Drax Group Annual Report 2008

FY2008 Annual Report · Drax Group

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Drax Group plc
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone: +44 (0)1757 618381
Fax: +44 (0)1757 612192
www.draxgroup.plc.uk

Drax Group plc
Annual report and accounts 2008

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Contents

Business review

Company profile

Principal performance indicators and summary
of operational achievements during 2008

Chairman’s introduction

Chief Executive’s statement

Business and financial review

Corporate and social responsibility review

Shareholder information

Company information, professional advisers
and service providers

Glossary

Governance

Board of directors

Directors’ report

Corporate governance

Audit Committee report

Nominations Committee report

Remuneration Committee report

Directors’ responsibility statement

Financials

Group – Independent auditors’ report

Consolidated income statements

Consolidated statements of recognised income
and expense

Consolidated balance sheets

Consolidated cash flow statements

Notes to the consolidated financial statements

Company – Independent auditors’ report

Company balance sheets

Notes to the Company balance sheets

100

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Company profile

Drax Group plc
Annual report and accounts 2008

Drax is a power generation business operating principally in
the commodity markets of power, coal, biomass and carbon.

We purchase coal, biomass and carbon allowances from both
UK and international suppliers.

We currently generate around 7% of the UK’s electricity and
trade power in the electricity wholesale market of Great Britain.

Through the effective alignment of our trading, production
and investment strategies we manage our exposure to
commodity price risks, operate and maintain our generating
facilities and pursue economic carbon abatement, all to
deliver shareholder value.

We are embarking on a growth strategy for the business, with
the intention of developing 900MW of dedicated biomass-ﬁred
power generating capacity and to add to the value of the
business in future years.

Principal performance indicators and summary
of operational achievements during 2008

Total revenue
£1,753 million

(2007: £1,247 million)

Read more: Pages 20 and 27

Dorothy Thompson
Chief Executive
2 March 2009

Project execution – our strength in making things happen
Our two major strategic carbon abatement projects are well
underway. Our commitment to improving thermal efﬁciency
is showcased by our £100 million turbine upgrade project,
which is the largest steam turbine modernisation programme
in UK history. Now just over one-third complete, we are already
saving at least one-third of a million tonnes of CO2 each year.
m Read more: Pages 20 to 26

This image shows a close up of the
pipework that distributes the steam
exhausting from the intermediate pressure
turbine module into the three new low
pressure turbine modules.

Drax Group plc
Annual report and accounts 2008

12
Business review
Business and financial review

The Group’s principal performance indicators are
highlighted on page one of this report. Solid operating
performance, an improvement in our average achieved
electricity price and an increase in net power sold
were offset by an increase in coal prices, the cost
of CO2 emissions allowances and operating expenses,
resulting in EBITDA of £454 million compared to
£506 million in 2007. The Business and ﬁnancial review
includes further explanation and commentary in relation
to our principal performance indicators and the results
for the year.

Drax Group plc
Annual report and accounts 2008

Continuing operations
Total revenue

Fuel costs(1)

Fuel costs in respect of generation

Cost of power purchases

Gross proﬁt

Other operating expenses excluding depreciation, amortisation,
exceptional items and unrealised gains on derivative contracts(2)

EBITDA(3)

Depreciation, amortisation and loss on disposal of ﬁxed assets

Exceptional operating income – ﬁnal TXU Claim proceeds

Unrealised gains on derivative contracts

Operating proﬁt

Interest payable and similar charges

Interest receivable

Proﬁt before tax

Tax charge

– Before changes in tax legislation

– Impact of industrial building allowances withdrawal on deferred tax

– Impact of reduction in tax rate on deferred tax

Proﬁt for the year attributable to equity shareholders

Year ended
31 December 2008
£m

Year ended
31 December 2007
£m

1,752.8

1,247.4

(858.4)

(211.8)

(1,070.2)

682.6

(228.4)

454.2

(46.4)

–

56.3

464.1

(28.8)

7.2

442.5

(100.8)

(8.8)

–

(109.6)

332.9

(470.6)

(75.5)

(546.1)

701.3

(195.7)

505.6

(43.7)

6.2

3.3

471.4

(34.3)

11.4

448.5

(113.4)

–

17.9

(95.5)

353.0

Earnings per share

– Basic and diluted

Notes:

Pence per share

(1) Fuel costs comprise the fuel costs incurred in the generation process, predominantly coal and CO2 emissions allowances, together with oil

and biomass. Fuel costs also include the cost of power purchased to meet power sales commitments.

(2) Other operating expenses excluding depreciation, amortisation, exceptional items and unrealised gains on derivative contracts principally
include salaries, maintenance costs, transmission network use of system charges (“TNUoS”), balancing services use of system charges
(“BSUoS”) and business rates.

(3) EBITDA is deﬁned as proﬁt before interest, tax, depreciation and amortisation, exceptional items and unrealised gains on derivative contracts.

Results of operations

Total revenue for the year ended
31 December 2008 was £1,753 million
compared to £1,247 million in 2007.
Power sales were £1,692 million in 2008
compared to £1,204 million in 2007,
reﬂecting a 29% improvement in our
average achieved electricity price to
£58.3/MWh (see Price of electricity) and
an increase in net power sold to 25.4TWh,
compared to 24.9TWh in 2007 (see
Outages and plant utilisation levels).

In addition to power sales, total revenue
also includes income from the provision of
ancillary services, the sale of by-products
(ash and gypsum), and the sale of ROCs,
LECs and SO2 emissions allowances.
In the year ended 31 December 2008,
these revenues were £61 million compared
to £43 million in 2007. Signiﬁcantly higher
ROC sales in 2008 were driven by our
growing biomass burn. Lower ancillary
services revenues were a result of stronger
competition in the market to provide
frequency response services to National
Grid plc (“National Grid”).

Revenue analysis

Sales analysis,
average achieved price
and net power sold

Net power sold (TWh)
Average achieved price (£/MWh)

Power sales (£m)
Other income (£m)

25.2TWh

£48.9/MWh

£60 million

24.9TWh

£45.3/MWh

£43 million

25.4TWh

£58.3/MWh
£61 million

23.2TWh

£35.2/MWh

£32 million

£897 million

£1,327 million

£1,204 million

£1,692 million

2005

2006

2007

2008

Fuel costs in respect of generation during
the year ended 31 December 2008 were
£858 million, compared to £471 million in
2007. The increase was primarily due to
higher generation, an increase in the price of
coal and other fuels, and the impact of higher
prices for and increased purchases of CO2
emissions allowances (see Price of coal and
other fuels and CO2 emissions allowances).

We purchase power in the market when
the cost of power in the market is below
our marginal cost of production in respect
of power previously contracted for generation
and delivery by us, and to cover any shortfall
in generation.

The cost of power purchased is included
within fuel costs. For the year ended
31 December 2008, the cost of purchased

power increased to £212 million compared
to £76 million in 2007, primarily due to
higher market prices for electricity.

As a result of these factors, gross proﬁt
for the year ended 31 December 2008 was
£683 million compared to £701 million in 2007.

Other operating expenses were £228 million
for the year ended 31 December 2008
compared to £196 million in 2007. In 2008,
we experienced an increase of £11 million
in use of system charges, following National
Grid price uplifts in response to market
conditions. Higher operating expenses in
2008 also reﬂect the impact of increased
generation on maintenance costs.

Drax Group plc
Annual report and accounts 2008

14
Business review
Business and financial review

Operating expenses include the impact
of growth in our average headcount to
712 compared to 658 in 2007. This reﬂects
planned investments in our business,
including operational support for the
implementation of our large capital projects,
the growth of our biomass procurement
activities and investments to support the
development of the biomass growth strategy.

Operating cost analysis

Use of system
charges

Production and
maintenance
costs

Staffing and
administration
costs

EBITDA for the year ended 31 December
2008 was therefore £454 million compared
to £506 million in 2007.

Depreciation and amortisation for the year
ended 31 December 2008 was £46 million
compared to £44 million in 2007,
reﬂecting signiﬁcant asset additions over
the last two years, as well as accelerated
depreciation on plant and equipment
we expect to replace under our capital
expenditure investment programme.

The Group recognises unrealised gains
and losses on forward contracts which
meet the deﬁnition of derivatives under
IASs. Where possible, we take the own
use exemption for derivative contracts
entered into and held for our own purchase,
sale or usage requirements, including
forward domestic coal contracts. As such,
the unrealised gains and losses recognised
in the balance sheet principally relate to the
mark to market of our forward contracts
for power yet to be delivered. The following
table describes the movements in unrealised
gains and losses and where they are
recorded in our ﬁnancial statements.

Year ended
31 December
2008
£m

Year ended
31 December
2007
£m

Net unrealised (losses)/gains
in balance sheet at 1 January

Unrealised gains recognised in
the income statement

Fair value gains/(losses) recognised
in the hedge reserve (a component
of equity)

Net unrealised losses in balance
sheet at 31 December

(236.7)

344.3

56.3

3.3

164.7

(584.3)

(15.7)

(236.7)

As a consequence of increases in power
prices throughout 2007, the average price
relating to power which had been contracted
but had yet to be delivered at 31 December
2007 was much lower than market prices
at that time, resulting in the recognition
of a net unrealised loss of £237 million
in the balance sheet (included in captions
described as derivative ﬁnancial instruments).
As a result of falling power prices over the
last quarter of 2008, the difference narrowed
considerably, resulting in a reduction
in the net unrealised loss to £16 million
at 31 December 2008. These trends in
forward power prices, which determine the
movements in our net unrealised gains/losses
position, are illustrated in the chart on page 16.

The unrealised gains recognised in the
income statement of £56 million for
the year ended 31 December 2008 and
£3 million in 2007 represent mark to market
movements on a small proportion of our
derivative contracts which do not qualify
for hedge accounting.

Mark to market movements on most of
our derivative contracts, considered to
be effective hedges, have been recognised
through the hedge reserve, a component
of shareholders’ equity in the balance
sheet. Movements in unrealised gains and
losses recognised in the hedge reserve
are mainly the result of unwinding mark
to market positions relating to power
delivered during a reporting period,
and the recording of mark to market
positions on power yet to be delivered
at the end of that period. The net unrealised
gain recognised through the hedge reserve
in the year ended 31 December 2008
was £165 million, compared to a net
unrealised loss of £584 million in 2007,
both reﬂecting the forward power price
trends described above.

Trading in the commodity markets
The commodity markets in which we operate were
highly volatile in 2008. We have a dedicated and
experienced team in place to deliver our trading
strategy of targeting market or better dark green
spreads, while retaining balanced market exposure.

Drax Group plc
Annual report and accounts 2008

In considering mark to market movements,
it is important to recognise that EBITDA
is driven by our strategy to deliver
market level or better dark green spreads,
not by the absolute price of electricity at
any given date.

After allowing for the unrealised gains
on derivative contracts, operating proﬁt
for the year ended 31 December 2008
was £464 million compared to £471 million
in 2007.

Net ﬁnance costs for the year ended
31 December 2008 were £22 million compared
to £23 million in 2007, as a result of lower
interest rates and debt levels.

The tax charge for the year ended
31 December 2008 was £110 million,
compared to £96 million in 2007.
Tax for 2008 includes a one-time charge
of £9 million to reﬂect the estimated
impact on deferred tax of the withdrawal
of industrial buildings allowances introduced
by the Finance Act 2008. The tax charge
for 2007 included a one-time credit
of £18 million to reﬂect the impact on
deferred tax of a reduction in the rate
of UK corporation tax from 30% to 28%
with effect from 1 April 2008.

As a result of the above factors,
proﬁt attributable to equity shareholders
for the year ended 31 December 2008
was £333 million compared to £353 million
in 2007, and basic and diluted earnings
per share were 98 pence compared to
99 pence in 2007.

Key factors affecting
the business

General commodity market conditions
Commodity market conditions were
generally favourable for Drax in the ﬁrst
half of the year. During the third quarter,
trading conditions continued to improve
primarily as a consequence of low capacity
reserve margins in the electricity market.
However, in the last quarter we saw dark
green spreads narrow and signiﬁcant falls
in power, coal and CO2 emissions allowances
prices. These trends in forward power,
coal and CO2 emissions allowances prices,
are illustrated in the charts on pages 16
and 17, and described further in the
following paragraphs.

Drax Group plc
Annual report and accounts 2008

16
Business review
Business and financial review

Power price

£/MWh

Summer 2008
Winter 2008
Summer 2009
Winter 2009

110

100

Source: Brokered trades and McCloskey

Coal price (API 2)

Source: Brokered trades and Spectron

$/tonne

Cal 08
Cal 09
Cal 10

220

200

180

160

140

120

100

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Price of electricity
The table below shows the average achieved
electricity price we realised for the years
ended 31 December 2008 and 31 December
2007, together with the market closing price
on the last day of each season illustrated.

Average achieved price
(£/MWh)

Summer baseload market close
(£/MWh)

Winter baseload market close
(£/MWh)

Year ended
31 December
2008

Year ended
31 December
2007

58.3

45.3

2008

55.8

2007

23.0

2008/2009

2007/2008

106.9

40.4

Average achieved price for the year ended
31 December 2008 was £58.3 per MWh
compared to £45.3 per MWh in 2007.
Average capture price (being the price
attained prior to Balancing Mechanism
activity) for the year ended 31 December
2008 was £57.4 per MWh compared to
£44.2 per MWh in 2007. The forward
baseload power prices for Summer 2009
and Winter 2009/2010 were approximately
£37.1 per MWh and £46.3 per MWh
respectively as at 20 February 2009.

The increase in average achieved price
primarily followed the impact of forward
sales contracts secured in the last six
months of 2007 and through the ﬁrst
six months of 2008, during which time
power prices were generally increasing
relative to the levels of late 2006 and
early 2007, for power delivered in 2008.

Increasing power prices through the
early part of 2008 followed strengthening
oil and gas prices. High power prices
were sustained through the third quarter,
with fears that outages, Large Combustion
Plant Directive (“LCPD”) constraints and
delays in Flue Gas Desulphurisation (“FGD”)
installations at other UK generating plant
might result in a capacity shortfall.

Power price falls towards the end of the year
followed weaker oil and gas prices. In addition,
other plants returned to service, which allayed
fears of a capacity shortfall, and peak electricity
demand fell, reﬂecting the economic climate.

Price of coal and other fuels
We burnt approximately 9.5 million tonnes
of coal in the year ended 31 December 2008
compared to approximately 9.8 million tonnes
in 2007. This coal was purchased from
a variety of domestic and international
sources under either ﬁxed or variable
priced contracts with different maturities.

Spot prices for internationally traded coal
delivered into North-West Europe (as reﬂected
by the TFS API 2 index) increased dramatically
over the second half of 2007, reaching US$127
per tonne by the end of the year. Spot prices
continued to increase to record levels over the
ﬁrst six months of 2008, reaching US$218 per
tonne by 30 June 2008. Price increases were
driven by continued tight markets for both coal
and freight, caused by strong demand from
China, India and Japan, combined with some
production and logistical issues in China,
as well as South Africa and Australia. However,
spot coal prices fell signiﬁcantly over the
ﬁnal quarter, down to US$81 per tonne by
31 December 2008, as supply constraints
eased in both the coal and freight markets.
The fall in coal prices was partially offset by
the depreciation of sterling against the
US dollar through the second half of 2008.

We also burn biomass, petcoke and fuel oil,
although coal comprised around 93% of
total fuel costs in the year ended 31 December
2008 (excluding CO2 emissions allowances)
compared to 95% in 2007, primarily as a
result of improved fuel diversity. The average
cost of fuel per MWh (excluding CO2 emissions
allowances) was £25.1 for the year ended
31 December 2008, compared to £18.5 in 2007,
with high coal prices in the ﬁrst nine months
of 2008 relative to the levels of last year.

CO2 emissions allowances
For Phase II of the EU ETS (2008–2012),
Drax has an allocation of 9.5 million tonnes
of CO2 emissions allowances per annum
under the UK NAP, compared to 14.6 million
tonnes per annum for Phase I (2005–2007).

Our CO2 emissions allowances requirement
for the year ended 31 December 2008,
in excess of those allocated under the
UK NAP, was approximately 12.8 million
tonnes compared to approximately
7.6 million tonnes in 2007, as a result
of the lower UK NAP allocation and
higher generation, partially offset by plant
efﬁciency improvements and increased
biomass burn.

The price for Phase I CO2 emissions
allowances began 2007 at approximately
B6.6 per tonne, and as a result of over-
supply, fell steadily over the ﬁrst six months
to B0.13 per tonne on 30 June 2007,
subsequently falling away further to
B0.04 per tonne by 31 December 2007.

The price for Phase II CO2 emissions
allowances began 2008 at approximately
B22.4 per tonne, and in common with power
and coal prices rose steadily over the ﬁrst half
of the year to B28.4 per tonne at 30 June 2008.
However, carbon prices also fell signiﬁcantly
over the ﬁnal quarter, down to B15.4 per
tonne by 31 December 2008, as commodity
prices fell back and industrial demand
reduced in response to the economic climate.

As a result, the average price expensed for
purchased CO2 emissions allowances during
the year ended 31 December 2008 was
£17.4 per tonne (equivalent to £223 million),
compared to £1.5 per tonne in 2007
(equivalent to £11 million).

Outages and plant utilisation levels

Electrical output (net sales) (TWh)

Load factor (%)

Availability (%)

Winter forced outage rate (%)

Forced outage rate (%)

Planned outage rate (%)

Total outage rate(1) (%)

Notes:

Year ended
31 December
2008

Year ended
31 December
2007

25.4

76.3

85.8

6.5

5.8

8.9

14.2

24.9

75.0

85.7

4.2

6.9

8.1

14.3

(1) The forced outage rate is expressed as a percentage of planned

capacity available (that is, it includes a reduction for planned losses).
The planned outage rate is expressed as a percentage of registered
capacity. Accordingly, the aggregation of the forced outage rate and
planned outage rate will not equate to the total outage rate.

Drax Group plc
Annual report and accounts 2008

Carbon price (Phase II EUA)

Source: ECK

b/tonne

Dec 08
Dec 09
Dec 10

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Attaining leading performance in health and safety
Our safety record continues to compare favourably
with that of our sector peers and international
benchmarks. Safety programmes are now becoming
well entrenched and we are seeing the results through
sound performance.

The load factor for the year ended
31 December 2008 was 76.3% compared
to 75.0% in 2007. The improvement arises
from an increase in electrical output
(net sales) to 25.4TWh in 2008 compared
with 24.9TWh in 2007, with higher generation
in 2008 in what have historically been
low margin periods. Commodity market
conditions through the Summer were
such that it was proﬁtable to generate
these additional volumes, albeit at
moderate margins.

Plant availability was approximately 86%
for both years ended 31 December 2007
and 2008.

The planned outage rate achieved for the
year ended 31 December 2008 was 8.9%
compared to 8.1% in 2007. Our maintenance
regime includes a major planned outage for
each of our six units once every four years.
Consequently, there is an irregular pattern
to planned outages and associated
expenditure, since in two of the four years
two units will each undergo a major planned
outage. Two major planned outages were
completed in both 2007 and 2008.

The forced outage rate for the year ended
31 December 2008 was 5.8%, compared to
6.9% in 2007.

The Winter forced outage rate was 6.5%
for the year ended 31 December 2008,
compared to 4.2% in 2007.

Health and safety
Our lost time injury rate was 0.10 for the
year ended 31 December 2008 compared
to 0.34 in 2007. This continues to
demonstrate that the safety programmes
implemented in the last few years are
becoming well entrenched and are delivering
sound performance. Our safety record
compares favourably with our sector peers
and international benchmarks.

Drax Group plc
Annual report and accounts 2008

18
Business review
Business and financial review

Liquidity and capital resources

Net debt was £235 million as at
31 December 2008 compared to £337 million
at 31 December 2007. Cash and cash equivalents
were £130 million as at 31 December 2008
compared to £60 million at 31 December 2007.
An analysis of cash ﬂows for both years is set
out in the following table.

Analysis of cash ﬂows

Year ended
31 December
2008
£m

Year ended
31 December
2007
£m

Net cash generated from
operating activities

309.5

Net cash used in investing activities

(91.4)

312.8

(67.8)

Net cash used in ﬁnancing activities

(147.6)

(340.1)

Net increase/(decrease) in cash
and cash equivalents

70.5

(95.1)

Net cash generated from operating
activities was £310 million in the year
ended 31 December 2008 compared to
£313 million in 2007. The small decrease
was a result of a reduction of £51 million
in EBITDA, largely offset by lower working
capital utilisation in 2008.

Net cash used in investing activities,
which represented payments in respect
of capital expenditure in both periods,
was £91 million for the year ended
31 December 2008 compared to £68million
in 2007 (see Capital expenditure).

Net cash used in ﬁnancing activities was
£148 million in the year ended 31 December
2008 compared to £340 million in 2007.
The 2008 amount includes equity dividends
paid of £110 million, term loan repayments
of £35 million, and purchases of our own
shares to meet commitments under
share-based incentive plans of £3 million.
The 2007 amounts included equity
dividends paid of £171 million and payments
under a share buy-back programme of
£84 million, together representing returns
to shareholders totalling £255 million.
Also included in 2007 were term loan
repayments of £80 million, the ﬁnal
bridge loan repayment of £3 million,
and purchases of our own shares to meet
commitments under share-based incentive
plans of £2 million.

The increase in cash and cash equivalents
was therefore £71 million in the year ended
31 December 2008, compared to a decrease
of £95 million in 2007. Drax’s policy is to
invest available cash in short-term bank,
building society or other low risk deposits.

Investing in plant improvements
In addition to our major strategic investments,
plant improvements have also been delivered through
a suite of smaller projects. A focus on upgrades,
process control and plant optimisation has brought
efficiency, reliability and availability benefits,
all strengthening the leadership position of Drax
Power Station in the coal-fired generation sector.

Turbine upgrade project
The largest steam turbine modernisation project
in the UK being undertaken at Drax Power Station
is now just over one-third complete.

Drax Group plc
Annual report and accounts 2008

Capital resources and reﬁnancing
Following scheduled repayments of
£35 million during the year, senior secured
debt was £370 million at 31 December 2008
(before deferred ﬁnance costs). Scheduled
debt repayments are £65 million in each
of 2009 and 2010, under an amortisation
proﬁle ending with a ﬁnal repayment of
£240 million on 31 December 2010.

Conditions in the debt markets have
continued to be turbulent. We continue
to monitor the situation, and will seek
to achieve an optimal balance between
reﬁnancing risk and the cost of reﬁnancing
before maturity of the existing facilities.

We acknowledge recent guidance on going
concern for companies preparing ﬁnancial
statements, in the light of recent volatility
in ﬁnancial markets which has created
a general level of uncertainty. However,
we have signiﬁcant headroom on our
existing facilities, and a reasonable
expectation that these will be renewed
when required. We also have a recent
history of cash generation, strong covenant
compliance, and good visibility in medium-
term forecasts, due to our progressive
hedging strategy.

We notiﬁed investors of a change in
distribution policy when we announced our
biomass growth strategy in October 2008
(see Distribution policy). At the same time,
we also notiﬁed investors that any net
reﬁnancing proceeds will be used to fund
our equity investment in the 900MW
dedicated biomass-ﬁred generation business
we intend to develop with Siemens Project
Ventures (see Biomass growth strategy).

Seasonality of borrowing
Our business is seasonal with higher
electricity prices and despatch in the
Winter period and lower despatch in
the Summer months, when prices are
lower and plant availability is affected
by planned outages.

Accordingly, cash ﬂow during the
Summer months is materially reduced
due to the combined effect of lower
prices and output, while maintenance
expenditures are increased during this
period due to major planned outages.
The Group’s £100 million revolving credit
facility assists in managing the cash
low points in the cycle where required.
The revolving credit facility was undrawn
at 31 December 2008 and has a ﬁnal
maturity date of 15 December 2010.

Capital expenditure
In March 2008, we announced that we
expected to incur total capital expenditure
of approximately £250 million over
the three years 2008 to 2010. Of this,
around £150 million speciﬁcally related to
the turbine upgrade project and investments
in extending our biomass capability.
The remainder comprised smaller value
enhancing investments and other expected
capital expenditure in support of current
operations. Following ﬁxed asset additions
of £102 million in the year ended
31 December 2008 (£83 million in 2007),
we remain on track to achieve this target.
In addition, we expect to incur expenditure
of around £20 million in 2009 in relation
to our plans to develop the dedicated
biomass-ﬁred generation business
(see Biomass growth strategy).

Drax Group plc
Annual report and accounts 2008

20
Business review
Business and financial review

In relation to the turbine upgrade project,
we expect to invest up to £100 million over
the ﬁve-year period from 2007 to 2011,
including approximately £60 million over
the three years 2008 to 2010, to upgrade
the high pressure and low pressure turbine
modules on all six generating units to
improve efﬁciency. Using proven technology
we expect to achieve an overall baseload
efﬁciency (that is, the ratio of energy out
to energy in when operating at full capacity)
approaching 40%. This will represent a 5%
improvement on current baseload efﬁciency
of around 38%. When complete, the project
is expected to deliver annual savings of one
million tonnes of CO2 emissions allowances
and approximately half a million tonnes
of coal.

During the two major planned outages
of 2008 we successfully completed the
upgrade of the high and low pressure
turbines on two of our six generating units.
Together these units are now delivering
the 5% efﬁciency improvement target.
Translated into carbon savings this means
that, from the third quarter of 2008,
two of our generating units have been
operating at an overall efﬁciency that
will save one-third of a million tonnes
of CO2 emissions allowances each year.

As part of our development of biomass
supply sources, we are also in the
process of constructing a pilot project
for the production of pellets from locally
sourced straw.

A pellet plant is being constructed in Goole,
approximately three miles from the Drax
site. The plant will take straw from the local
area and produce around 100,000 tonnes
of straw pellets annually, to be brought to
Drax for combustion in the co-ﬁring facility.
If successful, similar pellet plants could
be developed in other, local cereal
growing regions.

We ﬁrmly believe in procuring biomass
from sustainable sources and to this end
we have established a sustainable sourcing
policy framework.

We will also continue to evaluate other
investment opportunities which may
result in additional capital expenditure.
Further investment will be required beyond
2009 and prior to 2016 to meet the
requirements of the LCPD.

Biomass growth strategy
Under a Joint Development Agreement
with Siemens Project Ventures, we intend
to build, own and operate three 300MW
dedicated biomass-ﬁred power plants
in the UK.

We expect each plant to be funded with a
debt/equity mix, and we are targeting 60%
non-recourse project ﬁnance debt. Under the
terms of the Joint Development Agreement,
the intended ownership will be split 60%
Drax and 40% Siemens Project Ventures.

With regard to extending our biomass
capability, we expect to invest around
£80 million to develop a 400MW direct
injection co-ﬁring biomass facility. We will
extend our direct-injection capability from
one generating unit to all six generating
units, and install the necessary processing
and handling infrastructure to enable us to
handle an additional one and a half million
tonnes of biomass material per annum.
Delivery of the 400MW facility is expected
to result in savings of over two million
tonnes of CO2 emissions allowances, the
displacement of approximately one million
tonnes of coal and the generation of in excess
of one and a quarter million ROCs per annum.

We have made good progress in advancing
the project. Early in 2008, planning
permission was received to construct
biomass handling, processing and co-ﬁring
facilities on the Drax Power Station site.
During the year, contracts were awarded to
Alstom Power Limited for the construction
and installation of the main processing
works associated with the co-ﬁring facility,
and to Doosan Babcock Energy Limited
for the supply and installation of direct
injection biomass co-ﬁring systems to
all six generating units.

We anticipate commissioning phase one
of the project towards the end of 2009,
with achievement of the full 400MW
capacity around the middle of 2010.

