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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
insiDe Drax.
annual report anD accounts 2010
welcome to Drax
Drax is so much more
than the uk’s larGest,
cleanest anD most efficient
coal-fireD power station…
we are focuseD on
maximisinG value anD
achievinG our vision of
becominG a bolD, customer
orientateD power
Generation anD supply
business, Driven by
biomass innovation…
this year’s report
illustrates the six key
priorities that will help
us achieve this vision.
07
Drax is predominantly a power generation business
responsible for meeting some 7% of the UK’s electricity
demand. Currently owning and operating the largest power
station in the UK, we are committed to reducing our carbon
footprint. Through the progressive expansion of the use of
sustainable biomass, as a replacement for coal, we aim to
provide a low carbon, low cost and low risk power generation
business well into the future.
At the other end of the supply chain, through our retail arm,
Haven Power, we serve the needs of over 32,000 business
customers. Our intention is to grow a significant retail business
providing us with a valuable alternative to trading through
the wholesale electricity market.
This report has been printed on
Cocoon Silk which is 100% recycled
and FSC certified. This report was
printed by an FSC and ISO 14001
accredited printer using vegetable
oil and soya based inks.
FSC – Forest Stewardship Council.
This ensures that there is an
audited chain of custody from
the tree in the well-managed
forest through to the finished
document in the printing factory.
ISO 14001 – A pattern of
control for an environmental
management system against
which an organisation can be
certified by a third party.
illustration
Graphic Ad
photography
Lloyd Sturdy and Henry Thomas
Design and production
Radley Yeldar | www.ry.com
print
Granite
in this year’s report…
Drax Group plc | Annual report and accounts 2010
01
“ Through significantly
expanding our biomass
burn, Drax can continue
to be as reliable, flexible
and cost effective as it is
today well into the future,
but, importantly, as a
low carbon business.”
02—39
Business review
“ The systems, procedures,
processes and controls
that Drax has in place
provide assurance
to the Board and its
stakeholders of a well
governed business.”
40—72
Governance
“ For Drax, 2010 was a
year characterised by
strong financial results
and excellent operational
performance.”
73—116
Financials
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02 Chairman’s introduction
04
Maximising the value of the
Drax business
06 Delivering results
08 Chief Executive’s statement
16 How we are performing
18 Marketplace
20 Operational and financial performance
28 Principal risks and uncertainties
30 Corporate and social responsibility
40 Board of directors
42 Directors’ report
48 Corporate governance
55 Audit Committee report
58 Nominations Committee report
59 Remuneration Committee report
73 Group – Independent auditor’s report
74 Consolidated income statement
75
Consolidated statement of
comprehensive income
76 Consolidated balance sheet
77
Consolidated statement of changes
in equity
78 Consolidated cash flow statement
79
Notes to the consolidated financial
statements
106 Company – Independent auditor’s report
107
Company balance sheet
108 Notes to the Company balance sheet
112 Shareholder information
115 Glossary
Drax Group plc | Annual report and accounts 2010
02 BuSINESS REvIEw
chairman’s introDUction
“I believe we have achieved
significant progress during
2010 throughout the business
and my sincere thanks go
to all Group staff for their
tireless dedication.”
I am very pleased to report that, despite witnessing some of the weakest
spreads between the price of power and the cost of generation since the
electricity industry was privatised in 1990, Drax performed well in 2010.
Our good performance was primarily due to a combination of record
breaking operational plant performance and starting the year with
strong forward sales.
we report earnings (EBITDA) for 2010 of £391 million (2009: £355 million),
slightly ahead of market expectations, and an operating profit of £278 million
(2009: £173 million). In line with our dividend policy, the Board proposes
a final dividend in respect of 2010 of 17.9 pence per share, equivalent
to £65 million. This would give a total dividend for the year of 32.0 pence
per share (2009: 13.7 pence per share).
The outlook, however, is challenging as we face pressure on coal generation
margins due to today’s commodity market conditions.
Reducing our emissions of carbon dioxide remains central to our strategy.
During the year we continued to make progress on both improving
the overall efficiency of our plant and increasing our capability to burn
renewable biomass fuel. In 2010, we delivered a reduction in carbon
intensity per unit of electricity generated of 7.1% compared to 2007,
when we first started our carbon abatement work.
we remain determined to make further progress in this area. Through
eight years’ experience of burning biomass we have built the technical and
commercial expertise to greatly increase our electricity generation from
biomass. However, we will only do so if the economics of such generation
is attractive for our shareholders; this is not the case under the current
regulatory regime for renewables.
Drax Group plc | Annual report and accounts 2010
03
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The Government is actively reviewing the structure and levels of support
for all renewable generation technologies. we welcome these reviews and
are engaging fully with the Government to advance the case for increasing
the amount of renewable electricity generated from biomass. Generating
renewable electricity from sustainable biomass is relatively low cost, and
can be both flexible and reliable. with the right regulatory support it has the
potential to make a very significant contribution to the uK’s commitment to
delivering 15% of its energy from renewable sources by 2020.
The composition of the Board underwent some changes during the year.
I was delighted to welcome Tony Thorne and Tim Cobbold to the Board
as non-executive directors. Both Tony and Tim bring with them a wealth
of experience in commercial and industrial matters which will be of great
benefit to the Board. I was, however, sorry to see Jamie Dundas step
down from the Board at last year’s Annual General Meeting (”AGM”) and
I will be equally sorry to see Mike Grasby leave the Board at the conclusion
of the 2011 AGM. My thanks go to them both for their time, commitment
and considerable contribution to the Group since joining the Board.
I believe we have achieved significant progress during 2010 throughout
the business and my sincere thanks go to all Group staff for their tireless
dedication. without their hard work and commitment none of these
achievements would have been possible.
charles Berry
Chairman
21 February 2011
Drax Group plc | Annual report and accounts 2010
04
BuSINESS REvIEw
maXimisinG the VaLUe oF the DraX BUsiness
our business model
Our overriding objective is to maximise the value of the Drax business
whilst increasing our electricity generation from biomass, and so
reducing our carbon footprint, subject to the availability of appropriate
levels of regulatory support. Our profitability is determined by the
difference between the price at which we sell our power and the cost
of coal and carbon – known as the “dark green spread”. Starting at
the dark green spread there are several steps in the Drax value chain,
with each one adding incremental value to the business and ultimately
maximising the value of our business and delivering our gross margin.
FUeL
traditionally a coal burning
business, we now make use
of a range of alternative fuels.
how we maximise value
Over the last eight years we have progressively
increased the amount of biomass that we burn.
Beyond biomass, we also have the ability to burn
other fuels, such as petcoke and pond fines,
which can be economically advantageous.
By diversifying our fuel sources, not only are we
less reliant on a single fuel type, but we are able
to capture value from commodity market cycles,
and in the case of biomass avoid the cost of carbon.
Key facts for 2010
k9.4 million tonnes of coal burnt
k907,000 tonnes of biomass burnt
k742,000 tonnes of economically
advantageous fuels burnt
traDinG
through keeping a constant eye on the commodity markets within which
we operate we are able to optimise the commercial despatch of our power.
how we maximise value
As the largest power station in the uK we are able
to exploit economies of scale, for example, through
procuring fuel at competitive prices. Our trading
strategy to hedge our power sales with coal and
carbon purchases enables us to lock in value in the
near, short and long term. we are always looking
to increase the trading options available to us,
for example, through our retail business. we benefit
from having a physical asset to trade around and
through a seamless interface with the operations
side of the business we derive value from the
operational characteristics of the power station,
such as high availability and flexibility, enabling us to
extract value even when market conditions are poor.
Key facts for 2010
k26.4Twh net sales of power
k12.9 million tonnes of CO2 emissions
allowances purchased
k381,000 Renewables Obligation
Certificates sold for renewable power
generated
05
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Drax Group plc | Annual report and accounts 2010
enVironment
We work towards reducing our impact on the environment with a policy of
regarding compliance with legislation as a minimum level of achievement.
Key facts for 2010
k1.5 million tonnes of CO2 saved
through co-firing biomass
k1.0 million tonnes of ash sold
k696,000 tonnes of gypsum sold
how we maximise value
we strive to be at the forefront of environmental
performance in pursuit of maintaining our
commercial and environmental leadership position
in the coal-fired sector. Through our turbine upgrade
and biomass co-firing projects we are able to reduce
the amount of coal we burn, save on carbon costs
and reduce emissions of CO2. we generate revenue
through sales of our by-products. we aim to
maximise the sales of ash produced from burning
coal, which not only saves on landfill costs, but
creates its own revenue stream. By reducing
emissions of sulphur dioxide, through our flue gas
desulphurisation process, we produce gypsum which,
like ash, is sold to the construction industry.
Generation
Drax power station is the largest, cleanest and most efficient coal-fired
power station in the UK, almost twice the size of the next largest power station.
how we maximise value
Already the most efficient coal-fired power station
in the uK, our turbine upgrade project is improving
our overall efficiency bringing with it coal and
carbon savings. with leading performances across
all aspects of the operational side of the generation
business, from safety to maintenance, we are able
to deliver high availability and reliability. In addition,
the flexibility of our power station allows us to
respond quickly to changes in demand. Together that
means we are consistently there when needed, both
to meet our contractual obligations and to provide
support services critical to security of supply.
Key facts for 2010
k3,960Mw connected capacity of
Drax Power Station
k92.1% plant availability
k3.4% forced outage rate
k4.6% planned outage rate
retaiL
our retail supply business is focused on providing businesses of all sizes with
cost effective, tailored electricity supply backed by dedicated customer support.
how we maximise value
we have already achieved significant growth in the
marketplace and have become a recognised key
player by businesses throughout the uK. we have
ambitious plans to grow further and bring this
individual service to even more business customers.
Always looking to increase the trading options
available to us, our retail supply business provides
us with an alternative and direct route to market.
Key facts for 2010
k1.4Twh supplied
k100% sales growth by volume
k32,000+ business customers
on supply at the end of the year
Drax Group plc | Annual report and accounts 2010
06
BuSINESS REvIEw
DeLiVerinG resULts
Our business is influenced by external factors, which we manage to
the very best of our ability. Through focusing on our six key priorities
we aim to achieve our vision and maximise shareholder value.
We haVe a cLear intent
oUr Vision For DraX is
to Be a BoLD, cUstomer
orientateD poWer
Generation anD sUppLy
BUsiness, DriVen By
Biomass innoVation.
We manaGe many eXternaL Factors
There are many external factors with the potential to have an
impact on our business. we aim to be alert to all the identified
principal risks and uncertainties, and manage them to the
very best of our ability.
commodity market risk
counterparty risk
ratings risk
environmental and health
and safety risk
electricity wholesale market risk
Biomass strategy risk
plant operating risk
regulatory and political risk
tax risk
28
influenced by 07
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Drax Group plc | Annual report and accounts 2010
We haVe siX Key priorities
In order to achieve our vision and our overriding objective
to maximise the value of the Drax business, we will continue
to focus our efforts on the following key priorities:
maintain
operational
excellence
Deliver carbon
abatement
Develop
our biomass
operations
10
11
12
influence
the regulatory
framework
Grow our retail
customer base
maintain an
optimal supporting
capital structure
14
09
17
We DeLiVer
In 2010 we achieved:
total revenue
£1,648 million
(2009: £1,476 million)
Gross profit
£551 million
(2009: £503 million)
eBitDa
£391 million
(2009: £355 million)
Underlying earnings
64 pence per share
(2009: 58 pence per share)
Some of our principal performance indicators for 2010 are:
net cash
£204 million
(2009: £54 million net debt)
Load factor
80%
(2009: 68%)
carbon dioxide emissions
784 tonnes per GWh
(2009: 815 tonnes per Gwh)
total recordable injury rate
0.26
(2009: 0.17)
18
resulting infocusing 0n
Drax Group plc | Annual report and accounts 2010
08
BuSINESS REvIEw
chieF eXecUtiVe’s statement
Introduction
Commodity markets
The highlight of 2010 was without doubt
the delivery of excellent operational
performance. A number of best ever
performances at the power plant enhanced
our profitability, which was underpinned by
the strong contracted position we had in
place at the start of the year. Delivering
outstanding operational performance,
whilst maintaining a close watch on costs,
emphasises the value of sustained effort on
investing in and improving our operations
over a number of years.
Our electricity supply arm, Haven Power
Limited (“Haven Power”), continues to
provide us with a valuable alternative
to trading through the wholesale market.
we delivered our 2010 target for sales
growth and remain convinced of the
potential to grow a significant retail
business through Haven Power.
we continued to make progress in
our biomass operations, both through
increasing our capability to burn biomass at
Drax Power Station and our development
work to build a dedicated biomass business
in partnership with Siemens Project ventures.
In fact, in 2010, we believe Drax Power
Station generated the highest renewable
output from a single uK facility.
The commodity markets in 2010 remained
challenging. Dark green spreads, the
difference between power price and the
cost of coal and carbon, continued to
deteriorate in the early part of 2010,
and by April reached their lowest levels
in 20 years. However, during the second
quarter we experienced some improvement
in market conditions followed by generally
stable, although still relatively low, spreads
through the second half of the year.
Demand for electricity stabilised in 2010
after the effects of the recession. Gas again
proved to be the dominant factor in driving
power prices, and therefore dark green
spreads, throughout the year. Increasing
gas prices fed into power prices due to the
increased cost of gas-fired generation.
Coal prices started to increase in the last
months of the year as a result of supply
constraints in the Pacific market due to
severe weather conditions, particularly
in Australia, coupled with strong Asian
demand. Despite not purchasing coal from
Australia and sourcing around half of our
coal from the uK, we feel the impact of
constraints on the global market for
coal, which puts pressure on international
coal prices. However, our contracted
position affords some protection from
increasing prices.
“A number of best ever
performances at the power
plant enhanced our profitability,
which was underpinned by
the strong contracted position
we had in place at the start
of the year.”
Building on the working
relationship already in place
through the generation side
of our business, we secured
Associated British Ports as
an electricity customer in 2010
and have been supplying all
the ports and office buildings
since 1 January 2011.
Drax Group plc | Annual report and accounts 2010
09
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we secured Santander as an
electricity customer in 2010,
and from 1 January 2011 we
started to supply the buildings
that house the important back
office support functions.
Future growth potential
Haven Power provides us with an important
alternative and direct route to market for
our power, and is already demonstrating its
ability to grow its customer base. we believe
Haven Power has the potential to grow
significantly in the future.
StanleyBlack&Decker was
secured as an electricity
customer in 2009 and we first
started to supply all the sites
in 2010. The business has since
renewed its contract with
us for a further term.
In 2010, we secured the
university of Sussex as an
electricity customer and
started to supply the campus
in the same year.
one of our key priorities:
GroW oUr retaiL
cUstomer Base
Drax Group plc | Annual report and accounts 2010
10 BuSINESS REvIEw
chieF eXecUtiVe’s statement
management focus
Through the re-design of our operation and
maintenance processes we have laid the
foundation for good performance. This work
continues alongside a focus on innovation
and strong cost control.
maintaining the asset
A year of best ever performances saw record
low periods when we were unable to generate
and consequently our availability was at a record
high. Once again our leadership position in the
coal-fired sector was demonstrated.
industry-leading safety performance
Our safety statistics continue to be industry-
leading, comparing very favourably with those
of our sector peers and with international
benchmarks. Our annual safety conference
for contractors and staff sets expectations
for the year’s performance.
a seamless interface between
operations and trading
Our flexibility, reliability and size make us well
placed to participate in the Balancing Mechanism
(real-time balancing of supply and demand)
and to offer important balancing services
to the System Operator, National Grid.
one of our key priorities:
maintain
operationaL
eXceLLence
Operating performance
Our availability and reliability throughout
the year meant that, once again, Drax was
able to prove its worth, providing flexible
generation output and balancing services
in support of system stability and security.
The key operational performance
indicators demonstrate excellent results
for 2010. Our safety statistics continue to
be industry-leading, and the periods when
we were unable to generate were at record
lows, which meant our availability was at a
record high. For the year, our forced outage
rate, which measures any reduction in plant
availability excluding planned outages, was
3.4%, which compares very favourably to
our long-term target of 5%. we delivered
this operating performance whilst keeping
a tight control on costs.
It is important to note that our long-term
target has been set through extensive
benchmarking with uK and international
coal-fired plant to determine the optimum
balance between performance and cost.
we continued to work on increasing our
burn of fuels which have a financial
advantage to the standard bituminous coal
which we burn. Our alternative fuel burn,
which includes biomass, and petcoke and
other economically advantageous fuels,
accounted for 12% of the total fuel burnt
during the year.
The re-design of our operation and
maintenance processes continues and
is now becoming well embedded and
provides the platform for delivering
good performance, whilst implementing
innovations on fuels and maintaining
strong cost control.
Drax Group plc | Annual report and accounts 2010
increasing efficiency and reducing
co2 on track
we are now over two-thirds of the way through
our turbine upgrade project, which is on track for
completion in 2012. when complete the project
will increase our overall efficiency by 5% taking
it to 40% and with that deliver a reduction in CO2
emissions of 1.0 million tonnes a year.
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one of our key priorities:
DeLiVer carBon
aBatement
Carbon abatement
Carbon abatement remains central to
our strategy. Our turbine upgrade project
is now more than two-thirds complete,
and on track for conclusion in 2012.
The new modules are operating as
expected, which means we are comfortably
operating at an overall efficiency
across the power station of above 39%.
The resultant saving in emissions of carbon
dioxide (“CO2”) amounts to over half a
million tonnes a year.
In the Summer, we commissioned our
new biomass co-firing facility which gives
us the capability to produce one-eighth
of our power from sustainable biomass,
equivalent to the output of over 700 wind
turbines. when running at full capacity,
a saving of over 2.5 million tonnes of CO2
will be possible each year.
In 2010, our biomass burn reached the
record level of 907,000 tonnes, over
double that of the year before. As a result,
we estimate that Drax Power Station
generated 7% of the uK’s renewable power
in 2010, which is more than twice as much
as any other facility in the uK. This was
despite not utilising our co-firing capability
to the full because of insufficient regulatory
support for biomass.
More recently in February 2011, we, in
conjunction with Alstom uK Limited and
National Grid Carbon Limited, lodged an
application for European funding for a
new, stand-alone 426Mw oxy-fired carbon
capture and storage demonstration project
based at the Drax Power Station site.
Upgrading 24 turbines
The project will see each of our high pressure and
low pressure turbine modules upgraded. In total,
that amounts to six high pressure turbines
and 18 low pressure turbines.
reducing co2 through biomass
Our newly commissioned biomass co-firing facility,
alongside our existing co-firing capacity, gives us
the capability to reduce our emissions of CO2 by
over 2.5 million tonnes a year. we are well placed
to increase the level of biomass we burn still
further, but we require an appropriate level
of regulatory support.
Drax Group plc | Annual report and accounts 2010
12 BuSINESS REvIEw
chieF eXecUtiVe’s statement
Progressing our
biomass operations
It has become increasingly clear to us that
biomass could and should play a far greater
role in helping to meet the uK’s challenging
carbon reduction and renewables targets.
Generating electricity from biomass is a
relatively low cost renewable technology,
which we believe has an important role
to play in delivering these targets in a
cost effective way for consumers. Further,
as we move towards an energy mix with
increasing penetration of intermittent
generation capacity, the case for reliable
and flexible renewable generation capacity
becomes ever stronger.
Through our work at the power station
on biomass co-firing and our development
work on dedicated biomass plants we are
ready to expand our biomass operations.
Critical components of this work and of
delivering a biomass future for the Group
are establishing the biomass supply chain
logistics and procuring sustainable biomass
against our robust sustainability policy.
we made good progress on both these
fronts during 2010.
establishing the supply chain logistics
we have worked with key partners throughout
the year to establish critical logistics components
in the biomass supply chain. Bespoke rail
wagons to transport biomass and the biomass
handling, storage and rail loading facility at the
Port of Tyne were commissioned during the
second half of 2010.
one of our key priorities:
DeVeLop
oUr Biomass
operations
planning expansion through new build
Project economics for our proposed dedicated
biomass plants are dependent on attracting an
appropriate level of regulatory support. we will
continue to work with our partner, Siemens Project
ventures, to progress these developments where
possible in the absence of regulatory clarity.
Drax Group plc | Annual report and accounts 2010
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securing domestic supplies
Our 100,000 tonnes per annum straw pellet
plant is an example of the investment we have
made in the biomass supply chain. The ability
to process straw has created a new market for
local farmers and helped to secure domestic
supplies of biomass.
securing sustainable supplies
Our biomass procurement programme is
underpinned by a “field to furnace” service, offering
support and advice every step of the way. All our
contracts ensure that our biomass supplies are
sustainable and through independent audit we
are able to confirm each supplier’s compliance
with our robust sustainability policy.
expanding our on-site capability
In Summer 2010, we commissioned our new
biomass co-firing facility to time and in line with
budget. we now have the capability to produce
one-eighth of our power from renewable and
sustainable biomass. The full utilisation of our
facility is dependent on receiving an appropriate
level of regulatory support.
Drax Group plc | Annual report and accounts 2010
14 BuSINESS REvIEw
chieF eXecUtiVe’s statement
engaging with UK parliament
During 2010, a series of consultation papers and
policy statements were issued by the Government
giving a blueprint for regulatory change in the
electricity sector. we had significant engagement
with Parliament and officials throughout the year
and this will continue as the regulatory reform
agenda takes shape.
Regulatory outlook
The year saw a series of consultation
exercises and policy statements lay out the
Government’s intentions for regulatory
change. The three areas of greatest
importance to us are the review of
existing renewable generation support
arrangements, electricity market reform
and Eu agreement on measures under
the Industrial Emissions Directive.
In December, the Government committed
to a faster review of support for
renewables. we have long advocated the
need for regulatory certainty in gaining
investor confidence and securing
investment. The timetable for clarity
of the new support levels for renewable
technologies to be implemented from
April 2013 has been brought forward
by around 12 months. This is a welcome
move and is necessary to facilitate timely
investment decisions.
Although the Government’s position on
burning biomass in existing coal-fired
power plants is still evolving, we are
encouraged that consideration is being
given to introducing support for increased
biomass burn at fossil fuel power stations.
For example, through new bands for both
higher levels of biomass co-firing and full
conversion to biomass. we stand ready to
increase our biomass burn to much higher
levels, but will only do so with the
appropriate level of support.
During 2010, the Government developed
and consulted on sustainability standards
for biomass used in the generation of
electricity. As a proponent of sustainability
standards for biomass, we were delighted
with the Government’s announcement in
December that it will mandate compliance
with a standard. Electricity generation
from biomass has many important
benefits, including that it can be
sustainable. Our own sustainability policy,
introduced in 2008, not only commits us
to achieving reductions in greenhouse gas
emissions, but to doing so while satisfying
economic and social considerations.
Following the publication of proposals
by the Government in December,
consultations on a package of measures
to reform the electricity market are now
underway. The measures represent the
single biggest change to the electricity
sector in two decades, and whereas the
proposals are challenging for coal they do
reinforce our commitment to electricity
generation from biomass.
Proposals to change the support mechanism
for renewables and the introduction of a
capacity mechanism and carbon floor price
are included in the package.
we are supportive of the Government’s
proposal to reform the support for
renewables through the introduction of a
feed-in tariff. we believe that the proposals
will create a more level playing field for
investment in renewables by new entrants
and independents like Drax.
we are pleased that the Government
recognises the need for reform of the
electricity market through the introduction
of a capacity mechanism, but believe that
the specific proposals are too narrow to
provide the desired security of supply.
we are particularly concerned that the
Government’s lead proposal does not
address the importance of flexibility
to security of supply.
The proposals for carbon price support
are, we believe, unnecessary. There is
potential for conflict with the existing
Eu Emissions Trading Scheme (“Eu ETS”)
and given the cap and trade nature of the
Eu ETS, the floor price will have no impact
on overall CO2 emissions, since any
reduction in the uK’s emissions will simply
result in higher emissions elsewhere in the
Eu. we also believe that the introduction
of a floor price which supports specific
technologies would, in all likelihood,
distort the wholesale market.
Finally, on the Industrial Emissions
Directive, we now have a greater
understanding of the window within which
compliance with more stringent emissions
standards must be met. we are working on
the options available to us for compliance,
but with expected fuel mix integral to
optimising the solution for Drax, the
appropriate level of support for biomass
is again on the critical path.
one of our key priorities:
inFLUence
the reGULatory
FrameWorK
actively involved in europe
A significant amount of legislation with potential
implications for our business emanates from the
Eu institutions in Brussels. we are actively involved
in influencing Eu legislation through our own
representations and those of our trade
associations and uK Government itself.
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Drax Group plc | Annual report and accounts 2010
Looking ahead
Commodity markets remain challenging
for all fossil fuel generators. we enter 2011
with support from forward power sales of
18Twh, a significant portion of which were
executed on more attractive terms than we
could capture in today’s market. we intend
to work hard to continue to deliver leading
operating and cost performance and to
retain our focus on building options to burn
economically advantageous fuel. However,
markets recognise that profitability is likely
to be lower in 2011, unless there is a
significant improvement in spreads.
with a commitment to delivering value
to our shareholders, we will continue
our dialogue with the Government as
regulatory reform takes shape. we believe
that positive progress on the reform
agenda is central to our success. with the
right policy framework and support for
electricity generation from biomass, we
stand ready to make a significant, timely
and cost effective contribution to reducing
carbon emissions, whilst retaining reliable
and flexible capacity on the system.
we will continue our research and
development work around increasing
the level of biomass burnt at Drax Power
Station, both through exploring higher
levels of co-firing and full unit conversion.
Our work will be focused on design and
costing solutions for logistics, storage,
materials handling and engineering. we
will also continue working with Siemens
Project ventures to progress our dedicated
biomass developments, but in each case,
further significant investment is dependent
upon appropriate regulatory support.
we see biomass as a critical component
to resolving the energy policy trilemma
of tackling climate change sustainably,
affordably and without jeopardising
security of supply. Through significantly
expanding our biomass burn, Drax can
continue to be as reliable, flexible and cost
effective as it is today well into the future
but, importantly, as a low carbon business.
Dorothy thompson
Chief Executive
21 February 2011
Drax Group plc | Annual report and accounts 2010
16 business review
HOW WE ARE PERFORMING
we entered 2010 with a strong hedged position affording us a good
level of protection against dark green spreads which, in April 2010,
reached their lowest levels since privatisation. The combination of our
hedged position and excellent operational performance enabled us to
deliver earnings slightly ahead of market expectations. Our principal
performance indicators provide a snapshot of how we are performing
against our overriding objective to maximise shareholder value,
and against our key priorities.
MAxIMIsING THE vAluE OF THE DRAx BusINEss
Net sales
TWh
26.4TWh
(2009: 22.6TWh)
25.4
22.6
Average achieved
price of electricity
£51.6 per MWh
(2009: £52.0 per MWh)
£/MWh
Average cost of fuel
excluding carbon
£25.7 per MWh
(2009: £25.4 per MWh)
£/MWh
26.4
58.3
52.0
51.6
25.1
25.4
25.7
2008
2009
2010
2008
2009
2010
2008
2009
2010
The aggregate of net merchant sales
and net Balancing Mechanism activity
Why we measure
net sales tracks the volume of power we
can sell at positive margins.
Comment
unseasonably cold weather in the first and
fourth quarters increased demand and our
excellent operational performance meant we
were well placed to provide additional output.
Power revenues divided by volume of
net sales (includes imbalance charges)
Fuel costs excluding carbon divided by
volume of net sales
Why we measure
The average achieved price of electricity tracks
the power price component of the dark green
spread achieved.
Comment
The higher prices achieved through our strong
hedged position at the start of the year were offset,
in part, by the additional sales volume at lower
prices for trades placed in 2010.
Why we measure
The average cost of fuel excluding carbon tracks
the fuel cost component of the dark green spread
achieved, and reflects the value captured from
effective fuel procurement and diversified fuel
sources.
Comment
The small increase in average fuel prices was driven
by fuel mix and commodity price movements.
MAINTAIN OPERATIONAl ExCEllENCE
Lost time injury rate (“LTIR”)
Total recordable injury rate (“TRIR”)
Plant availability
%
0.13
(2009: 0.09)
0.10
0.09
0.26
(2009: 0.17)
92%
(2009: 89%)
0.13
0.31
0.26
86
89
92
0.17
2008
2009
2010
2008
2009
2010
2008
2009
2010
The frequency rate is calculated on the
following basis: lost time injuries/hours worked
x 100,000
The frequency rate is calculated on the
following basis: (lost time injuries + worse than
first aid injuries)/hours worked x 100,000
Why we measure
These injury rate metrics track our health and safety performance and enable us to maintain a positive
health and safety culture.
Comment
Our safety record continues to be industry-leading and was delivered alongside a significant amount
of project activity. The small increase in LTir and Trir demonstrates the importance of retaining a key
focus on health and safety.
Average percentage of time the units were
available for generation
Why we measure
Availability tracks our operating performance enabling
assessment of, and guidance for, our operational
regime and maintenance investment plans.
Comment
The periods when we were unable to generate
due to outages were at a record low, which meant
our availability was at a record high.
MAxIMIsING THE vAluE OF THE DRAx BusINEss
Drax Group plc | Annual report and accounts 2010
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MAINTAIN AN
OPTIMAl suPPORTING
CAPITAl sTRuCTuRE
DEvElOP OuR
BIOMAss OPERATIONs
Average cost of carbon
£/tonne
Net cash/(debt)
£m
Biomass burnt
tonnes
£12.6 per tonne
(2009: £14.3 per tonne)
17.4
£204 million net cash
(2009: £54 million net debt)
907,000 tonnes
(2009: 381,000 tonnes)
204
907,000
14.3
12.6
(235)
(54)
412,000
381,000
2008
2009
2010
2008
2009
2010
2008
2009
2010
Carbon costs divided by volume of allowances
purchased
Includes cash and short-term investments,
less borrowings net of deferred finance costs
Why we measure
The average cost of carbon tracks the carbon cost
component of the dark green spread achieved.
Comment
Average cost in 2010 resulted from both our existing
term contracts and our strategy to hedge power
sales with purchases of coal and carbon, hence we
locked into carbon contracts to cover our 2010
liability during 2009 when market prices were low.
Why we measure
Monitoring net cash/(debt) ensures an efficient
capital structure is maintained to support our
business model, alongside sufficient liquidity
to manage our future obligations.
Comment
The increase in net cash is largely due to a
significant working capital release from coal
stocks, resulting from higher generation output.
Tonnes of biomass fuel burnt during the year
Why we measure
Measuring the levels of biomass burnt tracks our
progress in producing power from renewable and
sustainable sources.
Comment
we have more than doubled our biomass burn
following the commissioning of our new co-firing
facility in 2010. As a result, Drax is now the largest
renewable power generation facility in the uK.
