Drax Group Plc · LSE:DRX
Drax — Investor Day (June 2017)
74 slides from Drax's investor day presentation, Jun 15, 2017
Slide 1: Drax Group Capital Markets Day
Drax Group Capital Markets Day 15 June 2017
Slide 2: Presenters
Presenters DOROTHY THOMPSON, CBE Chief Executive Officer Drax Group WILL GARDINER ANDREW KOSS JONATHAN KINI PETE MADDEN Chief Financial Officer Chief Executive Officer Chief Executive Officer President and CEO Drax Group Drax Power Retail Drax Biomass 2 Drax Group plc – Capital Markets Day
Slide 3: Agenda
Agenda Introduction and Strategy 9.30 – 9.45 Dorothy Thompson Retail – Haven Power and Opus Energy 9.45 – 10.15 Jonathan Kini Generation – Drax Power 10.15 – 10.45 Andy Koss Q&A 10.45 – 11.15 Break Biomass Supply – Drax Biomass 11.15 – 11.45 Pete Madden Financial Model 11.45 – 12.15 Will Gardiner Q&
Slide 4: Strategy
Strategy Dorothy Thompson CEO, Drax Group
Slide 5: Helping Change the Way Energy is Generated, Supplied and Used
Helping Change the Way Energy is Generated, Supplied and Used for a Better Future Our purpose Delivering targeted Deploying expertise across To help change the way energy is generated, growth the supply chain supplied and used for a better future Generation How By providing inspiring, flexible energ
Slide 6: Drax 2025
Drax 2025 High quality growing earnings across all areas of operation Generation Key part of UK infrastructure EBITDA >£300m(1) Biomass supply At least 30% self- Retail supply Leading UK energy EBITDA >£75m(1) supplier EBITDA >£80m(1) Underpinned by safety, sustainability, (1) Excludes Central Costs
Slide 7: Investment Case
Investment Case Clear strategy offering Key components of the a strong growth Group in place, with opportunity continued earnings streams beyond 2027 Capital allocation Management team supports growth strategy focused on driving and dividend policy operational excellence and innovation 7 Drax Group
Slide 8: Retail
Retail Jonathan Kini CEO, Haven Power & Opus Energy
Slide 9: Retail Strategy
Retail Strategy A leading challenger Innovation Market differentiation Continued strong Commercial agility Focus on customers growth in SME(1) Lowering cost to serve Make renewables Profitable I&C(2) and sustainability Customer proposition simple A growing retail annuity Inspire change in energy use
Slide 10: Retail Business
Retail Business 1,400 people across five UK sites Northampton Opus Energy Cardiff Opus Energy Oxford Opus Energy Ipswich Haven Power London 10 Drax Group plc – Capital Markets Day Haven / Opus
Slide 11: Business to Business (B2B) Market
Business to Business (B2B) Market A major market with over five million businesses UK retail electricity consumption UK retail gas consumption c.300 TWh c.600 TWh 180 TWh 235 TWh B2C (Domestic) B2B B2C (Domestic) B2B ~2.5m B2B meters(1) ~0.9m B2B meters(2) Big 6 market share Big 6 market share 2016
Slide 12: Our Customers
Our Customers Over 340,000 meters in electricity & gas ~300,000 meters(1) ~40,000 meters(1) I&C SME Small number of large users Large number of customers, wide range of business profiles Opportunities for power, gas, renewable and value adding services across our markets Opus – target growth in SME
Slide 13: Opus Energy
Opus Energy Track record of SME market share growth and profitability Annual meter count over period Annual gross margin over period 2014 - 2016 2014 - 2016 300 120 250 100 Annual meter count (000's) 200 80 Gross margin (£m) 150 60 100 40 50 20 0 0 2014 2015 2016 2014 2015 2016 13 Drax Group plc – C
Slide 14: Opus Energy: Delivering the Strategy
Opus Energy Delivering the strategy A leading challenger Innovation Market differentiation Increase SME Customer service Certainty market share – easy to do business with Understand Strong TPI(1) relationships business needs; Tie up with expertise in Increase product holding Renewables SME market of
Slide 15: Opus Energy: Differentiating in the Market
Opus Energy Differentiating in the market Strength of service to Expanding product Customers and TPIs offering to new segments Comprehensive Understand the value online service of certainty to the SME market 15 Drax Group plc – Capital Markets Day
Slide 16: Haven Power