We have also developed our biomass
procurement strategy, and identiﬁed
attractive biomass supplies which greatly
exceed the requirements of the new
400MW direct-injection co-ﬁring facility.
Conﬁdence in our fuel supplies will allow
us to operate the new co-ﬁring facilities
alongside our existing, through the mill
delivery, co-ﬁring capacity of 100MW.
This will provide us with a total co-ﬁring
capacity of 500MW when the new
400MW direct-injection project is
fully commissioned.

Drax Group plc
Annual report and accounts 2008

Drax will manage and operate the biomass
businesses, and will also be responsible for
all biomass procurement and trading. It is
proposed that the plants will use Siemens’
turbine technology.

Current estimates of the total capital
cost of this business are around £2 billion,
including investments in ancillary biomass
logistics and processing facilities.
Construction of the ﬁrst plant is targeted
to commence in late 2010, following
execution of the construction and ﬁnancing
contracts and agreed capital commitment,
with the ﬁrst plant expected to be
operational in 2014.

We are now in the advanced feasibility
stage of developing and planning but we
will only commit to investment once it can
be plainly demonstrated that we will secure
attractive returns. Whilst no commitments
to construction contracts or ﬁnancing
have been made to date, we expect to
ﬁnalise these arrangements by the second
half of 2010. We expect to incur expenditure
of around £20 million in 2009 in developing
this business.

Since we made the announcement
in October 2008, we have made good
progress. We now have ﬁve site options
under review. We expect to accept a grid
connection date shortly for the Drax site
(October 2012) and have already accepted
a connection date for the Immingham site
(October 2014).

We have also moved forward on the
engineering design, with our strategic
partner, Siemens Project Ventures.

We believe that the long-term investment
case for this business remains strong,
particularly in the light of the UK’s need
for reliable renewable generation capacity
by 2020.

Biomass handling and processing
Construction of the main biomass handling and
processing works at Drax Power Station is now well
underway. The facility will deliver processed biomass
material to the direct injection co-firing systems of
all six generating units.

Straw pellet plant
The straw pellet plant development at Goole,
some three miles from Drax Power Station, is rapidly
taking shape. With commercial operation due to
commence in the first half of 2009, the plant will
produce 100,000 tonnes of straw pellets a year
for co-firing alongside our coal.

Drax Group plc
Annual report and accounts 2008

22
Business review
Business and financial review

Principal risks
and uncertainties

We manage the commercial and operational
risks faced by the Group in accordance with
policies approved by the Board.

Regulatory market risk
The UK Government and other relevant
regulatory bodies have signiﬁcantly changed
the applicable regulatory regimes in Great
Britain over the past few years, in an attempt
to improve market information and
transparency, enhance competition and
liquidity, reduce the likelihood of market
abuse and implement new EU legislation.
In particular, new UK and EU legislation
applicable to our sector continues to target
reductions in emissions. We are exposed
to further regulatory developments, which
may favour other types of fuel or sources of
power, and which could result in additional
costs or lower output levels and reduce
our proﬁtability.

Plant operating risk
Extended forced outages or prolonged
planned outages could have a signiﬁcant
adverse effect on our revenue and
proﬁtability. We may also incur additional
costs in recovering from these outages,
and penalties if we cannot fulﬁl our
contractual obligations.

Forced outages may be caused by the
underperformance or outright failure
of our power generation plant, or other
equipment and components including
the information technology systems used
to operate the plant or conduct trading
activities. The duration of forced outages
is inﬂuenced by the lead time to
manufacture and procure replacement
components and to carry out repairs.
Although we always try to optimise our
holding of spare components for use
in the event of plant failure, we may not
always have ready access to the relevant
replacement parts.

Environmental and
health and safety risks
The EU, UK and local environmental and
health and safety laws and regulations
which affect the power station are complex,
frequently changing and are becoming
ever more stringent. They cover many
aspects of our operations, including limits
on emissions of particulate, SOX and NOX,
discharges to air and water, noise emissions,
soil/groundwater contamination, waste and
health and safety standards.

Changes in these laws and regulations
may cause increased compliance costs,
the need for additional capital expenditure
and could affect output levels. Whilst we
have robust systems in place to support
and monitor compliance with these
regulations, failure to do so could result
in ﬁnes or penalties, civil or criminal
liability, or even the limitation or suspension
of operations.

Electricity market liquidity risk
Liquidity in the market for wholesale
electricity is dependent on there being a
sufﬁcient number of counterparties willing
to trade actively. Changes in the market
structure or consolidation of the existing
generation and supply businesses in the
UK could result in a reduction in the number
of active participants in the market with
whom we are able to trade.

If we are not able to rely on wholesale
market trading as a means of hedging
our short to medium-term exposure to
electricity prices, it may affect our ability
to sell all of our output and/or the prices
at which we sell it. As a result we could
suffer reduced revenues and incur higher
costs to achieve our trading objectives.

Reﬁnancing risk
Recent volatility in ﬁnancial markets has
created a general level of uncertainty and
increased reﬁnancing risk.

Our senior secured debt matures under an
amortisation proﬁle ending on 31 December
2010. We have signiﬁcant headroom under
our existing facilities, and a reasonable
expectation that these will be renewed
when required.

Commodity risk
We are exposed to the effect of ﬂuctuations
in commodity prices, particularly the price
of electricity, the price of coal (and other
fuels) and the price of CO2 emissions
allowances. Price variations and market
cycles have historically inﬂuenced
our ﬁnancial results and are expected
to continue to do so.

Our policy is to make forward power sales
with corresponding purchases of fuel and
CO2 emissions allowances when proﬁtable
to do so. We purchase coal under either
ﬁxed or variable priced contracts with
different maturities from a variety of
domestic and international sources.
We purchase CO2 emissions allowances
under ﬁxed price contracts with different
maturity dates from a variety of domestic
and international sources.

Counterparty risk
As we rely on third-party suppliers for
the delivery of coal and other goods and
services, we are exposed to the risk of non-
performance by these third-party suppliers.

We purchase a signiﬁcant portion of our
coal requirement under contracts with a
number of UK suppliers. There is a risk that
if a large supplier falls into ﬁnancial difﬁculty
and/or fails to deliver against the contracts,
there would be additional costs associated
with securing coal from other suppliers.

We enter into ﬁxed price and ﬁxed margin
contracts for the sale of electricity to a
number of counterparties. The failure of one
or more of these counterparties to perform
their contractual obligations may cause us
ﬁnancial distress or increase our risk proﬁle.

The investment of surplus cash is
undertaken to maximise the return within
Board approved policies. These policies set
out minimum rating requirements, maximum
investment with any one counterparty and
the maturity proﬁle.

Interest rate risk
We are exposed to interest rate risk
principally in relation to our outstanding
bank debt. In particular, we are exposed
to changes in the LIBOR interest rate of
sterling denominated debt, as all of our
debt is both denominated in sterling and
has a variable LIBOR rate. We mitigate
this risk with interest rate hedges on
a proportion of our debt facilities.

Foreign currency risk
Foreign currency exchange contracts are
entered into to hedge substantially all of our
ﬁxed price international coal purchases in
US dollars, and our CO2 emissions allowances
purchases in euros.

Tax risk
Under the Group’s previous ﬁnancing
structure, Drax Holdings Limited
(a subsidiary company) was partially
funded by a Eurobond payable to another
group company. The whole of the coupon
was previously prepaid, and an accounting
based tax deduction has been claimed
for the corresponding interest charged in
the Drax Holdings Limited income statement
each year. Were HMRC to successfully
challenge the deductions claimed in respect
of the Eurobond coupons for open years
to 31 December 2008, it is estimated
that the additional tax liability would be
up to £90 million, together with interest
and penalties.

In November/December 2008, HMRC
issued draft legislation concerning
the “Principles based approach to
ﬁnancial products avoidance” and the
“Taxation of foreign proﬁts of companies”.
These provisions updated rules on, amongst
other things, the tax deductibility of interest
and were generally expected to reduce
the tax effectiveness of the Eurobond
ﬁnancing arrangements.

Following consultation with leading tax
counsel and after taking professional
advice, we decided to unwind the Eurobond
ﬁnancing arrangements. The Eurobond
was formally waived by the lending group
company on 30 December 2008. As a result
the whole of the remaining prepaid coupon
was charged in the Drax Holdings Limited
income statement giving rise to potential
additional interest deductions with a tax
effect of around £220 million. Because of
the risks related to the unwind of the
Eurobond structure, no beneﬁt will be
recognised in the Group’s ﬁnancial
statements with respect to the potential
additional deductions until we are more
certain they will be realised.

Drax Group plc
Annual report and accounts 2008

Distributions

Distribution policy
We notiﬁed investors of a change to our
distribution policy when we announced
our biomass growth strategy in October
2008. With respect to 2008 and 2009,
the Company will distribute all excess cash
generated from operations after meeting
business requirements in each year.
For 2010 and beyond, we will target a pay-out
ratio of 50% of underlying earnings (being
proﬁt attributable to equity shareholders
adjusted to exclude the impact of unrealised
gains and losses on derivative contracts)
in each year.

Dividends paid
On 3 March 2008, the Board resolved,
subject to approval by shareholders at the
Annual General Meeting on 17 April 2008,
to pay a ﬁnal dividend for the year ended
31 December 2007 of 9.9 pence per share
(£34 million). Also on 3 March 2008,
the Board resolved to pay a further interim
dividend for the year ended 31 December
2007 (payable as a special dividend) of
7.8 pence per share (£27 million). The ﬁnal
and special dividends were subsequently
paid on 7 May 2008.

On 4 August 2008, the Board resolved to
pay an interim dividend for the six months
ended 30 June 2008 of 5.0 pence per
share (£17 million). Also on 4 August 2008,
the Board resolved to pay a further interim
dividend (payable as a special dividend)
of 9.7 pence per share (£33 million).
The interim and special dividends were
subsequently paid on 8 October 2008.

Dividends proposed
At the forthcoming Annual General Meeting
the Board will recommend to shareholders
that a resolution is passed to approve
payment of a ﬁnal dividend for the year
ended 31 December 2008 of 38.3 pence
per share (£130 million) payable on or
before 22 May 2009. Shares will be marked
ex-dividend on 6 May 2009.

This Business and ﬁnancial review was
approved by the Board on 2 March 2009.

Tony Quinlan
Finance Director
2 March 2009

Closing cash
position guidance

We issued a Pre-close Trading Update on
16 December 2008 in which we reported
management’s expectation that the cash
position as at 31 December 2008 would be
in the range of £125 million to £130 million.
The reported cash position as at
31 December 2008 was £130 million.

Positions under contract
for 2009, 2010 and 2011

We continue to follow our stated trading
strategy of making steady forward power
sales with corresponding purchases of CO2
emissions allowances and fuel purchases.
Our aim is to deliver market level or better
dark green spreads across all traded
market periods and, as part of this strategy,
we retain power to be sold into the
prompt (within season) power markets.

As at 20 February 2009, the positions
under contract for 2009, 2010 and 2011
were as follows:

Power sales (TWh)
comprising:

– Fixed price power sales
(TWh) at an average
achieved price (per MWh)

– Fixed margin and
structured power
sales (TWh)

CO2 emissions allowances
hedged, including UK NAP
allocation, market
purchases, structured
contracts, and beneﬁt
of biomass co-ﬁring
(TWh equivalent)

Solid fuel at ﬁxed
price/hedged, including
structured contracts
(TWh equivalent)

2009

2010

2011

20.7

17.3

10.3

16.2 at
£51.0

11.2 at
£56.6

4.6 at
£62.6

4.5

6.1

5.7

20.5

17.5

18.0

22.1

15.2

9.8

Fixed price power sales include approximately
0.7TWh supplied to Centrica in the period
1 January 2009 to 20 February 2009
under the ﬁve-and-a-quarter year baseload
contract with Centrica which commenced
on 1 October 2007.

Fixed margin power sales include approximately
4.5TWh in 2009 and 5.3TWh in each of 2010
and 2011 in connection with the contract.

Under this contract we will supply power
on terms which include Centrica paying for
coal, based on international coal prices,
and delivering matching CO2 emissions
allowances amounting to approximately
4.8 million tonnes per annum. The contract
provides Drax with a series of ﬁxed dark
green spreads which were agreed in the
ﬁrst quarter of 2006.

Operations – our key to staying on top
Reliability, ﬂexibility and availability are key attributes
of our plant and critical to delivering shareholder value.
Throughout the year we delivered an availability of 86%,
ranking us highly amongst our sector peers.

m Read more: Page 17

This image shows a close up of the ﬂexible
braided hoses of the burners that are
located in the walls of the boilers, the point
at which the fuel ignites to produce heat
to turn water to steam.

Drax Group plc
Annual report and accounts 2008

26
Business review
Corporate and social responsibility review

CSR and our business

We operate our business within a framework
of increasingly stringent and challenging
legislative and regulatory requirements.
We are, however, mindful of the still tougher
expectations held by our wider stakeholder
group. For us, corporate and social
responsibility is about achieving a balance
between the commercial and regulatory
rigours of the competitive sector within
which we operate and our commitment
to our stakeholders.

The Board has ultimate control of policies
in respect of both the wider corporate
and social responsibility and in relation to
environmental and health and safety matters.
The Board’s policies are implemented by
dedicated specialists who make sure
effective processes and procedures are in
place to assure compliance and to identify
and to report on risks and opportunities.

As in previous years we have continued
to invest, not only to comply with the
environmental and health and safety
requirements, but, where practicable, to go
further. Throughout 2008, we maintained
our presence in the FTSE4Good Index
Series, which is designed to measure the
performance of companies that meet globally
recognised corporate responsibility standards
and facilitate investment in those companies.

Engaging with
our stakeholders

Like many businesses, our stakeholders
are many and diverse, including our
shareholders, employees, customers,
suppliers, the local community,
Government, non-governmental
organisations, opinion formers,
and the media. Communication with all
our stakeholders is considered to be an
essential part of our business and we
aim to be open and transparent in all
that we do. We fulﬁl our communication
commitments through an investor relations
programme and a wide-ranging external
relations programme.

No political donations were made in the
UK or elsewhere during 2008, and the
Company’s contact with those active in
the political arena has been and will continue
to be aimed solely at the promotion of the
Company’s business interests.

Suppliers
As in previous years, we encouraged local
and national companies to bid for contracts
to supply the many goods and services
required by the Company. In making purchases,
we are mindful that some companies or
indeed countries may have poor ethical
standards or human rights issues. Covering,
as we do, a varied marketplace with a number
of indirect manufacturers supporting the
end product, it is impossible for us to be
certain that we do not indirectly trade
with certain companies or countries whose
standards are poor. However, we do not
knowingly support or trade with such
companies or countries and we remain
alert to changing circumstances.

Caring for the environment

Tackling climate change
We believe we have an important part to
play in managing the transition of the UK
towards a low carbon economy. At Drax
Power Station our focus is on co-ﬁring
and thermal efﬁciency improvement.

On co-ﬁring, we aim to produce 12.5% of our
output from renewable biomass materials
by mid-2010, the equivalent output of around
600 wind turbines which will save over two
and a half million tonnes of CO2 each year.

During 2008, we co-ﬁred 412,000 tonnes
of biomass, which, due to the carbon neutral
status of biomass, avoided emissions of
644,000 tonnes of CO2.

At the centre of our thermal efﬁciency
improvement programme is the £100 million
upgrade of the high and low pressure
turbines of each of our six generating units.
During the major planned outages of 2008
we installed one high pressure and three
low pressure turbine modules to each of
two units. Together with the early installation
of one high pressure turbine module during
2007, this means that we are now just over
one-third of the way through the upgrade
project and already saving over one-third
of a million tonnes of CO2 emissions a year.

Investor relations
Drax is committed to delivering shareholder
value. We communicate our results and
prospects to our shareholders in an accurate
and timely manner using a variety of
channels. In addition to the Annual General
Meeting, we communicate through our
Annual Report and Accounts, Half Year
Report, Interim Management Statements
and Trading Updates. All of these documents
are made available on our website at
www.draxgroup.plc.uk. Signiﬁcant matters
relating to trading and the development of
the business are disseminated to the market
by way of announcements via a regulatory
information service and those announcements
appear as soon as practicable on our website.

Announcements are followed up with either
conference calls or presentations to provide
further detail and greater understanding.
In addition, face-to-face meetings are held
with our major institutional shareholders,
again to assist them in their understanding
of the announcements, but also to ensure
that the Board is aware of their views
and concerns. In 2008, a formal meeting
programme was delivered in the UK after
each of the Preliminary and Half Year
Results announcements and in the US after
the Preliminary Results announcement.
To aid our communication with our private
investors, during 2008 we continued to
develop further the investor section of our
website improving the information that is
readily available.

External relations
As with previous years, we maintained our
engagement with public affairs audiences
on issues with implications for our business.

We engaged with Parliamentarians and
ofﬁcials both in the UK and the EU on
issues including forthcoming environmental
legislation, energy prices, security of supply,
renewables policy and wholesale market issues.

The form of engagement was varied and
included both face-to-face and written brieﬁngs,
participation in public consultations,
written and oral evidence to select
committees and visits by Parliamentarians
and ofﬁcials to Drax Power Station.

Locally, we have continued to engage
with parish, town, district and county
councillors and ofﬁcers, with the intention
of keeping them up to date with our business
issues and developments. Our regular
communication channel with these and
other local opinion formers takes the
form of an annual consultative meeting,
and three meetings each year with our
local parish and town councillors.

Drax Group plc
Annual report and accounts 2008

On completion of the upgrade in 2011
we will see an improvement in our overall
baseload efﬁciency of 5%, taking it towards
40%, and an additional annual saving of
one million tonnes of CO2 emissions.

We fully recognise the challenge that we
and other fossil fuel-ﬁred power stations
face in tackling carbon emissions and these
two projects, when complete, will reduce our
emissions of CO2 by over three and a half
million tonnes or 17.5% by the end of 2011.

Our focus on co-ﬁring and in particular
biomass procurement has made us well
placed to pursue the development of a
dedicated biomass-ﬁred power generation
business. Our plan to develop three 300MW
biomass-ﬁred power plants alongside the
co-ﬁring capability at Drax Power Station,
could result in Drax becoming responsible for
supplying at least 15% of the UK’s renewable
power, and up to 10% of total UK electricity.

At the heart of our work with biomass is our
sustainability policy, which places us at the
forefront of the introduction of sustainable
biomass practices in the UK. Through a set
of sustainability principles we aim to ensure
that the biomass consumed in our generation
facilities is environmentally sustainable.

As a result of our policy we will strive to
reduce greenhouse gas emissions by at least
70% in comparison to coal-ﬁred generation.
Furthermore, we will engage a qualiﬁed third
party to develop and implement a rigorous
programme of audit and veriﬁcation of
biomass supply chains to ensure compliance
against these principles and our policy.

In addition, we have been involved in
research projects with industry partners
which have the potential for considerable
savings in emissions of CO2. We participated
in Yorkshire Forward’s initiative to examine
the potential for carbon capture and storage
infrastructure in the Yorkshire area which
reported in the year.

Taking these initiatives forward, and others
like them, is only possible within a regulatory
framework which is both certain and
predictable. Given the right framework,
investment in clean coal technologies
which will put the UK on a sure path to
a low carbon future, whilst delivering
reliable and secure supplies of electricity,
will be incentivised.

Sustainability principles
Our policy is designed to ensure that the biomass
consumed in our generation facilities is environmentally
sustainable. More speciﬁcally, our procurement process
is designed to ensure that the production and delivery
of our biomass will:

— Signiﬁcantly reduce greenhouse gas emissions compared
with coal-ﬁred generation and give preference to biomass
sources that maximise this beneﬁt.

— Not result in a net release of carbon from the vegetation

and soil of either forests or agricultural lands.

— Not endanger food supply or communities where the use
of biomass is essential for subsistence (for example, heat,
medicines, building materials).

— Not adversely affect protected or vulnerable

biodiversity and where possible we will give preference
to biomass production that strengthens biodiversity.

— Deploy good practices to protect and/or improve soil,

water (both ground and surface) and air quality.

— Contribute to local prosperity in the area of supply

chain management and biomass production.

— Contribute to the social wellbeing of employees and the
local population in the area of the biomass production.

Drax Group plc
Annual report and accounts 2008

28
Business review
Corporate and social responsibility review

Emissions to air

Carbon dioxide t/GWh

2005

2006

2007

2008

818

833

831

Sulphur dioxide g/kWh

Nitrogen oxides g/kWh

2002

2003

2004

2005

1.07

1.01

844

2006

2007

2008

0.78

0.77

0.71

1.78

2002

1.70

2003

2004

2005

2006

2007

2008

2.55

2.49

2.36

2.30

2.12

1.99

1.42

Environmental performance
and compliance
We recognise our responsibilities to
society and the environment and we are
committed to furthering the environmental
leadership position we hold in the coal-ﬁred
sector. Where practicable we work towards
reducing the environmental impacts of our
business, in line with our policy to regard
compliance with legislation as a minimum
level of achievement.

We manage our environmental compliance
under an Environmental Management
System (“EMS”). During the year our
EMS was externally audited and we were
successful in maintaining certiﬁcation to
the international standard ISO 14001: 2004.

We freely discuss our environmental
performance and activities with our
stakeholders and are sensitive to their
views and concerns. Amongst our staff,
business partners and contractors we
promote environmental awareness,
ensuring that they understand the
environmental aspects of their activities,
that they act responsibly and are competent
to undertake their duties.

We are pleased to report that there were
no breaches of our environmental consents
during the year.

Emissions to air
The principal emissions from burning coal
are CO2, sulphur dioxide (“SO2”), nitrogen
oxides (“NOX”), and particulates (“dust”).
Our generating units have all been
retroﬁtted with Flue Gas Desulphurisation
(“FGD”) equipment which removes, on
average, at least 90% of SO2 emissions
before the ﬂue gas is released via the
chimney into the atmosphere.

We maintain investment in our emissions
abatement equipment and consider this
to be a high priority. Our FGD plant already
complies with SO2 emissions limits to 2016
and we have now completed a programme
of retroﬁtting all units with low NOX, Boosted
Over Fire Air technology in line with the NOX
requirements of the Large Combustion Plant
Directive (“LCPD”). All of our six units have
been retroﬁtted and performance has been
in line with expectations.

Discharges to water
Procedures are in place to ensure that
all discharges and drainage to water are
monitored and treated where necessary
to meet our discharge consent limits.
There are a number of sources of discharge
and drainage as part of the electricity
generation process, including the cooling
water used to cool the condensers, which as
part of the steam cycle condense steam to
water after it leaves the turbines and before
returning to the boilers. The FGD process
produces efﬂuent water which is treated
in a specially designed plant before it is
discharged to the river, and there is also
drainage from the main plant, coal plant
and roads.

Water is abstracted mainly from the River
Ouse and boiler feedwater originates from
two boreholes on site. Approximately half of
the water is returned to the River Ouse at a
few degrees warmer than the river water.

Disposals to land
When coal is burnt, ash is left as a residue.
The ﬁner particles of ash, pulverised fuel
ash (“PFA”), are collected from the ﬂue
gas by electrostatic precipitators; the
heavier ash, furnace bottom ash (“FBA”)
falls to the bottom of the boiler. The majority
of ash is sold to the construction industry
with the remainder sent for landﬁll at the
power station’s adjacent ash disposal site,
which over time has been developed into
farmland, woodland and wetland features
providing a haven to many species of wildlife
and birdlife.

Whilst our target is zero ash landﬁll,
our ability to sell ash depends on the
state of the construction industry.
Hence performance in 2008 was not as
good as we would have liked, reﬂecting
contraction in the construction industry
in the second half of the year, and we were
forced to dispose of material to the ash
disposal site. The construction of an ash
rail loading facility was completed in 2008
and this will help us to improve our ash
export capability through providing greater
and more efﬁcient access to construction
markets around the country.

We pay landﬁll tax on the PFA disposed of
to the ash disposal site. Through the Landﬁll
Tax Credit Scheme, we are able to claim a tax
credit against our donations to recognised
Environmental Bodies. We have worked
with Groundwork Selby since 2001 on
projects designed to help mitigate the
effects of landﬁll upon our local community.
During 2008, we contributed approximately
£71,500 towards local community-based
projects designed to bring about sustainable
environmental beneﬁts and contribute
to the social and economic regeneration
of the area.

Drax Group plc
Annual report and accounts 2008

Alternative fuels
To help maintain our vital role in the UK
economy and safeguard cost effective power
production, our fuel strategy recognises the
need to sustain a ready supply of traditional
quality coal and how best to incorporate
alternative fuels, including different fossil
fuels and renewable biomass materials.
The choice of fuels has to be balanced
with availability and ﬂexibility of supply.
The combustion of petcoke, a fuel derived
from the petroleum industry, is an integral
part of our strategy of developing and
utilising alternative fuels.

A considerable amount of environmental
data on the combustion of petcoke has been
collected and analysed, where possible using
independent specialists. In line with our
policy on openness and transparency all
data have been made publicly available.

Our results have provided conclusive
evidence that there is no detectable impact
on the environment through burning blends
of coal and up to 15% petcoke compared to
coal at Drax and, as a result, in early 2008
the Environment Agency accepted our case
for commercial burn of coal/petcoke blends
across all six units up to 600,000 tonnes per
year of petcoke. The use of petcoke is now a
normal part of station operation and during
the year we burnt 268,000 tonnes.

Our people

Lifelong learning
We are committed to improving the skill,
knowledge and experience of every person
in employment. Our actions are focused on
enabling individuals to make the most of
their personal and potential contribution
at work. By its very nature, this is an
endless endeavour.

In 2008, we invested over £1,000 per
person, (£0.8 million), in training activities
to enhance technical skills and knowledge,
leadership and management knowledge
and experience, and a fundamental
understanding of every relevant aspect of
safe working and the safety of colleagues.
As a consequence, 38 of our people took
on a promotion and increased responsibility.

The people at Drax are not merely the
crucial asset. Through their dedication,
commitment and positive culture they help
to achieve outstanding results personally
and collectively.

Laboratory analysis
The fully equipped laboratory at the power station
enables comprehensive analysis of a whole range
of samples ensuring close monitoring of our
environmental performance.

Drax Group plc
Annual report and accounts 2008

30
Business review
Corporate and social responsibility review

Employment
We employed 727 people at the year end.
During the year we increased employment
by 40 jobs. We endeavour to recruit in our
local catchment area.

Nearly four out of ten Drax people have
been with the Company for 20 years or
more, constituting a unique core of skill,
experience and knowledge. Our employee
retention rate is over 96% per annum.

Our compliance with all relevant legislation
and regulations is non-negotiable.

We work to achieve high standards
in the areas of employment practices,
for example, through the avoidance
of discriminatory practices, and the
speedy and clear resolution of queries
and grievances. We review each of our
policies and procedures on a regular basis,
normally annually, to ensure improvement
of service and legal compliance.

Industrial partnership
We recognise and negotiate with independent
Trades Unions representing a substantial
number of our people. This is a long-standing
and well-developed partnership. Both parties
work hard to ensure that more objectives
are shared than are disputed.

As a consequence, we maintain a positive
industrial relations climate in which
continuity of the Company’s operations
is acknowledged to be paramount. We are
committed to be fair in the settlement of
any grievances or dispute. We undertake to
consult staff fully on all changes that have
a material impact on their employment.

Quality of internal communication
We use a variety of communication
techniques, one-way and two-way, formal
and informal, to ensure that all our staff
are kept fully informed of developments
in the Company’s operations.

In the last year the communication methods
have included monthly team briefs to all
staff, plant-wide meetings at least every
six months on Company performance and
major initiatives, written communications
such as leaﬂets and newsletters, e-mails,
and 360º feedback. The Company intranet
is also widely used.

Internal communication
We strive to communicate in a clear and timely
manner to all our employees. In 2008, we launched
our newsletter, theGen, which covers a range of
work-related and human interest topics.

