Drax Group plc (DRX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Drax Half Year Results presentation. My name is Stuart, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Will Gardiner, CEO. Please go ahead.

Thank you, and welcome, everyone. Using the usual format, but I'm trying to be brief, given that we will just be using audio. So I'll start on Page 4. At Drax, our purpose is always at the core of what we do, enabling a zero-carbon, lower-cost energy future. And during the first half of the year, we made great progress. By selling our Drax assets and ending commercial coal generation, we are transforming to the largest U.K. pure-play renewable power company, and we are well on our way to achieving our ambition of becoming carbon negative by 2030. Through the acquisition of Pinnacle, we're also the world's leading biomass generation and supply company and have made great strides towards achieving our key strategic goals for biomass. We continue to lower the cost of biomass power generation and are 3 million tonnes towards our 5 million tonne goal for self-supply. At the same time, the global momentum for decarbonization continues to grow; in particular, the recognition of the importance of carbon removals and the role Drax can play to deliver them. In short, Drax is well positioned to take advantage of growth opportunities in flexible renewable generation in the U.K. and environment impacts globally. Turning to Page 6. At the same time, we made that we made great strides strategically, we also continued to deliver. Safety is our priority, and we reduced our recordable incidents to only 5 in the first half of the year. We continue to manage carefully through COVID, not having any significant outbreaks on our sites, keeping our supply chain moving and delivering the power that the U.K. needs. We grew earnings in the shape of EBITDA by 4%, and our expectations for the full year remain unchanged, inclusive of Pinnacle. We reduced our pellet costs by 8% and we increased pellet output, including Pinnacle, by 70%. In Generation, we continued our decarbonization journey and have now reduced our carbon emissions by greater than 90% since 2012, while continuing to support the U.K. power system with ancillary services and in the balancing market. In our customer business, we bounced back well from the challenges of COVID last year. And as evidence of our confidence in our business and the opportunities in front of us, the Board is recommending a 10% increase in our dividends. On Page 7, we have reduced our generation carbon intensity more than any other European utility, and that journey will continue, given the end of coal and gas-fired power generation. Over the course of this year, we will be announcing further targets for reducing our emissions. We recognize that it is important not only for us to deliver negative emissions but also to reduce our own residual emissions and emissions in our supply chain, and we are working on that. Turning to Page 8. We are fully committed to building a long-term sustainable business with the health and wellbeing of our employees at the core, as well as doing our part for the communities where we operate and for the environment. Our performance in the first half was strong across all those metrics and was increasingly recognized by third parties, highlighted by our inclusion in the S&P Global Clean Energy Index and the Active Net Zero Clean Energy Index. We are also increasingly inventing carbon targets in our financings. Our long-term borrowings as well as the FX and derivatives trading that we do have incentives for further carbon reduction. Turning to Page 9, talk about generation. Our generation business continues to perform well, providing 12% of the U.K.'s renewable power. The availability of our CfD biomass unit was exceptionally strong, and we also got a boost in the first quarter from our last remaining coal gas generation. Earnings were lower in biomass as the cost of biomass in the period reflected the weak pound that we hedged 5 years ago as well as power prices that we hedged primarily 1 and 2 years ago. We expect both of those to improve in current coming periods during the recovery in sterling as well as currently high commodity prices. Finally, gross profit from system support services increased by 6%, reflecting coal operations during the first 3 months of the year and a good performance from our hydro and pump storage assets which, alongside biomass, continue to represent most of our earnings in this growing market. Turning to Page 10. Drax is now the second largest producer and supplier of biomass globally. We have 17 pellet plants in developments across 3 major fiber baskets, and we operate out of 4 deepwater ports. This gives us excellent resilience both operationally and logistically, and we are finding the combination with Pinnacle to be incredibly exciting. Making more pellets is not something we can learn in school. And our combined business has faced many challenges over the years and learned a wealth of lessons that we are now sharing across the portfolio. Our Canadian facilities face severe cold weather challenges, whereas our U.S. facilities face heat, hurricanes and rain. We use a range of different types of fiber in multiple forms. We have a wealth of supplier relationships. This combined experience, alongside our expertise in using biomass for generation, provides options to do more with biomass and more opportunities for value creation. In addition to our current plans, we also have a portfolio of new development options that we are in the process of prioritizing and we will look to execute as we grow our business. On Page 11, we also have excellent customer relationships in all the major biomass markets: the U.K., Europe, Japan and Korea. I have met virtually with many of them, and we're excited about the depth of those relationships as well as about the opportunities we have for growth. And I'll get into that more in the section of the strategy towards the end of the presentation. Page 12. Our top integration priority has been continuity of safe, low-cost, sustainable production, and we are doing that. Andrea Johnston, the CFO of Pinnacle, is also now leading Pinnacle overall, ensuring an ongoing focus on delivery. Matt White, who leads the operations of DBI, is also now running the Pinnacle pellet plant as part of Andrea's operational team. This is allowing us to quickly implement Drax's standards for health and safety, engineering, process safety and sustainability, and we will put in place a permanent structure across the group by the end of this year. I've had good meetings with most of our joint venture partners who are key stakeholders in our business, both as partners and also as fiber suppliers. While Westervelt decided to sell us their JV stake in Alabama Pellets, they will continue to be a key supplier. As we said at the time of acquisition, we will be making incremental investment in the Pinnacle facilities to ensure they meet our standards, as Andy will describe. I want to emphasize that I've been really impressed with our Pinnacle colleagues. They understand how to make a good pellet, they understand the markets and the opportunity, and they are excited to deliver the opportunity we have in front of us. Now on Page 13. Operationally, our pellet business is in good shape. Production is up 70% year-on-year to 1.3 million tonnes, and earnings have increased from GBP 25 million to GBP 40 million. Of that 1.3 million tonnes, we sold 400,000 to customers. Importantly, our production cost is down to $141 per metric ton, a significant reduction on the $154 per tonne in the first half of 2020. We continue to grow our capacity. With the Demopolis 360,000-tonne plant commissioned in Q3. The LaSalle expansion of 150,000 tonnes due to come onstream in Q3 as well and the satellite plants of 120,000 tonnes coming onstream starting in the fourth quarter. Now on Page 14. As we come out of COVID, we are repositioning our customer business to focus on its high-quality I&C customer base. These customers are lower risk than the SME customers and they are more aligned with Drax's corporate purpose of enabling a zero-carbon, lower-cost energy future. They are all consumers of renewable power, which is an increasing demand in the U.K. And it's interesting that there's a premium emerging for renewable power, which positions us well. In the first half, that I&C business performed well, increasing the volume of forward contracted sales for delivery in future years by 27% compared to the first half of 2020. We continue to look at options for our SME portfolio. Overall, our customer business significantly improved its earnings as the impact of COVID receded, and it's on track to return to profitability this year. And now I'll turn it over to Andy for the financial review.