Haven Power Growth and increasing profitability in I&C / SME markets Annual supply volume over period Annual gross margin over period 2014 - 2016 2014 - 2016 16 25 14 20 12 Annual volume (TWh) Gross margin (£m) 10 15 8 10 6 4 5 2 0 0 2014 2015 2016 2014 2015 2016 16 Drax Group plc – Capital Markets
Slide 17: Haven Power: Delivering the Strategy
Haven Power Delivering the strategy A leading challenger Innovation Market differentiation Sales volume Renewable tariff Better use of energy products I&C profitability Partnerships New platform SME growth 17 Drax Group plc – Capital Markets Day
Slide 18: Haven Power: Differentiating in the Market
Haven Power Differentiating in the market Flexible contracts Demand side response Energy efficiency and Budget tracking consulting services 18 Drax Group plc – Capital Markets Day
Slide 19: Opus Energy On-boarding
Opus Energy – On-boarding Areas of focus in 2017 1 2 3 Insource power Deliver People and gas targets procurement 19 Drax Group plc – Capital Markets Day
Slide 20: Areas of Focus
Areas of Focus Future 1 2 3 Gas and Combining Customer renewables expertise propositions 20 Drax Group plc – Capital Markets Day
Slide 21: A Growing Retail Annuity
A Growing Retail Annuity Margin predictability through customer retention Retail Leading UK energy supplier EBITDA >£80m in 2025 High quality, visible earnings 2017 2018 2019 2017 EBITDA 2020 2021 of Opus Full 12 months 2022 2023 Insourcing 2024 and gas power 2025 2026 Growth 2027 Time Underpinned b
Slide 22: Priorities for 2017
Priorities for 2017 Supporting the strategy Opus Haven Supporting Renewables on-boarding financial targets innovation through and gas smart programmes 22 Drax Group plc – Capital Markets Day
Slide 23: Summary
Summary A leading challenger Innovation Market differentiation Continued strong Commercial agility Focus on customers growth in SME Lowering cost to serve Make renewables Profitable I&C and sustainability simple Customer proposition A growing retail annuity Inspire change in energy use 23 Drax Group
Slide 24: Generation
Generation Andy Koss CEO, Drax Power
Slide 25: Generation Strategy
Generation Strategy Optimise returns from Drax Power Station Expand business to support low carbon future and manage system stability Explore all options to exploit strengths beyond 2027 Underpinned by safety, sustainability, operational excellence and expertise in our markets 25 Drax Group plc – Ca
Slide 26: Safety and Sustainability
Safety and Sustainability Safety Total Recordable Injury Rate Strong safety performance – Lowest injury rates on record 0.10 YTD (2016: 0.13) Sustainability Drax average GHG emissions 100 Proven carbon abatement 80 – Well established sustainability policy 60 Major reduction in NOx emissions 40 79g 2
Slide 27: Generation Business
Generation Business Asset locations Drax Power Station 4GW Rapid response gas developments 1.2GW Other infrastructure 12Mt biomass handling capacity(1) 225 biomass rail wagons (1) Dedicated facilities at four major UK ports – Hull, Immingham, Tyne and Liverpool 27 Drax Group plc – Capital Markets Da
Slide 28: Optimise Returns: Biomass
Optimise Returns Biomass – low cost, large scale renewable generation CfD unit operations Stable and predictable revenues to 2027 – indexed to CPI ROC unit operations ROC revenues to 2027 – indexed to RPI Secure biomass supply and cost visibility Core fuel requirement secured 5-10 year fixed price-f
Slide 29: Optimise Returns: Biomass Operational Performance
Optimise Returns Biomass – optimising operational performance Availability Biomass availability World class performance – 95% availability January - May 2017 in Q1 2017 Investment Prioritisation of biomass unit performance Year-round high availability target Focus on CfD unit outage in Q3 2017 Innov
Slide 30: Optimise Returns: Flexible Coal
Optimise Returns Coal – flexible capacity focused on system support market Greater demand for system support services Half hourly market index prices January - May 2017 Flexible operations – Dynamic mix of revenues depending on electricity price and system operator requirements – Units positioned to
Slide 31: Optimise Returns: Coal Operational Performance
Optimise Returns Coal – optimising operational performance Availability Coal availability Limited summer operation, higher level January - May 2017 winter operation Secure capacity market revenues Investment Targeted investment, maintaining optionality Flexibility and reliability rewarded over effic
