Drax Group plc
Annual report and accounts 2012
Our
transformation
continues…
We have always been the largest
and most efficient coal-fired power
station in the UK…
but we want to be a
leader in sustainable
power generation.
Our strategy to make biomass
our predominant fuel source is
on track. Together with our other
priorities, this will deliver strong,
long-term performance.
In this report…
Overview
01
Chairman’s introduction
02 Our business today
04 Our business model
Governance
46 The Board of directors
49 Corporate governance
59 Audit Committee report
06 Chief Executive’s statement
62
Nominations Committee report
14
Principal performance indicators
64 Remuneration Committee report
Marketplace, performance and risk
Financials
16
Marketplace
83 Group – Independent auditor’s report
20 Operational and financial performance
84 Consolidated income statement
32
Principal risks and uncertainties
85 Consolidated statement
of comprehensive income
Corporate and social responsibility
86 Consolidated balance sheet
36
Corporate and social responsibility
87
Consolidated statement of changes in equity
88 Consolidated cash flow statement
89 Notes to the consolidated financial statements
123 Company – Independent auditor’s report
124 Company balance sheet
125 Notes to the Company balance sheet
129 Shareholder information
134 Glossary
Drax Group plc
Annual report and
accounts 2012
01
Chairman’s introduction
Significant progress…
We have long believed that generating electricity from sustainable biomass has
great potential and that it should have an important role as a low carbon, cost-effective
and reliable renewable technology in the future energy mix of the UK. We are determined
that Drax should be a leading provider of this attractive renewable power for the UK.
A testament to the diligence, expertise and teamwork
of our engineers, this achievement is a clear
demonstration of our competence in project execution.
On governance-related matters, I am pleased to
welcome a new member to our Board. Melanie Gee
joined the Board on 1 January 2013 as a non-executive
director, bringing with her many years’ experience
in corporate finance. Her expertise will be a valuable
addition and will strengthen further the proficiency
of the Board.
I am, however, sorry to announce that Tim Barker will
be stepping down from the Board at the conclusion
of the Annual General Meeting in April. Tim is
bowing out after nine years of service, joining us at
a formative time for the Company and assisting us
through the Listing process. My sincere thanks go
to Tim for his time, commitment and considerable
contribution to the Group. The Board has appointed
David Lindsell to take over from Tim as Senior
Independent Director, and Tony Thorne as Chairman
of the Remuneration Committee, each with effect
from Tim’s retirement from the Board.
We have always recognised that our people are a key
resource to the business, but I believe the milestone
achievements of last year underline that sentiment.
The many and varied disciplines that make up our
business continued to demonstrate true commitment
to delivering on our key priorities and preparing the
ground for our future. My sincere thanks go to all
Group staff for their devotion and hard work.
Charles Berry
Chairman
18 February 2013
(1) EBITDA is defined as profit before interest, tax, depreciation, amortisation and
unrealised gains and losses on derivative contracts.
In 2012, we built on the work of previous years to deliver
solid foundations for the Group’s future as a major
renewable generator. We made significant progress with
very encouraging results in our biomass research and
development and we secured committed financing for
our strategic capital investment from our shareholders
and lenders. This was possible because the UK
Government delivered certainty through decisions
on the new regulatory framework for electricity
generation from biomass. We have now moved firmly
into execution of our plans to transform the business
into a predominantly biomass-fuelled generator.
Although much effort in the year was focused on our
biomass strategy and future, we did not neglect our
other key priorities and I am pleased to say that once
again I can report a year of strong operational and
trading performance across the business. Our earnings
(EBITDA(1)) of £298 million for 2012 were lower than
in 2011 (£334 million). However, this includes a year-
on-year increase in gross margin, with a record level
of generation at the power station, offset at EBITDA
level by higher operating costs due to the two planned
outages and costs incurred in accelerating our plans to
convert our first generating unit to biomass in April 2013.
In accordance with our dividend policy, the Board
proposes a final dividend in respect of 2012 of 10.9 pence
per share, equivalent to £44 million. This would give total
dividends for the year of £97 million (2011: £102 million).
Haven Power Limited (“Haven Power”), our electricity
retail company serving business customers, again
made good progress and delivered sizeable growth
in its sales in 2012 compared to the previous year.
We have been pleased with the way the business has
developed and with it the value that the Group is now
deriving from its success. Over time Haven Power will
play an increasingly important role as a credit efficient,
direct sales channel for our power.
Another strong year of generation performance saw
record levels of generation output for the power station
and a double planned outage accomplished in good
time. At all times our focus on high safety standards was
maintained and despite the significant number of man-
hours worked due to the outages and project activity
our safety performance remained industry-leading.