Thank you, Will, and good morning, everyone. Financial performance was robust in the first half, with GBP 186 million of adjusted EBITDA from continuing and discontinued operations, an increase of 4% compared to GBP 179 million in the first half of 2020. At the end of January, we completed the sale of our gas operations, which contributed adjusted EBITDA of GBP 21 million in the period compared with GBP 19 million in the first half of last year. During April, we completed the acquisition of Pinnacle. Integration activities are progressing well and the post-acquisition results of Pinnacle are included in adjusted EBITDA for pellet production and are in line with our expectations. Following the sale of our gas operations and the acquisition of Pinnacle, we've adopted a new income statement presentation. You'll note that adjusted EBITDA is no longer on the face of the income statement, but the details are provided in the notes. We report this adjusted EBITDA after material one-off exceptional items that, by their nature, don't reflect the trading performance of the group. In the period, we recorded a GBP 48 million exceptional deferred tax charge following confirmation that U.K. corporation tax rates will increase to 25% in April 23. We also incurred exceptional transaction and integration costs of GBP 10 million in respect to the Pinnacle acquisition, and we recorded an exceptional gain on the sale of the gas operations of GBP 16 million. We continue to have strong liquidity, with available cash and committed undrawn facilities at the end of June of GBP 666 million. The ratio of net debt to adjusted EBITDA was 2.5x for the 12 months ended 30th of June, and we continue to expect to deliver around 2x net debt to adjusted EBITDA by the end of 2022. The Board's resolved to pay an interim dividend of 7.5p per share, and we expect this to be 40% of our full year dividend of 18.8p per share, subject to continued good operational performance during the second half of the year. Both the interim and expected full year dividend represent a 10% year-on-year increase. Moving on to Slide 17 and looking at the adjusted EBITDA bridge. We've made strong progress in pellet production, and we continue to develop our biomass self-supply to expand the capacity and reduce costs. Included in the post-acquisition results of Pinnacle, adjusted EBITDA grew GBP 15 million or 60% to GBP 40 million in the first half, reflecting growth in the existing business and acquisition of Pinnacle. EBITDA in our existing business grew around 20%. And as I noted, Pinnacle performance for the period post acquisition is in line with our expectations. Pellet production of 1.3 million tonnes represents an increase of 70% compared to the first half of 2020, reflecting both the acquired volumes from Pinnacle and commissioning of additional capacity at Morehouse. Approximately 1/3 of this production was the sale to third parties under established long-term contracts. Our biomass cost savings remain a key strategic focus, and we're making good progress against our target to reduce cost to GBP 50 a megawatt hour by '27. The average cost of pellets produced across our expanded portfolio of $141 a tonne was 8% lower than $154 a tonne in the first half of 2020. In Generation, EBITDA of GBP 185 million was a reduction of GBP 29 million compared to the first half of 2020. Within that, biomass EBITDA reduced GBP 61 million and reflected weaker year-on-year hedged power prices and hedged foreign exchange rates. On power prices, we hedge around 2 years in advance, and therefore, achieved power prices in the period reflect hedges primarily placed in 2019 and 2020 when prices were lower than they are currently. The current higher power prices persist. The benefit of this will start to flow through our results in future years. I'd note that since we announced our prelim results at the end of February, we've added 5 terawatt hours of hedges across 21 to 23 at an average of GBP 70 a megawatt hour. We hedge foreign exchange rates on a quarterly basis around 5 years in advance, and the hedged rate for the first half reflects a period of significant uncertainty in advance of the Brexit vote in June 2016, and it's over 10% lower than the rate we achieved for 2020 as a whole. When we set our GBP 50 per megawatt hour ambitions, we assumed a long-term average rate of $1.45. And while our overall portfolio rate is below this level, reflecting the low stock regime over the last few years, the rates achievable this year out for 5 to 6 years have been broadly in line with that $1.45 target. Overall availability of our biomass units of 88% was slightly ahead of 87% in the first half of last year and underpinned by strong performance of the CfD unit where availability was 97%. Our RO availability was lower than in the first half of last year, reflecting a small increase in the false outage rate, as a result of which we bought back power positions and reprofiled generation to the second half of the year. I'd note that financial