Inside Drax
Drax Group plc
Annual report and accounts 2011
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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
reliable 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 40,000
business sites. Our intention is to
grow a significant retail business
providing us with a valuable alternative
to trading through the wholesale
electricity market.
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 oriented
power generation and
retail business, driven
by biomass innovation.
Contents
01—49
Business review
50—80
Governance
81—128
Financials
01
Drax Group plc
Annual report and
accounts 2011
02 Chairman’s introduction
04 Maximising the value of the
Drax business
06 Delivering results
08 Chief Executive’s statement
16 Principal performance indicators
18 Marketplace
22 Operational and financial
performance
32 Principal risks and uncertainties
36 Corporate and social responsibility
50 Corporate governance
62 Audit Committee report
65 Nominations Committee report
66 Remuneration Committee report
81 Group –
Independent auditor’s report
82 Consolidated income statement
83 Consolidated statement of
comprehensive income
84 Consolidated balance sheet
85 Consolidated statement of changes
in equity
86 Consolidated cash flow statement
87 Notes to the consolidated financial
statements
116 Company –
Independent auditor’s report
117 Company balance sheet
118 Notes to the Company balance sheet
122 Shareholder information
127 Glossary
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Our business
We operate both a generation and a retail business
in the UK electricity market. This report gives a
detailed account of our operations during 2011.
07
More on:
Our key priorities
36 49 More on:
Corporate and social responsibility
02
Drax Group plc
Annual report and
accounts 2011
Chairman’s introduction
During 2011, we delivered strong operational performance across
the business. Although we experienced a good deal of uncertainty
in the power-related commodity markets, I am pleased to report
earnings (EBITDA) for 2011 of £334 million (2010: £392 million)
and an operating profit of £366 million (2010: £279 million).
In accordance with our dividend policy, the Board proposes
a final dividend in respect of 2011 of 11.8 pence per share,
equivalent to £43 million. This would give a total dividend for
the year of 27.8 pence per share (2010: 32.0 pence per share).
We continue to make progress in reducing our carbon footprint,
something which is now well embedded in and central to our
business strategy. In just a matter of weeks we will embark on the
last stage of the largest steam turbine modernisation programme
in UK history, which brings with it a carbon dioxide emissions
saving of one million tonnes a year.
Haven Power Limited, our electricity retail company serving
business customers, made good progress implementing its IT
business platform which is critical to realising its growth ambitions.
We are delighted with the growth achieved in 2011 and the real
value that the Group is now deriving from the company’s success.
It complements well our existing trading capabilities and provides
a credit efficient, direct sales channel for an increasing proportion
of our power.
Electricity generation from sustainable biomass remains our
focus and we continue to believe that this technology has
considerable potential and an important role as a low carbon,
cost effective, reliable and flexible source of renewable power
for the UK. I am delighted to say that our view is being echoed
by those in Government and elsewhere, which is encouraging.
We have continued to work with the Government throughout
the year to advance the case for sustainable biomass and secure
an appropriate level of support. We have welcomed the dialogue
that we have been afforded and appreciate the extensive work
undertaken by the Government on the biomass agenda.
The UK’s largest ever steam
turbine modernisation programme
nearing completion
Earnings demonstrate good
business performance despite
uncertainty in the power-related
commodity markets
£334m
Earnings (EBITDA)*
2010: £392m
* Profit before interest, tax, depreciation, amortisation,
gains and losses on disposal of property, plant and equipment
and unrealised gains and losses on derivative contracts
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Drax Group plc
Annual report and
accounts 2011
We have enhanced our technical and commercial expertise
in the emerging biomass energy sector and we are ready
to increase greatly our electricity generation from sustainable
biomass. However, we will only do so if the regulatory regime,
including the economics of the support offered, is attractive
for our shareholders.
On more governance-related matters and in line with the guidance
given in the UK Corporate Governance Code (the “Code”), I should
like to comment on how the principles relating to the role and
effectiveness of the Board have been applied.
There is a clear division of responsibilities between myself as
Chairman and our Chief Executive, Dorothy Thompson. We have
a clear statement on which matters are reserved for the Board
and those which are delegated, and these are reviewed at least
annually. Our non-executive directors play a major role in
challenging constructively the Group’s management, particularly
on matters of strategy and its development.
In recent years through our formal, rigorous and transparent
selection process, we have endeavoured to ensure that those
appointed to the Board have complementary skills, experience
and knowledge in order to improve the quality of the Board and
its decision making. Following publication of the Davies Report,
Women on Boards, in February 2011, the Board considered the
recommendations of both the Davies Report and the Financial
Reporting Council consultation on possible changes to the Code.
Consequently, we established a policy to ensure that gender
diversity is one of the factors taken into account when considering
future appointments to the Board and other senior appointments.
Details of the Board, its function, performance and effectiveness
can be found in the Corporate governance section of this report.
Throughout the business I believe we have made significant
progress during 2011 and my sincere thanks go to all Group staff
for their hard work and commitment, without which none of this
year’s achievements would have been possible.
year s achievements would have
Charles Berry
Chairman
20 February 2012
Haven Power has made good
progress, implementing its
IT business platform for growth
Electricity generation from
sustainable biomass remains
a key focus for the business
Staff continue to underpin
the Group’s achievements
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04
Drax Group plc
Annual report and
accounts 2011
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 both the difference between
the price at which we sell our power and the cost of coal and
carbon, known as the “dark green spread”, and increasingly by the
“bark spread” for co-firing, which is the difference between power
price and renewable support and the cost of biomass.
From this starting point 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.
1 Fuel
We now make use of a range of fuels, including coal,
biomass and others which are economically advantageous.
How we maximise value
For the last nine years we have burnt biomass in place of
some of our coal, when economic to do so. 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.
2 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 utilise
economies of scale through, for example, 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 2011
k 9.1 million tonnes
of coal burnt
k 1.3 million tonnes
of biomass burnt
k 0.7 million tonnes
of economically
advantageous
fuels burnt
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Key facts for 2011
k 26.4TWh net
sales of power
k 11.9 million tonnes
of CO2 emissions
allowances
purchased
k 1.2 million
Renewables
Obligation
Certificates sold
for renewable
power generated
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Drax Group plc
Annual report and
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Key facts for 2011
k 3.3TWh supplied
k >100% sales
growth by volume
k 40,000+ business
sites on supply at
the end of the year
Key facts for 2011
k 3,960MW
connected
capacity of Drax
Power Station
k 88.4% plant
availability
k 5.8% forced
outage rate
k 6.2% planned
outage rate
Key facts for 2011
k 2.0 million tonnes
of CO2 saved
through co-firing
sustainable biomass
k 1.2 million tonnes
of ash sold
k 0.7 million tonnes
of gypsum sold
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3 Retail
Our retail 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. Our retail business increases the trading
options available for the power output of the Group, providing
us with an alternative and direct route to market.
4 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, we are improving our overall efficiency through our
turbine upgrade project which brings 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.
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5 Environment
We work towards reducing our impact on the
environment with a policy of regarding compliance
with legislation as a minimum level of achievement.
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 burning
sustainable biomass and our turbine upgrade project 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.
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Drax Group plc
Annual report and
accounts 2011
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
oriented power generation
and retail business, driven
by biomass innovation.
We have two strategic initiatives to enable us to achieve
our vision, namely:
Our project to convert Drax Power
Station into a predominantly
biomass fuelled generating asset,
subject to securing the necessary
regulatory support
Our programme for the expansion
of our retail business, Haven Power
Influenced by…
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:
k Commodity market risk
k Counterparty risk
k Ratings risk
k Electricity wholesale market risk
k Biomass strategy risk
k Plant operating risk
k Regulatory and political risk
32 More on:
Principal risks and uncertainties
07
Drax Group plc
Annual report and
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…delivered through
our six key priorities…
In order to achieve our vision and our overriding objective
to maximise the value of the Drax business, we will focus our
efforts on the following key priorities:
Maintain operational
excellence
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Grow our retail
customer base
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Progress our
biomass strategy(1)
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Maximise profitability from
our coal generation capacity
Maintain an optimal
supporting capital structure
Deliver excellent people
leadership across our operations
(1) Our turbine upgrade project will be completed in 2012. The other strand of our carbon abatement work is delivering our biomass strategy, which also encompasses influencing the regulatory
framework. These two key priorities from 2010 have, therefore, been absorbed within ‘progress our biomass strategy’.
…which in turn is
delivering consistent,
strong performance:
In 2011 we achieved:
22 More on:
Operational and financial performance
Total revenue
£1,836 million
(2010: £1,648 million)
EBITDA
£334 million
(2010: £392 million)
Gross profit
£501 million
(2010: £551 million)
Underlying earnings
56 pence per share
(2010: 64 pence per share)
Some of our principal
performance indicators
for 2011 are:
Net cash
£225 million
(2010: £204 million)
Load factor
80%
(2010: 80%)
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More on:
Principal performance indicators
Carbon dioxide emissions
760t/GWh
(2010: 784t/GWh)
Total recordable injury rate
0.10
(2010: 0.26)
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Drax Group plc
Annual report and
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Chief Executive’s statement
Introduction
The business performed well in 2011 against a backdrop
of volatile commodity markets and significant regulatory
developments. In our generation and retail businesses,
we maintained our focus on excellence in operations,
tight cost control and disciplined capital project execution.
Preparation for our biomass expansion is now well advanced.
We completed extensive combustion trials in 2011, and are now
confident in our technical ability to be predominantly biomass
fuelled. However, it is important to note that moving ahead
with our plans remains dependent on securing appropriate
regulatory support and a strong investment case.
Good financial results, the successful conclusion, in April,
to the Group’s Eurobond financing structure and the bank
refinancing we completed in July, leave us with a strong
balance sheet which provides a solid foundation for future
investment in the business.
Strategy
Our vision for Drax is to be a bold, customer oriented power
generation and retail business, driven by biomass innovation.
We have two key strategic initiatives to enable us to achieve
our vision, namely, our project to convert Drax Power
Station into a predominantly biomass fuelled generating
asset, subject to securing the necessary regulatory support,
and our programme for the expansion of Haven Power Limited
(“Haven Power”).
Commodity markets
A number of significant global events
in 2011 combined to create uncertainty
in the commodity markets in which
we operate.
The gas market continued to be the
dominant factor in driving power prices.
Both the unrest in North Africa and the
Middle East and the incident at one of
Japan’s nuclear power stations which
increased the country’s demand for
liquefied natural gas (“LNG”),
contributed to increasing gas prices
through the middle of the year.
Thereafter, exceptionally mild weather
in the fourth quarter saw gas prices
come under pressure and begin to fall.
Coal prices moved within a relatively
narrow range throughout the year.
Carbon prices reached their lowest
point for two years amid fears for the
Eurozone economies. Looking ahead, the
introduction of the carbon price support
mechanism by the UK Government
from April 2013 is likely to erode the
competitive position in the market
of our coal-fired generation business,
but at the same time it strengthens
the case for biomass generation.
Overall, gas prices were resilient through
much of the year and we saw improving
dark green spreads, the difference
between the price of power and the
cost of coal and carbon, for coal-fired
generators. In the last quarter of the year,
however, spreads began to drift down as
the unusually mild weather for the time
of year continued.
Bark spreads for co-firing, the difference
between power price and renewable
support and the cost of biomass,
remained weak, with most traded
biomass commanding lower margins
than coal.
Retail performance
Haven Power is meeting our growth
expectations with over double the retail
sales of 2010 during 2011. The growth
has been driven largely by our
progression in the industrial and
commercial (“I&C”) market, supported
by the implementation of a new IT
platform which is working well.
09
Drax Group plc
Annual report and
accounts 2011
1
One of our key priorities:
Grow our retail customer base
Opening up
routes to market
“We are pleased to report a doubling of
our sales volumes over the last year, driven
largely by our progression in the industrial
and commercial market.”
Peter Bennell
Chief Executive, Haven Power
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IT processes
New IT platform
implemented to support
customer growth.
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Customer service
Ranked No. 1 for
customer satisfaction
in SME market in 2011
Datamonitor Survey.
Trading
Some 20% of forward
sales of our generation
output are through
Haven Power.
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Customers
We have made real
progress in growing
our customer numbers
during the year.
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Drax Group plc
Annual report and
accounts 2011
Chief Executive’s statement
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Health and safety
2011 was a record
year for Drax, with our
best ever performance
on total recordable
injury rate.
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Waste management
All waste generated as
part of the operation
and maintenance of
the power station is
carefully managed.
Turbine upgrade
We are nearing the
completion of our
turbine upgrade
programme which
will deliver an overall
efficiency improvement
of 5%.
4
Industrial
Emissions Directive
We are working on the
options available to us
for compliance with the
Industrial Emissions
Directive from 2016.
One of our key priorities:
Maintain operational excellence
Delivering
industry-leading
performance
“We work hard to maintain the reliability,
availability and flexibility of the power station
so that we can make a vital contribution to
the nation’s security of supply.”
Peter Emery
Production Director
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Drax Group plc
Annual report and
accounts 2011
An excellent standard of customer
service is central to our proposition for
this business, and we were pleased to
see recognition of that through being
ranked No. 1 for customer satisfaction in
the small and medium enterprise (“SME”)
market in the 2011 Datamonitor Survey.
Selling our output through Haven Power
provides a credit efficient route
to market for our power sales compared
to the wholesale electricity market.
These sales, when secured at a fixed
price, provide a hedge against adverse
power price movements. Currently,
some 20% of our forward sales are
through Haven Power.
Although Haven Power made a small
loss in 2011, we remain on track with
our target to break-even in this business
from 2013.
Operating performance
Following a record year for operating
performance in 2010, we continued to
deliver industry-leading performance in
2011. As in previous years, our availability
and reliability throughout 2011 meant that
we were able to deliver value to the
business through providing flexible
generation output and balancing services
to the System Operator, National Grid, in
support of system stability and security.
The single unit outage for 2011 was
completed in good time, especially given
the complexity of some of the renewal
work undertaken. Our safety statistics
continue to be industry-leading, with the
best performance on total recordable
injury rate since we began using the
measure in 2005.
For the year, our forced outage rate,
which measures any reduction in plant
availability excluding planned outages,
is in line with our long-term target of 5%,
which has been set through extensive
benchmarking with UK and international
coal-fired plant to determine the
optimum balance between performance
and cost. We delivered this operating
performance whilst keeping a tight
control on costs.
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We continued to work on increasing
our burn of fuels which have a higher
margin or lower carbon footprint over
the standard bituminous coal which
we burn. These advantaged fuels
(petcoke, pond fines and commercial
biomass) accounted for 9% of the
total fuel burnt during the year.
We are furthering our work on the
options available to us for compliance
with the more stringent emissions
standards of the Industrial Emissions
Directive (“IED”) from 2016. The key
factors in determining the optimal
solution for compliance are plant
flexibility, with some technologies such
as selective catalytic reduction (“SCR”)
allowing more flexibility than others, and
fuel mix. Accordingly, the level of biomass
burn is an important consideration.
We currently estimate the cost of
compliance with the IED, including SCR,
to be in the order of £200 million (see
Strategic capital investment plan).
Renewable output and
research and development
Our biomass co-firing facility operated
well during the year, but at less than full
capacity. Unfortunately, due to the low
level of renewable support available for
co-firing, much of the biomass available
for purchase was not economic to burn.
This severely limited our commercial
burn of biomass, with less than half of
our co-firing capacity being used for
commercial electricity generation.
During the year, we extended our
research and development work with
combustion trials of a wide variety
of sustainable biomass materials at
different throughputs and under
varying operating conditions. We burnt
significant volumes of uneconomic
biomass to support our research
and development, but the associated
cost was necessary to support these
critical trials.
The results of the trials to date have been
encouraging and we have confidence
in the technical capability to become
predominantly biomass fuelled.
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Chief Executive’s statement
Through the trials we achieved high
levels of biomass burn over sustained
periods, during which time we were also
able to demonstrate the plant’s flexibility.
We have an advanced understanding of
the chemistry dynamics, and we have
been working closely with third party
experts to understand any longer term
plant efficiency or capacity reduction
implications.
We have also extended our research
and development work to cover more
fuels and further analysis of the likely
emissions of nitrogen oxides, to help
determine the optimal solution for
IED compliance as described earlier.
The final results of these trials are due
in the second half of 2012.
The final support level under the
regulatory framework is the main driving
force which will determine the mix of
sustainable biomass materials and
supply contract tenors, which in turn
determines the extent to which we co-fire
and, therefore, the performance of the
plant itself.
Further carbon abatement
In addition to the carbon dioxide (“CO2”)
savings through burning biomass in place
of coal, savings were made through
efficiency improvements, with the
progress of our turbine upgrade project
making a key contribution. The low
pressure and high pressure turbine
modules of five of our six generating
units have now been replaced and are
operating as expected, which means we
are approaching an overall efficiency
for the power station of 40%.
With only three low pressure turbine
modules to be replaced during the
first of two unit outages in 2012 we are
nearing completion of the project, which
commenced in 2007. On completion,
the improved efficiency of the power
station will lead to a reduction in CO2
emissions of one million tonnes a year.
In February 2011, in conjunction with
Alstom UK Limited and National Grid
Carbon Limited, we 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. Following
consideration by the UK Government the
project was one of seven put forward to
the European Investment Bank in May
2011 for further consideration. In January
2012, industrial gases provider, BOC (a
member of The Linde Group), joined the
consortium, further strengthening the
project. The outcome of the application
for European funding will not be known
until the second half of 2012.
Legislative and
regulatory framework
In July 2011, the Electricity Market
Reform (“EMR”) White Paper was
published. The White Paper represents
a major change for the electricity sector.
We do, however, believe that reform
of the electricity market is essential
to creating the right environment to
stimulate the huge investment necessary
to provide adequate, affordable and
sustainable supplies of electricity into
the 2020s and beyond.
In December, an EMR Technical Update
was published, providing further detail
on the Government’s preferred options
for market reform. The document
confirmed the intention to implement
a market-based capacity auction with
the aim of ensuring capacity availability.
A more detailed design of the mechanism
will be developed during this year.
Within the EMR, a new low carbon
support mechanism, Feed-in Tariff with
Contracts for Difference (“FiT CfD”)
has also been confirmed. This will replace
the Renewables Obligation in 2017
for new renewable generation facilities,
but not those already in operation.
It is proposed that both the capacity
mechanism and the FiT CfD
arrangements will be run by a single
central body, the System Operator.
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Greenhouse
gas saving
In 2011, the average
greenhouse gas saving
resulting from burning
biomass in place of
coal was 81%.
Pelleting facilities
In order to further
enhance the security
of supply, we are
exploring direct
investment in further
biomass pellet plants.
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Sustainability
Assessment of the
full life cycle carbon
footprint of sustainable
biomass is now well
developed.
Procurement
All of our biomass is
procured against our
own industry-leading,
robust sustainability
criteria.
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Drax Group plc
Annual report and
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One of our key priorities:
Progress our biomass strategy
Harvesting
a sustainable
resource
“Establishing the biomass supply chain logistics
and procuring sustainable biomass are critical
components of our biomass work.”
Matthew Rivers
Director of Biomass Business
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Drax Group plc
Annual report and
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Chief Executive’s statement
The 2011 Budget confirmed the
introduction of a carbon price support
mechanism, as part of the EMR, which we
are against. We believe there is potential
for conflict with the existing EU Emissions
Trading System (“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 price
support will, in all likelihood, distort the
wholesale market. Nevertheless, we have
actively engaged with the Government on
the detail and design of the mechanism.
In advance of the renewable support
arrangements proposed under the EMR,
the much awaited consultation on the
future support levels for renewable
technologies from 2013 was published
by the Government in October. This will
apply to all renewable generation
facilities accredited before April 2017.
We were particularly pleased to see
recognition in the consultation of the
strategically important role that
sustainably sourced biomass electricity
can play in the future UK renewable
energy mix. In seeking to maximise the
deployment of the cheapest renewable
technologies, specific support levels or
bands have been proposed for the
increased use of sustainable biomass in
existing coal-fired power stations through
enhanced co-firing and full conversion.
The new bands have been created
in recognition of the greater capital
investment that is required to either
co-fire large volumes of biomass or
convert existing coal-fired stations to
burn solely biomass.
The proposed support level for enhanced
co-firing will enable us to increase our
sustainable biomass burn. However,
to maximise our potential and secure
our renewable output out to 2020 and
beyond we require a moderate uplift on
the proposed level of support. This would
guarantee that this cost effective form of
renewable generation will be available to
help meet the UK’s 2020 targets and will
lead to lower electricity prices for the UK
consumer, who will otherwise bear the
cost of the more expensive alternatives.
We will also engage in spot and shorter
term opportunistic purchases, with
the ability to cope with a wide fuel
envelope being key to securing value
in this market.
We will try to develop further UK sources
of fuel. Although this is likely to remain
a small proportion of our total fuel mix.
Despite targeting various geographies
and fibre sources, we expect to see an
early concentration in North America.
All our biomass is procured against
our own industry-leading, robust
sustainability criteria, which include
greenhouse gas emission reduction
requirements, and habitats and
biodiversity protection, as well as socio-
economic considerations in the source
areas. A programme of independent
audits ensures all our suppliers comply
with our sustainability criteria.
We firmly believe that robust, mandatory
sustainability criteria are vital to maintain
and enhance public acceptance, and
ensure that sustainable practices are
implemented. Assessment of the full
life cycle carbon footprint of biomass,
that is, from field to furnace, is now well
developed, especially in the UK where
a mandatory life cycle standard comes
into effect in 2013.
We are now in our fifth year of calculating
the life cycle carbon footprint of all the
biomass we procure and we are
confident that our sustainable biomass
fuel sourcing strategy will meet the
current mandatory standard which will
ensure we continue to earn regulatory
support from April 2013. Our calculations
show that the range of sustainable
biomass materials we have burnt over
the last few years has a far lower carbon
footprint than that of fossil fuel-fired
generating plant. In 2011, the average
greenhouse gas saving resulting from
burning biomass in place of coal
was 81%, compared to the EU fossil
fuel comparator.
In addition to our focus on sustainable
biomass co-firing, we have been working
with Siemens Project Ventures on our
dedicated biomass developments.
We expressed disappointment with
the proposed level of support for this
technology, which makes the investment
case for independent generators highly
challenging. The development planned
for the Drax Power Station site has
proved the most challenging for a
number of reasons, including its inland
location which increases logistics costs.
Given the significant financial liability
that we would face were we to delay
our investment decision until we have
certainty over the final support level for
dedicated biomass we have decided to
cancel the project.
We are exploring a number of options
available to us for structuring the
development planned for the Port of
Immingham site so as to make it a viable
proposition.
We participated fully during the
Government’s consultation process with
a view to securing appropriate support to
progress our biomass plans and now that
the consultation has closed we await the
Government’s response, which we expect
to be published in the Spring.
Biomass supply chain
and sustainability
Establishing the biomass supply chain
logistics and procuring sustainable
biomass against our robust sustainability
policy are critical components of our
work to deliver a biomass future for the
Group. Despite the immature and
bespoke nature of the supply chain, we
believe we will be able to secure sufficient
sustainable biomass to meet our
ambition to become a predominantly
biomass fuelled generator.
There are four strands to our fuel
contracting strategy. We are looking to
secure term rights to sustainable
biomass through both direct contracts
for delivered biomass pellets and
contracts for unprocessed fibre to
provide greater security over the fibre
source. In order to enhance the security
of supply from such contracts we are also
exploring direct investment in biomass
pellet plants.
As described in Operating performance
above, we currently estimate the cost of
IED compliance, including SCR, to be in
the order of £200 million.
It is important to recognise that if we
are in a position to progress our strategic
investment plan, our strong balance
sheet, with net cash of £225 million at
year end, provides a good foundation
for our funding requirements. Other
important considerations for funding
include working capital, our credit rating
and our trading strategy. We expect that,
with an appropriate level of support
and a strong investment case, we would
be able to finance our investment plans
and begin the transformation of Drax
into a predominantly biomass fuelled
generator.
Our people
Our people are a key resource and
we consider it a priority to deliver
excellent people leadership across our
operations. Throughout the Group we
share the values of honesty, energy,
achievement and team spirit. We have
a responsibility to our people and we
recognise that engaging and motivating
them leads to better business
performance. Our approach to looking
after our people is described in more
detail in the Corporate and social
responsibility section on page 42.
Strategic capital
investment plan
As described above, the proposed
support level for enhanced co-firing
will enable us to increase our sustainable
biomass burn. However, our existing
co-firing capacity of 12.5% of our output
is insufficient to meet the proposed
threshold of 15% of output necessary
to receive enhanced co-firing support.
Therefore, to secure the full benefit
from our existing co-firing facilities,
we have committed to invest £50 million
in 2012 in new biomass storage and other
limited plant modifications to provide
the capability to produce up to 20%
of our output from co-firing sustainable
biomass, so enabling qualification for
the enhanced co-firing band. In doing
so, we will only burn biomass which is
economic, that is, which commands
higher margins than coal.
We have also made good progress on
the strategic capital investment plan
for further biomass expansion. However,
it is important to note again that further
investment remains dependent on
securing appropriate regulatory
support and a strong investment case.
The principal components of the plan are
the further development of our biomass
capability and IED compliance.
There are two phases to the development
of our biomass capability. Phase 1 is the
committed investment of £50 million
to secure full benefit from our existing
co-firing facilities as described above.
Phase 2 requires significant further
investment in the range of £400–£450
million. Much of this investment will be
in additional fuel storage and handling
facilities at Drax Power Station as well as
further investment in plant modifications.
There may also be investment in the
biomass supply chain to enhance security
of supply for strategic fuel supplies.
15
Drax Group plc
Annual report and
accounts 2011
Looking ahead
We enter 2012 with a strong hedge from
forward power sales, which were secured
at good margins. However, there is little
visibility in our markets beyond 2013.
In addition, whereas for Phase II of the EU
ETS (2008–2012) we have an allocation
of 9.5 million tonnes of CO2 emissions
allowances per annum under the UK
National Allocation Plan, we will not
receive any allocation in Phase III (2013–
2020). We will also have the increased
cost impact of the introduction of the
carbon price support mechanism from
April 2013. Both of these influences are
recognised in market forecasts.
We intend to continue our hard work
to deliver leading operating and cost
performance and to retain our focus on
building options to burn advantaged fuel.
With a commitment to delivering value
to our shareholders, we will continue
our dialogue with the Government on
the legislative and regulatory agenda.
We will continue with our preparations
to become predominantly biomass
fuelled. However, our plans are
dependent upon appropriate regulatory
support and proving a strong investment
case. With such, we are ready to make
a significant, timely and cost effective
contribution to reducing CO2 emissions,
whilst retaining reliable and flexible
capacity on the system.
There is now recognition of the
strategically important role that
sustainable biomass has to play in the
future renewable energy mix of the UK.