Drax Group plc
Annual report and accounts 2008

Our occupational health team undertakes
regular programmes to screen colleagues
who are in contact with high noise-levels
and sensitive respiratory conditions.
Everyone working in operational areas has
a three-yearly lung function test. Eye-sight
tests are carried out for all on a three-year
cycle, alongside the periodic medical
examination. During 2008, 200 employees
were tested and given specialist advice.

In 2008, the occupational health team
promoted a “Stop Smoking” campaign,
supported by the Hull and East Riding
stop smoking service.

The average level of absence at Drax
for 2008 was 2.8%, lower than the UK
average for the manufacturing/industrial
working environment.

New skills for young people
Drax runs an active and developing
apprenticeship programme, currently
training 24 young men and women over
a four-year training period. In 2008,
our second year apprentices won the
Apprentice Team Award, and one of its
number, Oliver Dann, won Power Generation
Apprentice of the Year and the Engineering
Academy Apprentice of the Year Award.

The third age
Each year we invite over 350 Drax
pensioners to a celebratory event at
Christmas. The Retired Employees Association
organise trips and other events during the
course of the year for our people who have
now retired from Drax.

There are 117 Pensioners in the Drax Power
Group Section of the Electricity Supply
Pension Scheme (“ESPS”), 54 deferred
members and 425 active contributors still
working at Drax. Since 2000, new recruits
have joined the Group Personal Pension Plan
which now has 268 contributing members.

Health and safety
Health and safety is at the heart of our
corporate responsibility. Protecting our
employees, contractors and all visitors from
injury and promoting employee wellbeing
is fundamental to our business philosophy.
We are committed to developing and
maintaining a positive health and safety
culture in which statutory requirements
are viewed as a minimum standard and
leading performance our goal.

Personal safety statistics

Fatality

Lost time accident

Restricted
work accident

Medical treatment
accident

First aid

RIDDOR(1) reportable

Notes:

2004
0

2005
0

2006
0

2007
1

2008
0

182

140

127

267

273

(1) Reporting of Injuries, Diseases and Dangerous Occurrences

Regulations.

Attaining leading performance
The lost time injury rate and total recordable
injury rate for 2008are signiﬁcantly
lower than in 2007. This improvement in
performance is commendable given the
signiﬁcant increase in contractor man-hours
worked during the year, andis a clear
indication that the safety programmes
implemented in the last few years are now
delivering sound sustainable performance.
Our safety record continues to compare
favourably with that of our sector peers
and international benchmarks.

The Company has been successful in
retaining accreditation of its Health and
Safety Management System to the recently
updated internationally recognised
Occupational Health and Safety standard
OHSAS 18001. Drax is proud to be one of a
select group of large coal-ﬁred power stations
in the country to hold this standard, which is
approved by Lloyd’s Register Quality Assurance.
In addition to this, the Company was equally
delighted to be awarded the RoSPA Gold
Award for the fourth year running.

Processes underpinning performance
The Production Integrity Management
Systems (“PIMS”) programme launched
last year continues to provide the platform
the business needs to deliver continuous
improvement of business critical systems
which are fundamental to the safe and
effective operation of the power station.

“Spotlight on Safety” is our implementation
of the internationally proven DuPont™
STOP™ programme. This behavioural safety
programme coupled with the Drax Task Risk
Assessment (“TRA”) process, the “Safety
Kick-Off” start of shift safety brieﬁngs and
the dynamic point of work risk assessment
(“POWRA”) initiatives give us the framework
we need for open engagement between
operatives and supervisors to develop the
defensive behaviours which are a fundamental
component of the robust world-class safety
culture we aspire to create.

Fair pay and beneﬁts
We operate fair and visible remuneration
policies which ensure that staff are paid
an appropriate salary for the work they
undertake. The lowest level of salary paid
at Drax is substantially higher than the
national minimum wage.

Beneﬁts, such as holidays and pension,
match or exceed the best in the industry
sector and the local area.

We commission independent experts to
benchmark our salaries and beneﬁts at
every level against the industry sector
and the market as a whole. We also
participate in specialist industry meetings
to exchange information and developments
in employment policy.

We commit to maintain and support a
range of share plans which encourage all
of our staff to build a personal stake in the
ownership of the business. In the case of
executive directors and senior staff this
includes a commitment to own shares to a
signiﬁcant percentage of their annual salary.

Health and wellbeing
Health and safety is our priority. We are
committed to promoting the wellbeing
of all our staff and to ensure a professional
response to all emergency situations that
occur. We ensure that our ﬁrst aid response
is the best that we can make it by training
our staff to the highest level we can.

Accident frequency rate

Lost time injury rate

2004

2005

2006

0.08

2007

2008

0.10

Total recordable injury rate

2004

2005

2006

0.17

0.60

2007

0.49

2008

0.31

0.35

0.34

0.42

0.99

Notes:
(1) Lost time injury rate = (number of time losing injuries/

hours worked)x 100,000.

(2) Total recordable injury rate = ((number of time losing injuries +

number of worst than first aid injuries)/hours worked) x 100,000.

Drax Group plc
Annual report and accounts 2008

32
Business review
Corporate and social responsibility review

Caring for the community

We are committed to being a good
neighbour to our local community and
our “caring for the community” philosophy
involves being part of local and regional
communities. Our involvement takes
the form of sponsoring a variety of
local charities and fund raising events,
promoting our own campaigns which
focus on the three themes of youth sport,
education and the environment, and
maintaining open communication channels
and good working relationships with the
region’s key opinion formers.

Sponsorship in the community
During 2008, we gave ﬁnancial support of
£137,012 in total across a range of charitable
and non-charitable causes. Of that total,
charitable donations amounted to £99,952
(2007: £73,754).

Some £24,000 of the total donations were
made under the direction of our sponsorship
team, across a range of activities within a
20-mile radius of the power station.

Safety leadership and recognition
The Company has made a concerted effort
to improve the critical safety leadership
contribution required from ﬁrst line
supervisors. The expectations of both
management and supervisors have been
debated afresh and reafﬁrmed in a Safety
Leadership Charter.

People working on the site at all levels who
have demonstrated safety leadership have
been given recognition awards.

Communicating the safety message
Our “Weekly Safety Bulletin” brieﬁng
process provides a fast track communication
vehicle to reach all those working on the
site. We use the process to draw attention
to speciﬁc safety issues, our performance
record and to recognise achievements.
Active engagement in the safety brieﬁng
process is a job requirement. In addition,
the safety representatives and management
team members of the Health and Safety
Advisory Committee continue to play a
vital role in facilitating staff consultation
on health and safety issues.

Our ongoing safety exchange relationships
with ScottishPower’s Longannet Power
Station and E.ON’s Ratcliffe-on-Soar Power
Station continue to provide new ideas and
a stimulus to drive our health and safety
improvement efforts forward.

Each month the team meets to consider
requests received for charitable donations
and community sponsorship and makes awards
against our criteria of furthering community,
environmental and sporting interests.

An example of the good causes supported
through the sponsorship team in 2008 is
The Prince of Wales Hospice in Pontefract,
West Yorkshire. Providing services to around
190,000 local people, the hospice cares
for adults with progressive illnesses free
of charge. Heavily dependent on donations,
we are pleased to play a small part in helping
to keep these services available.

Drax also operates a “£ for £” matching
scheme, under which we match, £ for £,
any monies raised for charity by employees.
During 2008, approximately £31,300 of
the total donations made were through
this scheme.

For the fourth year running, we ran a
scheme to encourage and reward good
safety performance during the planned
outage periods. Through the scheme £500
is donated for every seven days that goes by
without an injury requiring more than ﬁrst
aid treatment. In total £8,000 was raised
during the two outages. The money was
divided equally between Lindsey Lodge
Hospice in Scunthorpe, a charity chosen
by Drax and Martin House Children’s Hospice
in Boston Spa, selected by our contractors,
Doosan Babcock.

Caring for the community
Our approach to community engagement takes
many forms, but adheres to the themes of environment,
education and youth sport.

Drax Group plc
Annual report and accounts 2008

Visitors to Drax
Thousands of visitors are welcomed to
the power station every year. The appeal
of discovering more about how power
is produced and the sheer scale of
the site and its associated activities
attracts schools and colleges as well as
business organisations and associations.
During 2008, we played host to some
6,550 visitors.

Visitors

2006

2007

2008

5,000

5,750

6,550

For the second year running we held a
charity corporate golf tournament at the
championship course at Fulford, York.
The event raised £3,000 for The Yorkshire
Air Ambulance, which provides a crucial
emergency service for the region.

Other sponsorship activities included
a £40,000 donation to the Selby Abbey
Restoration Appeal. The donation not
only ensured that the Appeal’s £4.5 million
target was met, but importantly that
a reserve fund was set up to assist with
future restoration work.

Education in the community
Our “Cricket in the Community” initiative
launched in May 2006 has continued to
prove popular with local schools. The
England and Wales Cricket Board (“ECB”)
qualiﬁed coaches on our staff, together with
England ladies’ cricketer, Katherine Brunt
took cricket coaching to schools in the local
area as part of our support for education
and to promote sports learning as part of
the National Curriculum.

Strengthening our links with the game
of cricket, for the second year we ran the
Drax Cup, a cricket competition for teams
of girls and boys under the age of nine.

A total of 270 primary schools, treble the
number of last year, across Yorkshire took
part in the knock-out tournament organised
by The Yorkshire County Cricket Club
(“Yorkshire CCC”) in conjunction with The
Yorkshire Cricket Board and The Yorkshire
Schools’ Cricket Association. The semi-ﬁnals
and ﬁnal were played at Headingley
Carnegie Stadium, the home of Yorkshire
CCC and a long-standing venue for test
matches and one-day internationals.
This year the winning school was High View
Learning Centre, in Wombwell, near Barnsley.

Under the “Art in the Community” banner,
we held our second art competition for
primary and secondary schools. Double the
number of entries of the previous year’s
competition were received and the winners
and their schools shared in prize money
totalling over £2,500.

We also held a two-day art camp in the
Summer for seven to 13 year-olds. Under the
guidance of local artist, Mark Hearld, the
budding artists produced their own artistic
interpretations of the Drax nature reserve
and the materials handing area of the
power station site. The artwork is to be
pieced together to produce a large format
mural which will become a permanent
feature in the newly refurbished materials
handling ofﬁces.

This image shows the heart of our trading
systems, updated during the year with
sophisticated and dynamic analysis software
personalised to our trading needs.

Trading – our specialism in getting power to market
Throughout the year we maintained our focus on delivering
added value from our 24/7 trading capability. In 2008,
we continued to improve our ability to hedge our output and
expand the options available to us through setting up a gas
trading desk, providing a natural hedge for our power sales.

m Read more: Page 16

36
Board of directors

Drax Group plc
Annual report and accounts 2008

Charles Berry
Chairman
Age 56

Appointment to the Board:
15 December 2005 and was appointed Chairman
on 17 April 2008.

Committee Membership:
Nominations (Chairman) and Remuneration.

External Appointments:
The non-executive Chairman of eaga plc and a
non-executive director of Securities Trust of Scotland plc
and of Impax Environmental Markets plc.

Previous Experience:
Charles has extensive experience within the UK
power sector. He joined ScottishPower in 1991
and was appointed to the board in 1999. From 2000
to 2005, Charles was Chief Executive of the company’s
UK Operations, with responsibility for over 6,200MW
of generating capacity as well as the trading business,
energy retailing and strategic transactions, such as
renewables development. Charles is also a former non-
executive director and Chairman of THUS Group plc.

Qualiﬁcations:
BSc (Hons) in Electrical Engineering and a Masters
degree in Management.

Dorothy Thompson
Chief Executive
Age 48

Appointment to the Board:
20 October 2005, having joined Drax
in September 2005.

Committee Membership:
Executive, and Health and Safety.

External Appointments:
A non-executive director of Johnson Matthey plc.

Previous Experience:
Dorothy was previously the head of the European
business of InterGen NV, the power generation subsidiary
of Shell NV and Bechtel Inc., responsible for the
management and operation of four gas-ﬁred power
plants, totalling some 3,160MW of capacity across the
UK and the Netherlands. Prior to joining InterGen NV in
1998, Dorothy was initially in banking and subsequently
was assistant group treasurer for Powergen plc.

Qualiﬁcations:
BSc (Hons) and MSc in Economics.

Tony Quinlan
Finance Director
Age 43

Appointment to the Board:
1 September 2008.

Committee Membership:
Executive.

External Appointments:
None.

Peter Emery
Production Director
Age 46

Appointment to the Board:
20 October 2005, having joined Drax in June 2004.

Committee Membership:
Executive, and Health and Safety.

External Appointments:
A director of the Association of Electricity Producers.

Previous Experience:
Tony qualiﬁed as Chartered Accountant with Coopers
& Lybrand and subsequently joined Marks & Spencer
where he went on to hold a number of senior positions
within Internal Audit, Corporate Finance, Investor
Relations and Financial Control. From 2005, he
was Director of Finance, the deputy to the Group
Finance Director.

Qualiﬁcations:
BSc (Hons) joint degree in Chemistry and
Business Studies.

Previous Experience:
Peter joined Esso Petroleum upon leaving university
and held a number of analyst and managerial roles in
the UK before moving to Esso’s parent, Exxon in the US
to co-ordinate its downstream marketing and distribution
investments outside North America and Canada.
Peter returned to Esso in 1992 as plant technical services
manager at Fawley Oil Reﬁnery. He then undertook roles
managing various operational areas at the reﬁnery
before moving to reﬁnery maintenance manager
in 1997. He was appointed operations manager at
Fawley Oil Reﬁnery in 2002, with full responsibility
for the management and operation of the UK’s largest
reﬁnery and a member of Exxon Mobil’s European
leadership team for reﬁning.

Qualiﬁcations:
BSc (Hons) in Mining Engineering and completed the
Advanced Management Programme at INSEAD in 2007.

Drax Group plc
Annual report and accounts 2008

Tim Barker
Senior independent non-executive director
Age 68

Appointment to the Board:
20 October 2005, having joined Drax in June 2004,
and was appointed as the senior independent director
on 15 December 2005.

Committee Membership:

Remuneration (Chairman), Audit and Nominations.

External Appointments:
The senior independent non-executive director of
Electrocomponents plc and a Member of the Professional
Oversight Board of the Financial Reporting Council.

Previous Experience:
From 1993, Tim was Vice Chairman of Kleinwort Benson
Group plc and from 1998, until his retirement in 2000,
he was Vice Chairman of Dresdner Kleinwort Benson.
Notably, he was involved with a number of clients in the
energy sector and was an adviser to the UK Government
on the privatisation of the electricity sector. In the
mid-1980s, Tim was Director General of the City Panel
on Takeovers and Mergers. He is a former Chairman of
Robert Walters plc.

Qualiﬁcations:
MA in Economics.

Jamie Dundas
Independent non-executive director
Age 58

Appointment to the Board:
15 December 2005.

Committee Membership:
Audit (Chairman), Nominations and Remuneration.

External Appointments:
The non-executive Chairman of Jupiter Investment
Management Group, a non-executive director of
Standard Chartered PLC, and Chairman of Macmillan
Cancer Support.

Previous Experience:
Jamie’s career has been in merchant banking,
ﬁnance and the property sector. Jamie spent 19 years
with Morgan Grenfell Group, including ten years as a
director of Morgan Grenfell & Co Limited. Jamie was
Finance Director of the Airport Authority, Hong Kong
between 1992–1996 before joining MEPC plc in 1997,
initially as Finance Director and from 1999–2003
as Chief Executive. He is also a former non-executive
director of J Sainsbury plc.

Qualiﬁcations:
MA (Oxon) in Law and a Barrister (non-practising).

Mike Grasby
Independent non-executive director
Age 65

Appointment to the Board:
20 October 2005, having joined Drax in December 2003.

Committee Membership:
Audit, Health and Safety (Chairman), Nominations,
and Remuneration.

External Appointments:
A non-executive director of OPG Power Venture plc,
a director of executive recruitment business, Strategic
Dimensions Technical Limited and adviser to a Hong
Kong based joint venture acting as an international
marketing partner for the Shanghai Electric Corporation.

Previous Experience:
Mike retired from International Power in February 2002
after 36 years in the power industry. During his career
he held a number of senior positions in the UK and
international power industry with the CEGB and
National Power. He was manager of Drax Power Station
between 1991 and 1995, and director of operations
for National Power’s portfolio, with responsibilities
for over 16,000MW of generating capacity, until 1998.
Mike was also a director of power companies in Portugal,
Turkey and Pakistan. Following the demerger of National
Power, he joined International Power as senior vice-
president, continuing with his international directorships
and leading a major consortium in the Czech Republic.

Qualiﬁcations:
Chartered Engineer, FIET and FIMechE.

David Lindsell
Independent non-executive director
Age 61

Appointment to the Board:
1 December 2008.

Committee Membership:
Audit, Nominations, and Remuneration.

External Appointments:
A non-executive director of Premier Oil plc, a member of
the advisory board of Gartmore, deputy chairman of the
Financial Reporting Review Panel and a member of the
Supervisory Board of the European Financial Reporting
Advisory Group.

Previous Experience:
David was a partner at Ernst & Young for nearly
30 years. He specialised in audit and assurance services
and has extensive experience across a range of industry
sectors. He was a member of the Turnbull Committee
and was a member of the Auditing Practices Board for
a number of years.

Qualiﬁcations:
Fellow of the Institute of Chartered Accountants
in England and Wales (FCA).

38
Directors’ report

Drax Group plc
Annual report and accounts 2008

The directors present their report for Drax Group plc, together with the Consolidated accounts of the Drax group of companies,
for the year ended 31 December 2008.

Annual General Meeting

The fourth Annual General Meeting (“AGM”) of the Company will be held on 28 April 2009, at The City Presentation Centre,
4 Chiswell Street, London EC1Y 4UP at 11.00am. A separate document accompanying this report contains the notice convening the
AGM and a description of the business to be conducted thereat.

Corporate governance

The Group is committed to high standards of corporate governance, details of which are given in this Directors’ report and the
Corporate governance, Audit Committee, Nominations Committee and Remuneration Committee reports set out on pages 42 to 57.

Business review

A review of the development and performance of the business of the Group during the year ended 31 December 2008, including the
financial performance during the year, an analysis of the position of the Group at the end of the financial year, key performance indicators,
a description of the principal risks and uncertainties facing the Group, and forward looking statements can be found in the Chairman’s
introduction on pages 2 and 3. The Business review on pages 6 to 33 incorporates the Chief Executive’s statement, the Business and
financial review and the Corporate and social responsibility review and the reports under the broad heading of Corporate governance
as referred to above. The Business review is a constituent part of this Directors’ report.

The purpose of this Annual Report is to provide information to members of the Company. It contains certain forward looking statements
relating to the operations, performance and financial condition of the Group. By their nature these statements involve uncertainty since
future events and circumstances can differ from those anticipated. Nothing in this Annual Report should be construed as a profit forecast.

Principal activities

Drax Group plc is the holding company of the Drax group of companies. The principal activities of the Group are the generation and sale of
electricity at the Drax Power Station, Selby, North Yorkshire and the sale of by-products of the electricity generation process. No significant
acquisitions or disposals have been made by the Group during the year.

Results

The Group results for the year are shown in the Consolidated income statements on page 61.

Going concern

After making enquiries, the directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable
expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the
directors continue to adopt the going concern basis in preparing the financial statements.

Risk identification, assessment and management

A summary of the Group’s position regarding risk identification, assessment and management and use of financial instruments is contained
in the Audit Committee report on pages 46 and 47 and also in the Business and financial review on pages 12 to 23.

Dividends

Details of the dividends paid and proposed on the ordinary share capital by financial year to which these relate are shown below:

Interim and final dividends

Interim dividend paid on 8 October 2008 of 5.0 pence per share (24 October 2007: 4.7 pence per share)

Proposed final dividend to be paid on 22 May 2009(1) of 38.3 pence per share (7 May 2007: 9.9 pence per share)

Special dividends

Paid on 8 October 2008 of 9.7 pence per share (24 October 2007: nil)

Paid on 7 May 2008: 7.8 pence per share

Notes:

(1) Subject to approval by shareholders at the forthcoming AGM.

2008
£m

17.0

130.0

32.9

–

2007
£m

16.3

33.6

–

26.5

Drax Group plc
Annual report and accounts 2008

Share capital

The Company has only one class of equity shares, which are ordinary shares. There are no known restrictions on the voting rights of the
ordinary shares.

At 1 January 2008, 339,397,000 ordinary shares of 1116⁄29 pence each in the Company were in issue and at 31 December 2008, 339,398,968
ordinary shares of 1116⁄29 pence each in the Company were in issue. The following details the changes to the share capital during the year.

Share issues
During the year, a total of 1,968 ordinary shares of 1116⁄29 pence each were issued in satisfaction of share options which were exercised
in accordance with the rules of the Drax Group plc Approved Savings-Related Share Option Plan.

Authority to purchase own shares
At the AGM of the Company held on 17 April 2008, shareholders resolved to authorise the Company to make market purchases of up
to 10% of the issued ordinary share capital. At the forthcoming AGM, shareholders will be asked to renew this authority. Details are
contained in the Notice of Annual General Meeting.

The Company did not purchase any of its own shares during 2008.

The Company held no Treasury shares during 2008.

Details of the share capital as at 31 December 2008, and shares issued during the year, are given in note 19 on page 80.

Directors

The current directors are Tim Barker, Charles Berry, Jamie Dundas, Peter Emery, Mike Grasby, David Lindsell, Tony Quinlan and Dorothy
Thompson. Biographical notes of the directors appear on pages 36 and 37.

Gordon Horsfield retired as a non-executive director and Chairman of the Board at the conclusion of the AGM held on 17 April 2008.
He had been a director since 15 October 2005 and was succeeded as Chairman by Charles Berry.

Gordon Boyd resigned as a director and left the Company on 31 August 2008. He had been a director since 15 October 2005.
Tony Quinlan was appointed Finance Director of the Company on 1 September 2008.

David Lindsell was appointed a non-executive director of the Company on 1 December 2008.

No other person served as a director or as an alternate director at any time during the year.

In accordance with the Company’s Articles of Association, Charles Berry, Jamie Dundas and Dorothy Thompson will retire by rotation at
the forthcoming AGM and, being eligible, offer themselves for re-election. The evaluation of the Board described on page 44 concluded
that the directors offering themselves for re-election continue to demonstrate commitment to their particular role and perform effectively.

The Company’s Articles of Association also require that, following appointment by the Board, directors submit themselves for election by
shareholders at the first AGM following their appointment. Tony Quinlan was appointed to the Board of the Company on 1 September 2008
and David Lindsell was appointed to the Board of the Company on 1 December 2008 and, therefore, both retire and offer themselves for
re-election at the AGM.

The re-election of each director is recommended by the Board. Details of the relevant terms of appointment and service agreements
appear on page 54.

The rules relating to the appointment or replacement of directors are highlighted in the Corporate governance report on page 42.

Directors’ interests, indemnity arrangements and other significant agreements

Other than a deed of indemnity between each director, the Company and each of its subsidiaries in respect of claims made and personal
liability incurred as a result of the bona fide discharge of the director’s responsibilities and a service contract between the executive
directors and a Group company, or as noted in the Remuneration Committee report, no director had a material interest at any time
during the year in any contract of significance with the Company or any of its subsidiary undertakings.

Details of directors’ remuneration, service contracts and interests in the shares of the Company are set out in the Remuneration Committee
report on pages 49 to 57.

There are no agreements between the Group and its directors or employees providing for compensation for loss of office or employment
that occurs because of a takeover bid.

Under an £800 million credit facility agreement dated 27 October 2005 between, amongst others, Drax Finance Limited, Drax Power
Limited and Barclays Bank PLC (as facility agent), on a change of control, if any lender requires, it may, by giving notice to Drax Finance
Limited and the facility agent within 30 days of receiving notice from Drax Finance Limited that a change of control has occurred,
cancel its commitments and require payment of its share of any outstanding amounts within three business days of such cancellation
notice being given.

40
Directors’ report

Drax Group plc
Annual report and accounts 2008

Under a £100 million credit facility dated 11 May 2006 between, amongst others, Drax Finance Limited and Lloyds TSB plc (as facility
agent), on a change of control, if any lender so requires, it may, by giving notice to Drax Finance Limited and the facility agent within
30 days of receiving notice from Drax Finance Limited that a change of control has occurred, cancel its commitments and require
payment of its share of any outstanding amounts within three business days of such cancellation notice being given.

Under the terms of both credit facility agreements, a “change of control” occurs if any person or group of persons acting in concert gains
control of the Group.

There are no other significant agreements to which the Group is a party that take effect, alter or terminate upon a change of control of
the Group following a takeover bid providing that the Group’s credit rating is maintained.

Substantial shareholdings

As at 20 February 2009, the following shareholders had notified the Company that their holdings exceeded the appropriate disclosure
and notification thresholds:

Invesco plc

AXA S.A.

Barclays Global Investors

Total shares held by substantial shareholders

Employees

Number of
ordinary shares
directly held

Number of
ordinary shares
indirectly held

Total number % of the issued
ordinary share
capital held

of ordinary
shares held

–

100,966,140

1,641,991

19,534,443

21,176,434

–

11,827,092

1,641,991

132,327,673

133,969,666

29.74

6.23

3.48

39.45

A commentary on employee involvement and the Group’s commitment to its employees is set out within the Corporate and social
responsibility review on pages 26 to 33 and details of employee involvement through share participation are contained in the Remuneration
Committee report on pages 49 to 57.

Shares awarded under the Group’s Share Incentive Plan are registered in the name of the Trustee. Voting rights attached to those shares
are at the direction of individual employee participants.

Drax uses a wide variety of communication methods in order to create a common awareness on the part of all employees of the financial
and economic factors affecting the performance of the Company. For example, team briefings are held once a month where wide-ranging
information is communicated throughout the organisation. In addition, plant-wide meetings are held on a regular basis and cover, inter alia,
the financial and market factors affecting the performance of the Group. Details of the communication methods used are provided in the
“Our People” section of the report on Corporate and social responsibility on pages 29 to 31.

It is the Group’s policy to give full and fair consideration to suitable applications for employment from people with disabilities having
regards to their particular aptitudes and abilities. In the event of a member of staff becoming disabled every effort is made to ensure that
their employment with the Group continues and that appropriate training and rehabilitation is provided. It is the policy of the Group that
the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees.

The Group is committed to a policy of equal opportunities and ensures that country of origin, colour, gender, religious belief,
sexual orientation, age or disability, are not barriers to working at Drax.

The Group provides a wide range of development opportunities to help employees develop the necessary skills, knowledge and
experience to realise their performance potential.

Corporate and social responsibility

Details of the Group’s Corporate and social responsibility policies and operations are set out on pages 26 to 33.

There are Group policies for environment, health and safety and human resources as well as a code of business ethics. The internal
control processes described on page 43 takes account of social, environmental and ethical risks.

Charitable donations

The Group has continued to support community initiatives and charitable causes. The total charitable donations made by the Group
in the year were £99,952 (2007: £73,754). More information on the charitable donations made is contained within the Corporate and
social responsibility review on pages 32 and 33.

Drax Group plc
Annual report and accounts 2008

Political donations

No political donations were made in the UK or elsewhere during the year (2007: £nil). It is the Board’s policy not to make donations to
political organisations or for political causes.

The Corporate and social responsibility review explains that the Group’s activities in the political sphere are aimed only at the promotion
of its business interests. However, the definitions of EU political expenditure are broad and there is widespread doubt about the extent
to which normal business activities, which might not be thought to be political expenditure in the usual sense, could be considered to be
political expenditure within the meaning of the legislation. The Board wishes to avoid any inadvertent infringement of the legislation and
is, therefore, seeking the authority of shareholders to incur expenditure for the Company and its subsidiaries for such purposes of £100,000
during the next 12 months. A resolution to that effect is contained within the Notice of Meeting for the AGM. The Board does not believe
that the Group has incurred any political expenditure in the past year.