performance for the Generation business will reduce in the second half, reflecting the planned maintenance outage on our CfD unit, the sale of the gas assets and commercial closure of coal operations. Our pump storage and hydro assets in Scotland continued to perform well, contributing significantly to overall gross margin from system support, which increased from GBP 64 million to GBP 70 million in the first half of this year. These assets alongside biomass continue to represent the majority of our earnings in this growing market. In the period before disposal at the end of January, our gas assets benefited from higher power prices and increased demand for system support activities, delivering EBITDA of GBP 21 million, up from GBP 19 million in the first half of last year. Similarly, prior to the end of commercial generation in March, the coal units benefited from increased power prices, increased price volatility and demand for system support servicing. They delivered EBITDA of GBP 23 million compared to a loss of GBP 5 million in the first half of last year. The coal units remain available to meet their obligations under capacity market contracts until September 2022 and are only expected to run if called upon by system operator to meet balancing market or capacity market requirements. Our Customers business delivered adjusted EBITDA loss of GBP 5 million, including an estimated impact of COVID in the region of GBP 10 million to GBP 15 million. This compares to an EBITDA loss of GBP 37 million in the first half of 2020, which included a GBP 45 million impact of COVID. We are on track to return to profitability in 2021. In the first half of last year, we recorded bad debt expenses of GBP 26 million, reflecting increased risk of business failure as a result of COVID. Charges in the first half of this year have reduced to GBP 8 million. Our cash collections have been strong. Direct debit cancellations are below historic levels and reflect a healthier debt position in our business. Gross debt has reduced GBP 22 million in the first half, moving below pre-COVID levels. We're implementing some restructuring as we continue to explore operational and strategic options for our SME business. We incurred exceptional costs of GBP 2 million in respect to these activities in the period and anticipate some further costs to be incurred in the second half of the year. Activities include streamlining our operations with the closure of offices in Oxford and Cardiff and the rebranding of the Haven Power I&C business to Drax Customers. We've seen a strong recovery in demand in the I&C supply business with electricity supplied above pre-COVID levels. However, our SME supply remained significantly lower due both to the ongoing restrictions associated with the pandemic and as a result of tighter customer credit criteria that we've implemented. In the last 12 months, we've increased the future volume of the I&C committed book by 27%, signing higher quality customers in our target segments. This includes 3 major customer wins since the start of the year with a combined annual supply volume of 3 terawatt hours from 2022. Finally, on this slide are central and other costs, reflect core service functions and include innovation, and they increased by GBP 7 million in the period, but this reflects continued investment and development in key innovation projects such as BECCS. So turning to Slide 18 and our focus on biomass cost reductions. In November 2019, at our Capital Markets Day, we announced the target to expand our self-supply capacity to 5 million tonnes by '27 while reducing the portfolio cost of biomass to GBP 50 a megawatt hour. In support of that ambition, we outlined specific plans to deliver $35 a tonne cost savings on DBI self-supply capacity of 1.85 million tonnes and those savings to be delivered by the end of '22. This equates to $64 million of run rate cost savings. We're making good progress, and we've delivered $36 million of this to date, including the benefit of the expansion of Morehouse, which commissioned at the end of 2020. This run rate will increase further when the LaSalle expansion is commissioned in August, and we remain on track to deliver these target savings. Our innovation team continue to assess options for widening the fuel envelope to include other lower cost sustainable biomass materials. In time, we believe these materials could represent 1 million to 2 million tonnes of sustainable biomass and make a meaningful contribution to our cost reduction targets. In this regard, during the first half of '21, at Drax Power Station we completed trials of 4 different low-cost biomass materials to test combustion chemistry and handling. One of these materials represented 35% of the fuel mix on one of the units during testing runs. This is a significant increase, although there remains much work to do. Our production cost of $141 a tonne across the enlarged portfolio represents a reduction of 8% or $13 in the first half of 2020 compared to $154 last year. And