MAINTAIN OPERATIONAl ExCEllENCE
DElIvER CARBON
ABATEMENT
GROW OuR RETAIl
CusTOMER BAsE
Load factor
%
Carbon dioxide emissions
t/GWh
Retail customer volumes
TWh
80%
(2009: 68%)
76
68
784 tonnes per GWh
(2009: 815 tonnes per GWh)
1.4TWh
(2009: 0.7TWh)
80
818
815
1.4
784
0.7
0.3
2008
2009
2010
2008
2009
2010
2008
2009
2010
Net sent out generation as a percentage
of total available generation capacity
Why we measure
Load factor tracks our operating performance
and the competitiveness of Drax Power station.
Comment
The increase arises following an increase
in generation output (net power sales), as a result
of our competitive position in the marketplace,
high availability and unseasonably cold weather.
CO2 emissions rate per unit of output
Why we measure
This measure of carbon emissions illustrates our
progress in reducing the carbon footprint of Drax
Power station.
Comment
The performance data of the upgraded turbines
shows that we are operating at an overall efficiency of
above 39%, saving over half a million tonnes of CO2
per annum. record levels of biomass burnt saved an
additional 1.5 million tonnes of CO2 in the year.
Net sales distributed through our retail
supply arm, Haven Power
Why we measure
A measure of the rate of growth in our retail business.
Comment
This reflects planned growth in Haven Power’s
business, particularly in the industrial and commercial
market. Haven Power provides a valuable alternative
to trading through the wholesale market.
Drax acquired Haven Power in March 2009.
Drax Group plc | Annual report and accounts 2010
18 business review
MARKETPlACE
LnG and shale gas remain key drivers of
the long-term gas markets. shale gas is
largely a us phenomenon in the near-term.
Horizontal drilling technology has
advanced, but research papers remain
divided on the marginal cost and available
volumes at the lower end of the cost scale.
However, the us has significant reserves
that could enable it to become relatively
self sufficient. This could reduce its LnG
requirements, freeing up more volume
for the Asian and european markets
depending on their relative market price.
in the longer term, other countries such
as China may also exploit potentially
large shale gas reserves. However,
developments outside the us are in their
infancy and will, therefore, have little
impact in the short- to medium-term.
Power
Power prices during the period under
review generally followed the trends in
gas prices described above. in addition,
during 2009, high availability of uK
generating capacity, as well as a reduction
of more than 3% in electricity demand
caused by the economic downturn, put
further pressure on power prices.
During 2010, power demand appeared
to stabilise. There was a small increase
in demand in the first quarter of the year,
and demand reached record levels in
December, although on both occasions this
was most likely a result of the unseasonably
cold weather. To balance this, on the supply
side we are now seeing significant new
gas-fired capacity coming on line.
Commodity markets
After facing challenging commodity market
conditions throughout 2009, we had to
contend with dark green spreads that
continued to deteriorate in the early part
of 2010, and which by April reached their
lowest levels since privatisation of the
industry 20 years ago. However, during
the second quarter we experienced some
improvement in market conditions,
followed by a period of generally stable,
although still relatively low, spreads
through the remainder of the year.
Throughout, the gas market continued
to be the dominant factor in driving uK
power prices and dark green spreads.
These trends witnessed in 2009 and
2010 are described further in the following
paragraphs and are illustrated in the
accompanying charts.
Gas
During 2009, reducing demand and
increased Liquefied natural Gas (“LnG”)
supply led to a global gas surplus, and as
there is only storage for a finite volume,
the uK with its open market became the
consumer of last resort. Plentiful supply
consequently drove gas prices down.
Gas prices recovered in the second quarter
of 2010, reflecting lower LnG supply into
the uK, following higher than anticipated
demand from Asia, and lower production
in Qatar. in addition, there were some signs
of a recovery in continental european gas
demand, with higher exports from the
uK to europe through the interconnector.
Following a period of stability during the
third quarter, gas prices increased
towards the end of the year, with cold
temperatures driving high demand
in november and December.
“ Following the lowest
dark green spreads
experienced for two
decades, market
conditions did improve
and spreads were
generally stable, but still
relatively low, for the
rest of the year.”
Forward gas price
pence per therm
Forward power price
£/MWh
■
■
Summer 10
Winter 10
■
■
Summer 11
Winter 11
■
■
Summer 10
Winter 10
■
■
Summer 11
Winter 11
80
60
40
20
0
9
0
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9
0
r
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9
0
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9
0
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9
0
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9
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0
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70
60
50
40
30
20
10
0
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0
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“ Carbon allowances
traded within a narrow
price range throughout
2010, although a small
increase was experienced
in the second half of
the year.”
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Drax Group plc | Annual report and accounts 2010
Coal
Following a sharp fall and recovery early in
2009, coal prices were relatively stable for
the rest of the year. There was downward
pressure in the near-term, resulting
from recession induced weaker demand,
causing over supply and higher stock levels,
particularly in europe. upward pressure
in the medium- to long-term reflected
continued demand growth in China and
anticipation of global economic recovery.
Following a continued period of price
stability through the first half of 2010,
coal prices increased significantly in the
final months of the year. This reflected
tightening in the Pacific market with severe
weather causing constraints on production
in Australia, indonesia and Colombia.
in addition, strong Asian demand for Atlantic
coal, particularly from China, continued to
support eu prices. with current annual
steam coal consumption of around 2 billion
tonnes, there is enormous potential for
China to impact the global market. Over the
course of the last few years, China has switched
from an exporter to an importer of steam
coal, with net imports of around 80 million
tonnes in 2010, representing more than 10%
of the traded steam coal market.
Carbon allowances
Carbon price trends were similar to coal
in 2009, with a sharp fall and recovery
early in the year, followed by a period of
relative stability.
Carbon prices continued to trade in a
fairly narrow range throughout 2010,
with a small increase experienced in
the second half of the year.
it appears that the carbon market
predominantly continues to reflect
sentiment around eu policy. with any
Phase ii surplus bankable into Phase iii,
pricing seems largely driven by political
and macroeconomic factors, such as the
renewable generation build rate, the pace
of economic recovery, and the possible
increase in uK carbon dioxide (“CO2”)
reduction targets (from 20% to 30%).
Dark green spread
Overall during 2010, increased gas prices
pushed power prices higher, and with coal
and carbon prices also increasing, but to
a lesser extent, we have experienced some
improvement in dark green spreads across
the forward curve compared to a year ago.
However, compared to historical averages,
spreads still remain relatively low and the
outlook remains challenging.
“ Coal prices were stable
during the first half of
2010, but increased
significantly in the final
months of the year.”
Forward coal price (API 2)
$/tonne
Carbon price (Phase II EUA)
€/tonne
Dark green spread
£/MWh
■
■
■
Calendar year 10
Calendar year 11
Calendar year 12
■
■
■
Calendar year 10
Calendar year 11
Calendar year 12
■
■
Summer 10
Winter 10
■
■
Summer 11
Winter 11
140
120
100
80
60
40
20
0
9
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9
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9
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0
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20
16
12
8
4
0
9
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9
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25
20
15
10
5
0
9
0
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9
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9
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9
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9
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Drax Group plc | Annual report and accounts 2010
20 business review
OPERATIONAl AND FINANCIAl PERFORMANCE
earlier in the year we took steps to underpin
our financing arrangements, by executing
a new £135 million trading facility.
we ended the year with a strong balance
sheet, including net cash of over
£200 million, helped by a significant
working capital release from coal stocks.
This balance includes the ring-fenced cash
taxes of £117 million saved as a result of
unwinding the eurobond structure.
in summary, 2010 was a year characterised
by strong financial results and excellent
operational performance. At the upcoming
Annual General Meeting, the board will
recommend a final dividend for 2010 of
17.9 pence per share, taking total dividends
for the year to 32.0 pence per share, or
£117 million, and more than twice the total
dividend for 2009 (£50 million).
This review includes further explanation
and commentary in relation to our principal
performance indicators and the results for
the year.
introduction
The Group’s principal performance
indicators are highlighted on pages 16
and 17.
ebiTDA was £391 million for the year ended
31 December 2010 compared to £355 million
in 2009 and underlying earnings per share
were 64 pence compared to 58 pence last
year, both representing increases of 10%.
we entered the year with a strong hedged
position, which locked in higher average
margins than for 2009. Our profitability
was further enhanced by an excellent
operational performance, which enabled
us to capture incremental volume during
some of the coldest months on record
at the beginning and end of the year. in
addition, we continued our drive on cash
management and achieved our targeted
cost efficiencies and capital expenditure
reductions. in fact, underlying earnings per
share have increased by more than 20%,
excluding a gain of £31 million recognised
in 2009 on the close out of a number of
in-the-money foreign exchange contracts.
Our retail business, Haven Power Limited
(“Haven Power”), delivered a second year
of very strong sales growth.
“ increased profits in 2010
were underpinned by the
strong hedged position
we entered the year with,
and enhanced by our excellent
operational performance.”
Total revenue
£m
Gross profit
£m
£1,648.4 million
(2009: £1,475.8 million)
1,752.8
1,648.4
1,475.8
£550.5 million
(2009: £502.9 million)
623.2
502.9
550.5
2008
2009
2010
2008
2009
2010
EBITDA
£m
Underlying earnings
pence
£390.6 million
(2009: £354.9 million)
64 pence per share
(2009: 58 pence per share)
454.2
86
354.9
390.6
58
64
2008
2009
2010
2008
2009
2010
Drax Group plc | Annual report and accounts 2010
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results of business
Total revenue
Fuel costs in respect of generation(1)
Cost of power purchases(2)
Grid charges(3)
Other retail costs(4)
Total cost of sales
Gross profit
Other operating and administrative expenses excluding depreciation, amortisation
and unrealised losses on derivative contracts(5)
EBITDA(6)
Depreciation, amortisation and loss on disposal of property, plant and equipment
unrealised losses on derivative contracts
Operating profit
net finance costs
Profit before tax
Tax charge
– before changes in tax legislation
– impact of change in rate of corporation tax on deferred tax
Total tax
Profit for the year attributable to equity shareholders
Earnings per share
– basic and diluted
– underlying basic and diluted(7)
All results relate to continuing operations.
Year ended
31 December 2010
£m
1,648.4
Year ended
31 December 2009
£m
1,475.8
(840.9)
(165.8)
(82.2)
(9.0)
(1,097.9)
550.5
(159.9)
390.6
(52.2)
(60.5)
277.9
(23.0)
254.9
(74.1)
7.6
(66.5)
188.4
(691.0)
(209.5)
(68.0)
(4.4)
(972.9)
502.9
(148.0)
354.9
(52.0)
(129.7)
173.2
(15.4)
157.8
(46.9)
–
(46.9)
110.9
pence per share
pence per share
52
64
31
58
notes:
(1) Fuel costs in respect of generation predominantly comprise coal, biomass and CO2 emissions allowances, together with petcoke and oil.
(2) Cost of power purchases represents power purchased in the market.
(3) Grid charges include transmission network use of system charges (“Tnuos”), balancing services use of system charges (“bsuos”) and distribution use of system charges (“Duos”).
(4) Other retail costs include broker fees, rOCs and metering.
(5) Other operating and administrative expenses excluding depreciation, amortisation and unrealised gains and losses on derivative contracts include salaries, maintenance costs and other
administrative expenses.
(6) ebiTDA is defined as profit before interest, tax, depreciation, amortisation, gains and losses on disposal of property, plant and equipment and unrealised gains and losses on derivative contracts.
(7) Calculated using underlying earnings, being profit attributable to equity shareholders adjusted to exclude the after tax impact of unrealised gains and losses on derivative contracts.
Drax Group plc | Annual report and accounts 2010
22 business review
OPERATIONAl AND FINANCIAl PERFORMANCE
Revenue analysis
Power sales
£bn
■
■
Power and retail sales (£m)
Other income (£m)
Net power sold (TWh)
Average achieved price
(£/MWh)
25.4TWh
26.4TWh
24.9TWh
22.6TWh
£58.3/MWh
£52.0/MWh
£45.3/MWh
£61m
£1,692m
£66m
£1,410m
£43m
£1,204m
£51.6/MWh
£66m
£1,582m
1.6
1.4
1.2
1.0
2007
2008
2009
2010
Revenue
Total revenue for the year ended
31 December 2010 was £1,648 million
compared to £1,476 million in 2009.
Total revenue in 2010 includes power sales
of £1,458 million (2009: £1,345 million),
retail sales of £124 million (2009:
£65 million) and other income
of £66 million (2009: £66 million).
Higher power sales resulted from an
increase in net power sold to 26.4Twh,
compared to 22.6Twh in 2009. This was
driven largely by the unseasonably cold
weather during the first and fourth
quarters and our excellent operating
performance. whilst margins captured
on this incremental sales volume were
low, the additional generation resulted in
a reduction of 1.6 million tonnes in our coal
stocks and consequent improvement in our
cash balances (see Analysis of cash flows).
Average wholesale achieved electricity
price for the year ended 31 December 2010
of £51.6 per Mwh is broadly in line with
2009 (£52.0 per Mwh), and resulted from
a blend of locking in higher prices through
our strong hedge, offset in part by the
additional sales volume at lower prices
for trades placed in 2010.
retail sales volumes have increased
from 0.7Twh in the 12 months to
31 December 2009 (Drax acquired Haven
Power in March of 2009) to 1.4Twh in 2010.
This reflects planned growth in Haven
Power’s business.
“ An increase in generation
output led to a reduction
in our coal stock, with a
consequent improvement
in our cash balances.”
9
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o
p
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
and LeCs. These revenues were £66 million
in both years.
rOC and LeC sales
Ancillary services income
Other income
Year ended
31 December
2010
£m
Year ended
31 December
2009
£m
23.1
34.6
8.1
65.8
38.5
19.9
7.3
65.7
Although our rOC sales fell from £39 million
in 2009 to £23 million in 2010, the rOC
inventory held on our balance sheet
increased by £21 million through the year,
and we expect to sell most of these rOCs
in 2011. Lower rOC sales in 2010 reflect the
reduction in the rate of rOCs earned from
co-firing non-energy crop biomass with
coal, which from April 2009 has only
earned half a rOC for each Mwh of
electricity generated (previously one rOC),
therefore producing a lower volume of
rOCs available for sale. Additional 2010
ancillary services income benefited from
the Firm Frequency response contracts
secured with national Grid.
Our average cost of fuel is a function of
the timing of purchases under domestic
and international contracts in the forward
and near-term markets and of fuel mix.
The average cost of fuel per Mwh
(excluding CO2 emissions allowances) was
£25.7 for the year ended 31 December 2010,
compared to £25.4 in 2009. The small
increase in average fuel prices was
driven by fuel mix and commodity price
movements. Costs per Mwh for 2009 are
adjusted to exclude the £31 million foreign
exchange gain described above.
Fuel costs (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. we purchase CO2
emissions allowances under fixed price
contracts with different maturity dates
from a variety of domestic and
international sources.
Our CO2 emissions allowances requirement
for the year ended 31 December 2010,
in excess of those allocated under the uK
nAP, was approximately 12.9 million tonnes
compared to approximately 10.3 million
tonnes in 2009. This was a result of
higher generation, partially offset by plant
efficiency improvements and higher levels
of biomass burn.
Fuel costs (coal, biomass and other fuels)
Fuel costs were £841 million, compared
to £722 million in 2009 (excluding a
£31 million gain on the early close out of a
number of in-the-money foreign exchange
contracts). The increase was primarily
due to higher generation.
we burnt approximately 9.4 million tonnes
of coal in the year ended 31 December
2010, compared to approximately
8.2 million tonnes in 2009. This coal was
purchased from a variety of domestic and
international sources under either fixed
or variable priced contracts with different
maturities. Coal represented around
88% of total fuel burnt (by heat content)
both in 2010 and 2009.
in 2010, we burnt 0.9 million tonnes
of biomass (2009: 0.4 million tonnes)
representing 6% of total fuel burnt by
heat content (2009: 3%). This is a result
of the commissioning and early operation
of our new co-firing facility (see Capital
expenditure). we also burnt 0.2 million
tonnes of petcoke (2009: 0.5 million
tonnes) and 0.4 million tonnes of
pond fines (2009: 0.1 million tonnes).
Our petcoke burn volume is driven by
its pricing relative to coal. Pond fines are
a coal mining residue, which trades at a
significant discount to coal, and requires
specific blending and handling techniques
to burn in large volumes. we have
developed these techniques over the
last two years. The increases in our
biomass and pond fines burn in 2010,
demonstrate further improvements in
our fuel flexibility.
Fuel burn composition (heat)
GJ
Petcoke:
3%
Pond fines:
3%
Biomass:
6%
Petcoke:
7%
Biomass:
3%
Pond fines:
1%
Other:
1%
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Our average price of carbon is a function
of the timing of purchases under fixed price
contracts in the forward and near-term
markets. The average price expensed
for purchased CO2 emissions allowances
during the year ended 31 December 2010
was £12.6 per tonne compared to £14.3 per
tonne in 2009, reflecting the fact that we
locked into carbon contracts to cover our
2010 liability during 2009 when we sold the
related power. similarly, the 2009 carbon
cost reflects contract prices which were
largely locked in during 2008. Average
market prices for carbon were higher in
2008 than in 2009.
Cost of power purchases
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. in addition, Haven
Power purchases power in the wholesale
market for delivery to its retail customers.
For the year ended 31 December 2010, the
cost of purchased power was £166 million,
compared to £210 million incurred in 2009.
Haven Power’s cost of power purchases
amounted to £71 million, compared to
£40 million in 2009, including the cost
of power purchased directly from Drax
Power station.
Grid charges
Grid charges for the year ended
31 December 2010 were £82 million,
compared to £68 million in 2009.
Grid charges in 2010 include costs of
£28 million incurred at Haven Power
compared to £12 million in 2009, reflecting
the increase in retail volumes sold.
Other retail costs
Other retail costs include broker fees,
rOCs and metering at Haven Power
and were £9 million in the year ended
31 December 2010, compared to £4 million
in 2009.
As a result of these factors, gross profit
for the year ended 31 December 2010 was
£551 million compared to £503 million
in 2009.
2010
2009
Coal:
88%
Coal:
88%
Drax Group plc | Annual report and accounts 2010
24 business review
OPERATIONAl AND FINANCIAl PERFORMANCE
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 loss
recognised through the hedge reserve
in the year ended 31 December 2010 was
£233 million, compared to a net unrealised
gain of £376 million in 2009, with 2010
largely reflecting the unwind of mark-to-
market positions on power delivered in
the period and forward power price trends
described above.
in considering mark-to-market movements,
it is important to recognise that profitability
is driven by our strategy to deliver market
level dark green spreads, not by the absolute
price of electricity at any given date.
After allowing for the unrealised losses
on derivative contracts, depreciation and
amortisation, operating profit for the
year ended 31 December 2010 was
£278 million compared to £173 million
in 2009.
Interest
net finance costs for the year ended
31 December 2010 were £23 million
compared with £15 million in 2009.
The increase of £8 million includes
arrangement fees and other charges
associated with a new £135 million trading
facility (see Liquidity and capital resources).
it also includes higher funding costs now
applied to our term loan and working
capital facilities following the refinancing
completed in August 2009.
Tax
The tax charge for the year ended
31 December 2010 was £67 million
(an effective rate of 26%), compared to
£47 million in 2009 (an effective rate
of 30%). Tax for 2010 includes the impact
of the 1% reduction in corporation tax rate
from April 2011 on deferred tax liabilities.
unrealised gains and losses
on derivative contracts
The Group recognises unrealised gains
and losses on forward contracts which
meet the definition of derivatives under
iFrss. 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 and biomass contracts.
As such, the movement in the net
unrealised gains and losses recognised in
the balance sheet principally relate to the
mark-to-market of our forward contracts
for power. The following table describes
the movements in unrealised gains and
losses and where they are recorded in
our financial statements.
net unrealised gains/(losses)
in the balance sheet
at 1 January
unrealised losses recognised
in the income statement
Fair value (losses)/gains
recognised in the hedge
reserve (a component
of equity)
Derivative financial
instrument recognised on
acquisition of Haven Power
Premium on options sold
net unrealised (losses)/gains
in the balance sheet
at 31 December
Year ended
31 December
2010
£m
Year ended
31 December
2009
£m
234.1
(15.7)
(60.5)
(129.7)
(232.6)
375.5
–
(2.0)
4.0
–
(61.0)
234.1
The trends in forward power prices, which
largely determine the movements in our
net unrealised (losses)/gains position are
described within the Commodity markets
section above.
During 2009, power prices fell, such that
the average price of power that had been
contracted, but had yet to be delivered at
31 December 2009 was much higher than
market prices, driving the recognition of a
net unrealised gain of £234 million in the
balance sheet. During 2010, power prices
increased such that by 31 December this
difference was much smaller, driving the
movement to a net unrealised loss of
£61 million.
The unrealised losses recognised in the
income statement of £60.5 million for
the year ended 31 December 2010 and
£130 million in 2009 arise from mark-to-
market movements on our derivative
contracts which do not qualify for hedge
accounting; largely financial coal and
foreign exchange.
Operating and administrative expenses
Other operating and administrative
expenses before depreciation and
amortisation were £160 million for the
year ended 31 December 2010, compared
to £148 million in 2009. underlying costs
were held level through our continued
focus on business efficiencies and process
re-engineering. The cost increase of
£12 million reflects investment in growth
(Haven Power and biomass) as well as
our first full year’s obligation for the
Community energy saving Programme
(“CesP”).
Despite only a slight recovery in dark green
spreads in the year, we have delivered
ebiTDA ahead of expectations. Key to this
was entering the year with a strong hedged
position and our excellent operational
performance during the year, which
ensured high levels of availability at times
of increased demand.
ebiTDA for the year ended 31 December
2010 was, therefore, £391 million
compared to £355 million in 2009
representing an increase of 10%, or
21% excluding foreign exchange gains
of £31 million recognised last year
described above.
Depreciation and amortisation was
£52 million for both the years ended
31 December 2010 and 31 December 2009.
Operating and administrative
expenses
£m
160
155
150
145
140
s
t
s
o
c
9
0
0
2
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s
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0
0
2
1
Drax Group plc | Annual report and accounts 2010
“ Once again our high
availability demonstrated
our leadership position
in the coal-fired
generation sector.”
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Other key factors affecting
the business
Outages and plant utilisation levels
Year ended
31 December
2010
Year ended
31 December
2009
26.4
79.7
92.1
2.4
3.4
4.6
7.9
22.6
68.2
89.1
7.5
6.5
4.7
10.9
electrical output (net sales)
(Twh)
Load factor (%)
Availability (%)
winter forced outage rate (%)
Forced outage rate (%)
Planned outage rate (%)
Total outage rate(1) (%)
notes:
(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.
2010 was a record year for Drax in terms
of our operational performance with best
ever forced outage rate, winter forced
outage rate and availability results for
the power station.
The load factor for the year ended
31 December 2010 was 79.7%, compared
to 68.2% in 2009. The increase arises
following an increase in electrical output
(net power sales) to 26.4Twh in 2010,
compared with 22.6Twh in 2009 as
described in revenue above. we continued
to demonstrate our leadership position in
the coal-fired generation sector with plant
availability of 92.1% for the year ended
31 December 2010, compared to 89.1%
in 2009.
The forced outage and winter forced
outage rates for the year ended
31 December 2010 were 3.4% and 2.4%
respectively, compared to 6.5% and 7.5%
in 2009. The significantly higher forced
outage rates in 2009 reflect a one-off
incident in the first quarter which was
confined to a single generating unit.
excluding the impact of this outage,
the forced outage rate and winter
forced outage rate were 4.9% and 4.5%
respectively. The improved 2010 forced
outage rate compares favourably with
our long-term annual target of 5%.
The planned outage rate achieved for the
year ended 31 December 2010 was 4.6%,
compared to 4.7% in 2009, with one major
planned outage completed in both years.
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. One unit will
undergo a major planned outage in 2011.
Health and safety
Our lost time injury rate and total recordable
injury rate were 0.13 and 0.26 respectively
for the year ended 31 December 2010
compared to 0.09 and 0.17 respectively
in 2009. Our safety record continues
to be industry-leading and was delivered
alongside a significant amount of
project activity. we continue with our
commitment to deliver a positive health
and safety culture.
under the Group’s previous financing
structure, a subsidiary company was
partially funded by a eurobond payable
to another group company, which was
unwound in 2008, potentially accelerating
additional tax losses with a cash tax benefit
of up to £220 million. As at 31 December
2010, we had utilised in the region of
£117 million of these potential tax losses,
which is reflected in our cash position.
However, we have ring-fenced this cash
and will not reflect any benefit of the
£117 million, or further utilisation of the
remaining losses in our income statement
until our position with HMrC is certain.
we have continued our dialogue with HMrC
over this tax position. However, whilst we
still believe we have a strong and robust
case, we are no clearer as to whether
ultimately we will be successful.
As a result of the above factors, profit
attributable to equity shareholders for
the year ended 31 December 2010 was
£188 million compared to £111 million
in 2009, and basic and diluted earnings
per share were 52 pence compared
to 31 pence in 2009.
underlying profit attributable to equity
shareholders (that is profit excluding the
after tax impact of unrealised losses on
derivative contracts) was £233 million
for the year ended 31 December 2010,
compared to £204 million in 2009.
underlying basic and diluted earnings
per share were 64 pence in 2010,
compared to 58 pence in 2009,
representing an increase of 10% or 24%
excluding the foreign exchange gain of
£31 million in 2009 described above.
Operating performance
%
■
■
■
Forced outage rate
Planned outage rate
Winter forced outage rate
10
9
8
7
6
5
4
3
2
1
0
2007
2008
2009
2010
Drax Group plc | Annual report and accounts 2010
26 business review
OPERATIONAl AND FINANCIAl PERFORMANCE
Liquidity and capital resources
net cash was £204 million as at
31 December 2010, compared to net
debt of £54 million at 31 December 2009.
Cash and short-term deposits were
£331 million as at 31 December 2010,
compared to £135 million at 31 December
2009. These balances include the ring-
fenced cash taxes saved as a result of
unwinding the eurobond structure of
£117 million at 31 December 2010 (2009:
£100 million). An analysis of cash flows for
both years is set out in the following table.
Analysis of cash flows
Cash generated
from operations
income taxes (paid)/refunded
Other gains
net interest paid
Net cash from
operating activities
Cash flows from investing
activities
Purchases of property, plant
and equipment
Acquisition of a subsidiary
short-term investments
Net cash used in
investing activities
Cash flows from
financing activities
equity dividends paid
Proceeds on issue of
share capital
repayment of borrowings
Other financing costs paid
Purchase of own shares held
by employee trust
Net cash used in financing
activities
Net increase/(decrease) in
cash and cash equivalents
Year ended
31 December
2010
£m
Year ended
31 December
2009
£m
484.7
(56.1)
2.0
(19.5)
321.4
19.4
–
(12.7)
411.1
328.1
(62.3)
–
(40.0)
(93.1)
(11.7)
(55.0)
(102.3)
(159.8)
(86.5)
(145.0)
–
(65.2)
(1.5)
105.5
(170.1)
(7.0)
–
(1.5)
(153.2)
(218.1)
155.6
(49.8)
Cash generated from operations
was £485 million in the year ended
31 December 2010, compared to
£321 million in 2009. The increase
was largely the result of an increase of
£36 million in ebiTDA, a working capital
inflow of £115 million in 2010, compared
to an outflow of £43 million in 2009,
offset by an increase in rOCs held for
sale of £21 million (2009: decrease
of £10 million).
The working capital inflow of £115 million
in 2010 includes a decrease in coal stocks
of 1.6 million tonnes over the year
(£84 million), resulting from higher
generation (see revenue). The remaining
net inflow includes a higher carbon creditor
(£24 million) reflecting the timing of
payments with respect to our 2010 carbon
liability. The working capital outflow in
2009 largely reflects an increase in coal
stocks of 0.7 million tonnes (£21 million),
resulting from lower than expected
generation over the corresponding period.
income taxes paid were £56 million in the
year ended 31 December 2010, compared
to taxes refunded of £19 million in 2009.
unwinding the eurobond funding structure
in December 2008 potentially reduced the
2008 tax liability to £nil, subject to HMrC
agreement, resulting in a refund received
in 2009 (see note 6 to the consolidated
financial statements).
net cash used in investing activities includes
payments in respect of capital expenditure
of £62 million for the year ended
31 December 2010 and £93 million in 2009
(see Capital expenditure). 2010 includes
additional short-term investments of
£40 million (2009: additional £55 million),
comprising short-term deposits with a
maturity of more than three months at
inception. 2009 includes the net acquisition
costs of Haven Power of £12 million.
net cash used in financing activities was
£153 million in the year ended 31 December
2010, compared to £218 million in 2009.
The 2010 amount includes equity dividends
paid of £87 million and term loan
repayments of £65 million. The 2009
amount includes equity dividends paid of
£145 million, net proceeds from the issue
of share capital of £106 million and term
loan repayments of £170 million (see
Capital resources and refinancing).
The increase in cash and cash equivalents
was therefore £156 million in the year
ended 31 December 2010, compared
to a decrease of £50 million in 2009.
Drax’s policy is to invest available cash in
short-term bank, building society or other
low risk deposits.
Capital resources and refinancing
Following scheduled debt repayments of
£65 million during the year, senior secured
debt was £135 million at 31 December 2010
(before deferred finance costs). scheduled
debt repayments are £67.5 million in each
of 2011 and 2012, after which point the term
loan will be repaid in full.
On 3 August 2009, we completed the
refinancing of the remainder of our term
loan facility and our £100 million working
capital facility, both of which would
otherwise have fallen due for repayment
on 31 December 2010. The maturity date
of both facilities was extended to December
2012 to coincide with the maturity of the
£200 million letter of credit facility. The
margin over LibOr on our facilities is 3.5%.
To further underpin the strength of our
financing arrangements, in May 2010,
we put in place a new trading facility,
which may be used to trade without
collateral triggers up to a limit of
£135 million. we incurred additional fees
and charges of £5 million in connection
with the new facility during the year.
Going concern
The Group’s business activities, together
with the factors likely to affect future
developments, performance and position
including principal risks and uncertainties
are set out in this business review.
Our cash flows and borrowing facilities are
described above. in addition, note 18 to the
consolidated financial statements includes
our approach to capital risk management,
details on financial instruments and
hedging activities, and exposure to
credit, counterparty and liquidity risk.
we have significant headroom in our
banking facilities, and a recent history
of cash generation, strong covenant
compliance, and good visibility in medium-
term forecasts, due to our progressive
hedging strategy. Our business Plan, taking
account of reasonably possible changes in
trading performance, shows that we should
be able to operate within the level of our
current banking facilities.
Accordingly, we believe the Group has
adequate resources to continue in operational
existence for the foreseeable future, and
continue to adopt the going concern basis
when preparing our financial statements.
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 2010 and has
a final maturity date of December 2012.
Capital expenditure
Fixed asset additions were £59 million
in the year ended 31 December 2010
compared to £92 million in 2009.