We have long advocated the benefits
of biomass as a source of renewable
electricity, key amongst them being the
ability to deliver cost effective and
reliable low carbon electricity. Through
transforming Drax into a predominantly
renewable generator fuelled by
sustainable biomass we will not only
secure large volumes of cost effective
renewable generation for the consumer,
but also make a significant contribution
to meeting the UK’s 2020 climate
change targets.
change targets.
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Dorothy Thompson
Chief Executive
20 February 2012
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Drax Group plc
Annual report and
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Principal performance indicators
Our principal performance indicators provide a snapshot of how
we are performing against our overriding objective to maximise
shareholder value, and the progress we are making against our
strategic initiatives and key priorities.
Maximise profitability from our coal generation capacity
Net sales
26.4TWh
(2010: 26.4TWh)
22.6
TWh
Average achieved
price of electricity
£55.6 per MWh
(2010: £51.6 per MWh)
£/MWh
Average cost of fuel
excluding carbon
£33.3 per MWh
(2010: £25.7 per MWh)
£/MWh
26.4
26.4
55.6
33.3
52.0
51.6
25.4
25.7
2009
2010
2011
2009
2010
2011
2009
2010
2011
The aggregate of net merchant sales
and net Balancing Mechanism activity
Power revenues divided by volume of
net sales (includes imbalance charges)
Fuel costs excluding carbon divided by
volume of net sales
Why we measure
Net sales tracks the volume of power we can
sell at positive margins.
Comment
The increase in power prices following the growth
in demand for gas in the aftermath of the Japanese
earthquake, made it economic for us to generate
more volume in the Summer overnight periods,
thereby sustaining the high levels of output seen
in 2010.
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 in 2011 reflect the
impact of world events on market prices for
power, as well as our contracted position at
the start of the year.
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
Higher volumes of sustainable biomass burn
and rising coal prices combined to increase our
average cost of fuel in 2011.
Maintain operational excellence
Lost time injury rate (“LTIR”)
Total recordable injury rate (“TRIR”)
Plant availability
%
0.08
(2010: 0.13)
0.09
0.10
(2010: 0.26)
88%
(2010: 92%)
0.13
0.26
89
92
88
0.08
0.17
0.10
2009
2010
2011
2009
2010
2011
2009
2010
2011
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
The 2011 LTIR and TRIR represent a record year for health and safety performance at Drax. Our safety
record continues to be industry-leading and was delivered alongside a significant amount of project
activity. We need to retain focus on this area as we enter a year of double outage.
Average percentage of time the units were
available for generation
Why we measure
Availability tracks our operating performance,
enabling assessment of, and providing guidance
for, our operational regime and maintenance
investment plans.
Comment
We continue to demonstrate our leadership
position in the coal-fired generation sector,
with the impact of enhanced co-firing trials
marginally lowering 2011 availability.
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Drax Group plc
Annual report and
accounts 2011
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Generation
Progress our biomass strategy
Generation
Average cost of carbon
£/tonne
Carbon dioxide emissions
t/GWh
Sustainable biomass burnt
tonnes
£12.0 per tonne
(2010: £12.6 per tonne)
14.3
12.6
12.0
760 tonnes per GWh
(2010: 784 tonnes per GWh)
1,265,000 tonnes
(2010: 907,000 tonnes)
815
784
760
907,000
565,000
R&D
700,000
381,000
2009
2010
2011
2009
2010
2011
2009
2010
2011
Carbon costs divided by volume of allowances
purchased
Why we measure
The average cost of carbon tracks the carbon cost
component of the dark green spread achieved.
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
A large proportion of our 2011 carbon contracts
were locked in during 2010, when we sold the
related power. Subsequently carbon prices have
fallen significantly, thereby slightly reducing our
average cost.
Comment
The higher levels of sustainable biomass burnt
through our enhanced co-firing trials, saved
2 million tonnes of CO2 in the year. Further savings
were made through the efficiency improvements
resulting from the turbine upgrade project.
Generation
Grow our retail
customer base
Retail
Tonnes of sustainable biomass fuel burnt
during the year
Why we measure
Measuring the levels of sustainable biomass
burnt tracks our progress in producing power
from renewable and sustainable sources.
Comment
Low levels of support meant that our co-firing
facility was not used to its full capacity. However,
the trials undertaken for the research and
development of enhanced co-firing during the
year resulted in higher volumes of sustainable
biomass burnt in 2011 than previous years.
Maintain an
optimal supporting
capital structure
Group
Load factor
80%
(2010: 80%)
68
%
Retail customer volumes
TWh
Net cash/(debt)
£m
3.3TWh
(2010: 1.4TWh)
80
80
3.3
£225 million net cash
(2010: £204 million net cash)
204
225
2009
2010
2011
1.4
0.7
2009
2010
2011
2010
2011
(54)
2009
Net sent out generation as a percentage
of total available generation capacity
Net sales distributed through our retail
supply arm, Haven Power
Includes cash and short-term investments,
less borrowings net of deferred finance costs
Why we measure
Load factor tracks our operating performance
and the competitiveness of Drax Power Station.
Why we measure
A measure of the rate of growth in our retail
business.
Comment
Stable generation output (net sales) across
2010 and 2011 resulted in a consistent load factor,
and reflects our competitive position in the
marketplace and continued high availability.
Comment
The growth in retail volumes is driven by
Haven Power’s planned expansion in the
industrial and commercial market, supported
by stable growth in the small and medium
enterprise customer base.
Why we measure
Monitoring net cash/(debt) ensures an efficient
capital structure is maintained to support our
business, alongside sufficient liquidity to manage
our future obligations.
Comment
Despite an increase in working capital, the net
cash generated exceeded that required to repay
the term loan and meet dividend payments during
the year, resulting in an overall increase in net cash.
The UK electricity market
The UK electricity market is
characterised by six large vertically
integrated companies and a number
of smaller “independent” companies.
Drax is an example of an independent
company, which until 2009 was solely
focused on the generation of electricity.
Today, the energy mix of the UK benefits
from a diversity of fuel sources, including
gas, coal, nuclear and renewables, which
is a key contributor to security of supply.
In 2010 (the latest figures available), the
generating capacity of the UK’s major
power producers was some 83,200MW.
The final consumption of electricity in
2010 was approximately 330TWh.
The six large vertically integrated players
have control, either through ownership
or long-term contracts, of some 64%
of the total generation capacity and have
a combined interest of over 91% in
the supply market, and over 99.5% in
the domestic gas and electricity sector.
Drax has a 5% share in the generation
capacity market and typically meets
7% of the UK’s electricity needs.
Through our retail arm, Haven Power,
we serve over 40,000 business sites,
together accounting for sales of 3.3TWh
of power in 2011.
18
Drax Group plc
Annual report and
accounts 2011
Marketplace
From a nationalised, centrally planned system, the UK
electricity sector has been transformed over the last
22 years.
Privatisation, liberalisation and energy policy have shaped
the market and driven increasing consolidation and
market reform.
Complex arrangements and mechanisms have evolved to
match the supply and demand of a product which is not
stored, yet is vital to everyday life.
Our role in the supply chain
Our interests in the electricity supply chain cover the generation,
wholesale and retail markets.
Generation
Drax Power Station meets 7% of the UK’s
electricity needs and is the largest single
source of renewable power in the UK. There
are two routes to market for our power.
Wholesale market
Various mechanisms exist to allow
our power to be traded at the wholesale
level in Great Britain.
Retail
Haven Power is a retail company serving
the electricity needs of business
customers and providing an alternative
route to market for our power.
Forward
contract
market
(several years
before)
Short-term
market
(24 hours
before)
Balancing
mechanism
(one hour
before)
SMEs
(Small and medium
enterprises)
I&C
(Industrial and
commercial
businesses)
The wholesale
electricity market
Various mechanisms exist to allow power
to be traded at the wholesale level in
Great Britain (“GB”). Trading can take
place via forward and futures markets,
power exchanges, brokers and bilaterally.
Power can be traded close to real-time
and up to several years ahead of delivery.
It can also be traded for specific periods,
for example, specific half hours or
specific seasons. The GB wholesale
electricity market trades across three
sub-markets:
k long-term forward and futures
market allowing contracts to be struck
up to several years ahead of delivery
in response to market participants’
requirements;
k short-term bilateral market operated
over power exchanges which gives
market participants the opportunity
to fine tune their contractual positions;
and
k Balancing Mechanism (real-time
market) through which the System
Operator accepts offers and bids
for electricity to enable it to balance
supply and demand on the system.
Wholesale prices
Power prices are driven by a number of
factors, such as the underlying commodity
prices, the availability of capacity on the
system, and the physical positions taken
by the individual market players.
The wholesale market operates on
price and the relative prices of the fuel
sources, for example, gas and coal will
determine which plant, gas-fired
generation or coal-fired generation,
becomes the marginal plant. If gas prices
are high then gas-fired plant operates
at the margin.
With excellent reliability and availability,
Drax Power Station is at the top of the
merit order for UK coal-fired plant and
so even when coal-fired plant is at the
margin we will be the first of the coal-
fired plants to be called on to generate.
19
Drax Group plc
Annual report and
accounts 2011
Generation capacity
by fuel type, 2010*
MW
Net electricity supplied
by fuel input, 2010*
%
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Renewables:
7%
Other:
1%
Nuclear:
16%
Gas:
47%
Imports:
1%
Coal:
28%
Electricity generated from
renewable sources (Renewables
Obligation basis), 2010*
%
Electricity consumption
by end sector, 2010*
%
Biomass (co-firing):
11.2%
Offshore wind:
31.9%
Other: (commercial premises,
public administration,
transport and agriculture)
31.9%
Industrial:
31.0%
Biomass
(anaerobic
and sludge
digestion,
etc):
12.4%
Biomass
(landfill gas):
22.5%
Onshore
wind:
13.6%
Hydro: 8.2%
Solar
photovoltaics:
0.2%
* Source: Digest of UK Energy Statistics 2011
Domestic:
37.1%
Our trading capability
Our trading team has vast knowledge and
experience of the markets within which we
operate. Our trading capability and routes to
market allow us to manage exposures to the
commodities in which we deal.
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Annual report and
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Marketplace
Forward gas price
pence per therm
Forward power price
£/MWh
(cid:81)
(cid:81)
Summer 11
Winter 11
(cid:81)
(cid:81)
Summer 12
Winter 12
Summer 11
Winter 11
Summer 12
Winter 12
80
60
40
20
0
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70
60
50
40
30
20
10
0
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Forward coal price (API 2)
$/tonne
Carbon price (Phase II EUA) €/tonne
(cid:81)
(cid:81)
Calendar year 11
Calendar year 12
(cid:81) Calendar year 13
Dec 2010
Dec 2011
Dec 2012
Dec 2013
140
120
100
80
60
40
20
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1
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20
16
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Dark green spread
£/MWh
Summer 11
Winter 11
Summer 12
Winter 12
25
20
15
10
5
0
0
1
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0
1
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0
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Commodity markets
A number of significant global events
during 2011 have impacted to increase
uncertainty in the commodity markets
in which we operate.
The price of oil is a key driver of
wholesale price. In mainland Europe,
gas prices are linked under contract to
oil prices, and given that the UK imports
a significant amount of gas and that gas
is used to generate around 45% of the
UK electricity, any changes in wholesale
gas prices will impact wholesale
electricity prices.
The trends in commodity prices
witnessed in 2010 and 2011 are
described further in the following
paragraphs and are illustrated in
the accompanying charts.
Gas
The unrest in North Africa and the
Middle East during the first half of 2011
put upward pressure on oil markets
despite fears of an economic downturn.
This in turn drove up gas prices which
were then further strengthened by
the increase in demand following the
Japanese earthquake, and Germany’s
decision to close its older nuclear plants.
The Japanese earthquake reduced
market perceptions of liquefied natural
gas (“LNG”) availability.
Gas prices held during the Summer,
before softening during the final quarter
of the year as demand was far lower than
market expectation as a result of the mild
winter experienced in the UK and Europe.
This was compounded by the Eurozone
crisis which further reduced gas demand.
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. Furthermore, demand for gas
is rising rapidly so that even with the
possibility of increased shale gas
production, global markets may well
remain strong.
Power
During 2010, power demand was
relatively stable. 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 significant new gas-fired capacity
came on line and there were some
plant closures.
Power prices continued to be driven
by the gas market during 2011, increasing
over the first half of the year, before
stabilising and then dropping in the
final quarter as gas prices weakened.
Coal
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.
Asian demand continued to influence
the global steam coal market during 2011.
China is the most significant player in
this market with current consumption
estimates at 2 billion tonnes per annum.
US exports to Europe were circa 150%
higher year on year for the first half of
2011 due to increased German demand
following the closure of its older nuclear
plant, and relatively high gas prices
across the continent. Prices reduced
slightly towards the end of the year as
a result of lower demand levels during
the mild winter.
Carbon
Carbon prices traded in a fairly narrow
range throughout 2010, with a small
increase experienced in the second half
of the year.
Carbon prices remained fairly flat at
the start of 2011 before rising in the
immediate aftermath of the Japanese
earthquake. Prices dropped sharply in
the second half of 2011, reaching two year
lows in late November amid fears for the
Eurozone economies. 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 and the
pace of economic recovery.
Biomass
Types of biomass
Biomass used in energy production
comes in many different forms, but the
important characteristics shared by the
wide range of biomass fuels are that they
can be renewable and can be sustainable
and that they would often be discarded
if not used to produce energy.
The three common types of biomass
used to generate electricity are
agricultural residues, forestry products
and residues, and energy crops.
Recovered materials offer another,
very useful, source of biomass.
Agricultural residues
The by-products of food production, such
as straw, oat husks, peanut husks, grape
flour, cocoa shells, olive cake and many
more, can all be used as biomass for
energy production. Importantly, because
they are by-products of food production
they do not reduce the amount of land
available for farming, and they are readily
available. Residues from non-food crops,
such as cork fines, can also be used.
By placing a value on what may be an
unwanted by-product of farming, the use
of biomass to produce energy provides
a new income stream for farmers and
supports UK farming.
Forestry products and residues
Sustainably produced woody biomass
can be produced from managed forests
and forestry residues, such as bark,
thinnings, tree tops and branches that
are often discarded after trees are felled
for timber.
Energy crops
These are crops that are planted
specifically for the purpose of producing
energy. Energy crops include short
rotation coppice willow and miscanthus,
commonly known as elephant grass.
Since the start of the UK’s Energy Crop
Scheme in 2000, thousands of hectares
of miscanthus and other short rotation
coppice crops have been planted in the
UK alone and there is the potential to
increase this.
21
Drax Group plc
Annual report and
accounts 2011
Recovered materials
Recovered wood is an example of a
material that could be used as a biomass
fuel. The construction and demolition
sectors are very large producers of
recoverable wood.
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Availability of biomass
Biomass is a diverse, readily available
and plentiful fuel source. According
to the International Energy Agency,
biomass is the fourth largest energy
resource in the world after oil, coal
and gas. It estimates that by 2050,
sustainable sources of biomass could be
enough to supply the world with 10%-
20% of its primary energy requirements.
The EU has indicated that the use of
biomass will double over the next few
years, and be responsible for around
a half of the total effort in reaching the
EU’s 20% renewable energy target by
2020. In the UK, AEA Technology has
estimated that by 2020 sustainable
biomass could meet 20% of our primary
energy demand and by 2030 this could
more than double or even treble.
Agricultural residues
Forestry products
and residues
Energy crops
Biomass procurement
Our biomass is procured against our
industry-leading sustainability policy which is
independently audited. We are in our fifth year
of monitoring the carbon footprint of all the
biomass we burn.
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Drax Group plc
Annual report and
accounts 2011
Operational and financial performance
Introduction
EBITDA was £334 million for the year ended 31 December 2011
compared to £392 million in 2010 and underlying basic earnings
per share were 56 pence compared to 64 pence last year.
Our 2011 profit is in line with expectations, which increased during
the year with an improvement in the trading environment,
although commodity prices did soften towards the end of the
period. Earnings were below 2010 levels, which benefited from
the accelerated hedge which we put in place during 2008 when
wholesale margins were higher. We have continued to exercise
tight control over our cost base and our spend on capital projects.
2011 was a record year for health and safety performance at Drax
and we have been supported by strong operational performance.
Our retail business, Haven Power Limited (“Haven Power”),
is meeting our growth expectations, with sales of 3.3TWh
compared to 1.4TWh in 2010, largely as a result of the planned
growth in its industrial and commercial (“I&C”) customer base,
along with a continued increase in the volumes sold to the small
and medium enterprise market (“SME”).
In April, we were pleased to report that we had reached
agreement with HMRC over the Eurobond tax position, resulting
in cash tax relief of £180 million. This has enabled us to release
£148 million of cash to the business so far, with a further
£32 million to follow over the coming years as we utilise
the remaining losses.
In July, we completed the refinancing of our letter of credit,
working capital and term loan facilities, which were due to mature
in December 2012. These facilities were replaced by a £310 million
revolving credit facility, maturing in April 2014, with the term loan
repaid in full out of cash on hand.
At the upcoming Annual General Meeting, the Board will
recommend a final dividend for 2011 of 11.8 pence per share,
taking total dividends for the year to 27.8 pence per share,
or £101 million.
This review includes further explanation and commentary in
relation to our principal performance indicators and the results
for the year.
16 More on:
Principal performance indicators
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 gains/(losses) on derivative contracts(5)
EBITDA(6)
Depreciation, amortisation and loss on disposal of property, plant and equipment
Unrealised gains/(losses) on derivative contracts
Operating profit
Net finance costs
Profit before tax
Tax credit/(charge)
— Before exceptional items and impact of corporation tax rate change
— Impact of change in rate of corporation tax on deferred tax
— Exceptional items
Tax credit/(charge)
23
Drax Group plc
Annual report and
accounts 2011
Year ended
31 December 2011
£m
Year ended
31 December 2010
£m
1,835.9
1,648.4
(1,020.8)
(172.3)
(117.6)
(24.4)
(1,335.1)
500.8
(167.2)
333.6
(57.2)
89.8
366.2
(28.1)
338.1
(87.5)
16.1
197.9
126.5
(840.9)
(165.8)
(82.2)
(9.0)
(1,097.9)
550.5
(158.6)
391.9
(52.2)
(60.5)
279.2
(24.3)
254.9
(74.1)
7.6
—
(66.5)
Profit for the year attributable to equity shareholders
464.6
188.4
Earnings per share
— Statutory basic
— Statutory diluted
— Underlying basic(7)
— Underlying diluted(7)
All results relate to continuing operations.
Notes:
pence per share
pence per share
127
126
56
55
52
52
64
64
(1) Fuel costs in respect of generation predominantly comprise coal, sustainable biomass and carbon dioxide (“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, metering and LECs.
(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, and exceptional items.
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Drax Group plc
Annual report and
accounts 2011
Operational and financial performance
Segmental information
Revenue bridge
Power sales
ROC and LEC sales
Ancillary services income
Other income
Year ended
31 December
2011
£m
Year ended
31 December
2010
£m
1,641.0
1,528.2
69.2
17.4
7.6
25.1
34.6
8.1
Total generation revenue
1,735.2
1,596.0
Retail revenue
Inter-segment sales
275.5
(174.8)
124.3
(71.9)
Total Group revenue
1,835.9
1,648.4
Gross Margin
Generation gross margin
484.4
535.8
Retail gross margin
16.4
14.7
Total Group gross margin
500.8
550.5
EBITDA
Generation EBITDA
Retail EBITDA
Total Group EBITDA
336.1
(2.5)
333.6
393.4
(1.5)
391.9
2011
2010
£m
2,000
1,750
1,500
1,250
1,750
1,500
1,250
1,000
Generation
Retail
Inter-
segment
Group
1,000
Generation
Retail
Inter-
segment
Group
Gross margin
£m
Net generation split by customer1
(cid:81) Retail
(cid:81)
Generation
600
500
400
300
200
100
0
Retail:
13%
Retail:
6%
2011
2010
2011
2010
Wholesale:
87%
Wholesale:
94%
(1) Retail sales based on volume at Notional Balancing Point
Group revenue analysis
Biomass burn by month
cumulative tonnes (Mt)
Power and retail sales (£m)
Other income (£m)
Net power sold (TWh)
Average achieved price
(£/MWh)
26.4TWh
26.4TWh
22.6TWh
£55.6/MWh
£52.0/MWh
£51.6/MWh
£66m
£1,410m
£79m
£1,583m
£90m
£1,746m
(cid:81) 2009
(cid:81)
2010
(cid:81)
2011
1.4
1.2
1.0
0.8
0.6
0.4
0.2
Includes 0.6 million tonnes
of R&D trial burn
2009
2010
2011
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Generation results
Revenue
Total generation revenue for the
year ended 31 December 2011 was
£1,735 million compared to £1,596 million
in 2010. Total generation revenue in 2011
includes power sales of £1,641 million
(2010: £1,528 million), ROC and LEC
sales of £69 million (2010: £25 million),
ancillary services income of £17 million
(2010: £35 million) and other income
of £8 million (2010: £8 million).
Higher power sales in 2011 resulted from
an increase in the average wholesale
achieved electricity price for the year
ended 31 December 2011 to £55.6 per
MWh, compared to £51.6 per MWh in
2010. Our average achieved price of
electricity reflects our contracted
position, as well as higher power prices
on average during the year as a whole,
but particularly in the first half when
markets felt the impact of the Japanese
earthquake and the unrest in North
Africa and the Middle East. Net power
sold was 26.4TWh in both 2011 and 2010.
ROC and LEC sales have increased from
£25 million in 2010 to £69 million in 2011
as a result of an increase in sustainable
biomass burn during 2010, which
increased the number of ROCs available
for sale during 2011. In addition, we have
sold a number of current compliance
period ROCs, thereby benefiting earlier
than usual from sustainable biomass
burnt during 2011.
25
Drax Group plc
Annual report and
accounts 2011
In 2011, we burnt 1.3 million tonnes of
sustainable biomass (2010: 0.9 million
tonnes) representing 9% of total fuel
burnt by heat content (2010: 6%).
This increase is a result of the research
and development work described in the
Chief Executive’s statement. We also
burnt 0.1 million tonnes of petcoke (2010:
0.2 million tonnes) and 0.6 million tonnes
of pond fines (2010: 0.4 million tonnes).
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Our petcoke burn volume is driven by
its pricing relative to coal. Pond fines
is a coal mining residue, which trades
at a significant discount to coal, and
requires specific blending and handling
techniques to burn in large volumes.
The increases in our sustainable biomass
and pond fines burn in 2011, demonstrate
further improvements in our ability to
manage a wider fuel mix.
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 2011, in excess of those
allocated under the UK NAP, was
approximately 11.9 million tonnes
compared to approximately 12.9 million
tonnes in 2010. This was a result of plant
efficiency improvements and higher
levels of sustainable biomass burn
than in 2010, to achieve the same
level of generation.
Petcoke:
3%
Biomass:
6%
Pond fines:
3%
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Ancillary services income includes
revenue from the Firm Frequency
Response contracts in place with National
Grid during 2010. Whilst these contracts
gave us certainty of income and more
predictable despatch during the Summer
months in 2010, their benefit was
somewhat offset by the fact that we had
less potential to profit from the Balancing
Mechanism, where we add value through
the plant’s flexibility and reliability.
For 2011, whilst we had no contract
in place with National Grid, we have
continued to play a key role supporting
the system, and earning appropriate
margins from these activities.
Other income includes the sale of
by-products (ash and gypsum).
Fuel costs (coal, sustainable biomass
and other fuels)
Fuel costs were £1,021 million in 2011,
compared to £841 million in 2010.
The average cost of fuel per MWh
(excluding CO2 emissions allowances) was
£33.3 for the year ended 31 December
2011, compared to £25.7 in 2010. The
increase in average fuel prices was driven
by fuel mix, in particular higher sustainable
biomass burn following the research and
development work described in the Chief
Executive’s statement and by commodity
price movements, especially coal.
We burnt approximately 9.1 million tonnes
of coal in the year ended 31 December
2011, compared to approximately
9.4 million tonnes in 2010. 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 87% of total fuel burnt (by heat
content) in 2011 and 88% in 2010.
Fuel burn composition (heat)
Petcoke:
1%
Pond fines:
3%
Biomass:
5%
Biomass
R&D:
4%
2011
2010
Coal:
87%
Coal:
88%
26
Drax Group plc
Annual report and
accounts 2011
Operational and financial performance
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 2011 was £12.0 per tonne
compared to £12.6 per tonne in 2010.
The majority of our 2011 carbon
requirement was contracted during
2010 and the first half of 2011 when
prices were higher than in the second
half of 2011 (see Commodity markets).
This is in line with our hedging strategy
to purchase carbon when we sell the
related power.
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.
For the year ended 31 December 2011,
the cost of purchased power for the
generation business was £172 million,
compared to £165 million incurred in
2010, as a result of the higher power
prices in 2011 as described in
Commodity markets.
Grid charges
Grid charges for generation for
the year ended 31 December 2011 were
£58 million, compared to £54 million
in the year ended 31 December 2010.
The slight increase resulted from an
increase in the £/MWh charged by
National Grid reflecting the impact
of additional variable generation, such
as wind turbines, on their costs to
balance the system.
Group operating and
administrative expenses
170
£m
165
160
155
150
145
140
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Biomass research and development
work
The biomass research and development
work described in the Chief Executive’s
statement cost around £19 million in 2011.
This includes £11 million within generation
gross margin (the impact of burning
uneconomic biomass principally),
operating costs of £3 million (e.g. expert
technical advice in relation to biomass
combustion and chemistry) and capital
investment of £5 million (new conveyors
and fuel handling infrastructure).
We believe this work has placed Drax
in the best possible position to deliver
a step change as quickly and efficiently
as possible in the volumes of sustainable
biomass we burn, if support is at an
appropriate level.
As a result of these factors, generation
gross profit for the year ended
31 December 2011 was £484 million
compared to £536 million in 2010.
Operating and administrative expenses
Generation other operating and
administrative expenses before
depreciation and amortisation were
£148 million for the year ended
31 December 2011, compared to
£143 million in 2010. The cost increase
of £5 million largely reflects the
biomass investment in research and
development work described above.
Generation EBITDA for the year ended
31 December 2011 was, therefore,
£336 million compared to £393 million
in 2010.
Retail results
Revenue
Retail revenue of £276 million for the
year ended 31 December 2011 was 123%
higher than the revenue of £124 million
for the year ended 31 December 2010.
This substantial growth is in line with
our strategy to grow Haven Power,
with retail sales being a credit efficient
alternative to selling power in the
wholesale market. The growth in
sales has been secured at satisfactory
margins and good credit quality.
Retail sales volumes have increased from
1.4TWh in the year ended 31 December
2010 to 3.3TWh in 2011 following planned
growth in the I&C customer base and
continued growth in SME customer
volumes.
Cost of power purchases
Retail cost of power purchases
were £171 million for the year ended
31 December 2011 compared to
£71 million for the year ended
31 December 2010. Haven Power
purchases power in the wholesale
market for delivery to its retail customers.
The vast majority of these purchases
are from Drax Power Limited and are
eliminated on a group basis. The increase
in retail cost of power purchases is a
result of the significant increase in sales
volumes and power prices.