it reflects our ongoing program of cost reduction and supply chain improvements and the addition of lower-cost Pinnacle production. We expect to deliver increased capacity and further savings in the second half of this year associated with the improvement of existing sites, the commissioning of the LaSalle expansion and the Demopolis plant, and the ongoing development of 3 satellite plants. These expansions will increase our production capacity to 4.9 million tonnes once complete and allow greater utilization of lower-cost sawmill residues whilst leveraging existing infrastructure in the U.S. Southeast. Now moving to Slide 19, capital investments. Our capital expenditure totaled GBP 71 million in the first half of this year. Following the acquisition of Pinnacle, we're assessing investment opportunities across the enlarged Pellet Production business, and as a result, the timing of some of this capital expenditure is deferred to the second half. Key developments in the period include the expansion of our LaSalle pellet plant, which will increase production capacity by 150,000 tonnes when it commissions in the third quarter; and investment in the new Demopolis pellet plant acquired as part the Pinnacle transaction, which is expected to come online in the second half, adding 360,000 tonnes of capacity. We're also continuing to develop our satellite plants, the first of which we expect to commission in the fourth quarter. In addition to commissioning the Demopolis plant and as highlighted at the time of acquisition, we're also investing across the acquired Pinnacle portfolio to ensure standards. And combined with the commissioning of the Demopolis plant, we expect capital expenditure in respect to the acquired Pinnacle assets to total GBP 40 million this year. In total, our capital expenditure expectations for the year are between GBP 210 million and GBP 230 million. So moving on to Slide 20 and the balance sheet. We maintain a strong focus on cash flow discipline and maintenance of a robust balance sheet. It provides protection in times of economic uncertainty, but a strong platform from which to execute our strategy. Available cash and committed undrawn facilities provide substantial headroom over our short-term liquidity requirements. And as I noted at the end of the period, we had cash and committed facilities of GBP 666 million. Our net debt-to-EBITDA ratio based on reported EBITDA for the last 12 months of GBP 419 million was 2.5x at the end of June. This compares to 1.9x at the end of December and primarily reflects the impact of the Pinnacle acquisition and the sale of the gas assets. We do expect this ratio to be higher at the end of 2021, driven by capital expenditure weighting to the second half of the year, the minority interest buyout of Alabama Pellets, which we announced in July, and the impact of the CfD unit outage. But we continue to expect to deliver a ratio of 2x by the end of 2022. In July, we completed the refinancing of the Canadian dollar facility acquired as part of the Pinnacle acquisition, and they had a cost of over 5.5%. The new facilities include a CAD 300 million term loan and a CAD 10 million revolving credit facility. And those facilities, they mature in 2024, they diversify the group's sources of funds, and they further reduce the group's all-in cost of debt to below 3.5%. As Will noted, they include an embedded ESG component, which adjusts the margin payable based on the group's carbon intensity measured against an annual benchmark. These new facilities, alongside existing cash reserves, refinanced CAD 435 million, which were drawn under the acquired facility. Both Fitch and S&P have affirmed our corporate credit rating after the acquisition of Pinnacle as BB+ stable. We also have a BBB flat investment-grade corporate rating from DBRS. The quality of our group's assets, earnings and cash flows give rise to further opportunities to reduce the cost of debt in the future. And finally, on Slide 21 and our capital allocation policy. We continue to think about our approach to capital allocation in 4 steps. Firstly, maintenance of a strong balance sheet with a target net debt to adjusted EBITDA of around 2x. And as noted, we continue to expect to deliver around 2x net debt to EBITDA by the end of '22. Secondly, a continued investment in the core business. And as noted, we expect CapEx this year to be between GBP 210 million to GBP 230 million. Thirdly, a sustainable and growing dividend. The 10% expected increase in the full year dividend for '21 and an average annualized increase of 10% over the last 5 years is consistent with this objective, whilst the precise level of growth will vary year-to-year depending on operating environment and investment needs of the business. And finally, return surplus capital beyond investment requirements. In this regard, I'd note we have a range of development projects across the group which offer attractive returns but could require significant investment. With that, I'll hand back to Will.