Creditor payment policy and practice

Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms and pay creditors
when sums owing fall due for payment, provided that the suppliers also comply with all relevant terms and conditions. Drax Group plc,
the holding company of the Group, has no trade creditors. In respect of Group activities, the amounts due to trade creditors at 31 December
2008 represented approximately 21 days of average daily purchases through the year (2007: 22 days).

Auditors and the disclosure of information to the auditors

So far as each person who is a director at the date of approving this report is aware, there is no relevant audit information, being information
needed by the auditors in connection with preparing the report, of which the auditors are unaware. Having made enquiries of fellow directors,
each director has taken all the steps that he/she is obliged to take as a director in order to make himself/herself aware of any relevant audit
information and to establish that the auditors are aware of that information. This information is given and should be interpreted in accordance
with the provisions of Section 234ZA of the Companies Act 1985.

In accordance with Section 385 of the Companies Act 1985, a resolution is to be proposed at the AGM for the reappointment of
Deloitte LLP as auditors of the Company. A resolution will also be proposed authorising the directors to determine the auditors’
remuneration. The Audit Committee reviews the appointment of the auditors, the auditors’ effectiveness and relationship with the Group,
including the level of audit and non-audit fees paid to the auditors. Further details on the work of the auditors and the Audit Committee
are set out in the Audit Committee report on pages 46 and 47.

By order of the Board.

Philip Hudson
Company Secretary
2 March 2009

Registered Office:
Drax Power Station
Selby
North Yorkshire YO8 8PH
Registered in England No. 5562053

42
Corporate governance

Drax Group plc
Annual report and accounts 2008

The Board of directors

As at 2 March 2009, the Board comprised the non-executive Chairman, four independent non-executive directors and three executive
directors. The directors are named in the Directors’ report on page 39 and their principal commitments outside the Group are described
within their biographical notes on pages 36 and 37. The Board meets at least six times each year and more frequently if appropriate.
In addition, the Board meets at least annually to consider Group strategy.

Charles Berry is the Chairman, having succeeded Gordon Horsfield who retired as a non-executive director and Chairman of the Board
at the conclusion of the Company’s Annual General Meeting on 17 April 2008. The Board considered that Charles Berry was independent
on appointment as a director of the Company in December 2005.

Dorothy Thompson is the Chief Executive and is responsible for all aspects of the stewardship of the Group and its business, including
developing an appropriate business strategy for Board approval and securing its timely and effective implementation. She provides
leadership to the executive team and takes responsibility for the important external relationships with customers, suppliers, regulatory
agencies and government bodies. The division of responsibilities between the Chairman and the Chief Executive is set out in writing,
was agreed by the Board on 14 December 2005 and was reviewed and varied by the Board on 23 October 2006.

Tony Quinlan is the Finance Director, having succeeded Gordon Boyd on 1 September 2008. He is responsible for the financial management
of the Group, and for relationships with the Group’s bankers. He is the Chairman of the Risk Management Committee of Drax Power Limited.
That committee provides reports to the Board on a monthly basis.

Peter Emery is the Production Director and is responsible for the operation, safety, repair and maintenance of the electricity generation
plant at the power station and for the Drax site.

Tim Barker, Jamie Dundas and Mike Grasby have served the Group as independent non-executive directors throughout the year ended
31 December 2008. Having reviewed their position, the Board has again concluded that each of them is independent within the meaning
of the Combined Code. Tim Barker is the senior independent director. David Lindsell was appointed a non-executive of the Company on
1 December 2008 and is considered by the Board to be independent.

The Company’s Articles of Association provide that one-third of directors (rounded down to the nearest whole number) shall retire by
rotation each year but are eligible to submit themselves for re-election by shareholders and that directors shall not serve longer than the
third Annual General Meeting (“AGM”) following their election without being re-elected by shareholders. Charles Berry, Jamie Dundas and
Dorothy Thompson retire by rotation this year and offer themselves for re-election by shareholders at the next AGM. The Board considers
it appropriate that each of them be re-elected because of their individual experience and knowledge within the electricity generation sector,
wider management and industry experience. After performance evaluation, the Board has concluded that each continues to be effective
and committed to their role.

The Company’s Articles of Association also require that, following appointment by the Board, directors submit themselves for election
by shareholders at the next AGM. Tony Quinlan was appointed to the Board of the Company on 1 September 2008 and David Lindsell was
appointed to the Board of the Company on 1 December 2008 and, therefore, both will retire and offer themselves for election at the AGM.
The Board considers it appropriate that each of them be re-elected because of their recent and relevant financial experience and their
wider management and industry experience.

Tim Barker, Jamie Dundas and Mike Grasby have each agreed new letters of appointment during the year, by which the terms of
their appointment were changed from an indefinite period to a six-year term from 15 December 2005, subject to one month’s notice.
David Lindsell holds a letter of appointment for a three-year term from 1 December 2008, subject to one month’s notice of termination.
Charles Berry’s letter of appointment provides for a three-year term from 17 April 2008, subject to six months’ notice on either side. It is
the Board’s policy that each non-executive director will be appointed for a term of three years which, subject to the Board being satisfied
as to the director’s performance and commitment and a resolution to re-elect at the appropriate AGM, may be renewed by mutual
agreement. However, in the case of the independent non-executive directors, it is the Board’s policy not to extend the aggregate period
of service of any independent non-executive director beyond nine years and, as required by the Combined Code, any proposal made to
extend a non-executive director’s aggregate period of office beyond six years will be the subject of a rigorous review.

Drax Group plc
Annual report and accounts 2008

The Board has adopted a schedule of matters reserved for its decision and formal terms of reference for its committees which are
available to view on the Group’s website at www.draxgroup.plc.uk. The Board determines: the Group’s strategy; the Group’s appetite for risk
(particularly in its trading activities); the internal control and risk management policies; the business plan and key performance indicators;
acquisitions and disposals and other transactions outside delegated limits; material changes to accounting policies or practices; significant
financial decisions; capital structure and dividend policy; shareholder communications; prosecution, defence or settlement of material
litigation; Group remuneration policy; the terms of reference of Board committees; and the Board structure, composition and succession.
Matters which are not specifically reserved to the Board and its committees under their terms of reference, or to shareholders in General
Meeting, are delegated to the Chief Executive or otherwise delegated in accordance with a scheme of delegation approved by the Board.

The Board receives regular reports on performance against the business plan and periodic business reports from senior management.
Directors are briefed on matters to be discussed at meetings by papers distributed in advance of Board and committee meetings.

The Board is satisfied that all the directors are able to devote sufficient time to their duties as directors.

The Board has adopted a policy whereby directors may, in the furtherance of their duties, seek independent professional advice at the
Company’s expense. During 2008, Charles Berry sought independent legal advice pursuant to the policy in connection with the duties
under sections 175 and 177 of the Companies Act 2006 to avoid conflicts of interest, which concluded there were no issues.

Amended Articles of Association came into effect on 1 October 2008, giving the directors power to approve conflicts of interest.
The Board has adopted a procedure by which situations giving rise to potential conflicts of interest are identified to the Board,
considered for authorisation and recorded.

Each director has the benefit of a deed of indemnity from the Company and its subsidiaries in respect of claims made and liabilities
incurred, in either case arising out of the bona fide discharge by the director of his or her duties. The Company has also arranged
appropriate insurance cover in respect of legal action against directors of the Company and its subsidiaries.

Internal control

The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. A process has been established for
identifying, evaluating and managing the significant risks faced by the Group and this has been in place for the year under review up to the
date of approval of the Annual Report and Accounts. The process is designed to manage rather than eliminate the risk of failure to achieve
business objectives and can only provide reasonable, not absolute, assurance against material misstatement or loss.

The Group’s risk management process aims to be comprehensive, systematic and continuous. Its key features include the identification
and recording of the main risks facing the Group in a risk register with clear allocation of management responsibility for risk identification,
analysis and control. The Group has comprehensive and well defined control policies with clear structures, delegated authority levels and
accountabilities. During the year, the Group has enhanced its procedure governing appraisal and approval of investment and development
expenditure. Post completion reviews are required on significant investment and development project expenditure.

The Group has a system of planning and monitoring, which incorporates Board approval of a rolling five-year business plan and approval,
towards the end of each year, of operating and capital expenditure budgets for the year ahead. Performance against the budget is
subsequently monitored and reported to the Board on a monthly basis. The Board also receives monthly reports on trading risk exposure
as compared to the pre-set limits and monitors overall Company performance against a corporate balanced scorecard which shows progress
against a set of financial, operating, safety and other targets set at the start of the year. Performance is reported formally to shareholders
through the publication of Group results. Operational management make frequent reports on performance to the executive directors.

During the year, the Board reviewed arrangements for the management of commodity trading risk. Monitoring is undertaken by a Risk
Management Committee of the principal operating subsidiary, Drax Power Limited, chaired by the Finance Director. The Board receives
a summary report from the Risk Management Committee each month.

Through the Audit Committee the Board has implemented and annually reviews and updates a programme of internal audit reviews of
different aspects of the Group’s activities designed to ensure that, over time, all facets of the business are reviewed to ensure appropriate
systems of control are in place and are working effectively or, where they are not, deficiencies are rectified by timely and appropriate action.
In agreeing the actions to be taken in response to each report, the aim is always to embed internal controls, including measures intended
effectively to identify and manage risk, within each area of the Group’s operations. In parallel with its work in relation to internal audit, the
Audit Committee also satisfies itself that an action plan for dealing with points raised by the external auditors in their yearly management
letters is being properly addressed by management.

With the assistance of the Audit Committee, the Board has reviewed the effectiveness of the system of internal control. It has reviewed
the reports of the Audit Committee, which has considered all significant aspects of internal control including financial, operational, trading,
compliance, social, environmental and ethical risks in accordance with the “Internal Control: Guidance for Directors on the Combined Code”
issued in September 1999 and updated in October 2005.

Following its review the Board determined that it was not aware of any significant deficiency or material weakness in the system of
internal control.

44
Corporate governance

Drax Group plc
Annual report and accounts 2008

Committees of the Board

The Board has established the following standing committees:

Committee

Audit Committee

Remuneration Committee

Nominations Committee

Membership

Jamie Dundas (as Chairman), Tim Barker, Mike Grasby and David Lindsell.

Tim Barker (as Chairman), Charles Berry, Jamie Dundas, Mike Grasby and David Lindsell.

Charles Berry (as Chairman), Tim Barker, Jamie Dundas, Mike Grasby and David Lindsell.

Health and Safety Committee

Mike Grasby (as Chairman), Dorothy Thompson, Peter Emery and the Head of Safety.

Details of the work of the Audit, Nominations and Remuneration Committees are given in the reports of those Committees on pages 46 to 57.

The Board attaches particular importance to the role of its Health and Safety Committee because of the fundamental importance of
safety systems and procedures in a large and complex plant such as that of Drax Power Station. The Committee’s terms of reference provide
for it to review policy, monitor performance and hold management accountable for the efficacy of the Group’s health and safety procedures
and performance.

Board and Board Committee attendance

The table below shows the number of meetings, and attendance at them by directors, of the Board, Audit, Nominations, Remuneration,
and Health and Safety Committees of Drax Group plc during 2008.

The number in brackets represents the maximum number of meetings that each individual was entitled to and had the opportunity to
attend.

Tim Barker

Charles Berry

Gordon Boyd

Jamie Dundas

Peter Emery

Mike Grasby

Gordon Horsfield

David Lindsell

Tony Quinlan

Dorothy Thompson

Audit
Committee

Nominations
Committee

Remuneration
Committee

Health and
Safety
Committee

4 (4)

1 (1)

–

4 (4)

–

3 (3)

–

1 (1)

–

(cid:0)5 (5)

5 (5)

–

4 (5)

–

5 (5)

1 (1)

–

(cid:0)7 (7)

7 (7)

–

6 (7)

–

7 (7)

–

(cid:0)–

–

2 (2)

–

(cid:0)1 (2)

Board

11 (11)

7 (7)

11 (11)

3 (3)

1 (1)

4 (4)

11 (11)

Performance reviews and directors’ development

The effectiveness of the Board is vital to the success of the Group. During the year, the Company undertook a review to assess the
performance of the Board and its committees. In addition, a review of individual director’s performance was facilitated by Corporate
Partners, a consultancy specialising in providing assurance to listed companies on best practice in company regulation and corporate
governance.

The directors and Company Secretary each completed questionnaires on the Board and committee performance and on the performance
of each individual. Summarised reports were presented to the Board, and individual reports were presented to the Chairman (with a report
on the Chairman presented to the senior independent director). Individual feedback sessions were later conducted by the Chairman,
and by the senior independent director in relation to the Chairman. The conclusions were that the Board and its committees were effective
and performance compared well with that of other companies, and that each director continued to perform effectively in their role.

As stated in its report on pages 49 to 57, in February 2009, when deciding the executive directors’ bonuses for 2008, the Remuneration
Committee also evaluated the performance of each of the executive directors, against both corporate targets and personal objectives.
This evaluation was informed by the results of a confidential survey of senior managers’ opinions, which also covered the Chairman.
The results of this survey were fed back to relevant directors.

During the year, the Chairman held meetings with the non-executive directors in the absence of the executive directors as required
by provision A.1.3 of the Combined Code.

The Board is committed to the development of all employees and directors and has reviewed and will periodically again review each
individual director’s development requirements and make appropriate arrangements to address them. All new directors receive an
induction, including information about the Company and their responsibilities, meetings with key managers and visits to the Company’s
site. In addition, specific Board training days are arranged involving presentations on relevant topics.

Drax Group plc
Annual report and accounts 2008

Relations with shareholders

The Board places considerable importance on communication with shareholders and is proactive in obtaining an understanding of
shareholder preferences and evaluating systematically the economic, social, environmental and ethical matters that may influence or affect
the interests of shareholders. A number of formal communication channels are used to account to shareholders for the performance of the
Group, which include the Annual Report and Accounts, the AGM and periodic reports to the London Stock Exchange. Presentations given at
appropriate intervals to representatives of the investor community are available to all shareholders to download from the Group’s website.
Less formal processes include contacts with institutional shareholders by the Chairman and other directors.

Major shareholders are regularly offered the opportunity to meet with the Chairman. The Board also reviews and discusses the investor
feedback from post-results investor meetings conducted by the Chief Executive and the Finance Director in the UK, Europe and the USA.
These took place following both the preliminary and half year results announcements in 2008. The Company has also engaged Makinson
Cowell, an independent capital markets consultancy firm, to advise and assist in relation to communications with shareholders.

The Company’s private registered shareholders hold approximately 1% of the issued share capital. The Board is as interested in their
concerns as it is in the concerns of institutional and corporate shareholders. All shareholders are free to put questions to the Board at the
AGM. Questions asked in person at the AGM will receive an oral response whenever possible. Otherwise a written response will be provided
as soon as practicable after the meeting. Questions asked at other times will normally receive a written response. Shareholders attending
the AGM will have an opportunity to meet informally with the directors immediately after the meeting.

All information reported to the market via a regulatory information service also appears as soon as practicable on the Group’s website.

This Annual Report and Accounts together with other public announcements is designed to present a balanced and understandable
view of the Group’s activities and prospects. The Chairman’s introduction, Chief Executive’s statement, Business and financial review,
and Corporate and social responsibility review provide an assessment of the Group’s affairs. This Annual Report and Accounts is despatched
to shareholders at least 20 working days before the AGM and the accompanying Form of Proxy provides for a shareholder to vote in favour
or against, or to indicate abstention as an alternative on each separate resolution. Particulars of aggregate proxies lodged will be announced
to the London Stock Exchange via a regulatory information service and placed on the Group’s website as soon as practicable after the
conclusion of the AGM.

Compliance with the Combined Code

It is the Board’s view that throughout the period commencing on 1 January 2008, there has been full compliance with the provisions of
Section 1 of the Combined Code, with the exception that, as the former holder of an executive office, Gordon Horsfield as Chairman was not
independent within the meaning of the Combined Code provision A.2.2 from the start of the year up until his retirement on 17 April 2008.

Statement of directors’ responsibilities

The directors are responsible for preparing the Annual Report and Accounts. The accounts for the Group have been prepared in accordance
with International Financial Reporting Standards (“IFRSs”) and for the Company in accordance with United Kingdom Generally Accepted
Accounting Practice (“UK GAAP”). In the case of the IFRS Group Accounts, IAS 1 requires that Accounts present fairly for each financial
year the Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions,
other events and conditions in accordance with the definitions and recognition and measurement criteria for assets, liabilities, income and
expenses set out in the IAS Board’s “Framework for the Preparation and Presentation of Financial Statements”. In virtually all circumstances,
a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the directors to:

• properly select and apply accounting policies;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable

information; and

• provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the

impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

In the case of UK GAAP Accounts, the directors are required to prepare Accounts for each financial year, which give a true and fair view
of the state of affairs of the Company and of the profit or loss of the Company for the period. In preparing these Accounts, the directors
are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent; and

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained

in the Accounts.

The directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Group, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and
other irregularities and for the preparation of a Directors’ report and Directors’ Remuneration Committee report which comply with the
requirements of the Companies Act 1985.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation
in other jurisdictions.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website.
During 2007, the website underwent a complete overhaul and now has much improved information content and navigation capabilities.

46
Audit Committee report

Drax Group plc
Annual report and accounts 2008

Membership and process

The Committee comprises Jamie Dundas (as Chairman), Tim Barker, Mike Grasby (appointed 17 April 2008) and David Lindsell (appointed
1 December 2008), all of whom are independent non-executive directors, appointed by the Board. Charles Berry was a member of the
Committee until 17 April, when he was replaced by Mike Grasby.

The biographical notes of the members of the Committee are set out on pages 36 and 37. The Board is satisfied that the membership
of the Committee meets the requirement for recent and relevant financial experience. The Company Secretary acts as Secretary to
the Committee.

The Committee met on four occasions in 2008, and the members’ attendance record is set out on page 44. The Chairman of the Committee
reports the Committee’s deliberations to the following Board meeting and, once agreed, the minutes of each meeting of the Committee
are circulated to all members of the Board.

Role

The Committee assists the Board to fulfil its oversight responsibilities. Its primary functions are to:

• monitor the integrity of the financial statements and other information provided to shareholders;

• review significant financial reporting issues and judgements contained in the financial statements;

• review the systems of internal control and risk management;

• maintain an appropriate relationship with the Group’s external auditors and review the effectiveness and objectivity of the external audit

process; and

• monitor and review the effectiveness of the internal audit function (which is provided by Grant Thornton UK LLP, a leading firm of

accountants), review all internal audit reports and review and monitor management’s responses to the findings and recommendations
of the internal audit function.

The terms of reference for the Committee are reviewed annually by the Committee and then by the Board. A copy of the terms of reference
is available on the Group’s website at www.draxgroup.plc.uk.

Attendance at meetings

The Chairman of the Board, the Chief Executive, the Finance Director, the Financial Controller and the internal and external auditors
are normally invited by the Chairman of the Committee to attend meetings of the Committee. In undertaking its duties, the Committee
has access to the services of the Finance Director and the Company Secretary and their resources, as well as access to external
professional advice.

Programme of work

During the year, the Committee undertook its duties in accordance with an agreed annual work plan of which the main features were:

• at meetings in February and July 2008, the Committee reviewed the Group’s Preliminary Results Announcement and Annual Report and

Accounts, and the Half Year Results Announcement and Report respectively. On each occasion, the Committee both received reports from
the external auditors identifying any accounting or judgemental issues requiring its attention and also satisfied itself of the independence
and objectivity of the external auditors;

• at each meeting, the Committee received reports from the internal audit function on the progress of their programme for the year,

reviewed new internal audit reports and monitored progress with the implementation of internal control recommendations. In April 2008,
the Committee reviewed both the arrangements for the provision of the internal audit function and the performance of the current
provider, Grant Thornton UK LLP, before deciding to continue the outsourcing arrangement with that firm and then setting the internal
audit programme for the coming year;

• in April 2008, the Committee undertook a detailed review of the management letter covering the external auditors’ findings in respect

of the prior financial year and also reviewed the performance of the external auditors;

• at meetings in April and December 2008, the Committee reviewed the Company’s risk register and in December 2008 it undertook

a review of the effectiveness of the system of internal controls; and

• during the year, the Committee met four times in the absence of management with the external auditors and three times with

the internal auditors. No matters of concern were drawn to the Committee’s attention at any of these meetings. The Committee’s
understanding with both the external and internal auditors is that, if they should at any time become aware of any matters occasioning
them material concern, they will immediately draw it to the Committee’s attention via the Chairman. Nothing was subject to this
procedure in the course of the year.

Drax Group plc
Annual report and accounts 2008

The nature of the Group’s activities, and the markets in which we operate, are such that from time to time there is a need to consider
carefully certain complex accounting issues and make subjective judgements. During the year, the Committee reviewed the Group’s
accounting for unrealised gains and losses under derivative contracts, and the methodology through which we determine appropriate
actuarial assumptions for our defined benefit pension scheme. The Committee also considered the subjective judgements which are made
in connection with the Group’s tax accounting, the methodology for calculating the weighted average cost of coal stocks, and the remaining
useful economic life of the Drax Power Station.

On each occasion, the Committee concluded that the relevant accounting standards were being properly applied, and that the judgements
taken were reasonable and appropriate to the circumstances.

Independence of the audit

In July 2008, the Committee considered and adopted an enhanced Auditor Independence Policy. In accordance with the Policy,
the Committee annually reviews the quality and cost effectiveness of the external audit and the independence and objectivity
of the external auditor.

The provisions of the Policy include:

• seeking confirmation that the auditors are, in their professional judgement, independent of the Group and obtaining from them an account

of all relationships which may affect the firm’s independence and the objectivity of the audit partner and staff;

• a policy on the employment by the Group of former employees of the external auditors, the essence of which is to require a period of two

years to elapse between the cessation of an individual’s association with the auditors and appointment to any financial reporting oversight
role within the Group; and

• a policy governing the engagement of the auditors to conduct non-audit work under which:

• the auditors may not be engaged to provide certain categories of work, including those where they may be required to audit their own

work or make management decisions, or where the auditors would act in an advocacy role for the Company;

• there is a clear process of approval for engaging the auditors to conduct other categories of non-audit work, subject to financial limits;

• all engagements of the auditors to conduct non-audit work are reported to the next meeting of the Committee; and

• the balance between the fees paid to the external auditors for audit and non-audit work is monitored by the Committee.

Details of the amounts paid to the external auditors during the year for audit and other services are set out in the Notes to the consolidated
financial statements on pages 65 to 89.

Internal audit

Under an outsourcing arrangement, Grant Thornton UK LLP undertakes the Group’s internal audit function. Regular reports are provided
to the Audit Committee regarding the audit programme and reviews undertaken. Recommendations are made to management for process
improvements as appropriate. Topics dealt with by internal audit reports reviewed by the Committee during 2008 included: information
technology; financial reporting; budgeting; revenue; contract management; procurement; expenditure; human resources and payroll;
and treasury. The Committee is of the opinion that, because of the nature of the Group’s business, a higher quality of service is available
through outsourcing the function than would be possible through the employment of internal audit staff.

External auditors

Deloitte LLP were appointed auditors of the Company in 2005 and have been reappointed at each subsequent Annual General Meeting.
They previously acted as auditors to the Drax group of companies prior to the listing of the Company in December 2005.

Having reviewed their performance during the year and satisfied itself of their continuing independence and objectivity within the context
of applicable regulatory requirements and professional standards, the Committee has invited the Board to recommend the reappointment
of Deloitte LLP as auditors at the forthcoming Annual General Meeting and a resolution to that effect appears in the Notice of Meeting.

The Chairman of the Committee, independent of management, maintains regular and direct contact with both the internal and
external auditors.

This report was reviewed and approved by the Board on 2 March 2009.

Jamie Dundas
Chairman, Audit Committee

48
Nominations Committee report

Drax Group plc
Annual report and accounts 2008

The Committee comprises Charles Berry (as Chairman), Tim Barker, Jamie Dundas, Mike Grasby and David Lindsell (appointed
1 December 2008). The biographical notes of the members of the Committee are set out on pages 36 and 37. The Company Secretary
acts as Secretary to the Committee. Gordon Horsfield served as Chairman of the Committee until his retirement on 17 April 2008.

The principal duties of the Committee are to keep under review the structure, size and composition of the Board (including the skills,
knowledge and experience required by it), to consider succession planning for the directors and other senior managers, to identify and
nominate candidates to fill vacancies among the directors and to review the time required from non-executive directors. It also reviews
those directors retiring by rotation in accordance with the Company’s Articles of Association and makes recommendations to the Board
regarding their re-election.

The terms of reference for the Committee are reviewed annually by the Committee and then by the Board. A copy of the terms of reference
is available on the Group’s website at www.draxgroup.plc.uk.

The Committee met on five occasions in 2008, and the members’ attendance record is set out on page 44. The Chairman of the Committee
reports the Committee’s deliberations to the following Board meeting and, subject to redaction in the event that they include personal
information, the minutes of each meeting of the Committee are circulated to all members of the Board.

During the year, the Committee considered the succession planning process for the directors and senior managers and concluded that
it was appropriate for the business. The outcome of the process which it initiated for the review of the performance of the Board and
individual directors is reported in the Corporate governance report within this Annual Report and Accounts.

Following Gordon Boyd’s decision to resign as Finance Director, the Committee undertook the process to identify and nominate a
successor. External search consultants were engaged to assist in the process. A number of potential candidates were identified and
interviewed, and references were taken. The Committee recommended that Tony Quinlan be appointed as Finance Director, and he
was appointed by the Board on 1 September 2008.

The Committee reviewed the structure of the Board in the light of Gordon Horsfield’s retirement and the appointment of Charles Berry as
Chairman. It concluded that the appointment of an additional non-executive director was desirable, and conducted a process to identify and
nominate suitable candidates. External search consultants were engaged to assist in the process. A number of potential candidates were
identified and interviewed, and references were taken. The Committee recommended that David Lindsell be appointed as a non-executive
director, and he was appointed by the Board on 1 December 2008.

The executive directors’ service contracts and non-executive directors’ letters of appointment are available for inspection by prior
arrangement during normal business hours at the Company’s registered office. They will also be available for inspection at the venue,
prior to the Annual General Meeting, details of which are contained in the Notice of Meeting.

This report was reviewed and approved by the Board on 2 March 2009.

Charles Berry
Chairman, Nominations Committee

Remuneration Committee report

Drax Group plc
Annual report and accounts 2008

Introduction

This Remuneration report has been prepared on behalf of the Board by the Remuneration Committee. In all its activities, the Remuneration
Committee has adopted the principles of good governance as set out in the Combined Code and complies with the Listing Rules of the
Financial Services Authority, the relevant schedules of the Companies Act and the Directors’ Remuneration Report Regulations, 2002.

These Regulations require the Company’s auditors to report on the ”Audited information” in the report to state that this section has been
properly prepared in accordance with the Regulations. For this reason the report is divided into audited and unaudited information.

The Remuneration report is subject to shareholder approval at the Annual General Meeting on 28 April 2009.

Part 1 – Unaudited information

Remuneration Committee

During the year, the Committee comprised Tim Barker (as Chairman), Jamie Dundas, Mike Grasby and David Lindsell (appointed
1 December 2008), all of whom are independent non-executive directors. Charles Berry, Chairman of the Company is also a member
of the Committee. The biographical notes of the members of the Committee are set out on pages 36 and 37.

The Committee met on seven occasions during the year and its members’ attendance record is set out on page 44.

Advice to the Remuneration Committee

The Company Secretary, Philip Hudson, has attended meetings as Secretary to the Committee and, having taken over responsibility
for Human Resources during the year, provided assistance to the Committee.

Kepler Associates LLP (“Kepler”), appointed by the Committee, have provided advice to the Committee on market practice, incentive plans
and other remuneration-related topics. Kepler also advised the Board on the remuneration of non-executive directors. Kepler provided no
other services to the Company during the year.