Grid charges
Haven Power incurred £60 million
of grid charges during the year ended
31 December 2011 and £28 million
during the year ended 31 December 2010.
Charges have increased as a result of
higher sales volumes together with
substantial increases in the rates charged
by the distribution network operators.
Other retail costs
Other retail costs include broker fees,
ROCs, LECs and metering and
were £29 million in the year ended
31 December 2011, compared to
£11 million in 2010. In addition to higher
volumes, costs have increased in 2011 due
to the much larger than expected uptake
of the subsidy for solar photovoltaic
panels, which has resulted in very large
increases to the FiT levelisation costs
being charged to suppliers.
Retail gross profit for the year ended
31 December 2011 was £16 million
compared to £15 million in 2010.
Although sales volumes have increased
significantly, margins within the I&C
market remain relatively low.
Operating and administrative expenses
Retail operating and administrative
expenses excluding depreciation and
amortisation were £19 million for the year
ended 31 December 2011, £3 million
higher than for 2010. The increase largely
relates to staff costs following the growth
in the business and certain entry costs
into the I&C market.
As a result, retail EBITDA for both the
years ended 31 December 2011 and
2010 was a loss of £2 million.
We remain on track to achieve our target
of break even EBITDA for this business
from 2013.
27
Drax Group plc
Annual report and
accounts 2011
Central costs
Depreciation and amortisation
Depreciation and amortisation
was £57 million for the year ended
31 December 2011 and £52 million for
the year ended 31 December 2010.
2011 includes a full year of depreciation
for the co-firing facility, which was
commissioned part-way through 2010.
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 shows
the movements in unrealised gains and
losses and where they are recorded in
our financial statements.
Year ended
31 December
2011
£m
Year ended
31 December
2010
£m
Net unrealised (losses)/gains in
the balance sheet at 1 January
(61.0)
234.1
Unrealised gains/(losses)
recognised in the income
statement
Fair value gains/(losses)
recognised in the hedge reserve
(a component of equity)
Premium on options sold
89.8
(60.5)
2.6
(0.7)
(232.6)
(2.0)
Net unrealised gains/(losses) in
the balance sheet at 31 December 30.7
(61.0)
The trends in forward power prices,
which largely determine the movements
in our net unrealised gains and losses
position are described within the
Commodity markets section.
During 2010, power prices increased,
such that the difference between power
that had been contracted but had yet to
be delivered and the market price had
narrowed considerably at 31 December
2010, reducing the unrealised gain in the
balance sheet. In addition, following a
period of coal price stability during the
first half of 2010, prices increased
significantly in the final months of the
year, driving an increase in the unrealised
losses on our financial coal contracts,
which expose us to floating prices.
Together these factors resulted in an
unrealised loss in the balance sheet of
£61 million at 31 December 2010.
During 2011, power prices fell significantly
in the final quarter. As a result, the
average price of power that had been
contracted but had yet to be delivered
at 31 December 2011 was higher than
market prices, driving an increase in
the unrealised gain in the balance sheet.
Coal prices also continued to rise during
the first quarter of 2011, before stabilising
over the remainder of the year. A number
of the financial coal contracts in place
at 31 December 2010 unwound during
the year as the contracts matured,
thereby reducing the unrealised losses
at 31 December 2011.
This combination of factors drove the
recognition of an unrealised gain of
£31 million in the balance sheet at
31 December 2011.
The unrealised gains recognised in
the income statement of £90 million
for the year ended 31 December 2011 and
unrealised losses of £61 million in 2010
arise from mark-to-market movements
on our derivative contracts which do not
qualify for hedge accounting; largely
financial coal and foreign exchange.
Mark-to-market movements on most of
our derivative contracts, considered to be
effective hedges, have been recognised
through the hedge reserve, a component
of shareholders’ equity in the balance
sheet. Movements in unrealised gains
and losses recognised in the hedge
reserve are mainly the result of
unwinding mark-to-market positions
relating to power delivered during a
reporting period, and the recording of
mark-to-market positions on power yet
to be delivered at the end of that period.
The net unrealised gain recognised
through the hedge reserve in the year
ended 31 December 2011 was £3 million,
compared to net unrealised losses of
£233 million in 2010.
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 gains
and losses on derivative contracts,
depreciation and amortisation,
operating profit for the year ended
31 December 2011 was £366 million
compared to £279 million in 2010.
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Interest
Net finance costs for the year ended
31 December 2011 were £28 million
compared with £24 million in 2010.
The unwind of deferred finance costs
in relation to our previous bank facilities
was accelerated to reflect their
reduced term following the refinancing
(see Capital resources and refinancing).
This resulted in a one-time interest
charge of £3 million in the year to
31 December 2011.
Tax
The tax charge before exceptional items
for the year ended 31 December 2011
was £71 million (an effective rate of
21%), compared to £67 million in 2010
(an effective rate of 26%). Tax for 2011
includes the impact of the reduction
in corporation tax rate from April 2011
on current and deferred tax liabilities and
of the reduction in corporation tax rate
from April 2012 on deferred tax liabilities.
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.
The Group began utilising these
potential losses in 2008, with cash
saved notionally ring-fenced, and no
benefit recognised prior to agreement
with HMRC.
In April 2011, we reached agreement
with HMRC over the Eurobond tax
position which will result in the release
of £180 million cash tax relief. As at
31 December 2011, we had released
£148 million of cash saved to date to
the business and will release a further
£32 million over the coming years
as we utilise the remaining losses.
The exceptional tax credit of £198 million
includes full recognition of the Eurobond
settlement of £180 million and a further
£18 million in relation to other legacy
issues, being the release of historic tax
provisions no longer required following
settlement of these issues.
As a result of the above factors, profit
attributable to equity shareholders for
the year ended 31 December 2011 was
£465 million compared to £188 million
in 2010, and basic and diluted earnings
per share were 127 pence and
126 pence respectively, compared
to 52 pence in 2010.
28
Drax Group plc
Annual report and
accounts 2011
Operational and financial performance
Operating performance
%
(cid:81)
(cid:81)
Forced outage rate
Planned outage rate
(cid:81)
Winter forced outage rate
10
8
6
4
2
0
2 planned outages
1 planned outage
2007
2008
2009
2010
2011
Underlying profit attributable to equity
shareholders (that is profit excluding
the after tax impact of unrealised gains
and losses on derivative contracts, and
exceptional items) was £202 million
for the year ended 31 December 2011,
compared to £233 million in 2010.
Underlying basic and diluted earnings
per share were 56 pence and 55 pence
respectively in 2011, compared to
64 pence in 2010.
Other key factors affecting
the business
Outages and plant utilisation levels
The forced outage and Winter forced
outage rates for the year ended
31 December 2011 were 5.8% and 3.9%
respectively, compared to 3.4% and
2.4% in 2010 which was a record year.
2011 forced outage rate remains
consistent with our long-term target
of circa 5%.
The planned outage rate achieved for the
year ended 31 December 2011 was 6.2%,
compared to 4.6% in 2010, 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.
Two units will undergo a major planned
outage in 2012.
Health and safety
2011 was a record year for Drax in terms
of our health and safety performance.
Our lost time injury rate and total
recordable injury rate were 0.08 and
0.10 respectively for the year ended
31 December 2011 compared to 0.13 and
0.26 respectively in 2010. 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.
Year ended
31 December
2011
Year ended
31 December
2010
Liquidity and capital resources
Net cash was £225 million as at
31 December 2011, compared to
£204 million at 31 December 2010,
following the refinancing in July 2011,
and the repayment of £135 million
of borrowings (see Capital resources
and refinancing). Cash and short-term
deposits were £233 million as at
31 December 2011, compared to
£331 million at 31 December 2010.
An analysis of cash flows for both
years is set out in the following table.
Electrical output (net sales)
(TWh)
Load factor (%)
Availability (%)
Winter forced outage rate (%)
Forced outage rate (%)
Planned outage rate (%)
Total outage rate(1) (%)
Notes:
26.4
79.7
88.4
3.9
5.8
6.2
11.6
26.4
79.7
92.1
2.4
3.4
4.6
7.9
(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.
The load factor and electrical output
were 79.7% and 26.4TWh respectively
for both years ended 31 December 2011
and 2010. We continued to demonstrate
our leadership position in the coal-fired
generation sector with plant
availability of 88.4% for the year
ended 31 December 2011, compared
to 92.1% in 2010.
Analysis of cash flows
Cash generated from
operations
Income taxes paid
Other gains
Net interest paid
Net cash from operating
activities
Cash flows from investing
activities
Purchases of property,
plant and equipment
Short-term investments
Net cash generated from/
(used in) investing activities
Cash flows from
financing activities
Equity dividends paid
Repayment of borrowings
New borrowings
Other financing costs paid
Net cash used in
financing activities
Net (decrease)/increase in
cash and cash equivalents
Cash at 1 January
Cash at 31 December
Short-term investments
at 31 December
Year ended
31 December
2011
£m
Year ended
31 December
2010
£m
281.9
(67.7)
0.7
(16.4)
484.7
(56.1)
2.0
(19.5)
198.5
411.1
(43.8)
65.0
(62.3)
(40.0)
21.2
(102.3)
(123.7)
(135.4)
10.0
(3.8)
(86.5)
(65.2)
—
(1.5)
(252.9)
(153.2)
(33.2)
236.0
202.8
155.6
80.4
236.0
30.0
95.0
Borrowings at 31 December
Net cash at 31 December
(7.6)
225.2
(127.0)
204.0
Cash generated from operations
was £282 million in the year ended
31 December 2011, compared to
£485 million in 2010. The decrease was
largely the result of a fall of £58 million
in EBITDA and a working capital outflow
of £51 million in 2011, compared to
an inflow of £115 million in 2010.
The working capital outflow of £51 million
in 2011 includes an increase of £24 million
in the value of coal stocks, resulting from
an additional 0.2 million tonnes of stock
held at the end of 2011, and higher coal
prices during the period (see Fuel costs –
coal, sustainable biomass and other fuels).
The remaining net outflow includes
a lower carbon creditor (£21 million),
reflecting the timings of payments
with respect to our 2011 liability and a
fall in the cost of carbon over the year (see
Fuel costs – CO2 emissions allowances).
The working capital inflow in 2010 largely
reflects a decrease in coal stocks of
1.6 million tonnes (£84 million), resulting
from higher than expected generation
over the corresponding period.
Income taxes paid were £68 million in the
year ended 31 December 2011, compared
to £56 million in 2010. 2011 payments
include settlement of the 2010 liability,
as well as payments on account for 2011.
29
Drax Group plc
Annual report and
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The Group’s £310 million revolving credit
facility assists in managing the cash
low points in the cycle where required.
See Capital resources and refinancing.
Capital expenditure
Fixed asset additions were £45 million
in the year ended 31 December 2011,
compared to £59 million in 2010.
This includes expenditure of £8 million
(£20 million in 2010) on our major
strategic carbon abatement project,
the turbine upgrade, and £5 million of
expenditure on new conveyors and fuel
handling infrastructure in support of
our biomass research and development
work (2010: £nil).
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,
Tackling climate change). With a double
unit outage scheduled for 2012, the
turbine upgrade programme will be
completed. Expenditure remains in line
with budget.
We will continue to evaluate other
investment opportunities which may
result in additional capital expenditure
(see Chief Executive’s statement
Strategic capital investment plan).
Creditor payment policy and practice
Terms of payment are agreed with
suppliers when negotiating each
transaction and the Group’s 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 parent
company of the Group, has no trade
creditors. In respect of Group activities,
the amounts due to trade creditors
at 31 December 2011 represented
approximately 22 days of average
daily purchases through the year
(2010: 21 days). The figure is based
upon the ratio of amounts owed to
trade creditors against the amounts
the Group was invoiced by suppliers
during the financial year.
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Net cash flows from investing activities
includes payments in respect of capital
expenditure of £44 million for the year
ended 31 December 2011 and £62 million
in 2010 (see Capital expenditure).
2011 includes a reduction in short-term
investments of £65 million (2010:
additional £40 million), comprising
short-term deposits with a maturity of
more than three months at inception.
Net cash used in financing activities
was £253 million in the year ended
31 December 2011, compared to
£153 million in 2010. The 2011 amount
includes equity dividends paid of
£124 million and term loan repayments
of £135 million, net of new borrowings
of £10 million drawn down against the
revolving credit facility. The 2010
amount includes equity dividends paid
of £87 million and term loan repayments
of £65 million (see Capital resources
and refinancing).
The decrease in cash and cash
equivalents was therefore £33 million
in the year ended 31 December 2011,
compared to an increase of £156 million
in 2010. The Group’s policy is to invest
available cash in short-term bank,
building society or other low risk
deposits.
Capital resources and refinancing
In July 2011, we completed the
refinancing of our letter of credit,
working capital and term loan facilities,
which were due to mature in December
2012. These facilities were replaced with
a £310 million revolving credit facility
which matures in April 2014, and which
can be used for both letters of credit and
working capital purposes. The margin
over LIBOR on our new facility has
reduced from 3.5% to 2%.
Capital investment
£m
(cid:81)
(cid:81)
Plant projects
Co-firing project
(cid:81)
(cid:81)
Enhanced co-firing
Turbine upgrade
(cid:81)
Other non-plant
projects
120
100
80
60
40
20
0
2007
2008
2009
2010
2011
Scheduled debt repayments of
£34 million were made at 30 June 2011
and the remaining term loan balance
of £101 million was repaid in full upon
refinancing. During 2010 scheduled debt
repayments were £65 million.
The unwind of the deferred finance
costs in relation to the previous banking
facilities has been accelerated to reflect
their reduced term, resulting in a
one-time interest charge of £3 million
in the year to 31 December 2011.
£10 million has been drawn down against
the new revolving credit facility during
the year and remained in place at
31 December 2011.
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 19
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 near-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, the directors have a
reasonable expectation that the Group
has adequate resources to continue in
operational existence for the foreseeable
future, and continue to adopt the going
concern basis of accounting when
preparing these 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.
30
Drax Group plc
Annual report and
accounts 2011
Operational and financial performance
Future developments
Strategic capital investment plan
The Chief Executive’s statement
describes how preparation for our
biomass expansion is now well advanced.
Whilst moving ahead with our plans
remains dependent on securing
appropriate regulatory support and on
proving a strong investment case, we
have also made good progress with the
work to scope out the capital investment
plan for the project. The principal
components of the plan include potential
investments in development of the
Drax site biomass capacity, the biomass
supply chain, and in Industrial Emissions
Directive (“IED”) compliance.
Committed investment:
Biomass capacity development (Phase 1)
– secure full benefit from existing
co-firing facilities
Dependent on appropriate ROC support
and strong investment case:
Biomass capacity development (Phase 2)
£m
£50m
As at 15 February 2012, the positions
under contract for 2012, 2013 and 2014
were as follows:
Power sales (TWh) comprising:
22.0
9.1
3.0
2012
2013
2014
– Fixed price power sales (TWh)
at an average achieved price
(per MWh)
– Fixed margin and structured
15.1 at
£54.5
6.5 at
£52.7
0.4 at
£57.6
power sales (TWh)
6.9
2.6
2.6
CO2 emissions allowances
hedged, including UK NAP
allocation, market purchases,
structured contracts, and
benefit of biomass co-firing
(TWh equivalent)
Solid fuel at fixed price/hedged,
including structured contracts
(TWh equivalent)
21.8
9.1
3.1
22.6
11.0
11.1
Fixed price power sales include
approximately 1.0TWh supplied in the
period 1 January 2012 to 15 February
2012 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.
– increase Drax site capacity to
predominantly biomass
– pellet plants to provide
fuel security
IED compliance
c. £250m
£150m–£200m
Fixed margin power sales include
approximately 6.9TWh in 2012,
and 2.6TWh both in 2013 and 2014
in connection with the above contracts.
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 2012, and
approximately 2.4 million tonnes
in both 2013 and 2014.
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.
– estimate of plant retrofit cost
Net cash at December 2011
c. £200m
£225m
More information on the various
components of the capital investment
plan can be found in the Chief Executive’s
statement.
It is important to recognise that if
we are in a position to progress, our
strong balance sheet, with net cash of
£225 million at year end, provides a good
foundation for our funding requirements.
Positions under contract for 2012,
2013 and 2014
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.
Distributions
Distribution policy
Subject to the provisions of the
Companies Act, the Group 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
Group, in the opinion of the Board,
justifies the payment.
The Board has previously committed
to 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,
and exceptional items) in each year.
Underlying earnings per share were
56 pence on this basis for the year
ended 31 December 2011.
Dividends paid
On 21 February 2011, the Board resolved,
subject to approval by shareholders at
the Annual General Meeting (“AGM”)
on 13 April 2011, to pay a final dividend
for the year ended 31 December 2010
of 17.9 pence per share (£65 million).
The final dividend was subsequently
paid on 13 May 2011.
On 1 August 2011, the Board resolved
to pay an interim dividend for the
six months ended 30 June 2011 of
16.0 pence per share (£58 million),
representing 50% of underlying earnings
for the period. The interim dividend was
subsequently paid on 14 October 2011.
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 2011 of 11.8 pence per
share (£43 million), payable on or
before 11 May 2012. Shares will be
marked ex-dividend on 25 April 2012.
This Business review was approved by
the Board on 20 February 2012.
Tony Quinlan
Finance Director
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Annual report and
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One of our key priorities:
Maintain an optimal supporting capital structure
Foundation for
future growth
“The refinancing and conclusion of
the Eurobond tax structure have both
given us a strong platform on which
to grow the business. We had net cash
f 2011.
of £225 million at the end of 2011.”
Michael Scott
Head of Investor Relations
£225m
Refinancing
In July 2011,
we completed the
refinancing of our
bank facilities. These
were replaced by a
£310 million revolving
credit facility which
matures in April 2014.
Eurobond
In April 2011, we reached
agreement with HMRC
over the Eurobond tax
position, which resulted
in cash tax relief of
£180 million.
Capital
investment plan
We’ve made good
progress on the
strategic capital
investment plan for
our biomass expansion.
Further investment
remains dependent
on securing appropriate
regulatory support
and a strong
investment case.
Biomass capability
development
To secure the full
benefit from our
existing co-firing
investment, we have
committed to invest
£50 million in 2012 in
new biomass storage
and other limited plant
modification.
32
Drax Group plc
Annual report and
accounts 2011
Principal risks and uncertainties
The effective management of risks within the Group
underpins the delivery of our key priorities. The Group has
a comprehensive structure of governance controls in place
to manage risks. Policies have been established in key areas
of the business such as trading, treasury, production and
health and safety to ensure that these risks are managed
in a controlled manner and in accordance with the Board’s
appetite for risk.
Internal control and
risk management
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 2011 Annual report and accounts.
The process is designed to manage
rather than eliminate the risk of failure
to achieve business objectives, and can
only provide reasonable, not absolute,
assurance against material misstatement
or loss.
Risk management committees
There are five risk management
committees:
1 Treasury and commodity risk
management committee
2 Safety, health, environmental and
production integrity committee
3 New business risk management
committee
4 Corporate risk management
committee
5 Haven Power risk management
committee
Each Committee is responsible for
ensuring that all risks associated with
their specific area of the business are
identified, analysed and managed
systematically and appropriately.
Each Committee has terms of reference
that requires it to ensure that systems
and controls are approved, implemented
and monitored to ensure that activities
are commensurate with the risk appetite
established by the Board, are adequately
resourced and comply with applicable
legal and regulatory requirements.
Each risk committee contains at least
one member of the Executive Committee.
Philip Hudson
Director of Corporate Affairs
and Company Secretary
33
Drax Group plc
Annual report and
accounts 2011
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 auditor in their yearly
management letter 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 UK
Corporate Governance Code”.
Following its review, the Board
determined that it was not aware
of any significant deficiency or
material weakness in the system
of internal control.
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In addition, the Group has comprehensive
and well defined control policies with
clear structures, delegated authority
levels and accountabilities.
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 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
makes frequent reports on performance
to the executive directors.
The Group also has processes in
place for business continuity and
emergency planning.
Risk management process
Internal control
The key elements of the risk
management process are as follows:
Risk identification – risks faced by
the Group are identified during the
formulation of the Business Plan.
Senior management and risk owners,
with the assistance of the risk
management committees, periodically
review the risks to ensure that the risk
management processes and controls in
their area are appropriate and effective,
and that new risks are identified.
Risk analysis – the basic causes of each
risk are considered, and the impact and
likelihood of its materialising is assessed.
Risk registers are used to document
the risks identified, level of severity and
probability, ownership and mitigation
measures for each risk. The risk registers
are reviewed by the risk management
committees on a quarterly basis.
Risks are then logged with reference
to impact and probability as follows:
Probability
Low
Medium
High
h
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H
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M
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a
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I
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Risk appetite is identified by reference
to the same criteria. The analysis enables
decisions to be taken as to how that
risk should be managed by applying
mitigation measures to align the risk
with the identified risk appetite.
Risk monitoring and assurance –
the Board is ultimately responsible for
this system of risk management and
internal control. The Audit Committee
reviews financial information and the
suitability of internal controls on behalf
of the Board. Risk management
committees assist the executive directors
in the operation and implementation of
the risk management process, and
provide a source of assurance to the
Audit Committee that the process is
operating effectively.
Board
responsible
for the system
of risk management
and internal control
P
y
o
lic
Audit
Committee
review the
suitability of
internal controls and
review the risk registers
a
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Risk reportin g
Risk Management Committees
Quarterly review of risk register. Identify, monitor and manage risks
Operating companies
Maintain an effective system of internal control and risk management
Risk
Potential impact
kVolatility in financial results.
Associated objective and key priorities
kMaximise the value of the Drax business.
kMaximise profitability from our coal
generation capacity.
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.
Change
34
Drax Group plc
Annual report and
accounts 2011
Principal risks and uncertainties
Commodity market risk
Context
We experienced a great deal of uncertainty
in power-related commodity markets
during 2011
Risk
kWe are exposed to the effect of fluctuations in
commodity prices, particularly the price of
electricity and gas, the price of coal and
sustainable 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
kMaximise the value of the Drax business.
Ratings risk
Context
Our business model currently has
investment grade debt although we could
operate as sub-investment grade with
actions that have been implemented
Risk
kOur investment grade debt rating currently
underpins our ability to deliver optimal value
from our existing trading strategy. A downgrade
of our debt rating to sub-investment grade
would require a modified trading strategy.
Potential impact
kRequirement to post collateral for trading
positions.
kAdditional restrictions within facilities
agreements.
Associated objective and key priorities
kMaintain an optimal supporting capital
structure (which can be either investment or
sub-investment grade debt with appropriate
trading strategy).
Electricity wholesale market risk
Context
Liquidity in the market for wholesale
electricity is dependent on there being a
sufficient number of counterparties willing
to trade actively
Potential impact
kInability to hedge short- to medium-term
exposure to electricity prices through wholesale
market trading.
kIncreased exposure to short-term market
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.
volatility.
kInability to sell all of our output.
kLower revenues and increased costs to achieve
trading objectives.
Associated objective and key priorities
kGrow our retail customer base.
kMaximise the value of the Drax business.
kMaximise profitability from our coal
generation capacity.
Change
Change
Change
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
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.
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.
Potential impact
kInability to progress the biomass growth
strategy.
Associated objective and key priorities
kProgress our biomass strategy.
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Change
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Examples of mitigating activities
kEngage with Government to obtain the right
framework and grandfathered support from
April 2013 including the grandfathering of fuel
supply contracts.
kHedge currency exposures or secure
contracts in sterling to the extent that its
appropriate.
kAdvanced discussions with several large
creditworthy suppliers, building new
relationships and exploring new green field
projects.
kContract with suppliers where a robust
operational plant and logistics infrastructure
is already in place; work with new suppliers to
help develop such infrastructure.
Potential impact
kLower revenues.
kIncreased costs and contractual penalties.
kAdverse effect on financial results.
Associated objective and key priorities
kMaintain operational excellence.
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.
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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
kProgress our biomass strategy.
kMaintain operational excellence.
Examples of mitigating activities
kDeliver our biomass strategy.
kBriefing, representation and engagement
at EU and UK level.
kDevelopment of abatement and alternative
generation options.
kRegular third party assurance over system
effectiveness.
kStrong safety culture and related training.
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Context
Sustainable 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 sustainable biomass.
kFrom April 2013, in order for the sustainable
biomass we burn to qualify for support under the
Government’s renewables support mechanism,
we will have to demonstrate that it meets pre-
determined sustainability standards. Those
sustainability standards may be tightened over
time, and there is a risk that we may sign long-
term supply contracts which meet the current
standard but fail to meet a future standard.
kMost of the sustainable biomass that we can
procure is priced in foreign currency which
increases our exposure to fluctuations against
sterling and poses a risk to profitability.
kThere are relatively few sustainable biomass
suppliers in the market leading to concentration
of supply risk. A supply disruption from one
could impact on our generation capacity.
kWe could fail to secure sustainable biomass
supplies and logistics arrangements which meet
our hurdle return rates and sustainability criteria.
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.
Regulatory and political risk
Context
The Government’s market reform agenda is
driven predominantly by the need to move to
a sustainable, low carbon energy sector which
delivers affordable supplies to customers
whilst maintaining security of supply over the
longer term. Laws and regulations are many
and complex, are frequently changing, and
becoming ever more stringent, particularly
in relation to environmental matters
Risk
kThe Government’s Energy Market Reform
package, including the Carbon Price Support
mechanism which will be introduced by
HM Treasury from April 2013, will result in coal
generation becoming progressively and relatively
less economic than other major forms of
generation like gas, nuclear and renewables.
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.
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Corporate and social responsibility
Our approach to corporate and social responsibility
Engaging with our stakeholders
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 business
conduct, and our environmental, 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 2011,
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.
Shareholders:
k Road shows
k Face-to-face meetings
k Reports and announcements
k Website
k Visit programmes
Employees:
k Open Forum
k Briefing sessions
k Staff newsletter
Parliament:
k Briefing papers
k Face-to-face meetings
k Written and oral evidence
k Visit programmes
Government departments:
k Face-to-face meetings
k Consultation responses
k Visit programmes
k Via trade associations
European Union:
k Briefing papers
k Face-to-face meetings
k Via trade associations
Local government:
k Liaison meetings
k Annual consultative committee meeting
k Exhibitions
k Newsletters
Trading counterparties:
k Face-to-face meetings
k Industry events
Local community:
k Sponsorship
k Fund raising events
k Themed campaigns
k Visitor programme
k Exhibitions
k Newsletters
Government agents/regulators:
k Face-to-face meetings
k Correspondence and data submission
k Via trade associations
NGOs and opinion formers:
k Face-to-face meetings
k Briefing papers
Suppliers and customers:
k Face-to-face meetings
k Contractor briefings
k Contractor safety conference
Media:
k Press releases
k Face-to-face meetings
k Visit programme
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In 2012, we will see the completion of
the programme, which will result in an
improvement at full load of 5% in our
overall thermal efficiency and an annual
saving of around one million tonnes
of carbon dioxide (“CO2“) emissions.