This includes expenditure of £37 million
(£59 million in 2009) on our two major
strategic carbon abatement projects –
the turbine upgrade and our biomass
co-firing facility.
in relation to the turbine upgrade project,
we expect to invest up to £100 million
to upgrade the high pressure and low
pressure turbine modules on all six
generating units to improve efficiency
(see Corporate and social responsibility,
page 32). with a single unit outage
scheduled for 2011, the final turbine
upgrade will be undertaken in 2012.
expenditure remains in line with budget.
Commissioning of our new £80 million
biomass co-firing facility was completed
during the summer, to schedule and in
line with budget (see Corporate and
social responsibility, page 32). The current
economics of co-firing, however, mean
that under the existing rOC regime we
are under-utilising the facility.
we will also continue to evaluate other
investment opportunities which may result
in additional capital expenditure. Further
investment will be required prior to 2016
to meet the requirements of the industrial
emissions Directive.
“ we achieved a lot
through working with
key partners on the
logistics of the biomass
supply chain.”
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under these contracts the Group will
supply power on terms which include
Centrica paying for coal, based on
international coal prices, and delivering
matching CO2 emissions allowances
amounting in aggregate to approximately
7.2 million tonnes in 2011, approximately
7.2 million tonnes in 2012 and
approximately 2.4 million tonnes in 2013.
The contracts provide the Group with a
series of fixed dark green spreads, with the
spreads in the first contract having been
agreed in the first quarter of 2006 and
those in the second contract having been
agreed in October 2009.
Distributions
Distribution policy
we notified investors of a change to our
distribution policy when we announced
our biomass growth strategy in October
2008. 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 after
tax impact of unrealised gains and losses
on derivative contracts) in each year.
underlying earnings per share were
64 pence on this basis for the year ended
31 December 2010.
Dividends paid
On 22 February 2010, the board resolved,
subject to approval by shareholders at
the Annual General Meeting (“AGM”)
on 21 April 2010, to pay a final dividend
for the year ended 31 December 2009
of 9.6 pence per share (£35 million).
The final dividend was subsequently
paid on 14 May 2010.
On 2 August 2010, the board resolved to
pay an interim dividend for the six months
ended 30 June 2010 of 14.1 pence per
share (£52 million), representing 50%
of underlying earnings for the period.
The interim dividend was subsequently
paid on 15 October 2010.
Dividends proposed
At the forthcoming AGM the board
will recommend to shareholders that a
resolution is passed to approve payment
of a final dividend for the year ended
31 December 2010 of 17.9 pence per share
(£65 million), payable on or before 13 May
2011. shares will be marked ex-dividend
on 27 April 2011.
This business review was approved
by the board on 21 February 2011.
Tony Quinlan
Finance Director
Future developments
Progressing our biomass operations
we continued to make progress in our
biomass operations in 2010. in addition to
commissioning the co-firing facility at Drax
Power station, we have worked with key
partners to design rail wagons specifically
to transport biomass, and to develop a
biomass handling, storage and rail loading
facility at the Port of Tyne. in addition,
our straw pellet plant helped to secure
domestic supplies of biomass.
we have conducted research into increasing
the level of biomass burn at Drax Power
station, and have continued to progress
our dedicated biomass projects with
siemens Project ventures. As a result of
these investments, we stand ready to expand
our biomass business significantly, but will
only do so with appropriate regulatory
support (see Chief executive’s statement).
Positions under contract
for 2011, 2012 and 2013
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 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 14 February 2011, the positions
under contract for 2011, 2012 and 2013
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)
2011
2012
2013
18.1
10.3
3.0
11.3 @
55.4
2.4 @
58.2
0.4 @
53.5
6.8
7.9
2.6
18.0
20.8
4.1
solid fuel at fixed price/
hedged, including structured
contracts (Twh equivalent)
18.1
10.9
6.2
Fixed price power sales include
approximately 1.0Twh supplied in the
period 1 January 2011 to 14 February 2011
under the five and a quarter year baseload
contract which commenced on 1 October
2007 and the five year 300Mw baseload
contract which commenced on 1 October
2010, both with Centrica.
Fixed margin power sales include
approximately 6.8Twh in 2011, 7.9Twh
in 2012 and 2.6Twh in 2013 in connection
with the above contracts.
Drax Group plc | Annual report and accounts 2010
28 business review
PRINCIPAl RIsKs AND uNCERTAINTIEs
Our assessment of the most significant risks and uncertainties which
could impact long-term performance is detailed below. These risks
are not set out in any order of priority and they do not comprise all
the risks and uncertainties the Group faces.
Potential impact
kvolatility in financial results.
Associated objective and key priorities
kMaximising the value of the Drax business.
Examples of mitigating activities
kwell understood progressive hedging strategy:
forward power sales with corresponding purchases
of fuel and CO2 emissions allowances when
profitable to do so.
COMMODITY MARKET RIsK
Context
Commodity markets in 2010 remained challenging
Risk
kwe are exposed to the effect of fluctuations in
commodity prices, particularly the price of electricity
and gas, the price of coal and biomass (and other fuels),
and the price of CO2 emissions allowances.
COuNTERPARTY RIsK
Context
The recent recession and uncertain economic
growth potentially impact on counterparty risk
Risk
kwe rely on third party suppliers for the delivery of
fuel and other goods and services. we purchase a
significant quantity of our coal under contracts
with a number of large uK suppliers, so are exposed
to the risk of non-performance by these suppliers.
kwe enter into fixed price and fixed margin contracts
for the sale of electricity to a number of counterparties,
so are exposed to the risk of failure of one or more of
these counterparties.
Potential impact
kAdditional costs associated with securing fuel and
other goods and services from other suppliers.
kFailure to secure coal from other suppliers resulting
in limitation of operations.
kAdverse effect on cash flow and earnings arising
from the failure of one or more of the counterparties
to whom we sell power.
Associated objective and key priorities
kMaximising the value of the Drax business.
RATINGs RIsK
Context
Our business model currently assumes investment
grade debt
Risk
kOur investment grade debt rating currently underpins
our ability to deliver optimal value from our trading
strategy. A downgrade of our debt rating to sub-
investment grade could impact our business model.
Potential impact
krequirement to post collateral for current and future
trading positions.
kAdditional restrictions within facilities agreements.
Associated objective and key priorities
kMaintain an optimal supporting capital structure.
ENvIRONMENTAl AND HEAlTH AND sAFETY RIsK
Context
laws and regulations are complex, frequently changing
and becoming ever more stringent
Risk
kThe eu, uK and local environmental and health and
safety laws and regulations cover many aspects of our
operations including limits on emissions to air and
water, noise, soil/groundwater contamination, waste,
and health and safety standards.
Potential impact
kincreased compliance costs.
kAdditional capital expenditure.
kFines, penalties, civil or criminal liability.
kLimitation or suspension of operations.
Associated objective and key priorities
kMaintain operational excellence.
kDeliver carbon abatement.
ElECTRICITY WHOlEsAlE MARKET RIsK
Context
Potential impact
liquidity in the market for wholesale electricity
kinability to hedge short- to medium-term exposure to
is dependent on there being a sufficient number
electricity prices through wholesale market trading.
of counterparties willing to trade actively
kincreased exposure to short-term market volatility.
kinability to sell all of our output.
kLower revenues and increased costs to achieve trading
Risk
kChanges 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.
objectives.
Associated objective and key priorities
kGrow our retail customer base.
kMaximising the value of the Drax business.
kInfluence the regulatory framework.
Examples of mitigating activities
kDiversified coal supply in terms of source and
counterparties.
kGood portion of purchases at market indexed prices
(no mark-to-market exposure).
kDiversified logistics routes.
kTarget to optimise holding of coal stocks.
kClose monitoring and reporting of concentration
risk in suppliers.
kFull suite of power counterparties with strong
credit ratings.
kClose monitoring and reporting of concentration risk
in power counterparties.
kTrading contracts generally include provisions that
force counterparties to post collateral if they drop
below investment grade.
Examples of mitigating activities
kstrengthened capital structure through share
placing and subsequent refinancing in 2009.
krefinement to trading strategy to trade on
credit-efficient terms.
kGrow direct sales through Haven Power,
our electricity supply business.
kAdditional access to collateral through the
£135 million trading facility signed in 2010.
kMaintain relatively low levels of debt.
Examples of mitigating activities
krobust systems to ensure compliance and
improve performance.
kregular third party assurance over system
effectiveness.
kstrong safety culture and related training.
Examples of mitigating activities
kGrow direct sales through Haven Power,
our electricity supply business.
kinitiatives to be active, responsive and provide
good credit towards counterparties make Drax
an attractive business partner.
kOppose structural changes that impact our market
access, such as clearing and margining.
kwork with other independent generators
(via independent Generators Group) to achieve
positive market and regulatory changes to
improve liquidity.
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Drax Group plc | Annual report and accounts 2010
Examples of mitigating activities
kengage with Government through the 2011 banding
review process to obtain the right framework
and grandfathered support from April 2013.
kAdvanced discussions with large creditworthy
feedstock suppliers.
kFocus on maximising uK term contract sources
including energy crop volumes and active in
global markets identifying diverse fuel sourcing
opportunities.
ksignificant knowledge gained building existing
co-firing capability.
kContinuation of research and development work
in 2011.
kDevelopment of commercial structures to
manage price exposures that enable pursuit
of multiple sources of debt and equity.
kPlanning applications for two sites already
submitted and robust contracting strategy
well advanced and currently in the process
of finalising ePC costs and commercial terms.
Examples of mitigating activities
kComprehensive risk-based plant investment
and maintenance programme.
kTarget to optimise holding of spare components
for use in the event of plant failure particularly
long lead time items.
kbusiness continuity plan for iT systems.
Examples of mitigating activities
kintegration of strategic and near-term
investment planning.
kProgress our biomass strategy.
kbriefing, representation and engagement at
eu and uK level.
kDevelopment of abatement and alternative
generation options.
Examples of mitigating activities
kstructure unwound in December 2008 following
proposed changes to tax legislation.
kActive engagement and dialogue with HMrC
over structure and subsequent unwind.
BIOMAss sTRATEGY RIsK
Context
Biomass is well placed to provide the uK with low
cost and flexible renewable power, and contribute
to meeting carbon reduction targets
Risk
kwe may not secure an appropriate regulatory
framework and specific support mechanisms from
Government, which underpin the economics
of biomass.
kwe could fail to secure biomass supplies and logistics
arrangements which meet our hurdle return rates,
sustainability criteria and banking requirements.
kTechnical and cost uncertainty exists over our ability
to burn significantly enhanced volumes of biomass
in the existing coal plant.
kwe may fail to find an appropriate commercial structure
that would secure the necessary equity and/or debt to
fund our biomass strategy.
kwe may not be able to secure planning permits, or
contract for the engineering design and construction
(“ePC”) of the dedicated biomass-fired plants at prices
which meet our hurdle return rates.
PlANT OPERATING RIsK
Context
Forced outages impact on our ability
to generate electricity
Risk
kForced outages may be caused by the
underperformance or outright failure of our power
generation plant, or transmission assets or other
equipment and components including the iT 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.
Potential impact
kinability to progress the biomass growth strategy.
Associated objective and key priorities
kDevelop our biomass operations.
kInfluence the regulatory framework.
Potential impact
kLower revenues.
kincreased costs and contractual penalties.
kAdverse effect on financial results.
Associated objective and key priorities
kMaintain operational excellence.
REGulATORY AND POlITICAl RIsK
Context
The Government’s market reform agenda is
driven predominantly by the need to deliver
a low carbon economy and security of supply
over the longer term
Risk
kThe recent DeCC electricity Market reform publication
together with the HM Treasury consultation on the
introduction of a carbon floor price represent the
biggest change to the electricity sector since
privatisation of the industry in 1990. The changes
implemented are likely to result in coal generation
becoming progressively and relatively less economic
than other major forms of generation.
TAx RIsK
Context
Previous financing structure unwind currently
being agreed with HMRC
Risk
kA full description of the tax risks which relate to the
Group’s previous financing structure, and the
unwinding of it, is set out in note 6 to the consolidated
financial statements.
Potential impact
kLess funding available for plant retrofit/investment
costs to meet increasingly stringent environmental
requirements.
kLower load factors/generation levels.
kAdverse effect on financial results.
Associated objective and key priorities
kInfluence the regulatory framework.
kDevelop our biomass operations.
kDeliver carbon abatement.
Potential impact
kAdverse effect on cash flow arising from successful
HMrC challenge to historic interest deductions claimed
under the structure.
kFailure to realise significant tax asset if HMrC disallows
interest deductions arising as a result of unwinding
the structure.
Associated objective and key priorities
kMaintain an optimal supporting capital structure.
“ we aim to be alert to all
the identified principal
risks and uncertainties
facing the business,
and manage them to the
very best of our ability.”
Drax Group plc | Annual report and accounts 2010
30 business review
CORPORATE AnD sOCiAl REsPOnsiBiliTY
Our approach to corporate
and social responsibility
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 as a whole.
The board has ultimate control of policies
in respect of both the wider corporate
responsibility, such as our Code of business
ethics (see panel opposite), and our
environmental and health and safety
programmes. 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
environmental and health and safety
requirements, but, where practicable, to go
further. in 2010, we retained 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.
During the year, we took the decision to
improve the measurement and reporting
of our economic, environmental and
social performance. The Global reporting
initiative (“Gri”) Framework provides
principles and performance indicators
which can usefully be used to demonstrate
our commitment to sustainable
development, compare our performance
over time, and to measure our performance
against other standards and norms.
Although only at the level of partial
disclosure against the Gri Framework for
2010, we commit to improve on this over
time as we move towards full disclosure.
BusinEss COnDuCT
Our commitment to integrity
Drax has a commitment to high ethical standards and to conduct our business
with honesty, integrity and in accordance with applicable laws and regulations.
Our reputation for acting with integrity plays a critical role in our success. integrity not
only underpins how we do business, but how we expect our suppliers, agents, partners,
contractors and consultants to do business whether in the uK or beyond. Compliance
with the laws and regulations of the countries in which we do business is a “must”
for us. Drax is committed to preventing bribery and corruption and takes responsibility
for maintaining a culture within the Group in which bribery is never acceptable.
As a business we refuse to offer, give or receive bribes or any other form of improper
payments and we will never knowingly participate in any form of corrupt activity.
Consideration should always be given by our employees when offering or receiving
gifts or hospitality. Drax has a policy whereby gifts and hospitality offered or received
may only be of minimal value.
if faced with a situation of compromising our integrity or losing the associated
business, we would forego the business.
Code of business ethics
The Group’s Code of business ethics establishes the rules and framework under
which employees should base their decision making. employees are expected to
follow not only the letter of the code, but the spirit.
what is expected of our employees
ensuring that the reputation and good standing of the Group continues to be
maintained requires our employees to act with the highest standards of behaviour
and to be accountable for upholding the requirements of Drax’s Code of business
ethics, wherever they are in the world.
Poor choices can have potentially damaging consequences, not only to Drax’s
reputation, but financial penalties and imprisonment are also a reality for
“getting it wrong”.
whilst it is often obvious what is right and wrong, our employees may, on occasion,
face an ethical dilemma. if it feels wrong, it often is. by encouraging our employees
to apply good judgement and common sense within the framework of the Code of
business ethics they can contribute to maintaining our reputation.
whistleblowing
The Group’s whistleblowing policy provides a confidential means for our employees
to speak up with confidence. The policy provides guidance on how to make a
disclosure of information (in good faith) relating to some danger, fraud or other
illegal or unethical conduct they may have witnessed or are concerned about.
Drax Group plc | Annual report and accounts 2010
Drax and shareholders:
kroad shows
kFace-to-face meetings
kreports and
announcements
kwebsite
kvisit programmes
Drax and employees:
kOpen Forum
kbriefing sessions
kstaff newsletter
Drax and local community:
ksponsorship
kFund raising events
kThemed campaigns
kvisitor programme
kexhibitions
knewsletters
Drax and media:
kPress releases
kFace-to-face meetings
kvisit programme
Drax and Government
agents/regulators:
kFace-to-face
meetings
kCorrespondence
and data
submission
kvia trade
associations
Drax and nGOs and
opinion formers:
kFace-to-face meetings
kbriefing papers
engaging with
our stakeholders
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Drax and Parliament:
kbriefing papers
kFace-to-face meetings
kwritten and oral
evidence
kvisit programmes
Drax and Government
departments:
kFace-to-face
meetings
kConsultation
responses
kvisit programmes
kvia trade
associations
Drax and
European union:
kbriefing papers
kFace-to-face meetings
kvia trade associations
Drax and suppliers
and customers:
kFace-to-face meetings
kContractor briefings
kContractor safety
conference
Drax and trading
counterparties:
kFace-to-face meetings
kindustry events
Drax and local
government:
kLiaison meetings
kAnnual consultative
committee meeting
kexhibitions
knewsletters
Drax Group plc | Annual report and accounts 2010
32
business review
CORPORATE AnD sOCiAl REsPOnsiBiliTY
“ we manage our
environmental compliance
under an environmental
Management system,
which in 2010 was
recertified to isO 14001.”
“ burning 907,000 tonnes
of biomass in 2010 was
a record for Drax, and
saved 1.5 million tonnes
of CO2 emissions during
the year.”
“ Our new biomass co-firing
facility, the largest of
its kind in the world,
was commissioned in
the summer.”
Climate change and
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. The single
biggest challenge facing coal-fired
generators today is environmental, and in
particular, carbon. Against that backdrop
and with an eye on future-proofing the
business, Drax identified biomass co-firing
and increased thermal efficiency as the
major strategic carbon abatement
initiatives to undertake.
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
outage of 2010 we installed one high
pressure and three low pressure turbine
modules to one unit. Together with the
installation of similar modules during 2007,
2008 and 2009, this means that we are
now more than two-thirds of the way
through the upgrade project. As a result
we are comfortably operating at above
39% overall efficiency at full load and
we are already saving over half a million
tonnes of carbon dioxide (“CO2”) emissions
a year. On completion of the upgrade in
2012 we will see an improvement in our
overall baseload efficiency at full load of
5%, taking it to 40%, and an annual saving
of one million tonnes of CO2 emissions.
biomass co-firing is a recognised renewable
technology. Through displacing coal and
taking into account the carbon neutral
status of biomass emissions at the point
of combustion, emissions of CO2 can be
significantly reduced. Our new 400Mw
biomass co-firing facility, the largest of its
kind in the world, was commissioned in the
summer of 2010. Alongside our existing
100Mw co-firing capacity, we now have the
capability to produce 12.5% of our output
from renewable and sustainable biomass.
This is equivalent to the output of over
700 wind turbines, and has the potential
to save over 2.5 million tonnes of CO2
emissions a year. The new facility
considerably aided our ability to burn
biomass and 2010 saw the highest level yet
of biomass burned at the power station.
with a record burn of 907,000 tonnes of
biomass, our coal throughput was reduced
and we saved 1.5 million tonnes of CO2
emissions during the year.
we fully recognise the challenge that we
and other fossil fuel-fired power stations
face in tackling carbon emissions and these
two projects are giving us the capability
to reduce our emissions of CO2 by over
3.5 million tonnes a year, or 17.5% by
the end of 2011.
Our focus on all aspects of biomass, from
the upstream supply chain to combustion
performance, makes us well placed to
pursue a biomass future for the Group,
whether through increasing the level of
biomass burnt at the power station or
through progressing our intention to
develop dedicated biomass power plants.
However, regulatory certainty and
appropriate support are critical to realising
our ambitions and we continue to further
our research and development work
on biomass ahead of receiving the
Government’s pronouncements on
the regulatory and market framework.
Environmental performance
and compliance
we recognise our responsibilities to society
and the environment and are committed
to furthering the environmental leadership
position we hold in the coal-fired sector.
we have environmental policies in
operation at both Drax Power station
and Haven Power Limited (“Haven Power”).
At Drax Power station, we manage our
environmental compliance under an
environmental Management system
(“eMs”). During 2010, our eMs was
externally audited and we were successful
in being recertified to the international
standard isO 14001: 2004.
Drax Group plc | Annual report and accounts 2010
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“ we tightly manage the
wastes produced on site
to maximise recycling
and minimise landfill.”
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 major breaches of our environmental
consents during the year.
Emissions to air
we maintain investment in our emissions
abatement equipment and consider this to
be a high priority. Our current equipment,
namely the flue gas desulphurisation
facility and combustion systems to reduce
emissions of nitrogen oxides (“nOX”),
ensure compliance with environmental
limits to 2016. we have a programme
in place to identify the optimum means
of compliance beyond that date.
Discharges to water
The availability of water is key to the
operations of the power station and it is
important that it is managed sustainably.
There are three sources of water supplying
the station – river, aquifer and mains.
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.
Approximately half of the water is returned
to the river Ouse a few degrees warmer
than the river at the discharge point.
in 2010, 0.83 tonnes of water per Gwh of
electricity generated was used by the
power station, continuing the year-on-year
reduction since 2005.
Disposals to land
The Group has invested in infrastructure,
including rail loading facilities, to maximise
sales of the ash products to avoid the use
of landfill. This has enabled 66% of the
1.5 million tonnes of ash produced in 2010
to be sold to the construction industry
as a replacement for virgin aggregates,
fillers and cement.
when ash is unable to be sold it is sent
to the power station’s ash disposal site.
The site is managed responsibly with
completed areas restored to use as
farmland and high biodiversity woodland,
which is home to over a hundred species
of wildlife in total. The careful planting and
management of the restored areas has
seen the number of un red list species
on the site increase from seven in 2007
to the nine found at the last survey.
we pay landfill tax on the ash disposed
of to the ash disposal site. Through the
Landfill Communities Fund, we are able
to claim a tax credit against our donations
to recognised environmental bodies.
we have worked with Groundwork north
Yorkshire since 2001 on projects designed
to help mitigate the effects of landfill
upon our local community. During 2010,
we contributed £80,500 towards local
community-based projects designed to
bring about sustainable environmental
benefits and contribute to the social and
economic regeneration of the area. This
brings the total amount provided by Drax
to the Fund since 2001 to over £1 million.
Other wastes generated as part of the
operation and maintenance of the power
station are managed to maximise recycling
and minimise the use of landfill in their
disposal. This has resulted in 84% of
the 4,306 tonnes of waste generated
on site being diverted from landfill,
with 3,531 tonnes of the diversion coming
from recycling or composting.
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.
A considerable amount of environmental
data on the combustion of petcoke, a fuel
derived from the petroleum industry, has
been collected and analysed, where
possible using independent specialists.
in line with our policy on openness and
transparency all data are discussed with
the environment Agency and local councils.
The combustion of petcoke is now an
integral part of our strategy of developing
and utilising alternative fuels and during
the year we burnt 210,000 tonnes.
Drax Group plc | Annual report and accounts 2010
34
business review
CORPORATE AnD sOCiAl REsPOnsiBiliTY
supply chain
non-fuel procurement
we have in place a rigorous set of checks
and measures to ensure that our suppliers
meet certain pre-determined standards.
As part of our tender process, information
is sought from prospective suppliers on
health and safety, environmental and
quality standards, which is taken into
account during the assessment and
selection process. At times, this may
prompt further requests for information.
Financial reviews of supply companies
are also undertaken.
Compliance with current and foreseeable
legislation is mandatory. 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 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.
we work hard to develop and maintain
an open dialogue with suppliers. we have
found site visits to key suppliers and
prospective key suppliers to be useful
in encouraging that dialogue and also
as part of the assessment and selection
process. During 2010, ten such visits
were completed.
in 2010, we initiated performance meetings
with suppliers. seven key suppliers were
targeted and we were able to undertake
a thorough review of their overall
performance, covering aspects such as
spend, safety, environmental and quality
performance, productivity and areas for
improvement or innovation.
“ we have implemented
comprehensive
sustainability criteria
within our biomass
procurement activities.”
These criteria were designed in the
absence of national or international
legislation, to meet or exceed any likely
emerging standards across the whole
sustainability spectrum of life cycle, social
and environmental issues. we note that
the sector is continually changing and our
management systems and procurement
policies will have to be structured to
address legislation which is emerging
as biomass production attracts an even
higher profile amongst Government
and other stakeholders.
Although the anticipated development
of credible international sustainability
schemes for bioliquids and biomass has
been slow, our initiative has been extremely
valuable since our policy stands up well
against the legislative proposals from
the Department of energy and Climate
Change. These require that, from April 2011,
generators will have to report on
greenhouse gas savings and whether
they meet certain criteria on land use.
From April 2013, generators over 1Mw
capacity will have to comply with those
standards in order to receive renewables
Obligation Certificates.
recognising that formal, mandatory
international standards will, in time, be
derived it is evident that the experience
gained by our suppliers through
implementing our policy will be beneficial
to them as clarity in the eventual definition
of sustainability standards and associated
methodologies is developed. To aid this
process, and to ensure compliance with
future legislation, we have engaged
qualified third parties to develop and
implement a rigorous audit of our biomass
supply chains to ensure compliance with
our principles.
we have adopted the target of a minimum
annual saving of 70% in greenhouse gas
emissions for the biomass materials burnt
at Drax Power station. Our calculations
show that substantial benefits of the
order of 70%–90% savings were generally
achieved across the range of biomass
materials burnt in 2010. This provides good
reassurance that the current suppliers and
procurement practices are robust.
Although we encourage local and national
companies to bid for contracts to supply
the many goods and services required by
the Group, we recognise that meeting some
of our business needs demands specialist
skills and these are sought accordingly.
Biomass sustainability and procurement
we regard biomass use as a high priority
not only to reduce the carbon footprint
of the Group, but to reduce the carbon
footprint of uK electricity generation
and increase the proportion of the
uK’s energy coming from renewable
and sustainable sources. we believe it is
a prerequisite that any biomass used for
energy should be sustainable. This makes
sense from a business perspective,
providing longevity of feedstock. it is also
essential for environmental, economic
and social reasons.
we have implemented comprehensive
sustainability criteria into our biomass
procurement activities with the aim
of assuring both the availability and
sustainability of biomass supplies.
These include a high level set of principles
committing the Group to progressively
improving the sustainability performance
of our suppliers.
Our procurement process is designed to
ensure that the production and delivery
of biomass will:
k significantly reduce greenhouse
gas emissions compared to coal-fired
generation and, where possible,
give preference to biomass sources
that maximise this benefit;
k not result in a net release of carbon from
the vegetation and soil of either forests
or agricultural lands;
k not endanger food supply or
communities where the use of biomass
is essential for subsistence (for example
heat, medicines, building materials);
k not adversely affect protected or
vulnerable biodiversity and where
possible will give preference to biomass
production that strengthens biodiversity;
k deploy good practices to protect and/or
improve soil, water (both ground and
surface) and air quality;
k contribute to local prosperity in the
area of supply chain management
and biomass production; and
k contribute to the social wellbeing of
employees and the local population
in the area of the biomass production.
“ we are committed
to developing
and maintaining a
positive health and
safety culture.”
Drax Group plc | Annual report and accounts 2010
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During 2010, we met with five key
non-governmental organisations in
order to discuss our biomass sustainability
work. The meetings allowed open and
honest discussion about our policy and
practice, and were generally positive,
with our sustainability and life cycle
analysis model and our “industry-leading”
approach welcomed.
Coal procurement
we purchase around 8-9 million tonnes of
steam coal each year. we buy from a range
of sources with the objective of managing
our commercial exposures and
environmental obligations. Around half of
the coal we purchase is from uK deep and
surface mines and the remainder from
mines around the world, including usA,
Colombia and russia.
As responsible procurers we work within a
strong corporate compliance framework.
The suitability of each of our suppliers
is checked through our counterparty
approval and “know your customer”
processes. in addition, when buying from
overseas we have introduced a process
of documenting, in our contracts, the
minimum standards we expect from our
suppliers in respect of compliance with
legislation, human rights, labour relations,
health and safety arrangements and
business ethics.
Health and safety
Health and safety is at the heart of our
corporate responsibility. Protecting our
employees, contractors and all visitors
from injury 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 as
our goal.
Personal safety statistics
Fatality
Time Losing injuries
restricted work injuries
Medical Treatment injuries
2010 2009 2008 2007
0
4
0
5
0
3
3
0
0
4
1
7
1
10
2
3
First Aid injuries
148 154 273
267
riDDOr(1) reportable
6
4
7
13
notes:
(1) reporting of injuries, Diseases and Dangerous Occurrences
regulations.
Attaining leading performance
The lost time injury rate and total
recordable injury rate for 2010 at 0.13 and
0.26 respectively remain industry-leading.
Maintaining this level of performance
is commendable given the significant
construction work that took place during
the year and number of man-hours worked,
which at the Drax Power station site
totalled some 3.2 million. Our safety record
continues to compare very favourably with
that of our sector peers and international
benchmarks. Amongst global comparator
coal-fired power stations we are ahead
of the european and world Pacesetter
group for total recordable injury rate,
which is a clear indication that the safety
management system implemented in the
last few years is now delivering sustained
levels of performance.
The Group has been successful in retaining
certification of its Health and safety
Management system to the internationally
recognised Occupational Health and safety
standard, OHsAs 18001, at the Drax Power
station site and has recently attained
certification for the Group’s straw pellet
plant, based at Goole in the east riding
of Yorkshire. 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 Group was delighted, once again,
to be awarded the rosPA Gold Medal
Award having achieved Gold Award
standards for six consecutive years.
Processes underpinning performance
The Production integrity Management
system (“PiMs”) 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” (“sOs”) is our
implementation of the internationally
proven DuPont™ sTOP™ programme. This
behavioural safety programme is coupled
with the Drax “Four Pillars of safety”:
1 Task risk Assessment (“TrA”)
2 “safety Kick-Off” start of shift safety briefing
3 Dynamic point of work risk assessment (“POwrA”)
4 weekly safety Meeting
The Four Pillars and sOs give us the
framework we need for open engagement
between operatives and supervisors.
Together these tools allow us to develop
the defensive behaviours which are a
fundamental component of the robust
world-class safety culture we aspire to
create and maintain.
specific processes and procedures
are also in place to clarify the general
health and safety responsibilities for
the effective supervision, control and
monitoring of contractors in accordance
with current legislation and regulations.
The arrangements are built around an
understanding that the Group and its
contractors have a responsibility to protect
each other, their respective workforces and
others, such as visitors. An internal audit
process is used to ensure compliance.
More generally, compulsory health and
safety induction courses are tailored to
suit a range of individuals and their on-site
activities. in total, six courses have been
introduced covering, at one end of the
spectrum, accompanied visitors, right
through to those employees or contractors
working on large scale operational projects.
Drax Group plc | Annual report and accounts 2010
36
business review
CORPORATE AnD sOCiAl REsPOnsiBiliTY
safety leadership and recognition
The Group is constantly striving to improve
the critical safety leadership contribution
required from first line supervisors.
The expectations of both management
and supervisors continue to be reaffirmed
in the safety Leadership Charter.
The annual safety Conference for
contractors and staff continues to be a
focal point. in 2010, 110 people attended.
Held early in the year, the conference
sets expectations for the coming year’s
performance.
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 and
our performance record, and to recognise
achievements. Active engagement in the
safety briefing process is a job requirement.