Thanks, Andy, and I'm now on Page 23. So Drax is undergoing a remarkable transformation. The carbon and climate change benefits of that are clear, and we are now essentially a pure-play renewable energy company. That repositioning of Drax has also put us in front of some major growth trends. First, as a renewable power company in the U.K., we see an increasing need for the system support and renewable power that we can provide, and we will look to participate more in those markets. One example is through the potential expansion of Cruachan. The government took another step in that direction last week, launching a consultation on the measures needed to support the deployment of large-scale and long-duration electricity storage. It is encouraging that the government is already acknowledging the relevance of the cap and floor model as an effective approach for achieving this, in line with Drax and wider industry views. On the basis of the consultation of responses, the government will outline next steps in 2022. In biomass, we see a growing recognition that biomass will be an important source of renewable power globally. And finally, there's growing global recognition that negative emissions will be absolutely necessary, and quickly, if we're going to achieve a 1.5-degree pathway, and we are well positioned to deliver strong growth across all of these opportunities. So moving on to Page 24. Over the last 12 months, there have been a series of important announcements that highlight the key role biomass will play in the energy transition. In the U.K., biomass was highlighted in the Energy White Paper as one of our most valuable tools for reaching net-zero emissions. In the U.K. -- sorry, in Japan, the government's doubled its target for biomass power generation to 8 gigawatts and its plan for achieving net-zero by 2050. And importantly, in Europe, biomass is set to grow by 70% and the recent set of proposals, including RED III, were very supportive of the role of biomass, and more importantly, BECCS, in the European energy mix. Those RED III proposals also call for increased sustainability centers. We are very supportive of higher standards. There's no question that biomass must be used in a sustainable way, and Drax is the global leader in biomass sustainability. And we will continue to work with standards bodies, regulators and NGOs to extend those standards to more markets and to ensure that they follow the latest science. And we've provided more detail in the appendix, on Page 43 and we'll come back to that, on the latest European proposals. Turning to Page 25. The recognition that biomass will be critical is being underpinned by a need for carbon renewables, so-called negative emissions. And the Coalition for Negative Emissions recently released a report with knowledge and advisory support from McKinsey that highlighted the need for negative emissions if we are to achieve a 1.5 degree pathway. And that view is shared by the Intergovernmental Panel on Climate Change, the International Energy Association, the Energy Transitions Commission and the U.K. Climate Change Committee, among many other international bodies. In fact, today, the National Infrastructure Commission has published another report demonstrating the importance of negative emissions in enabling the U.K. to reach its net-zero targets, and quite explicitly calling for BECCS to be brought online in the 2020s. Importantly, the Coalition for Negative Emissions report highlighted that BECCS is one of the lowest cost ways of achieving carbon removal of between GBP 225 and GBP 90 per tonne today, and potentially dropping as low as GBP 45 per tonne when done at scale. And finally, it also confirmed that up to 4 gigatonnes of BECCS can be done sustainably on a global scale and I want to absolutely emphasize that sustainability is a critical limit. But that is -- this big opportunity is the equivalent of 1,000 BECCS 4 million-tonne units globally. Turning to Page 26. And as you would expect, we're working hard to deliver on that opportunity. We're investing in CCS technologies through C-Capture. We're exploring the markets that we think will be attractive, including the U.S., in Europe and in Asia. We're working with Bechtel to understand the best technology for new Drax plants, and we're working with Phoenix BioPower on specific biomass turbine technologies. And I believe this is going to be a big opportunity for Drax globally, and we will update you further at our Capital Markets Day, which we will be hosting in November. Turning to Page 27. And our first opportunities to do BECCS here in the U.K., and we're making great progress. We started our planning permission, and we will be ready to begin building in early 2024. We have chosen our technology partner, MHI, Mitsubishi Heavy Industries, who is the world leader in capture technology. Our next step will be to choose a FEED partner, which we would expect to do towards the end of this year. We are a participant in the East Coast CCS cluster that brings together projects from Humber and Teesside to form U.K.'s largest industrial cluster and biggest opportunity to deploy CCS at scale. The cluster is well positioned to be selected in Phase 1 of the government's CCS cluster sequencing competition that will enable deployment of CCS transport and storage infrastructure in time for the development effects at Drax. And finally, we continue to work with the government on the process for allocating funding for BECCS projects. And our own projects correlate extremely well against the assessment criteria that the government is using to select clusters. So in terms of carbon reduction at 8 million tonnes of negative emissions before 2030, we represent the largest single opportunity to reduce the U.K.'s carbon footprint. In terms of value for money, supporting BECCS at the Drax Power Station, we saved the U.K. over GBP 13 billion in meeting its fifth carbon budget. In terms of deliverability, we completed pre-feed, selected our technology partner, and commenced our planning process, making us one of the most mature CCS projects in the country. And finally, in terms of the socioeconomic impact, doing BECCS at Drax will secure the current 6,000 jobs that Drax supports across the North of England and create as many as 10,000 new jobs at the peak of our construction. Now turning to Page 28. And finally, before I come on to our outlook, I wanted to comment briefly on our post 2027 plan. 1.5 years ago, we described 3 potential business models for biomass that would work in a world of 5 million tonnes of self-supply at 50 pounds per megawatt hour. And if we look at those now, I am more confident that all 3 will work well. We have a strong and growing third-party sales business, supported by growing interest and demand for biomass globally. BECCS is increasingly recognized as critical to the global delivery of the 1.5 degree pathway, and we have the most advanced project in the world. And finally, we are confident in our ability to reduce the cost of biomass power generation. Importantly as well, power prices are rising, largely driven by carbon prices, and volatility is increasing, both of which will help create a profitable biomass generation business. Now winter baseload prices of GBP 95 currently are no long-term guarantee, but they are an interesting indicator of what is possible. Finally, on Page 29. We've had a good start to the year, operationally and financially. The second half, as always, will have its challenges, and our CfD outage is a key deliverable for us. On the other hand, the current high power price environment also creates opportunity. And as I said at the start, our expectations for the full year remain unchanged. Safe operational performance is always critical, and we remain focused on delivering that. Fundamentally, I am extremely excited about the future for Drax. We sit in the front of a massive energy transition globally that will require our biomass, our BECCS, our ability to generate and sell renewable power and support power systems. We have everything to look forward to. Thank you all for listening, and I'm happy to take any questions.