Slide 32: Meeting the System Operability Challenge
Optimise Returns Meeting the system operability challenge – Increase in intermittent and embedded generation Growth of – Closure of large thermal plant system support – Renewal of inflexible nuclear Key services – Frequency, reserve and voltage Markets – Prompt, balancing and ancillary service marke
Slide 33: Opportunities from Changing System Demand
Optimise Returns Opportunities from changing system demand requirements UK generation – varying intermittent generation 2017 (GW) 66 58 55 Peak winter demand 52 Minimum winter demand 25 Minimum 18 summer demand Minumum wind Average wind Max wind Nuclear CHP Interconnectors Wind Biomass Gas Coal 33 D
Slide 34: Expansion Opportunity: Rapid Response OCGT
Expansion Opportunity Rapid response Open Cycle Gas Turbines (OCGT) Why rapid response? Response to system operability challenge – Highly flexible – Rapid delivery of full load from stand-still Strong strategic fit – Long-term revenue predictability from capacity market – Builds on generation and tr
Slide 35: Rapid Response Gas Project Update
Rapid Response Gas Project update Four sites with total capacity of c.1,200MW Four x 299MW units Two sites with all principal permits Progress Power and Hirwaun Power – Bidding in 2017 auction for 15 year capacity contract Progress – Target operations three years post contract award Hirwaun Two site
Slide 36: Rapid Response Gas Investment Case
Rapid Response Gas Investment case Option to develop 1.2GW of new OCGT gas Investment decisions subject to 15 year capacity contract Multiple revenue streams, with high visibility from capacity contract Low capital and operating cost Attractive return on capital Diversification of generation asset b
Slide 37: Options Beyond 2027
Options Beyond 2027 Biomass – continuing profitable generation Continued need for Pellet cost Development of options system support services reduction for future unit conversions Biomass units can provide Specific team focused on Trialling low cost solutions for reliable, flexible low pellet cost re
Slide 38: Options Beyond Coal
Options Beyond Coal Creating options, supporting operational flexibility New opportunities for a coal-free future Conversion of remaining units to biomass – Baseload or system support units with optimised biomass supply chain Potential to repurpose assets to gas – Exploit infrastructure and grid acc
Slide 39: Good Underlying Growth: Generation
Good Underlying Growth Increasing earnings visibility and important role in system support Generation Key part of UK infrastructure EBITDA >£300m in 2025 High quality, visible earnings CfD Capacity payments Rapid response gas ROC, DGS, system support Time 39 Drax Group plc – Capital Markets Day
Slide 40: Summary
Summary - CfD – strong visible base Optimise returns from - RO – significant additional earnings current business - Coal – upside from flexible operations - System support - Capacity payments - Further biomass generation Low carbon future - Rapid response gas projects Development options - Optimisat
Slide 41: Questions
Questions
Slide 42: Biomass Supply
Biomass Supply Pete Madden President and CEO, Drax Biomass
Slide 43: Pellet Supply Strategy
Pellet Supply Strategy Advancing innovation and improvement within the pellet industry Operational - Safe, reliable and flexible operations excellence - Low cost, good quality pellets - Continuous improvement, efficiencies and cost reduction Innovation - Leverage benefits of multiple assets and loca
Slide 44: Safe and Sustainable
Safe and Sustainable Committed to high safety and sustainability standards Safety Total Recordable Injury Rate Improving performance 0.47YTD (2016: 1.11) Strong sustainability credentials SFI® Certified Sourcing SFI®, PEFC, FSC® Chain of Custody Sustainable Biomass Programme certification Drax Bioma
Slide 45: US Forestry
US Forestry Leveraging abundant resource of fibre and infrastructure in US Southeast US has >750 million acres of forest land >35% of the landmass and Pellet industry Forest growing Protected by Best practices in 25% of global industrial less than 3% of annually since statutes, regulation forest man
Slide 46: Operations Located in US Southeast