The Committee also received legal advice and other legal services from Norton Rose LLP who were appointed by the Board to act as
principal legal advisers to the Group.

The Chief Executive is invited to attend meetings of the Remuneration Committee except when her own remuneration is being discussed.

Principal responsibilities

The Committee’s principal responsibilities are:

• recommending to the Board the remuneration strategy and framework for the executive directors and senior managers;

• determining, within that framework, the individual remuneration packages for the executive directors and senior managers;

• approval of the design of annual and long-term incentive arrangements for executive directors and senior managers, including agreeing

the annual targets and payments under such arrangements;

• determining and agreeing the general terms and conditions of service and the specific terms for any individual within the Committee’s

remit, either on recruitment or on termination;

• determining the policy for, and scope of, executive pension arrangements; and

• to oversee any major changes in employee benefit structures throughout the Group and review remuneration trends across the Group.

The terms of reference for the Committee are reviewed annually by the Committee and then by the Board. A copy of the terms of reference
is available on the Group’s website at www.draxgroup.plc.uk.

50
Remuneration Committee report

Drax Group plc
Annual report and accounts 2008

Remuneration policy

The remuneration policy applicable to executive directors and senior managers whose remuneration is determined by the Committee is to:

• link a significant proportion of remuneration to performance;

• manage salaries and benefits around market levels, taking into account both industry and cross-industry benchmarks;

• award annual cash bonuses which are linked to the delivery of the annual business plan targets and personal performance; and

• provide staff with long-term incentives linked to total shareholder returns.

When applying this policy to senior managers below director level, the Committee selects salary and benefit benchmarks appropriate
to individual specialisms.

The objectives of the remuneration policy are to:

• motivate executive directors and staff to help ensure that Drax meets challenging performance goals;

• enable Drax to recruit and retain the expertise needed to manage and develop its business;

• strengthen teamwork at all levels; and

• ensure alignment of executive and shareholder interests.

During the year under review the remuneration package of executive directors and senior managers comprised five components, namely:

• base salary;

• annual performance bonus (a mix of cash and deferred shares);

• conditional share awards under the Executive Share Incentive Plan (“ESIP”);

• pension and benefits; and

• all-employee share plans.

Variable remuneration is targeted to account for approximately 50% of the fair value of executive director remuneration.

During 2008, the Remuneration Committee, in conjunction with its independent advisers, Kepler, reviewed the Company’s incentive
arrangements for its executives to ensure that they are motivational and support retention, are competitive in relevant
talent markets, reward growth in shareholder value and that they should not be unduly influenced by the short-term volatility of the
“Dark Green Spread”.

As a result of the review, the Committee decided to discontinue the “exceptional” maximum bonus opportunity (of up to 150% of salary
for executive directors) and increase the “normal” target and maximum bonus opportunities available to executive directors and senior
managers whose remuneration is determined by the Committee, but with a mandatory requirement to defer 25% of annual bonus into
shares in the Company which will vest in three years’ time subject to forfeiture if the executive is a “bad” leaver prior to vesting. The revised
target and maximum bonus levels for the executive directors are set out below in the section entitled “Annual performance bonus”.

In addition, it is proposed to replace the ESIP (the Company’s current long-term incentive plan) in 2009 with a share-based Bonus Matching
Plan (“BMP”). A proposed resolution for the adoption of the BMP is to be considered at the Annual General Meeting (“AGM”) of the
Company to be held on 28 April 2009. The Notice of Meeting accompanies this report and includes a description of the BMP, and the Rules
of the BMP will be available for inspection at the AGM.

Under the BMP a participant would receive an annual grant of conditional shares which shall not exceed in value to 1.5 times such
executive’s annual bonus earned for the prior year. BMP awards will vest based on Drax’s three-year Total Shareholder Return (“TSR”)
versus the FTSE50-150 over a three-year period. The BMP allows for 100% vesting for upper quartile performance, 15% vesting at median,
and no vesting for below median performance. The Committee intends to allow partial vesting (up to 33%) based on continued employment
only for BMP awards made to participants not on the Executive Committee, to support retention and in recognition that TSR is a less
meaningful performance measure for that group of participants.

In addition to the performance-related awards, directors and members of the Executive Committee will be required to defer a fixed
proportion of their annual bonus (currently intended to be 25%) into a conditional award of shares which will vest conditional on three
years’ continuing service.

BMP awards will first be made during 2009 based on the annual bonus earned for 2008. As such, BMP awards will be granted to
participants conditional on shareholder approval for the BMP being obtained at the AGM.

The following paragraphs provide more detail in relation to each of the five components of remuneration for executive directors.

Drax Group plc
Annual report and accounts 2008

Base salary
Executive directors’ base salaries and benefits are reviewed each year with any changes taking effect from 1 April. The review takes into
account individual performance and market competitiveness. Pensionable salary is derived from base salary only.

The Committee benchmarks executive director salaries against comparator groups of utilities, power generators and selected other
industrial and commercial companies with comparable turnover, market value or staff numbers.

Annual performance bonus
The Group operates an annual bonus scheme. Bonuses are based on Group performance and individual performance against objectives.
The Committee sets Group performance measures based on the Group’s business priorities for which the Board sets challenging
performance targets. In 2008, Group measures included financial, trading, plant operations, safety, environmental and development
objectives, and a discretionary element. In exercising its discretion the Committee has regard to management’s performance in handling
unforeseen events which arise during the year.

As part of its review of incentive arrangements, the Committee adjusted the target and maximum annual performance bonus
opportunity for the directors and members of the Executive Committee in 2008 and introduced a requirement to defer 25% of any
bonus into a conditional award of shares which will vest in three years and be forfeited if the executive leaves the Company other than as
a “good leaver” before the shares vest. For annual performance bonus awards in 2008, the target bonus for the Chief Executive and other
executive directors is 65% and 60% of base salary respectively. The maximum bonus is 130% and 120% respectively. 75% of any bonus
award is paid in cash. Subject to shareholder approval of the BMP being obtained at the AGM, 25% of any bonus will be subject to a
deferred share award.

In 2008, achievement of Group-based performance conditions provided for a bonus of up to 125% of target bonus, which was then adjusted
according to individual performance by a multiplier in the range 0.67 to 1.33. The Committee reviewed 2008 actual performance against
bonus targets and the amounts awarded and payable in cash are shown in the Directors’ emoluments table in Part 2 of this report.

From 2008 onwards, 25% of any bonus earned will be deferred in the Company’s shares for three years, and will be forfeited if the executive
leaves Drax other than as a “good leaver” before the shares vest.

The target and maximum bonus for 2009 for the Chief Executive and the other executive directors are the same as in 2008, and bonus
measures and targets have been set using a similar process to that used previously.

Benefits
The Company’s policy is to offer a car allowance to executive directors and to certain senior managers, according to their role. The annual
allowance is currently £17,500 per annum for the Chief Executive, £12,000 per annum for executive directors and £9,000 per annum
for senior managers whose remuneration is determined by the Committee. In addition, life assurance (in a sum assured of four times
base salary) is provided for the directors and senior managers and private medical insurance is provided for them and their dependants.
Relocation expenses are paid where appropriate.

Pensions
Executive directors and senior managers who joined the Group after 1 January 2002 are entitled to membership of the Group’s defined
contribution pension plan. The employer’s contribution for executive directors is 20% of base salary and for senior managers who are not
members of the Electricity Supply Pension Scheme (“ESPS”) it is 11.5% of base salary. For senior managers who are members of the ESPS
the normal employer’s contribution is 21.6% of base salary. In each case contributions were and are capped by the different statutory limits
applicable before and after 6 April 2006, although there is no director or senior manager for whom contributions would mean they exceed
either the lifetime or annual allowances.

Alternatively, at their option, executive directors may either have contributions of the same amounts made to their personal pension
schemes or cash in lieu of pension at the stated rate and subject to normal statutory deductions. Details of pension contributions for
executive directors and of payments in lieu are included in the emoluments table in Part 2 of this report.

Drax Power Limited, a trading subsidiary, is the Principal Employer of the Drax Power Group Section of the ESPS, an occupational pension
scheme providing defined benefits on death, ill-health, early retirement or normal retirement to eligible members and beneficiaries based
on the member’s length of pensionable service, final salary and the applicable accrual rate. The defined benefit pension scheme was closed
to new entrants in 2002. Although certain senior managers are members, none of the executive directors are eligible for membership.

52
Remuneration Committee report

Drax Group plc
Annual report and accounts 2008

Current annualised rates of pay
The following table shows the current annualised rates of base salary, benefits, bonus (at target level) and pension contributions
for each of the directors:

Tim Barker

Charles Berry

Jamie Dundas

Peter Emery

Mike Grasby

David Lindsell

Tony Quinlan

Dorothy Thompson

Notes:

Annual
salary
£000

–

255

–

300

450

Annual
fees(1)
£000

200

–

Annual
bonus(2)
£000

Annual
benefits(3)
£000

Annual
cash
pension(4)
£000

–

153

–

180

293

–

(1) Includes Board Committee membership fees paid as separate amounts.

(2) The annual bonus assumes an “on target” performance yielding a bonus of 65% of base salary for Dorothy Thompson and 60% of base salary for the other executive directors, of which 25% is required to be deferred

into shares.

(3) Covers car allowance only. The cost of other benefits such as BUPA and additional life cover is not easily predicted because they are subject to price variation (the amount of which depends on personal circumstances

at the time) during the year.

(4) Annual contribution by the Company to the directors’ pension plans or cash in lieu.

The Committee has determined that the executive directors shall not receive any increase in their base salaries in the review year
2009/2010.

Executive Share Incentive Plan (“ESIP”)
Under the ESIP, annual awards of performance shares were made to executive directors and other senior staff up to a normal maximum
of 100% of salary (200% in exceptional circumstances). Shares vest based on Drax’s Total Shareholder Return (“TSR”) performance
relative to an index over three years. The Committee considers relative TSR to be an objective, external measure of the Company’s success.

For the 2008 ESIP awards, index TSR is based 50% (60% for 2006 ESIP awards and 50% for 2007 ESIP awards) on the median TSR
of FTSE350 electricity sector peers, 25% (20%) on the median TSR of selected UK-listed oil and gas companies and 25% (20%) on the
TSR of the FTSE100 index, as shown below:

Weighting

Constituents(1)(2)

Notes:

Electricity sector peers

Oil and gas comparators

50%

British Energy(3)

International Power

25%

BG Group

Scottish and Southern Energy

Gazprom

Royal Dutch Shell

FTSE100

25%

FTSE100 index, as published

(1) Viridian Group Limited had previously been included in the electricity sector peers group, however, it was subject to takeover which took effect on 8 December 2006, and therefore it was considered appropriate to remove

it as a constituent in the sector peers group for 2007.

(2) ScottishPower had previously been included in the electricity sector peers group, however, it was subject to takeover which took effect on 23 April 2007, and therefore it was considered appropriate to remove it as a

constituent in the sector peers group for 2007.

(3) British Energy remained as an electricity sector peer until its takeover which took effect on 3 February 2009, following which it will be removed as a constituent.

No shares vest if the Company’s TSR over the three-year period is less than the index TSR; 25% of shares vest if the Company’s TSR equals that
of the Index; shares vest in full if the Company’s TSR outperforms that of the Index by 30% or more, and there is straight-line pro rata vesting
in between.

For any award to vest, the Committee must be satisfied that there has been a demonstrable improvement in the performance of the
Company in terms of (but not limited to) finance, production, trading, ancillary activities and progress in delivering the Company’s strategy.
The Committee has chosen these broader criteria rather than the more straightforward criterion of financial performance because of the
extent to which financial performance is susceptible to the influence of movements in relevant commodity markets.

Awards under the ESIP will normally be pro rated for time and performance in circumstances where they vest for “good leavers” and on
a change of control.

At the 2007 Annual General Meeting a resolution proposing that dividends accrue on ESIP shares over the vesting period to ensure alignment
with shareholders’ interests was approved. The dividend accrual will only relate to “ordinary” dividends and will not be allowed in respect
of any special dividends which are directly linked to share consolidations (where each share consolidation has the effect of automatically
maintaining the value of the award following payment of the special dividend).

The ESIP will be replaced by the proposed BMP in 2009, conditional upon shareholder approval at the 2009 AGM.

Drax Group plc
Annual report and accounts 2008

2008 ESIP award
ESIP awards were made in April 2008, for nil consideration. For executive directors, each award was calculated based on 100% of base
salary. Performance for the 2008 ESIP awards will be measured over the three years from 1 January 2008 to 31 December 2010 with
potential vesting in April 2011. The awards made in September 2006 and April 2007 are the only long-term incentives having the potential
to vest before that date.

All-employee share plans
The Committee operates a Savings-Related Share Option Plan (“SAYE”) and a Share Incentive Plan (“SIP”), both of which are approved
by HM Revenue & Customs and must be operated on an all-employee basis. The executive directors may participate in each plan upon the
same terms as other employees.

The SAYE provides for the grant of options (which, at the Committee’s discretion, may be offered at a discount of up to 20% to the market
price of a share determined in accordance with the rules of the plan) linked to a savings contract which pays interest at a statutory rate.
No invitations to participate in the SAYE plan were made in 2007 or 2008.

Details of the SAYE options held by the executive directors are shown in the table in Part 2 of this report.

In any one tax year, the Committee may operate the SIP for the benefit of participants using any combination of the following elements:

• award Free Shares (up to £3,000 in value);

• allow the purchase of Partnership Shares (up to £1,500 in value subject to an overriding maximum of 10% of salary);

• allocate free Matching Shares (in a maximum ratio of two Free Shares for each Partnership Share); and

• allow the investment in shares of dividends received in respect of SIP shares.

In January 2007, the Committee reviewed the use of the SIP with the aim of establishing a clearer linkage between long-term incentive
rewards for all employees and collective performance and encouraging wider share ownership amongst employees. Wider employee share
ownership aligns the interests of employees with those of shareholders by enabling employees to share in the benefits flowing from their
contribution to the success of the Company.

As a result of the review the Committee decided to:

• award Free Shares to the value of £2,500 to each eligible employee;

• allow employees to purchase Partnership Shares up to the maximum permitted of £1,500 subject to an overriding maximum of 10%

of salary; and

• make an allocation of one free Matching Share in respect of each Partnership Share purchased.

In accordance with the plan rules, shares taken up by an employee are allocated to a trustee which holds them on behalf of the employee.
Under normal circumstances, the employee will receive the shares from the trustee without incurring a tax liability once the shares have
been held in trust for five years. The employee is entitled to receive dividends paid in respect of the shares held in trust.

The SIP operated on the same basis in 2008 as it did in 2007. The SIP Trustee was funded by the Group to purchase the required Free
and Matching Shares in order to avoid any dilution.

Details of the shares allocated to executive directors are shown in the table in Part 2 of this report.

Provision of shares for share plans — dilution
The current estimated dilution from subsisting awards, including executive and all-employee share awards, is less than 0.5% of the shares
in issue at the date of this report.

All equity-based plans are funded through the issuance of shares, or through the purchase of shares in the marketplace through a trust,
subject to an overall dilution limit for all employee share plans of no more than 10% of share capital in any ten-year period and a limit of
5% of share capital in any ten-year period for the Company’s discretionary share plans (e.g. ESIP).

Share ownership guidelines
The Company has share ownership guidelines for executives participating in the ESIP. They are 100% and 50% of base salary for executive
directors and other senior manager ESIP participants, respectively.

Those who receive shares by virtue of ESIP awards or who receive deferred bonus shares must retain 50% of the net (that is, after income
tax and national insurance contributions) shares received until the applicable guideline is reached.

54
Remuneration Committee report

Drax Group plc
Annual report and accounts 2008

Service contracts

Executive directors’ service agreements are of indefinite duration, subject to a normal retirement age of 65, terminable at any time
by either party giving 12 months’ prior notice except that Peter Emery’s contract is terminable by him providing six months’ notice
to the Company.

Under each of the executive directors’ service agreements other than the Chief Executive’s, Drax has the right to make a payment in lieu
of notice of termination, the amount of that payment being the salary and benefits that would have accrued to the executive director during
the contractual notice period.

The following table shows for each person who has served as a director of the Company at any time during the year ended 31 December
2008, the commencement date and term of the service agreement or contract for services, and details of the notice periods. No service
agreement now includes any operative provision for the payment of compensation upon early termination. Any compensation payable
in those circumstances would need to be negotiated at the time and in the light of the circumstances.

Tim Barker

Charles Berry

Jamie Dundas

Peter Emery

Mike Grasby

David Lindsell

Tony Quinlan

Dorothy Thompson

Contract start date

Contract term

15 December 2005

17 April 2008

15 December 2005

14 June 2004

15 December 2005

1 December 2008

1 September 2008

26 September 2005

6 years

3 years

6 years

Indefinite duration

6 years

3 years

Indefinite duration

Notice period
by the Company
Months

Notice period
by the director
Months

Directors’ service agreements and contracts for services are available for inspection at the Company’s registered office during normal
hours of business and will be available at the place of the AGM from 10.00am until the close of the meeting.

External appointments

The Committee recognises that executive directors may be invited to become non-executive directors of other companies and that such
appointments can broaden their knowledge and experience to the benefit of the Company. The policy is that an executive director who
accepts an external appointment having had the prior approval of the Board should retain the fees payable in respect of the appointment.
Dorothy Thompson was appointed as a non-executive director of Johnson Matthey plc with effect from 1 September 2007, and received
£45,000 in fees for that appointment during 2008.

Drax Group plc
Annual report and accounts 2008

Non-executive directors

Chairman’s remuneration and service agreement
Charles Berry, as a non-executive director and Chairman of the Board has a contract to provide services in substantially similar terms
to the contract of each of the other non-executive directors, save as to the level of remuneration and the period of notice to terminate
the contract.

The Committee reviewed the Chairman’s remuneration prior to his appointment using a similar approach to that used in previous years,
which followed a review of remuneration data for chairmen of other listed companies of a similar market value or turnover to Drax and
having regard to his expected time commitment. It decided that upon his appointment his remuneration should be at the annual rate
of £200,000, which is reflected in the table of annualised rates of pay on page 52. The Committee has determined that the Chairman shall
not receive any increase in his remuneration in the review year 2009/2010. His notice period is six months’ on either side. Like the other
non-executive directors, he does not receive a pension or other benefits, nor is he eligible for an annual cash bonus or any of the
share-based reward plans.

Other non-executive directors
The remuneration for the other non-executive directors is determined by the Chairman and the executive directors and is designed to:

• recognise prevailing market rates for non-executive directors’ fees;

• reflect the responsibilities and time commitment of non-executive directors; and

• attract and retain individuals with the necessary skills and experience to contribute to the future growth of the Company.

The fees for non-executive directors were last reviewed in April 2008. The review looked at the structure of payments made in respect
of Committee Chairmanship and membership and took into account the fees payable by the same comparator companies as those used
for the purposes of the review of the Chairman’s remuneration by the Committee and decided to increase the basic fee from £39,000
to £40,000 per annum with additional fees for each Board Committee membership being reduced from £5,040 to £2,500 per annum
and the fee for being the Chairman of each of the Board’s Committees being increased from £2,500 to £10,000 per annum, other than
the Nominations Committee (of which the Chairman of the Board is the Chairman).

Non-executive directors’ fees are neither performance-related nor pensionable. The non-executive directors do not participate in any
of the Company’s bonus schemes or share-based reward plans. The non-executive directors have contracts to provide services to the
Company which may be terminated by either party at any time on giving one month’s notice.

Value of £100 invested

The following graph shows how the value of £100 invested in the Company on the listing of its shares on the London Stock Exchange on
15 December 2005 has changed and compares that performance with the changing value of the same amount invested at the same time
in the FTSE100 and FTSE250 indices. Those indices have been chosen as suitable broad comparators against which the Company’s
shareholders may judge their relative returns given that, during the year under review, the Company has been a member of both the
FTSE250 and FTSE100 indices. The graph reflects the total shareholder return (determined according to usual market practice) for the
Company and each of the indices referred to on a cumulative basis over the period from 15 December 2005 to 31 December 2008.

TSR performance since listing — Drax versus FTSE100 and FTSE250

Value (£)

Drax

FTSE100

FTSE250

200

150

100

Dec 05

Mar 06

Jun 06

Sep 06

Dec 06

Mar 07

Jun 07

Sep 07

Dec 07

Mar 08

Jun 08

Sep 08

Dec 08

56
Remuneration Committee report

Drax Group plc
Annual report and accounts 2008

Part 2 – Audited information

This section of the report (which has been subject to audit) sets out the remuneration paid to the directors during the year ended
31 December 2008.

Directors’ emoluments

The emoluments payable in respect of 2008 to directors who held office for any part of the financial year, including amounts paid
to them as directors of subsidiary undertakings and compensation for loss of office, was as follows:

Salary
£000

–

163

–

249

–

100

440

Termination
payment
£000

–

485(2)

–

Tim Barker

Charles Berry (appointed
as Chairman on 17 April 2008)

Gordon Boyd
(resigned on 31 August 2008)

Jamie Dundas

Peter Emery

Mike Grasby

Gordon Horsfield
(retired on 17 April 2008)

David Lindsell (appointed
on 1 December 2008)

Tony Quinlan (appointed
on 1 September 2008)

Dorothy Thompson

Notes:

Fees
£000

157

–

Cash bonus
in respect of
2008
£000

Benefits
£000

Pension(1)
£000

–

(cid:0)172

–

(cid:0)68

(cid:0)343

–

Total
2008
£000

(cid:0)157

786

(cid:0)57

489

(cid:0)59

(cid:0)4

194

894

Total
2007
£000

383

384

194

–

692

(1) Annual contribution by the Company to directors’ pension plans or cash in lieu.

(2) Gordon Boyd’s termination comprised payment of salary and other contractual benefits for 12 months in lieu of notice, together with payment representing on target bonus for the notice period, and an additional payment

of two months’ salary and benefits in consideration for his agreement to remain with the Company after the agreed termination date, pending the appointment of a successor.

Directors’ interests under the ESIP

The following information shows the interests of the directors as at the end of the financial year in the Company’s ESIP:

Dorothy Thompson
2006 award(1)
2007 award(2)
2008 award(3)
Peter Emery
2006 award(1)
2007 award(2)
2008 award(3)
Gordon Boyd
2006 award(1)
2007 award(2)
2008 award(3)

As at
1 January
2008
Number

60,048
46,104
–

30,024
25,718
–

32,597
27,600
–

Awards
made during
the year
Number

Awards
vesting during
the year
Number

Awards
lapsing during
the year
Number

As at
31 December
2008
Number

Market value
at the date of
award
Pence

–
–
71,057

–
–
39,861

–
–
42,461

–
–
–

32,597
27,600
42,461

60,048
46,104
71,057

30,024
25,718
39,861

–
–
–

874.3
797.1
577.0

Notes:
(1) The 2006 awards were made on 19 September 2006 and, subject to the performance conditions being achieved, will vest on 19 September 2009. The performance period for those awards commenced

on 1 July 2006 and will end on 30 June 2009.

(2) The 2007 awards were made on 19 April 2007 and, subject to the performance conditions being achieved, will vest on 19 April 2010. The performance period for those awards commenced on 1 January 2007

and will end on 31 December 2009.

(3) The 2008 awards were made on 14 April 2008 and, subject to the performance conditions being achieved, will vest on 14 April 2011. The performance period for those awards commenced on 1 January 2008

and will end on 31 December 2010.

Details of the conditions subject to which the above awards will vest are given on page 52.

Drax Group plc
Annual report and accounts 2008

Directors’ interests under SAYE
The following information shows the interests of directors as at the end of the financial year in the Company’s SAYE Plan:

As at
1 January
2008
Number
2,531

Share options
granted during
the year
Number
–

Share options
exercised
during
the year
Number
–

Share options
lapsed during
the year
Number
–

Dorothy Thompson

Tony Quinlan
Peter Emery
Gordon Boyd

–
–
1,470

–
–
–

–
–
1,470

Exercise
price
per share
Pence
636.0

–
–
636.0

Exercise period
From July 2011 to
December 2011
–
–
–

As at
31 December
2008
Number
2,531

–
–
–

The middle market closing quotation for an ordinary share of the Company on 31 December 2008, was 561 pence and the daily middle
market closing quotations during the financial year ranged from 486.75 pence to 821 pence.

Directors’ interests in Drax Group shares
The interests held by each director at the end of the financial year in the ordinary shares in the Company are shown below. All the disclosed
interests are beneficial. No director had any interest at any time during the year or since in any security issued by the Company other than
its ordinary shares.

Tim Barker

Charles Berry

Jamie Dundas

Peter Emery

Mike Grasby

David Lindsell

Tony Quinlan

Dorothy Thompson

Notes:

As at 31 December 2008

As at 1 January 2008

Ordinary
shares

3,462

1,730

30,551

1,730

–

SIP shares(1)

SAYE
option
shares(2)

–

1,813

–

Ordinary
shares

3,462

1,730

30,551

1,730

–

SIP shares(1)

SAYE
option
shares(2)

–

897

–

63,569

1,813

2,531

63,569

897

2,531

(1) The SIP shares include the Free, Partnership and Matching elements of the plan.

(2) The number of SAYE option shares are those which will be available to exercise at the maturity of the savings contract.
No director had at any time during the financial year, or has had since, any beneficial interest in the shares of any subsidiaries.

No other changes to directors’ share interests have taken place between 31 December 2008 and the date upon which this report was
approved by the Board.

This report was reviewed and approved by the Board on 2 March 2009.

Tim Barker
Chairman, Remuneration Committee

58
Directors’ responsibility statement

Drax Group plc
Annual report and accounts 2008

We confirm to the best of our knowledge:

1. the Group financial statements, prepared in accordance with IFRSs as issued by the IASB and IFRS as adopted by the EU,

give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

2. the Business review includes a fair review of the development and performance of the business and the position of the Group,

together with a description of the principal risks and uncertainties it faces.

By order of the Board.

Dorothy Thompson
Chief Executive
2 March 2009

Tony Quinlan
Finance Director
2 March 2009

Group – Independent auditors’ report

Drax Group plc
Annual report and accounts 2008

To the members of Drax Group plc

We have audited the Group financial statements of Drax Group plc for the year ended 31 December 2008 which comprise the consolidated
income statements, the consolidated statements of recognised income and expense, the consolidated balance sheets, the consolidated cash
flow statements, and the related notes 1 to 30. These Group financial statements have been prepared under the accounting policies set out
therein. We have also audited the information in the Remuneration Committee report that is described as having been audited.

We have reported separately on the parent Company financial statements of Drax Group plc for the year ended 31 December 2008.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the annual report, the directors’ Remuneration Committee report and the Group financial
statements in accordance with applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union
are set out in the statement of directors’ responsibilities.

Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the Group financial statements give a true and fair view, whether the Group financial
statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether
the part of the Remuneration Committee report described as having been audited has been properly prepared in accordance with
the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ report is consistent
with the Group financial statements. The information given in the Directors’ report includes that specific information presented in
the Chairman’s introduction, Chief Executive’s review and Business and financial review that is cross referred from the Business review
and Risk identification sections of the Directors’ report.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit,
or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are
not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the annual report as described in the contents section and consider whether it is consistent
with the audited Group financial statements. We consider the implications for our report if we become aware of any apparent misstatements
or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the
annual report.

60
Group – Independent auditors’ report

Drax Group plc
Annual report and accounts 2008

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements and
the part of the Remuneration Committee report to be audited. It also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the
Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the Group financial statements and the part of the Remuneration
Committee report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements and the part of
the Remuneration Committee report to be audited.

Opinion

In our opinion:

• the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state

of the Group’s affairs as at 31 December 2008 and of its profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the

IAS Regulation;

• the part of the Remuneration Committee report described as having been audited has been properly prepared in accordance

with the Companies Act 1985; and

• the information given in the Directors’ report is consistent with the Group financial statements.