[Operator Instructions] Your first telephone question today is from the line of Martin Young from Investec.

Yes. Just a couple of questions, if I can, please. The first one relates to pump storage and the encouraging noises from government about the ambition to get more long-duration storage into the mix. You've alluded to the cap and floor, which does appear to be your preferred route to remuneration. But there's also consideration of that type of assets being given a longer time to build so that we could participate in the capacity market. Would a 15-year new build max capacity market contract on pump storage, if at the right level, be something that could cause you to take a positive final investment decision on pump storage? And what's the timing we should be thinking around that? And then the second question relates to how you will finance a storage expansion, how you will finance ex if either of those 2 come in to pass. You do have within the portfolio, obviously, the SME business that you are reviewing. You've got those OCGT assets with a 15-year capacity market contract. Could you just sort of update on the likelihood of the disposal of either or both of those to assets/businesses? And what sort of timing we could be thinking about in terms of decisions being made?

Thanks, Martin. Two quite comprehensive questions. On pump storage, I mean you're absolutely right. There are sort of a couple of options that are being considered, the cap and floor as well as the possibility of a, as I understand it, kind of a sort of 6-year, or call it, T-minus-6 capacity market auction that would give us more time to build another 15-year contract from then. I guess what I would say -- well, 2 things I would say. One is that a 6-year contract -- 6-year time frame, I think, would enable us to do the build before that CM contract would come into effect. So it is, I think, operationally, or it is feasible. Currently, my preference is definitely for a cap and floor because I think it is difficult to forecast the volatility. So I think that would be our current preference, but we will wait and see how that all plays out. And I think we are still a few years away from being in a position to actually start building on that project. And as you know, we've started our planning process for that this half year as well. In terms of financing for pump storage and/or BECCS, I mean as you would imagine, we're doing quite a lot of work in thinking about that. But again, it's too early to give you a sort of a concrete plan. I would say that both of those, again, based on what I just said, would likely come with quite clear and supported sort of revenue and earnings streams, which I think is an important factor. So we obviously, look at -- take that into consideration when we think through the financing plans for one or both of those programs. In terms of disposals, we continue to look at the opportunity to -- as far as the open cycles, and we're having some interesting discussions there. I wouldn't give you a time frame. We'll see how that plays out. And on Customers, I just would repeat, I think, what we said in our presentation so far, we're very comfortable and excited about the opportunities we have in the I&C space for the larger customers. As Andy mentioned, we are going to be rebranding the Haven business as Drax. So that is a nice and attractive part of the portfolio and gives us interesting opportunities both for a route to market for power today, for renewable power, as well as in the future possibly for other types of things like negative emissions, for example. But on the SME side, we continue to look at the best opportunities and the best plan there, both strategically and operationally, for that part of the business. And so again, I wouldn't give a timeline, but we're still looking on that.

Next question is from the line of [ Michael Watton ] from RBC Capital Markets.