Operations Located in US Southeast 1.5 million tonnes of capacity Morehouse BioEnergy Amite BioEnergy Bastrop, LA, 525kt pa Gloster, MS, 525kt pa LaSalle BioEnergy Baton Rouge Transit LaSalle, LA, 450kt pa Port Allen, LA (from 2018) 46 Drax Group plc – Capital Markets Day
Slide 47: Pellet Plant Economics
Pellet Plant Economics Components of process cost, opportunities for savings DBI DRAX POWER Forest Harvesting Transport Processing Transport Port storage Ocean freight Port storage Rail Generation and handling and handling 40% delivered 40% processed pellets to 20% transport to fibre port Drax Focus
Slide 48: Innovation: Pellet Dies
Innovation Case study: pellet dies Pellet dies New pellet dies reduce costs Technology Used to press fibre applicable across all at high temperature existing assets into pellets Increased availability Significant wear and 800-1,000 hours tear of operation 12 dies per plant Lighter, easier New dies c
Slide 49: Innovation and Continuous Improvement
Innovation and Continuous Improvement Opportunities identified to increase capacity and reduce pellet costs Investments at Amite and Morehouse Additional truck dumps – Increase capacity for lower cost residuals Install dry shavings system – Increase capacity c.75k tonnes per plant Total capex c.£10
Slide 50: LaSalle BioEnergy
LaSalle BioEnergy Attractively priced, good quality asset Attractively priced Good quality asset 1/3 of new build cost Proven technology – Price reflects lack of long-term offtake agreement – c.130k pellets produced in 2016 Shorter lead time to operation vs. new build c.£20 million investment for –
Slide 51: LaSalle BioEnergy: Strong Fibre Basket
LaSalle BioEnergy Strong fibre basket – low fibre demand, high supply Region with 70% forest coverage LaSalle fibre basket growth 70 million metric tonnes of standing pine and extraction 2014(1) timber in 50 mile radius(1) 12 Strong market for low value fibre 10 > Two million metric tonnes decline i
Slide 52: LaSalle Bioenergy: Leveraging Multiple Assets
LaSalle Bioenergy Leverage benefits of multiple assets and locations for operational efficiencies All sites within 200 mile radius Operational efficiencies Common plant and joint strategic spares – Maximise reliability, minimise capital outlay Flexibility through outage cycle Human capital Shared lo
Slide 53: Target at Least 30% Self-supply
Target at Least 30% Self-supply Identify opportunities to add capacity to portfolio 3000 >30% 2500 Options for further 2000 capacity 1500 Expansion Expansion LaSalle LaSalle 1000 Expansion Expansion Expansion 500 Morehouse & Amite Morehouse & Amite Morehouse & Amite Morehouse & Amite 0 1 2 3 4 Incre
Slide 54: Good Underlying Growth: Biomass
Good Underlying Growth Increasingly profitable and growing biomass supply business Biomass Target at least 30% self-supply EBITDA >£75m in 2025 High quality, visible earnings Morehouse & Amite LaSalle Expansion of existing capacity Additional capacity Time 54 Drax Group plc – Capital Markets Day
Slide 55: Global Pellet Market Outlook
Global Pellet Market Outlook Development of stable global growth of industrial and heating markets European Demand (mt) 34 34 Asian 22 Demand (mt) North American 18 Demand (mt) 9 3 3 3 4 2016 2021 2026 2016 2021 2026 2016 2021 2026 Global industrial and heating Focus on biomass Explore opportunities
Slide 56: Summary
Summary Excellence in operations Safe, reliable, flexible operations Innovation Opportunities for operational and fibre cost savings Strong locational benefits Maximising fibre basket resources Good progress towards self-supply strategy Incremental capacity improvements LaSalle engineering programme
Slide 57: Financial Model
Financial Model Will Gardiner CFO, Drax Group
Slide 58: Financial Model Highlights
Financial Model Highlights - Renewable support – CfD and RO contracts to 2027 with long-term fuel and FX hedging programme High degree of earnings - Capacity payments visibility, reducing - Retail annuity commodity exposure - Predictable pellet supply earnings - Profitable and growing retail busines
Slide 59: High Degree of Earnings Visibility
High Degree of Earnings Visibility Reducing commodity exposure Renewable support mechanisms One biomass unit supported by CfD Two biomass units supported by ROCs – Guaranteed strike price for electricity – Increasing premium on power price – £107/MWh in 2017(1) – Units earn c.£45/MWh(2) plus power p