A Health and safety Advisory Committee
(“HesAC”), which brings together a range
of employees, including trade union
representatives, safety representatives,
occupational health and management team
members, continues to play a vital role
in facilitating staff consultation on health
and safety issues, and driving standards
upwards. During 2010, the Corporate
HesAC Group was launched. Focusing
on engagement with corporate staff,
the group has a unique set of targets
and a reporting line back to HesAC
on a quarterly basis.
People working on the site at all levels
who have demonstrated safety leadership
have been given recognition awards.
Our active involvement with the
programmes of our trade body,
the Association of electricity Producers
and the Coal Generators Forum, GensiP,
continues to provide new ideas and a
stimulus to drive our health and safety
improvement efforts forward.
employees
Employment
The Group employed 1,080 people at the
year end. Most of our employees work
full-time and are on permanent contracts.
Our quarterly employee Opinion survey,
conducted at Drax Power station and Goole
straw Pellet Plant, shows that 80% of our
employees are proud to work for Drax, and
other measures of engagement are also
high. For example, the annual resignation
rate at Drax Power station is only 1%, and
over 40% of the workforce has been with
the Group for 20 years or more. This high
level of retention is positive for Drax, as our
power generation business requires levels
of skill and experience which are difficult to
source externally. Absence rates are also
very low at around 2%.
staff turnover at Haven Power is higher,
reflecting the nature of the business,
averaging 27% in the sales team and
11% in other areas of the business.
we work to achieve high standards in
employment practices, for example,
through the avoidance of discriminatory
practices, and the speedy and clear
resolution of queries and grievances.
we review our policies and procedures on
a regular basis to ensure legal compliance
and improved service levels.
“ The apprenticeship
is a four year
programme, with the
time split between
Drax Power station and
engineering academy
training centres.”
Employee relations
At Drax Power station, 530 people
(70% of the workforce) are covered
by collective bargaining arrangements.
Formal negotiation and consultation takes
place through the Company Committee –
a joint management and union body that
meets regularly to discuss working practices
and terms and conditions of employment
for production employees, and to receive
updates on the Group’s strategy.
in 2010, we agreed a long-term pay deal
for all employees in the collective bargaining
unit, that is, all production employees
up to and including technical grades.
The pay deal extends to 31 December 2012,
providing a platform for continuing stable
employee relations ahead.
All employees in corporate functions,
Haven Power and senior production
staff are employed on personal contracts,
which are not covered by collective
bargaining. Formal information and
consultation arrangements are in place for
these groups of staff, so that any proposals
for change can be discussed openly and
with sufficient time to build in revisions
arising out of the consultation.
learning and development
Our personal and career development
processes are designed to ensure that
all our people have the technical skills,
management and leadership competencies,
and personal behaviours needed to achieve
the business Plan. every employee has a
personal appraisal and development plan,
including targets which are reviewed and
assessed formally through interim and final
appraisal discussions with their manager.
Personal development plans include
both technical training and behavioural
development, which are delivered through
a rolling programme of internal and
external learning events.
For approved external training
programmes, our employees receive
financial support, for example, course
fees and expenses. each year we recruit
up to six new employees for a fully
sponsored four year advanced modern
apprenticeship in power station operations
and engineering maintenance. we currently
have 18 apprentices at different stages of
the programme.
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Drax Group plc | Annual report and accounts 2010
Health and wellbeing
we are committed to promoting the health
and wellbeing of all our staff and ensuring
a professional response to all first aid and
emergency situations that occur.
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 medical every three years.
Health surveillance, such as hearing tests,
lung function tests and eyesight tests
are completed in accordance with risk,
exposure and Health and safety executive
requirements.
Pension provision and retired employees
Many of our employees are members of
the Drax Power Group of the electricity
supply Pension scheme, which was
closed to new entrants in 2002. since then,
Drax employees have joined the Group
Personal Pension Plan or the Haven
Power Personal Pension Plan, which are
both actively promoted to new recruits.
we offer paid pre-retirement leave and
pre-retirement courses to help people
transition smoothly from working life
to their new life.
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 people
who have retired from the Group.
sports and social Club
employees can join the Drax sports
and social Club for a nominal monthly
subscription through the payroll.
The sports and social Club, which
is also open to public subscription,
offers an extensive range of facilities.
“ we use a variety
of communication
channels to keep
colleagues informed
of developments and to
provide an opportunity
for feedback.”
we accommodate work experience
requests and support local schools
and colleges with their career events,
as well as supporting Drax employees
to be school governors.
At Haven Power, our new team leaders
completed a development programme
entitled “Light, Power and energy”.
All team managers undertake training
to assist them in their role in respect
of staff induction, conduct and capability,
and absence management.
Throughout the Group we have a rolling
programme of health and safety and
first aid refresher training, to underpin
the safety culture which is central to
all operations.
internal communications
we use a variety of communication
channels to ensure that all colleagues
are kept fully informed of developments
in the Group’s operations and have an
opportunity to provide feedback.
Our “flagship” communication channel
at Drax Power station is Open Forum,
a series of face-to-face meetings where the
Chief executive and executive Committee
present business updates to small groups,
followed by an open question and answer
session. The Open Forums, which are
scheduled to accommodate the power
station’s operational resource
requirements, cover every shift pattern
so that all employees have an opportunity
to attend. This year we have used a variety
of media at the Open Forum, including
DvDs featuring colleagues across the
business. Feedback about the Open Forums
is very positive, as reflected in our opinion
survey scores.
in addition, our all-employee communication
methods include monthly team briefs,
a twice yearly in-house magazine,
and e-mail and intranet communications.
At Haven Power there is a well-established
framework of individual one-to-one
discussions and team meetings. This year
the operations team introduced “Did you
know?”, a fortnightly brief designed to
provide useful information on team, system
and process development.
each month following the Haven Power
board meeting, members of the senior
management team conduct briefing
sessions that all staff are invited to
attend. These sessions update staff on
the progress of the business and provide
an opportunity to raise questions and
to discuss any concerns.
Performance and reward
Pay and benefits at Drax are attractive
and match or exceed the best in the
industry sector and the local area.
we 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.
Through a range of share plans we encourage
all employees to build a personal stake in
the ownership of the business.
Recognition
The achievements of our staff have been
rightly recognised through a number of
awards from external bodies during 2010.
Our biomass co-firing project was awarded
first place in the environment category of
the utility industry Achievement Awards.
These prestigious awards recognise the
outstanding achievements of the utility
and energy industry and reflect innovation,
outstanding service, efficiency and quality.
we also received “highly commended”
in the supply Chain excellence category,
for success in introducing sustainability
standards to the biomass supply chain.
The Forest Footprint Disclosure Project is
an innovative initiative assisting businesses
in assessing their impact on the world’s
forests. For the second year running,
Drax was ranked as the leader in the
utilities sector based on the comprehensive
sustainability criteria in our business
procurement activities.
Our straw pellet plant won the east riding
of Yorkshire Council Chairman’s business
Award for businesses with under 50
employees. The awards are presented
annually by the Council to individuals,
companies and organisations within the
east riding of Yorkshire in recognition
of their achievements towards enhancing
the area in which they work and live.
in addition to receiving recognition for
our project work, we were also delighted
to be acknowledged for upholding good
governance and professional standards at
the iCsA (institute of Chartered secretaries
and Administrators) Hermes Transparency
in Governance Awards, where we received
the “best sustainability and stakeholder
disclosure – FTse250” award for our 2009
Annual report and accounts.
Drax Group plc | Annual report and accounts 2010
38 business review
CORPORATE AnD sOCiAl REsPOnsiBiliTY
stakeholder engagement
and community relations
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, regulators, 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. reference has been already made to
specific stakeholder engagement practice
and exercises throughout the Corporate
and social responsibility review; below we
touch on other aspects of our stakeholder
engagement commitments, from investor
relations to community relations.
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 frequently 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 2010, a formal meeting
programme was conducted in the uK
after each of the Preliminary and Half
year results announcements and we
undertook investor visits to the united
states and mainland europe during the
year. To aid our communication with
private investors, the investor section of
our website has been developed to be a
readily accessible and transparent source
of information to enhance understanding
of the business.
External relations
As in previous years, we maintained our
engagement with public affairs audiences
on issues with implications for our business.
with a General election during the year
and energy policy still high on the political
agenda, we had significant engagement
with Parliamentarians and officials at all
levels on issues including forthcoming
environmental legislation, renewables
policy, and market reform issues.
The form of engagement was varied and
included both face-to-face and written
briefings, participation in public
consultations, written evidence to inquiries,
and visits by Parliamentarians and officials
to Drax Power station. As in the past,
trade association membership proved
useful during the year. The ability to meet
with and discuss issues of the day with
other interested parties has facilitated
representation of collective positions on
energy policy matters.
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.
we maintained a programme of
engagement with local stakeholders within
the vicinities of the planned developments
of dedicated biomass power stations.
Through the use of exhibitions, newsletters,
press releases, information on our website
and a freephone line we aimed to ensure
that local people had the opportunity
to study our proposals and discuss issues
with members of the project team.
no political donations were made in the
uK or elsewhere during 2010, and the
Group’s contact with those active in the
political arena has been and will continue
to be aimed solely at the promotion of
the Group’s business interests.
Community relations
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 and fundraising
During 2010, we gave financial support
of £131,450 (2009: £138,930) in total
across a range of charitable and
non-charitable community causes.
Of that total, charitable donations
amounted to £87,384 (2009: £88,041).
some £18,000 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. 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. examples of the good
causes supported through the sponsorship
team in 2010 are donations to Camblesforth
Community Primary school to enhance
their existing music lessons through the
provision of tuition to develop instrumental
skills and to vixen radio to soundproof the
radio station’s new studio.
Drax also operates a “£ for £” and Give As
You earn matching scheme, under which
we match any monies raised for, or donated
to, charity by employees. During 2010,
approximately £46,700 of the total donations
made were through this scheme.
“ we communicate our
results and prospects
to our shareholders in
an accurate and timely
manner using a variety
of channels.”
“ During the year we had
significant engagement
with Parliamentarians
and officials at all levels.”
“ each month the
sponsorship team meets
to consider requests
received for donations
and sponsorship.”
Drax Group plc | Annual report and accounts 2010
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now in its sixth year, the outage charity
scheme raised £4,500 during the year’s
single outage. Through the scheme £500
is donated for every seven days that goes
by without an injury requiring more than
first aid treatment. As in previous years
the money was divided equally between
charities chosen by Drax staff and our
contractors. Candlelighters, a Yorkshire-
based charity providing services and
support to children with cancer and their
families, and Goole Drop-in, a drop-in centre
for young people between the age of
16 and 25 were the nominated charities.
Through two schemes focused on safety
performance, the Yorkshire Air Ambulance,
which provides a crucial emergency service
for the region, received a total donation of
£5,000. Of the total, £4,000 was raised
through staff and contractors delivering
zero recordable injuries during part of the
construction of the new biomass co-firing
facility. This was boosted with a further
£1,000 from a similar scheme applied to
the whole Drax site.
For the fourth year running we held a
charity corporate golf tournament at the
championship course at Fulford, York.
The event raised a further £9,205 for
the Yorkshire Air Ambulance.
Education in the community
we provide a choice of educational
experiences hosted by our team of power
station guides and, at times, technical
experts. A state-of-the-art visitor centre is
of particular interest to students of all ages
allowing them to explore the properties of
electricity, discover how a power station
works and consider the environmental
issues related to electricity generation.
under the “Art in the Community” banner,
we held our fourth art competition for
primary and secondary schools. some 16
schools participated and the winners and
their schools shared in prize money
totalling over £2,500.
we also held a two-day art masterclass run
by David Anderson, a designer, illustrator
and watercolourist, and a Fellow of the
royal society of Arts. David provided
expert advice and guidance to the young
artists, all aged seven to 13, who were able
to try out various techniques and explore
the world of art and illustration, from
caricature and collage to watercolour
and mixed media. Over the two days, the
aspiring artists each produced a segment
of a panoramic image of the power station,
using a variety of media which, when
pieced together, will measure 3m x 1.5m
and be on display at Drax Power station.
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 2010,
we played host to some 7,500 visitors.
For three sundays in the run-up to
Christmas, we converted the skylark
Centre into a santa’s Grotto. The attraction
proved popular with local residents, some
900 people came to visit the grotto and
through their generosity £500 was raised
for selby Hands of Hope, a charity helping
to fund groups and activities in the local
area. we donated an additional £1,000 to
the charity in lieu of purchasing corporate
Christmas cards.
Combined with a tour of the power
station students can learn about the basic
principles and development of electricity
generation, the role of different fuels in
electricity generation, trading of electricity,
environmental issues related to burning
fossil fuels, the recycling of by-products
and the role of a large industrial complex
in the local economy and community.
Another visitor opportunity exists at our
skylark Centre that lies at the heart of our
ash disposal site. A nature reserve has been
established there to provide a haven for
over 100 species of wildlife. it is specially
designed to help schoolchildren understand
more about the natural habitat and ecology
of the area.
educational visits are complemented by
classroom and laboratory facilities where
teachers and students can discuss and
investigate the results of pond dipping,
a bugs and grubs hunt, or a nature trail
walk through woodland areas.
Our “Cricket in the Community” initiative
launched in May 2006 has continued
to prove popular with local schools.
The england and wales Cricket board
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 fourth year we ran the Drax
Cup, a cricket competition for teams of girls
and boys under the age of nine. Over 300
primary schools 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
Alwoodley Primary school, Leeds.
Drax Group plc | Annual report and accounts 2010
40 BOARD Of DiRECTORs
3
Peter emery
Production Director
Age 48
Appointment to the Board:
20 October 2005, having joined Drax
in June 2004.
Committee Membership:
executive.
External Appointments:
A director of the Association of electricity
Producers.
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’s Fawley Oil refinery
in 1992 as plant technical services manager. in 1997,
he became refinery maintenance manager and
in 2002, he was appointed operations manager
with full management and operational responsibility
for Fawley Oil refinery, the uK’s largest refinery.
He was also a member of exxonMobil’s european
leadership team for refining.
Qualifications:
bsc (Hons) in Mining engineering, FiMMM and
completed the Advanced Management Programme
at inseAD in 2007.
1
Dorothy Thompson
Chief executive
Age 50
Appointment to the Board:
20 October 2005, having joined Drax
in september 2005.
Committee Membership:
executive.
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.
2
Tony Quinlan
Finance Director
Age 45
Appointment to the Board:
1 september 2008.
Committee Membership:
executive.
External Appointments:
none.
Previous Experience:
Tony qualified as a 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) degree in Chemistry with business
studies and an Associate of the institute of
Chartered Accountants in england and wales (ACA).
4
1
3
2
5
Drax Group plc | Annual report and accounts 2010
41
4
Charles berry
Chairman
Age 58
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 Msc in Management.
6
Tim Cobbold
independent non-executive director
Age 48
8
David Lindsell
independent non-executive director
Age 63
Appointment to the Board:
27 september 2010.
Appointment to the Board:
1 December 2008.
Committee Membership:
Audit, nominations and remuneration.
External Appointments:
Chief executive and an executive director of
De La rue Plc.
Previous Experience:
Tim was previously the Chief executive Officer
of Chloride Group plc, the leading international
provider of secure power solutions having joined
them in 2007 as Chief Operating Officer. Following
emerson electric’s takeover of Chloride he held
a senior position in emerson, responsible for the
Chloride Group of companies. He trained as a
Mechanical engineer and qualified as a Chartered
Accountant in 1987 and joined smiths Group plc
(formerly Ti Group plc) in 1989 where he held a
number of senior financial and operational
management positions over an 18-year period.
Qualifications:
bsc (Hons) in Mechanical engineering and an
Associate of the institute of Chartered Accountants
in england and wales (ACA).
Committee Membership:
Audit (Chairman), nominations and remuneration.
External Appointments:
A non-executive director of Premier Oil plc, a
non-executive director of Gartmore Group Limited
and Deputy Chairman of the Financial reporting
review Panel.
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 has served on
a number of professional bodies relating to financial
reporting, including the standards Advisory
Committee of the international Accounting
standards board, the Auditing Practices board,
the Turnbull Committee and the european Financial
reporting Advisory Group.
Qualifications:
Fellow of the institute of Chartered Accountants
in england and wales (FCA).
5
Tim barker
senior independent non-executive director
Age 70
7
Mike Grasby
independent non-executive director
Age 67
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:
A non-executive director of several other companies
including an early stage company developing a new
energy storage technology and the uK subsidiary
of a us investment bank.
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 and was the senior independent non-executive
director of electrocomponents plc.
Qualifications:
MA in economics.
Appointment to the Board:
20 October 2005, having joined Drax in
December 2003.
Committee Membership:
nominations and remuneration.
External Appointments:
A non-executive director of OPG Power venture plc,
a director of executive recruitment business,
strategic Dimensions Technical Limited.
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 a senior vice-president,
continuing with his international directorships and
leading a major consortium in the Czech republic.
Qualifications:
Chartered engineer, FieT and FiMeche.
9
Tony Thorne
independent non-executive director
Age 60
Appointment to the Board:
29 June 2010.
Committee Membership:
Audit, nominations and remuneration.
External Appointments:
A non-executive director and Chairman designate
of wsP Group plc.
Previous Experience:
Tony was Chief executive of Ds smith plc, the
international packaging and office products group,
from 2001 until his retirement from the board in
May 2010. Previously he was President of sCA’s
corrugated packaging business. Prior to this he
spent 20 years with shell international, working
throughout the world in senior management roles,
including strategic planning and President of the
shell companies in Mexico.
Qualifications:
bsc (Hons) in Agricultural economics.
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Drax Group plc Annual report and accounts 2010
42
DIRECTORS’ REPORT
The directors present their report for Drax Group plc, together with the consolidated financial statements of the Drax group of
companies, for the year ended 31 December 2010.
Annual General Meeting
The Annual General Meeting (“AGM”) of the Company will be held on 13 April 2011, at The City Presentation Centre, 4 Chiswell Street,
London EC1Y 4UP at 11.30am. A separate document accompanying this report contains the notice convening the AGM and a
description of the business to be conducted.
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 48 to 72.
The various sections of this report contain in summary certain provisions of the Company’s current Articles of Association (the
“Articles”) and applicable English law concerning companies (the Companies Act 2006). This is a summary only and the relevant
provisions of the Articles or the Companies Act should be consulted if further information is required.
Business review
A review of the development and performance of the business of the Group during the year ended 31 December 2010, 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 Business review on pages 2 to 39. The Business review incorporates the Chairman’s introduction, Maximising the value of the
Drax business, Delivering results, Chief Executive’s statement, How we are performing, Marketplace, Operational and financial
performance, Principal risks and uncertainties 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 and accounts 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 and
accounts 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. The Group also has an electricity supply business, Haven Power Limited (“Haven Power”), which serves business customers.
Haven Power is a direct subsidiary of the Group’s principal trading subsidiary, Drax Power Limited.
Results
The Group results for the year are shown in the Consolidated income statement on page 74.
Going concern
The Group’s business activities, financial position, and principal risks and uncertainties are set out in the Business review as
referenced above. In addition note 18 of the consolidated financial statements includes details of the Group’s borrowings, financial
instruments, and hedging activities, together with its exposure to credit and liquidity risk and how it manages its capital.
The directors’ consideration of the going concern basis is set out specifically on page 26. The Group’s forecasts and projections,
taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within its
available facilities.
The directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational
existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing these
consolidated and company accounts.
Risk identification, assessment and management
A summary of the Group’s position regarding risk identification is set out on page 52, risk assessment and management is set on
pages 28 and 29 and the use of financial instruments is contained in note 18, as is the identification and assessment of financial risk.
Drax Group plc Annual report and accounts 2010
43
Dividends and distributions
Subject to the provisions of the Companies Act, the Company may by ordinary resolution from time to time declare dividends not
exceeding the amount recommended by the Board. The Board may pay interim dividends whenever the financial position of the
Company, in the opinion of the Board, justifies such payment.
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 15 October 2010 of 14.1 pence per share
(7 October 2009: 4.1 pence per share)
Proposed final dividend to be paid on 13 May 2011(1) of 17.9 pence per share
(14 May 2010: 9.6 pence per share)
Notes:
(1) Subject to approval by shareholders at the forthcoming AGM.
Share capital
2010
£m
2009
£m
51.5
15.0
65.3
35.0
The Company has only one class of equity shares, which are ordinary shares. There are no restrictions on the voting rights of the
ordinary shares.
At 1 January 2010, 364,853,890 ordinary shares of 1116⁄29 pence each in the Company were in issue and at 31 December 2010,
364,859,988 ordinary shares of 1116⁄29 pence each in the Company were in issue. The following paragraphs detail the changes to the
share capital during the year.
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Issue of shares
Subject to the provisions of the Companies Act relating to authority and pre-emption rights and to any resolution of the Company in
a General Meeting, all unissued shares of the Company shall be at the disposal of the directors and they may allot (with or without
conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such
terms as they think proper.
On 1 September 2010, a total of 6,098 ordinary shares of 1116/29 pence each in the Company were issued in satisfaction of shares
vesting in accordance with the rules of the Group’s Bonus Matching Plan to six individuals whose employment with the Group had
terminated due to retirement. The shares issued represented 0.002% of the Company’s issued ordinary share capital prior to those
shares being issued. No other ordinary shares were issued during the year.
Authority to purchase own shares
At the Annual General Meeting of the Company held on 21 April 2010, 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 the AGM.
The Company did not purchase any of its own shares during 2010 and the Company held no Treasury shares during 2010.
Details of the share capital as at 31 December 2010, and shares issued during the year, are given in note 21 on page 96.
Rights and obligations attaching to shares
The rights and obligations attaching to the ordinary shares are set out in the Articles. The Articles may only be changed by the
shareholders by special resolution.
Variation of rights
Subject to statute, the Articles specify that rights attached to any class of shares may be varied with the written consent of the
holders of not less than three-quarters in nominal value of the issued shares of that class, or with the sanction of an extraordinary
resolution passed at a separate General Meeting of the holders of those shares. At every such separate General Meeting the quorum
shall be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class (calculated
excluding any shares held as Treasury shares). The rights conferred upon the holders of any shares shall not, unless otherwise
expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking
pari passu with them.
Drax Group plc Annual report and accounts 2010
44
DIRECTORS’ REPORT
Transfer of shares
All transfers of shares which are in certificated form may be effected by transfer in writing in any usual or common form or in any
other form acceptable to the directors and may be under hand only. The instrument of transfer shall be signed by or on behalf of the
transferor and (except in the case of fully paid shares) by or on behalf of the transferee. The transferor shall remain the holder of
the shares concerned until the name of the transferee is entered in the register. All transfers of shares which are in uncertificated
form may be effected by means of the CREST system.
The directors may decline to recognise any instrument of transfer relating to shares in certificated form unless it:
(a) is in respect of only one class of share; and
(b) is lodged at the transfer office (duly stamped if required) accompanied by the relevant share certificate(s) and such other
evidence as the directors may reasonably require to show the right of the transferor to make the transfer (and, if the instrument
of transfer is executed by some other person on his/her behalf, the authority of that person so to do).
The directors may, in the case of shares in certificated form, in their absolute discretion and without assigning any reason therefore,
refuse to register any transfer of shares (not being fully paid shares) provided that, where any such shares are admitted to the
Official List of the London Stock Exchange, such discretion may not be exercised in such a way as to prevent dealings in the shares
of that class from taking place on an open and proper basis. The directors may also refuse to register an allotment or transfer of
shares (whether fully paid or not) in favour of more than four persons jointly.
If the directors refuse to register an allotment or transfer, they shall send within two months after the date on which the letter
of allotment or transfer was lodged with the Company, to the allottee or transferee, notice of the refusal.
A shareholder does not need to obtain the approval of the Company, or of other shareholders of shares in the Company, for a
transfer of shares to take place.
The Articles provide that directors must give reasons for any refusal to register a transfer of shares in accordance with the
Companies Act.
Shares in uncertificated form
Directors may determine that any class of shares may be held in uncertificated form and title to such shares may be transferred by
means of a relevant system or that shares of any class should cease to be held and transferred. Subject to the provisions of the
Companies Act, the CREST Regulations and every other statute, statutory instrument, regulation or order for the time being in force
concerning companies and affecting the Company, the directors may determine that any class of shares held on the branch register
of members of the Company resident in South Africa or any other overseas branch register of the members of the Company may be
held in uncertificated form in accordance with any system outside the UK which enables title to such shares to be evidenced and
transferred without a written instrument and which is a relevant system. The provisions of the Articles shall not apply to shares
of any class which are in uncertificated form to the extent that the Articles are inconsistent with the holding of shares of that
class in uncertificated form, the transfer of title to shares of that class by means of a relevant system or any provision of the
CREST Regulations.
Substantial shareholdings
As at 21 February 2011, the Company has been notified in accordance with the Financial Services Authority’s Disclosure and
Transparency Rules, of the following interests in the voting rights of the Company:
Date last TR1
Notification made
Number of voting
rights directly held
Number of voting
rights indirectly
held
Total number of
ordinary shares
held
% of the issued
ordinary share
capital held
Invesco plc
Black Rock Inc.
AXA S.A.
Legal & General Group Plc
Orbis Holdings Limited
01.03.2010
22.07.2010
–
–
108,072,751
108,072,751
29.62%
19,066,106
19,066,106
17.12.2009
1,704,050
14,952,477
16,656,527
19.07.2010
14,478,741
–
14,478,741
25.08.2010
–
11,221,474
11,221,474
5.23%
4.57%
3.96%
3.08%
Total shares held by substantial shareholders
16,182,791
153,312,808 169,495,599
46.46%
Drax Group plc Annual report and accounts 2010
45
Directors
The current directors are Tim Barker, Charles Berry, Tim Cobbold, Peter Emery, Mike Grasby, David Lindsell, Tony Quinlan,
Dorothy Thompson and Tony Thorne. Biographical notes of the directors appear on pages 40 and 41.
Jamie Dundas retired as a director at the conclusion of the AGM on 21 April 2010, due to other work commitments. Tony Thorne and
Tim Cobbold were appointed to the Board on 29 June 2010 and 27 September 2010 respectively pursuant to Article 79 of the
Company’s Articles of Association.
No other person served as a director or as an alternate director at any time during the year.
The Articles require that, following appointment to the Board, directors submit themselves for election by shareholders at the first
AGM following their appointment. Tony Thorne and Tim Cobbold were appointed to the Board after the last AGM and, therefore,
both will retire and offer themselves for election by shareholders at the AGM to be held on 13 April 2011.
The UK Corporate Governance Code provides for the annual re-election of all directors and whilst the relevant provision of the Code
is intended to apply to financial years commencing on or after 29 June 2010, the Board has determined that it will adopt this
provision with immediate effect and therefore each of Tim Barker, Charles Berry, Peter Emery, David Lindsell, Tony Quinlan and
Dorothy Thompson will retire at the forthcoming AGM and, being eligible, offer themselves for re-election. The evaluation of the
Board described on page 50 concluded that the directors offering themselves for re-election continue to demonstrate commitment
to their particular role and perform effectively. The re-election of each director is recommended by the Board. Details of the
relevant terms of appointment and service agreements appear on page 69.
Mike Grasby has stated that he intends to step down from the Board having joined Drax in December 2003 and therefore will not be
seeking re-election. He will retire as a director at the conclusion of the AGM on 13 April 2011.
The rules relating to the appointment or replacement of directors and the powers of directors are highlighted in the Corporate
governance report on page 49.
A director is not required to hold any shares of the Company by way of qualification. Directors’ interests in the share capital of the
Company are shown on page 72.
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 directors’ 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 59 to 72.
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 a £200 million letter of credit facility agreement dated 27 October 2005, as amended on 6 December 2005 and further
amended and restated on 3 August 2009, and amended on 5 May 2010, between, amongst others, 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 Power Limited and the
facility agent within 30 days of receiving notice from Drax Power Limited that a change of control has occurred, cancel its
commitments and require the payment of its share of any outstanding amounts within three business days of such cancellation
notice being given.
Under a £235 million forward start credit facility dated 3 August 2009, as amended on 18 January 2011 between, amongst others,
Drax Finance Limited, Drax Power Limited and Barclays Bank 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 the payment of its share of any outstanding
amounts within three business days of such cancellation notice being given.
Under a trading agreement dated 5 May 2010, between, amongst others, Drax Power Limited and Barclays Bank PLC, Drax Power
Limited may have uncollateralised trading positions up to a threshold of £135 million. On a change of control, Barclays Bank PLC,
may by giving notice to Drax Power Limited within 30 days of receiving notice from Drax Power Limited that a change of control has
occurred, withdraw the uncollateralised trading line and require all trading positions to be collateralised.
Under the terms of the three credit facility agreements, a “change of control” occurs if any person or group of persons acting in
concert gains control of Drax Group plc.
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.
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Drax Group plc Annual report and accounts 2010
46
DIRECTORS’ REPORT
Employees
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 30 to 39 and details of employee involvement through share participation are contained in the
Remuneration Committee report on pages 59 to 72. 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 Group. For example, team briefings are held once a month where
wide-ranging information is communicated throughout the organisation. In addition, Open Forums are held three times a year 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 “Employees” section of the report on Corporate and social responsibility on pages 36 to 37.
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 30 to 39.
There are Group policies in place for environment, health and safety and human resources as well as a Code of Business Ethics.
This includes processes designed to comply with the Bribery Act 2010 when it comes into force.
The internal control processes described on page 52, take 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 £87,384 (2009: £88,041). More information on the charitable donations made is contained within the Corporate
and social responsibility review on pages 30 to 39.
Political donations
No political donations were made in the UK or elsewhere during the year (2009: £nil). It is the Board’s policy not to make donations
to political organisations or for political causes.
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 the Annual General Meeting. 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 2010 represented approximately 21 days of average daily purchases through the year (2009: 23 days).
The figure is essentially based upon the ratio of amounts owed to trade creditors against the amounts Drax was invoiced by
suppliers during the financial year.
Drax Group plc Annual report and accounts 2010
47
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 418 of the Companies Act.
In accordance with Section 489 of the Companies Act, 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 55 to 57.
Voting
Subject to the Articles generally and to any special rights or restrictions as to voting attached by or in accordance with the Articles
to any class of shares, on a show of hands every member who is present in person at a General Meeting shall have one vote and, on
a poll, every member who is present in person or by proxy shall have one vote for every share of which he/she is the holder. It has
been the Company’s practice since incorporation to hold a poll on every resolution at Annual General Meetings and Extraordinary
General Meetings.
Where shares are held by trustees/nominees in respect of the Group’s employee share plans and the voting rights attached to such
shares are not directly exercisable by the employees, it is the Company’s practice that such rights are not exercised by the relevant
trustee/nominee.
Under the Companies Act, members are entitled to appoint a proxy, who need not be a member of the Company, to exercise all or
any of their rights to attend and to speak and vote on their behalf at a General Meeting or class meeting. A member may appoint
more than one proxy in relation to a General Meeting or class meeting provided that each proxy is appointed to exercise the rights
attached to a different share or shares held by that member. A member that is a corporation may appoint one or more individuals
to act on its behalf at a General Meeting or class meetings as a corporate representative.