Deloitte LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
2 March 2009

Consolidated income statements

Drax Group plc
Annual report and accounts 2008

Continuing operations

Revenue

Fuel costs

Other operating expenses excluding exceptional items

Exceptional operating income

Total other operating expenses, net

Unrealised gains on derivative contracts

Operating profit

Interest payable and similar charges

Interest receivable

Profit before tax

Tax charge

Profit for the year attributable to equity shareholders from continuing operations

Earnings per share from continuing operations

– Basic and diluted

Years ended 31 December

2008
£m

2007
£m

Notes

1,752.8

(1,070.2)

682.6

(274.8)

–

(274.8)

56.3

464.1

(28.8)

7.2

442.5

(109.6)

332.9

Pence
per share

1,247.4

(546.1)

701.3

(239.4)

6.2

(233.2)

3.3

471.4

(34.3)

11.4

448.5

(95.5)

353.0

Pence
per share

62
Consolidated statements of recognised income and expense

Drax Group plc
Annual report and accounts 2008

Profit for the year

Actuarial losses on defined benefit pension scheme

Deferred tax on actuarial losses on defined benefit pension scheme

Impact of reduction in tax rate on deferred tax on defined benefit pension scheme

Fair value gains/(losses) on cash flow hedges

Deferred tax on cash flow hedges

Impact of reduction in tax rate on deferred tax on cash flow hedges

Net gains/(losses) recognised in equity

Total recognised income/(expense) for the year attributable to equity shareholders

Notes

Years ended 31 December

2008
£m

332.9

(12.9)

3.6

–

164.7

(47.4)

–

108.0

440.9

2007
£m

353.0

(3.3)

0.9

(0.4)

(584.3)

171.1

1.0

(415.0)

(62.0)

Consolidated balance sheets

Assets

Non-current assets

Property, plant and equipment

Derivative financial instruments

Current assets

Inventories

Trade and other receivables

Derivative financial instruments

Cash and cash equivalents

Liabilities

Current liabilities

Financial liabilities:

– Borrowings

– Derivative financial instruments

Trade and other payables

Current tax liabilities

Net current assets/(liabilities)

Non-current liabilities

Financial liabilities:

– Borrowings

– Derivative financial instruments

Deferred tax liabilities

Retirement benefit obligations

Other non-current liabilities

Provisions

Net assets

Shareholders’ equity

Issued equity

Capital redemption reserve

Share premium

Merger reserve

Hedge reserve

Retained losses

Total shareholders’ equity

These financial statements were approved by the Board of directors on 2 March 2009.

Signed on behalf of the Board of directors:

Dorothy Thompson
Chief Executive
2 March 2009

Tony Quinlan
Finance Director
2 March 2009

Drax Group plc
Annual report and accounts 2008

As at 31 December

2008
£m

2007
£m

Notes

1,135.7

105.5

1,241.2

189.5

259.9

286.5

130.2

866.1

14.9

337.1

295.0

49.4

696.4

169.7

350.0

70.6

273.8

20.6

—

2.6

717.6

693.3

39.2

1.5

420.7

710.8

(44.0)

(434.9)

693.3

1,080.4

1.6

1,082.0

108.3

129.6

15.0

59.7

312.6

9.9

145.6

94.1

70.4

320.0

(7.4)

387.0

107.7

201.6

13.5

1.4

2.4

713.6

361.0

39.2

1.5

420.7

710.8

(161.3)

(649.9)

361.0

64
Consolidated cash flow statements

Drax Group plc
Annual report and accounts 2008

Cash generated from operations

Income taxes paid

Interest paid

Interest received

Net cash generated from operating activities

Cash flows from investing activities

Purchase of property, plant and equipment

Net cash used in investing activities

Cash flows from financing activities

Equity dividends paid

Purchase of own shares under share buy-back programme

Repayment of borrowings

Purchase of own shares held by employee trust

Net cash used in financing activities

Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at 1 January

Cash and cash equivalents at 31 December

Years ended 31 December

2008
£m

430.8

(102.2)

(25.9)

6.8

309.5

(91.4)

(110.0)

–

(35.0)

(2.6)

(147.6)

70.5

59.7

130.2

2007
£m

437.7

(104.7)

(31.3)

11.1

312.8

(67.8)

(171.3)

(83.5)

(82.9)

(2.4)

(340.1)

(95.1)

154.8

59.7

Notes

Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

1. General information

Drax Group plc (the “Company”) is a company incorporated in England and Wales under the Companies Act 1985. The Company and its
subsidiaries (together the “Group”) operate in the electricity generation industry within the UK. The address of the Company’s registered
office and principal establishment is Drax Power Station, Selby, North Yorkshire YO8 8PH, United Kingdom. The operating companies of
the Group are disclosed in note 3 of the Company’s separate financial statements, which follow these consolidated financial statements.

2. Basis of preparation

The financial statements have been prepared in accordance with “IFRSs”. The financial statements have also been prepared in
accordance with IFRSs adopted by the European Union and therefore the consolidated financial statements comply with Article 4
of the EU IAS Regulations.

The financial statements have been prepared on the basis of a going concern, as set out in the Directors’ report on page 38 and after
considering the Group’s capital resources as described on page 19.

The financial statements have been prepared under the historical cost basis, except for certain financial assets and liabilities that have
been measured at fair value.

Adoption of new and revised accounting standards
At the date of authorisation of these financial statements, the following standards and relevant interpretations, which have not been
applied in these financial statements, were in issue but not yet effective (and some of which were pending endorsement by the EU).

• IFRS 8 “Operating segments” – effective for accounting periods beginning on or after 1 January 2009
• IAS 23 “Borrowing costs” – effective for costs incurred from 1 January 2009
• IFRS 3 “Business combinations” – revision effective for accounting periods beginning on or after 1 July 2009
• IFRS 2 “Share-based payment” – revision effective for accounting periods beginning on or after 1 January 2009
• IFRIC 18 “Transfers of assets from customers” – effective for accounting periods beginning on or after 1 July 2009
• IAS 1 “Presentation of financial statements” – revision effective for accounting periods beginning on or after 1 January 2009
• IAS 27 “Consolidated and separate financial statements – cost of an investment in a subsidiary, jointly controlled entity or associate”

– revision effective for accounting periods beginning on or after 1 July 2009

• IAS 39 “Financial instruments: recognition and measurement – eligible hedged items” – revision applies restrospectively for accounting

periods beginning on or after 1 July 2009.

With the exception of IAS 23 “Borrowing costs”, the adoption of these standards in future periods will have no material impact on the
financial statements of the Group. IAS 23 is expected to impact the treatment of any borrowing costs incurred on the construction of any
new plant, with such costs being capitalised as part of the construction cost.

3. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been
consistently applied to both years presented, unless otherwise stated.

(A) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company
made up to the reporting date each year. Control is achieved where the Company has the power to govern the financial and operating
policies of an investee entity so as to obtain benefits from its activities.

All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

(B) Critical accounting judgements, estimates and assumptions
The preparation of financial statements in conformity with IFRSs requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Although these estimates are based on management’s reasonable knowledge of the amount, event or actions,
actual results ultimately may differ from those estimates. The critical accounting judgements, estimates and assumptions that have
a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are
discussed below.

Fixed assets and depreciation – Estimated useful lives and residual values are reviewed annually, taking into account prices prevailing
at each balance sheet date. The carrying values of fixed assets are also reviewed for impairment where there has been a trigger event
(that is, an event which may have resulted in impairment) by assessing the present value of estimated future cash flows and net realisable
value compared with net book value. The calculation of estimated future cash flows and residual values is based on the directors’
reasonable estimates of future prices, output and costs, and is, therefore, subjective.

66
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

3. Summary of significant accounting policies (continued)

Pensions – The Group operates an approved defined benefit scheme. The cost of providing benefits is determined using the projected
unit credit method and actuarial valuations of the plan assets and liabilities are carried out as at the balance sheet date. Inherent in
these valuations are key assumptions, including discount rates, expected returns on scheme assets, salary and pension increases,
and mortality rates.

These actuarial assumptions are reviewed annually and modified as appropriate. The Group believes that the assumptions utilised in
recording obligations under the scheme are reasonable based on prior experience, market conditions and the advice of scheme actuaries.
However, actual results may differ from such assumptions.

Taxation – In accounting for taxation the Group makes assumptions regarding the treatment of items of income and expenditure for
tax purposes. The Group believes that these assumptions are reasonable based on prior experience and consultation with advisers.

Full provision is made for deferred taxation at the rates of tax prevailing at the period end dates unless future rates have been substantively
enacted. Deferred tax assets are recognised where it is considered more likely than not that they will be recovered.

Derivatives – Derivative financial instruments are stated in the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in earnings unless specific hedge accounting criteria are met. The fair values of derivative instruments for
commodities are determined using forward price curves. Forward price curves represent the Group’s estimates of the prices at which
a buyer or seller could contract today for delivery or settlement of a commodity at future dates. The Group generally bases forward price
curves upon readily obtainable market price quotations, as the Group’s commodity contracts do not generally extend beyond the actively
traded portion of these curves. However, the forward price curves used are only an estimate of how future prices will move and are,
therefore, subjective.

(C) Revenue recognition
Revenue represents amounts receivable for goods or services provided in the normal course of business, net of trade discounts,
VAT and other sales-related taxes, and excluding transactions with or between subsidiaries.

Revenues from the sale of electricity are recorded based upon output delivered at rates specified under contract terms or prevailing
market rates as applicable.

Revenues from sales of Renewables Obligation Certificates (“ROCs”) are recorded at the invoiced value, net of VAT. Revenue is recognised
when the risks and rewards of ownership have been transferred to a third party.

Where goods or services are exchanged for goods or services of a similar nature and value, the exchange is not treated as giving rise
to revenue. Where goods or services are exchanged for goods or services of a dissimilar nature, the exchange is treated as giving rise to
revenue. The revenue is measured at the fair value of goods or services received, adjusted by the amount of any cash or cash equivalents
received or paid. If the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value
of the goods or services given up, adjusted by the amount of any cash or cash equivalents received or paid.

(D) Segmental reporting
Turnover comprises primarily sales of electricity generated by the Group to the electricity wholesale market in Great Britain. As such,
the Group has only one business segment and one geographical segment.

(E) Property, plant and equipment
Property, plant and equipment are initially measured at cost. Cost comprises the purchase price (after deducting trade discounts and rebates),
any directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner
intended by management, and the estimate of the present value of the costs of dismantling and removing the item and restoring the site.
Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairment in value. Freehold land
and assets in the course of construction are not depreciated.

Depreciation is provided on a straight-line basis to write-down assets to their residual value evenly over the estimated useful lives of the
assets from the date of acquisition (limited to the expected decommissioning date of the power station). The estimated useful lives,
beginning in 2004 when they were reset, are currently:

Main generating plant and freehold buildings

Other plant and machinery

Decommissioning asset

Plant spare parts

Years

4–20

Estimated useful lives and residual values are reviewed annually, taking into account commercial and technological obsolescence as well
as normal wear and tear, and any provision for impairment. Residual values are based on prices prevailing at each balance sheet date.

Costs relating to major inspections, overhauls and upgrades to the power station are included in the asset’s carrying amount or recognised
as a separate asset, as appropriate, if the recognition criteria are met; namely, when it is probable that future economic benefits associated
with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed
as incurred.

Drax Group plc
Annual report and accounts 2008

(F) Impairment of property, plant and equipment
At each balance sheet date the Group reviews its property, plant and equipment to determine whether there is any indication that these
assets may have suffered an impairment loss. If such an indication exists, the recoverable amount is assessed by reference to the net
present value of expected future cash flows of the asset (value-in-use). If an asset is impaired, a provision is made to reduce its carrying
amount to the estimated recoverable amount. The discount rate applied is a pre-tax rate based upon the Group’s weighted average cost
of capital and reflects the current market assessment of the time value of money and the risks specific to the business.

(G) Decommissioning costs
Provision is made for the estimated decommissioning costs at the end of the useful economic life of the Group’s generating assets,
when a legal or constructive obligation arises, on a discounted basis. The amount provided represents the present value of the expected
costs. An amount equivalent to the discounted provision is capitalised within tangible fixed assets and is depreciated over the useful lives
of the related assets. The unwinding of the discount is included in interest payable and similar charges.

(H) Inventories
Inventories primarily comprise coal stocks, together with other fuels and consumables. Coal stocks are valued at the lower of the weighted
average cost of coal and net realisable value. Other stocks of fuel and consumables are valued at the lower of average cost and net
realisable value.

The Group is able to claim ROCs from the Office of Gas and Electricity Markets (“OFGEM”) as a result of burning renewable fuels. A market
exists for sale of ROCs and the Group recognises income in the income statement at the point where the risks and rewards of ownership
have been transferred to a third party. The attributable incremental cost of generating ROCs above that of burning coal is included within
inventory in respect of ROCs earned but not yet sold. The inventory value is stated at the lower of cost and net realisable value.

(I) CO2 emissions allowances
The Group recognises its free emissions allowances received under the National Allocation Plan at nil cost. Any additional allowances
purchased in the market are recorded at cost. The Group also recognises a liability in respect of its obligations to deliver emissions
allowances. The charge to the income statement within fuel costs and the related liability is measured based on an estimate of the amounts
that will be required to satisfy the net obligation, taking into account generation, free allowances allocated under the National Allocation
Plan, market purchases, sales and forward contracts already in place, and the market price at the year end.

(J) Taxation
Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively
enacted by the balance sheet date.

Deferred tax is the tax payable or recoverable on the difference between the carrying amounts of assets and liabilities in the balance sheet
and the corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognised for all taxable
temporary differences and deferred tax assets are recognised to the extent that it is considered more likely than not that taxable profit
will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised,
and is charged or credited in the income statement, except where it relates to items charged or credited to equity via the statement
of recognised income and expense, in which case the deferred tax is also dealt with in equity and is shown in the statement of recognised
income and expense.

(K) Pension and other post-retirement benefits
The Group provides pensions through an approved industry defined benefit scheme and a defined contribution scheme. The cost of
providing benefits under the defined benefit scheme is determined using the projected unit credit method, and actuarial valuations of the
plan assets and liabilities are carried out as at the balance sheet date. Actuarial gains and losses are taken to the statement of recognised
income and expense as incurred.

The current service cost and finance cost of the pension charge are deducted in arriving at operating profit. The excess of the present
value of the defined benefit obligation over the fair value of the plan assets is recognised as a liability in the balance sheet.

For the defined contribution scheme, the Group pays contributions to publicly or privately administered pension insurance plans on
a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid.
The contributions are recognised as employee benefit expense when they are due to be paid.

(L) Share-based payments
Share-based payments are measured at fair value at the date of grant and expensed on a straight-line basis over the relevant vesting
period, based on an estimate of the shares that will ultimately vest.

(M) Foreign currencies
The Group’s consolidated financial statements are presented in sterling, which is the functional and presentational currency of the
Company and its principal subsidiaries. Transactions in foreign currencies are translated into sterling at the exchange rate ruling at the
date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at
the exchange rate ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies, are recognised
in the income statement.

68
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

3. Summary of significant accounting policies (continued)

(N) Financial instruments

Debt instruments
The Group measures all debt instruments, whether financial assets or financial liabilities, initially at the fair value of the consideration paid
or received. Subsequent to initial measurement, debt instruments are measured at amortised cost using the effective interest method.
Transaction costs (any such costs incremental and directly attributable to the issue of the financial instrument) are included in the calculation
of the effective interest rate and are, in effect, amortised through the income statement over the life of the instrument.

Commodity contracts and treasury derivatives
Where possible, the Group takes the own use exemption for commodity contracts entered into and held for the purpose of the Group’s own
purchase, sale or usage requirements. Commodity contracts which do not qualify for the own use exemption are dealt with as derivatives
and are recorded at fair value in the balance sheet with changes in fair value reflected through the hedge reserve to the extent that contracts
are considered to be effective hedges, or the income statement to the extent the contracts are not effective as hedges.

The Group uses a number of treasury-related derivatives to manage exposure to interest rate and currency fluctuations. Treasury-related
derivatives are recorded at fair value in the balance sheet with changes in fair value reflected through the hedge reserve to the extent
that contracts are considered to be effective hedges, or the income statement to the extent the contracts are not effective as hedges.
Income statement movements under interest rate hedges are accounted for as adjustments to finance cost/income for the period.

The Group designates certain hedging instruments used to address commodity price risk, foreign currency risk and interest rate risk as
cash flow hedges. At the inception of the hedge, the relationship between the hedging instrument and hedged item is documented, along
with its risk management objectives. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether
the hedging instruments used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity.
The gain or loss relating to any ineffective portion is recognised immediately in profit or loss. Amounts deferred in equity are released in
the periods when the hedged item is recognised in profit or loss.

The fair value of hedging derivatives is classified as a non-current asset or non-current liability if the remaining maturity of the hedge
relationship is more than 12 months, and as a current asset or liability if the remaining maturity of the hedge relationship is less than
12 months. Derivatives not designated into an effective hedge relationship are classified as a current asset or current liability.

Other financial instruments
Share capital – Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are
shown in equity as a deduction, net of tax, from the proceeds. The share premium account records the difference between the nominal
value of shares issued and the fair value of the consideration received.

Cash and cash equivalents – Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly
liquid investments with original maturities of three months or less, and bank overdrafts.

Trade receivables – Trade receivables are recognised initially at fair value. A provision for impairment of trade receivables is established
subsequently where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms
of the receivable.

Drax Group plc
Annual report and accounts 2008

4. Exceptional operating income

Distributions under the TXU Claim

Years ended 31 December

2008
£m

–

2007
£m

6.2

The Group received £6.2 million under the TXU Claim in April 2007, bringing the total received to £336 million, representing full recovery of
the claim. This amount is net of VAT and costs, and all proceeds were used to prepay debt secured against the claim, which was repaid in full.

5. Operating profit

The following charges have been included in arriving at operating profit:

Staff costs (note 27)

Depreciation of property, plant and equipment (all owned assets)

Repairs and maintenance expenditure on property, plant and equipment

Other operating expenses

Total other operating expenses excluding exceptional items

Auditors’ remuneration
During the year the Group obtained the following services from its auditors, Deloitte LLP, at costs as detailed below:

Audit fees:

Fees payable for the audit of the Group’s consolidated financial statements

Fees payable for the audit of the Company’s subsidiaries pursuant to legislation

Other services:

Pursuant to legislation – interim review

Total audit related fees

Taxation services

Other services

Total non-audit fees

Total auditors’ remuneration

Years ended 31 December

2008
£m

51.1

46.2

56.3

121.2

274.8

2007
£m

42.9

43.7

50.4

102.4

239.4

Years ended 31 December

2008
£000

261

271

330

–

338

2007
£000

272

282

337

195

261

598

In addition to the amounts set out above, the Drax Power Group of the Electricity Supply Pension Scheme paid fees of £190,000
(2007: £150,000) to Deloitte LLP in respect of pension advisory services.

70
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

6. Finance costs

Interest payable and similar charges:

Interest payable on bank borrowings

Amortisation of deferred finance costs

Total interest payable and similar charges

Interest receivable:

Interest income on bank deposits

Total interest receivable

7. Taxation

Years ended 31 December

2008
£m

(25.8)

(3.0)

(28.8)

7.2

2007
£m

(30.7)

(3.6)

(34.3)

11.4

The income tax expense reflects the estimated effective tax rate on profit before taxation for the Group for the year ended 31 December 2008
and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the income statement.

The Finance Act 2007 introduced a reduction in the rate of UK corporation tax from 30% to 28% with effect from 1 April 2008, and
accordingly the tax charge for the year ended 31 December 2007 included a credit of approximately £18 million to reflect the impact
on deferred tax.

The Finance Act 2008 introduced the withdrawal of industrial buildings allowances, and accordingly tax for 2008 includes an additional
deferred tax charge of £9 million to reflect the estimated impact of loss of tax base in April 2011.

Tax charge comprises:

Current tax

Deferred tax:

– Before impact of changes in tax legislation

– Impact of withdrawal of industrial buildings allowances

– Impact of reduction in tax rate

Tax charge

Tax on items charged/(credited) to equity:

Deferred tax on actuarial losses on defined benefit pension scheme

Impact of reduction in tax rate on deferred tax on defined benefit pension scheme

Deferred tax on cash flow hedges

Impact of reduction in tax rate on deferred tax on cash flow hedges

Years ended 31 December

2008
£m

81.2

19.6

8.8

–

109.6

2007
£m

112.2

1.2

–

(17.9)

95.5

Years ended 31 December

2008
£m

(3.6)

–

47.4

–

43.8

2007
£m

(0.9)

0.4

(171.1)

(1.0)

(172.6)

Drax Group plc
Annual report and accounts 2008

The tax differs from the standard rate of corporation tax in the UK of 28.5% (2007: 30%). The differences are explained below:

Profit before tax

Profit before tax multiplied by rate of corporation tax in the UK of 28.5% (2007: 30%)

Effects of:

Adjustments in respect of prior periods

Expenses not deductible for tax purposes

Tax effect of funding arrangements

Other

Change in UK tax rate

Change to industrial buildings allowances

Total tax charge

Years ended 31 December

2008
£m

442.5

126.1

(2.6)

1.4

(24.0)

(0.1)

–

8.8

109.6

2007
£m

448.5

134.6

(0.4)

1.5

(22.9)

0.6

(17.9)

–

95.5

Under the Group’s previous financing structure, Drax Holdings Limited (a subsidiary company) was partially funded by a Eurobond payable
to another group company. The whole of the coupon was previously prepaid, and an accounting based tax deduction has been claimed for
the corresponding interest charged in the Drax Holdings Limited income statement each year. Were HMRC to successfully challenge the
deductions claimed in respect of the Eurobond coupons for open years to 31 December 2008, it is estimated that the additional tax liability
would be up to £90 million, together with interest and penalties.

In November/December 2008 HMRC issued draft legislation concerning the “Principles based approach to financial products avoidance”
and the “Taxation of foreign profits of companies”. These provisions updated rules on, amongst other things, the tax deductibility of interest
and were generally expected to reduce the tax effectiveness of the Eurobond financing arrangements.

The Eurobond was formally waived by the lending group company on 30 December 2008. As a result, the whole of the remaining prepaid
coupon was charged in the Drax Holdings Limited income statement, giving rise to potential additional interest deductions with a tax effect
of around £220 million. Because of the risks related to the unwind of the Eurobond structure, no benefit will be recognised in the Group’s
financial statements with respect to the potential additional deductions until the Group is more certain they will be realised.

Further details of the Group’s previous financing structure, and related contingent tax liability described above, are included on
pages 78 and 79 of the listing particulars issued on 28 October 2005 in respect of the introduction of Drax Group plc to the Official List
of the UK Listing Authority.

8. Dividends

Amounts recognised as distributions to equity holders in the year (based on the number of shares
in issue at the record date):

Final dividend for the year ended 31 December 2007 of 9.9 pence per share paid on 7 May 2008
(2007: 9.1 pence per share paid on 16 May 2007)

Special interim dividend for the year ended 31 December 2007 of 7.8 pence per share paid 7 May 2008
(2007: 32.9 pence per share paid on 16 May 2007)

Interim dividend for the year ended 31 December 2008 of 5.0 pence per share paid on 8 October 2008
(2007: 4.7 pence per share paid on 24 October 2007)

Special interim dividend for the year ended 31 December 2008 of 9.7 pence per share paid on
8 October 2008 (2007: £nil)

Years ended 31 December

2008
£m

2007
£m

33.6

26.5

17.0

32.9

110.0

33.6

121.4

16.3

–

171.3

The Company undertook a share consolidation in connection with the special interim dividend paid on 16 May 2007 (note 19).

At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment
of a final dividend for the year ended 31 December 2008 of 38.3 pence per share (equivalent to approximately £130 million) payable on
or before 22 May 2009. The final dividend has not been included as a liability as at 31 December 2008.

72
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

9. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of ordinary shares outstanding during the year. In calculating diluted earnings per share the weighted average number of ordinary shares
outstanding during the year is adjusted to take account of outstanding share options in relation to the Group’s Savings-Related Share
Option Plan (“SAYE Plan”) and contingently issuable shares under the Group’s Executive Share Incentive Plan (“ESIP”).

Reconciliations of the earnings and weighted average number of shares used in the calculation are set out below.

Earnings attributable to equity holders of the Company for the purposes of basic and diluted earnings

Number of shares:

Weighted average number of ordinary shares for the purposes of basic earnings per share (millions)

Effect of dilutive potential ordinary shares under share options

Weighted average number of ordinary shares for the purposes of diluted earnings per share (millions)

Earnings per share – basic and diluted (pence)

10. Property, plant and equipment

Years ended 31 December

2008
£m

332.9

2007
£m

353.0

Years ended 31 December

2008

2007

339.3

0.3

339.6

354.9

0.1

355.0

Cost:

At 1 January 2007

Additions at cost

Disposals

Issues

At 1 January 2008

Additions at cost

Disposals

At 31 December 2008

Accumulated depreciation:

At 1 January 2007

Charge for the year

Disposals

At 1 January 2008

Charge for the year

Disposals

At 31 December 2008

Net book amount at 31 December 2007

Net book amount at 31 December 2008

Freehold
land and
buildings
£m

Plant and
equipment
£m

Plant spare
parts
£m

134.5

0.3

–

134.8

18.7

–

153.5

25.9

3.5

–

29.4

3.5

–

32.9

105.4

120.6

1,139.4

78.6

(4.3)

–

1,213.7

80.2

(13.5)

1,280.4

232.5

39.6

(4.3)

267.8

42.0

(13.3)

296.5

945.9

983.9

30.6

3.7

–

(0.7)

33.6

2.8

–

36.4

3.9

0.6

–

4.5

0.7

–

5.2

29.1

31.2

Total
£m

1,304.5

82.6

(4.3)

(0.7)

1,382.1

101.7

(13.5)

1,470.3

262.3

43.7

(4.3)

301.7

46.2

(13.3)

334.6

1,080.4

1,135.7

Assets in the course of construction amounted to £81.0 million at 31 December 2008 (2007: £61.4 million).

During the year ended 31 December 2008 depreciation was accelerated for plant and machinery which the Group expects to replace
under its capital expenditure investment programme, resulting in an increase in depreciation for the year of approximately £4.0 million
(2007: £7.0 million).

11. Inventories

Coal

Other fuels and consumables

Renewables Obligation Certificates (ROCs)

12. Trade and other receivables

Amounts falling due within one year:

Trade debtors

Prepayments and other debtors

Drax Group plc
Annual report and accounts 2008

As at 31 December

2007
£m

86.0

12.6

9.7

108.3

As at 31 December

2007
£m

124.8

4.8

129.6

2008
£m

142.3

25.1

22.1

189.5

2008
£m

228.3

31.6

259.9

Prepayments and other debtors at 31 December 2008 include £26.4 million (2007: £nil) in relation to market purchases of CO2 emissions
allowances acquired in advance to satisfy part of the Group’s 2009 obligation.

Trade debtors generally represent sales of electricity to a number of counterparties. At 31 December 2008, the Group had amounts
receivable from six (2007: five) significant counterparties, and a number of smaller counterparties, representing 86% (2007: 96%) of
trade debtors, all of which paid within 15 days of receipt of invoice in line with agreed terms. Counterparty risk is discussed in note 16.

Management do not consider there to be a significant concentration of credit risk and as a result, do not believe that a further credit
risk provision is required in excess of the normal provision for doubtful debts of £0.1 million (2007: £0.1 million). This allowance has been
determined by reference to past default experience.

13. Cash and cash equivalents

Cash and cash equivalents

The Group’s policy is to invest available cash in short-term bank, building society or other low risk deposits.