Question, first of all, [indiscernible] start in production costs at Drax. Is it -- this is a lower production cost that the Pinnacle-based plants that have come in or a higher share of the Pinnacle production in the mix to drive lower costs? Or cost of the original Drax plant is also decreasing in Western Canada? And then a second quick one would just be what has sort of been the engagement on the U.K. biomass white paper expected to come out this summer? You've been engaged there. Any updates or things that we should expect?

Okay. So Michael, you were a little bit cutting in and out. So I'll repeat what I think was the first question, which I'm going to ask Andy to take in a second. But I think the question was, were you able to achieve a lower cost of biomass production because of either, a, the inclusion of Pinnacle; b, cost reduction at DBI or a combination of the two, and I'm going to ask Andy to answer that one in a second. And then the other one was what has been your engagement on the bioenergy strategy which the government is expected to announce later this year ends out? On the second one, we absolutely have been heavily engaged in that. We think -- I mean I think, again, obviously, the government is working on that. We'll see how that comes out. We've put in our responses to the consultation. I was, again, very encouraged by the way biomass was described in the Energy White Paper at the end of last year, as I mentioned earlier, and we look forward to seeing how that bioenergy strategy comes out in the autumn. Probably Andy for the other one?

Yes. And on your first question, it's a combination of the two. So the cost of production that are pre-Pinnacle sites, DBI plants, they reduce in the period. And I think I said at the start that if you look at the profitability of the pellet segment, the 60% increase from GBP 25 million to GBP 40 million, that the underlying Drax business grew 20%, excluding Pinnacle. So some of that is volume. It's like the Morehouse expansion, but some of that is further cost reductions. And then when I talked about the $35 a tonne or $64 million target, the progress we're making with $36 million of that, that's all in the DBI business. So a long way around of saying we did reduce the cost in DBI but Pinnacle absolutely helps drive the portfolio cost further down.

Next question is from the line of Dominic Nash from Barclays.

I have 2 questions. The first is on carbon. The question on carbon is that, obviously, carbon prices have gone up a lot this year. Do you think that the U.K. government will introduce a market intervention? And do you think that there's a natural cap, either technically or politically, the carbon prices can get both in the short-term power markets, but also longer term for your BECCS technology? And the second question is really about power prices and consensus numbers. You said that you're happy with analyst consensus, I think the number spent around was GBP 377 million for this year. But I don't think that's much of a rise or could you -- I mean what analyst consensus has done over the year? Because in the year-to-date, I think winter '21, '22, power prices have doubled. I mean they're touching GBP 100 a megawatt hour now, just a phenomenal increase. And I'm just curious as to why there's been -- why you see there's no extra gains to come through to Drax either around the edges? Or secondly, do you have spare capacity in Unit 4 biomass or getting on 2 of the other units this winter to take advantage of this GBP 100 a megawatt hour power number?

So why don't I'll take a crack at your first question, Dominic, in terms of where carbon prices might go, and then I'm going to ask Andy to take a question around the consensus and power prices, et cetera. So I guess I mean, so I don't have a -- I don't believe that there is a sort of natural path, either politically or economically, that the government would put into place. I think there's a whole bunch of factors there. There is a -- there's no explicit sort of linkage, obviously, with the European market, but the markets do seem to be trading in a reasonable range across the 2. And there will be some, I think, linking across power prices and across interconnectors. My own expectation is that what will happen over time, and this will take some time, it's already starting at the end of the year, is that the logical thing that happened is that carbon removals will be compensated with the, sort of, call it the inverse of the carbon tax. And effectively, what that will do -- I mean that actually will be, I think, obviously quite positive for negative emissions because I think the price of carbon will continue to rise. But also, that does provide a sort of counterbalance to the increase in price, right, effectively protecting CO2 out of the atmosphere. That will allow the decarbonization to happen, I think, ultimately at a lower cost than if you have to get everything else to 0. And so that will provide a sort of counterbalance to where carbon prices will go. But I don't -- I'm not -- again, I'm not inside the room. So I don't know exactly how the U.K. government is thinking, but I'm not expecting any sort of an intervention on carbon prices at this point. Andy?

Yes. So on your consensus question, GBP 377 million was the number. And if that doesn't, just a clarification, include the continuing and discontinued, so it includes the gas operations that were sold at the end of January. And I think I mentioned that since the prelims, we've added 5 terawatt hours of -- into our power sort of hedge book at an average price of GBP 70. Only about 1.4 of that relates to 2021, and actually, that price was just under GBP 80 a megawatt hour. So when we talked earlier about reprofiling generation in the RO units from the first half to the second half, then we did capture some of that upside in the second half and that's part of being comfortable with the consensus for the full year. But the main benefit you'll see if these power prices persist is when you look forward into '22 and '23, where there's a great amount of the position that was unhedged and we're able to capture that, and you'll see the benefit coming through.