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Through co-firing sustainable biomass
we reduced our reliance on coal and
saved 2.0 million tonnes of CO2 during
the year. The investment in co-firing of
biomass since 2008, including building
the world’s largest co-firing facility has
avoided the release of 4.7 million tonnes
of CO2 and shows our continuing
commitment to the transition to
a low carbon economy for the UK.
Our experience and commitment to
sustainable biomass from source to
combustion has provided us with strong
roots from which a future in biomass can
be grown. This will only come with further
regulatory certainty and appropriate
support, both of which are critical
to us realising our ambition to become,
over time, a predominantly biomass
fuelled generator. In the meantime,
we continue to further our research
and development work on biomass
while awaiting further developments
in the regulatory framework.
In addition to our thermal efficiency
and co-firing work, during the year, in
partnership with Alstom UK Limited and
National Grid Carbon Limited, we applied
to the European Union for partial funding
to build a 426MW oxy-fired carbon
capture and storage demonstration plant
at the Drax Power Station site. In January
2012, we were joined by industrial gas
provider, BOC (a member of The Linde
Group) as a co-sponsor of the project.
Environmental performance
and compliance
We fully understand the responsibilities
we have to society and the environment
and we are committed to furthering
the environmental leadership position
we hold in the coal-fired sector.
Environmental policies and activities
at both Drax Power Station and Haven
Power are discussed and supported
at Board level.
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Business conduct
Our commitment to integrity
We have 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 mandatory
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. Our employees should
always consider the appropriateness of
offering or receiving gifts or hospitality.
We have 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
We require our employees, wherever
they are in the world, to apply the
highest standards of behaviour
and to be accountable for upholding
the requirements of our Code of
Business Ethics.
Poor choices could have potentially
damaging consequences including
financial penalties and imprisonment
and would be damaging to our
reputation. During 2011, the Code of
Business Ethics was refreshed and
updated, and ensures compliance
with the Bribery Act 2010 through
the adoption of a zero tolerance policy
towards bribery. In addition, our
commitment to integrity has been
reiterated by issuing to all our colleagues
a booklet giving specific and clear
guidance on the various policies and
procedures in place to ensure that the
highest standards of ethical behaviour
are maintained.
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 the high
standards we expect.
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 that they may have witnessed
or are concerned about.
Climate change
and the environment
Tackling climate change
We believe we have an important
role to play in the transition of the UK
towards a low carbon economy whilst
maintaining secure and affordable
supplies of electricity. For us, a sustainable
business principally implies retaining
and, where possible, enhancing
our commitment to sustainable
biomass co-firing and increased
thermal efficiency as the major,
strategic carbon abatement initiatives.
The centre of our improved thermal
efficiency programme at the power
station is the £100 million upgrade of
the high and low pressure steam turbines
of each of our six generating units.
During the major planned outage of
2011, the penultimate year of the upgrade
programme, the installation of a high
pressure and three low pressure turbine
modules to a further unit was completed.
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Corporate and social responsibility
Our Drax Power Station and associated
landfill site manages environmental
compliance through an environmental
management system (“EMS”). This
system is externally certified to the
international standard ISO 14001 and is
subject to external audit twice a year.
We freely discuss our environmental
performance and activities with our
stakeholders and are sensitive to their
views and concerns. This includes
colleagues, business partners and
contractors and we ensure that they
understand how they can affect our
environmental performance by
identifying the environmental aspects
of their activities and by working in a
responsible manner.
We are pleased to report that there were
no major breaches of our environmental
consents during 2011.
Emissions to air
We manage all our emissions effectively
and have maintained high levels of
investment in flue gas desulphurisation
and combustion control systems to
ensure compliance with environmental
limits. Work continues to develop an
investment programme to optimise
compliance with the anticipated emission
limits which will be in place beyond 2016.
Total emissions (kt)
Sulphur dioxide
Nitrogen oxides
Dust
2011
2010
2009
32.1
27.3
26.9
38.9 40.4 38.2
0.6
0.6
0.5
Discharges to water
Water is a key resource to Drax Power
Station with the great majority of the
cooling water abstracted from the
River Ouse. Other minor sources include
the Sherwood Sandstone Aquifer and
the town’s mains.
Water abstraction (Mt)
River Ouse water
Mains water
Borehole water
2011
2010
2009
57.7 64.8 58.2
0.2
2.1
0.2
1.8
0.2
1.9
Procedures are in place to manage
and monitor the drainage and water
systems on-site to ensure all discharge
consent limits are met. Last year
we returned 51% of extracted water
back to the River Ouse. Our water
use in 2011 was 1.0 tonnes per GWh
of electricity generated.
Disposals to land
We have continued to invest in site
infrastructure to maximise the sale of ash
products into the construction industry
and to reduce the disposal of surplus ash
to landfill. In 2011, ash was sold in
conformance with European construction
product standards and in compliance
with the Waste Recycling Action
Programme (“WRAP”) quality protocol.
The other wastes generated as part of
the operation and maintenance of the
power station are managed to ensure
they are processed or disposed of at the
highest point on the waste hierarchy.
This has resulted in 84% of our waste
diverted from landfill. This year’s
operations have also reduced the
total production of waste by around
624 tonnes.
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 and sustainable biomass
materials. The choice of fuels has to be
balanced with availability and flexibility
of supply.
The use of petcoke is now routine and
our monitoring indicates that there is no
impact on the local community. In line
with our policy on openness and
transparency all data are discussed
with the Environment Agency and
local councils.
This has helped us to sell 77% of the
1.5 million tonnes of ash produced in 2011
as replacement for virgin aggregates
and as a cement replacement product.
In August, we entered into an agreement
to lease some of our land to Lytag Ltd
(“Lytag”), a company based in Escrick,
North Yorkshire, which manufactures
lightweight aggregate from pulverised
fuel ash (“PFA”). PFA generated by the
power station will be processed in the
Lytag plant, providing another route to
reducing the amount of ash we send
to landfill.
Any unsold ash is sent to the power
station’s ash disposal site, Barlow Mound.
The completed area of the site has been
fully restored for use as farm land and
woodland.
We pay landfill tax on the ash disposed
of to the 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 2011, we contributed £68,800
towards local community-based projects
designed to bring about sustainable
environmental benefits and contribute
to the social and economic regeneration
of the area.
During the year, we worked with Biffa
Group Limited to introduce a new general
and dry mixed recycling waste collection
service to assist in recycling waste items
such as food packaging, bottles, cans,
paper and card. We have removed
individual waste bins at desks in order
to change people’s behaviour when it
comes to recycling. The results speak for
themselves with an additional 64 tonnes
of waste from these sources collected in
the 250 big red bins now installed across
our site and recycled in 2011.
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Good procurement practice
Sustainability is an essential element of good
procurement practice and takes account of wider
social, economic and environmental factors in
addition to the conventional criteria of price,
quality and service.
Supply chain
Non-fuel procurement
In 2011, performance measurement
of our procurement supply chain was
increased and improved. The system has
been improved to include contingency
planning and true supply chain mapping
to encompass more elements in the
existing process. This has helped to
develop strategies to identify and
mitigate risks in our supply base.
We undertook a series of exercises to
map out our vulnerable supply markets
and suppliers. Contingency plans have
been developed to take into account the
ease of transference of work, potential
new suppliers, risks involved with these
selections and timescales for changeover,
if necessary. We also undertook training
to enable us to recognise signs of
suppliers in distress and as a result we
have enhanced our risk register, allowing
supply markets or suppliers to be logged
and monitored.
This additional diligence has proved
invaluable, allowing us to mitigate the
impact of a supplier that did go into
administration. Through implementing
the contingency plan for this particular
service, disruption to services and
contractor personnel were successfully
minimised.
Overall, we like to take a balanced
approach to our supply chain and
we look to use suppliers and working
partners from diverse backgrounds,
in particular, small and medium suppliers
in the local community.
Sustainability is an essential element
of good procurement practice and takes
account of wider social, economic and
environmental factors in addition to the
conventional criteria of price, quality and
service. Moving into 2012, by applying
these wider principles we will create
procurement practices that go beyond
meeting simple tender requirements
and will include safeguarding our brand
reputation and delivering improved
value and real cost savings throughout
the supply chain.
Coal procurement
We purchase around 8 to 9 million tonnes
of steam coal each year. We buy from a
range of sources with the objective of
managing our commercial exposures,
environmental obligations and diversity
of supply. We continue to purchase
around half of the coal from UK deep
and surface mines with the remainder
coming from major supply basins around
the world, including USA, Colombia
and Russia.
As a responsible procurer we work
within a strong corporate compliance
framework. The suitability of each of
our suppliers is checked through our
counterparty approval, “know your
customer” processes and ongoing
liaison with counterparties. 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.
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Corporate and social responsibility
Biomass sustainability
and procurement
Biomass use is a high priority, but it is
a prerequisite that it must be from a
sustainable source. To ensure this we
have implemented comprehensive
criteria into our procurement activities
with the aim of assuring both the
availability and sustainability of the
supply. The backbone of our criteria is
a high level set of principles committing
us to progressively improve 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, 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.
These criteria were originally
designed in the absence of national
or international legislation, to meet or
exceed any likely emerging standards
across the whole sustainability spectrum.
Our system is continuously improving
as our experience and legislation
develops. In 2011, these criteria
secured our leadership position in the
utilities sector of the Forest Footprint
Disclosure scheme.
From April 2013, generators of over
1MW capacity will have to comply with
a set of sustainability requirements on
greenhouse gas savings and land use
developed by the Department of Energy
and Climate Change (“DECC”) in order
to receive Renewables Obligation
Certificates. We are confident that
our existing policy will be sufficient
to ensure compliance.
To assist us in continually improving
our systems and the performance of
our suppliers and to ensure compliance
with our sustainability policy we use
an experienced third party to rigorously
audit our biomass supply chain.
In 2011, our third party auditors carried
out a range of audits on key existing and
potential suppliers to confirm that they
are embracing our policy and are
improving their performance against
our criteria. Auditors also undertook an
ISAE 3000 audit of our overall biomass
procurement, logistics and combustion
in order to provide early experience of
the 2013 requirements.
We have adopted the target for life cycle
greenhouse gas emissions which DECC
has established for 2013 and beyond,
this being similar to our previous internal
benchmark. We have also used the DECC
model for calculating these emissions,
which compares emissions from biomass
to the EU fossil fuel comparator and
shows that average emissions savings
across the range of biomass materials
we burnt in 2011 were of the order of
81%, but with a wide range in savings
for individual biomass materials.
This provides reassurance that our
current procurement practices and
suppliers are robust.
Procuring sustainable biomass
We have implemented comprehensive criteria
into our procurement activities with the aim of
assuring both the availability and sustainability
of our biomass supplies.
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Safety leadership and recognition
We are 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 2011, 84 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.
A Corporate HESAC group also exists.
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.
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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
First Aid Injuries
RIDDOR(1) reportable
Notes:
2011
2010
2009
0
3
1
0
0
4
0
5
0
3
3
0
207
148
154
5
6
4
(1) Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations.
Attaining leading performance
The lost time injury rate and total
recordable injury rate for 2011 at
0.08 and 0.10 respectively, remain
industry-leading, with the latter a record
breaking achievement at the power
station since the measure was first
recorded in 2005. 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 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 delivering sustained
levels of performance.
We have been successful in retaining
certification of our Health and Safety
Management System to the
internationally recognised Occupational
Health and Safety standard, OHSAS
18001, at the Drax Power Station site and
we have attained certification for the our
straw pellet plant, based at Goole in the
East Riding of Yorkshire. Drax Power
Station is 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, we were delighted,
once again, to be awarded the RoSPA
Gold Medal Award having achieved
Gold Award standards for seven
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”:
k Task Risk Assessment (“TRA”)
k “Safety Kick-Off” start of shift
safety briefing
k Dynamic Point of Work Risk
Assessment (“POWRA”)
k 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 we and our
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.
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Drax Group plc
Annual report and
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Corporate and social responsibility
Employees
Employment
The Group employed 1,150 people at the
year end. Most of our employees work
full-time and are on permanent contracts.
Our opinion surveys consistently show
that our employees are proud to work
for the Group, and other measures
of engagement are also very high.
For example, at Drax Power Station
the annual resignation rate is only 1.6%,
the average length of service is just
under 15 years and 37% of the workforce
has been with the Group for 20 years
or more. This high level of retention is
positive, as our power generation
business requires levels of skill and
experience which are difficult to source
externally. Absence rates are consistently
low, at around 2% per annum.
The annual resignation rate at Haven
Power is over 30%, reflecting the nature
of the business. This is an improving
figure and Haven Power management
has recently established a working group
which is focused on potential actions to
reduce staff turnover.
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.
Employee relations
At Drax Power Station, 529 people
(68% 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.
Each year we recruit for our sponsored
four year apprentice training programme
covering power station operations and
engineering maintenance. We currently
have 18 apprentices at different stages
of the programme, with plans to recruit
up to ten new apprentices in 2012.
We accommodate work experience
requests and support local schools
and colleges with their career events,
as well as supporting employees to be
school governors.
At Haven Power, there are a number of
leadership programmes in place for the
operations management team, all team
managers and all new team leaders.
This year Haven Power has also
introduced a “Learning to Lead”
programme focused on equipping
potential team leaders with the skills
to progress into supervisory roles.
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.
In our 2011 Employee Survey, 96% of
respondents said they understood
the direction the Group is taking.
At Drax Power Station, Open Forums
provide 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. We use
a variety of media at the Open Forums,
including DVDs featuring colleagues
across the business. This face-to-face
communication channel is much valued
by employees.
In 2010, we agreed a long-term pay
deal for all employees in the collective
bargaining unit, that is, all production
employees other than managers and
senior engineers. The pay deal extends
to 31 December 2012, providing a
platform for continuing stable employee
relations in the year 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 equip all
our people with the technical skills,
management and leadership
competencies, and personal behaviours
needed to achieve our Business Plan.
All employees receive annual
performance and career development
reviews. Individual targets 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.
In 2011, we introduced a supervisor
development programme to develop a
pipeline of potential supervisors to fill
succession gaps at Drax Power Station.
Seven participants completed the
programme, sponsored and accredited
by Coventry University. The group
developed their leadership skills through
a series of workshops, an action learning
project and a 12 week secondment into
a supervisory position. Most of the
participants have already secured a
supervisor position and work is now
underway to run a second programme
during 2012.
For approved external training
programmes, our employees receive
financial support, for example, course
fees and expenses. The Group also
supports those staff who, as members of
professional institutions or associations,
are required to undertake continued
professional development.
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Drax Group plc
Annual report and
accounts 2011
One of our key priorities:
Deliver excellent people leadership
across our operations
Nurturing
our talent
“Our people are a key resource and we
consider it a priority to deliver excellent
people leadership across our operations.”
Richard Neville
Head of Human Resources
2
3
1
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Apprenticeships
Each year we recruit
for our sponsored
four year apprentice
training programme.
2
Our values
Throughout the
Group we share the
values of honesty,
energy, achievement
and team spirit.
1,150
4
3
Diversity and equality
Our policies on diversity
and equality, and dignity
at work have been
updated in line with
the Equality Act 2010.
4
Number of employees
The Group employed
1,150 employees at the
year end.
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Drax Group plc
Annual report and
accounts 2011
Corporate and social responsibility
The proportion of women
employed within the Group
Board
11.0%
Executive Committee
20.0%
Senior Management
Group(1)
19.2%
Drax Power Limited(2)
11.4%
Haven Power
Limited(2)
52.3%
Group total
25.1%
Notes:
(1) This excludes the Board and Executive Committee.
(2) This excludes the Board, Executive Committee and Senior
Management Group.
In addition, our all-employee
communication methods include
monthly team briefs and e-mail and
intranet communications.
At Haven Power there is a framework of
individual one-to-one discussions, team
meetings and staff forums. This year
Haven Power has introduced a weekly
communications cascade and targeted
communications events focused on
particular initiatives. The intranet is
widely used.
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.
Diversity and equality
We are committed to attracting a broad
spectrum of candidates, as we believe
that we are more likely to find the best
available people if we look in the widest
possible talent pool. Our aim is to
maintain an inclusive work environment
where difference is respected.
We have established a policy to ensure
that gender diversity is one of the factors
taken into account when considering
future appointments to the Board and
other senior appointments, and in line
with the Equality Act 2010, we have
updated our diversity and equality
policy and our dignity at work policy.
We give full and fair consideration to
suitable applications for employment
from people with disabilities having
regard to their particular aptitudes and
abilities. Through a voluntary diversity
monitoring data collection process,
6% of colleagues who responded
recorded that they have a disability,
amounting to 3.5% of the workforce.
Where a colleague becomes disabled
whilst employed by the Group,
we make reasonable adjustments,
with the assistance of advice from the
occupational health team and other
specialists, to help them remain in work.
Through monitoring and encouraging
feedback, the Group is committed
to ensuring that none of the protected
characteristics, such as age, race and
religion, which underpin the Equality Act
are barriers to working for us.
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 in the organisation
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.
All core benefits, including pension,
permanent ill-health insurance, free
or discounted private healthcare,
life insurance, maternity/paternity leave,
and the Savings-Related Share Option
Plan are provided to both full and part-
time, as well as temporary, employees.
Recognition
The achievements of our staff have been
recognised through a number of awards
and shortlistings for awards from
external bodies during 2011.
The Forest Footprint Disclosure
scheme is an innovative initiative
assisting businesses in assessing their
impact on the world’s forests. For the
third year running, Drax was ranked as
the leader in the utilities sector based on
the comprehensive sustainability criteria
in our business procurement activities.
This year staff at Haven Power helped
the company to achieve the accolade
of No. 1 for customer satisfaction
in the small and medium enterprise
(“SME”) market in the external 2011
Datamonitor Survey.
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Drax Group plc
Annual report and
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Some categories of worker are
exposed to materials which may pose
a risk to health, such as chemicals and
coal dust. In these cases, more specific
health surveillance, such as lung function
tests, hearing tests and eyesight tests
are undertaken through an ongoing
programme managed in accordance
with risk, exposure and Health and Safety
Executive requirements. Driving and
driver training support programmes are
in place for those travelling on business
on a frequent basis.
Each year we have a planned programme
of health promotion. Promotions in 2011
included a healthy heart campaign for
all employees at Drax Power Station,
run by the charity Heart Research
UK and funded by us, and a prostate
and ovarian cancer awareness campaign.
Haven Power had a full week aimed
at greater promotion of staff benefits
and facilities. During the week Haven
Power’s occupational health partners
visited both the Ipswich and Chelmsford
sites and provided health advice on
areas such as keeping fit at work and
stress management.
All the Drax Power Station workforce
is represented in formal joint
management-worker health and safety
committees that help monitor and
advise on occupational health and
safety programmes. The committees
have senior management representation,
with trade union or employee
representatives.
We were shortlisted for the Company
Award, given to the company that
has done the most to advance UK
renewables, of the British Renewable
Energy Awards 2011. Our work on
introducing sustainability standards
to the biomass supply chain ahead of
legislation was recognised and shortlisted
in the Renewable Energy category of
the Green Business Awards 2011.
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
2011, where we were shortlisted for the
“Best sustainability and stakeholder
disclosure – FTSE250” award and
the “Best remuneration disclosure –
FTSE250” award for our 2010
Annual report and accounts.
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.
On appointment to a role in the Group,
each new employee completes a medical
questionnaire or examination to identify
any pre-existing medical conditions
and previous environmental exposure,
or to identify where any reasonable
adjustments are needed in cases
where an employee has a disability.
We have published occupational
health policies which address industrial
disease risks, and our occupational
health team undertakes regular
programmes to screen colleagues
who are in contact with, for example,
high noise levels or dust. Everyone
working in operational areas has
a general medical every three years.
Pension provision and retirement
There are 378 employees who are
members of the Drax Power Group of
the Electricity Supply Pension Scheme,
which was closed to new entrants in
2002. All other employees are eligible to
join the Group Personal Pension Plan or
the Haven Power Personal Pension Plan,
which are both actively promoted to
new recruits. Any employee aged 55
or over is eligible to take their accrued
retirement benefits, in line with the
statutory minimum age for receipt
of an occupational pension.
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In 2011, we removed the default
retirement age and we now have a
number of employees working beyond
the age of 65. We have also introduced
a phased retirement policy so that
any employee aged 55 or over may
apply to take accrued retirement benefits
and continue to work part-time for Drax
Power Limited, subject to operational
requirements.
From our Human Resources information
systems we produce reports to assist
managers with retirement and
succession planning and for employees
approaching their chosen retirement
age 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.
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Drax Group plc
Annual report and
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Corporate and social responsibility
Caring for the
community
“We are committed to being a good
neighbour and our “caring for the community”
philosophy involves being part of our local
and regional communities.”
Rachael Hudson
External Affairs Officer
3
1
£136,813
1
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Financial support
During 2011, the Group
gave financial support
of £136,813 across a
range of charitable and
non-charitable causes.
2
Skylark Centre
At the heart of our
nature reserve, the
Skylark Centre is
equipped with facilities
to help schoolchildren
understand more about
the natural habitat and
ecology of the area.
Cricket in the
community
Our cricket initiative
continues to be popular
amongst local schools.
In 2011, we staged
the fifth Drax Cup
competition for boys
and girls aged under
nine across the region.
4
Art in the Community
Our Summer Art
Schools and annual
art competition
were well supported
during the year helping
us to promote art
learning within the
National Curriculum.
4
2
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Drax Group plc
Annual report and
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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 this Corporate and social
responsibility section; below we touch
on other aspects of our stakeholder
engagement commitments, from investor
relations to community relations.
Investor relations
We are 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
and Interim Management Statements.
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 2011, 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, Canada 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.
7
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Drax Group plc
Annual report and
accounts 2011
Corporate and social responsibility
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 2011, the Group gave financial
support of £136,813 (2010: £131,450)
in total across a range of charitable
and non-charitable community causes.
Of that total, charitable donations
amounted to £93,878 (2010: £87,384).
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.
One of the good causes supported
through the sponsorship team in 2011
was the Children’s Heart Surgery Fund
Charity, at the Leeds General Infirmary,
which supports valuable equipment,
resources and research for the treatment
of children with heart defects, whilst
providing a support service both for the
children and their families.
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 2011, just over £40,000 of the
total donations made were through
this scheme.
External relations
As in previous years, we maintained our
engagement with public affairs audiences
on issues with implications for our
business. With 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.
No political donations were made
in the UK or elsewhere during 2011
(2010: nil), 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.
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 Company wishes
to avoid any inadvertent infringement
of the legislation and each year, though a
resolution at the Annual General Meeting,
seeks the authority of shareholders to
incur expenditure for the Company
and its subsidiaries for such purposes
of £100,000.
Now in its seventh year, the outage
charity scheme raised £7,000 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.
Added to this was a further £400
through an initiative to collect used ear
plugs during the outage. As in previous
years the money was divided equally
between two local charities chosen by
Drax staff and our contractors: Willow’s
Wish, helping a 7 year old girl with
cerebral palsy travel to America for a
potentially lifesaving operation; and The
Steve Prescott Foundation, which raises
money for people suffering with cancer.
For the fifth year running we held a
charity corporate golf tournament at
Fulford Golf Club, York. The event raised
£14,520 for the Yorkshire Air Ambulance,
which provides a crucial emergency
service for the region. A further £750
was donated following a fund raising
event held at the Drax annual Safety
Conference for contractors and staff.
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.
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 sanctuary for over 100 species of
wildlife. It is specially designed to help
schoolchildren understand more about
the natural habitat and ecology of
the area.
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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 local and professional
associations. During 2011, we played host
to some 7,300 visitors.
On Easter Sunday, we held an event to
provide fun and games for local families
and also raise money for The Sobriety
Project, a charity based at the Yorkshire
Waterways Museum in Goole, which
helps disadvantaged young people
and vulnerable groups in the local
community. Hundreds of children took
part in the activities, which included a
hunt for huge Easter eggs, mask-making
and face-painting.
For three Sundays in the run-up to
Christmas, we converted the Skylark
Centre into Santa’s Grotto. The attraction
proved popular with local residents, over
1,200 people came to visit the grotto
and through their generosity and other
Christmas initiatives some £2,500 was
raised for Selby Hands of Hope, a charity
helping to fund groups and activities in
the local 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.
During the year, 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 fifth year we ran the
Drax Cup, a cricket competition for teams
of girls and boys under the age of nine.
Around 340 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 four area final winners –
English Martyrs’ RC Primary School from
York, Wickersley Northfield Primary
School from Rotherham, Snaith Primary
School near Goole and Alwoodley
Primary School from Leeds – met in the
semi-finals and final day at Headingley
Carnegie Stadium, the home of Yorkshire
CCC and a long-standing venue for test
matches and one-day internationals.
This year, for the second year running,
the winning school was Alwoodley
Primary School.
Under the “Art in the Community”
banner, we held our fifth art competition
for primary and secondary schools.
Some 20 schools participated and
the winners received prizes of top art
supplies and their schools shared in
prize money totalling over £2,800.
Our Summer Art Schools, designed to
encourage and develop art appreciation
as part of our support for education
and to promote art learning within the
National Curriculum, entered their fourth
year in 2011. Children aged 7 to 10 learnt
how to make creatures from bugs to birds
and animals in an arts and crafts class
using a variety of materials along with
t-shirt printing and painting, while a
master class for 11 to 14 year olds helped
them get to grips with more advanced
arts and digital technology.
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Drax Group plc
Annual report and
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Corporate governance
What good corporate governance means at Drax
“ 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 that
the business is well governed.”
Charles Berry
Chairman
Chairman’s letter
I am pleased to present Drax’s Corporate governance report for 2011 on behalf of our Board. This report is intended to provide you
with a clear and meaningful explanation of what governance means to us and how it will guide our decision making in the future.
Good governance at all levels is taken seriously at Drax and it is for the Board to set the tone and take the lead. Good governance
should be second nature to everyone at Drax as they go about their day-to-day business and is not simply a set of policies and
processes. The Board believes that good practice should flow throughout the Group, which in turn should guide the decisions taken
on a daily basis. If we achieve this, then we can be sure that we are taking the right actions for the benefit of all our stakeholders.
It is important that we continue to develop our board structures, processes and procedures to ensure that our governance remains
relevant and focused on improving our business and driving our strategic priorities. During 2011, we continued to strengthen our
internal control and risk management processes to ensure that they are embedded in business operations across the Group.
I believe the drive for transparent reporting has continued to improve business conduct in recent years. Recently the Financial
Reporting Council has built into the UK Corporate Governance Code an emphasis for organisations to actively consider the make up
and diversity of their boards. Drax has established a policy to ensure that gender diversity is one of the factors taken into account
when considering future appointments to the Board and other senior appointments.
This year we are required to report against the UK Corporate Governance Code, which replaces the Combined Code. I am pleased
to report that the Board has reviewed the new code and we comply with it. We intend to continue to observe it, to ensure ongoing
good governance is maintained.
A more detailed report on our corporate governance arrangements is set out on the following pages.