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Deadlines for exercising voting rights
Votes are exercisable at a General Meeting of the Company in respect of which the business being voted upon is being heard. Votes
may be exercised in person, by proxy, or in relation to corporate members, by corporate representative. The Articles provide a
deadline for submission of proxy forms of not than less than 48 hours before the time appointed for the holding of the meeting or
adjourned meeting.
Restrictions on voting
No member shall, unless the directors otherwise determine, be entitled in respect of any share held by him/her to vote either
personally or by proxy at a shareholders’ meeting or to exercise any other right conferred by membership in relation to
shareholders’ meetings if any call or other sum presently payable by him/her to the Company in respect of that share remains
unpaid. In addition, no member shall be entitled to vote if he/she has been served with a notice after failing to provide the Company
with information concerning interests in those shares required to be provided under the Companies Act.
By order of the Board.
Philip Hudson
Company Secretary
21 February 2011
Registered Office:
Drax Power Station
Selby
North Yorkshire YO8 8PH
Registered in England No. 5562053
Drax Group plc Annual report and accounts 2010
48
CORPORATE GOVERNANCE
“ Good corporate governance is one of the cornerstones of the success
of the organisation and I believe that the systems, procedures,
processes and controls that Drax has in place provide assurance
to the Board and its stakeholders of a well governed business.”
Charles Berry
Chairman
Compliance with the Combined Code
It is the Board’s view that throughout the period commencing on 1 January 2010, there has been full compliance with the provisions
of Section 1 of the Combined Code 2008. The Combined Code is available at: www.frc.org.uk/corporate/ukcgcode.cfm
This section describes in broad terms how the Company is organised
in terms of the overall structure and principal roles and responsibilities
of the Board, its committees and other significant bodies.
Board of directors
Board Committees
Audit
Nominations
Remuneration
Chief Executive
Executive Committee
The Board of directors
As at 21 February 2011, the Board consisted of the non-executive Chairman, five
independent non-executive directors and three executive directors. The directors
are named in the Directors’ report on page 45 and their principal commitments
outside the Group are described within their biographical notes on pages 40 and 41.
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.
Chairman
Non-executive directors
Executive directors
Charles Berry is the Chairman, having been appointed on 17 April 2008, and having served as an independent non-executive director
of the Company since December 2005. He had no material business or other relationship with the Company, and there were no
other matters that were likely to affect his independence of character and judgement. The Board therefore considered that
Charles Berry was independent on appointment as Chairman. Charles Berry is also Chairman of Eaga plc (“Eaga”). On 7 January
2010, the Group announced that it had entered into a contract with Eaga to outsource the provision of services in fulfilment of
the Group’s carbon emissions reduction obligation under the Community Energy Saving Programme, which came into effect on
1 September 2009 and runs until 31 December 2012. Further detail is contained on page 105 under Related party transactions.
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. He is responsible for the financial management of the Group, and for relationships with
the Group’s bankers.
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.
Drax Group plc Annual report and accounts 2010
49
Tim Barker is the Senior Independent Director.
Tim Barker, Mike Grasby and David Lindsell have served the Group as independent non-executive directors throughout the year
ended 31 December 2010. Tim Cobbold, Jamie Dundas and Tony Thorne, served the Group as independent non-executive directors
for only part of the year ended 31 December 2010.
Jamie Dundas retired as a director on 21 April 2010. Tony Thorne and Tim Cobbold were appointed as directors by the Board in
accordance with Article 79 of the Articles of Association on 29 June 2010 and 27 September 2010 respectively.
The Board has reviewed the independence of each non-executive director. Mike Grasby was the manager of Drax Power Station
between 1991 and 1995, whilst the power station was owned by National Power plc. He has never been an employee of the Company
or the Group. The Board considered that at the time he was appointed as a non-executive director, sufficient time had elapsed
from his previous association with Drax Power Station such that it did not affect his independence of character and judgement.
Mike is to retire as a director at the conclusion of the Annual General Meeting (“AGM”) on 13 April 2011.
None of the non-executive directors who have served during the year had any material business or other relationship with the
Group, and there were no other matters that were likely to affect their independence of character and judgement. The Board
therefore considers all of the non-executive directors to be independent.
The Articles provide that one-third of directors, not including directors appointed by the Board, (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 AGM following their election without being re-elected by shareholders. During the year, the
Nominations Committee considered the requirements for directors to retire by rotation, together with the provisions of the
Combined Code to ensure planned and progressive refreshing of the Board.
The Nominations Committee met on 15 February 2011, following the completion of the Board evaluation process. The Nominations
Committee also noted that the UK Corporate Governance Code provides for the annual re-election of all directors and whilst the
provision of that Code is intended to apply in respect of financial years commencing on or after 29 June 2010, the Nominations
Committee and the Board have determined that it will adopt this provision with immediate effect. Accordingly each of Tim Barker,
Charles Berry, Peter Emery, David Lindsell, Tony Quinlan and Dorothy Thompson will retire at the forthcoming AGM and, being
eligible, offer themselves for re-election. Tony Thorne and Tim Cobbold will each retire at the forthcoming AGM and offer
themselves for election. The evaluation of the Board described on page 50 concluded that the directors offering themselves
for election or re-election (in line with the provisions contained in the Articles) continue to demonstrate commitment, management
and industry expertise to their particular role and perform effectively.
The election and re-election of each director is recommended by the Board. Details of the relevant terms of appointment and
service agreements appear on page 69.
Mike Grasby has stated that he intends to step down from the Board having joined Drax in December 2003 and therefore will not
be seeking re-election. He will retire as a director at the conclusion of the AGM on 13 April 2011.
Details of the service contracts for the executive directors and letters of appointment for the non-executive directors are set out
in a table on page 69.
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 is the subject of a rigorous
review. Such reviews in cases where a director remains in office after six years, will be conducted annually, as part of the evaluation
of the Board.
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Drax Group plc Annual report and accounts 2010
50
CORPORATE GOVERNANCE
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; the internal control and risk management policies; the business plan and principal 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 and membership 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 2010 no director sought independent legal advice pursuant to the policy.
The Articles give 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. Under the Articles
certain conflicts of interest do not need to be authorised, for example an interest as a director of a group company. Generally the
nature and extent of any conflict of interest must be disclosed before it can be authorised or before it is permitted without being
authorised but the Articles provide for some situations in which disclosure is not required where knowledge can be presumed and
disclosure is unlikely to be necessary. The Articles also allow the Board to exercise voting rights in group companies without
restriction (e.g. so as to appoint a director to the board of a group company without this counting as a conflict requiring
authorisation).
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.
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 evaluate
the performance of the Board, its committees and individual directors. This was performed by Independent Audit Limited
(“Independent Audit”), an independent strategic governance consultancy that has no other connection with the Company.
Independent Audit conducted individual interviews with each director, the Company Secretary and members of the senior
management group. A written report was presented to the Board, and Independent Audit attended a Board meeting to present
and discuss the conclusions of the report. In addition, Independent Audit met separately with the Chairman to discuss the findings
of the review generally, and with the Senior Independent Director to discuss the performance of the Chairman.
The main conclusions of Independent Audit’s review were that the Board was strong and appears well equipped to meet the
challenges ahead. In particular, the composition and mix of the Board were appropriate with a strong cadre of non-executive
directors with a broad range of relevant experience. In addition, the Board benefits from a management team that is receptive
to and recognises the value of challenge. The report made a number of recommendations which would enhance Board
effectiveness, all of which the Board is taking account as part of the process of continuing improvement. The Board intends
to improve the process for reviewing past decisions and lessons learnt and maintain regular visits by the non-executive directors
to the different Group locations.
During the year, the Chairman held meetings with the non-executive directors in the absence of the executive directors, and the
Senior Independent Director held meetings with the non-executive directors without the Chairman being present, 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 being provided with information about the Group and their responsibilities, meetings with key
managers and visits to the Group’s sites. In addition, each non-executive director visits operational sites and meets with senior
management to be briefed on the Group’s business at least annually, and specific Board training days are arranged involving
presentations on relevant topics.
Drax Group plc Annual report and accounts 2010
51
Committees of the Board
The Board has established the following standing committees:
Committee
Audit Committee
Nominations Committee
Remuneration Committee
Notes:
Membership
David Lindsell (as Chairman), Tim Barker, Tim Cobbold and Tony Thorne.
Charles Berry (as Chairman), Tim Barker, Tim Cobbold, Mike Grasby,
David Lindsell and Tony Thorne.
Tim Barker (as Chairman), Charles Berry, Tim Cobbold, Mike Grasby,
David Lindsell and Tony Thorne.
(1) Jamie Dundas was a member of Audit, Nominations and Remuneration Committees until he retired from the Board at the conclusion of AGM on 21 April 2010.
(2) Tim Cobbold and Tony Thorne joined each of the Audit, Nominations and Remuneration Committees on the same date that they were appointed to the Board, namely
27 September 2010 and 29 June 2010 respectively.
Details of the work of the Audit, Nominations and Remuneration Committees are given in the reports of those Committees on pages
55 to 72. The terms of reference for these Committees are reviewed annually by each Committee and then by the Board. The terms
of reference of each Committee are available on the Group’s website at www.draxgroup.plc.uk.
The Board attaches particular importance to its scrutiny of health and safety performance, systems and procedures. The section
headed Internal control on page 52 makes reference to steps taken by the Board to strengthen the Group’s system of internal
control during the year. One such step is an increase in the level of independent scrutiny of health and safety controls. Prior to the
adoption of the Risk Management Policy, this was carried out by the Health and Safety Committee which included one non-executive
director and two executive directors. Following the adoption of the Risk Management Policy, the Health and Safety Committee has
been discontinued and the Safety, Health, Environmental and Production Integrity Committee (“SHEPIC”) has been established
with responsibility to assist the Production Director in the operation and implementation of risk management and internal control
processes. Its activities are reviewed by the Audit Committee, which provides assurance to the Board on the effectiveness of the
health and safety controls. In addition, the SHEPIC reports directly to the Board at least annually.
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There is also an Executive Committee through which the Chief Executive discharges her duties in respect of the day-to-day
management of the Group. The Executive Committee membership currently comprises: Dorothy Thompson (Chief Executive),
Sean Ebnet (Director of New Business), Peter Emery (Production Director), Philip Hudson (Director of Corporate Affairs and
Company Secretary), Tony Quinlan (Finance Director) and Paul Taylor (Director of Trading). The Deputy Company Secretary acts
as Secretary to the Executive Committee.
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 2010.
The number in brackets represents the maximum number of meetings that each individual was entitled to and had the opportunity
to attend.
Time on
the Board
(years/months)
Time
with Drax(1)
(years/months)
Board(2)
Audit
Committee
Nominations
Committee
Remuneration
Committee
Health
and Safety
Committee
5/2
5/0
0/3
4/0
5/2
5/2
2/0
2/4
5/2
0/6
6/6
5/0
0/3
4/0
6/6
7/0
2/0
2/4
5/3
0/6
7 (7)
7 (7)
2 (2)
3 (3)
7 (7)
7 (7)
7 (7)
7 (7)
7 (7)
4 (4)
4 (4)
–
1 (1)
2 (2)
–
–
4 (4)
–
–
2 (2)
3 (3)
3 (3)
1 (1)
2 (2)
–
3 (3)
3 (3)
–
–
1 (1)
3 (3)
3 (3)
1 (1)
2 (2)
–
3 (3)
3 (3)
–
–
1 (1)
–
–
–
–
2 (2)
2 (2)
–
–
1 (2)
–
Tim Barker
Charles Berry
Tim Cobbold
Jamie Dundas
Peter Emery
Mike Grasby
David Lindsell
Tony Quinlan
Dorothy Thompson
Tony Thorne
Notes:
(1) This includes both the time spent on the Board of Drax Group plc and also the effective predecessor companies Drax Group Limited and Drax Power Limited, up to 31
December 2010.
(2) In addition to the Board meetings identified above, there have also been three teleconference calls to discuss various matters and there is a meeting held annually
to consider strategy.
Drax Group plc Annual report and accounts 2010
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CORPORATE GOVERNANCE
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 2010. 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.
During the year, the Board strengthened the Group’s system of internal control through the adoption of a new Risk Management
Policy which is the principal document governing the objectives and requirements of the Group’s internal control and risk
management processes. The policy stipulates the structure by which identification and analysis of risks and clear designation of
accountability, together with effective risk management processes, ensure that risk management is embedded within the Group.
Risk Management Committees assist the business directors in the operation and implementation of the risk management process
in all areas of the Group’s business, and provide a source of assurance to the Audit Committee that the process is operating
effectively.
There are now five Risk Management Committees, which are as follows: the Corporate Risk Management Committee; the Haven Risk
Management Committee; the New Business Risk Management Committee; the Safety, Health, Environmental and Production
Integrity Committee; and the Treasury and Commodity Risk Management Committee. The Board has also adopted the practice of
receiving annual reports from each Risk Management Committee, and receives monthly reports on particular risk areas including
health and safety and commodity trading.
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 risk register is used by management and by the Risk Management Committees to
ensure that risks are identified, analysed and managed systematically and appropriately. It lists all of the significant risks faced by
the Group, records the level of severity and probability, ownership and mitigation measures for each risk. In addition, the Group has
comprehensive and well defined control policies with clear structures, delegated authority levels and accountabilities. During the
year, the Executive Committee reviewed the risk management process and the controls applicable to the most significant risks
facing the Group.
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 Group performance against a Balanced Corporate
Scorecard (”BCS”) 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.
The Group also has processes in place for business continuity and emergency planning.
Through the Audit Committee the Board has implemented a programme of internal audit reviews of different aspects of the Group’s
activities. The programme, which is reviewed and updated annually, is designed so 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.
Drax Group plc Annual report and accounts 2010
53
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, AGMs 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 (www,draxgroup.plc.uk). Less formal processes include contacts with
institutional shareholders by the Chairman and other directors.
The Chairman is keen to ensure that he maintains an open relationship with the Group’s major shareholders and communicates
directly with them, offering the opportunity to meet in order that he can understand their views on the Group, be it corporate
governance issues or any other points they might wish to raise.
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 2010. The Group has also engaged Makinson Cowell Limited, an independent capital markets consultancy firm,
to advise and assist in relation to communications with shareholders.
The Company’s private registered shareholders hold, in aggregate, 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 AGM. 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 Business review, see pages 2 to 39, provides 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.
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Drax Group plc Annual report and accounts 2010
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CORPORATE GOVERNANCE
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual report and accounts, Remuneration Committee report and the consolidated
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. The directors are required by the IAS
Regulation to prepare the consolidated financial statements under International Financial Reporting Standards (“IFRSs”) as adopted
by the European Union. The consolidated financial statements are also required by law to be properly prepared in accordance with
the Companies Act and Article 4 of the IAS Regulation.
International Accounting Standard 1 requires that IFRS financial statements 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 criteria for assets, liabilities, income and expenses set out
in the International Accounting Standards 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. However, directors are
also required to:
− properly select and apply accounting policies;
− present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
− provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial
performance; and
− make an assessment of the Group’s ability to continue as a going concern.
The directors have elected to prepare the parent Company financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The parent Company financial
statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial
statements, the directors are required to:
− select suitable accounting policies and then apply them consistently;
− make judgements and estimates that are reasonable and prudent;
− state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and
explained in the financial statements; and
− prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial
position of the Company and enable them to ensure that the parent Company financial statements comply with the Companies Act.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s
website. Regular review meetings are held with the website administrators to ensure that the website is continually maintained to a
high standard.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
We confirm that to the best of our knowledge:
1.
the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken
as a whole; and
2. the Business review, which is incorporated into the Directors’ report, includes a fair review of the development and performance
of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they face.
By order of the Board.
Dorothy Thompson
Chief Executive
21 February 2011
Tony Quinlan
Finance Director
21 February 2011
AUDIT COMMITTEE REPORT
Drax Group plc Annual report and accounts 2010
55
“ The steps Drax has taken in 2010 in revising and refining its
risk and governance framework should provide stakeholders
with greater comfort that it is a well run business.”
David Lindsell
Chairman of the Audit Committee
Membership and process
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The Audit Committee (the “Committee”) consisted of David Lindsell (as Chairman), Tim Barker (Senior Independent Director), Tim
Cobbold (from 27 September 2010), Jamie Dundas (until 21 April 2010) and Tony Thorne (from 29 June 2010) all of whom are
independent non-executive directors.
Whilst the Committee consisted of two independent non-executive directors in the period from 22 April 2010 to 28 June 2010, all
four meetings of the Committee held during the year were properly constituted with at least three independent non-executive
directors in attendance.
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 2010, and the members’ attendance record is set out on page 51. The Chairman
of the Committee reports the Committee’s deliberations to the following Board meeting and 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), review the
internal audit plan, 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. The terms of reference
are 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 Group 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.
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 2010, the Committee reviewed the Group’s Preliminary results announcement and Annual
report and accounts, and the Half year results announcement and Half year report respectively. On each occasion, the
Committee received reports from management and the external auditors identifying 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.
The Committee reviewed the arrangements for the provision of the internal audit function and the performance of the current
provider, Grant Thornton UK LLP. The Committee considered that outsourcing the internal audit function through Grant
Thornton UK LLP continues to be effective and appropriate. In establishing the internal audit plan for 2011, the Committee
continues to focus on specifically identified strategic risk areas, as well as ensuring the provision of a core compliance
assurance service;
Drax Group plc Annual report and accounts 2010
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AUDIT COMMITTEE REPORT
Attendance at meetings (continued)
− in April 2010, 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 November 2010, the Committee reviewed the Company’s risk register and in November 2010 it
undertook a review of the effectiveness of the system of internal controls;
− in July 2010, the Committee received a specific report that it had commissioned from PricewaterhouseCoopers LLP (“PwC”) on
the effectiveness of controls applicable to Drax Power Limited’s commodity trading activities. The report concluded that there
were no significant weaknesses in the controls. PwC are to conduct a further phase of their review during 2011;
− 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 of the
Committee. Nothing was subject to this procedure in the course of the year; and
− from October 2010, the revised risk and governance framework came into being and each of the Risk Management Committees
met. The Committee was presented with the key risks from each management committee in November 2010.
The nature of the Group’s activities, and the markets in which it operates, 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 the Group determine
appropriate actuarial assumptions for its defined benefit pension scheme. The Committee also considered the subjective
judgements which are made in connection with the Group’s tax accounting 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 external 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 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 Group;
− 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;
− the balance between the fees paid to the external auditors for audit and non-audit work is monitored by the Committee; and
− 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.
Details of the amounts paid to the external auditors during the year for audit and other services are set out in note 4 to the
consolidated financial statements on page 84.
The external auditors are required to rotate the audit partner responsible for the Group audit every five years and the current audit
partner, Carl Hughes, has been in place for two years.
No contractual obligations exist that restrict the Group’s choice of external auditor.
Drax Group plc Annual report and accounts 2010
57
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 2010 included: dedicated biomass project; tax strategy; non-fuel stock; Haven Power key controls; risk management and
other sources of assurance; and operations and safety sources of assurance.
External auditors
Deloitte LLP were appointed auditors of the Group 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. Any
decision to open the external audit to tender is taken on the recommendation of the Audit Committee based on the results of the
performance review described below.
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 AGM and a resolution to that effect appears in the Notice of the
Annual General 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 21 February 2011.
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David Lindsell
Chairman of the Audit Committee
Drax Group plc Annual report and accounts 2010
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NOMINATIONS COMMITTEE REPORT
The Nominations Committee (the “Committee”) consisted of Charles Berry (as Chairman), Tim Barker (Senior Independent
Director), Tim Cobbold (from 27 September 2010), Jamie Dundas (until 21 April 2010), Mike Grasby, David Lindsell and Tony Thorne
(from 29 June 2010). The Company Secretary acts as Secretary to the Committee.
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 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. The terms of reference
are available on the Group’s website at www.draxgroup.plc.uk.
The Committee met on three occasions in 2010, and the members’ attendance record is set out on page 51.
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, its committees and individual directors is reported in the Corporate governance report on page 50.
During the course of the year, the Committee conducted an external search with the assistance of an executive search consultancy
for a suitable candidate to replace Jamie Dundas, who retired from the Board and the committees on which he served on 21 April
2010. Following the recommendation of the Committee, the Board decided to appoint both Tony Thorne and Tim Cobbold on
29 June 2010 and 27 September 2010 respectively. The Board considered that their skills and experience would benefit the Board
and complement the existing skill set and meet the objective of the planned progression in refreshing the Board.
As is noted on page 49, the Committee met on 15 February 2011, following the completion of the Board evaluation process, and
determined that each of Tim Barker, Charles Berry, Peter Emery, David Lindsell, Tony Quinlan and Dorothy Thompson will retire at
the forthcoming AGM and, being eligible, offer themselves for re-election. The evaluation of the Board described on page 50
concluded that the directors offering themselves for re-election continue to demonstrate commitment to their particular role and
perform effectively.
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 21 February 2011.
Charles Berry
Chairman of the Nominations Committee
REMUNERATION COMMITTEE REPORT
59
Drax Group plc Annual report and accounts 2010
“ The Committee has sought to ensure that the variable elements of
management remuneration achieve an appropriate balance between
he Group’s
short-term financial and operational performance, progress towards the Group’s
strategic objectives and alignment with the returns to shareholders.”
Tim Barker
Chairman of the Remuneration Committee
Introduction
The spreads between power price and the cost of generation during 2010 have been at the lowest levels since the electricity
industry was privatised in 1990. The Remuneration Committee (“the Committee”) is acutely aware that it is these spreads that
primarily determine the returns to our shareholders in the short term. This is a critical component in the Committee’s determination
of the remuneration packages of executive directors and senior staff. The Committee also recognises that true alignment with the
interests of our shareholders requires management to make judgements to ensure that the business is managed effectively through
challenging market conditions and take action to develop an enduring, sustainable business which is less reliant on the spreads
available from coal-fired power generation.
The strong contracted power sales position which was put in place by management in 2009 provided a substantial hedge against
the low spreads and gave more certainty over our earnings. Operationally, 2010 was an exceptional year with a number of measures
at best ever performances levels for the power station. The resulting high availability and high output, allowed the Group to benefit
from the power station’s ability to provide critical support to the electricity system in some unusually cold weather over the winter.
These factors, combined with strong cost control, resulted in an improved profit position compared to the prior year.
There has also been progress in the strategic development of the biomass operation and the continuing growth of the retail
business, Haven Power Limited (“Haven Power”).
Collectively, these are important steps in positioning the Group for its long-term development, and have been taken against a
background of significant regulatory uncertainty.
The Committee has striven to maintain a fair remuneration package. It needs to reflect the current economic context and the
returns to shareholders, whilst also providing the right rewards and incentives to encourage the management of Drax’s transition
to become a sustainable, low carbon business.
The Committee has considered the environmental, social and governance implications of the remuneration arrangements and is
satisfied that they will not lead to irresponsible behaviours.
This Remuneration Committee report has been prepared on behalf of the Board by the Committee. The Committee has adopted
the principles of good governance as set out in the Combined Code 2008 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
(“the Regulations”).
These Regulations require the Company’s auditors to report on the “Audited information” in the Remuneration Committee report
and to state that this section has been properly prepared in accordance with the Regulations. For this reason the report is divided
into unaudited and audited information.
The Remuneration Committee report is subject to shareholder approval at the Annual General Meeting (“AGM”) on 13 April 2011.
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Part 1 – Unaudited information
The Committee
During the year, the Committee consisted of Tim Barker (as Chairman), Tim Cobbold (from 27 September 2010), Mike Grasby,
David Lindsell and Tony Thorne (from 29 June 2010), all of whom are independent non-executive directors, together with
Charles Berry, Chairman of the Company. Jamie Dundas was a member of the Committee until he retired from the Board
on 21 April 2010. The Company Secretary acts as Secretary to the Committee.
The Chief Executive is invited to attend meetings of the Committee except when her own remuneration is being discussed.
The Committee met on three occasions during the year and its members’ attendance record is set out on page 51. In addition to
its formal meetings, the Committee met to review the appointment of its principal remuneration adviser and receive presentations
from prospective advisers.
Drax Group plc Annual report and accounts 2010
60
REMUNERATION COMMITTEE REPORT
Advice to the Committee
Adviser
Services provided to the Committee
Other services provided to the Group
Kepler Associates LLP
(”Kepler”)
PricewaterhouseCoopers LLP
(“PwC”)
Independent adviser, appointed by the Committee,
until October 2010 to advise on market practice
and remuneration of executive and non-executive
directors.
Independent adviser appointed by the
Committee, from October 2010, to advise
on market practice and remuneration
of executive and non-executive directors.
Kepler provided no other services
to the Group.
From time to time the Group engages PwC
to provide financial, taxation and related advice
on specific matters. The Committee will continue
to monitor such engagements in order to be
satisfied that they do not affect PwC’s
independence as an adviser to the Committee.
Norton Rose LLP
Philip Hudson
Appointed by the Board, with the agreement
of the Committee, to provide legal advice
on long-term incentives and directors’
service contracts.
The Group 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.
Philip has attended meetings as Secretary
to the Committee and has provided assistance
on Human Resources (”HR”) matters to the
Committee as he also has overall responsibility
for HR.
Philip is Director of Corporate Affairs and
Company Secretary for the Group and
therefore provides advice and assistance to
the Board, Board Committee and other
companies within the Group.
As the Group’s auditor, Deloitte LLP (“Deloitte”) undertakes an audit annually of Part 2 of the Remuneration Committee report.
Deloitte provided no advice to the Committee during the year.
Principal responsibilities
The Committee has formal terms of reference, in accordance with which its 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 arrangements 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 personal 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
− overseeing any major changes in employee benefit structures throughout the Group and reviewing remuneration trends across
the Group.
Agenda
Each year the Committee agrees an annual work schedule. The regular scheduled matters considered by the Committee
in 2010 were:
− review of the performance of the Group by reference to the 2009 Balanced Corporate Scorecard (“BCS”), including the
application of the Committee’s discretionary factor;
− ratification of the measures and weightings of the 2010 BCS;
− 2009 annual bonus awards to directors and senior managers by reference to the BCS and individual performance against
personal objectives;
− agreeing personal objectives for directors and senior managers for 2010;
− review of base salary and overall remuneration packages for executive directors and senior managers;
− review of the Chairman’s remuneration;
− granting of awards under executive and all employee share plans;
− consideration of vesting of awards under executive share plans (no such awards vested during 2010); and
− review of fees paid to advisers.
Drax Group plc Annual report and accounts 2010
61
In addition, with the assistance of its advisers PwC, the Committee reviewed long-term incentive arrangements of the Group.
Further details of the review and of the adjustments to the performance conditions made as a result of the review are included in
the section of this report headed “Conditional share awards under the Bonus Matching Plan” on page 65. The Committee also
reviewed the rules of the Annual Bonus Plan, which it considered to remain appropriate. It considered that the opportunity under
the Annual Bonus Plan is consistent with market practice and the mix of performance measures applied via the BCS and further
personal objectives provide suitably challenging targets.
Remuneration policy
The core principles of the remuneration policy are to:
− manage salaries and benefits around market levels, taking into account remuneration in relevant comparator groups;
− link a significant proportion of remuneration to performance;
− award annual 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 (“TSR”) and to the delivery of Business Plan targets
with a particular emphasis on the achievement of strategic objectives.
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 was made up of:
Fixed
Variable
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Base salary
Pension
Annual performance bonus
(A mix of cash and deferred shares)
Long-term incentive comprising conditional
shares under the Bonus Matching Plan (BMP)
(Performance over three years)
Benefits in Kind (“BiK”)
(Car allowance, private medical etc)
All employee share plans
The table on page 62 shows the mix of remuneration that applied in 2010 for executive directors between variable and fixed, and
short-term and long-term remuneration.
During 2010, the Committee appointed PwC as its independent adviser, in place of Kepler Associates who had held that appointment
for more than five years. Following PwC’s appointment in October 2010, the Committee reviewed the remuneration arrangements
for its executive directors and senior management. The Committee was particularly concerned to ensure that these provided the
right incentive and retention elements to ensure alignment with the steps needed to manage the business effectively and to develop
a sustainable business relying less on coal generation, increasing its generation from biomass and developing its supply business.
The review concluded that base salary levels (effective from 1 April 2010 as detailed on page 67), benefits and annual bonus
performance structures were appropriate and aligned with the market. It was considered, however that there was an opportunity
to improve the long-term incentive arrangements provided through the Bonus Matching Plan (“BMP”), the vesting of awards under
which was determined wholly by relative TSR, which, because of its close correlation with commodity markets, is a measure over
which management has limited influence. The Committee considered that it was appropriate to retain a significant element of
relative TSR in the long-term incentive performance condition in order to align directly with the interests of shareholders, but also to
include measures relating to the operational and strategic objectives of the Company. The Committee therefore consulted with the
Company’s largest shareholders on proposals to adjust the performance conditions of the BMP to include additional performance
measures. Shareholders who were consulted were generally supportive of the proposed adjustments and the Committee took
account of comments made by shareholders in implementing the proposals. Further details of the BMP are included on page 65.
The Committee believes that the current remuneration arrangements, including the adjusted performance conditions of the
long-term incentive, are appropriate and fit for purpose taking account of the particular nature of Drax’s business.
Drax Group plc Annual report and accounts 2010
62
REMUNERATION COMMITTEE REPORT
Components of remuneration
The main components of current executive directors’ remuneration are summarised as follows:
Salary
− Salaries were benchmarked in 2010 against comparator groups of utilities, power
generators and selected other industrial and commercial companies with
comparable market capitalisation, turnover and employee numbers.
Annual bonus (% of salary)
Target
Maximum
− 25% of any bonus is settled in shares deferred for three years. Bonuses are based
on Group and individual performance against objectives.
Bonus match (maximum match as a multiple of annual bonus award)
− An award of conditional shares which vests based as to half on Drax three year TSR
compared to that of the FTSE 51-150 and half on achievement of operational and
strategic objectives over a three year period. (For awards made under the BMP in
2011 onwards).
Employer’s pension contribution (% of salary)
Chief
Executive
Finance
Director
Production
Director
65%
130%
60%
120%
60%
120%
1.5x
20%
1.5x
20%
1.5x
20%
Drax executive director – pay mix
% of total remuneration
Chief Executive
Finance Director
Production Director
100%
80%
60%
40%
20%
Pension
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
100%
80%
60%
40%
20%
Pension
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
100%
80%
60%
40%
20%
Pension
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
The chart values the annual bonus at target with a 5.0% p.a. forfeiture risk applied to the mandatory deferred bonus. The Bonus
Matching Plan opportunity is based on “fair value” assuming the annual bonus pays out at target and the fair value of a BMP
performance share is 4.5% of its face value.
The following paragraphs provide more detail in relation to each of the components of remuneration for executive directors.
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.