Just follow on from that question I had there, that was just how much wiggle room do you have to burn biomass this winter outside of the RO regime, just to take advantage of the GBP 100 power price.

I think on that, Dominic, I mean there's -- it's really like at a limited amount because it's a function of how many days. And effectively, we are -- probably the way to think about it, as we reprofile some generation into the second half of the year, we are running many of the days that are available. So there's not really a whole lot of available days left where we could run without support. So I think that the opportunity there is limited.

Next question is from the line of Mark Freshney from Credit Suisse.

Just to pick you up on the -- where consensus is. So to be clear, the fact that you're happy with consensus of GBP 377 million includes that GBP 20 million you want to call an exceptional gain from the CCGTs in January. So my first question is just on that. And secondly, on the Customers business, Opus, or the SME business, should I say, it seems to me like you're shedding business there, from what you say, you're shedding business there, streamlining it, shutting down parts of it to get that business together for a sale or other divestments. My question is, what is the carrying value of Opus in the books? Because I recall when you purchased it, there was over GBP 300 million. A lot of it was customer intangibles depreciated on a front-end loaded basis, but it would be interesting to know what the carrying value of Opus is in the books and whether you would need to impair it at some point if you drop large amounts of business.

I'm going ask Andy to take both of those questions.

So on the first question, Mark, just to be clear, the adjusted EBITDA for the discontinued operations of the gas that we sold at the end of January made GBP 21 million in January, and that is in the consensus number. But you referred to an exceptional gain. The exceptional gain on the sale of the gas assets is not in the adjusted EBITDA number because we treated that as exceptional. So that's stripped out in the exceptional items. So that isn't included in there. So it's just the trading performance of the gas assets that's in the GBP 377 million. When it comes to the carrying value of the Opus assets, I can't tell you off the top of my head what that is exactly. But what -- to your question on impairment, clearly, every time we report our numbers, where we're carrying goodwill in businesses, we need to be able to be confident that the carrying value supports those assets and that looks at earnings potential of that business going forward. And you can take it by the fact that we are not reporting anything at the moment, but we're comfortable that those carrying value are supported.

Next question is from the line of Jenny Ping from Citi.

Two questions, please. Just again, picking up on consensus. We talked about '21, but obviously, also, as you look into 2022, the EBITDA of just over GBP 500 million. I just wondered how comfortable you are with that given the forward curves that we can see and the remaining open positions that you have? And then secondly, going back to FX for a moment. If I just very simplistically look at the 5-year rolling average USD-GBP FX, it does seem like 2021 is the low point, i.e., the biggest impact in terms of your financials. Is that fair to say as we get into 2022, things will actually be improving and you're unlikely to see another FX headwind from 2022 onwards?

Okay. I will ask Andy to take both of them once again.

So on the '22 consensus, and we published that earlier this week, it was just over GBP 500 million of EBITDA. And I think there's a number of things in there. You should think about one being the CfD outage this year. Obviously, we said there's a cost of around GBP 50 million of earnings. So -- and we don't have that outage next year. Secondly, to address your FX point, you're right that '21 is effectively the low point, '22 will improve somewhat, so we don't have the same headwinds that we've had this year. But the -- post-Brexit, the rates were depressed for some time until we sort of recovered closer to sort of high 1.30s, 1.40s recently. But there is some improvement in the hedge rate next year, which helps. And then thirdly, the power prices, which, obviously, depends on our ability to capture the current power prices as we close out the rest of that forward position. But the 3 of those right now give us some comfort in where consensus is for next year. But clearly, on the power prices, we need to be able to capture those as we close out the forward book.

Next question is from the line of Adam Forsyth from Longspur.

Just a quick question on potential future BECCS policy. We just had a recent consultation paper on power CCUS, which has suggested a move away from an energy payment towards more of an availability payment mechanism. I wonder if that's something you might expect in BECCS policy and whether that would be something you would welcome or not, particularly as it, obviously, impacts on biomass consumption itself?

Thanks, Adam. I think that the power CCUS sort of consultation, I think that one of the dynamics around that which has been sort of quite important around having that availability payment is allowing for more flexible generation, effectively making sure that you can compensate those units when they're not necessarily running baseload, as power with CCS will become an important part of the system support market. We don't see sort of BECCS, frankly, playing that type of a role. We think the combination of the large-scale rotating plant that provides consistent inertia, et cetera, as well as the, really, primarily the value of the negative emissions being quite substantial but actually having more of a baseload running regime is what we think makes more sense, and that we would like to work with the government towards a system that actually works in that way.

Next question is from the line of Chris Laybutt from Morgan Stanley.