This is the fifth year running that I have made reference
to the £100 million turbine upgrade project, and I make
no apology for reporting on the completion of the
largest steam turbine modernisation project in UK
history. Drax Power Station is now benefiting from
an overall improvement in its efficiency of 5% and a
consequent reduction in emissions of carbon dioxide
amounting to 1 million tonnes each year.
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02 Drax Group plc
Annual report and
accounts 2012
Our business today
Scale, efficiency and service…
Drax is principally a power generation business responsible for meeting around 7%
of the UK’s electricity demand. Owning and operating the largest power station in
the UK, we are committed to reducing our carbon footprint. Through transforming
the business into a predominantly biomass-fuelled generator, we aim to provide low
carbon, low cost and reliable renewable power well into the future.
At the other end of the supply chain, through our retail business, Haven Power,
we serve the electricity needs of businesses of all sizes. Our intention is to grow
a significant retail presence in the business sector providing us with a direct route
to market for an increasing proportion of our power.
Fuel
We make use of a range of fuels, including coal, sustainable
biomass and others, for example, petcoke and pond fines,
which are economically advantageous. As our business
transformation takes shape we will burn predominantly
sustainable biomass.
Key facts for 2012
9.6 million tonnes
of coal bur
of coal burnt
0.7 million tonnes
of biomass burnt
(commercial plus R&D burn)
0.7 million tonnes
of economically advantageous
fuel burnt
Environment
We work hard towards reducing our impact on the
environment with a policy of regarding compliance with
legislation as a minimum level of achievement. As we
convert three of our generating units to biomass our carbon
footprint will reduce dramatically. We sell the by-products
of our operations to the construction industry.
Key facts for 2012
5
1.2 million tonnes
1.15 million tonnes
11.15million tonnes
tonne
of CO2 saved through burning
burning
oof CO2 saved through burning
of CO2 saved through burning
sustainable biomass in place of coal
sustainable biomass in place of coal
n place o
sustainable biomass in place of coal
1.0 million tonnes
1.0 million tonnes
0
1.0million tonnes
of ash sold
of ash sold
of ash sold
0.8 million tonnes
0.8 million tonnes
00.8million tonnes
8
n tonn
of gypsum sold
of gypsum sold
oof gypsum sold
Drax Group plc
Annual report and
accounts 2012
03
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. Through strong
operational performance we are able to deliver high
availability and reliability.
Key facts for 2012
3,960 MW
connected capacity
at Drax Power Station
86 %
plant availability
4.8 %
forced outage rate
9.6 %
planned outage rate
Retail
Our retail business, Haven Power, is focused on providing
businesses of all sizes with electricity contracts that
are simple, flexible and designed to meet their specific
requirements. Importantly, these contracts are backed
by an excellent standard of customer service.
Key facts for 2012
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. The growth of sales
through our retail business, Haven Power, is becoming
increasingly important to our trading strategy.
Key facts for 2012
27.1 TWh
net sales of power generated
0.8 million
Renewables Obligation Certificates
sold from renewable power generated
13.1 million tonnes
of CO2 emissions allowances purchased
55 %
sales growth by volume
net power supplied
5.1 TWh
c.30 %
proportion of total forward sales
of generation output through
Haven Power
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04 Drax Group plc
Annual report and
accounts 2012
Our business model
Maximising value…
Our overriding objective is to maximise the value of the Drax business whilst
increasing our electricity generation from sustainable biomass, thereby reducing
our carbon footprint.
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”, which is the difference between
the power price and the cost of biomass plus renewable support.
From this starting point there are several steps in the Drax value chain, with each
one providing incremental value to the business and ultimately maximising the
value of our business and delivering our gross margin.
Fuel
How we maximise value…
For the last ten years we have burnt sustainable
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, we are also able to capture
value from commodity market cycles, and in
the case of biomass avoid the cost of carbon.
Generation
How we maximise value…
Through the completion of the £100 million
turbine upgrade project we have secured our
position as the most efficient coal-fired power
station in the UK, and with it we are delivering
coal and CO2 savings. With leading operational
performances across all aspects of the generation
business, from safety to maintenance, we are
able to deliver high availability and reliability.
In addition, the flexibility of our despatch allows
us to respond quickly to changes in demand.
Together these characteristics mean we are
consistently there when needed, both to meet
our contractual positions and to provide support
services critical to security of supply.
Trading
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.
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 our power station’s high
availability and flexibility, enabling us to extract
value even when market conditions are poor.
Environment
How we maximise value…
We strive to be at the forefront of environmental
performance in order to maintain our commercial
and environmental leadership position in the
coal-fired sector. Through burning sustainable
biomass and our efficiency improvements 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 sales of ash
produced from burning coal, which not only
saves on landfill costs, but creates its own
revenue stream. By reducing emissions of SO2,
through our flue gas desulphurisation process,
we produce gypsum which, like ash, is sold to
the construction industry.
