Drax : 26 July 2022 - Half year results for the six months ended 30 June 2022

26 July 2022

DRAX GROUP PLC (Symbol: DRX)

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022

Strong performance, supporting security of supply, investment in renewables

Six months ended 30 June	H1 2022	H1 2021
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)	225	186
Continuing operations	225	165
Discontinued operations - gas generation	-	21
Net Debt (£ million)(3)	1,101	1,029
Adjusted Basic EPS (pence)(1)	20.0	14.6
Interim dividend (pence per share)	8.4	7.5
Total financial performance measures from
continuing operations
Operating profit (£ million)	207	84
Profit before tax (£ million)	200	52

Will Gardiner, CEO of Drax Group, said "As the UK's largest generator of renewable power by output, Drax plays a critical role in supporting the country's security of supply. We are accelerating our investment in renewable generation, having recently submitted planning applications for the development of BECCS at Drax Power Station and for the expansion of Cruachan Pumped Storage Power Station.

"As a leading producer of sustainable wood pellets we continue to invest in expanding our pellet production in order to supply the rising global demand for renewable power generated from biomass. We have commissioned new biomass pellet production plants in the US South and expect to take a final investment decision on up to 500,000 tonnes of additional capacity before the end of the year.

"As carbon removals become an increasingly urgent part of the global route to Net Zero, we are also making very encouraging progress towards delivering BECCS in North America and progressing with site selection, government engagement and technology development.

"In the UK and US we have plans to invest £3 billion in renewables that would create thousands of green jobs in communities that need them, underlining our position as a growing, international business at the heart of the green energy transition."

Financial highlights

• Adjusted EBITDA £225 million up 21% (H1 2021: £186 million)
• Strong liquidity and balance sheet - £539 million of cash and committed facilities at 30 June 2022
• • Expect to be significantly below 2 times Net Debt to Adjusted EBITDA by the end of 2022
• Sustainable and growing dividend - expected full year dividend up 11.7% to 21.0 p/share (2021: 18.8 p/share)
• • Interim dividend of 8.4 p/share (H1 2021: 7.5 p/share) - 40% of full year expectation

Progress with strategy in H1 2022

• To be a global leader in sustainable biomass - targeting 8Mt of capacity and 4Mt of sales to 3rd parties by 2030
• • Addition of 0.4Mt of operational pellet production capacity
  • New Tokyo sales office opened July 2022
• To be a global leader in negative emissions
• • BECCS - UK - targeting 8Mt of negative emissions by 2030
  • • Planning application submitted and government consultation on GGR business models published with power BECCS business model consultation expected "during the summer"
  • BECCS - North America - targeting 4Mt of negative emissions by 2030
  • • Ongoing engagement with policy makers, screening of regions and locations for BECCS
• To be a leader in UK dispatchable, renewable power
• • >99% reduction in scope 1 and 2 emissions from generation since 2012
  • UK's largest generator of renewable power by output - 11% of total
  • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
  • Planning application submitted for 600MW expansion of Cruachan and connection agreement secured

Outlook for 2022

• Expectations for full year Adjusted EBITDA unchanged from 6 July 2022 update which reflected optimisation of biomass generation and logistics to support UK security of supply this winter when demand is high, a strong pumped storage performance and agreement of a winter contingency contract for coal

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Future positive - people, nature, climate

• People
• • Diversity and inclusion programme - inclusive management, promoting social mobility via graduates, apprenticeships and work experience programmes
  • Continued commitment to STEM outreach programme
• Nature and climate
• • Science-basedsustainability policy fully compliant with current UK and EU law on sustainable sourcing and aligned with UN guidelines for carbon accounting
  • Biomass produced using sawmill and forest residuals, and low-grade roundwood, which often have few alternative markets and would otherwise be landfilled, burned or left to rot, releasing CO2 and other GHGs
  • Increase in sawmill residues used by Drax to produce pellets - 67% of total fibre (FY 2021: 62%)
  • 100% of woody biomass produced by Drax verified against SBP, SFI, FSC®(4) or PEFC Chain of Custody certification with third-party supplier compliance primarily via SBP certification

Operational review

Pellet Production - increased production, flexible operations to support UK generation, addition of 0.4Mt of capacity