14. Trade and other payables

Amounts falling due within one year:

Trade payables

Other creditors

Accruals

Other tax and social security payable

As at 31 December

2008
£m

130.2

2007
£m

59.7

As at 31 December

2008
£m

21.0

13.5

259.6

0.9

295.0

2007
£m

16.7

5.1

71.5

0.8

94.1

Accruals at 31 December 2008 include £158.3 million (2007: £15.9 million) with respect to the Group’s estimated net liability to deliver CO2
emissions allowances. Amounts due to trade creditors at 31 December 2008 represented approximately 21 days of average daily purchases
through the year (2007: 22 days).

74
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

15. Borrowings

Current:

Term loans

Non-current:

Term loans

As at 31 December

2007
£m

9.9

As at 31 December

2007
£m

2008
£m

14.9

2008
£m

350.0

387.0

Maturity of borrowings
The following table details the remaining contractual maturity, including interest payments, for the Group’s borrowings at the
balance sheet dates:

In less than one year

In more than one year but not more than two years

In more than two years but not more than five years

Total contractual maturity

Less interest payments

Carrying amount of borrowings

As at 31 December

2008
£m

28.8

363.2

–

392.0

(27.1)

364.9

2007
£m

33.0

28.5

393.8

455.3

(58.4)

396.9

The term loans are subject to a fixed amortisation profile ending with full repayment on 31 December 2010 and debt service payments are
made semi-annually on 30 June and 31 December. Payment profiles for repayment of debt set out above are based on the fixed minimum
repayment profile. Repayments above the fixed minimum repayment profile are permitted subject to the amount of cash available for debt
service.

Interest payments are calculated based on forward interest rates estimated at the balance sheet date based on publicly available information.
The interest rates payable at the balance sheet dates were as follows:

Term loans

As at 31 December

2008
%

4.09

2007
%

6.01

Analysis of borrowings
Borrowings at 31 December 2008 and 31 December 2007 consisted of bank loans held by the Company’s subsidiary Drax Finance Limited
as follows:

Term loans

Total borrowings

Less current portion of debt

Non-current borrowings

Term loans

Total borrowings

Less current portion of debt

Non-current borrowings

As at 31 December 2008

Borrowings
before deferred
finance costs
£m

Deferred
finance costs
£m

Net
borrowings
£m

370.0

(15.0)

355.0

(5.1)

0.1

(5.0)

364.9

(14.9)

350.0

As at 31 December 2007

Borrowings
before deferred
finance costs
£m

Deferred
finance costs
£m

Net
borrowings
£m

405.0

(10.0)

395.0

(8.1)

0.1

(8.0)

396.9

(9.9)

387.0

Drax Group plc
Annual report and accounts 2008

Term loan repayments of £17.5 million were made on each of 30 June 2008 and 31 December 2008. Previously, repayments of
£40.0 million were made on each of 29 June 2007 and 31 December 2007. All repayments have been made in line with the target
repayment profile as a result of the levels of cash available for debt service.

The Group’s debt is guaranteed and secured directly by each of the principal subsidiary undertakings of the Company, as set out in note 3
to the Company’s separate financial statements. Drax Group plc is not a guarantor of the Group’s debt, but has granted a charge over the
shares in its subsidiary, Drax Finance Limited.

Letter of credit facility and revolving credit facility
In addition to its borrowings, the Group has access to a letter of credit facility which provides credit support of up to £200 million to
the Group’s trading activities. The letter of credit facility, which has a final maturity date of 15 December 2012, provides a mechanism
whereby it may be extended for a further 12 months at any time up to one year before the final maturity date. The Group guarantees the
obligations of a number of banks in respect of the letters of credit issued by those banks to counterparties of the Group. As at 31 December
2008 the Group’s contingent liability in respect of these guarantees amounted to £160.2 million (2007: £133.3 million).

In addition, the Group has access to an undrawn £100 million revolving credit facility, which may be used to issue letters of credit or
for working capital, with a final maturity date of 15 December 2010.

16. Financial instruments

The Group issues or holds financial instruments for two purposes: financial instruments relating to the financing and risks of the Group’s
operations; and financial instruments relating to the financing and risks of the Group’s debt portfolio.

The Group’s financial instruments comprise borrowings, cash and liquid resources, items that arise directly from its operations and derivative
contracts. The Group enters into short-term and medium-term forward contracts for the sale of electricity and the purchase of coal and
CO2 emissions allowances. The Group also enters into interest rate swap agreements and forward foreign currency exchange contracts.

Fair value
Cash and cash equivalents, trade and other receivables, and trade and other payables generally have short times to maturity. For this
reason, their carrying values approximate their fair value. The Group’s borrowings relate to term loans, the carrying amounts of which
approximate their fair values by virtue of being floating rate instruments.

The fair values of the Group’s derivative financial instruments which are marked to market and recorded in the balance sheet
at 31 December 2008 and 31 December 2007 were as follows:

As at 31 December 2008

As at 31 December 2007

Commodity contracts:

In less than one year

In more than one year but not more than two years

In more than two years

Interest rate swaps:

In less than one year

In more than one year but not more than two years

In more than two years

Forward foreign currency exchange contracts:

In less than one year

Total

Less: non-current portion

Commodity contracts

Interest rate swaps

Total non-current portion

Current portion

Assets
£m

172.9

63.9

41.6

–

113.6

392.0

(105.5)

–

(105.5)

286.5

Liabilities
£m

Assets
£m

Liabilities
£m

(267.5)

(51.2)

(17.9)

(5.8)

(1.5)

–

(63.8)

(407.7)

69.1

1.5

70.6

(337.1)

10.4

0.7

0.2

1.6

0.4

0.3

3.0

16.6

(0.9)

(0.7)

(1.6)

15.0

(144.3)

(87.0)

(20.7)

(0.3)

–

(1.0)

(253.3)

107.7

–

107.7

(145.6)

76
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

16. Financial instruments (continued)

The amounts recorded in the income statement in respect of derivatives which are marked to market were as follows:

Unrealised gains on derivative contracts recognised in arriving at operating profit

As at 31 December

2008
£m

56.3

2007
£m

3.3

The net unrealised gains on derivative contracts recorded in the income statement in 2008 primarily represent mark to market movements
on CO2 emissions allowances contracts, foreign currency exchange contracts and financial coal derivatives.

Commodity contracts fair value
Due to the nature of commodity contracts and the way they are managed, the own use exemption has been applied to a limited number
of them, including the five-and-a-quarter year baseload contract with Centrica which commenced on 1 October 2007.

The fair value of commodity contracts qualifying as derivative financial instruments is calculated by reference to forward market prices
which are available at the balance sheet date. As contracts are generally short term, forward market price curves are available for the
duration of the contracts. The quoted market price used for financial assets held by the Group is the current bid price; the quoted price
for financial liabilities is the current ask price.

• Interest rate swaps fair value – The fair value of interest rate swap contracts is determined by discounting the future cash flows using

forward interest rate curves at the balance sheet date.

• Forward foreign currency exchange contracts fair value – The fair value of forward foreign currency exchange contracts is determined

using forward currency exchange market rates at the balance sheet date.

• Embedded derivatives fair value – The Group has also reviewed all contracts for the presence of embedded derivatives. Where contracts
were found to contain embedded derivatives, they were considered to be closely related to the economic characteristics and risks of the
host contract, and therefore do not require separate valuation from their host contracts.

Risk
The Group’s activities expose it to a variety of financial risks including commodity price risk, counterparty risk, interest rate risk and
foreign currency risk. The Group’s overall risk management programme focuses on the unpredictability of commodity and financial
markets and seeks to manage potential adverse effects on the Group’s financial performance.

The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by a management
committee and treasury function which identify, evaluate and hedge financial risks in close co-operation with the Group’s trading function
under policies approved by the Board of directors.

Commodity price risk
The Group is exposed to the effect of fluctuations in commodity prices, particularly the price of electricity, the price of coal (and other fuels)
and the price of CO2 emissions allowances. Price variations and market cycles have historically influenced the financial results of the Group
and are expected to continue to do so.

The Group has a policy of making forward power sales with corresponding purchases of fuel and CO2 emissions allowances when profitable
to do so. All commitments to sell power under fixed price contracts are designated as cash flow hedges in order to reduce the Group’s cash
flow exposure resulting from fluctuations in the price of electricity.

The Group purchases coal under either fixed or variable priced contracts with different maturities from a variety of domestic and
international sources. All physical coal purchase contracts transacted at a fixed price and financial coal contracts exchanging floating
price coal for fixed price amounts are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from
fluctuations in the price of coal.

The Group purchases CO2 emissions allowances under fixed price contracts with different maturity dates from a range of domestic and
international sources. All commitments to purchase CO2 emissions allowances under fixed price contracts are designated as cash flow
hedges in order to reduce the Group’s cash flow exposure resulting from fluctuations in the price of CO2 emissions allowances.

Drax Group plc
Annual report and accounts 2008

Commodity price sensitivity
The sensitivity analysis below has been determined based on the exposure to commodity prices for outstanding monetary items at the
balance sheet date. The analysis is based on the Group’s commodity financial instruments held at each balance sheet date.

If commodity prices had been 5% higher/lower and all other variables were held constant, the Group’s:

• profit after tax for the year ended 31 December 2008 would decrease/increase by £3.2 million (2007: decrease/increase by £2.1 million).

This is mainly attributable to the Group’s exposure to financial coal derivatives; and

• other equity reserves would decrease/increase by £64.2 million (2007: decrease/increase by £57.2 million) mainly as a result of the

changes in the fair value of commitments to sell power.

Interest rate risk
The Group is exposed to interest rate risk principally in relation to its outstanding bank debt. In particular, it is exposed to changes in the
LIBOR interest rate of sterling denominated debt, as all of its debt is both denominated in sterling and has a variable LIBOR rate. The Group
mitigates this risk with interest rate hedges on a proportion of its debt facilities. Information about the Group’s instruments that are exposed
to interest rate risk and their repayment schedules is included in note 15.

All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow
hedges in order to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings. The interest rate swap
payments and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in profit or loss
over the loan period.

Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative
instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding
at the balance sheet date was outstanding for the whole year.

If interest rates had been 1% higher/lower and all other variables were held constant, the Group’s:

• profit after tax for the year ended 31 December 2008 would decrease/increase by £1.7 million (2007: decrease/increase by £1.8 million).

This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings; and

• other equity reserves would decrease/increase by £2.0 million (2007: decrease/increase by £2.7 million) mainly as a result of the changes

in the fair value of interest rate swaps.

Foreign currency risk
Foreign currency exchange contracts are entered into to hedge substantially all of the Group’s fixed price international coal purchases in
US dollars and CO2 emissions allowances purchases in euros. Exchange rate exposures are managed within approved policy parameters
utilising foreign currency exchange contracts.

Foreign currency sensitivity
If sterling exchange rates had been 5% stronger/weaker against other currencies, and all other variables were held constant, the Group’s
profit after tax and net assets for the year ended 31 December 2008 would increase/decrease by £10.7 million (2007: increase/decrease
by £1.6 million).

Liquidity risk
The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board of directors.
Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group maintains
a mixture of cash and cash equivalents, long-term debt and committed facilities in order to ensure sufficient funding for business
requirements. Note 15 includes details of undrawn facilities that the Group has at its disposal.

The following table sets out details of the expected maturity of derivative financial instruments which are marked to market based on the
undiscounted net cash inflows/(outflows). Where the amount payable or receivable is not fixed, the amount disclosed has been determined
by reference to projected commodity prices, interest rates, or foreign currency exchange rates, as illustrated by the yield or other forward
curves existing at the reporting date.

Commodity contracts, net

Interest rate swaps

Forward foreign currency exchange contracts, net

Within 1 year
£m

456.7

(5.8)

(201.5)

249.4

1–2 years
£m

563.2

(1.5)

1.6

563.3

As at 31 December 2008

>2 years
£m

291.0

–

(63.8)

227.2

Total
£m

1,310.9

(7.3)

(263.7)

1,039.9

78
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

16. Financial instruments (continued)

Commodity contracts, net

Interest rate swaps

Forward foreign currency exchange contracts, net

As at 31 December 2007

Within 1 year
£m

481.4

1.3

(52.3)

430.4

1–2 years
£m

282.7

0.4

2.8

285.9

>2 years
£m

179.9

0.3

4.1

184.3

Total
£m

944.0

2.0

(45.4)

900.6

Details of the contractual maturity of the Group’s borrowings are included in note 15.

Counterparty risk
As the Group relies on third party suppliers for the delivery of coal and other goods and services, it is exposed to the risk of
non-performance by these third party suppliers.

The Group purchases a significant portion of its coal requirement under contracts with a number of UK suppliers. There is a risk that if
a large supplier falls into financial difficulty and/or fails to deliver against the contracts, there would be additional costs associated with
securing coal from other suppliers.

The Group enters into fixed price and fixed margin contracts for the sale of electricity to a number of counterparties. The failure of one
or more of these counterparties to perform their contractual obligations may cause the Group financial distress or increase the risk profile
of the Group.

Credit risk
The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date,
as summarised below:

Financial assets

Cash and cash equivalents

Trade and other receivables

Derivative financial instruments

As at 31 December

2008
£m

130.2

259.9

392.0

782.1

2007
£m

59.7

129.6

16.6

205.9

Credit exposure is controlled by counterparty limits that are reviewed and approved by a management committee. Counterparties
without an investment grade rating are normally required to provide credit support in the form of a parent company guarantee,
letter of credit, deed of charge, or cash collateral. Where deemed appropriate the Group has purchased credit default swaps.

The investment of surplus cash is undertaken to maximise the return within Board approved policies. These policies manage credit
risk exposure by setting out minimum rating requirements, maximum investment with any one counterparty and the maturity profile.

Capital risk management
The Group manages its capital to ensure it is able to continue as a going concern while maximising the return to stakeholders
through the optimisation of the debt and equity balance. The capital structure of the Group consists of the borrowings disclosed in
note 15, cash and cash equivalents in note 13, and equity attributable to the equity holders of the parent, comprising issued capital,
reserves and retained earnings in note 25.

The capital structure of the Group is as follows:

Borrowings

Cash and cash equivalents

Net debt

Total shareholders’ equity

As at 31 December

2008
£m

(364.9)

130.2

(234.7)

693.3

2007
£m

(396.9)

59.7

(337.2)

361.0

17. Provisions

At 1 January 2007

Unwinding of discount

At 1 January 2008

Unwinding of discount

At 31 December 2008

Drax Group plc
Annual report and accounts 2008

Re-instatement
£m

2.2

0.2

2.4

0.2

2.6

The provision for re-instatement represents the estimated decommissioning, demolition and site remediation costs at the end of the useful
economic life of the Group’s generating assets, on a discounted basis. The amount provided represents the present value of the expected
costs. An amount equivalent to the initial provision is capitalised within tangible fixed assets and is being depreciated over the useful lives
of the related assets. The unwinding of the discount is included in interest payable and similar charges.

The provision is estimated using the assumption that the re-instatement will take place between 2039 and 2045. The provision has
been estimated using existing technology at current prices. The discount rate applied is the pre-tax rate based upon the Group’s weighted
average cost of capital and reflects the current market assessment of the time value of money and the risks specific to the business.

18. Deferred tax

The movement on the deferred tax account is as shown below:

Deferred tax liability at 1 January

Charged/(credited) to income statement

Deferred tax on actuarial losses on defined benefit pension scheme

Deferred tax on cash flow hedges

Deferred tax liability at 31 December

Year ended 31 December

2008
£m

201.6

28.4

(3.6)

47.4

273.8

2007
£m

390.9

(16.7)

(0.5)

(172.1)

201.6

The movements in deferred tax assets and liabilities during each year are shown below. Deferred tax assets and liabilities are offset where
there is a legally enforceable right of offset and there is an intention to settle the balances net.

Deferred tax liabilities/(assets):

At 1 January 2007

Charged/(credited) to income statement

Credited to equity

At 1 January 2008

Charged to income statement

Charged/(credited) to equity

At 31 December 2008

Financial
instruments
£m

Accelerated
capital
allowances
£m

103.3

1.5

(172.1)

(67.3)

15.5

47.4

(4.4)

282.8

(21.6)

–

261.2

8.8

–

270.0

Other
liabilities
£m

15.8

1.8

–

17.6

–

17.6

Other
assets
£m

(11.0)

1.6

(0.5)

(9.9)

4.1

(3.6)

(9.4)

Total
£m

390.9

(16.7)

(172.6)

201.6

28.4

43.8

273.8

Deferred tax assets are recognised to the extent that the realisation of the related tax benefit through future associated taxable profits
is probable.

As described in note 7, no deferred tax asset has been recognised with respect to the unwind of the Eurobond financing structure.

80
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

19. Called-up share capital

Authorised

865,238,823 ordinary shares of £0.11 16⁄29 each

Issued and fully paid

2007 – 339,397,000 ordinary shares of £0.11 16⁄29 each

2008 – 339,398,968 ordinary shares of £0.11 16⁄29 each

The movement in allotted and fully paid share capital of the Company during each year was as follows:

At 1 January

Effect of share consolidations

Cancelled under share buy-back programme

Issued under employee share schemes

At 31 December

As at 31 December

2008
£m

2007
£m

100.0

–

39.2

–

39.2

Years ended 31 December

2008
Number

2007
Number

339,397,000

368,921,151

–

(16,518,847)

(13,005,304)

1,968

–

339,398,968 339,397,000

Effect of share consolidations
The Company undertook a share consolidation in connection with the interim special dividend paid on 16 May 2007 (note 8).
Following approval at the Annual General Meeting held on 26 April 2007, the share consolidation under which shareholders received
64 new ordinary shares of 11 16⁄29 pence each for every 67 existing ordinary shares of 11 1⁄29 pence each, became effective on 30 April 2007.

Share buy-back programme
Under a share buy-back programme completed between 7 September 2007 and 13 December 2007, the Company purchased 13,005,304
ordinary shares for an aggregate consideration (inclusive of all transaction costs) of £83.5 million. Transaction costs of share purchases
under the programme amounted to £0.5 million. All shares purchased through the share buy-back programme were cancelled.

Issued under employee share schemes
During the year, a total of 1,968 ordinary shares of 11 16⁄29 pence each were issued in satisfaction of share options which were exercised
in accordance with the rules of the SAYE Plan.

The Company has only one class of ordinary shares, which carry no right to fixed income. No shareholders have waived their rights
to dividends.

Drax Group plc
Annual report and accounts 2008

20. Share-based payments

Costs recognised in the income statement in relation to share-based payments are as follows:

SIP

ESIP

SAYE

Years ended 31 December

2008
£m

2.4

1.3

0.1

3.8

2007
£m

2.2

0.8

0.1

3.1

Share Incentive Plan (“SIP”)
Under the 2008 SIP Free share award, the Company’s employee benefit trust purchased a total of 295,776 shares (2007: 195,810 shares
issued) in April 2008 to be held on behalf of qualifying employees, equating to 416 shares (2007: 305 shares) with a cash value of approximately
£2,500 (2007: £2,500) per employee based on the Company’s share price at the time of the award. The fair value of the 2008 Free share
award (determined at the award date based on the price paid) of £1.8 million was charged in the income statement in full in the year ended
31 December 2008, on the basis that employees were granted specific rights in relation to shares held in trust on their behalf. Similarly, the
fair value of the 2007 Free share award of £1.6 million was charged to the income statement in full in the year ended 31 December 2007.

In March 2007, the SIP was extended by introducing two further elements: Partnership shares and Matching shares. Qualifying employees
can buy up to £1,500 worth (subject to an overriding maximum of 10% of salary) of Partnership shares (out of pre-tax pay) in any one
tax year. Matching shares are awarded to employees to match any Partnership shares they buy, in a ratio of one-to-one, with the cost of
Matching shares borne by the Group. As at 31 December 2008, a total of 230,790 Matching shares had been purchased and were held
in trust on behalf of qualifying employees (2007: 104,367). The fair value of Matching shares awarded in the year to 31 December 2008
(determined at the award dates based on the price paid) of £0.6 million is being charged in the income statement on a straight-line basis
over a one-year vesting period. Similarly, the fair value of the 2007 Matching shares award of £0.8 million was charged to the income
statement on a straight-line basis over a one-year vesting period now ended.

Shares in the Company held under trust and under the Company’s control as a result of the SIP (i.e. the Matching shares) were as follows:

Shares
held at
1 January
2008
Number

104,367

Shares
acquired
during year
Number

130,681

Shares
transferred
during year
Number

Shares
held at
31 December
2008
Number

Cost at
31 December
2008
£000

Year ended 31 December 2008

Nominal
value at
31 December
2008
£000

Market
value at
31 December
2008
£000

(4,258)

230,790

1,583

1,295

SIP

Executive Share Incentive Plan (“ESIP”)
Under the ESIP, annual awards of performance shares are made at nil consideration to executive directors and other senior staff up to
a normal maximum of 100% of salary (200% in exceptional circumstances). Shares vest according to whether Drax’s TSR matches or
outperforms an index (determined in accordance with the scheme rules) over three years.

ESIP awards over 604,753 shares (2007: 361,582 shares) were granted to executive directors and other senior staff in 2008, with performance
measured over the three years to December 2010 and potential vesting in April 2011. The fair value of the 2008 ESIP awards (determined
at the grant date using a Monte Carlo simulation model, which takes into account the estimated probability of different levels of vesting) of
£1.2 million, is being charged to the income statement on a straight-line basis over the three-year vesting period to April 2011. Similarly, the
fair value of the 2006 and 2007 ESIP awards of £1.9 million and £0.9 million are being charged to the income statement on a straight-line
basis over the three-year vesting period to September 2009 and April 2010 respectively.

82
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

20. Share-based payments (continued)

Savings-Related Share Option Plan (“SAYE Plan”)
In July 2006, participation in the SAYE Plan was offered to all qualifying employees. Options were granted for employees to acquire
shares at a price of £6.36 (representing a discount of 20% to the prevailing market price determined in accordance with the scheme rules),
exercisable at the end of the three and five year savings contracts. The fair value of the 899,396 options granted in connection with the
SAYE Plan of £0.5 million is being charged to the income statement over the life of the respective contracts. There have been no further
offers under the SAYE Plan since that made in July 2006.

During the year, a total of 1,968 ordinary shares of 11 16⁄29 pence each were issued in satisfaction of share options which were exercised
in accordance with the rules of the SAYE Plan. No other shares have been issued or repurchased to date with respect to the SAYE
Plan or ESIP. Given that these share-based incentive plans have commenced only recently, the level of forfeitures is not significant.
Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration Committee report.

21. Capital redemption reserve

At 1 January

Redemption of ordinary shares under share buy-back programme

At 31 December

22. Merger reserve

At 1 January and 31 December

The merger reserve arose on the financial restructuring of the Group which took place in 2005.

Years ended 31 December

2008
£m

1.5

–

1.5

2007
£m

–

1.5

Years ended 31 December

2008
£m

710.8

2007
£m

710.8

23. Hedge reserve

At 1 January

Gains/(losses) recognised:

– Commodity contracts

– Interest rate swaps

Released from equity:

– Commodity contracts

– Interest rate swaps

Related deferred tax, net

At 31 December

Drax Group plc
Annual report and accounts 2008

Years ended 31 December

2008
£m

(161.3)

49.0

(5.9)

123.2

(1.6)

(47.4)

(44.0)

2007
£m

250.9

(317.7)

(0.8)

(264.1)

(1.7)

172.1

(161.3)

The Group’s cash flow hedges relate to commodity contracts, principally commitments to sell power and interest rate swaps. Amounts
are recognised in the hedge reserve as the designated contracts are marked to market at each period end for the effective portion of the
hedge, which is generally 100% of the relevant contract. Amounts held within the hedge reserve are then released as the related contract
matures and the hedged transaction impacts profit or loss. For power sales contracts, this is when the underlying power is delivered.
Further information in relation to the Group’s accounting for financial instruments is included in notes 3 and 16.

The expected release profile from equity of post-tax hedging gains and losses is as follows:

Commodity contracts

Interest rate swaps

Commodity contracts

Interest rate swaps

24. Retained losses

At 1 January

Profit for the year

Equity dividends paid (note 8)

Purchase of own shares under share buy-back programme (note 19)

Actuarial losses on defined benefit pension scheme (note 28)

Deferred tax on actuarial losses on defined benefit pension scheme

Impact of reduction in tax rate on deferred tax on defined benefit pension scheme

Net movements in equity associated with share-based payments

Within
1 year
£m

(67.4)

(2.7)

(70.1)

Within
1 year
£m

(86.3)

1.2

(85.1)

1–2
years
£m

9.1

(1.0)

8.1

1–2
years
£m

(62.1)

0.3

(61.8)

As at 31 December 2008

>2 years
£m

18.0

–

18.0

Total
£m

(40.3)

(3.7)

(44.0)

As at 31 December 2007

>2 years
£m

(14.5)

0.1

(14.4)

Total
£m

(162.9)

1.6

(161.3)

Years ended 31 December

2008
£m

(649.9)

332.9

(110.0)

–

(12.9)

3.6

–

1.4

2007
£m

(746.0)

353.0

(171.3)

(83.5)

(3.3)

0.9

(0.4)

0.7

At 31 December

(434.9)

(649.9)

84
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

25. Shareholders’ funds and statement of changes in shareholders’ equity

At 1 January 2007

Profit for the year

Equity dividends paid

Purchase and redemption
of own shares under
share buy-back
programme

Actuarial losses on defined
benefit pension scheme

Deferred tax on actuarial
losses on defined benefit
pension scheme

Impact of reduction in tax rate
on deferred tax on defined benefit
pension scheme

Fair value losses on
cash flow hedges

Deferred tax on cash flow hedges

Impact of reduction in tax rate on
deferred tax on cash flow hedges

Movement in equity associated
with share-based payments

Own shares held by
employee trust

Own shares purchased and
vested with employees

At 1 January 2008

Profit for the year

Equity dividends paid

Actuarial losses on defined
benefit pension scheme

Deferred tax on actuarial
losses on defined benefit
pension scheme

Fair value gains on
cash flow hedges

Deferred tax on cash flow hedges

Movement in equity associated
with share-based payments

Own shares held by
employee trust

Own shares purchased and vested
with employees

Share
capital
£m

40.7

–

Capital
redemption
reserve
£m

–

(1.5)

1.5

–

Share
premium
£m

420.7

Merger
reserve
£m

710.8

Hedge
reserve
£m

250.9

–

(584.3)

171.1

1.0

–

39.2

1.5

420.7

710.8

(161.3)

–

164.7

(47.4)

–

At 31 December 2008

39.2

1.5

420.7

710.8

(44.0)

Retained
losses
£m

(746.0)

353.0

(171.3)

Total
£m

677.1

353.0

(171.3)

(83.5)

(3.3)

0.9

(0.4)

–

3.1

(584.3)

171.1

1.0

3.1

(0.8)

(1.6)

(649.9)

332.9

(110.0)

(1.6)

361.0

332.9

(110.0)

(12.9)

3.6

–

3.8

(0.6)

(1.8)

(434.9)

3.6

164.7

(47.4)

3.8

(0.6)

(1.8)

693.3

26. Cash flow from operating activities

Profit for the year

Adjustments for:

Interest payable and similar charges

Interest receivable

Tax charge

Depreciation

Unrealised gains on derivative contracts

Defined benefit pension scheme charge

Non-cash charge for share-based payments

Operating cash flows before movement in working capital

Changes in working capital:

Increase in inventories

(Increase)/decrease in receivables

Increase/(decrease) in payables

Defined benefit pension scheme contributions

Increase in provisions

Cash generated from operations

27. Employees and directors

Staff costs (including executive directors)

Included in other operating expenses excluding exceptional items (note 5):

Wages and salaries

Social security costs

Other pension costs (note 28)

Share-based payments (note 20)

Average monthly number of people employed (including executive directors)

Operations

Business services

Drax Group plc
Annual report and accounts 2008

Years ended 31 December

2008
£m

332.9

28.8

(7.2)

109.6

46.2

(56.3)

4.1

3.8

461.9

(81.2)

(130.3)

190.1

(9.9)

0.2

430.8

2007
£m

353.0

34.3

(11.4)

95.5

43.7

(3.3)

2.3

3.1

517.2

(31.4)

43.8

(87.5)

(4.6)

0.2

437.7

Years ended 31 December

2008
£m

39.0

3.1

5.2

3.8

51.1

2007
£m

33.5

3.2

3.1

42.9

Years ended 31 December

2008
Number

566

146

712

2007
Number

520

138

658

86
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

28. Pensions

The Group operates an approved defined benefit scheme on behalf of the Drax Power Group of the Electricity Supply Pension Scheme
(“DPG ESPS”). This scheme was closed to new members as from 1 January 2002 unless they qualify through being existing members
of another part of the ESPS. The Group also operates a defined contribution scheme.