Charles Berry
Chairman
Directors’ report
The directors present their report for Drax Group plc, which should be taken to incorporate the Business review section of the
annual report, the Corporate governance review and the consolidated financial review for the year ended 31 December 2011.
Corporate governance
The Group is committed to high standards of corporate governance, details of which are given in this Corporate governance report
and the Audit, Nominations and Remuneration Committee reports set out on pages 62 to 80.
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.
Compliance with the UK Corporate Governance Code
It is the Board’s view that throughout the period commencing on 1 January 2011, there has been full compliance with the provisions
of the UK Corporate Governance Code.
51
Drax Group plc
Annual report and
accounts 2011
The Board of directors
As at 20 February 2011, the Board consisted of the non-executive Chairman, four independent non-executive directors and four
executive directors. The current directors are Tim Barker, Charles Berry, Tim Cobbold, Peter Emery, David Lindsell, Tony Quinlan,
Paul Taylor, Dorothy Thompson and Tony Thorne. Biographical notes of the directors appear below.
Charles Berry
Chairman
Appointment to the Board:
15 December 2005 and was appointed Chairman on 17 April 2008.
Committee membership:
Nominations (Chairman) and Remuneration.
External appointments:
A non-executive director and Chairman-designate of Senior plc, 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 Chairman of Eaga plc and of THUS Group plc.
Qualifications:
BSc (Hons) in Electrical Engineering and MSc in Management.
Responsibilities and skills:
As Chairman, Charles is responsible for the leadership of an effective Board ensuring cohesion between the executive and
non-executive directors. He liaises closely with the Chief Executive in order to fully understand the business challenges facing
the executive directors and the senior management team and in turn he ensures that matters laid before the non-executive
directors are challenged and tested in a robust manner.
Dorothy Thompson
Chief Executive
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.
Responsibilities and skills:
As Chief Executive, Dorothy 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
Finance Director
Appointment to the Board:
1 September 2008.
Committee membership:
Executive.
External appointments:
A non-executive director of the Port of London Authority.
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).
Responsibilities and skills:
As Finance Director, Tony is responsible for the financial management of the Group, and for relationships with the Group’s bankers.
In addition, he has the Investor Relations, Risk Management, IT, Facilities, and Procurement functions reporting to him. Tony also
has responsibility for the development of the enhanced co-firing facilities at Drax.
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Drax Group plc
Annual report and
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Corporate governance
Peter Emery
Production Director
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 and a member of The Energy Research Partnership.
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.
Responsibilities and skills:
As Production Director, Peter is responsible for the operation of the Group’s plant and equipment. This includes all aspects of
safety management, plant integrity, engineering support and design, maintenance and plant design. Peter also has responsibility
for leading the Company’s carbon capture and storage activity.
Paul Taylor
Retail and Trading Director
Appointment to the Board:
1 September 2011, having joined Drax in July 2004.
Committee membership:
Executive. Paul is also Chairman of the Group’s retail subsidiary, Haven Power Limited.
External appointments:
None.
Previous experience:
Paul has more than 15 years experience in energy trading previously working for TXU Europe and Powergen/E.ON UK. At TXU
Europe Paul led the UK electricity trading function responsible for trading a combined portfolio of over 7GW of power plant and
a retail position of more than 50TWh. Before energy trading Paul worked in operational research.
Qualifications:
BSc (Hons) in Business Operation and Control.
Responsibilities and skills:
As Retail and Trading Director, Paul has responsibility for the trading of power and other associated commodities. He is also
responsible for the retail division, Haven Power, which sells electricity to customers in the industrial and commercial and small
and medium enterprises markets.
Tim Barker
Senior independent non-executive director
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 the European subsidiary of the Investment Bank Jeffries Group Inc.
and Chairman of an early stage company developing a new energy storage technology.
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 (Hons) in Economics.
Responsibilities and skills:
As the Senior Independent Director, Tim’s counsel is of great importance to the Board and its Committees. His knowledge and
experience of financial markets provides the Board with added insight.
53
Drax Group plc
Annual report and
accounts 2011
Tim Cobbold
Independent non-executive director
Appointment to the Board:
27 September 2010.
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 a Fellow of the Institute of Chartered Accountants in England and Wales (FCA).
Responsibilities and skills:
Tim’s blend of financial and engineering experience means that he is well placed to contribute significantly to the Board and its
Committees. His role as an active chief executive in a different sector adds a different dimension to his contribution.
David Lindsell
Independent non-executive director
Appointment to the Board:
1 December 2008.
Committee membership:
Audit (Chairman), Nominations and Remuneration.
External appointments:
A non-executive director of Premier Oil plc, 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. David is a former non-executive director of Gartmore
Group Limited.
Qualifications:
Fellow of the Institute of Chartered Accountants in England and Wales (FCA).
Responsibilities and skills:
David’s recent and relevant experience in the areas of finance and audit are a significant asset to the Board and his role as
Chairman of the Audit Committee.
Tony Thorne
Independent non-executive director
Appointment to the Board:
29 June 2010.
Committee membership:
Audit, Nominations and Remuneration.
External appointments:
Chairman of the South East Coast Ambulance Service.
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.
Responsibilities and skills:
Tony’s geographical experience is of great importance as Drax considers expansions into global markets. The fact that Tony is also
a recently retired chief executive also adds a different dimension to his contribution.
Each of the independent non-executive directors detailed above served the Group throughout the year ended 31 December 2011.
Mike Grasby served the Group as an independent non-executive director for only part of the year. He retired as a director at the
conclusion of the Annual General Meeting (“AGM”) on 13 April 2011.
No person, other than those mentioned above, served as a director or as an alternate director at any time during the year.
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Drax Group plc
Annual report and
accounts 2011
Corporate governance
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.
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.
The Board has reviewed the independence of each non-executive director. None of the non-executive directors who has 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.
Selection, appointment, review and re-election
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.
Notwithstanding the provisions of the Articles, and in accordance with the UK Corporate Governance Code, the Company will
continue to propose all directors for annual re-election. Accordingly each of Tim Barker, Charles Berry, Tim Cobbold, Peter Emery,
David Lindsell, Tony Quinlan, Dorothy Thompson and Tony Thorne will retire at the forthcoming AGM and, being eligible, offer
themselves for re-election.
The Articles require that, following appointment to the Board, directors submit themselves for election by shareholders at the
first AGM following their appointment. Paul Taylor was appointed to the Board after the last AGM and, therefore, will retire and
offer himself for election by shareholders at the AGM to be held on 18 April 2012.
The evaluation of the Board described on page 55 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
in their particular role and perform effectively.
The election or re-election of each director is recommended by the Board. 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 76.
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, it is the Board’s policy not to extend the aggregate period of service of any independent
non-executive director beyond nine years and, 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.
The Board is satisfied that all the directors are able to devote sufficient time to their duties as directors.
55
Drax Group plc
Annual report and
accounts 2011
How the Board functions
The Board has seven scheduled meetings each year, and arranges additional meetings if the need arises. There are also three
scheduled business updates for the Board by telephone conference call. In addition, the Board meets at least annually to
consider strategy.
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 schedule of delegated authorities 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 has adopted a policy whereby directors may, in the furtherance of their duties, seek independent professional
advice at the Company’s expense. During 2011, no director sought independent legal advice pursuant to the policy.
The Company Secretary is responsible for advising the Board on all governance matters, ensuring good information flows
within the Board, its committees and senior management, and ensuring that Board processes are complied with. He is also
responsible for compliance with the Companies Act, the Listing, Prospectus and Disclosure and Transparency Rules. In his role
as Director of Corporate Affairs, he is also responsible for advising the Board on legal matters and has responsibility for the
Company Secretarial, Environmental, External Affairs, Group Legal, Human Resources, and Regulatory and Policy functions,
and for the management of the Group’s internal control and risk management framework and processes.
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. 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 2010, 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.
The 2010 review involved individual interviews with each director, the Company Secretary and members of the senior
management group, and concluded that the Board was strong and appeared well equipped to meet the challenges ahead.
In particular, the composition and mix of the Board were considered to be appropriate with a strong cadre of non-executive
directors with a broad range of relevant experience. The report made a number of recommendations to enhance Board
effectiveness, all of which the Board acted upon as part of the process of continuing improvement. During 2011, the Board
commissioned Independent Audit to conduct a follow up review, which was carried out through a questionnaire based process.
The findings of the review were presented to the Board. The review did not disclose any areas of concern and found that good
progress had been made on the areas for improvement identified by the 2010 review. The review suggested that there would
be benefit in the Board reviewing certain of its past decisions. The Board will act on this suggestion and, as an example, will
consider whether its decision taken in 2010 to change the manner in which it scrutinises and receives assurance in respect of
health and safety management has resulted in a more effective process.
During the year, the Chairman held a meeting 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.4.2 of the UK Corporate Governance Code.
The Board is committed to the development of all employees and directors and has reviewed and will periodically continue to
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.
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Drax Group plc
Annual report and
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Corporate governance
Committees of the Board
The Board has established the following standing committees:
Committee
Membership
Audit Committee
David Lindsell (as Chairman), Tim Barker, Tim Cobbold and Tony Thorne.
Nominations Committee(1)
Charles Berry (as Chairman), Tim Barker, Tim Cobbold, David Lindsell and Tony Thorne.
Remuneration Committee(1)
Tim Barker (as Chairman), Charles Berry, Tim Cobbold, David Lindsell and Tony Thorne.
Notes:
(1) Mike Grasby was a member of the Nominations and Remuneration Committees until he retired from the Board at the conclusion of the AGM on 13 April 2011.
Details of the work of each of the Committees are given in the respective reports of those Committees on pages 62 to 80.
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.
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),
Peter Emery (Production Director), Philip Hudson (Director of Corporate Affairs and Company Secretary), Tony Quinlan
(Finance Director) and Paul Taylor (Retail and Trading Director). 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 and
Remuneration Committees of Drax Group plc during 2011.
The number in brackets represents the maximum number of meetings that each individual was entitled to and had the
opportunity to attend.
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Mike Grasby(3)
David Lindsell
Tony Quinlan
Paul Taylor(4)
Dorothy Thompson
Tony Thorne
Time on
the Board
(years/months)
Time
with Drax(1)
(years/months)
Board(2)
Audit
Committee
Nominations
Committee
Remuneration
Committee
6/2
6/0
1/3
6/2
5/6
3/0
3/4
0/4
6/2
1/6
7/6
6/0
1/3
7/6
7/4
3/0
3/4
7/6
6/3
1/6
7(7)
7(7)
7(7)
7(7)
3(3)
7(7)
7(7)
2(2)
7(7)
7(7)
4(4)
4(4)
4(4)
3(3)
3(3)
3(3)
2(2)
3(3)
4(4)
4(4)
4(4)
3(3)
4(4)
4(4)
3(3)
4(4)
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 2011.
(2) In addition to the Board meetings identified above, there have also been three teleconference calls to discuss various matters and there was one meeting held to specifically consider strategy.
(3) Mike Grasby retired as a director on 13 April 2011.
(4) Paul Taylor was appointed as a director on 1 September 2011.
Under the terms of his letter of appointment, the Chairman is expected to commit between 50 and 70 full days a year to fulfil
his role.
Under the non-executive’s letters of appointment, the time commitment each is expected to give in respect of membership of
the Board, is 12 to 15 full days a year. That includes attendance at Board meetings, the AGM, one annual Board strategy day
and at least one site visit per year. In addition, they are expected to devote appropriate preparation time ahead of each
meeting. The time commitment expected in respect of their membership of committees of the Board, notably the Audit,
Nominations and Remuneration Committees, is an additional three to four full days a year in each case.
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Drax Group plc
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Internal control
Details of the Group’s system of internal control and risk management are contained in the Principal risks and uncertainties
section on pages 32 to 35 together with the Directors’ responsibilities statement in accordance with the UK Corporate
Governance Code.
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 2011. 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 0.8% 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, on pages 2 to 49, 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.
Additional Information
Annual General Meeting
The Annual General Meeting (“AGM”) of the Company will be held on 18 April 2012, at The Armourer’s Hall, 81 Coleman Street,
London EC2R 5BJ at 11.30am. A separate document contains the notice convening the AGM and a description of the business
to be conducted.
Other significant agreements
Under a £310 million revolving credit facility agreement dated 22 July 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 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 repayment 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, as amended on 22 July 2011 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 two 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.
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Drax Group plc
Annual report and
accounts 2011
Corporate governance
Auditors and the disclosure of information to the auditor
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 auditor in connection with preparing the report, of which the auditor is unaware.
Having made enquiries of fellow directors, each director has taken all steps that he/she ought to have taken as a director
to ascertain any relevant audit information and to establish that the auditor is 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 the auditor of the Company. A resolution will also be proposed authorising the directors to determine the
auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and
relationship with the Group, including the level of audit and non-audit fees paid to the auditor. Further details on the work
of the auditor and the Audit Committee are set out in the Audit Committee report on pages 62 to 64.
Share capital
The Company has only one class of equity shares, which are ordinary shares of 11 16⁄29 pence each. There are no restrictions
on the voting rights of the ordinary shares.
At 1 January 2011, 364,859,988 shares were in issue and at 31 December 2011, 364,862,718 shares were in issue. As at
20 February 2012, 364,864,494 shares were in issue.
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 April 2011, a total of 2,456 shares were issued in satisfaction of shares vesting in accordance with the rules of the Group’s
Bonus Matching Plan to an individual who had retired from the Group. On 28 September 2011, a total of 274 shares were
issued in satisfaction of share options exercised in accordance with the rules of the Group’s Savings-Related Share Option Plan
to an individual who had their employment with the Group terminated due to redundancy. The shares issued represented a
negligible percentage of the Company’s issued ordinary share capital prior to those shares being issued. No other ordinary
shares were issued during the year.
On 10 February 2012, a total of 1,776 shares were issued in satisfaction of share options exercised in accordance with the rules
of the Group’s Savings-Related Share Option Plan to an individual who had retired from the Group.
Substantial shareholdings
As at 20 February 2012, 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
Number of
voting rights
in qualifying
financial
instruments
Total
number of
shares held
% of the
issued share
capital held
Invesco plc
Black Rock Inc.
Schroders plc
AXA S.A
1.3.2010
27.4.2011
20.01.2012
—
—
—
108,072,751
—
108,072,751
29.62%
30,870,078
5,516,236
36,386,314
20,668,302
15,643
20,683,945
Legal & General Group Plc
15.7.2010
14,478,741
—
Orbis Holdings Limited
3.02.2012
—
13,447,250
17.12.2009
1,704,050
14,952,477
—
—
—
16,656,527
14,478,741
13,447,250
Total shares held by
substantial shareholders
16,182,791 188,010,858
5,531,879 209,725,528
57.47%
9.97%
5.66%
4.57%
3.96%
3.69%
59
Drax Group plc
Annual report and
accounts 2011
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Authority to purchase own shares
At the AGM held on 13 April 2011, 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 2011 and the Company held no Treasury shares during 2011.
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.
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.
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Drax Group plc
Annual report and
accounts 2011
Corporate governance
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.
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
20 February 2012
Registered office:
Drax Power Station
Selby
North Yorkshire YO8 8PH
Registered in England and Wales No. 5562053
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Drax Group plc
Annual report and
accounts 2011
Directors’ responsibilities statement
The directors are responsible for preparing the Annual report and the financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are
required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union and Article 4 of the IAS Regulation and 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). Under company law the directors must not approve the accounts unless they are satisfied that
they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the parent Company financial statements, the directors are required to:
−(cid:3) select suitable accounting policies and then apply them consistently;
−(cid:3) make judgements and accounting estimates that are reasonable and prudent;
−(cid:3) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed
and explained in the financial statements; and
−(cid:3) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company
will continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that directors:
−(cid:3) properly select and apply accounting policies;
−(cid:3) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
−(cid:3) 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
−(cid:3) make an assessment of the Company's ability to continue as a going concern.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to
ensure that the financial statements comply with the Companies Act 2006. 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
Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
−(cid:3) 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
−(cid:3) the management report, 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
20 February 2012
Tony Quinlan
Finance Director
20 February 2012(cid:2)
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Drax Group plc
Annual report and
accounts 2011
Audit Committee report
“ The steps Drax has taken in 2011 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
The Audit Committee (the “Committee”) consisted of David Lindsell (as Chairman), Tim Barker (Senior Independent Director),
Tim Cobbold, and Tony Thorne all of whom are independent non-executive directors.
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 2011, and the members’ attendance record is set out on page 56. 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:
−(cid:3) monitor the integrity of the financial statements and other information provided to shareholders;
−(cid:3) review significant financial reporting issues and judgements contained in the financial statements;
−(cid:3) review the systems of internal control and risk management;
−(cid:3) maintain an appropriate relationship with the Group’s external auditor and review the effectiveness and objectivity of the
external audit process; and
−(cid:3) 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 auditor 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:
−(cid:3) at meetings in February and July 2011, 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 auditor identifying accounting or judgemental issues
requiring its attention and also satisfied itself of the independence and objectivity of the external auditor;
−(cid:3) 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 continues to focus on specifically identified strategic risk areas, as well as ensuring
the provision of a core compliance assurance service. No significant weaknesses were identified in any of the internal audit
reports although certain improvements in processes and procedures were made as a result of reviews;
−(cid:3) in July 2011, 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;
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Drax Group plc
Annual report and
accounts 2011
−(cid:3) in April 2011, the Committee undertook a detailed review of the management letter covering the external auditor’s findings
in respect of the prior financial year and also reviewed the performance of the external auditor;
−(cid:3) at meetings in April and November 2011, the Committee reviewed the Company’s risk register and in February and
November 2011, it undertook a review of the effectiveness of the system of internal controls and consideration of fraud;
−(cid:3) during 2011, PricewaterhouseCoopers LLP (“PwC”) conducted a further phase on the effectiveness of controls applicable
to Drax Power Limited’s commodity trading activities. In July 2011, the results of this further phase were presented to the
Committee. The report did not identify any significant weaknesses in the controls;
−(cid:3) during the year, the Committee met three times in the absence of management with each of the external and internal
auditor. 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 auditor 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
−(cid:3) strategic reviews of tax (July 2011), treasury and the finance team (both November 2011), were undertaken and presented
to the Committee and in addition, policy reviews covering auditor independence and whistleblowing were put to, and
approved by, the Committee in April 2011.
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.
Independence of the external audit
In April 2011, 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:
−(cid:3) seeking confirmation that the auditor is, 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;
−(cid:3) a policy governing the engagement of the auditor to conduct non-audit work under which:
−(cid:3)the auditor 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 auditor would act in an advocacy role for the Group;
−(cid:3)there is a clear process of approval for engaging the auditor to conduct other categories of non-audit work, subject to
financial limits;
−(cid:3)all engagements of the auditor to conduct non-audit work are reported to the next meeting of the Committee;
−(cid:3)the balance between the fees paid to the external auditor for audit and non-audit work is monitored by the Committee;
and
−(cid:3) a policy on the employment by the Group of former employees of the external auditor, the essence of which is to require
a period of two years to elapse between the cessation of an individual’s association with the auditor and appointment to
any financial reporting oversight role within the Group.
Details of the amounts paid to the external auditor during the year for audit and other services are set out in note 5 to the
consolidated financial statements on page 93. The external auditor is 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 three years.
No contractual obligations exist that restrict the Group’s choice of external auditor.
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64
Drax Group plc
Annual report and
accounts 2011
Audit Committee report
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 2011 included: Senior Accounting Officer compliance; Human Resources strategy; Bribery Act compliance; payroll, Drax
cyclical key financial controls; Haven key financial controls; Drax IT key controls and strategy; Haven IT key controls and
strategy; and group wide risk management.
External auditor
Deloitte LLP was appointed auditor of the Group in 2005 and have been reappointed at each subsequent Annual General
Meeting. They previously acted as auditor 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 auditor at the forthcoming AGM and a resolution to that effect appears
in the notice of the AGM.
The Chairman of the Committee, independent of management, maintains regular and direct contact with both the internal
and external auditor.
This report was reviewed and approved by the Board on 20 February 2012.
David Lindsell
Chairman of the Audit Committee
65
Drax Group plc
Annual report and
accounts 2011
Nominations Committee report
The Nominations Committee (the “Committee”) consisted of Charles Berry (as Chairman), Tim Barker (Senior Independent
Director), Tim Cobbold, Mike Grasby (until 13 April 2011), David Lindsell and Tony Thorne. 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
managers, to identify and nominate candidates to fill vacancies among th
from non-executive directors.
succession planning for the directors and other senior
e directors and to review the time required
The Company’s Articles provide that directors retire by rotation. However, the UK Corporate Governance Code provides that
all directors should be subject to annual re-election. The Company adopted the provisions of the UK Corporate Governance
Code on the annual re-election of all directors at the beginning of 2011.
The terms of reference for the Committee are reviewed annually by the Committee and then by the Board. They are available
on the Group’s website at www.draxgroup.plc.uk.
The Committee met on three occasions in 2011, and the members’ attendance record is set out on page 56.
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.
In September 2011, 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 55.
During the course of the year, the Committee considered the composition of the Board and concluded that it was an
appropriate time to appoint a commercial director. The succession planning process had already established that Paul Taylor
was capable of stepping into an executive director role, when the time was right for the Company. Paul Taylor was
subsequently appointed the Retail and Trading Director on 1 September 2011. He will retire and offer himself for election
by shareholders at the AGM to be held on 18 April 2012.
The Board has considered the recommendations of the Report by Lord Davies, Women on Boards, and welcomes initiatives
aimed at increasing diversity generally, including gender diversity. We believe, however, that an over prescriptive approach
through setting targets or announcing aspirational goals is not desirable. It is possible that in setting out attributes for new
appointments, without specific consideration of gender diversity, the Board could unintentionally limit the available talent
pool. However, it is equally possible that setting out gender diversity targets may also have a limiting effect. The Board has
established a policy to ensure that the proportion of women on the Board will be one of the considerations for future Board
and senior management appointments. We believe that proper account of the benefits of gender diversity can be taken
without establishing specific aims and without giving undue weight to gender diversity. The Nominations Committee will
implement this policy in relation to future appointments to the Board.
Further details of gender diversity in the Group are included in the Corporate and social responsibility section of the Annual
report and accounts.
The Committee met on 14 February 2012, following the completion of the Board evaluation process, and determined that all of
the directors who are the subject of annual re-election will retire at the forthcoming AGM and, being eligible, offer themselves
for re-election. The evaluation of the Board described on page 55 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 AGM, details of which are contained in the Notice of Meeting.
This report was reviewed and approved by the Board on 20 February 2012.
Charles Berry
Chairman of the Nominations Committee(cid:2)
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Drax Group plc
Annual report and
accounts 2011
Remuneration Committee report
“ The Committee has sought to ensure that the variable elements of
management remuneration achieve an appropriate balance between
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 debate in respect of executive remuneration and in particular the transparency of reporting has continued in earnest
during 2011. The Remuneration Committee (“the Committee”) has welcomed this and has actively contributed.
We recognise the need to build trust in the remuneration process through transparency and accountability and we are
therefore supportive of many of the proposals currently being suggested by the Government following the Department
for Business, Innovation and Skills reviews of narrative reporting and executive remuneration.
In particular we welcome proposals that promote clear and concise reporting as evidenced by our nomination for
“Best Remuneration Disclosure” in the ICSA Hermes Transparency in Governance Awards 2011. We are also considering
implementing further measures to promote greater transparency within the Group.
Some disclosures, particularly if they are overly prescriptive, may have unintended consequences or be subject to invalid
comparisons between companies. We therefore think that it is essential to give companies flexibility to present information
in a way that is relevant to their business and compensation structures.
The Committee strongly supports proposals that enhance the link between performance and executive remuneration and
also improve the clarity of reporting of the same. We believe that the measures of performance to which executive reward
is linked should be based on the specific company’s circumstances and also individual contribution, so cannot be measured
solely in terms of share price or earnings growth. This is particularly so in challenging market conditions and in companies
such as Drax, where shareholders recognise that earnings volatility is inescapable.
The Committee further developed this approach during the last remuneration review whereby performance measures
applicable to the Bonus Matching Plan (“BMP”) for executives and senior management were adjusted to include both
operational and strategic measures. Our aim was to align more closely remuneration with key strategic goals specific to Drax,
in particular the development of a much more sustainable business with reduced reliance on coal, a greater focus on biomass
and increased retail sales. A relative Total Shareholder Return (“TSR”) measure was also retained to ensure continued
alignment of executive reward with the interests of shareholders.
All participants in the BMP are subject to the share ownership guidelines as set out on page 75.
The Committee has striven to maintain a balanced remuneration structure which recognises both short-term performance
and the achievement of long-term strategic objectives. Financial and operational performance continue to be critical
components in the Committee’s determination of remuneration for executive directors and senior staff as it is these factors
that primarily determine the returns to shareholders in the short-term. Indeed, the business performed well in both of these
areas during 2011 against a backdrop of volatile commodity markets.
Remuneration for executives also takes into account progress in the Group’s two key strategic initiatives; to convert Drax
Power Station into a predominantly biomass fuelled generating asset, subject to securing the necessary regulatory support,
and the programme for the expansion of Haven Power Limited. The Committee’s assessment was that excellent progress
was made during 2011 in achieving these objectives.
The Committee is satisfied that remuneration incentives are compatible with the Group’s risk policies and systems,
including those relating environmental, social and governance risks.
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Drax Group plc
Annual report and
accounts 2011
This Remuneration Committee report has been prepared by the Committee on behalf of the Board which has adopted
Governance Code and it complies with the Listing Rules
the principles of good governance as set out in the UK Corporate
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 auditor 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
18 April 2012.
Part 1 — Unaudited information
The Committee
During the year, the Committee consisted of Tim Barker (as Chairman), Tim Cobbold, Mike Grasby (until 13 April 2011), David
Lindsell and Tony Thorne, all of whom are independent non-executive directors, together with Charles Berry, Chairman of the
Company. 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 four occasions during the year and its members’ attendance record is set out on page 56.
Advice to the Committee
PricewaterhouseCoopers LLP
(“PwC”)
Independent adviser appointed by the Committee,
in October 2010, to advise on market practice and
remuneration of executive and non-executive directors.
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 Committees 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:
−(cid:3) recommending to the Board the remuneration strategy and framework for the executive directors and senior managers;
−(cid:3) determining, within that framework, the individual remuneration arrangements for the executive directors and senior
managers;
−(cid:3) 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;
−(cid:3) 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;
−(cid:3) determining the policy for, and scope of, executive pension arrangements; and
−(cid:3) overseeing any major changes in employee benefit structures throughout the Group and reviewing remuneration trends
across the Group.