• Adjusted EBITDA up 13% to £45 million (H1 2021: £40 million)
• • Pellet production up 54% to 2.0Mt (H1 2021: 1.3Mt) (including Pinnacle since 13 April 2021)
• Addition of c.0.4Mt of new production capacity
• • Commissioning of Demopolis and Leola, expect to reach full production capacity in H2 2022
• Total $/t cost of $146/t(5) - 2% increase on 2021 ($143/t(5))
• • Increase in utility costs in Q2-22 (>20% increase)
  • Fuel surcharge - barge and rail to port (> 10% increase)
  • Commissioning costs at Demopolis and Leola plants
  • Net reduction in other costs, inclusive of optimisation of supply chain to meet reprofiling of Generation
  • No material change in fibre costs
• Areas of focus for further savings - wider range of sustainable biomass fibre, continued focus on operational efficiency and improvement, capacity expansion, innovation and technology
• Continue to target final investment decision on up to 0.5Mt of new capacity in H2 2022

Generation - increased recognition of value of long-term security of supply from biomass and pumped storage

• Adjusted EBITDA from continuing operations £205 million up 24% (H1 2021: £165 million)
• • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
  • • Summer - lower power demand, lower power generation and sale of reprofiled biomass
    • Winter - maximise biomass deliveries to support increased generation at times of higher demand
    • Four small, planned biomass outages completed in H1, supporting higher planned generation in H2-22
  • Strong portfolio system support performance (balancing mechanism, ancillary services and optimisation)
  • Higher cost of sales - logistics optimisation, biomass and system costs
• Six-monthextension of coal at request of UK government - winter contingency contract for security of supply
• • Closure of coal units in March 2023 following expiration of agreement with ESO at end of March 2023
  • Fixed fee and compensation for associated costs, including coal
  • Remain committed to coal closure and development of BECCS, with no change to expected timetable
• As at 21 July 2022, Drax had 25.4TWh of power hedged between 2022 and 2024 on its ROC and hydro generation assets at an average price of £95.9/MWh, with a further 2.3TWh equivalent of gas sales (transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices) plus additional sales under the CfD mechanism

Contracted power sales 21 July 2022	2022	2023	2024
ROC (TWh)(6)	11.7	8.8	4.5
- Average achieved £ per MWh	87.2	98.3	109.5
Hydro (TWh)	0.3	0.1	-
- Average achieved £ per MWh	133.1	242.0	-
Gas hedges (TWh equivalent)	(0.1)	0.5	1.9
- Pence per therm	361.0	145.8	135.0

Lower expected level of ROC generation in 2023 due to major planned outages on two units

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

• Adjusted EBITDA of £24 million (H1 2021: £5 million loss) - continued improvement following impact of Covid-19
  - principally in the SME business
• • Includes benefit of excess contracted power sold back into merchant market

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• Continued development of Industrial & Commercial (I&C) portfolio
• • 6.9TWh of power sales - 21% increase compared to H1 2021 (5.7TWh)
  • Focusing on key sectors to increase sales to high-quality counterparties supporting generation route to market
  • Energy services to expand the Group's system support capability and customer sustainability objectives
• SME - increasingly stringent credit control in SME business to reflect higher power price environment

Other financial information

• Total operating profit from continuing operations of £207 million (H1 2021: £84 million), including £130 million mark-to-market gain on derivative contracts and £27 million of exceptional costs
• Total profit after tax from continuing operations of £148 million includes an £8 million non-cash charge from revaluing deferred tax balances following confirmation of UK corporation tax rate increases from 2023 (H1 2021: £6 million loss including a £48 million non-cash charge from revaluing deferred tax balances)
• Capital investment of £60 million (H1 2021: £71 million) - primarily maintenance
• • Full year expectation of £290-£310 million, includes £120 million for Open Cycle Gas Turbine projects, £20 million BECCS FEED and site preparation, and £10 million associated with new pellet capacity, subject to final investment decision (FID)
• Depreciation and amortisation of £121 million (H1: £89 million) reflects inclusion of Pinnacle for a full six months, plant upgrades and accelerated depreciation of certain pellet plant equipment in line with planned capital upgrades
• Group cost of debt below 3.6%
• Cash Generated from Operations £185 million (H1 2021: £138 million)
• Net Debt of £1,101 million (31 December 2021: £1,044 million), including cash and cash equivalents of £288
  million (31 December H1 2021: £317 million)
• • Continue to expect Net Debt to Adjusted EBITDA significantly below 2 times by end of 2022, reflecting optimisation of generation and logistics to deliver higher levels of power generation and cash flows in H2 2022