Retail
How we maximise value…
We have already achieved significant growth
in a competitive marketplace and have become
established as a recognised supplier by businesses
across the UK. We have plans to grow further
and deliver our tailor-made supply contracts
to even more business customers. Our retail
business increases the trading options available
for our power output, providing an important,
credit-efficient and direct route to market.
Drax Group plc
Annual report and
accounts 2012
05
Delivering strong performance…
Our business is influenced by a number of 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.
Our vision…
Our vision for Drax is to be a bold, customer oriented power
generation and retail business, driven by biomass innovation.
…our strategy…
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.
Our programme for
the expansion of our retail
business, Haven Power.
fluenced by a number of factors…
…influenced by a number of factors…
There are many external factors with the potential
to have an impact on our business. We aim to be
alert to and manage all the identified principal risks
and uncertainties:
32 More on:
Principal risks and uncertainties
k Commodity market price risk
k Biomass market risk
k Counterparty risk
k Plant operating risk
k Power and renewables market
k Regulatory and political risk
liquidity risk
…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 focus our efforts on the following key priorities:
hich in turn is delivering
…which in turn is delivering
consistent, strong performance:
20 More on:
Operational and financial performance
14 More on:
Principal performance indicators
(1) EBITDA is defined as profit before interest, tax,
depreciation, amortisation and unrealised gains
and losses on derivative contracts.
(2) Comprising cash and cash equivalents, short-term
investments, less borrowings net of deferred finance costs.
aintain operation
Maintain operational
excellence
Grow our
Grow our
retail business
Deliver our
Deliver our
biomass strategy
Maximise profitability
from our coal
generation capacity
Maintain an
optimal supporting
capital structure
Deliver excellent
people leadership across
our operations
Total revenue
Total revenue
£1,780 million
(2011: £1,836 million)
EBITDA(1)
£298 million
(2011: £334 million)
Net cash(2)
£311 million
(2011: £225 million)
Gross profit
Gross profit
£511 million
(2011: £501 million)
Underlying basic earnings
52 pence per share
(2011: 56 pence per share)
Load factor
82 %
(2011: 80%)
Carbon dioxide emissions
784 t/GWh
(2011: 760t/GWh)
Total recordable injury rate
0.17
(2011: 0.10)
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06 Drax Group plc
Annual report and
accounts 2012
Chief Executive’s statement
Driving our strategy forward…
Introduction
I am very pleased to say that 2012 was a good and extremely important year
for the Group. Good in the sense that the business performed well delivering
profits in line with expectations underpinned by continued strength in operations,
and important in that we now have the clear mandate, means and expertise to
transform Drax into a predominantly biomass-fuelled generator.
Through the year we made excellent progress with our biomass research and
development work. We demonstrated that we could operate a single generating
unit on a fully converted basis for a sustained period and we delivered very
encouraging results from our engineering optimisation work. As a result
we gained full confidence in our ability to deliver reliable and flexible renewable
power through converted units at attractive rates of efficiency and output.
The much needed regulatory clarity and certainty was delivered in the
Government’s conclusions on the future support levels for biomass electricity
and proposals for sustainability criteria, which saw clear recognition of the
true benefits of biomass and its potential to play a strategically important
role in the UK’s future energy mix.
The final piece of the jigsaw, securing the means to finance our biomass strategy,
was achieved through raising a mixture of equity and debt. Equity of £190 million
was raised through a share placing, and we secured new debt of £200 million
through term loan facilities with M&G UK Companies Financing Fund and the
UK Green Investment Bank, at £100 million each. In addition, our working capital/
letter of credit facility was increased to £400 million and the maturity extended
to April 2016.
All in all, 2012 was a positive and pivotal year marking real progress in our
journey to transform the business, whilst maintaining our focus on excellence
in operations, and disciplined capital project execution across our generation
and retail businesses.
Drax Group plc
Annual report and
accounts 2012
07
With Phase II surplus bankable in Phase III
a range of interventions is being considered
by the European Commission to rectify the
over-supply, but these are by no means certain
to proceed.
Dark green spreads, the difference between the
price of power and the cost of coal and carbon,
have been relatively good for coal-fired generators.
The introduction to the UK of the carbon price
support mechanism 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.
During 2012, 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. Consequently, the amount of
commercial biomass burnt during the year was
much lower than previous years. Substantially
all of the biomass burnt during the period was
at a loss, but in support of critical research and
development work.
The Government’s new support levels for biomass
electricity through conversion and co-firing come
into effect in April 2013. We expect co-firing
at low levels to remain uneconomic, but generation
through converted units will become economic
and yield attractive rates of return on the required
capital investment.