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Drax Group plc
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Remuneration Committee report
Agenda
Each year the Committee agrees an annual work schedule. The regular scheduled matters considered by the Committee
in 2011 were:
−(cid:3) review of the performance of the Group by reference to the 2010 Balanced Corporate Scorecard (“Scorecard”),
including the application of the discretionary factor;
−(cid:3) ratification of the measures and weightings of the 2011 Scorecard;
−(cid:3) 2010 annual bonus awards to directors and senior managers by reference to the Scorecard and individual performance
against personal objectives;
−(cid:3) agreeing personal objectives for directors and senior managers for 2011;
−(cid:3) review of base salary and overall remuneration packages for executive directors and senior managers;
−(cid:3) review of the Chairman’s remuneration;
−(cid:3) granting of awards under executive and all employee share plans;
−(cid:3) consideration of vesting of awards under executive share plans (no such awards vested during 2011); and
−(cid:3) review of advisers and the fees paid to them.
In addition, with the assistance of its advisers, the Committee considered current trends in executive remuneration with
particular reference to consultation on executive remuneration by the Department of Business, Innovation and Skills.
actices in that context. It concluded that
The Committee considered the Company’s own remuneration policy and pr
the structure and level of executive remuneration in the Company continued to be appropriate.
The Committee also considered the provision of pension benefits to executive directors in the light of changes in personal
taxation. It decided not to make any change to the provision of pension benefit, save to give executives the option to be paid
in cash in lieu of pension contributions for amounts in excess of the annual personal allowance of £50,000.
Remuneration policy
During the year the Committee reviewed and updated its terms of reference to ensure that they were sufficiently flexible and
appropriate to meet the different requirements necessary to motivate and retain senior managers in all Group companies.
The objectives of the remuneration policy are:
−(cid:3) to enable the Company to recruit, retain and motivate the talent needed to achieve its business objectives;
−(cid:3) to strengthen teamwork by enabling all employees to share in the success of the business;
−(cid:3) to ensure alignment of executive and shareholder interests; and
−(cid:3) to develop an approach which emphasises Total Reward.
The core principles of the remuneration policy are to:
−(cid:3) pay market rates of total remuneration;
−(cid:3) adopt different pay and benefit structures for different operating entities in the Group as appropriate to each entity’s
markets, workforce and location;
−(cid:3) ensure that there is an appropriate link between performance and reward;
−(cid:3) award annual bonuses which are linked to the delivery of the annual Business Plan targets including the achievement
of strategic objectives and personal performance; and
−(cid:3) ensure that long-term incentives are linked to TSR and to the delivery of Business Plan targets including the achievement
of strategic objectives.
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During the year under review the remuneration package of executive directors and senior managers was made up of:
Fixed
Variable
Base salary
Pension
Annual performance bonus
(A mix of cash and deferred shares)
Long-term incentive comprising
conditional shares under the BMP
(Performance over three years)
Benefits in kind
(Car allowance, private medical etc)
All employee share plans
Each executive director received total remuneration in respect of the year from 1 January to 31 December 2011 to the value set
out in the following table:
Salary (£000)
Annual bonus (£000)
Pension contributions (£000)
Benefits in kind (£000)
Vested shares under long-term incentive plan
Deferred shares
Total remuneration
Dorothy Thompson
Tony Quinlan
Peter Emery
Paul Taylor
508
497
101
90
—
—
1,196
345
312
69
85
—
—
811
284
257
57
18
—
—
616
225
216
39
15
—
—
495
The table on page 70 shows the mix of remuneration that applied in 2011 for executive directors between variable and fixed,
and short-term and long-term remuneration.
Components of remuneration
The main components of current executive directors’ remuneration are summarised as follows:
Chief
Executive
Finance
Director
Production
Director
Retail and
Trading
Director
Salary
−(cid:3) Salaries were benchmarked in 2010 against two comparator groups,
firstly; utilities, power generators and selected other industrial
companies, and secondly; commercial companies with comparable
market capitalisation, turnover and employee numbers.
Annual bonus (% of salary) Target
Maximum
65%
130%
60%
120%
60%
120%
60%
120%
−(cid:3) Bonuses are based 50% on Group and 50% on individual performance
against objectives. 25% of any bonus is settled in shares deferred for
three years.
Bonus match (maximum match as a multiple of annual bonus award)
−(cid:3) An award of conditional shares which vests based as to half on Drax
three year TSR compared to that of the FTSE51—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)
1.5x
20%
1.5x
20%
1.5x
20%
1.5x
20%
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Drax Group plc
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Remuneration Committee report
Drax executive director – pay mix for 2011
% of total remuneration
Chief Executive
Finance Director
Production Director
Retail and Trading Director
100%
Pension
100%
Pension
100%
Pension
100%
Pension
80%
60%
40%
20%
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
80%
60%
40%
20%
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
80%
60%
40%
20%
BMP matching shares
Deferred annual bonus
Cash annual bonus
Salary
80%
60%
40%
20%
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 BMP opportunity is based on “fair value” assuming the annual bonus pays out at target and the fair value of a BMP
performance share is assessed at 45% 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, recognising that there is no obvious comparator to
Drax in the market.
The Committee also takes into account the level of general pay increases within the Company. The pay increase agreed
on behalf of staff covered by collective bargaining arrangements is subject to a three year agreement with increases on
1 January of each year of the agreement, at RPI plus 0.3%. The increase is subject to a cap of 4.9%, which was therefore
the level of the general pay increase on 1 January 2011. The agreement continues until 31 December 2012. The average
pensionable pay of an executive director is nine times the average of pensionable pay for employees within the collective
bargaining unit.
In the light of the benchmarking exercise and the other factors considered, the Committee agreed that with effect from 1 April 2011:
−(cid:3) Dorothy Thompson’s base salary should be increased by 2% to £510,000
−(cid:3) Tony Quinlan’s base salary should be increased by 2% to £346,800
−(cid:3) Peter Emery’s base salary should be increased by 2% to £285,600
The Committee consider these salary levels to be appropriate taking into account all of the factors set out.
−(cid:3) Paul Taylor was appointed to the Board on 1 September 2011 at an annual base salary of £240,000.
−(cid:3) Pensionable salary is derived from base salary only.
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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 Scorecard 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 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 2011, the Scorecard had the following elements and weightings:
Financial targets
Elements
Underlying earnings per share; and
Cash flow(1) and controllable costs.
Production targets
Safety and plant and operational performance.
Strategic and Business Plan objectives Regulatory — securing appropriate support for co-firing
of sustainable biomass;
Development of technical and sourcing plans to increase the level of
biomass generation subject to regulatory support;
Commercial and development targets for retail business;
Development of plans for compliance with Industrial Emissions
Directive (“IED”) post 2016
Volume of commercially advantaged fuel combustion; and
Value added through commodity trading.
Weighting
20%
10%
20%
10%
15%
10%
5%
5%
5%
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 this process, the Committee assessed the corporate score for 2011 at 146%. The Committee exercised its discretion
to adjust the corporate score (by a factor of 1.03x), resulting in a final corporate score of 150%.
A summary of the assessment is set out in the following table:
Financial targets
Production targets
Elements
Stretch target achieved for underlying earnings per share.
Between target and stretch target achieved for cash flow.(1)
Stretch target achieved for controllable costs.
Stretch target achieved for total recordable injury rate.
Between target and stretch target achieved for all other safety and operational
targets, except for planned outage rate, which achieved between low and target
because of additional outages associated with plant modifications for biomass
trials which were not included in the original plan.
Strategic and Business Plan objectives Between target and stretch target achieved for regulatory objectives.
Overall, slightly below target was achieved for development of biomass plans,
which reflected the inability to demonstrate a viable investment case for the
development of dedicated biomass plant.
Between target and stretch target was achieved for commercial and
development targets for the retail business.
Target was achieved for IED plans.
Target was achieved for volume of commercially advantaged fuel combustion.
Stretch target was achieved for value added from commodity trading.
Notes:
(1) Cash flow for the year excluding the impact of short-term investments, prior to payment of equity dividends.
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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 2011, 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 2012 for the Chief Executive and the other executive directors are the same
as in 2011, and bonus measures and targets have been set using a similar process to that used previously. The corporate
scorecard weightings are 30% financial, 15% safety and production, 5% retail and 50% strategic and Business Plan.
The weightings are set out in the following table:
Target weighting
Financial performance
Group underlying earnings per share(1)
Cash flow(2) and controllable costs
Total financial
Safety, production and retail
Safety and production targets
Retail sales volume
Total safety, production and retail
Strategic and Business Plan
Regulatory objectives
Biomass co-firing development
Biomass procurement targets
IED compliance plan development
Other
Total strategic and Business Plan
Total weighting
20%
10%
30%
15%
5%
20%
5%
20%
10%
5%
10%
50%
100%
Notes:
(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, and exceptional items (see note 9 to the consolidated financial statements).
(2) Cash flow for the year excluding the impact of short-term investments, prior to payment of equity dividends
Conditional share awards under the Bonus Matching Plan
The Group operates the BMP as a long-term performance share plan. Awards under the BMP have been made in 2009, 2010
and 2011.
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 performance conditions determined by the Committee and described below.
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The TSR condition
50% of such part of any awards that are subject to performance conditions shall vest subject to 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 FTSE51—150 (the Comparator Group). TSR is the
return received by a Drax shareholder through appreciation in the share price, plus dividends assumed to be reinvested in
Drax shares.
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
Notes:
(1) Subject normally to continuing service up to the third anniversary.
100%
15%
0%
(1)
100%
33%
33% (1)
The Scorecard condition
50% of the BMP award subject to performance conditions will vest by reference to the Company’s performance against
the average outcome from the Scorecard over the three year performance period (the Scorecard award).
The Scorecard award will vest by reference to the average of the outputs of the Scorecard 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.
It is then proposed that the Scorecard award will vest at the end of the three year performance period as follows:
Average Scorecard outcome
% of Scorecard Award vesting
<1
1
1.5
0%
15%(1)
100%(1)
Notes:
(1) 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 Scorecard calculation and has 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 its
discretion the Committee will pay particular regard to progress against the strategic objectives incorporated in the Scorecard
including sustainable development of biomass generation and the development of the Haven Power supply business.
In addition, the Committee must be satisfied that there has also been a demonstrable and sustainable 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.
Pension
Executive directors are entitled to non-contributory membership of the Group’s defined contribution pension plan.
The employer’s contribution for executive directors is 20% of base salary.
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; or a combination of
pension contributions up to £50,000 per annum with the remainder as cash in lieu of pension. 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.
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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:
£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
Life assurance (in a sum assured of four times base salary) is provided for the executive
directors and senior managers.
Private medical cover
The Company’s policy is to offer BUPA private medical cover to all employees within the
Group, on a non-contributory or discounted basis according to the subsidiary company’s
policy. 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 or senior manager is required
to spend a significant amount of time at two Drax locations.
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
David Lindsell
Tony Quinlan
Paul Taylor
Dorothy Thompson
Tony Thorne
Annual salary
£000
Annual fees(1)
£000
Annual bonus(2)
£000
Annual benefits(3)
£000
Annual cash
pension(4)
£000
—
—
—
286
—
347
240
510
—
63
220
53
—
63
—
—
—
53
—
—
—
172
—
208
144
332
—
—
—
—
12
—
78
12
84
—
—
—
—
57
—
69
48
102
—
Notes:
(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.
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 and 2011, 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.
In each year of operation, options have been granted at the permitted discount of 20% to the prevailing share price
(determined in accordance with the plan rules) resulting in option prices of:
2006 — 636.00 pence per share
2010 — 310.50 pence per share
2011 — 321.00 pence per share
Options may be exercised upon successful completion of the three or five year savings contract to which they are linked.
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The five year contracts under the 2006 Plan matured on 1 July 2011. The market price of Drax Group plc shares from the
maturity date up to the end of the exercise period peaked at 581.50 pence per share, which was well below the option price
of 636 pence per share. Therefore all options under this plan lapsed on 31 December 2011.
Details of the SAYE options held by the executive directors are shown in the table in Part 2 of this report.
On 14 February 2012, the Committee agreed that invitations to the SAYE be made again in 2012, 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.
SIP
In any one tax year, the Committee may operate the SIP for the benefit of participants using any combination of the
following elements:
−(cid:3) award Free Shares (up to £3,000 in value);
−(cid:3) allow the purchase of Partnership Shares (up to £1,500 in value subject to an overriding maximum of 10% of salary);
−(cid:3) allocate free Matching Shares (in a maximum ratio of two Matching Shares for each Partnership Share); and
−(cid:3) 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 Share
Award
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.
Matching Share
Award (1)
Partnership Shares matched on a one-for-one basis in each year.
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 SIP has not operated since 2009.
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 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.
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Service contracts
Executive directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’
prior notice except that the contracts of Peter Emery and Paul Taylor are terminable by them 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 2011, 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
Peter Emery
Mike Grasby(1)
David Lindsell
Tony Quinlan
Paul Taylor
Dorothy Thompson
Tony Thorne
Notes:
(1) Mike Grasby retired as a director on 13 April 2011.
Contract start date
Contract term
Notice period
by the Company
(months)
Notice period
by the director
(months)
14 February 2012
17 April 2011
27 September 2010
3 years
3 years
3 years
14 June 2004
Indefinite duration
15 December 2005
14 February 2012
6 years
3 years
1 September 2008
Indefinite duration
1 September 2011
Indefinite duration
26 September 2005
Indefinite duration
29 June 2010
3 years
1
6
1
12
1
1
12
12
12
1
1
6
1
6
1
1
12
6
12
1
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 is a non-executive director of Johnson Matthey plc and received
£50,000 in fees for that appointment during 2011.
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. This is designed to:
−(cid:3) 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;
−(cid:3) reflect the responsibilities and time commitment; and
−(cid:3) attract and retain individuals with the necessary skills and experience to contribute to the future growth of the Company.
Chairman
The Committee determined that the Chairman’s remuneration should be increased from £200,000 to £220,000 per annum
with effect from 1 April 2011. This was the first increase in the Chairman’s remuneration since his appointment in April 2008
and was agreed on the basis that it would not be increased further until at least April 2013. This is reflected in the table of
annualised rates of pay on page 74.
77
Drax Group plc
Annual report and
accounts 2011
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 31 December 2006 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 31 December 2006 to 31 December 2011.
TSR performance – Drax versus FTSE100 and FTSE250
as at 31 December 2011
Drax
FTSE100
FTSE250
120
100
80
60
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
Mar 11
Jun 11
Sep 11
Dec 11
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Drax Group plc
Annual report and
accounts 2011
Remuneration Committee report
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 2011.
Directors’ emoluments
The emoluments payable in respect of 2011 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:
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Mike Grasby(2)
David Lindsell
Tony Quinlan
Paul Taylor(3)
Dorothy Thompson
Tony Thorne
Salary
£000
Fees
£000
Cash bonus in
respect of
2011
£000
Benefits
£000
Pension(1)
£000
—
—
—
284
—
—
345
225
508
—
63
215
53
—
18
63
—
—
—
53
—
—
—
257
—
—
312
216
497
—
—
—
—
18
—
—
85
15
90
—
—
—
—
57
—
—
69
39
101
—
Total
2011
£000
63
215
53
616
18
63
811
495
1,196
53
Total
2010
£000
61
200
14
598
55
61
780
399
1,155
27
Notes:
(1) Annual contribution by the Group to directors’ pension plans or cash in lieu.
(2) Mike Grasby retired from the Board on 13 April 2011 and therefore his emoluments are for only part of the year.
(3) Paul Taylor was appointed to the Board on 1 September 2011. The figures in the table above show the total amounts he received, as both an employee and a
director, for the period 1 January 2011 to 31 December 2011. The total for 2010 is the amount he received as an employee.
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
2008 Award
Paul Taylor
2008 Award
Dorothy Thompson
2008 Award
As at
1 January 2011
(or appointment
if later)
(number)
Awards made
during the year
(number)
Awards vesting
during the year
(number)
Awards lapsing
during the year
(number)
As at
31 December
2011
(number)
Market value
at the date
of award
(pence)
39,861
28,596
71,057
—
—
—
—
—
—
39,861
28,596
71,057
—
—
—
577.0
577.0
577.0
79
Drax Group plc
Annual report and
accounts 2011
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:
As at
1 January 2011
(or appointment
if later)
(number)
Awards made
during the year
(number)
Awards vesting
during the year
(number)
Awards lapsing
during the year
(number)
As at
31 December
2011
(number)
Market value
at the date
of award
(pence)
Peter Emery
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
Total
Tony Quinlan
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
Total
Paul Taylor
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
Total
Dorothy Thompson
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
Total
69,489
11,581
85,171
14,195
—
—
180,436
81,752
4,716
103,541
17,257
—
—
207,266
48,256
8,042
63,003
10,500
—
—
129,801
138,382
23,063
175,039
29,173
—
—
—
—
125,660
20,943
146,603
—
—
—
—
152,588
25,431
178,019
—
—
—
—
76,667
12,777
89,444
—
—
—
—
—
—
243,093
40,515
365,657
283,608
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
69,489
11,581
85,171
14,195
125,660
20,943
327,039
81,752
4,716
103,541
17,257
152,588
25,431
385,285
48,256
8,042
63,003
10,500
76,667
12,777
219,245
138,382
23,063
175,039
29,173
243,093
40,515
649,265
495.40
495.40
388.02
388.02
401.08
401.08
—
495.40
495.40
388.02
388.02
401.08
401.08
—
495.40
495.40
388.02
388.02
401.08
401.08
—
495.40
495.40
388.02
388.02
401.08
401.08
—
Details of the conditions subject to which the above awards will vest are given on page 72.
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Drax Group plc
Annual report and
accounts 2011
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 2011
(or appointment
if later)
(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)
Tony Quinlan
Paul Taylor
Dorothy Thompson
2,922
2,922
2,922
—
—
—
—
—
—
—
—
—
310.5
310.5
310.5
Exercise period
1 May 2013 to
31 October 2013
1 May 2013 to
31 October 2013
1 May 2013 to
31 October 2013
As at
31 December
2011
(number)
2,922
2,922
2,922
The middle market closing quotation for an ordinary share of the Company on 31 December 2011 was 545.0 pence and the
daily middle market closing quotations during the financial year ranged from 371.9 pence to 581.5 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 2011
As at 1 January 2011 (or appointment if later)
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)
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Ordinary
shares
3,462
1,730
1,000
—
—
—
30,551
2,616
—
—
—
—
—
—
—
—
—
—
—
3,462
1,730
—
—
—
—
— 327,039
30,551
2,616
7,500
2,500
—
—
—
—
—
—
—
—
—
—
—
39,861
180,436
—
—
David Lindsell
7,500
—
—
—
—
Tony Quinlan
2,500
803 2,922
— 385,285
803
2,922
— 207,266
Paul Taylor
— 2,694 2,922
— 219,245
—
2,694
2,922 28,596
129,801
Dorothy Thompson 63,569
2,616 2,922
— 649,265
63,569
2,616
2,922
71,057 365,657
Tony Thorne
7,500
—
—
—
—
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.
(4) A director is not required to hold shares of the Company by way of qualification.
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 2011 and the date upon which this
report was approved by the Board.
This report was reviewed and approved by the Board on 20 February 2012.
Tim Barker
Chairman of the Remuneration Committee
81
Drax Group plc
Annual report and
accounts 2011
Group – Independent auditor’s report
To the members of Drax Group plc
We have audited the Group financial statements of Drax Group plc for the year ended 31 December 2011 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 32. 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. In addition, we read all the financial and non-financial information in
the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our Report.
Opinion on financial statements
In our opinion the Group financial statements:
−(cid:3) give a true and fair view of the state of the Group’s affairs as at 31 December 2011 and of its profit for the year then ended;
−(cid:3) have been properly prepared in accordance with IFRSs as adopted by the European Union; and
−(cid:3) 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:
−(cid:3) certain disclosures of directors’ remuneration specified by law are not made; or
−(cid:3) we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
−(cid:3) the directors’ statement contained within the Directors’ report in relation to going concern;
−(cid:3) the part of the Corporate governance statement relating to the Company’s compliance with the nine provisions of the
UK Corporate Governance Code specified for our review; and
−(cid:3) 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
2011 and on the information in the Directors’ remuneration report that is described as having been audited.
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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
20 February 2012
82
Drax Group plc
Annual report and
accounts 2011
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 gains/(losses) on derivative contracts
Operating profit
Interest payable and similar charges
Interest receivable
Profit before tax
Tax:
— Before exceptional items
— Exceptional items
Profit for the year attributable to equity holders
Earnings per share
— Basic
— Diluted
All results relate to continuing operations.
Underlying earnings and underlying earnings per share are set out in note 9.
Years ended 31 December
2011
£m
2010
£m
Notes
1,835.9
1,648.4
(1,020.8)
(172.3)
(117.6)
(24.4)
(840.9)
(165.8)
(82.2)
(9.0)
(1,335.1)
(1,097.9)
500.8
550.5
(224.4)
89.8
366.2
(30.3)
2.2
338.1
(71.4)
197.9
126.5
(210.8)
(60.5)
279.2
(26.5)
2.2
254.9
(66.5)
—
(66.5)
464.6
188.4
pence
127
126
pence
52
52
5
19
6
6
7
7
9
9
Consolidated statement of comprehensive income
Profit for the year
Actuarial losses on defined benefit pension scheme
Deferred tax on actuarial losses on defined benefit pension scheme
Fair value gains/(losses) 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 income/(expense)
Total comprehensive income for the year attributable to equity holders
83
Drax Group plc
Annual report and
accounts 2011
Notes
30
7
25
7
7
Years ended 31 December
2011
£m
464.6
(3.7)
0.9
2.6
(0.7)
1.9
1.0
465.6
2010
£m
188.4
(6.2)
1.7
(232.6)
65.1
0.6
(171.4)
17.0
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Drax Group plc
Annual report and
accounts 2011
Consolidated balance sheet
Assets
Non-current assets
Intangible assets — goodwill
Property, plant and equipment
Derivative financial instruments
Current assets
Inventories
ROC assets
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
Retained profits/(accumulated losses)
Total shareholders’ equity
As at 31 December
2011
£m
2010
£m
Notes
10
11
19
12
13
14
19
15
16
17
18
19
18
19
20
21
30
22
24
24
24
25
26
10.7
1,195.7
11.0
1,217.4
137.6
32.1
269.3
120.6
30.0
202.8
792.4
292.8
33.8
7.1
95.6
429.3
363.1
0.5
5.3
30.5
203.8
37.0
277.1
1,303.4
42.1
1.5
420.7
710.8
63.3
65.0
1,303.4
10.7
1,184.2
25.8
1,220.7
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
The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for
issue by the Board of directors on 20 February 2012.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
Consolidated statement of changes in equity
85
Drax Group plc
Annual report and
accounts 2011
At 1 January 2010
Profit for the year
Other comprehensive expense
Total comprehensive (expense)/income
for the year
Equity dividends paid (note 8)
Movement in equity associated with
share-based payments (note 23)
At 1 January 2011
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income for the year
Equity dividends paid (note 8)
Movement in equity associated with
share-based payments (note 23)
Issued
equity
£m
42.1
Capital
redemption
reserve
£m
Share
premium
£m
1.5
420.7
Merger
reserve
£m
710.8
Retained
profits/
(accumulated
losses)
£m
Hedge
reserve
£m
Total
£m
226.4
(376.8)
1,024.7
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—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
188.4
(166.9)
(4.5)
(166.9)
—
—
183.9
(86.5)
2.8
42.1
1.5
420.7
710.8
59.5
(276.6)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3.8
3.8
—
—
464.6
(2.8)
461.8
465.6
(123.7)
(123.7)
3.5
3.5
188.4
(171.4)
17.0
(86.5)
2.8
958.0
464.6
1.0
At 31 December 2011
42.1
1.5
420.7
710.8
63.3
65.0
1,303.4
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Drax Group plc
Annual report and
accounts 2011
Consolidated cash flow statement
Cash generated from operations
Income taxes paid
Other gains
Interest paid
Interest received
Net cash from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Short-term investments
Net cash generated from/(used in) investing activities
Cash flows from financing activities
Equity dividends paid
Repayment of borrowings
New borrowings
Other financing costs paid
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Years ended 31 December
Notes
27
8
16
2011
£m
281.9
(67.7)
0.7
(18.9)
2.5
198.5
(43.8)
65.0
21.2
(123.7)
(135.4)
10.0
(3.8)
(252.9)
(33.2)
236.0
202.8
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
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Drax Group plc
Annual report and
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Notes to the consolidated financial statements
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. The principal activities of the Group are the generation
and sale of electricity and by-products of the electricity generation process at Drax Power Station, Selby, North Yorkshire
and the sale of electricity to business customers by Haven Power Limited (“Haven Power”).
2. Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (“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 Operational and financial review on
page 29, and on the historical cost basis, except for certain financial assets and liabilities that have been measured at fair value.
Adoption of new and revised accounting standards
In 2011, several new, revised and amended standards and interpretations became effective. These are IAS 24 (revised)
“Related party disclosures”, IFRS 1 (amendment) “First time adoption: financial instrument disclosure”, IAS 32 (amendment)
“Financial instruments: Presentation on classification of rights issues”, IFRIC 19 “Extinguishing financial liabilities with equity
instruments”, IFRIC 14 “Prepayments of a minimum funding requirement”, and Improvements to IFRSs (2010). The adoption
of these standards and interpretations has not had a material impact on the financial statements of the Group.
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).
−(cid:3) 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.
−(cid:3) IFRS 7 (amendment) “Financial instruments: Disclosures on derecognition” — effective for accounting periods beginning
on or after 1 July 2011.
−(cid:3) IFRS 9 “Financial instruments — Classification and measurement” — effective for accounting periods beginning on or after
1 January 2015.
−(cid:3) IFRS 10 “Consolidated financial statements” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IFRS 11 “Joint arrangements” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IFRS 12 “Disclosure of interests in other entities” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IFRS 13 “Fair value measurement” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IAS 1 (amendment) “Presentation of financial statements — Other comprehensive income” — effective for accounting
periods beginning on or after 1 July 2012.
−(cid:3) IAS 12 (amendment) “Deferred tax: Recovery of underlying assets” — effective for accounting periods beginning on or after
1 January 2012.
−(cid:3) IAS 19 (revised) “Employee benefits” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IAS 27 (revised) “Separate financial statements” — effective for accounting periods beginning on or after 1 January 2013.
−(cid:3) IAS 28 (revised) “Investments in associates and joint ventures” — effective for accounting periods beginning on or after
1 January 2013.
The Group is yet to assess the full impact of adoption of IFRS 9 and IFRS 13, and intends to adopt both standards no later
than the accounting period beginning on or after 1 January 2015 and 1 January 2013 respectively, subject to endorsement
by the EU.
Adoption of the other standards in future periods is not expected to have a material impact on the financial statements
of the Group.
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Drax Group plc
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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 (E). 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 10).
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.
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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.
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
calculated based on consumption statistics and selling
be recovered. Energy supplied, but not yet measured or billed is
price estimates.
(D) Segmental reporting
The business activity of the Group consists of the generation and sale of electricity at Drax Power Station, along with the sale
of electricity direct to customers through our retail business, Haven Power. As a result of the growth in the retail business, this
segment has become more significant during the year ended 31 December 2011, and therefore the results of this segment are
separately disclosed from 1 January 2011, along with comparatives for the year ended 31 December 2010 (see note 4).