In March 2010, Kepler presented a report to the Committee in which executive director salaries were benchmarked against two
relevant comparator groups. Firstly, an industry sector group of 20 companies comprising companies in the electricity, oil and gas,
engineering and utilities sectors. Secondly, a comparator group comprising 20 companies of comparable size to Drax in terms of
market capitalisation, turnover and employee numbers from a variety of industry sectors. By way of an additional comparator, the
report reviewed reported remuneration at International Power plc, which was considered to be the company with characteristics
most similar to that of Drax. The report indicated that the remuneration of the Company’s executive directors was, in all cases, in
the lower quartile of the comparator group by reference to salary, cash and total remuneration.
The Committee also took account of the fact that no increase in salary had been awarded to the executive directors in the pay
review year ending on 31 March 2010, and also of the level of general pay increases within the Company. The pay increase agreed on
behalf of staff covered by collective bargaining arrangements was 2.7% to be effective on 1 April 2010, with further increases of RPI
plus 0.3% on 1 January 2011 and 1 January 2012. The collective settlement for 2009 had been 3.5%. It was therefore noted that, on
an annualised basis, general increase in salaries in the Company had been in excess of 7% over a two year period. The RPI based
increase for the collective bargaining group as at 1 January 2011 was 4.9%.
In light of the benchmarking exercise and the other factors considered, the Committee agreed that with effect from 1 April 2010:
− the Chief Executive’s base salary should be increased from £450,000 to £500,000;
− the Finance Director’s base salary should be increased from £300,000 to £340,000; and
− the Production Director’s base salary should be increased from £255,000 to £280,000.
Drax Group plc Annual report and accounts 2010
63
Following the increases, each of the executive directors’ salary, cash and total remuneration remained below median by reference
to the comparator group. The Committee consider this salary level to be appropriate taking into account all of the factors set out.
The Committee has determined that executive directors’ salaries shall be increased by 2% with effect from 1 April 2011.
Pensionable salary is derived from base salary only.
Annual performance bonus
The Group operates an annual bonus scheme. Bonuses are based on both Group and individual performance against objectives and
are designed to reward short-term performance.
The Committee determines Group performance measures using a BCS for which the Board sets challenging performance targets as
part of the Business Plan approval process. Each element of the scorecard has a low, target and stretch target measure and is given
a percentage weighting. No score is attributed if performance is below the low target and maximum score is attributed to stretch
target performance. In 2010 the scorecard had the following elements and weightings:
Financial targets
Elements
Underlying earnings per share; and
Cash(1) and controllable costs.
Production targets
Safety and Plant and operational performance.
Strategic and Business Plan objectives Trading and commercial;
Commissioning of co-firing plant;
Alternative and advantaged fuel combustion;
Biomass plant project development;
Supply business customer and volume growth; and
Other business plan objectives.
Weighting
20%
10%
20%
10%
5%
2.5%
10%
12.5%
10%
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Notes:
(1) Cash flow for the year excluding the impact of short-term investments prior to payment of equity dividends.
In setting these measures and weightings, the Committee recognises that the short-term financial performance of the Group is
substantially determined by commodity prices, and especially the dark green spread, over which management has limited control.
The Committee, nevertheless, believes that the variable elements of pay should be sufficiently linked to financial performance to
ensure that there is alignment with the interests of shareholders. The Committee considers that the annual bonus measures and
weightings achieve an appropriate balance between financial performance measures and other key performance measures that are
more directly in the control of management.
The Committee assesses corporate performance against each of these measures, and has a discretion to adjust the overall score by
a factor between 0.75x and 1.25x (i.e. +/–25%) to reflect performance and unexpected developments that are not directly included
in the scorecard, leading to an overall percentage score.
Following the process, the Committee assessed the corporate score for 2010 at 150%. A summary of the assessment is set out in
the following table:
Financial targets
Elements
Stretch target achieved for:
− underlying earnings per share;
− cash(1) and controllable costs.
Production targets
Between target and stretch target for safety; and
Stretch target achieved for plant and operational performance.
Strategic and Business Plan objectives Between target and stretch target for:
− trading and commercial;
− commissioning of co-firing plant; and
− supply business customer and volume growth.
Stretch target achieved for:
− Alternative and advantaged fuel combustion.
Below target for:
Biomass plant project development.
Notes:
(1) Cash flow for the year excluding the impact of short-term investments prior to payment of equity dividends.
Drax Group plc Annual report and accounts 2010
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REMUNERATION COMMITTEE REPORT
The Board determines personal performance objectives for each executive director. The Committee assesses performance against
these objectives and applies an individual performance multiplier of between zero and 1.5.
To determine the actual bonus awarded to each executive director, the target bonus is multiplied by the corporate score and by the
personal score, subject to a cap of two times the target bonus.
For bonus awards in 2010, the target bonus for the Chief Executive and the other executive directors was 65% and 60% of base
salary respectively. The maximum bonus was 130% and 120% respectively. 75% of any bonus award is paid in cash and 25% is
deferred in shares that vest after three years and are forfeited if the executive leaves the Group other than as a “good leaver”
before the shares vest.
The target and maximum bonus percentages for 2011 for the Chief Executive and the other executive directors are the same as
in 2010, and bonus measures and targets have been set using a similar process to that used previously. The corporate scorecard
weightings are, as for 2010, 30% financial, 20% production and 50% strategic and Business Plan. The weightings are set out
in the following table:
KPI
Financial performance
Group underlying earnings per share(1)
Cash(2) and controllable costs
Total financial
Production
Safety and production targets
Total production
Strategic and Business Plan
Regulatory
Biomass development
Retail development
Trading added value
Alternative/advantaged fuel burn
Other
Total strategic and Business Plan
Total weighting
Notes:
Target weighting
20%
10%
30%
20%
20%
10%
15%
10%
5%
5%
5%
50%
100%
(1) Calculated using underlying earnings, being profit attributable to equity shareholders adjusted to exclude the after tax impact of unrealised gains and losses on derivative
contracts (see note 8 to the consolidated financial statements).
(2) Cash flow for the year excluding the impact of short-term investments prior to payment of equity dividends
Drax Group plc Annual report and accounts 2010
65
Conditional share awards under the Bonus Matching Plan
The Group operates a Bonus Matching Plan (“BMP”) as a long-term performance share plan. Awards under the BMP have been
made in 2009 and 2010.
Under the BMP executive directors and other senior executives receive an annual grant of conditional shares to a value of up
to 1.5 times the amount of the executive’s annual bonus for the prior year. No payment is made for the shares, however vesting
is subject to service and performance conditions.
In respect of existing awards, 33% of awards granted to those members of senior management who are not members of the
Executive Committee will vest on the third anniversary of grant provided that the participant is still employed by the Group.
Awards granted to members of the Executive Committee and the balance (i.e. 67%) of the awards granted to other members
of senior management will vest on the third anniversary of grant provided the participant is still employed by the Group and
subject to achievement of a performance condition determined by the Committee and described below.
The Committee has approved a condition relating to the Company’s TSR over the three-year period measured from the start of the
financial year in which an award is granted relative to the TSR over the same period of the companies comprising the FTSE 51–150
(the Comparator Group).
The TSR condition provides for vesting as follows:
Company rank within the comparator group
Vesting of Matching Awards granted to
Executive Committee members
Vesting of Matching Awards granted to
other participants
Within upper quartile
At median
Below median
100%
15%
0%
100%
33%
33%
(subject normally to continuing service up to the third anniversary)
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In addition, the Committee must be satisfied that there has also been a demonstrable and sustained improvement in the Company’s
performance over the period. In determining this, the Committee will take into account all relevant factors but in particular will
consider improvement in the Company’s financial, production and trading performance.
Adjustment to performance conditions for 2011 and subsequent awards
As mentioned above, the Committee, assisted by its independent advisers PwC, conducted a review of its long-term remuneration
arrangements. This concluded that:
− the basic construct of the BMP remains appropriate for Drax;
− the maximum incentive opportunity under the BMP remains competitive and appropriate;
− relative TSR should remain a significant part of the performance measure for the BMP; and
− the performance measures on half of the matching shares under the BMP should be aligned more directly to short-term and
operational performance and to the achievement of long-term strategic objectives.
The current BCS used to measure performance in respect of the annual bonus arrangements has been developed over a number of
years and is a key tool for aligning reward to both business performance and strategy. The Committee has therefore concluded that
the BCS should be adapted so that it can be used for both short-term performance measurement for the assessment of annual
bonus payments and as a building block in the three year assessment of performance under the BMP.
Accordingly, the following amendments will be made to the performance measures for awards made under the BMP to executives
in 2011 (the BMP award):
− 50% of the BMP award will vest based on TSR relative to the FTSE 51–150 in line with the current performance condition
(the TSR award); and
− 50% of the BMP award will vest by reference to the Company’s performance against the average outcome from the BCS
over the three year performance period (the Scorecard award).
The TSR performance condition will continue to measure TSR performance relative to companies in the FTSE 51–150 over the three-
year performance period measured from the start of the financial year in which the BMP award is made. It will also continue to be
leveraged such that 0% of the TSR award will vest if Drax’s TSR ranking against the FTSE 51–150 at the end of the performance
period is less than Median, 15% of the TSR award (i.e. 7.5% of the total BMP award) will vest upon achieving Median and 100%
of the TSR award (i.e. 50% of the total BMP award) will vest upon achieving a ranking at least equal to upper quartile.
The Scorecard award will vest by reference to the average (mean) of the outputs of the BCS for each of the three years reported
on during the performance period, commencing at the start of the financial year in which the BMP award is made. The averaging
calculation is capped although the annual result on which the three year calculation will be made will not, for this purpose,
be so capped.
Drax Group plc Annual report and accounts 2010
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REMUNERATION COMMITTEE REPORT
It is then proposed that the Scorecard award will vest at the end of the three year performance period as follows:
Average BCS outcome
<1
1
1.5
% of Scorecard Award vesting
0%
15% (7.5% of total BMP award)*
100% (50% of total BMP award)*
* Straight-line vesting between 15% and 100% for average result between 1 and 1.5.
In addition, at the end of the three year performance period the Remuneration Committee will ratify each of the annual results
going into the average BCS calculation and will have the discretion to adjust the final outcome based on events over the period to
ensure an outcome that is consistent with the underlying performance progression of the business. In exercising their discretion
the Committee will pay particular regard to progress against the strategic objectives incorporated in the BCS including sustainable
development of biomass generation and the development of the Haven Power supply business.
For awards made to executives who are not members of the Executive Committee, one-third of the award will continue to vest on
the third anniversary of the award subject to continued service, one-third will vest by reference to TSR relative to the FTSE 51–150
and one-third will vest by reference to the average BCS output on the basis described above.
Pension
Executive directors are entitled to membership of the Group’s defined contribution pension plan. The employer’s contribution for
executive directors is 20% of base salary. Contributions were and are capped by the different statutory limits applicable before and
after 6 April 2006, although there is no executive director 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 Directors’ emoluments table in Part 2 of this report.
Benefits in kind (car, private medical cover, etc)
Car allowance
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:
Life assurance
Private medical cover
£17,500 per annum for the Chief Executive;
£12,000 per annum for other executive directors; and
£9,000 per annum for senior managers whose remuneration is determined by the Committee.
Life assurance (in a sum assured of four times base salary) is provided for the executive
directors and senior managers.
The Company’s policy is to offer BUPA private medical cover to all employees within the Group.
The executive directors and senior managers receive medical cover for them and their
dependants.
Relocation expenses and second
base expenses
Relocation expenses are paid where appropriate. Second base expenses provide an allowance
towards the cost of accommodation and travel when a director is required to spend a significant
amount of time at two Drax locations.
Executive Share Incentive Plan
Between 2006 and 2008, the Group operated the Executive Share Incentive Plan (“ESIP“). The ESIP is a long-term performance
share plan under which executives received conditional awards of shares which vest after a three-year performance period, subject
to Drax’s relative TSR compared to an index of comparator companies. The ESIP was replaced by the BMP in 2009. Details of
awards made to the executive directors under the ESIP are set out in Part 2 of this report.
The 2007 ESIP Award was due to mature on 19 April 2010. Over the three-year performance period, Drax’s TSR was below that of
the index. As a result, all awards under the 2007 ESIP award have lapsed and no shares have been transferred to participants. It is
anticipated that the 2008 ESIP Award will lapse on 14 April 2011, if the trend during the relative performance period continues.
Drax Group plc Annual report and accounts 2010
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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 current directors:
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Mike Grasby
David Lindsell
Tony Quinlan
Dorothy Thompson
Tony Thorne
Notes:
Annual
salary
£000
–
–
–
280
–
–
340
500
–
Annual
fees(1)
£000
63
200
53
–
53
63
–
–
53
Annual
bonus(2)
£000
Annual
benefits(3)
£000
Annual cash
pension(4)
£000
–
–
–
168
–
–
204
325
–
–
–
–
12
–
–
78
84
–
–
–
–
56
–
–
68
100
–
(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 and second base expenses 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.
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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 plans are the main vehicles for aligning staff with TSR.
SAYE
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. The plan was operated in 2006 and again in 2010, so that (subject to the statutory upper aggregate limit of £250 per
month on an individual’s savings under all SAYE plans) a participating employee could choose to save for either or both periods of
three or five years.
The options in both 2006 and 2010 were granted at the permitted discount of 20% to the prevailing share price (determined in
accordance with the plan rules) resulting in option prices of 636 pence per share and 310.5 pence per share respectively and may be
exercised upon successful completion of the three year or five year savings contract to which they are linked.
The five year contracts under the 2006 Plan are due to mature on 1 July 2011. The closing mid-market price of the Drax Group plc
shares on 31 December 2010 was 368.3 pence per share, which is materially below the option price of 636 pence per share.
Details of the SAYE options held by the executive directors are shown in the table in Part 2 of this report.
The Committee agreed that invitations to the SAYE be made again in 2011, immediately following the preliminary results
announcement. The 20% discount to the market price is applied and participants will be able to take out SAYE contracts over three
and five years and contribute in total no more than £250 per month.
Drax Group plc Annual report and accounts 2010
68
REMUNERATION COMMITTEE REPORT
SIP
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 Matching Shares for each Partnership Share); and
− allow the investment in shares of dividends received in respect of SIP shares.
The table below details how the SIP has been operated between 2006 and 2009:
2006
2007
2008
2009
SIP Free Share
Award(1)
Participants received
£2,000 worth of shares.
Participants received £2,500 worth of shares in
each year.
Participants received
£1,000 worth of shares.
Partnership Shares Participants were allowed to invest up to the maximum permitted of £1,500 (subject to an overriding
maximum of 10% of salary) in each year.
Partnership shares matched on a one-for-one basis in each year.
Matching Share
Award(1)
Notes:
(1) The SIP Trustee was funded by the Group to purchase the required Free and Matching Shares in order to avoid any dilution.
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.
Details of the shares allocated to executive directors under the SIP are shown in the table in Part 2 of this report.
The Committee decided not to operate the SIP in 2010 or 2011.
Provision of shares for share plans — dilution
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. BMP).
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.
Share ownership guidelines
The Company has share ownership guidelines for executives participating in its performance share plans. They are 100% and 50%
of base salary for executive directors and other senior manager ESIP/BMP participants, respectively.
Those who receive shares by virtue of share plan 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.
No shares have vested since the introduction of the relevant performance share plan.
Drax Group plc Annual report and accounts 2010
69
Service contracts
Executive directors’ service agreements are of indefinite duration, 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 2010, 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
Tim Cobbold
Jamie Dundas
Peter Emery
Mike Grasby
David Lindsell
Tony Quinlan
Dorothy Thompson
Tony Thorne
Contract start date
Contract term
Notice period
by the Company
(months)
Notice period
by the director
(months)
15 December 2005
17 April 2008
27 September 2010
15 December 2005
6 years
3 years
3 years
6 years
14 June 2004
Indefinite duration
15 December 2005
1 December 2008
6 years
3 years
1 September 2008
Indefinite duration
26 September 2005
Indefinite duration
29 June 2010
3 years
1
6
1
1
12
1
1
12
12
1
1
6
1
1
6
1
1
12
12
1
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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 10.30am 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 Group. 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 £48,750 in fees for that appointment during 2010.
Non-executive directors
The Chairman and non-executive directors receive fees in respect of their services. They do not receive any pension or benefits in
kind. Nor are they eligible for any annual performance bonus or any of the share-based reward plans. The Chairman’s notice period
is six months whilst the other non-executive directors have a notice period of one month.
The remuneration of the Chairman is determined by the Committee whilst that of the other non-executive directors is determined
by the Chairman and the executive directors. It is designed to:
− recognise prevailing market rates for the Chairman’s and non-executive directors’ fees in other listed companies of a similar
market value or turnover to Drax;
− reflect the responsibilities and time commitment; and
− attract and retain individuals with the necessary skills and experience to contribute to the future growth of the Company.
Chairman
The Committee determined that upon his appointment on 17 April 2008, the Chairman’s remuneration should be at the annual rate
of £200,000, which is reflected in the table of annualised rates of pay on page 67. The Committee determined that the Chairman
would not receive any increase in his remuneration in the review year ending on 31 March 2011.
Drax Group plc Annual report and accounts 2010
70
REMUNERATION COMMITTEE REPORT
Other non-executive directors
The fees for non-executive directors were determined in April 2009 as shown below:
Basic fee
£52,500 per annum
Senior Independent Director (to include chair of a committee other than the Audit Committee)
£10,000 per annum
Audit Committee Chairmanship
Other committee Chairmanship
Value of £100 invested
£10,000 per annum
£7,500 per annum
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. These indices have been chosen as suitable broad comparators against which the
Company’s shareholders may judge their relative returns given that, in recent years, the Company has been a member of both the
FTSE100 and FTSE250 indices. The graph reflects the TSR (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 2010.
TSR performance since listing — Drax versus FTSE100 and FTSE250
as at 31 December 2010
200
150
100
Value (£)
Drax
FTSE100
FTSE250
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 Mar 09
Jun 09
Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10
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 2010.
Directors’ emoluments
The emoluments payable in respect of 2010 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 were as follows:
Salary
£000
–
–
–
–
274
–
–
330
487
–
Fees
£000
61
200
14
16
–
55
61
–
–
27
Cash bonus in
respect of
2010
£000
Benefits
£000
Pension(1)
£000
–
–
–
–
252
–
–
306
488
–
–
–
–
–
17
–
–
78
83
–
–
–
–
–
55
–
–
66
97
–
Total
2010
£000
61
200
14
16
598
55
61
780
1,155
27
Total
2009
£000
58
200
–
51
488
58
54
602
903
–
Tim Barker
Charles Berry
Tim Cobbold(2)
Jamie Dundas(3)
Peter Emery
Mike Grasby
David Lindsell
Tony Quinlan
Dorothy Thompson
Tony Thorne(4)
Notes:
(1) Annual contribution by the Group to directors’ pension plans or cash in lieu.
(2) Tim Cobbold joined the Board on 27 September 2010 and therefore his emoluments are for only part of the year.
(3) Jamie Dundas retired from the Board on 21 April 2010 and therefore his emoluments are for only part of the year.
(4) Tony Thorne joined the Board on 29 June 2010 and therefore his emoluments are for only part of the year.
Drax Group plc Annual report and accounts 2010
71
The average pensionable pay of an executive director is nine times the average of pensionable pay for employees within the
collective bargaining unit.
Directors’ interests under the BMP
The following information shows the interests of the directors as at the end of the financial year in the Company’s BMP:
Awards made
during the year
(number)
Awards vesting
during the year
(number)
Awards lapsing
during the year
(number)
As at
31 December
2010
(number)
Market value
at the date
of award
(pence)
Peter Emery
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
Tony Quinlan
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
Dorothy Thompson
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
As at
1 January
2010
(number)
69,489
11,581
–
–
81,752
4,716
–
–
138,382
23,063
–
–
85,171
14,195
–
–
103,541
17,257
–
–
–
–
175,039
29,173
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
69,489
11,581
85,171
14,195
81,752
4,716
103,541
17,257
138,382
23,063
175,039
29,173
495.40
495.40
388.02
388.02
495.40
495.40
388.02
388.02
495.40
495.40
388.02
388.02
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Details of the conditions subject to which the above awards will vest are given on page 65.
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:
Peter Emery
2007 Award
2008 Award
Dorothy Thompson
2007 Award
2008 Award
As at
1 January
2010
(number)
25,718
39,861
46,104
71,057
Awards made
during the year
(number)
Awards vesting
during the year
(number)
Awards lapsing
during the year
(number)
As at
31 December
2010
(number)
Market value
at the date
of award
(pence)
–
–
–
–
–
–
–
–
25,718
–
–
39,861
46,104
–
–
71,057
797.1
577.0
797.1
577.0
Details of the conditions subject to which the above awards will vest are given on page 63.
Drax Group plc Annual report and accounts 2010
72
REMUNERATION COMMITTEE REPORT
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
2010
(number)
Share options
granted during
the year
(number)
Share options
exercised during
the year
(number)
Share options
lapsed during
the year
(number)
Exercise price
per share
(pence)
As at
31 December
2010
(number)
Exercise period
Tony Quinlan
2010 Plan
Dorothy Thompson
–
2,922
2006 Plan
2,531
–
2010 Plan
–
2,922
–
–
–
–
310.5
1 May 2013 to
31 October 2013
2,531
636.0
–
310.5
1 July 2011 to
31 December 2011
1 May 2013 to
31 October 2013
2,922
–
2,922
The middle market closing quotation for an ordinary share of the Company on 31 December 2010, was 368.3 pence and the daily
middle market closing quotations during the financial year ranged from 326.3 pence to 444.0 pence.
Directors’ interests in Drax Group plc 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.
As at 31 December 2010
As at 1 January 2010
Ordinary
shares
SIP
shares(1)
SAYE
option
shares(2)
ESIP
share
awards
BMP
share
awards(3)
Ordinary
shares
SIP
shares(1))
SAYE
option
shares(2)
ESIP
share
awards
BMP
share
awards(3)
3,462
1,730
–
–
–
–
–
–
–
–
–
–
–
–
–
3,462
1,730
–
–
–
–
–
–
–
–
–
–
–
–
–
30,551
2,616
– 39,861 180,436
30,551
2,616
– 65,579
81,070
1,730
7,500
–
–
–
–
–
–
–
–
1,730
–
–
–
2,500
803 2,922
– 207,266
2,500
803
–
–
–
–
–
–
–
– 86,468
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Mike Grasby
David Lindsell
Tony Quinlan
Dorothy Thompson
63,569
2,616 2,922 71,057 365,657
63,569
2,616
2,531
117,161
161,445
Tony Thorne
7,500
–
–
–
–
–
–
–
–
–
Notes:
(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.
(3) Includes both the Matching and Deferred elements of BMP.
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 2010 and the date upon which this report was
approved by the Board.
This report was reviewed and approved by the Board on 21 February 2011.
Tim Barker
Chairman of the Remuneration Committee
GROUP – INDEPENDENT AUDITOR’S REPORT
73
Drax Group plc Annual report and accounts 2010
To the members of Drax Group plc
We have audited the Group financial statements of Drax Group plc for the year ended 31 December 2010 which comprise the
Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated balance sheet, the
Consolidated statement of changes in equity, the Consolidated cash flow statement and the related notes 1 to 31. The financial
reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. 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 auditor’s 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 auditor
As explained more fully in the Directors’ responsibilities statement, the directors are responsible for the preparation of the Group
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion
on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements.
Opinion on financial statements
In our opinion the Group financial statements:
− give a true and fair view of the state of the Group’s affairs as at 31 December 2010 and of its profit for the year then ended;
− have been properly prepared in accordance with IFRSs as adopted by the European Union; and
− have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is
consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
− certain disclosures of directors’ remuneration specified by law are not made; or
− we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
− the directors’ statement contained within the Directors’ report in relation to going concern;
− the part of the Corporate governance statement relating to the Company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review; and
− certain elements of the report to shareholders by the Board on directors’ remuneration.
Other matters
We have reported separately on the parent company financial statements of Drax Group plc for the year ended 31 December 2010
and on the information in the Directors’ remuneration report that is described as having been audited.
i
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Carl D Hughes MA FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
21 February 2011
Drax Group plc Annual report and accounts 2010
74
CONSOLIDATED INCOME STATEMENT
Revenue
Fuel costs in respect of generation
Cost of power purchases
Grid charges
Other retail costs
Total cost of sales
Gross profit
Other operating and administrative expenses
Unrealised losses on derivative contracts
Operating profit
Interest payable and similar charges
Interest receivable
Profit before tax
Tax charge
Profit for the year attributable to equity holders
Earnings per share
– Basic and diluted
All results relate to continuing operations.
Years ended 31 December
2010
£m
2009
£m
Notes
1,648.4
1,475.8
(840.9)
(165.8)
(82.2)
(9.0)
(1,097.9)
550.5
(212.1)
(60.5)
277.9
(25.2)
2.2
254.9
(66.5)
188.4
(691.0)
(209.5)
(68.0)
(4.4)
(972.9)
502.9
(200.0)
(129.7)
173.2
(17.3)
1.9
157.8
(46.9)
110.9
pence
per share
52
pence
per share
31
4
18
5
5
6
8
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
75
Drax Group plc Annual report and accounts 2010
Profit for the year
Actuarial losses on defined benefit pension scheme
Deferred tax on actuarial losses on defined benefit pension scheme
Fair value (losses)/gains on cash flow hedges
Deferred tax on cash flow hedges before corporation tax rate change
Impact of corporation tax rate change on deferred tax on cash flow hedges
Other comprehensive (expense)/income
Total comprehensive income for the year attributable to equity holders
Notes
29
6
24
6
6
Years ended 31 December
2010
£m
188.4
(6.2)
1.7
(232.6)
65.1
0.6
(171.4)
17.0
2009
£m
110.9
(15.1)
4.2
375.5
(105.1)
–
259.5
370.4
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Drax Group plc Annual report and accounts 2010
76
CONSOLIDATED BALANCE SHEET
Assets
Non-current assets
Intangible assets – goodwill
Property, plant and equipment
Derivative financial instruments
Current assets
Inventories
Intangible assets – ROCs held for sale
Trade and other receivables
Derivative financial instruments
Short-term investments
Cash and cash equivalents
Liabilities
Current liabilities
Trade and other payables
Current tax liabilities
Borrowings
Derivative financial instruments
Net current assets
Non-current liabilities
Borrowings
Derivative financial instruments
Provisions
Deferred tax liabilities
Retirement benefit obligations
Net assets
Shareholders’ equity
Issued equity
Capital redemption reserve
Share premium
Merger reserve
Hedge reserve
Accumulated losses
Total shareholders’ equity
As at 31 December
2010
£m
2009
£m
Notes
9
10
18
11
12
13
18
14
15
16
17
18
17
18
19
20
29
21
23
23
23
24
25
10.7
1,184.2
25.8
1,220.7
10.7
1,177.2
112.5
1,300.4
116.6
33.1
233.0
112.6
95.0
236.0
826.3
285.0
189.7
61.7
197.9
734.3
92.0
65.3
1.5
6.4
244.2
37.3
354.7
958.0
42.1
1.5
420.7
710.8
59.5
(276.6)
958.0
194.2
11.7
208.9
308.8
55.0
80.4
859.0
227.3
157.8
62.9
178.3
626.3
232.7
126.9
8.9
5.9
333.6
33.1
508.4
1,024.7
42.1
1.5
420.7
710.8
226.4
(376.8)
1,024.7
The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for issue by
the Board of directors on 21 February 2011.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
77
Drax Group plc Annual report and accounts 2010
At 1 January 2009
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income for the year
Issue of share capital (note 21)
Equity dividends paid (note 7)
Movement in equity associated with
share-based payments (note 22)
Own shares held by employee trust
Own shares purchased and vested
with employees
At 1 January 2010
Profit for the year
Other comprehensive expense
Total comprehensive (expense)/income for
the year
Equity dividends paid (note 7)
Movement in equity associated with
share-based payments (note 22)
Issued
equity
£m
39.2
–
–
–
2.9
–
–
–
–
Capital
redemption
reserve
£m
Share
premium
£m
1.5
420.7
Merger
reserve
£m
710.8
Hedge
reserve
£m
Accumulated
losses
£m
Total
£m
(44.0)
(434.9)
693.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
270.4
270.4
–
–
–
–
–
110.9
(10.9)
100.0
102.6
110.9
259.5
370.4
105.5
(145.0)
(145.0)
2.0
(0.8)
2.0
(0.8)
(0.7)
(0.7)
42.1
1.5
420.7
710.8
226.4
(376.8)
1,024.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
188.4
`188.4
(166.9)
(4.5)
(171.4)
(166.9)
–
–
183.9
(86.5)
17.0
(86.5)
2.8
2.8
At 31 December 2010
42.1
1.5
420.7
710.8
59.5
(276.6)
958.0
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Drax Group plc Annual report and accounts 2010
78
CONSOLIDATED CASH FLOW STATEMENT
Cash generated from operations
Income taxes (paid)/refunded
Other gains
Interest paid
Interest received
Net cash from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Acquisition of a subsidiary
Short-term investments
Net cash used in investing activities
Cash flows from financing activities
Equity dividends paid
Proceeds on issue of share capital
Repayment of borrowings
Other financing costs paid
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
Notes
26
7
21
17
15
2010
£m
484.7
(56.1)
2.0
(23.0)
3.5
411.1
(62.3)
–
(40.0)
(102.3)
(86.5)
–
(65.2)
(1.5)
–
(153.2)
155.6
80.4
236.0
2009
£m
321.4
19.4
–
(13.4)
0.7
328.1
(93.1)
(11.7)
(55.0)
(159.8)
(145.0)
105.5
(170.1)
(7.0)
(1.5)
(218.1)
(49.8)
130.2
80.4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
79
Drax Group plc Annual report and accounts 2010
1. General information
Drax Group plc (the “Company”) is incorporated in England and Wales under the Companies Act. The Company and its subsidiaries
(together the “Group”) operate in the electricity generation and supply 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 to 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 International Financial Reporting Standards (“IFRSs”). Also,
the financial statements have 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 a going concern basis, as set out in the Directors’ report on page 42, and on the
historical cost basis, except for certain financial assets and liabilities that have been measured at fair value.
Management has performed a review of the presentation of certain items in the income statement and balance sheet. As Drax
increases the amounts of biomass burnt at the power station, the value of Renewables Obligation Certificates (“ROCs”) in the
balance sheet is likely to become more significant. Accordingly, management has concluded that ROCs should be separately
presented in the balance sheet. £33.1 million (2009: £11.7 million) has been reclassified from “inventories” to “intangible assets –
ROCs held for sale”.
Additionally, management felt that metering charges, broker fees and ROC costs incurred at Haven Power Limited (“Haven Power”)
should be separately disclosed under “other retail costs” within the income statement in order to provide better information to
users of the Annual report and accounts, as the retail business continues to grow. Accordingly £2.9 million of costs included in other
operating and administrative expenses and £1.5 million of costs included in fuel costs has been reclassified to other retail costs in the
2009 comparative figures.
These are presentational changes only and have no net impact on operating profit or net assets for either of the financial years
disclosed.