Slide 60: Risk Management Supports Earnings Visibility
High Degree of Earnings Visibility Risk management supports earnings visibility Biomass generation revenues actively hedged Biomass cost actively hedged CfD unit hedged via CfD reference price 5-10 year fixed price-formula contracts in place Forward power sales concentrated on ROC units Benefit of s
Slide 61: Good Underlying Growth: Retail
Good Underlying Growth Profitable and growing retail business Retail Leading UK energy supplier EBITDA >£80m in 2025 High quality, visible earnings 2017 2018 2019 2020 2021 2017 EBITDA Full 12 months of Opus2022 2023 Insourcing 2024 power 2025 and gas 2026 Growth 2027 Time 61 Drax Group plc – Capita
Slide 62: Good Underlying Growth: Generation
Good Underlying Growth Increasing earnings visibility and important role in system support Generation Key part of UK infrastructure EBITDA >£300m in 2025 High quality, visible earnings CfD Capacity payments Rapid response gas ROC, DGS, system support Time 62 Drax Group plc – Capital Markets Day
Slide 63: Good Underlying Growth: Biomass
Good Underlying Growth Increasingly profitable and growing biomass supply business Biomass Target at least 30% self-supply EBITDA >£75m in 2025 High quality, visible earnings Morehouse & Amite LaSalle Expansion of existing capacity Additional capacity Time 63 Drax Group plc – Capital Markets Day
Slide 64: Opportunities for Further Long-term Growth
Opportunities for Further Long-term Growth Value accretive long-term investment opportunities Generation Retail Further biomass Strengthen annuity generation by expanding Pellet Supply Opportunities to Continuing trials of product offering low cost conversion Attractive create value solutions growin
Slide 65: Strong Financial Position: Cash Flow
Strong Financial Position Cash flow Operating cash flow Visible and growing operating cash flow Capital investment Average maintenance capex c.£50m Further investment in value accretive projects – Rapid response gas – £320-£400m – Additional pellet plant acquisitions Working capital Remain focused o
Slide 66: Strong Financial Position: Prudent Financial Policies
Strong Financial Position Prudent financial policies Refinancing complete Strong cash flow Modest levels of debt generation from stable and – Robust to low points in business cycle predictable earnings base – 2017 target c.2x net debt/EBITDA Opportunities for further cash flow benefits Lower cost of
Slide 67: Capital Allocation
Capital Allocation Policy designed to support strategy Maintain credit rating Investment in core business Pay a sustainable and growing dividend Return surplus capital to shareholders 67 Drax Group plc – Capital Markets Day
Slide 68: Dividend Policy
Dividend Policy Drax expects to pay a growing dividend consistent with maintaining its credit rating and investing in its business Drax expects to recommend a dividend of £50m with regards to the 2017 financial year. The Board is confident that this dividend is sustainable and expects it to grow fro
Slide 69: Summary
Summary Strategy being delivered Improving quality and stability of earnings, reducing commodity exposure – Renewable and contract based revenues – Retail and pellet supply becoming businesses of scale Attractive opportunities from core assets Value accretive investment opportunities support long-te
Slide 70: Questions
Questions
Slide 71: Drax Model Summary
Drax Model Summary Supporting earnings visibility and growth Higher quality diversified and visible earnings, management of commodity exposure Strategic Objective Targeted long-term growth opportunities Current Drax 2025 Other Opportunities Retail Opus and Haven Opus and Haven >£80m* Products, servi
Slide 72: Summary
Summary Dorothy Thompson CEO, Drax Group
Slide 73: Drax 2025
Drax 2025 High quality growing earnings across all areas of operation Generation Key part of UK infrastructure EBITDA >£300m(1) Biomass supply At least 30% self- Retail supply Leading UK energy EBITDA >£75m(1) supplier EBITDA >£80m(1) Underpinned by safety, sustainability, (1) Excludes Central Costs
Slide 74: Drax Group Capital Markets Day
Drax Group Capital Markets Day 15 June 2017