(E) 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.
(F) 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
The estimated useful lives, beginning in 2004 when they were reset, are currently:
to the expected decommissioning date of the power station).
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.
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Notes to the consolidated financial statements
3. Summary of significant accounting policies (continued)
(G) 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.
(H) 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. The discount rate used is a risk free pre-tax rate, reflecting the fact that the estimated future cash
flows have built in risks specific to the liability. An amount equivalent to the discounted provision is capitalised within property,
plant and equipment and is depreciated over the useful lives of the related assets. The unwinding of the discount is included
in interest payable and similar charges.
(I) 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.
(J) ROC assets
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. In respect of ROCs
earned but not yet sold, 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.
(K) 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, within intangible assets.
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.
(L) 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.
(M) 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 of the pension charge is deducted in arriving at operating profit in other operating and administrative
expenses. The net interest cost of the pension charge is now included in finance costs and therefore deducted in arriving
at profit before tax. This presentational change has resulted in the reclassification of £1.3 million costs in 2010 from salaries,
in other operating and administrative expenses, to finance costs. 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.
.
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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.
(N) 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.
(O) 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.
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(P) 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.
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The Group designates certain hedging instruments used to address commodity price risk as cash flow hedges. At the
ent and hedged item is documented, along with its risk
inception of the hedge, the relationship between the hedging instrum
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 treasury related derivatives to manage exposure to 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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Notes to the consolidated financial statements
4. Segmental reporting
Information reported to the Board and for the purposes of assessing performance and making investment decisions
is organised into two operating segments. The Group’s operating segments under IFRS 8 are as follows:
Generation — The generation of electricity at Drax Power Station.
Retail — The supply of electricity to retail customers in the small and medium enterprise and industrial and commercial markets.
The measure of profit or loss for each reportable segment, presented to the Board on a regular basis is EBITDA. Assets and working
capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and
hence no separate asset disclosure is provided here.
Segment revenues and results
The following is an analysis of the Group’s results by reporting segment for the year ended 31 December 2011:
Revenue
External sales
Inter-segment sales
Total revenue
Result
Segment EBITDA
Central costs
Generation
£m
Retail
£m
Eliminations
£m
Consolidated
£m
Year ended 31 December 2011
1,560.4
174.8
1,735.2
275.5
—
275.5
—
1,835.9
(174.8)
(174.8)
—
1,835.9
336.1
(2.5)
—
333.6
Depreciation, amortisation and loss on disposal of property,
plant and equipment
Unrealised gains on derivative contracts
Operating profit
Net finance costs
Profit before tax
(57.2)
89.8
366.2
(28.1)
338.1
The following is an analysis of the Group’s results by reporting segment for the year ended 31 December 2010:
Revenue
External sales
Inter-segment sales
Total revenue
Result
Segment EBITDA
Central costs
Generation
£m
Retail
£m
Eliminations
£m
Consolidated
£m
Year ended 31 December 2010
1,524.1
71.9
1,596.0
124.3
—
124.3
—
1,648.4
(71.9)
(71.9)
—
1,648.4
393.4
(1.5)
—
391.9
Depreciation, amortisation and loss on disposal of property,
plant and equipment
Unrealised losses on derivative contracts
Operating profit
Net finance costs
Profit before tax
(52.2)
(60.5)
279.2
(24.3)
254.9
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The accounting policies of the reportable segments are the same as the Group’s accounting policies which are described in
note 3. All revenue and results arise from operations within Great Britain, therefore no separate geographical segments are
reported. The revenue and results of both segments are subject to seasonality as detailed in the Operational and financial
performance review — Seasonality of borrowing.
Major customers
Total revenue for the year ended 31 December 2011 includes amounts of £482.4 million and £228.5 million (2010:
£307.0 million, £295.6 million and £159.1 million) derived from tw
10% or more of the Group’s revenue for the year. All of these revenues arose in the generation segment.
o customers (2010: three customers), each representing
5. Operating profit
The following charges have been included in arriving at operating profit:
Staff costs (note 29)
Depreciation of property, plant and equipment (note 11)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total other operating and administrative expenses
Years ended 31 December
2011
£m
73.4
57.2
33.4
60.4
224.4
2010
£m
66.0
52.2
36.4
56.2
210.8
Auditor’s remuneration
During the year the Group obtained the following services from its auditor, 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
Total non-audit fees
Total auditor’s remuneration
Years ended 31 December
2011
£000
258
42
300
60
40
400
138
138
538
2010
£000
251
39
290
59
21
370
70
70
440
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Notes to the consolidated financial statements
6. Net finance costs
Interest payable and similar charges:
Interest payable on bank borrowings
Other financing charges
Unwinding of discount on provisions (note 20)
Net finance cost in respect of defined benefit scheme (note 30)
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
2011
£m
(15.1)
(4.4)
(0.6)
(1.0)
(9.2)
2010
£m
(17.5)
(4.9)
(0.5)
(1.3)
(2.3)
(30.3)
(26.5)
2.2
2.2
2.2
2.2
Following the refinancing of our letter of credit, working capital and term loan facilities in July 2011 (see note 18), the deferred
finance costs in relation to our previous bank facilities have been accelerated. This resulted in a one-time £2.6 million interest
charge in the year ended 31 December 2011.
7. Taxation
The income tax expense reflects the estimated effective tax rate on profit before tax for the Group for the year ended
31 December 2011 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the
income statement.
Exceptional items
Under the Group’s previous financing structure, Drax Holdings Limited (a subsidiary company) was partially funded by a
Eurobond payable to another group company. This Eurobond debt structure was unwound in 2008, potentially accelerating
additional tax losses with a cash tax benefit of up to £220 million. Because of the risks related to the unwinding of the
Eurobond structure, no benefit was recognised in the Group’s financial statements prior to agreement with HMRC.
On 5 April 2011, we reached agreement with HMRC, resulting in the resolution of the Eurobond tax position and certain smaller
legacy tax matters. Accordingly, we have recognised an exceptional tax credit of £197.9 million in the income statement.
This includes a current tax credit of £149.5 million and a deferred tax credit of £48.4 million.
Changes in the rate of corporation tax
Following the announcement of the 2011 Budget, the Finance Act 2011 (the “Act”) was enacted by Parliament in July 2011.
The Act confirmed reductions in the rate of corporation tax from 27% to 26% from April 2011, and from 26% to 25% from
April 2012, both of which were enacted during the year. In addition, in the 2011 Budget, the Government proposed further
reductions in the rate of corporation tax from 25% to 23% by 2014. These proposals had not been substantively enacted
at the balance sheet date. It is currently expected that each future Finance Bill will reduce the corporation tax rate by 1%
until the rate of 23% is effective.
Tax (credit)/charge comprises:
Current tax before exceptional items
Deferred tax before exceptional items:
— Before impact of corporation tax rate change
— Impact of corporation tax rate change
Tax charge before exceptional items
Exceptional items:
— Current tax
— Deferred tax
Exceptional items
Total tax (credit)/charge
Tax on items (credited)/charged to other comprehensive income:
Deferred tax on actuarial losses on defined benefit pension scheme (note 21)
Deferred tax on cash flow hedges (note 21)
Impact of corporation tax rate change on deferred tax on cash flow hedges (note 21)
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Annual report and
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Years ended 31 December
2011
£m
2010
£m
61.3
88.5
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26.2
(16.1)
71.4
(149.5)
(48.4)
(197.9)
(126.5)
(14.4)
(7.6)
66.5
—
—
—
66.5
Years ended 31 December
2011
£m
(0.9)
0.7
(1.9)
(2.1)
2010
£m
(1.7)
(65.1)
(0.6)
(67.4)
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The tax differs from the standard rate of corporation tax in the UK of 26.5% (2010: 28%). The differences are explained
below:
Profit before tax
Profit before tax multiplied by the rate of corporation tax in the UK of 26.5% (2010: 28%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Other
Change to corporation tax rate
Total tax charge before exceptional items
Exceptional items
Total tax (credit)/charge
Years ended 31 December
2011
£m
338.1
89.6
(3.8)
1.3
0.4
(16.1)
71.4
(197.9)
(126.5)
2010
£m
254.9
71.4
(0.5)
1.5
1.7
(7.6)
66.5
—
66.5
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Drax Group plc
Annual report and
accounts 2011
Notes to the consolidated financial statements
8. 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 2011 of 16.0 pence per share paid on
14 October 2011 (2010: 14.1 pence per share paid on 15 October 2010)
Final dividend for the year ended 31 December 2010 of 17.9 pence per share paid on
13 May 2011 (2010: 9.6 pence per share paid on 14 May 2010)
Years ended 31 December
2011
£m
2010
£m
58.4
65.3
123.7
51.5
35.0
86.5
At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve
payment of a final dividend for the year ended 31 December 2011 of 11.8 pence per share (equivalent to approximately
£43.1 million) payable on or before 11 May 2012. The final dividend has not been included as a liability as at 31 December 2011.
9. Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year. In calculating diluted earnings per share the weighted average
number of ordinary shares outstanding during the year is adjusted, 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, and exceptional items.
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 gains and losses on derivative contracts
Exceptional items (note 7)
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 (pence)
Earnings per share — diluted (pence)
Underlying earnings per share — basic (pence)
Underlying earnings per share — diluted (pence)
Years ended 31 December
2011
£m
2010
£m
464.6
(64.3)
(197.9)
202.4
188.4
44.6
—
233.0
Years ended 31 December
2011
2010
364.9
2.6
364.9
0.7
367.5
365.6
127
126
56
55
52
52
64
64
10. Intangible assets — goodwill
Cost and carrying amount:
At 1 January 2010, 31 December 2010 and 31 December 2011
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Annual report and
accounts 2011
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£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 2011, the fair value of goodwill was significantly in excess of its book value; accordingly
a sensitivity analysis has not been disclosed.
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.
11. Property, plant and equipment
Cost:
At 1 January 2010
Additions at cost
Disposals
Issues
Transfers
At 1 January 2011
Additions at cost
Disposals
Issues
Transfers
At 31 December 2011
Accumulated depreciation:
At 1 January 2010
Charge for the year
Disposals
At 1 January 2011
Charge for the year
Disposals
At 31 December 2011
Net book amount at 31 December 2010
Net book amount at 31 December 2011
Freehold land and
buildings
£m
Plant and
equipment
£m
Plant
spare parts
£m
158.2
1,358.5
1.2
—
—
11.5
170.9
0.4
—
—
(0.1)
53.4
(10.2)
6.5
(21.5)
1,386.7
58.7
(6.5)
7.8
(1.4)
37.9
4.6
—
(6.5)
10.0
46.0
9.6
—
(7.8)
1.5
Total
£m
1,554.6
59.2
(10.2)
—
—
1,603.6
68.7
(6.5)
—
—
171.2
1,445.3
49.3
1,665.8
36.4
3.5
—
39.9
3.9
—
43.8
131.0
127.4
331.9
47.6
(10.2)
369.3
51.4
(6.5)
414.2
1,017.4
1,031.1
9.1
1.1
—
10.2
1.9
—
12.1
35.8
37.2
377.4
52.2
(10.2)
419.4
57.2
(6.5)
470.1
1,184.2
1,195.7
Assets in the course of construction amounted to £40.0 million at 31 December 2011 (2010: £30.4 million).
Plant and equipment includes assets held under finance lease agreements with a carrying value at 31 December 2011 of
£1.1 million (2010: £0.7 million).
Additions in the year ended 31 December 2011 include £23.5 million in relation to the revaluation of the provision for
reinstatement (see note 20).
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Annual report and
accounts 2011
Notes to the consolidated financial statements
12. Inventories
Coal
Biomass
Other fuels and consumables
2011
£m
103.1
17.9
16.6
137.6
The cost of inventories recognised as an expense in the year ended 31 December 2011 was £879.5 million
(2010: £658.3 million).
13. ROC assets
Cost and carrying amount:
At 1 January 2010
Generated
Utilised
Sold
At 1 January 2011
Generated
Utilised
Sold
At 31 December 2011
14. Trade and other receivables
Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments and other receivables
As at 31 December
2010
£m
79.2
21.9
15.5
116.6
ROCs
£m
11.7
42.4
(1.3)
(19.7)
33.1
59.2
(2.9)
(57.3)
32.1
As at 31 December
2011
£m
206.5
55.6
7.2
269.3
2010
£m
195.4
32.8
4.8
233.0
Trade receivables principally represent sales of electricity to a number of counterparties. At 31 December 2011, the Group had
amounts receivable from three (2010: three) significant counterparties, representing 71% (2010: 75%) 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 19.
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 £3.0 million (2010: £2.6 million).
This allowance has been determined by reference to past default experience, and includes £3.0 million in relation to Haven
Power (2010: £2.6 million).
The movement in the allowance for doubtful debts is laid out in the following table:
At 1 January
Receivables written off
Provision for receivables impairment
At 31 December
15. Short-term investments
Short-term investments
99
Drax Group plc
Annual report and
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Years ended 31 December
2011
£m
2.6
(1.6)
2.0
3.0
2010
£m
1.2
(1.0)
2.4
2.6
As at 31 December
2011
£m
30.0
2010
£m
95.0
Short-term investments represent cash held on deposits with a maturity of greater than three months at inception.
16. Cash and cash equivalents
Cash and cash equivalents
As at 31 December
2011
£m
202.8
2010
£m
236.0
The Group’s policy is to invest available cash in short-term bank, building society or other low risk deposits.
17. Trade and other payables
Amounts falling due within one year:
Trade payables
Accruals
Other payables
As at 31 December
2011
£m
2010
£m
16.7
228.8
47.3
292.8
13.4
239.4
32.2
285.0
Accruals at 31 December 2011 include £126.1 million (2010: £146.7 million) with respect to the Group’s estimated net liability
to deliver CO2 emissions allowances.
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Drax Group plc
Annual report and
accounts 2011
Notes to the consolidated financial statements
18. Borrowings
Current:
Term loans
Revolving credit facility
Finance lease liabilities
Non-current:
Term loans
Finance lease liabilities
As at 31 December
2010
£m
61.6
—
0.1
61.7
As at 31 December
2010
£m
64.9
0.4
65.3
2011
£m
—
6.8
0.3
7.1
2011
£m
—
0.5
0.5
Scheduled term loan repayments of £33.8 million were made on 30 June 2011, and £32.5 million on each of 30 June 2010
and 31 December 2010. These repayments were made in line with the target repayment profile as a result of the levels of cash
available for debt service.
Refinancing
On 28 July 2011, we completed the refinancing of our letter of credit, working capital and term loan facilities, which were due
to mature in December 2012. These facilities were replaced with a £310 million revolving credit facility which matures in April
2014, which can be used for both letters of credit and working capital purposes. The margin over LIBOR on our new facility
has reduced from 3.5% to 2%. The existing term loan was repaid in full out of cash in hand and we subsequently drew down
£10 million against the new revolving credit facility.
Analysis of borrowings
Borrowings at 31 December 2011 and 31 December 2010 consisted principally of amounts drawn down against the revolving
credit facility, and bank loans respectively, both held by the Company’s subsidiary Drax Finance Limited as follows:
Revolving credit facility
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 2011
Borrowings
before deferred
finance costs
£m
Deferred
finance
costs
£m
Net
borrowings
£m
10.0
0.8
10.8
(10.3)
0.5
(3.2)
—
(3.2)
3.2
—
6.8
0.8
7.6
(7.1)
0.5
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
(8.5)
—
(8.5)
5.9
(2.6)
126.5
0.5
127.0
(61.7)
65.3
101
Drax Group plc
Annual report and
accounts 2011
Contingent liabilities
In addition to the amount drawn down against the revolving credit facility, 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 2011 the
Group’s contingent liability in respect of letters of credit issued under the revolving credit facility amounted to £126.1 million
(2010: £134.3 million, under the previous £200 million letter of credit facility).
19. 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, sustainable biomass and CO2 emissions allowances, as well as financial coal contracts to swap
floating for fixed, or fixed for floating prices on fixed volumes of coal. 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 amounts drawn down against the revolving credit facility (2010: 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 2011 and 31 December 2010 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
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
Forward foreign currency exchange contracts
Total non-current portion
Current portion
As at 31 December 2011
As at 31 December 2010
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
101.7
10.6
—
—
18.9
0.4
—
131.6
(10.6)
(0.4)
(11.0)
120.6
(78.0)
(4.5)
—
—
(17.6)
(0.5)
(0.3)
(100.9)
4.5
0.8
5.3
(95.6)
87.8
19.3
6.1
(167.5)
(0.3)
(0.3)
—
(4.6)
24.8
0.3
0.1
138.4
(25.4)
(0.4)
(25.8)
112.6
(25.8)
(0.5)
(0.4)
(199.4)
0.6
0.9
1.5
(197.9)
The amounts recorded in the income statement in respect of derivatives which are marked-to-market were as follows:
Unrealised gains/(losses) on derivative contracts recognised in arriving at operating profit
Years ended 31 December
2011
£m
89.8
2010
£m
(60.5)
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.
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Drax Group plc
Annual report and
accounts 2011
Notes to the consolidated financial statements
19. Financial instruments (continued)
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.
−(cid:3) 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.
−(cid:3) 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.
−(cid:3) 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.
−(cid:3) 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 currency exchange 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. Th
on the unpredictability of commodity and financ
financial performance.
ial markets and seeks to manage potential adverse effects on the Group’s
e Group’s overall risk management programme focuses
The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by the
Risk Management Committees as detailed in Principal risks and uncertainties 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,
sustainable 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, sustainable 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
and domestic coal 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.
103
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Annual report and
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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:
−(cid:3) profit after tax for the year ended 31 December 2011 would increase/decrease by £61.2 million (2010: decrease/increase
by £17.3 million). This is mainly attributable to the Group’s exposure to financial coal derivatives; and
−(cid:3) other equity reserves would decrease/increase by £25.7 million (2010: decrease/increase by £9.3 million) mainly as a result
of the changes in the fair value of commitments to sell power and the Group’s exposure to financial coal derivatives.
Interest rate risk
Historically the Group has been exposed to interest rate risk principally in relation to its bank debt, and has sought to mitigate
this risk with interest rate hedges on a proportion of its debt facilities. On refinancing in July 2011 (see note 18), the Group
repaid its outstanding term loan balance, and drew down £10 million against a new revolving credit facility. The interest rate
swaps linked to the previous term loans were closed out and no new interest rate swaps have been taken out since.
Information about the Group’s instruments that are exposed to interest rate risk and their repayment schedules is included
in note 18.
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 2011 would decrease/increase by £0.8 million (2010: increase/decrease by £0.2 million)
mainly as a result of the changes in interest payable during the period.
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:
−(cid:3) profit after tax for the year ended 31 December 2011 would decrease/increase by £21.2 million (2010: increase/decrease
by £6.1 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
−(cid:3) other equity reserves would decrease/increase by £4.9 million (2010: decrease/increase by £0.9 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, and committed facilities in order to ensure sufficient funding
for business requirements.
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Annual report and
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Notes to the consolidated financial statements
19. Financial instruments (continued)
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.
Revolving credit facility, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
Term loans, gross value
Finance lease liabilities, carrying value
Add interest payments
Borrowings, contractual maturity
Trade and other payables
As at 31 December 2011
Within
3 months
£m
3 months—
1 year
£m
1—5 years
£m
10.0
0.1
10.1
260.7
270.8
—
0.2
0.2
31.4
31.6
—
0.5
0.5
0.7
1.2
Total
£m
10.0
0.8
10.8
292.8
303.6
Within
3 months
£m
3 months—
1 year
£m
—
—
—
—
232.2
232.2
67.5
0.1
8.9
76.5
52.8
129.3
As at 31 December 2010
1—5 years
£m
67.5
0.4
4.0
71.9
—
71.9
Total
£m
135.0
0.5
12.9
148.4
285.0
433.4
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:
Revolving credit facility
Term loans
As at 31 December
2011
% p.a.
3.12
—
2010
% p.a.
—
7.45
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
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
197.8
224.7
422.5
60.9
138.9
199.8
As at 31 December 2011
>2 years
£m
(0.9)
381.8
380.9
Total
£m
257.8
745.4
1,003.2
As at 31 December 2010
Within 1 year
£m
1—2 years
£m
>2 years
£m
186.2
(3.2)
148.0
331.0
45.0
(1.4)
87.4
131.0
(14.6)
—
50.1
35.5
Total
£m
216.6
(4.6)
285.5
497.5
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Annual report and
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Counterparty risk
As the Group relies on third party suppliers for the delivery of coal, sustainable 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 thei
distress or increase the risk profile of the Group.
r contractual obligations may cause the Group financial
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, as amended on 22 July 2011, 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.
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
2011
£m
2010
£m
202.8
30.0
272.3
131.6
636.7
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236.0
95.0
235.6
138.4
705.0
Trade and other receivables are stated gross of the provision for doubtful debts of £3.0 million (2010: £2.6 million). Credit
exposure is controlled by counterparty limits that are reviewed and approved by the trading and risk 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 18,
cash and cash equivalents in note 16 and short-term investments in note 15. Equity attributable to the shareholders of the
Company comprises issued capital, capital reserves, retained profits/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 within the Business review. The capital structure of the Group is as follows:
Borrowings
Cash and cash equivalents
Short-term investments
Net cash
Total shareholders’ equity, excluding hedge reserve
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£m
(7.6)
202.8
30.0
225.2
1,240.1
2010
£m
(127.0)
236.0
95.0
204.0
898.5
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Annual report and
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Notes to the consolidated financial statements
20. Provisions
Carrying amount:
At 1 January 2010
Unwinding of discount
At 1 January 2011
Adjustment for change in discount rate
Unwinding of discount
At 31 December 2011
Reinstatement
£m
5.9
0.5
6.4
23.5
0.6
30.5
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,
present value of the expected costs. The initial provision and subsequent estimation increases are capitalised within property,
plant and equipment and are being depreciated over the useful lives of the related assets. The unwinding of the discount is
included in finance costs (note 6).
on a discounted basis. The amount provided represents the
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 a risk free rate, reflecting the fact that the
estimated future cash flows have built in the risks specific to the liability.
21. 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 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 1 January 2011
Charged/(credited) to the income statement
Credited to equity in respect of actuarial losses
Credited to equity in respect of cash flow hedges
At 31 December 2011
Financial
instruments
£m
Accelerated
capital
allowances
£m
Non trade
losses
£m
65.5
(15.9)
—
(65.7)
(16.1)
25.5
—
(1.2)
8.2
262.1
(7.5)
—
—
254.6
(19.5)
—
—
—
—
—
—
—
(31.6)
—
—
235.1
(31.6)
Other
liabilities
£m
17.6
—
—
—
17.6
(14.5)
—
—
3.1
Other
assets
£m
(11.6)
1.4
(1.7)
—
(11.9)
1.8
(0.9)
—
Total
£m
333.6
(22.0)
(1.7)
(65.7)
244.2
(38.3)
(0.9)
(1.2)
(11.0)
203.8
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 7, we reached agreement with HMRC during 2011 on the resolution of the Eurobond tax position.
This has resulted in the recognition of a deferred tax asset in respect of the non trading losses incurred on the unwinding
of the Eurobond debt structure.
The Group did not recognise deferred tax assets with an estimated value of £3.0 million at 31 December 2011
(2010: £3.2 million) in respect of trading losses that ar
e carried forward against future taxable income.
22. Issued equity
Authorised:
107
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Annual report and
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As at 31 December
2011
£m
2010
£m
865,238,823 ordinary shares of 11 16⁄29 pence each
100.0
100.0
Issued and fully paid:
2010 — 364,859,988 ordinary shares of 11 16⁄29 pence each
2011 — 364,862,718 ordinary shares of 1116⁄29 pence each
—
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
Issued under employee share schemes
At 31 December
Years ended 31 December
2011
(number)
2010
(number)
364,859,988 364,853,890
2,730
6,098
364,862,718 364,859,988
The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income.
No shareholders have waived their rights to dividends.
Issued under employee share schemes
On 1 April 2011, a total of 2,456 shares were issued in satisfaction of shares vesting in accordance with the rules of the Group’s
Bonus Matching Plan to an individual whose employment with the Group had terminated due to retirement (1 September 2010:
6,098 shares, issued to six individuals). Additionally, on 28 September 2011, a total of 274 options under the Group’s Savings-
Related Share Option Plan were exercised early, resulting in an issue of the same number of shares to one individual whose
employment with the Group had terminated due to redundancy.
23. 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
2011
£m
—
0.1
3.2
0.2
3.5
2010
£m
0.2
0.4
2.0
0.2
2.8
Share Incentive Plan (“SIP”)
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. There were no awards under the SIP Partnership and Matching share plan
in 2010, or 2011.
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
2011
(number)
Shares
acquired
during year
(number)
Shares
transferred
during year
(number)
Shares
held at
31 December
2011
(number)
Cost at
31 December
2011
£000
Nominal
value at
31 December
2011
£000
Market
value at
31 December
2011
£000
SIP
385,589
—
(20,541) 365,048
2,465
42
1,990
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Notes to the consolidated financial statements
23. Share-based payments (continued)
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 vested
according to whether the Group’s Total Shareholder Return (“TSR”) matched or outperformed 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 have been charged to the income statement on a straight-line basis over the
corresponding three year vesting periods.
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 the Group’s TSR matches or outperforms an
index (determined in accordance with the scheme rules) over three years. From 2011, a proportion of the shares vesting will be
conditional upon performance against the internal Balanced Corporate Scorecard. The fair value of the 2011, 2010 and 2009
BMP awards of £5.5 million, £3.0 million and £2.8 million respectively are being charged to the income statement on a
straight-line basis over the corresponding three year vesting periods.
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)
2011
BMP
(number)
ESIP
(number)
2010
BMP
(number)
442,799 2,278,856
754,925
981,932
— 2,054,644
—
1,404,989
—
—
(65,533)
(36,180)
(101,967)
(2,456)
—
(6,098)
(442,799)
—
(275,946)
—
—
4,265,511
442,799
2,278,856
Savings-Related Share Option Plan (“SAYE Plan”)
In April 2011 and 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 321 pence (2010: 310.5 pence), representing a discount of 20% to the prevailing
market price determined in accordance with the scheme rules. The options are exercisable at the end of three or five year
savings contracts. The fair value of the 2011 and 2010 options granted in connection with the SAYE Plan of £0.2 million and
£0.6 million, respectively, is being charged to the income statement over the life of the relevant 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
Exercised
Expired
At 31 December
2011
2010
SAYE 3 Year
(number)
SAYE 5 Year
(number)
SAYE 3 Year
(number)
SAYE 5 Year
(number)
668,521
906,343
—
464,449
138,242
114,159
701,877
730,811
(50,942)
(66,454)
(33,356)
(288,917)
(274)
—
—
(165,159)
—
—
—
—
755,547
788,889
668,521
906,343
109
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Annual report and
accounts 2011
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.
24. Other reserves
At 1 January and 31 December
Capital redemption reserve
Share premium
Merger reserve
2011
£m
1.5
2010
£m
1.5
2011
£m
2010
£m
2011
£m
420.7
420.7
710.8
2010
£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.