Adoption of new and revised accounting standards
In 2010, several new, revised and amended standards became effective. These are IFRS 3 (revised) “Business combinations”, IAS 27
(revised) “Consolidated and separate financial statements”, IAS 28 “Investments in associates”, IAS 31 “Interests in joint ventures”,
IFRS 2 “Share-based payment” (amendment), IAS 39 (revised) “Financial instruments: recognition and measurement – eligible
hedged items”, IFRIC 18 “Transfers of assets from customers” and IFRIC 17 “Distribution of non-cash assets to owners”. The
adoption of these standards and interpretations has not had a material impact on the financial statements of the Group. In future
periods, IFRS 3 is expected to impact the accounting for business combinations, with any future acquisition costs being expensed in
the income statement.
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).
− IFRIC 14 “Prepayments of a minimum funding requirement” – effective for accounting periods beginning on or after
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1 January 2011.
− IAS 24 (revised) “Related party disclosures” – effective for accounting periods beginning on or after 1 January 2011.
− IAS 32 (amendment) “Financial instruments: Presentation on classification of rights issues” – revision effective for accounting
periods beginning on or after 1 February 2010.
− IFRIC 19 “Extinguishing financial liabilities with equity instruments” – effective for accounting periods beginning on or after
1 July 2010.
− IFRS 7 (amendment) “Financial instruments: Disclosures on derecognition” – amendment effective for accounting periods
beginning on or after 1 July 2011.
− IFRS 9 “Financial instruments – Classification and measurement” – effective for accounting periods beginning on or after
1 January 2013.
− IAS 12 (amendment) “Deferred tax: Recovery of underlying assets” – effective for accounting periods beginning on or after
1 January 2012.
− IFRS 1 (amendment) “Severe hyperinflation and removal of fixed dates for first-time adopters” – effective for accounting periods
beginning on or after 1 July 2011.
− Improvements to IFRS 2010 – effective for accounting periods beginning on or after 1 January 2011, with certain aspects on or
after 1 July 2010.
The adoption of these standards in future periods is not expected to have a material impact on the financial statements
of the Group.
Drax Group plc Annual report and accounts 2010
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
Property, plant and equipment – Estimated useful lives and residual values are reviewed annually, taking into account prices
prevailing at each balance sheet date. The carrying values of property, plant and equipment 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 management’s reasonable estimates of future prices, output and costs, and is therefore subjective.
Impairment – The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy
stated in note 3 (F). The recoverable amounts of cash-generating units have been determined based on value in use calculations.
These calculations require the use of estimates (see note 9).
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, inflation 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,
taking into account the nature of the losses, and the certainty of the relevant offsetting income streams.
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 and foreign exchange rates 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 or foreign exchange payment or receipt, at future dates. The Group generally bases forward price curves upon readily
obtainable market price quotations, as the Group’s commodity and forward foreign exchange 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 group companies.
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 ROCs are recorded at the invoiced value, net of VAT. Revenue is recognised when the risks and rewards of
ownership have been substantially 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.
Drax Group plc Annual report and accounts 2010
81
Revenue from the sale of electricity direct to customers through our retail business, Haven Power is recorded after deduction of
trade discounts, VAT and Climate Change Levy. Revenue is recognised on the supply of electricity when a contract exists, supply has
taken place, a quantifiable price has been established or can be determined and the receivables are likely to be recovered.
Energy supplied, but not yet measured or billed is calculated based on consumption statistics and selling price estimates.
(D) Segmental reporting
The business activity of the Group consists of the generation and sale of electricity at the Drax Power Station, along with the sale
of electricity direct to customers through our retail business, Haven Power. The retail segment currently falls below the threshold
of separate reportable segments under IFRS 8 “Operating Segments” and as such we only present one operating segment.
(E) Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate
of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the
Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s
identifiable assets, liabilities and contingent liabilities that meet the criteria for recognition under IFRS 3 are recognised at their
fair value at the acquisition date. For business combinations made after 1 July 2010, costs directly attributable to the business
combination are not included in the measurement of cost, but expensed in the income statement in line with IFRS 3 (revised).
(F) Goodwill
Goodwill arising on an acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the
business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities
recognised. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised
immediately in the income statement and is not subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from
the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually or
more frequently where there is an indication it may be impaired. If the recoverable amount of the cash-generating unit is less than
its carrying amount, the impairment loss is allocated first to reduce the carrying amount of goodwill and then to its other assets.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
(G) 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:
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Main generating plant and freehold buildings
Other plant and machinery
Decommissioning asset
Plant spare parts
Years
35
3-20
35
35
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 2010
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued)
(H) 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) or sales value net of expenses. 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.
(I) 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.
(J) Inventories
Inventories primarily comprise coal and biomass stocks, together with other fuels and consumables. Coal and biomass stocks are
valued at the lower of the weighted average cost and net realisable value. Other stocks of fuel and consumables are valued at the
lower of average cost and net realisable value.
(K) Intangible assets – ROCs held for sale
The Group is able to claim ROCs from the Office of Gas and Electricity Markets (“OFGEM”) as a result of burning renewable fuels
instead of coal. A market exists for the sale of ROCs and the Group recognises revenue in the income statement at the point where
the risks and rewards of ownership have been substantially transferred to a third party. The attributable incremental cost of
generating ROCs above that of burning coal, limited to the recoverable amount expected to be realised, is included within current
intangible assets in respect of ROCs earned but not yet sold.
(L) CO2 emissions allowances
The Group recognises its free emissions allowances received under the UK NAP at £nil cost allocated to each financial year on a
straight line basis. Any additional allowances purchased in the market are recorded at cost. The Group also recognises a liability in
respect of its unsettled obligations to deliver emissions allowances. The charge to the income statement within fuel costs and the
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 UK NAP, market purchases, sales and forward contracts already in place allocated
to the financial year, and the market price at the balance sheet date.
(M) 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 have been substantively enacted at the balance sheet date and 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 comprehensive income, in which case the deferred tax is also
dealt with in equity and is shown in the statement of comprehensive income.
(N) 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 recognised in full in the
statement of comprehensive income.
The current service cost and interest cost of the pension charge are deducted in arriving at operating profit in other operating and
administrative expenses. 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.
(O) 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.
Drax Group plc Annual report and accounts 2010
83
(P) 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.
(Q) 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.
Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that
some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs.
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 treated as effective hedges, or the income statement to the extent the contracts are not treated as
effective hedges.
The Group designates certain hedging instruments used to address commodity price 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 Group also 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 cash flow hedges, or the income statement to the extent the
contracts are not effective as hedges.
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 the income statement. Amounts deferred
in equity are released in the periods when the hedged item is recognised in the income statement.
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
Issued equity – Ordinary shares are classified as equity as evidenced by their residual interest in the assets of the Company after
deducting all of its liabilities. 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.
Short-term investments – Short-term investments includes cash held on deposits with financial institutions, with a maturity
of greater than three months at inception.
Trade and other receivables and payables – Trade and other receivables and payables are measured at amortised cost using
the effective interest method. 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.
Interest income is recognised by applying the effective interest rate, except for short-term items where the recognition
of interest would be immaterial.
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Drax Group plc Annual report and accounts 2010
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Operating profit
The following charges have been included in arriving at operating profit:
Staff costs (note 28)
Depreciation of property, plant and equipment (note 10)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total other operating and administrative expenses
Years ended 31 December
2010
£m
67.3
52.2
36.4
56.2
212.1
2009
£m
57.6
51.7
39.3
51.4
200.0
Total other operating and administrative expenses for 2010 includes £17.3 million incurred at Haven Power (2009: £9.8 million).
Auditors’ remuneration
During the year the Group obtained the following services from its auditors, Deloitte LLP, at fees 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 fees:
Pursuant to legislation – interim review
Other services
Total audit related fees
Taxation services
Other advisory services
Total non-audit fees
Total auditors’ remuneration
5. Net finance costs
Interest payable and similar charges:
Interest payable on bank borrowings
Other financing charges
Unwinding of discount on provisions (note 19)
Amortisation of deferred finance costs
Total interest payable and similar charges
Interest receivable:
Interest income on bank deposits
Total interest receivable
Years ended 31 December
2010
£000
251
39
290
59
13
362
70
8
78
2009
£000
251
39
290
59
22
371
45
52
97
440
468
Years ended 31 December
2010
£m
(17.5)
(4.9)
(0.5)
(2.3)
(25.2)
2.2
2.2
2009
£m
(14.0)
–
(0.5)
(2.8)
(17.3)
1.9
1.9
Drax Group plc Annual report and accounts 2010
85
6. Taxation
The income tax expense reflects the estimated effective tax rate on profit before tax for the Group for the year ended
31 December 2010 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the
income statement.
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 with the corresponding interest charged in the Drax Holdings Limited income statement each year to 31 December
2008. 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 which updated rules on, amongst other things, the tax deductibility of
interest and which was generally expected to reduce the tax effectiveness of the Eurobond financing arrangements.
As previously described, 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. We have continued our dialogue with HMRC over this tax position. However, whilst
we still believe we have a strong and robust case, we are no clearer as to whether we will ultimately be successful.
Changes in the rate of tax
On 28 June 2010, the Finance Bill 2010-11 was presented to Parliament. The Bill proposed four annual reductions in the rate of
corporation tax from 28% to 24% by 2014-15. At the balance sheet date, the reduction in the corporation tax rate to 27% from
April 2011 had been enacted. The resulting net reduction in the deferred tax liability has been reflected in the balance sheet at
31 December 2010 and gave rise to a credit to the income statement for the year ended 31 December 2010 of £8 million. It is
currently expected that each future Finance Bill enacted will reduce the corporation tax rate by 1% until the rate of 24% is reached.
Tax charge comprises:
Current tax
Deferred tax:
– Before impact of corporation tax rate change
– Impact of corporation tax rate change
Tax charge
Tax on items (credited)/charged to equity:
Deferred tax on actuarial losses on defined benefit pension scheme (note 20)
Deferred tax on cash flow hedges (note 20)
Impact of corporation tax rate change on deferred tax on cash flow hedges (note 20)
Years ended 31 December
2010
£m
2009
£m
88.5
89.1
(14.4)
(7.6)
66.5
(42.2)
–
46.9
Years ended 31 December
2010
£m
2009
£m
(1.7)
(65.1)
(0.6)
(67.4)
(4.2)
105.1
–
100.9
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The tax differs from the standard rate of corporation tax in the UK of 28% (2009: 28%). The differences are explained below:
Profit before tax
Profit before tax multiplied by the rate of corporation tax in the UK of 28% (2009: 28%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Other
Change to corporation tax rate
Total tax charge
Years ended 31 December
2010
£m
254.9
71.4
(0.5)
1.5
1.7
(7.6)
66.5
2009
£m
157.8
44.2
–
1.4
1.3
–
46.9
Drax Group plc Annual report and accounts 2010
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. Dividends
Amounts recognised as distributions to equity holders in the year
(based on the number of shares in issue at the record date):
Interim dividend for the year ended 31 December 2010 of 14.1 pence per share paid on
15 October 2010 (2009: 4.1 pence per share paid on 7 October 2009)
Final dividend for the year ended 31 December 2009 of 9.6 pence per share paid on
14 May 2010 (2009: 38.3 pence per share paid on 22 May 2009)
Years ended 31 December
2010
£m
2009
£m
51.5
15.0
35.0
86.5
130.0
145.0
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 2010 of 17.9 pence per share (equivalent to approximately £65.3 million)
payable on or before 13 May 2011. The final dividend has not been included as a liability as at 31 December 2010.
8. 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, when relevant, to take account of outstanding share options in relation to
the Group’s Approved Savings-Related Share Option Plan (“SAYE Plan”) and contingently issuable shares under the Group’s
Executive Share Incentive Plan (“ESIP”) and Bonus Matching Plan (“BMP”). The underlying earnings per share has been calculated
after excluding the after tax impact of marking to market derivative contracts which are not hedged.
Reconciliations of the earnings and weighted average number of shares used in the calculation are set out below:
Earnings:
Earnings attributable to equity holders of the Company for the purposes of
basic and diluted earnings
After tax impact of unrealised losses on derivative contracts
Underlying earnings attributable to equity holders of the Company
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 plans
Weighted average number of ordinary shares for the purposes of
diluted earnings per share (millions)
Earnings per share – basic and diluted (pence)
Underlying earnings per share – basic and diluted (pence)
9. Intangible assets – goodwill
Cost and carrying amount:
At 1 January 2009, 31 December 2009 and 31 December 2010
Years ended 31 December
2010
£m
2009
£m
188.4
44.6
233.0
110.9
93.4
204.3
Years ended 31 December
2010
2009
364.9
0.7
352.7
–
365.6
352.7
52
64
31
58
£m
10.7
Goodwill arising on the Haven Power acquisition has been allocated to the Haven cash-generating unit (Haven Power Limited, or
Haven Power). At 31 December 2010, the fair value of goodwill was significantly in excess of its book value; accordingly a sensitivity
analysis has not been disclosed.
Drax Group plc Annual report and accounts 2010
87
The recoverable amount of Haven Power was calculated based on a value in use calculation. The key assumptions used in these
calculations are those regarding the discount rates and future cash flows. Management estimates discount rates using pre-tax rates
that reflect current market assessments of the time value of money and the risks specific to the business. The first five years of cash
flows are based upon the five year Business Plan approved by the Board. Future cash flows have been taken in perpetuity, assuming
no growth rate is applied to the final year of the Business Plan. The pre-tax rate used to discount the forecast cash flows from Haven
Power is 12% reflecting a reasonable assumption of the applicable cost of capital.
10. Property, plant and equipment
Cost:
At 1 January 2009
Acquisition of subsidiary
Additions at cost
Disposals
At 1 January 2010
Additions at cost
Disposals
Issues
Transfers
At 31 December 2010
Accumulated depreciation:
At 1 January 2009
Charge for the year
Disposals
At 1 January 2010
Charge for the year
Disposals
At 31 December 2010
Net book amount at 31 December 2009
Net book amount at 31 December 2010
Freehold land and
buildings
£m
Plant and
equipment
£m
Plant
spare parts
£m
Total
£m
153.5
1,280.4
36.4
1,470.3
–
4.7
–
1.2
86.1
(9.2)
158.2
1,358.5
1.2
–
–
11.5
53.4
(10.2)
6.5
(21.5)
–
1.5
–
37.9
4.6
–
(6.5)
10.0
1.2
92.3
(9.2)
1,554.6
59.2
(10.2)
–
–
170.9
1,386.7
46.0
1,603.6
32.9
3.5
–
36.4
3.5
–
39.9
121.8
131.0
296.5
44.3
(8.9)
331.9
47.6
(10.2)
369.3
1,026.6
1,017.4
5.2
3.9
–
9.1
1.1
–
10.2
28.8
35.8
334.6
51.7
(8.9)
377.4
52.2
(10.2)
419.4
1,177.2
1,184.2
i
F
n
a
n
c
i
a
l
s
Assets in the course of construction amounted to £30.4 million at 31 December 2010 (2009: £113.3 million).
Plant and equipment includes assets held under finance lease agreements with a carrying value at 31 December 2010 of £0.7 million
(2009: £0.7 million).
11. Inventories
Coal
Biomass
Other fuels and consumables
As at 31 December
2010
£m
79.2
21.9
15.5
116.6
2009
£m
163.4
14.2
16.6
194.2
The cost of inventories recognised as an expense in the year ended 31 December 2010 was £658.3 million (2009: £581.4 million).
Drax Group plc Annual report and accounts 2010
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. Intangible assets – ROCs held for sale
Cost:
At 1 January 2009
Generated
Utilised
Sold
At 1 January 2010
Generated
Utilised
Sold
At 31 December 2010
13. Trade and other receivables
Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments and other receivables
ROCs
£m
22.1
28.3
(0.5)
(38.2)
11.7
42.4
(1.3)
(19.7)
33.1
As at 31 December
2010
£m
2009
£m
195.4
32.8
4.8
233.0
173.8
29.0
6.1
208.9
Trade receivables principally represent sales of electricity to a number of counterparties. At 31 December 2010, the Group had
amounts receivable from three (2009: four) significant counterparties, representing 75% (2009: 73%) of trade receivables, all of
which paid within 15 days of receipt of invoice in line with agreed terms. Counterparty risk is discussed in note 18.
Total revenue for the year ended 31 December 2010 includes amounts of £307.0 million, £295.6 million and £159.1 million (2009:
£222.9 million and £221.8 million) derived from three customers (2009: two customers), each representing 10% or more of the
Group’s revenue for the year.
Management does not consider there to be a significant concentration of credit risk and as a result, does not believe that a further
credit risk provision is required in excess of the normal provision for doubtful debts of £2.6 million (2009: £1.2 million).
This allowance has been determined by reference to past default experience, and includes £2.6 million in relation to Haven Power
(2009: £1.1 million).
The movement in the allowance for doubtful debts is laid out in the following table:
At 1 January
Acquisition of subsidiary
Receivables written off
Provision for receivables impairment
At 31 December
Years ended 31 December
2010
£m
1.2
-
(1.0)
2.4
2.6
2009
£m
-
0.1
(1.2)
2.3
1.2
14. Short-term investments
Short-term investments
Drax Group plc Annual report and accounts 2010
89
As at 31 December
2010
£m
95.0
2009
£m
55.0
Short-term investments represent cash held on deposits with a maturity of greater than three months at inception.
15. 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.
16. Trade and other payables
Amounts falling due within one year:
Trade payables
Accruals
Other payables
As at 31 December
2010
£m
236.0
2009
£m
80.4
As at 31 December
2010
£m
13.4
239.4
32.2
285.0
2009
£m
26.4
180.4
20.5
227.3
Accruals at 31 December 2010 include £146.7million (2009: £113.6 million) with respect to the Group’s estimated net liability to
deliver CO2 emissions allowances.
17. Borrowings
Current:
Term loans
Finance lease liabilities
Non-current:
Term loans
Finance lease liabilities
i
F
n
a
n
c
i
a
l
s
As at 31 December
2009
£m
62.8
0.1
62.9
As at 31 December
2009
£m
126.4
0.5
126.9
2010
£m
61.6
0.1
61.7
2010
£m
64.9
0.4
65.3
Scheduled term loan repayments of £32.5 million were made on 30 June and 31 December in 2010 and 2009. These repayments
were made in line with the target repayment profile as a result of the levels of cash available for debt service.
On 3 August 2009, the Group completed the refinancing of the term loan facility and the £100 million working capital facility which
would otherwise have fallen due for repayment on 31 December 2010. The maturity date of both facilities has been extended to
December 2012 to coincide with the maturity of the £200 million letter of credit facility, which remains in place. Future scheduled
debt repayments are £67.5 million in each of 2011 and 2012, after which point the term loan will have been repaid in full.
Drax Group plc Annual report and accounts 2010
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. Borrowings (continued)
Analysis of borrowings
Borrowings at 31 December 2010 and 31 December 2009 consisted principally of bank loans held by the Company’s subsidiary Drax
Finance Limited as follows:
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
As at 31 December 2010
Borrowings
before deferred
finance costs
£m
Deferred
finance
costs
£m
Net
borrowings
£m
135.0
0.5
135.5
(67.6)
67.9
Borrowings
before deferred
finance costs
£m
200.0
0.6
200.6
(65.1)
135.5
(8.5)
–
(8.5)
5.9
(2.6)
126.5
0.5
127.0
(61.7)
65.3
As at 31 December 2009
Deferred
finance
costs
£m
(10.8)
–
(10.8)
2.2
(8.6)
Net
borrowings
£m
189.2
0.6
189.8
(62.9)
126.9
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 in 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 2010 the Group’s contingent liability in respect of these guarantees amounted to £134.3 million (2009:
£141.3 million).
In addition, the Group has access to an undrawn £100 million revolving credit facility agreement, which may be used to issue letters
of credit or for working capital, with a final maturity date of December 2012.
Drax Group plc Annual report and accounts 2010
91
18. Financial instruments
The Group issues or holds financial instruments for two purposes: financial instruments relating to the financing and management
of risks for the Group’s operations; and financial instruments relating to the financing and risks in 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, short-term investments, 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 principally to
term loans, the carrying amounts of which approximate their fair values by virtue of being floating rate instruments.
The fair values and maturities of the Group’s derivative financial instruments which are marked-to-market and recorded in the
balance sheet at 31 December 2010 and 31 December 2009 were as follows:
Commodity contracts:
Less than one year
More than one year but not more than two years
More than two years
Interest rate swaps:
Less than one year
More than one year but not more than two years
More than two years
Forward foreign currency exchange contracts:
Less than one year
More than one year but not more than two years
More than two years
Total
Less: non-current portion
Commodity contracts
Interest rate swaps
Forward foreign currency exchange contracts
Total non-current portion
Current portion
As at 31 December 2010
As at 31 December 2009
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
87.8
19.3
6.1
–
–
–
24.8
0.3
0.1
(167.5)
(0.3)
(0.3)
(4.6)
–
–
(25.8)
(0.5)
(0.4)
286.1
89.4
23.1
–
–
–
(141.3)
(5.7)
(0.3)
(4.4)
(2.1)
(0.8)
22.7
(32.6)
–
–
–
–
138.4
(199.4)
421.3
(187.2)
(25.4)
–
(0.4)
(25.8)
112.6
0.6
–
0.9
1.5
(197.9)
(112.5)
–
–
(112.5)
308.8
6.0
2.9
–
8.9
(178.3)
i
F
n
a
n
c
i
a
l
s
The amounts recorded in the income statement in respect of derivatives which are marked-to-market were as follows:
Unrealised losses on derivative contracts recognised in arriving at operating profit
Years ended 31 December
2010
£m
2009
£m
(60.5)
(129.7)
The unrealised gains and losses recorded in the income statement arise from a proportion of our derivative contracts which do not
qualify for hedge accounting; largely financial coal and foreign exchange.
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, and
the five year baseload contract with Centrica which commenced on 1 October 2010.
− Commodity contracts fair value – The fair value of commodity contracts qualifying as derivative financial instruments, not
excluded through the own use exemption, is calculated by reference to forward market prices 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.
Drax Group plc Annual report and accounts 2010
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Financial instruments (continued)
− 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.
All financial instruments that are measured subsequent to initial recognition at fair value, have been grouped into Level 2, as defined
below, based on the degree to which fair value is observable.
Categorisation within the fair value measurement hierarchy has been determined on the basis of the lowest level input that is
significant to the fair value measurement of the relevant asset or liability as follows:
Level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or
liabilities;
Level 2 – fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are
not based on observable market data (unobservable inputs).
The fair value of commodity contracts and forward foreign exchange currency contracts is determined by comparison between
forward market prices and the contract price; therefore these contracts are categorised as Level 2. The fair value of interest rate
swap contracts is determined by discounting future cash flows using forward interest rate curves at the balance sheet date.
These are also categorised as Level 2 inputs.
There have been no transfers during the year between Level 1, 2 or 3 category inputs.
Risk
The Group’s activities expose it to a variety of financial risks including commodity price risk, interest rate risk, foreign currency risk,
liquidity risk, counterparty risk and credit 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 the Risk
Management Committees as detailed in Corporate governance (page 52) 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, biomass
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, biomass and other fuels under either fixed or variable priced contracts with different maturities from
a variety of domestic and international sources. All international 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. All physical biomass purchase contracts are
currently entered into and held for the purpose of the Group’s own purchase, sale or usage requirements and are therefore
designated as own use.
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.
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 2010 would decrease/increase by £17.3 million (2009: decrease/increase by
£16.1 million). This is mainly attributable to the Group’s exposure to financial coal derivatives; and
Drax Group plc Annual report and accounts 2010
93
− other equity reserves would decrease/increase by £9.3 million (2009: decrease/increase by £30.3 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 17.
Following the refinancing of the term loan in 2009, new interest rate swaps were taken out which do not meet the required hedge
criteria and hence movements in the fair value of the new swaps are recognised in the income statement. The fair value of the
previous swaps was frozen on refinancing and has been unwound over the period to December 2010.
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 and net assets
for the year ended 31 December 2010 would increase/decrease by £0.2 million (2009: profit after tax would decrease/increase
by £0.8 million, other equity reserves would increase/decrease by £1.2 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, biomass purchases in Canadian and US dollars and euros, 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 for the year ended 31 December 2010 would increase/decrease by £6.1 million (2009: increase/decrease by
£1.1 million). This is mainly attributable to the Group’s exposure to foreign currency exchange contracts for the purposes of
meeting commitments under financial coal contracts; and
− other equity reserves would decrease/increase by £0.9 million (2009: net assets would increase/decrease by £1.1 million)
as a result of the changes in the fair value of hedged foreign currency exchange contracts.
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.
The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include
both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from
interest rate curves at the balance sheet date.
i
F
n
a
n
c
i
a
l
s
Term loans, gross value
Finance lease liabilities, carrying value
Add interest payments
Borrowings, contractual maturity
Trade and other payables
As at 31 December 2010
Within
3 months
£m
3 months–
1 year
£m
1–5 years
£m
–
–
–
–
232.2
232.2
67.5
0.1
8.9
76.5
52.8
129.3
67.5
0.4
4.0
71.9
-
71.9
Total
£m
135.0
0.5
12.9
148.4
285.0
433.4
Drax Group plc Annual report and accounts 2010
94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. Financial instruments (continued)
Term loans, gross value
Finance lease liabilities, carrying value
Add interest payments
Borrowings, contractual maturity
Trade and other payables
Within
3 months
£m
3 months–
1 year
£m
As at 31 December 2009
1–5 years
£m
135.0
0.5
13.5
149.0
–
65.0
0.1
10.5
75.6
79.8
155.4
149.0
Total
£m
200.0
0.6
24.0
224.6
227.3
451.9
–
–
–
–
147.5
147.5
Interest payments are calculated based on forward interest rates estimated at the balance sheet date using publicly available
information. The interest rates payable at the balance sheet dates were as follows:
Term loans
As at 31 December
2010
% p.a.
7.45
2009
% p.a.
5.93
The following tables set out details of the expected contractual 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
Commodity contracts, net
Interest rate swaps
Forward foreign currency exchange contracts, net
Within 1 year
£m
1–2 years
£m
186.2
(3.2)
148.0
331.0
Within 1 year
£m
692.5
(4.4)
194.2
882.3
45.0
(1.4)
87.4
131.0
1–2 years
£m
248.6
(2.1)
(58.9)
187.6
As at 31 December 2010
>2 years
£m
(14.6)
–
50.1
35.5
Total
£m
216.6
(4.6)
285.5
497.5
As at 31 December 2009
>2 years
£m
76.6
(0.8)
(157.3)
(81.5)
Total
£m
1,017.7
(7.3)
(22.0)
988.4
Counterparty risk
As the Group relies on third party suppliers for the delivery of coal, biomass 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.
The Group is also exposed to the risk of collateral calls against its trading contracts should the Group’s creditworthiness deteriorate
and its counterparties demand collateral to protect their exposure to the Group. In order to mitigate this risk the Group has
undertaken a number of actions – refining its trading strategy to concentrate on more credit-efficient structures and to transact
more fixed margin contracts which are less exposed to commodity price movements; and increasing the volume of business traded
through its supply company, Haven Power, which is less exposed to collateral calls. In addition, the Group entered into a trading
agreement with Barclays Bank PLC on 5 May 2010, which enables it to enter into trading contracts without the requirement to
post collateral up to a fixed amount of £135 million, irrespective of the Group’s underlying credit rating.
Drax Group plc Annual report and accounts 2010
95
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
Short-term investments
Trade and other receivables
Derivative financial instruments
As at 31 December
2010
£m
2009
£m
236.0
95.0
235.6
138.4
705.0
80.4
55.0
210.1
421.3
766.8
Trade and other receivables are stated gross of the provision for doubtful debts of £2.6 million (2009: £1.2 million). 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 management
The Group manages its capital to ensure it is able to continue as a going concern, and maintain its credit rating while maximising
the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of
shareholders’ equity excluding the hedge reserve, together with net debt or, when the Group has net cash, shareholders’ equity
excluding the hedge reserve less net cash. Net debt/cash comprises borrowings disclosed in note 17, cash and cash equivalents in
note 15 and short-term investments in note 14. Equity attributable to the shareholders of the Company comprises issued capital,
capital reserves and accumulated losses, excluding the hedge reserve, (see Consolidated statement of changes in equity).
Maintaining an optimal supporting capital structure is one of the Group’s key priorities, and as such, our performance is detailed on
page 16 of the Business review. The capital structure of the Group is as follows:
Borrowings
Cash and cash equivalents
Short-term investments
Net cash/(debt)
Total shareholders’ equity, excluding hedge reserve
19. Provisions
At 1 January 2009
Additional provision
Unwinding of discount
At 1 January 2010
Unwinding of discount
At 31 December 2010
As at 31 December
2010
£m
(127.0)
236.0
95.0
204.0
898.5
2009
£m
(189.8)
80.4
55.0
(54.4)
798.3
i
F
n
a
n
c
i
a
l
s
Reinstatement
£m
2.6
2.8
0.5
5.9
0.5
6.4
The provision for reinstatement 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 property, plant and equipment and is being
depreciated over the useful lives of the related assets. The unwinding of the discount is included in finance costs (note 5).
The provision is estimated using the assumption that the reinstatement will take place between 2039 and 2045, and 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.
Drax Group plc Annual report and accounts 2010
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. Deferred tax
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 2009
Acquisition of subsidiary
(Credited)/charged to the income statement
Credited to equity in respect of actuarial losses
Charged to equity in respect of cash flow hedges
At 1 January 2010
(Credited)/charged to the income statement
Credited to equity in respect of actuarial losses
Credited to equity in respect of cash flow hedges
At 31 December 2010
Financial
instruments
£m
(4.4)
1.1
(36.3)
–
105.1
65.5
(15.9)
–
(65.7)
(16.1)
Accelerated
capital
allowances
£m
270.0
–
(7.9)
–
–
262.1
(7.5)
–
–
Other
liabilities
£m
17.6
–
–
–
–
17.6
–
–
–
Other
assets
£m
(9.4)
–
2.0
(4.2)
–
(11.6)
1.4
(1.7)
–
Total
£m
273.8
1.1
(42.2)
(4.2)
105.1
333.6
(22.0)
(1.7)
(65.7)
254.6
17.6
(11.9)
244.2
Deferred tax assets are recognised to the extent that the realisation of the related tax benefit through future associated taxable
profits is probable (note 3 (B)).
As described in note 6, no deferred tax asset has been recognised with respect to the unwind of the Eurobond financing structure.
The Group did not recognise deferred tax assets estimated at £3.2 million at 31 December 2010 (2009: £3.7 million) in respect of
trading losses that can be carried forward against future taxable income.