Defined benefit scheme
The most recent actuarial valuation of the DPG ESPS was 31 March 2007. This has been updated as at 31 December 2008 to reflect
relevant changes in assumptions. The principal assumptions were as follows:

Discount rate

Inflation

Rate of increase in pensions in payment and deferred pensions

Rate of increase in pensionable salaries

Expected return on plan assets

Years ended 31 December

2008
% p.a.

6.1

3.0

4.5

5.4

2007
% p.a.

5.8

3.4

4.9

6.5

The mortality assumptions are based on standard mortality tables which incorporate an adjustment to allow for future mortality
improvements. The assumptions are that a member who retired in 2008 at age 60 will live on average for a further 25 years
(2007: 25 years) after retirement if they are male, and for a further 27 years (2007: 27 years) after retirement if they are female.
Similarly life expectancy at age 60 for male and female non-pensioners (currently aged 45) is assumed to be 27 years and 28 years
respectively (2007: 27 years and 28 years respectively).

The amounts recognised in the balance sheet are determined as follows:

Present value of funded obligations

Fair value of plan assets

Net liability recognised in the balance sheet

The amounts recognised in the income statement, entirely within other operating expenses, are as follows:

Current service cost

Past service cost

Interest cost

Expected return on plan assets

Total included in staff costs (note 27)

The actual return on plan assets was a loss of £19.2 million (2007: gain of £4.4 million).

The amounts recognised in the statement of recognised income and expense are as follows:

Cumulative actuarial losses on defined benefit pension scheme at 1 January

Actuarial losses on defined benefit pension scheme recognised in the year

Cumulative losses recognised in the statement of recognised income and expense at 31 December

As at 31 December

2008
£m

114.4

(93.8)

20.6

2007
£m

118.6

(105.1)

13.5

Years ended 31 December

2008
£m

3.7

0.3

7.0

(6.9)

4.1

2007
£m

3.3

–

5.6

(6.6)

2.3

Years ended 31 December

2008
£m

(25.7)

(12.9)

(38.6)

2007
£m

(22.4)

(3.3)

(25.7)

Changes in the present value of the defined benefit obligation are as follows:

Defined benefit obligation at 1 January

Service cost

Past service cost

Employee contributions

Interest cost

Actuarial (gains)/losses

Benefits paid

Defined benefit obligation at 31 December

Changes in the fair value of plan assets are as follows:

Fair value of plan assets at 1 January

Expected return

Actuarial losses

Employer contributions

Employee contributions

Benefits paid

Fair value of plan assets at 31 December

Drax Group plc
Annual report and accounts 2008

Years ended 31 December

2008
£m

118.6

3.7

0.3

1.0

7.0

(13.2)

(3.0)

114.4

2007
£m

109.4

3.3

–

1.0

5.6

1.1

(1.8)

118.6

Years ended 31 December

2008
£m

105.1

6.9

(26.1)

9.9

1.0

(3.0)

93.8

2007
£m

96.9

6.6

(2.2)

4.6

1.0

(1.8)

105.1

Employer contributions included a special payment to reduce the actuarial deficit of £3.5 million in June 2008. This payment was
subsequently invested in fixed interest bonds.

The major categories of plan assets as a percentage of total plan assets were as follows:

Equities

Fixed interest bonds

Cash

As at 31 December

2008
%

48.4

47.9

3.7

2007
%

65.2

34.8

–

The pension plan assets do not include any ordinary shares issued by Drax Group plc or any property occupied by the Group.

The Group employs a building block approach in determining the long-term rate of return on pension plan assets. Historical markets are
studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles.
The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset
allocation for the scheme.

The net liability recognised in the balance sheet is particularly sensitive to the discount rate assumption, which is determined by
reference to market yields at the balance sheet date on high quality corporate bonds, allowing for the duration of the scheme’s liabilities.
Recent volatility in financial markets has caused the range of yields on corporate bonds to widen significantly. It is estimated that a
change of +/–0.5% in the discount rate would have the effect of decreasing/increasing the net liability recognised in the balance sheet
by approximately £11 million.

88
Notes to the consolidated financial statements

Drax Group plc
Annual report and accounts 2008

28. Pensions (continued)

The history of experience adjustments is as follows:

Defined benefit obligation

Fair value of plan assets

Deficit

Experience adjustments on plan liabilities

Experience adjustments on plan assets

Defined contribution plans
Pension costs for the defined contribution scheme are as follows:

Years ended 31 December

2008
£m

(114.4)

93.8

(20.6)

13.2

(26.1)

2007
£m

(118.6)

105.1

(13.5)

(1.1)

(2.2)

2006
£m

(109.4)

96.9

(12.5)

5.3

3.3

2005
£m

(107.0)

62.3

(44.7)

(15.1)

6.9

2004
£m

(85.0)

48.5

(36.5)

(7.6)

1.5

Total included in staff costs (note 27)

The Group expects to contribute £9 million to its pension plans during the 12 months ended 31 December 2009.

29. Capital and other financial commitments

Contracts placed for future capital expenditure not provided in the financial statements

Future support contracts not provided in the financial statements

Future commitments to purchase fuel under fixed and variable priced contracts

Future commitments to sell power under fixed and variable priced contracts

Years ended 31 December

2008
£m

1.1

2007
£m

0.8

As at 31 December

2008
£m

110.9

65.2

1,211.3

2,873.1

2007
£m

94.8

45.6

996.5

2,558.2

Drax Group plc
Annual report and accounts 2008

30. Related party transactions

Subsidiary companies
The Company’s subsidiary undertakings including the name, country of incorporation and proportion of ownership interest for
each are disclosed in note 3 to the Company’s separate financial statements which follow these consolidated financial statements.
Transactions between subsidiaries and between the Company and its subsidiaries are eliminated on consolidation.

Remuneration of key management personnel
The remuneration of the directors, who are considered to be the key management personnel of the Group, is set out below in aggregate
for each of the categories specified in IAS 24 “Related party disclosures”. Further information about the remuneration of individual
directors, together with the directors’ interests in the share capital of Drax Group plc, is provided in the audited part of the Remuneration
Committee report on pages 56 and 57.

Salaries and short-term benefits

Termination payment

Aggregate amounts receivable under share-based incentive schemes

Company contributions to money purchase pension schemes

Years ended 31 December

2008
£m

2,080

485

343

190

3,098

2007
£m

1,702

–

247

173

2,122

Amounts receivable under long-term incentive schemes represents the expenses arising from share-based payments included in the
income statement, determined based on the fair value of the related awards at the date of grant (note 20).

There were no other transactions with directors for the periods covered by these consolidated financial statements.

90
Company – Independent auditors’ report

Drax Group plc
Annual report and accounts 2008

To the members of Drax Group plc

We have audited the parent Company financial statements of Drax Group plc for the year ended 31 December 2008 which comprise
the balance sheet and the related notes 1 to 7. These parent Company financial statements have been prepared under the accounting
policies set out therein.

We have reported separately on the Group financial statements of Drax Group plc for the year ended 31 December 2008 and on the
information in the Remuneration Committee report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the Annual Report and the parent Company financial statements in accordance with applicable
law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of
directors’ responsibilities.

Our responsibility is to audit the parent Company financial statements in accordance with relevant legal and regulatory requirements
and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent Company financial statements give a true and fair view and whether the parent
Company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether
in our opinion the Directors’ report is consistent with the parent Company financial statements. The information given in the Directors’
report includes that specific information presented in the Chairman’s introduction, Chief Executive’s review and Business and financial
review that is cross referred from the Business review and Risk identification sections of the Directors’ report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other
transactions is not disclosed.

We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent
with the audited parent Company financial statements. We consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the parent Company financial statements. Our responsibilities do not extend to any further
information outside the Annual Report.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company
financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation
of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to
provide us with sufficient evidence to give reasonable assurance that the parent Company financial statements are free from material
misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy
of the presentation of information in the parent Company financial statements.

Opinion

In our opinion:

• the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting

Practice, of the state of the Company’s affairs as at 31 December 2008;

• the parent Company financial statements have been properly prepared in accordance with the Companies Act 1985; and

• the information given in the Directors’ report is consistent with the parent Company financial statements.

Deloitte LLP
Chartered accountants and registered auditors
London, United Kingdom
2 March 2009

Company balance sheets

Fixed assets

Investment in subsidiaries

Current assets

Other debtors

Cash at bank and in hand

Current liabilities

Amounts due to other Group companies

Net current assets

Net assets

Capital and reserves

Called-up share capital

Capital redemption reserve

Share premium account

Profit and loss account

Total equity shareholders’ funds

These financial statements were approved by the Board of directors on 2 March 2009.

Signed on behalf of the Board of directors:

Dorothy Thompson
Chief Executive
2 March 2009

Tony Quinlan
Finance Director
2 March 2009

Drax Group plc
Annual report and accounts 2008

As at 31 December

2008
£000

2007
£000

Notes

461,373

461,368

3,370

3,381

(3,198)

183

3,637

3,674

(1,086)

2,588

461,556

463,956

39,207

1,502

39,207

1,502

420,688

420,675

159

2,572

461,556

463,956

92
Notes to the Company balance sheets

Drax Group plc
Annual report and accounts 2008

1. Significant accounting policies

The separate financial statements of the Company are presented as required by the Companies Act 1985. They have been prepared
under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.

The principal accounting policies are summarised below, and have been consistently applied to both years presented.

Cash flow statement
The cash flows of the Group are included in the consolidated cash flow statements of Drax Group plc, whose accounts are publicly available.
Accordingly, the Company has taken advantage of the exemption under FRS 1 “Cash flow statements” not to publish a cash flow statement.

Related party transactions
The Company has taken advantage of the exemption granted by paragraph 3(b) of FRS 8 “Related party disclosures” not to disclose
transactions with other Group companies.

Fixed asset investments
Fixed asset investments in subsidiaries are stated at cost less, where appropriate, provision for impairment.

2. Profit and loss account

As permitted by Section 230 of the Companies Act 1985, the Company has elected not to present its own profit and loss account for the
year. The Company’s profit and loss account was approved by the Board on 2 March 2009. Drax Group plc reported a profit for the year
ended 31 December 2008 of £110.1 million (£0.1 million before dividends received from other Group companies) (2007: £123.9 million,
or £2.4 million before dividends received from other Group companies).

The Company has no employees other than the directors, whose remuneration was borne by a subsidiary undertaking and recharged
to the Company. The amount recharged during the year was £599,000 (2007: £599,000).

The auditors’ remuneration for audit services to the Company, totalling £20,000 (2007: £20,000), was borne by a subsidiary undertaking
and recharged to the Company during the year.

3. Fixed asset investments

Cost

At 1 January 2008

Additions in year (see below)

At 31 December 2008

Subsidiary undertakings

Name and nature of business

Drax Finance Limited (holding company)

Drax GCo Limited (non-trading company)(1)

Drax Group Limited (holding company)(1)

Drax Intermediate Holdings Limited (holding company)(1)

Drax Holdings Limited (holding company)(1)(2)

Drax Electric Limited (in members’ voluntary liquidation) (holding company)(1)

Drax Limited (holding company)(1)

Drax Power Limited (power generation)(1)

Drax Ouse (dormant company)(1)

Drax Investments Limited (investment company)(1)

Biomass Developments Limited (holding company)*

Emergeforce Limited (non-trading company)*(1)

Emergestyle Limited (non-trading company)*(1)

Mid Suffolk Power Limited (non-trading company)*(1)

BondPower Limited (investment company)*

Subsidiary
undertakings
£000

461,368

461,373

Group
effective
shareholding

100%

Country of incorporation
and registration

Type of
share

England and Wales

Ordinary

England and Wales

–

(3)

Cayman Islands

England and Wales

Jersey

Ordinary

Drax Group plc
Annual report and accounts 2008

All subsidiary undertakings operate in their country of incorporation. All subsidiary undertakings have 31 December year ends,
except as indicated below.

Notes:

(1) Held by an intermediate subsidiary undertaking.

(2) 30 December year end.

(3) Limited by guarantee.

* Additions in year.

InPower Limited, InPower 2 Limited and NoteCo Limited are all incorporated in Jersey. Although not subsidiaries of Drax Group plc,
they have been included in the consolidated financial statements (prepared under IFRSs) in accordance with SIC 12 “Consolidation –
special purpose entities” on the basis that their sole purpose was to hold the debt of the Group prior to the Refinancing and listing
on 15 December 2005.

4. Cash at bank and in hand

Cash at bank and in hand

5. Called-up share capital

Authorised

865,238,823 ordinary shares of £0.1116⁄29 each

Issued and fully paid

2007 – 339,397,000 ordinary shares of £0.1116⁄29 each

2008 – 339,398,968 ordinary shares of £0.1116⁄29 each

The movement in allotted and fully paid share capital of the Company during each year was as follows:

At 1 January

Effect of share consolidations

Cancelled under share buy-back programme

Issued under employee share schemes

At 31 December

As at 31 December

2008
£000

3,370

2007
£000

3,637

As at 31 December

2008
£000

2007
£000

99,950

–

39,207

–

39,207

Years ended 31 December

2008
Number

2007
Number

339,397,000

368,921,151

–

(16,518,847)

(13,005,304)

1,968

–

339,398,968 339,397,000

Effect of share consolidations
The Company undertook a share consolidation in connection with the interim special dividend paid on 16 May 2007 (note 7).
Following approval at the Annual General Meeting held on 26 April 2007, the share consolidation under which shareholders received
64 new ordinary shares of 1116⁄29 pence each for every 67 existing ordinary shares of 111⁄29 pence each, became effective on 30 April 2007.

Share buy-back programme
Under a share buy-back programme completed between 7 September 2007 and 13 December 2007, the Company purchased
13,005,304 ordinary shares for an aggregate consideration (inclusive of all transaction costs) of £83.5 million. Transaction costs of
share purchases under the programme amounted to approximately £0.5 million. All shares purchased through the share buy-back
programme were cancelled.

The Company has only one class of ordinary shares, which carry no right to fixed income. No shareholders have waived their rights
to dividends.

94
Notes to the Company balance sheets

Drax Group plc
Annual report and accounts 2008

6. Analysis of movements in equity shareholders’ funds

At 1 January 2007

Retained profit for the year

Purchase and redemption of own shares
under share buy-back programme (note 5)

Equity dividends paid (note 7)

At 1 January 2008

Share capital issued (note 5)

Retained profit for the year

Charge to equity for share-based payments

Equity dividends paid (note 7)

At 31 December 2008

7. Dividends

Share
capital
£000

40,709

–

(1,502)

–

39,207

–

Capital
redemption
reserve
£000

–

1,502

–

Share
premium
£000

420,675

–

Profit and
loss account
£000

133,506

123,852

Total
£000

594,890

123,852

(83,510)

(171,276)

(83,510)

(171,276)

1,502

420,675

2,572

463,956

–

110,147

(2,595)

110,147

(2,595)

(109,965)

39,207

1,502

420,688

159

461,556

Amounts recognised as distributions to equity holders in the year
(based on the number of shares in issue at the record date):

Final dividend for the year ended 31 December 2007 of 9.9 pence per share paid
on 7 May 2008 (2007: 9.1 pence per share paid on 16 May 2007)

Special interim dividend for the year ended 31 December 2007 of 7.8 pence
per share paid 7 May 2008 (2007: 32.9 pence per share paid on 16 May 2007)

Interim dividend for the year ended 31 December 2008 of 5.0 pence per share paid
on 8 October 2008 (2007: 4.7 pence per share paid on 24 October 2007)

Special interim dividend for the year ended 31 December 2008 of 9.7 pence
per share paid on 8 October 2008 (2007: nil)

Years ended 31 December

2008
£000

2007
£000

33,600

33,572

26,473

121,375

16,970

16,329

32,922

109,965

–

171,276

The Company undertook a share consolidation in connection with the special interim dividend paid on 16 May 2007 (note 5).

At the forthcoming Annual General Meeting, the Board will recommend to shareholders that a resolution is passed to approve payment
of a final dividend for the year ended 31 December 2008 of 38.3 pence per share (equivalent to approximately £130 million) payable on or
before 22 May 2009. The final dividend has not been included as a liability as at 31 December 2008.

Drax Group plc
Annual report and accounts 2008

Shareholder information

Key dates for 2009

At the date of publication of this document, the following are the proposed key dates in the 2009 financial calendar:

Annual General
Meeting

Interim Management
Statement

Ordinary shares
marked ex-dividend

Record Date for
entitlement to the
final dividend

Payment of
final dividend(1)

May

Financial
year end

April

May

Announcement
of half year results

Interim Management
Statement

Pre-close
Trading Update

April

Pre-close Trading
Update and financial
half year end

Mid
5

August
October

December

June

August

Notes:

(1) Payment of the final dividend is subject to shareholder approval at the forthcoming Annual General Meeting.
Other significant dates, or amendments to the proposed dates above, will be posted on the Company’s website as and when they
become available.

Results announcements

Results announcements are issued to the London Stock Exchange and are available on its news service. Shortly afterwards,
they are available on the Company’s website.

Financial reports

Copies of all financial reports we publish are available from the date of publication on our website. Printed copies of reports can
be requested by writing to the Company Secretary at the registered office, by clicking on “Contact Us” on our website, or direct by
e-mail to enquiries@draxpower.com.

96
Shareholder information

Drax Group plc
Annual report and accounts 2008

Share price

Shareholders can access the current share price of Drax Group plc ordinary shares on our website at www.draxgroup.plc.uk. During Stock
Exchange trading hours the price shown on the website is subject to a delay of approximately 15 minutes and outside trading hours it is the
last available price.

The table below provides an indication of fluctuations in the Drax Group plc share price during the course of 2008, and the graph provides
an indication of the trend of the share price throughout the year.

Closing price on 31 December 2007

High during the year (19 September 2008)

Low during the year (23 January 2008)

Closing price on 31 December 2008

Share price

Volume

605 pence

821 pence

486.75 pence

561 pence

850.0

650.0

450.0

)
p
(
e
c
i
r
p
e
r
a
h
S

)

(
e
m
u
o
V

Jan 08

Feb 08

Mar 08

Apr 08

May 08

Jun 08

Jul 08

Aug 08

Sep 08

Oct 08

Nov 08

Dec 08

Notes:

(1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List and no adjustment has been made to try to reflect the effects of the share consolidation.

Market capitalisation

The market capitalisation, based on shares in issue and closing middle market price at 31 December 2008, was approximately £1.9 billion.

Company share registrars and transfer office

Shareholders who have a query regarding their shareholding should contact the Company’s share registrars at Equiniti Limited,
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or by telephone on 0871 384 2030 from within the UK (calls to 0871
Helpline numbers are charged at 8 pence per minute from a BT landline. Other telephony provider costs may vary) or +44 121 415 7047
from outside the UK. When contacting the registrar it is advisable to have the shareholder reference to hand and quote Drax Group plc,
as well as the name and address in which the shares are held.

Electronic communication

Registering for online communication gives shareholders more control of their shareholding. The registration process is via our registrars’
secure website www.shareview.com.

Once registered shareholders are able to:

• elect how we communicate with them;
• amend their details;
• amend the way dividends are received; and
• buy or sell shares online.

This doesn’t mean shareholders can no longer receive paper copies of documents. We are able to offer a range of services and
tailor communication to meet our shareholders’ needs.

Beneficial owners of shares with “information rights”

Beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under
Section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares and not to
the Company or Equiniti Limited.

Drax Group plc
Annual report and accounts 2008

Shareholder profile

The categories of ordinary shareholders and the ranges and size of shareholdings are set out below:

Analysis of shareholders

Private shareholders

Institutional and corporate holders

Total

Range

1–100

101–200

201–500

501–1,000

1,001–5,000

5,001–10,000

10,001–100,000

100,001–500,000

500,001–5,000,000

5,000,001 and above

Total

Notes:

(1) Ordinary shares of 1116⁄29 pence each.

Number of
shareholders

720

1,416

2,136

Number of
shareholders

124

139

347

405

461

327

159

As at 31 December 2008

33.71

Number
of shares(1)

1,761,510

66.29

337,637,458

100.00 339,398,968

0.52

99.48

100.00

As at 31 December 2008

5.81

6.51

16.25

18.96

21.58

4.31

15.30

7.44

3.28

0.56

Number
of shares(1)

6,679

21,546

122,801

308,814

1,005,725

658,418

12,868,173

37,651,301

102,386,199

184,369,312

0.00

0.01

0.04

0.09

0.30

0.19

3.79

11.09

30.17

54.32

100.00

2,136

100.00 339,398,968

Shareholders by percentage ownership
as at 31 December 2008

Shareholders by number
as at 31 December 2008

Private shareholders:
0.52%

Institutional and
corporate holders:
99.48%

Private shareholders:
720

Institutional and
corporate holders:
1,416

98
Shareholder information

Drax Group plc
Annual report and accounts 2008

Want to find out more?

Information about the Group in addition to that outlined in this report is available on the Company’s website
at www.draxgroup.plc.uk. Information made available on the website does not constitute part of this Annual Report.

Company information, professional advisers and service providers

Drax Group plc
Annual report and accounts 2008

Drax Group plc

Professional advisers
and service providers

Registered office and trading address
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone +44 (0)1757 618381
Fax +44 (0)1757 612192

Registration details
Registered in England and Wales
Company Number: 5562053

Company website
www.draxgroup.plc.uk

Company Secretary
Philip Hudson

Enquiry e-mail address
enquiries@draxpower.com

Auditors
Deloitte LLP
2 New Street Square
London EC4A 3BZ

Bankers
Barclays Bank PLC
1 Churchill Place
Canary Wharf
London E14 5HP

Brokers
Deutsche Bank AG
Winchester House
1 Great Winchester Street
London EC2N 2DB

Financial PR
Brunswick Group LLP
16 Lincoln’s Inn Fields
London WC2A 3ED

Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA

Remuneration
Kepler Associates LLP
60 Trafalgar Square
London WC2N 5DS

Solicitors
Norton Rose LLP
3 More London Riverside
London SE1 2AQ

Technical Availability
Total availability after planned and forced outages.

Through the mill co-firing
Is a process whereby biomass passes first through the
pulverising mills before going to the burners situated
in the boiler walls.

TXU
TXU Europe Energy Trading Limited (in administration
and subject to a company voluntary arrangement).

TXU Claim
The claim issued by the Group, ultimately agreed by the
Administrators of TXU at approximately £336.0 million
(excluding VAT) in respect of unpaid power purchased
by TXU and liquidated damages under the TXU Contract.

TXU Contract
A 15-year power purchase agreement with TXU.

UK NAP
UK National Allocation Plan.

Winter
The calendar months October to March.

Winter baseload market close
Market price on the last day that the season was
traded as a product.

100
Glossary

Drax Group plc
Annual report and accounts 2008

Ancillary services
Services provided by National Grid plc used for balancing
supply and demand or maintaining secure electricity
supplies within acceptable limits. They are described
in Connection Condition 8 of the Grid Code.

Group
Drax Group plc and its subsidiaries.

IASs
International Accounting Standards.

Availability
Average percentage of time the units were available
for generation.

Average achieved price
Power revenues divided by volume of net sales
(includes imbalance charges).

Average capture price
Revenue derived from bilateral contracts divided
by volume of net merchant sales.

Balancing Mechanism
The period during which the System Operator can call
upon additional generation/consumption or reduce
generation/consumption, through market participants’
bids and offers, in order to balance the system minute
by minute.

Baseload
Running 24 hours per day, seven days per week
remaining permanently synchronised to the system.

Bilateral contracts
Contracts with counterparties and power
exchange trades.

Company
Drax Group plc.

Dark green spread
The difference between the price available in the
market for sales of electricity and the marginal cost
of production (being the cost of coal and other fuels
including C02 emissions allowances).

Direct-injection co-firing
Is a process whereby biomass is fed directly (that is,
avoiding the pulverising mills) to the burners situated
in the boiler walls.

EBITDA
Profit before interest, tax, depreciation and amortisation,
exceptional items and unrealised gains/(losses) on
derivative contracts.

ESIP
The Drax Group plc Restricted Share Plan, also known
as the Drax Group plc Executive Share Incentive Plan.

EU ETS
The EU Emissions Trading System is a mechanism
introduced across the EU to reduce emissions of CO2;
the scheme is capable of being extended to cover all
greenhouse gas emissions.

Forced Outage
Any reduction in plant availability excluding
planned outages.

Forced Outage Rate
The capacity which is not available due to forced
outages or restrictions expressed as a percentage
of the maximum theoretical capacity, less planned
outage capacity.

Frequency Response Service
Services purchased by National Grid plc used to maintain
system frequency.

IFRSs
International Financial Reporting Standards.

LECs
Levy Exemption Certificates. Evidence of Climate
Change Levy exempt electricity supplies generated
from qualifying renewable sources.

Load factor
Net sent out generation as a percentage of
maximum sales.

Lost Time Injury Rate
The frequency rate calculated on the following basis
(number of accidents x 100,000)/hours worked.
Accidents are defined as occurrences when the injured
party is absent from work for more than 24 hours.

Net Balancing Mechanism
Net volumes attributable to accepted bids and offers
in the Balancing Mechanism.

Net merchant sales
Net volumes attributable to bilateral contracts and
power exchange trades.

Net sales
The aggregate of net merchant sales and net
Balancing Mechanism.

Occupational health and safety
assessment series (OHSAS)
The OHSAS specification gives requirements for an
occupational health and safety management system,
to enable an organisation to control its occupational
health and safety risks and improve its performance.

Planned Outage
A period during which scheduled maintenance is
executed according to the plan set at the outset
of the year.

Planned Outage Rate
The capacity not available due to planned outages
expressed as a percentage of the maximum
theoretical capacity.

Power exchange trades
Power sales or purchases transacted on the
APX UK power trading platform.

Power revenues
The aggregate of bilateral contracts and Balancing
Mechanism income/expense.

ROCs
Renewables Obligation Certificates. Under the current
regime, one ROC is issued to eligible generators for every
MWh of electricity generated from renewable sources.

SAYE Plan
The Drax Group plc Approved Savings-Related Share
Option Plan.

SIP
The Drax Group plc Approved Share Incentive Plan.

Summer
The calendar months April to September.

Summer baseload market close
Market price on the last day that the season was
traded as a product.

Contents

Business review

Company profile

Principal performance indicators and summary
of operational achievements during 2008

Chairman’s introduction

Chief Executive’s statement

Business and financial review

Corporate and social responsibility review

Shareholder information

Company information, professional advisers
and service providers

Glossary

Governance

Board of directors

Directors’ report

Corporate governance

Audit Committee report

Nominations Committee report

Remuneration Committee report

Directors’ responsibility statement

Financials

Group – Independent auditors’ report

Consolidated income statements

Consolidated statements of recognised income
and expense

Consolidated balance sheets

Consolidated cash flow statements

Notes to the consolidated financial statements

Company – Independent auditors’ report

Company balance sheets

Notes to the Company balance sheets

100

Design and production:
Radley Yeldar (London) | www.ry.com

Photography:
Marcus Ginns and Lloyd Sturdy

Print:
Granite

Drax Group plc
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone: +44 (0)1757 618381
Fax: +44 (0)1757 612192
www.draxgroup.plc.uk

Drax Group plc
Annual report and accounts 2008

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