Notes:

1. Financial performance measures prefixed with "Adjusted" are stated after adjusting for one-off exceptional items that, by their nature, do not reflect the trading performance of the Group (revaluation of deferred tax balances reflecting future increases in UK CT rates, acquisition costs, gain on sale of Combined Cycle Gas Turbine generation assets, restructuring costs, debt restructuring costs and asset obsolescence charges and impairments), and certain remeasurements on derivative contracts. Adjusted EBITDA and EPS measures exclude amounts attributable to non-controlling interests.
2. Earnings before interest, tax, depreciation, amortisation, gains/losses on disposal of assets and impairment of non-current assets, excluding the impact of exceptional items and certain remeasurements, earnings from associates and earnings attributable to non-controlling interests.
3. Borrowings less cash and cash equivalents, excluding amounts attributable to non-controlling interests.
4. FSC License code: FSC-C119787.
5. Total $/t cost of production in Pellet Production - raw fibre, processing into a wood pellet, delivery to Drax port facilities in US and Canada, loading to vessel for shipment and overheads - Free on Board (FOB). Cost of ocean freight, UK port and rail cost reflected in Generation business accounts in addition to price paid to Pellet Production for the biomass pellet.
6. Typical estimated annual biomass generation from ROC and CfD units c.14TWh based on estimated biomass availability, incrementally lower in 2023 due to major planned outages on two ROC units, expected to result in lower ROC cap versus 2022.

Forward Looking Statements

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

Results presentation webcast arrangements

Management will host a webcast presentation for analysts and investors at 9:00am (UK Time), Tuesday 26 July 2022.

The presentation can be accessed remotely via a live webcast link, as detailed below. After the meeting, the webcast recording will be made available and access details of this recording are also set out below.

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A copy of the presentation slides will be made available from 7:00am (UK time) on Tuesday 26 July 2022 for download at: www.drax.com>>investors>>results-reports-agm>>#investor-relations-presentations or use the link https://www.drax.com/investors/results-reports-agm/#investor-relations-presentations

Event Title:	Drax Group plc: Half Year Results
Event Date:	Tuesday 26 July 2022
	9:00am (UK time)
Webcast Live Event Link:	https://secure.emincote.com/client/drax/drax021
Conference call and pre-register Link:	https://secure.emincote.com/client/drax/drax021/vip_connect
Start Date:	Tuesday 26 July 2022
Delete Date:	Tuesday 25 July 2023
Archive Link:	https://secure.emincote.com/client/drax/drax021
For further information, please contact: [e-mail]
Website:	www.drax.com

CEO Business Review

Introduction

The Group's purpose is to enable a zero carbon, lower cost energy future and this drives our commitment to address climate change. Since 2012, the actions the Group has taken have reduced our generation scope 1 and 2 carbon emissions by over 99%. We are the UK's largest source of renewable power by output, a leading source of reliable and flexible generation and our ambition is to become a carbon negative company by 2030.

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

Globally there is increased recognition and policy support for sustainable biomass and BECCS. We believe that Drax is a world leader in sustainable biomass and that BECCS can become a world leading, UK-led, exportable solution for large- scale negative emissions. These benefits will only be possible with the right biomass - sustainable biomass. At Drax we are committed to using the right biomass to ensure positive outcomes for the climate, nature and people and we have put in place policies, controls and reviews to support this.

The UK Government has signposted an ambition for at least 5Mt p.a. of negative emissions from BECCS and Direct Air Capture by 2030, 23Mt p.a. by 2035 and up to 81Mt p.a. by 2050. To support this ambition, in July 2022, the government published a consultation on engineered Greenhouse Gas Removals (GGRs). Separately, the government has publicly stated its intent to publish a power BECCS business model consultation during summer 2022 in order to develop the financial model required to support BECCS, recognising its advanced technological readiness and the co-benefits of both power and negative emissions.

Aligned with our strategy, we have outlined £3 billion of planned investment in growth by 2030. This includes the expansion of our North American supply chain, BECCS in the UK and dispatchable non-thermal generation via the expansion of our Cruachan Pumped Storage Power Station in Scotland. We expect this plan to be fully funded from future cashflows and by 2030 we anticipate being significantly below 2 times Net Debt to Adjusted EBITDA, providing additional capacity to support the options we are developing to invest in BECCS in North America.

