll maintain our level of spend overall. So we are building in some efficiencies in our corporate costs into the forecast.

The next question is from Fraser McLaren with Bank of America.

I also have 3 questions, please. The first one is another one on biomass pellets. And just wondering if you can speak a little bit more about the scalability of those new satellite plants, please? And how important these are in the overall model in terms of reducing costs. And just to be clear that these are in addition to the $64 million outlined on Slide 17. That's the first question. The second question is on employees. And just wondering if you can update us on the status of your discussions with the unions relating to the coal closure? And also perhaps a little bit more about the changes to the management structure after Andy's departure. And then lastly, could you speak a little bit more about the advantages of looking at the 2 separate technologies for CCS? Do you have a preference at this point in time?

Thank you, Fraser. First, on the satellite plants. Maybe just first to describe how the concept works. I mean the idea is that it's basically a pellet plant in a box. So take a shipping container, all the equipment in there and it allows you to sort of modularly design and build up, which again, creates significant opportunity for savings in the actual capital cost. Then the amount of capacity that you would use, the number of these modules you will use will depend upon effectively the amount of sawmill residues that we can get sort of where we place them. So the idea is you put these near a sawmill, you have an offtake contract from the sawmill owner. And effectively, that's effectively your furnish of fiber. And so at the end of the day, start with one, you could ultimately, if there's more sawmill residues available in a certain spot, you can put another one. The way we think about the current plan in terms of the sort of the impact on the overall picture is that well there's 3 in this sort of one cluster. I mean the benefit of cluster i.e. is, there's 3 in a cluster, one of them -- each of those getting sawmill residues from a different sawmill, but they then share sort of common logistics infrastructure, i.e., they're all going to be going to a sort of barging system in -- river-based barging system, and then we'll ship those down to our Port Baton route. And so that's the cluster. We've identified several of these, and we think we could ultimately do as many as 4 or more. So I would say, sort of 0.5 million tonnes from 4 of these, plus or minus, is one good way to think about it. Specifically, the cost savings from these are outside of the $64 million. So $54 million is $35 a tonne on the 1.85 million tonnes that we have currently got in our 3 existing plants and their expansion funds. But finally, I would add those, and one of the things that's also interesting that we're looking at is the best way to expand our capacity is to expand capacity at our existing sites. And to the extent that we have healthy wood baskets, the opportunities will be there to potentially do that. So we continue to look at ways of doing expansions, both at our existing sites and then the satellite plants probably will have similar opportunities over time. On the employee situation, we've been working with our employees and with our unions for quite some time now on trying to work out a plan that works both for Drax in terms of making sure that we can be viable and have the right cost base once we move past coal. And also, at the end of the day, do what's right by our employees, right. We've had good discussions. We have effectively -- GMV and prospect are aligned with our plan. We need to work with unity to sort of hopefully get them to a similar place. And ultimately, that's our objective. I mean we recognize that it's a challenging time for everybody And so we need to -- we will make sure we take that into account, and we believe that we are with the plans that we're making. And ultimately, if we don't get to where we need to get to, we're prepared for various different contingencies, although don't currently expect that to be where we end up. In terms of management structure, as I mentioned, effectively, the Generation business has 2 sort of big pieces to it. There is the running operating and management of the generating assets, Hydro, pump storage, thermal and the Drax power station. And that responsibility is with now Mike Mosley, as I mentioned in my presentation, and he is reporting directly to me. The other portion of it is the trading and optimization. I'm making sure that we sell and manage that position effectively. That's led by Charlotte Roads, who also is reporting to me, and that's the plan that we have. Key point there for me just to mention is that the team there has done an outstanding job of making sure that they are really very well aligned all the way from the biomass supply chain through the logistics, through the generation and then optimization. So that we have the material, the pellets that we need to generate as and when we need to. And I think they demonstrated an excellent performance there in the first half of the year. Final point, part of the benefit of having 2 technologies, I mean the -- there are very well-proven technologies for capturing CO2, as you know. And MHI from Mistubishi Heavy Industries has one of them. I mean they're project that Petro Nova in the U.S., very successful. I think 1.4 million tonnes of CO2 captured per year. And so working with them, I think, makes a lot of sense for us because having a proven technology that is demonstrated at scale makes a lot of sense, right. At the same time, we also believe that the carbon capture technologies are quite early in their development. And so C-Capture, we believe, has some very exciting technology, as we've discussed before, that ultimately will provide a route to a cost down over time for the cost of the carbon. When we recognize that one of governments and our sort of key objectives as we develop BECCS is the ability to demonstrate technology improvement over time. And that's one of the important ways that we expect to be able to do that.

The next question is from Pavan Mahbubani with JPMorgan.

I have 2 questions, please. Firstly, could you talk about the thinking behind the lower dividend growth rate compared to previous years? And just walk us through what the thinking was in terms of how you balance that with your CapEx, et cetera? And my second question actually relates to CapEx. So you've reduced your CapEx, looking at your strategic options for biomass cell supply. Is this just timing related to COVID? Or should we take this as a change in priorities and reducing your commitment to the self-supply versus looking up carbon top doctors, for example?