25. Hedge reserve
At 1 January
Gains/(losses) recognised:
— Commodity contracts
— Forward foreign currency exchange contracts
Released from equity:
— Commodity contracts
— Forward foreign currency exchange contracts
— Interest rate swaps
Related deferred tax, net (note 21)
At 31 December
Years ended 31 December
2011
£m
59.5
70.5
0.1
2010
£m
226.4
(68.3)
(1.0)
(68.6)
(167.2)
0.6
—
1.2
63.3
—
3.9
65.7
59.5
The Group’s cash flow hedges relate to commodity contracts (principally commitments to sell power) and forward foreign
currency exchange contracts. 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 19.
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Annual report and
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Notes to the consolidated financial statements
25. Hedge reserve (continued)
The expected release profile from equity of post-tax hedging gains and losses is as follows:
Commodity contracts
Forward foreign currency exchange contracts
Commodity contracts
Forward foreign currency exchange contracts
26. Retained profits/(accumulated losses)
As at 31 December 2011
Within 1 year
£m
1—2 years
£m
>2 years
£m
59.6
0.2
59.8
3.9
(0.2)
3.7
—
(0.2)
(0.2)
Total
£m
63.5
(0.2)
63.3
As at 31 December 2010
Within 1 year
£m
1—2 years
£m
>2 years
£m
42.0
(0.3)
41.7
13.8
(0.1)
13.7
4.3
(0.2)
4.1
Total
£m
60.1
(0.6)
59.5
At 1 January
Profit for the year
Actuarial losses on defined benefit pension scheme (note 30)
Deferred tax on actuarial losses on defined benefit pension scheme (note 21)
Equity dividends paid (note 8)
Net movements in equity associated with share-based payments
At 31 December
Years ended 31 December
2011
£m
(276.6)
464.6
(3.7)
0.9
(123.7)
3.5
65.0
2010
£m
(376.8)
188.4
(6.2)
1.7
(86.5)
2.8
(276.6)
27. Cash generated from operations
Profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax (credit)/charge
Depreciation and loss on disposal of property, plant and equipment
Unrealised (gains)/losses on derivative contracts
Defined benefit pension scheme current service cost
Non-cash charge for share-based payments
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Years ended 31 December
2011
£m
464.6
30.3
(2.2)
(126.5)
57.2
(89.8)
5.4
3.5
2010
£m
188.4
26.5
(2.2)
66.5
52.2
60.5
4.3
2.8
Operating cash flows before movement in working capital
342.5
399.0
Changes in working capital
(Increase)/decrease in inventories
Increase in receivables
Increase in payables
Total (increase)/decrease in working capital
Decrease/(increase) in ROC assets
Defined benefit pension scheme contributions
Cash generated from operations
28. Reconciliation of net cash
Net cash/(debt) at 1 January
(Decrease)/increase in cash and cash equivalents
(Decrease)/increase in short-term investments
Decrease in borrowings
Net cash at 31 December
(21.0)
(36.6)
6.4
(51.2)
1.0
(10.4)
281.9
77.6
(25.4)
62.5
114.7
(21.4)
(7.6)
484.7
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Years ended 31 December
2011
£m
204.0
(33.2)
(65.0)
119.4
225.2
2010
£m
(54.4)
155.6
40.0
62.8
204.0
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Notes to the consolidated financial statements
29. Employees and directors
Staff costs (including executive directors)
Included in other operating and administrative expenses (note 5):
Wages and salaries
Social security costs
Other pension costs (note 30)
Share-based payments (note 23)
Average monthly number of people employed (including executive directors)
Operations
Retail services
Business services
Years ended 31 December
2011
£m
55.6
6.0
8.3
3.5
73.4
2010
£m
52.7
4.3
6.2
2.8
66.0
Years ended 31 December
2011
(number)
2010
(number)
582
352
162
593
298
153
1,096
1,044
30. 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
The most recent actuarial valuation of the DPG ESPS was 31 March 2010. This has been updated as at 31 December 2011
to reflect relevant changes in assumptions. The principal assumptions were as follows:
Discount rate
Inflation (RPI)
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
2011
% p.a.
4.8
3.1
3.0
4.1
5.2
2010
% p.a.
5.3
3.5
3.3
4.5
5.9
The mortality assumptions are based on standard mortality tables which allow for future mortality improvements.
The assumptions are that a member who retired in 2011 at age 60 will live on average for a further 26 years (2010: 26 years)
after retirement if they are male, and for a further 28 years (2010: 28 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 (2010: 27 years and 29 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
113
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As at 31 December
2011
£m
182.4
(145.4)
37.0
2010
£m
167.2
(129.9)
37.3
The amounts recognised in the income statement, within other operating and administrative expenses and finance costs, are
as follows:
Included in staff costs (note 29):
Current service cost
Total included in other operating and administrative expenses
Included in finance costs (note 6):
Interest cost
Expected return on plan assets
Total included in finance costs
Total amounts recognised in the income statement
The actual return on plan assets was a gain of £8.5 million (2010: gain of £10.5 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
Changes in the present value of the defined benefit obligation are as follows:
Defined benefit obligation at 1 January
Current service cost
Employee contributions
Interest cost
Actuarial losses
Benefits paid
Defined benefit obligation at 31 December
Years ended 31 December
2011
£m
5.4
5.4
8.9
(7.9)
1.0
6.4
2010
£m
4.3
4.3
8.4
(7.1)
1.3
5.6
Years ended 31 December
2011
£m
(59.9)
(3.7)
(63.6)
2010
£m
(53.7)
(6.2)
(59.9)
Years ended 31 December
2011
£m
167.2
5.4
0.4
8.9
4.3
(3.8)
182.4
2010
£m
146.5
4.3
1.0
8.4
9.6
(2.6)
167.2
Employee contributions reduced from 1 April 2011 following the introduction of a salary sacrifice arrangement, whereby
employees sacrifice pay equal to the contributions that they would otherwise have paid to the DPG ESPS, and in return the
Group pays an equal amount to the DPG ESPS.
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Notes to the consolidated financial statements
30. Retirement benefit obligations (continued)
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
Years ended 31 December
2011
£m
129.9
7.9
0.6
10.4
0.4
(3.8)
145.4
2010
£m
113.4
7.1
3.4
7.6
1.0
(2.6)
129.9
Employer contributions included payments to reduce the actuarial deficit of £5.4 million (2010: £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
As at 31 December
2011
%
35.8
49.4
11.0
3.8
2010
%
40.5
42.4
13.0
4.1
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. 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 £16 million (2010: £15 million) and a decrease of 0.5% in the
discount rate would increase the net liability recognised in the balance sheet by £19 million (2010: £17 million).
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
2011
£m
(182.4)
145.4
(37.0)
(4.3)
0.6
2010
£m
(167.2)
129.9
(37.3)
(9.6)
3.4
2009
£m
(146.5)
113.4
(33.1)
(23.1)
8.0
Defined contribution scheme
Pension costs for the defined contribution scheme are as follows:
Total included in staff costs (note 29)
As at 31 December
2008
£m
(114.4)
93.8
(20.6)
13.2
(26.1)
2007
£m
(118.6)
105.1
(13.5)
(1.1)
(2.2)
Years ended 31 December
2011
£m
2.9
2010
£m
1.9
The Group expects to contribute £13.9 million to its pension plans during the 12 months ended 31 December 2012.
The Company intends to fund the deficit, agreed at the last triennial valuation, over the period to 31 December 2018.
31. 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
115
Drax Group plc
Annual report and
accounts 2011
As at 31 December
2011
£m
68.4
22.9
2010
£m
72.7
39.7
Future commitments to purchase fuel under fixed and variable priced contracts
1,400.7
1,345.7
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Within one year
Within two to five years
After five years
As at 31 December
2011
£m
0.9
3.3
7.2
11.4
2010
£m
0.4
1.5
3.8
5.7
32. 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.
Salaries and short-term benefits
Aggregate amounts receivable under share-based incentive schemes
Company contributions to money purchase pension schemes
Years ended 31 December
2011
£000
3,317
1,145
266
2010
£000
2,749
595
218
4,728
3,562
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 23), as adjusted for
non-market related vesting conditions.
On 21 April 2011, Charles Berry resigned as the Chairman and as a director of Eaga Limited (formerly Eaga plc), upon the
completion of the acquisition of that company by Carillion plc. During the year ended 31 December 2011, services purchased
from Eaga plc totalled £5.3 million (2010: £5.0 million), with a total of £10.2 million outstanding at 31 December 2011
(2010: £6.0 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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116
Drax Group plc
Annual report and
accounts 2011
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 2011 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 statem
information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware
of any apparent material misstatements or inconsistencies we consider the implications for our Report.
ents. In addition, we read all the financial and non-financial
Opinion on financial statements
In our opinion the parent Company financial statements:
−(cid:3) give a true and fair view of the state of the parent Company’s affairs as at 31 December 2011;
−(cid:3) have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
−(cid:3) 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:
−(cid:3) the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006; and
−(cid:3) 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:
−(cid:3) 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
−(cid:3) 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
−(cid:3) certain disclosures of directors’ remuneration specified by law are not made; or
−(cid:3) 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 2011.
Carl D Hughes MA FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
20 February 2012
Company balance sheet
Fixed assets
Investment in subsidiaries
Current assets
Amounts due from other group companies
Cash at bank and in hand
Current liabilities
Amounts due to other group companies
Net current assets
Net assets
Capital and reserves
Called-up share capital
Capital redemption reserve
Share premium account
Profit and loss account
Total equity shareholders’ funds
These financial statements were approved by the Board of directors on 20 February 2012.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
117
Drax Group plc
Annual report and
accounts 2011
As at 31 December
2011
£000
2010
£000
Notes
3
469,766
466,096
12,318
10,564
101
66
12,419
10,630
(2,790)
9,629
(2,338)
8,292
479,395
474,388
4
5
5
5
5
42,148
1,502
42,148
1,502
420,688
420,688
15,057
10,050
479,395
474,388
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118
Drax Group plc
Annual report and
accounts 2011
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 20 February 2012. Drax Group plc
reported a profit for the year ended 31 December 2011 of £125.1 million, or £0.6 million before dividends received from other
group companies (2010: a profit for the year of £0.5 million).
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 £593,000 (2010: £578,000).
The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2011 was £20,000
(2010: £20,000).
3. Fixed asset investments
Carrying amount:
At 1 January 2011
Capital contribution
At 31 December 2011
Subsidiary
undertakings
£000
466,096
3,670
469,766
The capital contribution consists of two elements: a £0.1 million capital injection into a new subsidiary, and £3.6 million
in relation to the share-based payment charge associated with the Executive Share Incentive Plan, Savings-Related
Share Option Plan and Bonus Matching Plan schemes, which arises because the beneficiaries of the scheme are employed
by subsidiary companies. For more information see note 23 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 Limited (holding company) (1)
119
Drax Group plc
Annual report and
accounts 2011
Country of incorporation and
registration
Type of share
Group effective
shareholding
England and Wales
Ordinary
England and Wales
—(7)
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Cayman Islands
Ordinary
Drax Power Limited (trading company, power generation) (1)
England and Wales
Ordinary
Drax Ouse (dormant company) (1)
England and Wales
Ordinary
Drax Fuel Supply Limited (trading company, fuel supply) (1)(3)
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
(1)
Drax Biomass (Tyneside) Limited (non-trading company)
England and Wales
Ordinary
BondPower Limited (non-trading company)
Jersey
Ordinary
(1)
Haven Power Limited (trading company, power retail)
England and Wales
Ordinary
Haven Power Nominees Limited (non-trading company)
England and Wales
Ordinary
Drax Power International Limited (non-trading company) *
(4)
England and Wales
Ordinary
Drax (International) Limited (holding company) *
(5)
England and Wales
Ordinary
Drax Biomass International Limited (non-trading company) *
(5)
England and Wales
Ordinary
Drax Biomass International Inc. (non-trading company) *
(1)
USA
Ordinary
Salerosa One Limited (non-trading company) (6)*
Salerosa Two Limited (non-trading company) (1)(6)*
England and Wales
Ordinary
England and Wales
Ordinary
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) Formerly Drax Investments Limited.
(4) 25 October year end.
(5) 24 October year end.
(6) 16 December year end.
(7) Limited by guarantee.
* Additions in year.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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120
Drax Group plc
Annual report and
accounts 2011
Notes to the Company balance sheet
4. Called-up share capital
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each
99,950
99,950
As at 31 December
2011
£000
2010
£000
Issued and fully paid:
2010 — 364,859,988 ordinary shares of 1116⁄29 pence each
2011 — 364,862,718 ordinary shares of 1116⁄29 pence each
—
42,148
42,148
42,148
—
42,148
The movement in allotted and fully paid share capital of the Company during each year was as follows:
At 1 January
Issued under employee share schemes
At 31 December
Years ended 31 December
2011
(number)
2010
(number)
364,859,988 364,853,890
2,730
6,098
364,862,718 364,859,988
The Company has only one class of shares, which are ordinary shares of 1116⁄29 pence each, carrying no right to fixed income.
No shareholders have waived their rights to dividends.
Issued under employee share schemes
On 1 April 2011, a total of 2,456 shares were issued in satisfaction of shares vesting in accordance with the rules of the Group’s
Bonus Matching Plan to one individual whose employment with the
2010: 6,098 shares, issued to six individuals). Additionally, on 28 Se
Savings-Related Share Option Plan were exercised early, resulting in
whose employment with the Group had terminated due to redundancy.
Group had terminated due to retirement (1 September
ptember 2011, a total of 274 options under the Group’s
an issue of the same number of shares to one individual
5. Analysis of movements in equity shareholders’ funds
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 1 January 2011
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 6)
At 31 December 2011
Share
capital
£000
42,147
1
—
—
—
Capital
redemption
reserve
£000
Share
premium
£000
Profit and loss
account
£000
Total
£000
1,502
420,688
93,463
557,800
—
—
—
—
—
—
—
—
(1)
534
—
534
2,525
2,525
(86,471)
(86,471)
42,148
1,502
420,688
10,050
474,388
—
—
—
—
—
—
—
—
—
125,125
3,570
125,125
3,570
(123,688)
(123,688)
42,148
1,502
420,688
15,057
479,395
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 2011 of 16.0 pence per share paid on
14 October 2011 (2010: 14.1 pence per share paid on 15 October 2010)
Final dividend for the year ended 31 December 2010 of 17.9 pence per share paid on
13 May 2011 (2010: 9.6 pence per share paid on 14 May 2010)
121
Drax Group plc
Annual report and
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Years ended 31 December
2011
£000
2010
£000
58,378
51,445
65,310
123,688
35,026
86,471
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 2011 of 11.8 pence per share (equivalent to approximately
£43.1 million) payable on or before 11 May 2012. The final dividend ha
s not been included as a liability as at 31 December 2011.
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 18 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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122
Drax Group plc
Annual report and
accounts 2011
Shareholder information
Key dates for 2012
At the date of publication of this document, the following are the proposed key dates in the 2012 financial calendar:
Annual General Meeting
Ordinary shares marked ex-dividend(1)
Record Date for entitlement to the final dividend(1)
Payment of final dividend(1)
Interim Management Statement
Financial half year end
Announcement of half year results
Interim Management Statement
Financial year end
18 April
25 April
27 April
11 May
mid May
30 June
31 July
mid November
31 December
Notes:
(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 under “Regulatory news” within the Investor section on the Company’s website.
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 2011, and the
graph provides an indication of the trend of the share price throughout the year.
Closing price on
31 December 2010
368.3 pence
Low during the year
(24 March 2011)
371.9 pence
High during the year
(16 November 2011)
581.5 pence
Closing price on
31 December 2011
545.0 pence
Share price graph(1)
as at 31 December 2011
600
500
400
)
p
(
e
c
i
r
p
e
r
a
h
S
300
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Notes:
(1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.
Market capitalisation
The market capitalisation, based on the number of shares in issue and the closing middle market price at 31 December 2011,
was approximately £2.0 billion.
123
Drax Group plc
Annual report and
accounts 2011
Financial reports
Copies of all financial reports we publish are available from the date of publication and can be downloaded from 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.
Drax shareholder queries
Drax’s share register is maintained by Equiniti Limited (“Equiniti”), who is primarily responsible for updating the share register
and for dividend payments.
Shareholders should contact Equiniti directly if they have a query relating to their Drax shareholding. In particular queries
regarding;
−(cid:3) Transfer of shares;
−(cid:3) Change of name or address;
−(cid:3) Lost share certificates;
−(cid:3) Lost or out-of-date dividend cheques;
−(cid:3) Payment of dividends direct to a bank or building society account;
−(cid:3) Death of a registered shareholder.
Equiniti can be contacted as follows:
−(cid:3) Call Equiniti on 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.
−(cid:3) Write to Equiniti at Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA.
When contacting Equiniti by telephone or in writing it is advisable to have your shareholder reference to hand and quote
Drax Group plc, as well as the name and address in which the shares are held.
Online communications
Registering for online communications allows you to have more control over the administration of your shareholding.
The registration process is easy via Equiniti’s secure website www.shareview.com.
Once registered with Shareview you are able to:
−(cid:3) elect how Drax communicates with you;
−(cid:3) amend some of your personal details;
−(cid:3) amend the way you receive dividends; and
−(cid:3) buy or sell shares online.
Registering for electronic communications does not mean that you can no longer receive paper copies of documents.
We are able to offer a range of services and tailor the communications to meet your needs.
A range of frequently asked shareholder questions can also be found on the Drax website
at www.draxgroup.plc.uk/investor/shareholder_info/shareholderfaq.
Beneficial owners and “information rights”
If your shares are registered in the name of a third party (i.e. an ISA provider or other nominee company) you may, if you
wish, receive information rights under Section 146 of the Companies Act 2006. In order for this to happen, you must contact
the third party registered holder, who will then nominate you. All communications by beneficial owners of shares where the
shares are held by third party registered holders must be directed to that registered holder and not to Drax or Equiniti.
ShareGift
ShareGift (registered charity No. 1052686) is an independent charity which provides a free service for shareholders wishing
to dispose charitably of small parcels of shares, which would most likely cost more to sell than they are worth. There are no
capital gains tax implications (i.e. no gain or loss) on gifts of shares to charity and it is possible to obtain income tax relief.
Further information can be obtained directly from the charity at www.sharegift.org.
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Drax Group plc
Annual report and
accounts 2011
Shareholder information
Share frauds (“Boiler room scams”)
In recent years, many companies have become aware that their shareholders have received unsolicited phone calls
or correspondence offering to purchase their shares at apparently inflated prices. It is often the case that the caller, or
message in the correspondence claims that they represent a majority shareholder who is looking to take over the Company.
Some Drax Group plc shareholders have received such communications in the latter part of 2011 and the early part of 2012.
At the time of this report, the Company was not the subject of a take-over attempt, hostile or otherwise, and approaches such
as those experienced by our shareholders are usually made by unauthorised companies and individuals. The approaches can
be very persistent and extremely persuasive. Shareholders should be very wary of any unsolicited advice, offers to buy shares
at a premium or offers of free reports into the Company.
If you receive any unsolicited investment advice or any offers to purchase your shares:
−(cid:3) make sure you get the correct name of the person and organisation;
−(cid:3) check that they are properly authorised by the Financial Services Authority (”FSA”) before getting involved. You can check
at www.fsa.gov.uk/register;
−(cid:3) the FSA also maintains on its website a list of unauthorised overseas firms who are targeting, or have targeted, UK
investors and any approach from such organisations should be reported to the FSA so that this list can be kept up to date
and any other appropriate action can be considered. If you deal with an unauthorised firm, you would not be eligible
to receive payment under the Financial Services Compensation Scheme;
−(cid:3) do not provide any personal details to callers e.g. bank details, full address;
−(cid:3) do not send your share certificates to anyone; and
−(cid:3) report the matter to the FSA either by calling 0845 606 1234 (cost of calls may vary) or visiting
www.fsa.gov.uk/pages/consumerinformation.
The FSA advises that, if it sounds too good to be true, it probably is. The FSA also recommend ten steps to help protect
shareholders and consumers from scams such as this. More detailed information on this or similar activity can be found
on the FSA website (details above).
125
Drax Group plc
Annual report and
accounts 2011
Shareholder profile
The categories of ordinary shareholders and the ranges and size of shareholdings as at 31 December 2011 are set out below:
As at 31 December 2011
Number of
shareholders
%
Number of
shares(1)
Analysis of shareholders
Private shareholders
Institutional and corporate holders
Total
Range
1–100
101–200
201–500
501–1,000
1,001–5,000
5,001–10,000
10,001–100,000
100,001–500,000
500,001–5,000,000
5,000,001 and above
Total
Notes:
(1) Ordinary shares of 1116⁄29 pence each.
1,558
1,366
2,924
Number of
shareholders
113
163
531
625
911
118
254
127
70
12
%
0.80
99.20
53.28
46.72
2,921,808
361,940,910
100.00
364,862,718
100.00
As at 31 December 2011
%
3.86
5.57
18.16
21.37
31.16
4.04
8.69
4.34
2.39
0.41
Number of
shares(1)
5,851
26,501
194,321
515,664
2,036,109
846,871
9,582,782
30,618,331
%
0.00
0.01
0.05
0.14
0.56
0.23
2.63
8.39
106,349,470
214,686,818
29.15
58.84
2,924
100.00
364,862,718
100.00
Shareholders by percentage ownership
as at 31 December 2011
Shareholders by number
as at 31 December 2011
Private
shareholders:
0.80%
Institutional
shareholders:
99.20%
Private
shareholders:
1,558
Institutional
shareholders:
1,366
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Drax Group plc
Annual report and
accounts 2011
Shareholder information
Company information, professional advisers and service providers
Drax Group plc
Registered office and trading address
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone +44 (0)1757 618381
Fax +44 (0)1757 612192
www.draxgroup.plc.uk
Registration details
Registered in England and Wales
Company Number: 5562053
Company Secretary
Philip Hudson
Enquiry e-mail address
enquiries@draxpower.com
Professional advisers and service providers
Auditor
Deloitte LLP
2 New Street Square, London EC4A 3BZ
Bankers
Barclays Bank PLC
1 Churchill Place, Canary Wharf, London E14 5HP
Brokers
Deutsche Bank AG
Winchester House, 1 Great Winchester Street, London EC2N 2DB
UBS Investment Bank
1 Finsbury Avenue, London EC2M 2PP
Financial PR
Brunswick Group LLP
16 Lincoln’s Inn Fields, London WC2A 3ED
Registrars
Equiniti Limited
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
Remuneration
PricewaterhouseCoopers LLP
1 Embankment Place, London WC2N 6RH
Solicitors
Norton Rose LLP
3 More London Riverside, London SE1 2AQ
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Drax Group plc
Annual report and
accounts 2011
Glossary
Ancillary services
Availability
Average achieved price
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.
Average percentage of time the units were
available for generation.
Power revenues divided by volume of net
sales (includes imbalance charges).
Average capture price
Balancing Mechanism
Baseload
Revenue derived from bilateral contracts
divided by volume of net merchant sales.
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.
Running 24 hours per day, seven days per
week remaining permanently synchronised
to the system.
Bilateral contracts
Contracts with counterparties and power
exchange trades.
Company
Drax Group plc.
Dark green spread
The difference between the price available
in the market for sales of electricity and the
marginal cost of production (being the cost
of coal and other fuels including CO2
emissions allowances).
Direct injection co-firing
EBITDA
EU ETS
The process whereby biomass is fed
directly (that is, avoiding the pulverising
mills) to the burners situated in the
boiler walls.
Profit before interest, tax, depreciation
and amortisation, gains/(losses) on disposal
of property, plant and equipment and
unrealised gains/(losses) on derivative
contracts.
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.
Feed-in Tariff with Contracts
for Difference (FiT CfD)
A long-term contract set at a fixed level
where variable payments are made to
ensure the generator receives an agreed
tariff (assuming they sell their electricity
at the market price). The Feed-in Tariff
payment would be made in addition to
the generator’s revenues from selling
electricity in the market. The FiT CfD
can be a two-way mechanism that has
the potential to see generators return
money to consumers if electricity prices
are higher than the agreed tariff.
Forced outage
Forced outage rate
Any reduction in plant availability excluding
planned outages.
The capacity which is not available due to
forced outages or restrictions expressed as
a percentage of the maximum theoretical
capacity, less planned outage capacity.
Frequency response service
Grid charges
Services purchased by National Grid to
maintain system frequency.
Includes transmission network use of
system charges (“TNUoS”), balancing
services use of system charges (“BSUoS”)
and distribution use of system charges
(“DUoS”).
Group
IFRSs
LECs
Drax Group plc and its subsidiaries.
International Financial Reporting
Standards.
Levy Exemption Certificates. Evidence of
Climate Change Levy exempt electricity
supplies generated from qualifying
renewable sources.
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128
Drax Group plc
Annual report and
accounts 2011
Glossary
Load factor
Lost time injury rate
Net Balancing Mechanism
Net sent out generation as a percentage of
maximum sales.
The frequency rate is calculated on the
following basis: lost time injuries/hours
worked times 100,000. Lost time injuries
are defined as occurrences where the
injured party is absent from work for more
than 24 hours.
Net volumes attributable to accepted bids
and offers in the Balancing Mechanism.
Net cash/(debt)
Net merchant sales
Net sales
Comprises cash and cash equivalents,
short-term investments less overdrafts
and borrowings net of deferred finance
costs.
Net volumes attributable to bilateral
The aggregate of net merchant sales and
contracts and power exchange trades.
net Balancing Mechanism.
Occupational health and safety
assessment series (OHSAS)
The OHSAS specification gives
requirements for an occupational health
and safety management system to enable
an organisation to control occupational
health and safety risks and improve
its performance.
Planned outage
Planned outage rate
A period during which scheduled
maintenance is executed according to the
plan set at the outset of the year.
The capacity not available due to planned
outages expressed as a percentage of the
maximum theoretical capacity.
Pond fines
Power exchange trades
Power revenues
Coal dust and waste coal from the cleaning
and screening process which can be used
for coal-fired power generation.
Power sales or purchases transacted on
the APX UK power trading platform.
The aggregate of bilateral contracts and
Balancing Mechanism income/expense.
ROCs
Summer
Technical availability
Renewables Obligation Certificates.
The calendar months April to September.
Total availability after planned and forced
outages.
Through-the-mill co-firing
Total recordable injury rate (TRIR)
UK NAP
The process whereby biomass passes first
through the pulverising mills before going
to the burners situated in the boiler walls.
The frequency rate is calculated on the
UK National Allocation Plan.
following basis: (lost time injuries + worst
than first aid)/hours worked x 100,000.
Underlying earnings per share
Winter
The calendar months October to March.
Calculated as profit attributable to equity
holders, adjusted to exclude the after tax
impact of unrealised gains and losses on
derivative contracts, and exceptional items,
divided by the weighted average number
of ordinary shares outstanding during
the period.
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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