The Intergovernmental Panel on Climate Change (IPCC), the UK's Climate Change Committee (CCC) and the Coalition for Negative Emissions have all outlined a clear role for BECCS, identifying a requirement of between 2 billion and 7

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billion tonnes of negative emissions globally from BECCS per year. Recognising the importance of this opportunity we are also continuing to develop options for BECCS projects outside of the UK.

At the same time as addressing the global challenge of climate change, we must also address the challenge of energy security of supply this winter. At the request of the UK Government, we have entered into an agreement with National Grid pursuant to which our two legacy coal-fired units at Drax Power Station will remain available to provide a "winter contingency" service to the UK power system from October 2022 until the end of March 2023, at which point the units will close. The units will not generate commercially for the duration of the agreement and will only operate if and when instructed to do so by National Grid.

Summary of H1 2022

Safety remains a primary focus and in the first half of 2022 the Total Recordable Incident Rate was 0.41 (H1 2021: 0.14). The increase in part reflects a widening of the scope and improvement in the recording of incidents in our North American operations, which now includes contractors in the Pinnacle operations we acquired in 2021. Over the last 12 months we have begun implementing a rigorous HSE improvement plan in our North American business as we align safety and environmental practices across the Group. We expect investments in training, human resource and capital projects to deliver improved performance.

Adjusted EBITDA of £225 million represents a 21% increase compared to H1 2021 (£186 million). This strong performance reflects increased pellet sales, a strong generation performance across the portfolio and improved profitability in our Customers business. Whilst we have seen some limited inflationary pressures in our cost base, most notably in respect of utilities and bunker fuel, the integrated nature of our biomass supply chain and operations, combined with long-term contracts in place for fibre, pellet procurement and freight continue to provide a good level of protection from any cost increases. Further, with indexation of UK renewable schemes and third-party sales contracts, inflationary pressure in our cost base is largely offset by increased revenues.

Our balance sheet is strong with total cash and committed facilities of £539 million as at 30 June 2022 and Net Debt of £1,101 million. Consistent with our fully funded plans for investment in growth to 2030, we continue to target long-term Net Debt to Adjusted EBITDA of around 2 times, but now expect to be significantly below this level by the end of 2022.

We expect to propose a dividend for the 2022 financial year of £84 million, an 11.7% increase on 2021, consistent with our policy to pay a dividend which is sustainable and expected to grow. As has been our practice since we implemented the policy in 2017, 40% of the expected full year dividend will be paid for the first six months of 2022, £34 million or 8.4 pence per share.

H1 operational performance

Pellet Production

In North America, our Pellet Production business reported Adjusted EBITDA of £45 million, up 13% (H1 2021: £40 million). This primarily reflects higher levels of production and sales from existing assets, and the addition of new capacity following the acquisition of Pinnacle in April 2021.

We produced 2.0Mt of pellets, an increase of 54% (H1 2021: 1.3Mt), which reflects a full six months-worth of production from Pinnacle's 10 pellet plants following the acquisition in April 2021, increased capacity at Morehouse and LaSalle, Louisiana, and incremental commissioning volumes at both Demopolis, Alabama and Leola, Arkansas.

The headline Free On Board (FOB) production cost (the cost of producing biomass pellets and transferring them to a port in North America for onwards transit) across the portfolio was $146/t, an increase of 2% on 2021 (2021: $143/t). In addition to the inflation impact on utilities and bunker fuels described above, this reflects a number of other factors.

During the first half of 2022, the Group completed the commissioning of its 360Kt plant at Demopolis, Alabama and its 40Kt satellite plant in Leola, Arkansas, with lower production volumes during commissioning adding temporarily to the average cost per tonne. Both plants are expected to reach full production capacity in H2 2022.

The Pellet Production business provided flexibility in biomass supply, supporting efforts to optimise biomass generation from summer to winter periods, and support UK security of supply at times of higher demand in the coming winter. As a result, some additional cost was incurred in Pellet Production, but additional value was created for the Group as a whole.

The reprofiling of biomass logistics also enabled accelerated maintenance work at a number of pellet plants in the first half of 2022 and this is expected to support higher output in H2 2022.

Strong demand for forest products in construction and manufacturing markets continues to support good fibre residue availability. Taking account of changes in fibre mix by plant, there was no material change in overall fibre cost. However, as outlined in our April 2022 Trading Update, there has been an incremental increase in transportation costs in North America, as well as higher utilities costs associated with power and gas in Q2.

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