21. Issued equity
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each
Issued and fully paid:
2009 – 364,853,890 ordinary shares of 1116⁄29 pence each
2010 – 364,859,988 ordinary shares of 1116⁄29 pence each
As at 31 December
2010
£m
2009
£m
100.0
100.0
–
42.1
42.1
42.1
–
42.1
The movement in allotted and fully paid share capital of the Company during each year was as follows:
At 1 January
Issue of share capital
Issued under employee share schemes
At 31 December
Years ended 31 December
2010
number
2009
number
364,853,890 339,398,968
–
25,454,922
6,098
–
364,859,988 364,853,890
Issue of share capital
On 23 June 2009, the Group announced the placing of approximately 25.5 million new ordinary shares, representing 7.5% of the
Group’s existing issued ordinary share capital. The placing raised £105.5 million and was undertaken to help maintain the Group’s
investment grade debt rating, with the proceeds used to pay down debt on 31 July 2009.
The placing shares were credited as fully paid and rank equally in all respects with the existing ordinary shares of 1116⁄29 pence each
in the capital of the Company, including the right to receive all dividends and other distributions declared, made or paid in respect of
such shares after the date of issue of the placing shares.
Drax Group plc Annual report and accounts 2010
97
The share placing was achieved through a “cash box” placing arrangement. The benefit of a cash box placing arrangement is that
it is legally structured to enable the merger relief criteria within the Companies Act to apply. Accordingly the funds raised in excess
of the nominal value of the shares issued have been treated as distributable within retained reserves rather than credited to the
share premium account. As a consequence, of the £105.5 million funds raised, share capital increased by £2.9 million, and the
balance of £102.6 million reduced the Group’s accumulated losses in the year ended 31 December 2009.
Issued under employee share schemes
On 1 September 2010, a total of 6,098 ordinary shares of 1116⁄29 pence each in the Company were issued in satisfaction of shares
vesting in accordance with the rules of the Group’s Bonus Matching Plan to six individuals whose employment with the Group had
terminated due to retirement. There were no such issues in 2009.
The Company has only one class of shares, which are ordinary shares, carrying no right to fixed income. No shareholders have
waived their rights to dividends.
22. Share-based payments
Costs recognised in the income statement in relation to share-based payments are as follows:
SIP
ESIP
BMP
SAYE
Years ended 31 December
2010
£m
0.2
0.4
2.0
0.2
2.8
2009
£m
1.3
0.4
0.3
–
2.0
Share Incentive Plan (“SIP”)
Under the 2009 SIP Free share award, the Company’s employee benefit trust purchased shares to be held on behalf of qualifying
employees equating to a cash value of approximately £1,000 per employee based on the Company’s share price at the time of the
award. The fair value of the 2009 Free share award of £0.7 million was charged to the income statement in full in the year ended
31 December 2009. There were no SIP Free shares awarded in 2010.
Between 2007 and 2009, qualifying employees could buy up to £1,500 worth of Partnership shares in any one tax year. Matching
shares were awarded to employees to match any Partnership shares they bought, in a ratio of one-to-one, with the cost of Matching
shares borne by the Group. The fair value of Matching shares awarded in the year to 31 December 2009 of £0.5 million was charged
to the income statement on a straight-line basis over a one year vesting period now ended. There were no awards under the SIP
Partnership and Matching share plan in 2010.
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Shares in the Company held under trust and under the Company’s control as a result of the SIP were as follows:
Shares
held at
1 January
2010
number
Shares
acquired
during year
number
Shares
transferred
during year
number
Shares
held at
31 December
2010
number
Cost at
31 December
2010
£000
Nominal
value at
31 December
2010
£000
Market
value at
31 December
2010
£000
SIP
381,096
28,561
(24,068)
385,589
2,465
45
1,420
Executive Share Incentive Plan (“ESIP”)
Between 2006 and 2008 the Group operated the ESIP. Under the ESIP, annual awards of performance shares were made at £nil
consideration to executive directors and other senior staff up to a normal maximum of 100% of salary. Shares vest according to
whether Drax’s Total Shareholder Return (“TSR”) matches or outperforms an index (determined in accordance with the scheme
rules) over three years. The fair value of the 2008, 2007 and 2006 ESIP awards, of £1.2 million, £0.9 million and £1.9 million
respectively are or have been charged to the income statement on a straight-line basis over the corresponding three year vesting
periods.
Drax Group plc Annual report and accounts 2010
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. Share-based payments (continued)
Bonus Matching Plan (“BMP”)
The BMP was introduced in 2009 to replace the ESIP. Under the BMP, annual awards of performance and service related shares are
made at £nil consideration to executive directors and other senior staff up to a normal maximum of 150% of their annual bonus.
A proportion of the shares vesting is conditional upon whether Drax’s TSR matches or out-performs an index (determined in
accordance with the scheme rules) over three years. The fair value of the 2010 BMP awards of £3.0 million (2009: £2.8 million) is
being charged to the income statement on a straight-line basis over the three year vesting period to April 2013 (2009: April 2012).
Movements in the number of share options outstanding for the ESIP and BMP awards are as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
ESIP
number
2010
BMP
number
ESIP
number
754,925
981,932
1,272,877
2009
BMP
number
–
–
1,404,989
–
1,010,332
(36,180)
(101,967)
(234,710)
(28,400)
–
(6,098)
–
(275,946)
–
(283,242)
–
–
442,799 2,278,856
754,925
981,932
Savings-Related Share Option Plan (“SAYE Plan”)
In April 2010, participation in the SAYE Plan was offered to all qualifying employees. Options were granted for employees to
acquire shares at a price of 310.5 pence (representing a discount of 20% to the prevailing market price determined in accordance
with the scheme rules), exercisable at the end of three or five year savings contracts. The fair value of the 2010 options granted in
connection with the SAYE Plan of £0.6 million is being charged to the income statement over the life of the respective contracts.
The only previous grant under the SAYE Plan, in July 2006 at an exercise price of 636 pence, resulted in a fair value of £0.5 million
being charged to the income statement over the life of the respective contracts.
Movements in the number of share options outstanding for the SAYE plans are as follows:
At 1 January
Granted
Forfeited
Expired
At 31 December
2010
2009
SAYE 3 Year
number
SAYE 5 Year
number
SAYE 3 Year
number
SAYE 5 Year
number
–
464,449
223,959
530,905
701,877
730,811
–
–
(33,356)
(288,917)
(490)
(66,456)
–
–
(223,469)
–
668,521
906,343
–
464,449
Fair value of share-based payment awards
The fair value of share-based payment awards was determined as follows:
SIP – based on price paid at award dates;
ESIP and BMP – Monte-Carlo valuation model, which takes into account the estimated probability of different levels of vesting; and
SAYE – Black-Scholes model which compares exercise price to share price at the date of grant.
Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration Committee report.
Drax Group plc Annual report and accounts 2010
99
23. Other reserves
At 1 January and 31 December
Capital redemption reserve
Share premium
Merger reserve
2010
£m
1.5
2009
£m
1.5
2010
£m
420.7
2009
£m
420.7
2010
£m
710.8
2009
£m
710.8
The capital redemption reserve arose when the Group completed a share buy-back programme in 2007.
The share premium and the merger reserve arose on the financial restructuring of the Group which took place in 2005.
24. Hedge reserve
At 1 January
(Losses)/gains recognised:
– Commodity contracts
– Forward foreign currency exchange contracts
Released from equity:
– Commodity contracts
– Interest rate swaps
Related deferred tax, net (note 20)
At 31 December
Years ended 31 December
2010
£m
226.4
(68.3)
(1.0)
(167.2)
3.9
65.7
59.5
2009
£m
(44.0)
327.0
–
47.3
1.2
(105.1)
226.4
The Group’s cash flow hedges relate to commodity contracts (principally commitments to sell power), forward foreign currency
exchange contracts 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 18.
The expected release profile from equity of post-tax hedging gains and losses is as follows:
As at 31 December 2010
Within 1 year
£m
1–2 years
£m
>2 years
£m
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Commodity contracts
Forward foreign currency exchange contracts
Interest rate swaps
Commodity contracts
Interest rate swaps
42.0
(0.3)
–
41.7
Within 1 year
£m
151.8
(2.8)
149.0
13.8
(0.1)
–
13.7
1–2 years
£m
60.8
–
60.8
Total
£m
60.1
(0.6)
–
59.5
4.3
(0.2)
–
4.1
As at 31 December 2009
>2 years
£m
16.6
–
16.6
Total
£m
229.2
(2.8)
226.4
Drax Group plc Annual report and accounts 2010
100
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. Accumulated losses
At 1 January
Profit for the year
Actuarial losses on defined benefit pension scheme (note 29)
Deferred tax on actuarial losses on defined benefit pension scheme (note 20)
Issue of share capital (note 21)
Equity dividends paid (note 7)
Net movements in equity associated with share-based payments
At 31 December
26. Cash generated from operations
Profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax charge
Depreciation and loss on disposal of property, plant and equipment
Unrealised losses on derivative contracts
Defined benefit pension scheme charge
Non-cash charge for share-based payments
Years ended 31 December
2010
£m
2009
£m
(376.8)
(434.9)
188.4
(6.2)
1.7
–
(86.5)
2.8
110.9
(15.1)
4.2
102.6
(145.0)
0.5
(276.6)
(376.8)
Years ended 31 December
2010
£m
188.4
25.2
(2.2)
66.5
52.2
60.5
5.6
2.8
2009
£m
110.9
17.3
(1.9)
46.9
52.0
129.7
5.1
2.0
Operating cash flows before movement in working capital
399.0
362.0
Changes in working capital
Decrease/(increase) in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Total decrease/(increase) in working capital
(Increase)/decrease in intangible assets – ROCs held for sale
Defined benefit pension scheme contributions
Cash generated from operations
77.6
(25.4)
62.5
114.7
(21.4)
(7.6)
484.7
(27.4)
61.8
(77.7)
(43.3)
10.4
(7.7)
321.4
Drax Group plc Annual report and accounts 2010
101
27. Reconciliation of net cash/(debt)
Net debt at 1 January
Increase/(decrease) in net cash
Increase in short-term investments
Decrease in borrowings
Net cash/(debt) at 31 December
28. Employees and directors
Staff costs (including executive directors)
Included in other operating and administrative expenses (note 4):
Wages and salaries
Social security costs
Other pension costs (note 29)
Share-based payments (note 22)
Average monthly number of people employed (including executive directors)
Operations
Retail services
Business services
The average number of people employed for 2010 includes 298 at Haven Power (2009: 153).
Years ended 31 December
2010
£m
(54.4)
155.6
40.0
62.8
2009
£m
(234.7)
(49.8)
55.0
175.1
204.0
(54.4)
Years ended 31 December
2010
£m
52.7
4.3
7.5
2.8
67.3
2009
£m
45.2
3.7
6.7
2.0
57.6
Years ended 31 December
2010
number
593
298
153
1,044
2009
number
591
153
156
900
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Drax Group plc Annual report and accounts 2010
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Retirement benefit obligations
The Group operates an approved defined benefit scheme on behalf of the Drax Power Group (“DPG”) of the Electricity Supply
Pension Scheme (“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
As at the year end, the most recent actuarial valuation of the DPG ESPS was 31 March 2007. This has been updated as at
31 December 2010 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
As at 31 December
2010
% p.a.
5.3
3.5
3.3
4.5
5.9
2009
% p.a.
5.7
3.6
3.4
5.1
6.1
The mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions
are that a member who retired in 2010 at age 60 will live on average for a further 26 years (2009: 25 years) after retirement if they
are male, and for a further 28 years (2009: 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 29 years respectively (2009: 27 years and
28 years respectively).
The amounts recognised in the balance sheet are determined as follows:
Defined benefit obligation
Fair value of plan assets
Net liability recognised in the balance sheet
As at 31 December
2010
£m
167.2
(129.9)
37.3
2009
£m
146.5
(113.4)
33.1
The amounts recognised in the income statement, entirely within other operating and administrative expenses, are as follows:
Current service cost
Interest cost
Expected return on plan assets
Total included in staff costs (note 28)
The actual return on plan assets was a gain of £10.5 million (2009: gain of £13.2 million).
The amounts recognised in the statement of comprehensive income 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 comprehensive income at 31 December
Years ended 31 December
2010
£m
4.3
8.4
(7.1)
5.6
2009
£m
3.3
7.0
(5.2)
5.1
Years ended 31 December
2010
£m
(53.7)
(6.2)
(59.9)
2009
£m
(38.6)
(15.1)
(53.7)
Changes in the present value of the defined benefit obligation are as follows:
Drax Group plc Annual report and accounts 2010
103
Defined benefit obligation at 1 January
Current service cost
Employee contributions
Interest cost
Actuarial 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 on plan assets
Actuarial gains
Employer contributions
Employee contributions
Benefits paid
Fair value of plan assets at 31 December
Employer contributions included payments to reduce the actuarial deficit of £3.7 million (2009: £3.7 million).
The major categories of plan assets as a percentage of total plan assets were as follows:
Equities
Fixed interest bonds
Hedge funds
Cash
Years ended 31 December
2010
£m
146.5
4.3
1.0
8.4
9.6
(2.6)
167.2
2009
£m
114.4
3.3
1.0
7.0
23.1
(2.3)
146.5
Years ended 31 December
2010
£m
113.4
7.1
3.4
7.6
1.0
(2.6)
129.9
2009
£m
93.8
5.2
8.0
7.7
1.0
(2.3)
113.4
As at 31 December
2010
%
40.5
42.4
13.0
4.1
2009
%
40.2
39.8
14.5
5.5
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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 an increase of 0.5% in the discount rate would have the effect of decreasing the net liability recognised in the
balance sheet by approximately £15 million (2009: £14 million) and a decrease of 0.5% in the discount rate would increase the
net liability recognised in the balance sheet by £17 million (2009: £16 million).
Drax Group plc Annual report and accounts 2010
104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Retirement benefit obligations (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
2010
£m
(167.2)
129.9
(37.3)
(9.6)
3.4
2009
£m
(146.5)
113.4
(33.1)
(23.1)
8.0
2008
£m
(114.4)
93.8
(20.6)
13.2
(26.1)
Defined contribution scheme
Pension costs for the defined contribution scheme are as follows:
Total included in staff costs (note 28)
As at 31 December
2007
£m
(118.6)
105.1
(13.5)
(1.1)
(2.2)
2006
£m
(109.4)
96.9
(12.5)
5.3
3.3
Years ended 31 December
2010
£m
1.9
2009
£m
1.6
The Group expects to contribute £12.3 million to its pension plans during the 12 months ended 31 December 2011.
In February 2011, the pension trustees and the Company agreed the 2010 triennial valuation. The agreed assumptions were adopted
in the 2010 year end valuation. The Company intends to fund the deficit over a period of eight years.
30. 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
As at 31 December
2010
£m
72.7
39.7
2009
£m
103.6
77.3
Future commitments to purchase fuel under fixed and variable priced contracts
1,345.7
1,369.8
The future aggregate minimum lease payments under non-cancellable operating leases for buildings are as follows:
Within one year
Within two to five years
After five years
As at 31 December
2010
£m
0.4
1.5
3.8
5.7
2009
£m
0.4
1.5
4.3
6.2
Drax Group plc Annual report and accounts 2010
105
31. 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 70 to 72.
Salaries and short-term benefits
Aggregate amounts receivable under share-based incentive schemes
Company contributions to money purchase pension schemes
Years ended 31 December
2010
£000
2,749
595
218
2009
£000
2,213
248
201
3,562
2,662
Amounts receivable under 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 22).
On 7 January 2010, the Company announced that its subsidiary Drax Power Limited (“DPL”) had chosen Eaga plc as its partner to
provide services in connection with DPL’s Community Energy Saving Programme obligation. Charles Berry, who is Chairman of both
Drax Group plc and Eaga plc had no involvement in the discussions which led to the decision, or the decision itself, which was taken
at Executive Committee level. During the year ended 31 December 2010 services purchased from Eaga plc totalled £5.0 million
(2009: £1.3 million), of which £6.0 million was outstanding at 31 December 2010 (2009: £1.3 million); no security or guarantee
was provided.
There were no other transactions with directors for the periods covered by these consolidated financial statements.
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Drax Group plc Annual report and accounts 2010
106
COMPANY – INDEPENDENT AUDITOR’S REPORT
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 2010 which comprise
the parent Company balance sheet and the related notes 1 to 7. The financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. 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 auditor’s 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 auditor
As explained more fully in the Directors’ responsibilities statement, the directors are responsible for the preparation of the parent
Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an
opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the parent Company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements.
Opinion on financial statements
In our opinion the parent Company financial statements:
− give a true and fair view of the state of the parent Company’s affairs as at 31 December 2010;
− have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
− have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
− the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006; and
− the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent
with the parent Company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in
our opinion:
− adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been
received from branches not visited by us; or
− the parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or
− certain disclosures of directors’ remuneration specified by law are not made; or
− we have not received all the information and explanations we require for our audit.
Other matters
We have reported separately on the Group financial statements of Drax Group plc for the year ended 31 December 2010.
Carl D Hughes MA FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
21 February 2011
COMPANY BALANCE SHEET
Drax Group plc Annual report and accounts 2010
107
Fixed assets
Investment in subsidiaries
Current assets
Amounts due from other Group companies
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
As at 31 December
2010
£000
2009
£000
Notes
3
466,096
463,459
10,564
92,785
–
66
4
8,810
10,630
101,599
(2,338)
8,292
(7,258)
94,341
474,388
557,800
4
5
5
5
5
42,148
1,502
42,147
1,502
420,688
420,688
10,050
93,463
474,388
557,800
These financial statements were approved by the Board of directors on 21 February 2011.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
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NOTES TO THE COMPANY BALANCE SHEET
1. Summary of significant accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006. 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.
(A) Cash flow statement
The cash flows of the Group are included in the Consolidated cash flow statement 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.
(B) 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.
(C) 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 408 of the Companies Act 2006, 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 21 February 2011. Drax Group plc reported a
profit for the year ended 31 December 2010 of £0.5 million (2009: £135.1 million, or £1.1 million before dividends received from other
Group companies).
The Company has no employees other than the directors, whose remuneration was paid by a subsidiary undertaking and a
proportion was re-charged to the Company. The amount re-charged during the year was £578,000 (2009: £506,000).
The auditors’ remuneration for audit services provided to the Company for the year ended 31 December 2010 was £20,000
(2009: £20,000).
3. Fixed asset investments
Carrying amount:
At 1 January 2010
Capital contribution
At 31 December 2010
Subsidiary
undertakings
£000
463,459
2,637
466,096
The capital contribution relates to the share-based payment charge associated with the Share Incentive Plan, Executive Share
Incentive Plan, Savings-Related Share Option Plan and Bonus Matching Plan schemes, and arises because the beneficiaries of the
scheme are employed by a subsidiary. For more information see note 22 to the consolidated financial statements.
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)
(dormant company) (1)
Drax Limited (holding company) (1)
Drax Group plc Annual report and accounts 2010
109
Country of incorporation
and registration
Type of share
Group effective
shareholding
England and Wales
Ordinary
England and Wales
–(3)
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Cayman Islands
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Drax Power Limited (trading company, power generation) (1)
England and Wales
Ordinary
Drax Ouse (dormant company) (1)
Drax Investments Limited (investment company) (1)
England and Wales
Ordinary
England and Wales
Ordinary
Drax Biomass Developments Limited (holding company)
England and Wales
Ordinary
Drax Biomass (Selby) Limited (non-trading company) (1)
England and Wales
Ordinary
Drax Biomass (Immingham) Limited (non-trading company) (1)
England and Wales
Ordinary
Drax Biomass (Tyneside) Limited (non-trading company,
formerly Mid Suffolk Power Limited) (1)
BondPower Limited (non-trading company)
England and Wales
Ordinary
Jersey
Ordinary
Haven Power Limited (trading company, power retail) (1)
England and Wales
Ordinary
Haven Power Nominees Limited (non-trading company,
formerly Haven Trustee Limited)*
England and Wales
Ordinary
100%
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.
During the year, InPower Limited and InPower 2 Limited were dissolved. Although not subsidiaries of Drax Group plc, they were
previously included in the consolidated financial statements (prepared under IFRSs) in accordance with SIC 12 “Consolidation –
special purpose entities”.
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NOTES TO THE COMPANY BALANCE SHEET
4. Called-up share capital
Authorised
865,238,823 ordinary shares of 1116⁄29 pence each
Issued and fully paid
2009 – 364,853,890 ordinary shares of 1116⁄29 pence each
2010 – 364,859,988 ordinary shares of 1116⁄29 pence each
As at 31 December
2010
£000
2009
£000
99,950
99,950
–
42,147
42,148
42,148
–
42,147
The movement in allotted and fully paid share capital of the Company during each year was as follows:
At 1 January
Issue of share capital
Issued under employee share schemes
At 31 December
Years ended 31 December
2010
number
2009
number
364,853,890 339,398,968
–
25,454,922
6,098
–
364,859,988 364,853,890
Issue of shares
On 23 June 2009, the Group announced the placing of approximately 25.5 million new ordinary shares, details of which are
disclosed in note 21 to the consolidated financial statements.
Issued under employee share schemes
On 1 September 2010, a total of 6,098 ordinary shares of 1116⁄29 pence each in the Company were issued in satisfaction of shares
vesting in accordance with the rules of the Group’s Bonus Matching Plan to six individuals whose employment with the Group had
terminated due to retirement. There were no such issues in 2009.
The Company has only one class of shares, which are ordinary shares, carrying no right to fixed income. No shareholders have
waived their rights to dividends.
5. Analysis of movements in equity shareholders’ funds
Share
capital
£000
Capital redemption
reserve
£000
Share
premium
£000
Profit and loss
account
£000
At 1 January 2009
Share capital issued (note 4)
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 6)
At 1 January 2010
Share capital issued (note 4)
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 6)
At 31 December 2010
Total
£000
461,556
105,539
135,058
596
39,207
2,940
–
–
–
1,502
420,688
159
–
–
–
–
–
–
–
–
102,599
135,058
596
(144,949)
(144,949)
42,147
1,502
420,688
93,463
557,800
1
–
–
–
–
–
–
–
–
–
–
–
(1)
534
2,525
–
534
2,525
(86,471)
(86,471)
42,148
1,502
420,688
10,050
474,388
Drax Group plc Annual report and accounts 2010
111
6. Dividends
Amounts recognised as distributions to shareholders in the year
(based on the number of shares in issue at the record date):
Interim dividend for the year ended 31 December 2010 of 14.1 pence per share paid on
15 October 2010 (2009: 4.1 pence per share paid on 7 October 2009)
Final dividend for the year ended 31 December 2009 of 9.6 pence per share paid on
14 May 2010 (2009: 38.3 pence per share paid on 22 May 2009)
Years ended 31 December
2010
£000
2009
£000
51,445
14,959
35,026
86,471
129,990
144,949
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 2010 of 17.9 pence per share (equivalent to approximately £65.3 million) payable on
or before 13 May 2011. The final dividend has not been included as a liability as at 31 December 2010.
7. Contingent liabilities
The Company has provided unsecured guarantees to third parties in respect of contracts held by a subsidiary company. The
guarantees have been issued for £nil consideration and the Company has not charged the subsidiary for the guarantees.
The Company has granted a charge over the shares in its subsidiary, Drax Finance Limited, in respect of the Group’s debt (detailed
in note 17 to the consolidated financial statements), which is guaranteed and secured directly by each of the principal subsidiary
undertakings of the Company. The Company itself is not a guarantor of the Group’s debt.
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SHAREHOLDER INFORMATION
Key dates for 2011
At the date of publication of this document, the following are the proposed key dates in the 2011 financial calendar:
Annual General Meeting
Ordinary shares marked ex-dividend(1)
Record Date for entitlement to the final dividend(1)
Interim Management Statement
Payment of final dividend(1)
Financial half year end
Announcement of half year results
Interim Management Statement
Financial year end
Notes:
13 April
27 April
3 May
12 May
13 May
30 June
2 August
15 November
31 December
(1) The ex-dividend and record dates and the payment of the final dividend are all subject to shareholders approving the final dividend 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.
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 2010, and the graph
provides an indication of the trend of the share price throughout the year.
Closing price on
31 December 2009
414.80 pence
High during the year
(5 January 2010)
444.00 pence
Low during the year
(26 May 2010)
326.30 pence
Closing price on
31 December 2010
368.30 pence
Notes:
(1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.
Share price graph
as at 31 December 2010
)
p
(
e
c
i
r
p
e
r
a
h
S
500.0
400.0
300.0
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Drax Group plc Annual report and accounts 2010
113
Market capitalisation
The market capitalisation, based on shares in issue and closing middle market price at 31 December 2010, was approximately
£1.34 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
− 0871 384 2030 from within the UK (calls to this number cost 8 pence per minute from a BT landline, other providers’ costs
may vary. Lines are open from 8.30am to 5.30pm, Monday to Friday – excluding Bank Holidays); 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 does not 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.
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SHAREHOLDER INFORMATION
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
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
Notes:
(1) Ordinary shares of 1116⁄29 pence each.
As at 31 December 2010
Number of
shareholders
1,552
1,650
%
Number of
shares(1)
48.47%
3,079,851
51.53%
361,780,137
%
0.84%
99.16%
Total
3,202
100.00% 364,859,988
100.00%
As at 31 December 2010
Number of
shareholders
107
164
555
696
%
3.34%
5.12%
17.33%
21.74%
Number of
shares(1)
5,909
26,139
204,631
576,075
1,074
33.54%
2,434,975
136
264
127
67
12
4.25%
8.24%
1,010,101
9,665,711
3.97%
28,269,811
2.09%
105,741,032
28.98%
0.37%
216,925,604
59.45%
Total
3,202
100.00% 364,859,988
100.00%
%
0.00%
0.01%
0.06%
0.16%
0.67%
0.28%
2.65%
7.75%
Shareholders by percentage ownership
as at 31 December 2010
Shareholders by number
as at 31 December 2010
Private shareholders:
0.84%
Private shareholders:
1,552
Institutional and corporate holders:
99.16%
Institutional and
corporate holders:
1,650
GLOSSARY
Ancillary services
Services provided to National Grid 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.
Company
Drax Group plc.
Drax Group plc Annual report and accounts 2010
115
Frequency response service
Services purchased by National Grid to maintain
system frequency.
Availability
Dark green spread
Grid charges
Average percentage of time the units were
available for generation.
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).
Includes transmission network use of system
charges (“TNUoS”), balancing services use of
system charges (“BSUoS”) and distribution use
of system charges (“DUoS”).
Average achieved price
Direct injection co-firing
Group
Power revenues divided by volume of net sales
(includes imbalance charges).
Is a process whereby biomass is fed directly
(that is, avoiding the pulverising mills) to the
burners situated in the boiler walls.
Drax Group plc and its subsidiaries.
Average capture price
EBITDA
IASs
Revenue derived from bilateral contracts divided
by volume of net merchant sales.
Profit before interest, tax, depreciation and
amortisation, gain/(loss) on disposal of fixed
assets and unrealised gains/(losses) on
derivative contracts.
International Accounting Standards.
Balancing Mechanism
ESIP
IFRSs
The sub-set of the market through 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.
The Drax Group plc Restricted Share Plan, also
known as the Drax Group plc Executive Share
Incentive Plan.
International Financial Reporting Standards.
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Baseload
EU ETS
LECs
Running 24 hours per day, seven days per week
remaining permanently synchronised to the
system.
The EU Emissions Trading Scheme 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.
Levy Exemption Certificates. Evidence of
Climate Change Levy exempt electricity supplies
generated from qualifying renewable sources.
Bilateral contracts
Forced outage
Load factor
Contracts with counterparties and power
exchange trades.
Any reduction in plant availability excluding
planned outages.
Net sent out generation as a percentage of
maximum sales.
BMP
Forced outage rate
Lost time injury rate
The Drax Group plc Bonus Matching Plan.
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.
The frequency rate is calculated on the following
basis: (lost time injuries x 100,000)/hours
worked. Lost time injuries are defined as
occurrences where the injured party is absent
from work for more than 24 hours.
Drax Group plc Annual report and accounts 2010
116
GLOSSARY
Net Balancing Mechanism
Pond fines
Net volumes attributable to accepted bids and
offers in the Balancing Mechanism.
Coal dust and waste coal from the cleaning
and screening process which can be used for
coal-fired power generation.
Technical availability
Total availability after planned and forced
outages.
Net cash/(debt)
Power exchange trades
Through-the-mill co-firing
Comprises cash and cash equivalents, short-
term investments less borrowings net of
deferred finance costs.
Power sales or purchases transacted on the
APX UK power trading platform.
Is a process whereby biomass passes first
through the pulverising mills before going to the
burners situated in the boiler walls.
Net merchant sales
Power revenues
Net volumes attributable to bilateral contracts
and power exchange trades.
The aggregate of bilateral contracts and
Balancing Mechanism income/expense.
Total recordable injury rate (TRIR)
The frequency rate is calculated on the following
basis: (lost time injuries + worst than first aid)/
hours worked x 100,000.
Net sales
ROCs
UK NAP
The aggregate of net merchant sales and net
Balancing Mechanism.
Renewables Obligation Certificates.
UK National Allocation Plan.
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
occupational health and safety risks and
improve its performance.
SAYE Plan
The Drax Group plc Approved Savings-Related
Share Option Plan.
Underlying earnings per share
Calculated as profit attributable to equity
shareholders, adjusted to exclude the after tax
impact of unrealised gains and losses on
derivative contracts, divided by the weighted
average number of ordinary shares outstanding
during the year.
Planned outage
SIP
Winter
A period during which scheduled maintenance is
executed according to the plan set at the outset
of the year.
The Drax Group plc Approved Share Incentive
Plan.
The calendar months October to March.
Planned outage rate
Summer
The capacity not available due to planned
outages expressed as a percentage of the
maximum theoretical capacity.
The calendar months April to September.
welcome to Drax
Drax is so much more
than the uk’s larGest,
cleanest anD most efficient
coal-fireD power station…
we are focuseD on
maximisinG value anD
achievinG our vision of
becominG a bolD, customer
orientateD power
Generation anD supply
business, Driven by
biomass innovation…
this year’s report
illustrates the six key
priorities that will help
us achieve this vision.
07
Drax is predominantly a power generation business
responsible for meeting some 7% of the UK’s electricity
demand. Currently owning and operating the largest power
station in the UK, we are committed to reducing our carbon
footprint. Through the progressive expansion of the use of
sustainable biomass, as a replacement for coal, we aim to
provide a low carbon, low cost and low risk power generation
business well into the future.
At the other end of the supply chain, through our retail arm,
Haven Power, we serve the needs of over 32,000 business
customers. Our intention is to grow a significant retail business
providing us with a valuable alternative to trading through
the wholesale electricity market.
This report has been printed on
Cocoon Silk which is 100% recycled
and FSC certified. This report was
printed by an FSC and ISO 14001
accredited printer using vegetable
oil and soya based inks.
FSC – Forest Stewardship Council.
This ensures that there is an
audited chain of custody from
the tree in the well-managed
forest through to the finished
document in the printing factory.
ISO 14001 – A pattern of
control for an environmental
management system against
which an organisation can be
certified by a third party.
illustration
Graphic Ad
photography
Lloyd Sturdy and Henry Thomas
Design and production
Radley Yeldar | www.ry.com
print
Granite
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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
insiDe Drax.
annual report anD accounts 2010