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 and our
programme for the expansion of our retail
business, Haven Power Limited (“Haven Power”)
through growing our sales to businesses.
Commodity markets
The gas market continued to be the dominant
factor in driving power prices. The impact of
the incident at one of Japan’s nuclear power
stations continued to be felt through the
country’s increased demand for liquefied natural
gas (“LNG”) and consequent increasing Asian
LNG prices. As a result the UK saw reduced
LNG imports and gas prices remained strong.
Accordingly, some gas-fired plant capacity was
withdrawn from the market and in some cases
considered for closure.
International coal prices were weak as a result
of excess supply. Exports from the US to Europe,
in particular, increased significantly. A combination
of low prices and high stocks put pressure on the
UK’s domestic coal producers.
Carbon prices remained at their lowest point for
over three years driven by over-supply of carbon
emissions allowances in Phase II of the EU Emissions
Trading System (“EU ETS”). As of 1 January 2013,
we entered into Phase III of the EU ETS, which
introduced 100% auctioning of allowances to
the power sector – a departure from receiving
allowances in the previous Phases.
Over the following pages we highlight
some of the progress we’re making
across our key priorities…
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08 Drax Group plc
Annual report and
accounts 2012
One of our key priorities…
Grow our retail business
Well established
and growing
With substantial sales growth delivered in
2012, further growth of our retail business,
Haven Power, is planned. This will bring with it
an increasingly important direct route to market
for our power sales.
Drax Group plc
Annual report and
accounts 2012
09
Chief Executive’s statement
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 or economic biomass –
accounted for 7% of the total fuel burnt during
the year.
Assessment of the technical solutions available
to us for compliance with the more stringent
emissions standards of the Industrial Emissions
Directive from 2016 is well advanced. The key
factors in determining the optimal solution for
compliance are plant flexibility and fuel mix.
Hence, the level of biomass burn is an important
consideration. The legislative arrangements in place
afford us some flexibility in the timing and the extent
of the required modifications which fits well with our
biomass conversion programme.
Biomass transformation
During the year we completed our engineering
designs of the plant modifications and new facilities
required for unit conversion. We made good
progress on the time critical construction of the
receipt, storage and delivery systems for biomass,
including the erection of the first two biomass
storage domes. Building on the early work
undertaken in 2012 and making use of the existing
biomass co-firing infrastructure we believe it will be
technically feasible to convert single units in 2013,
2014 and 2015. However, the actual timing is
dependent on biomass fuel sourcing.
We have made good progress towards securing
sufficient biomass to run two converted units and
we plan to convert the first unit in April 2013 and
the second unit in 2014. We are now in advanced
negotiations for a large proportion of the biomass
necessary to fuel the third unit. Established North
American suppliers, Enviva, Green Circle, Pinnacle
and Plum Creek are amongst those with whom
we have entered into term contracts for the supply
of wood pellets and sustainable forest fibre.
Retail performance
During 2012 our retail business, Haven Power,
delivered substantial growth in a highly competitive
market with retail sales over 60% higher than in
2011. Sales growth remains a key priority for the
business, targeting the industrial and commercial
(“I&C”), and small and medium enterprise (“SME”)
markets. Due to our continued drive for growth
across these markets we expect Haven Power to
make a modest loss up to 2015.
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 SME market in the 2012
Datamonitor Survey.
Selling our output through Haven Power continues
to provide us with a credit-efficient route to market
for our power sales compared to the wholesale
electricity market, as well as a route to market for
the Renewables Obligation Certificates and Levy
Exemption Certificates associated with our
renewable power generation.
Generation performance
We continued to deliver industry-leading performance
in 2012 amid higher than ever output levels, and
significant project and construction activity.
As in previous years, our load factor was high
compared to other thermal capacity on the system
and we recorded our highest ever generation
out-turn level. With high availability and reliability
throughout 2012 we were able to continue to deliver
additional 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.
Two planned unit outages were undertaken during
2012, and both were completed in good time.
With two outages and considerable biomass
project work activity, the number of engineering
man-hours worked throughout the year was
significant. Yet against this backdrop our safety
statistics continued to be industry-leading,
reflecting the emphasis we place on safety.
For the year, our forced outage rate, which measures
any reduction in plant availability excluding planned
outages, was close to our long-term target of 5%,
which has been set through extensive benchmarking
with UK and international coal-fired plants to
determine the optimum balance between
performance and cost.
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10 Drax Group plc
Annual report and
accounts 2012
Chief Executive’s statement
Elsewhere in the supply chain, at the end of 2012
the final investment decision was taken to develop
two US-based pellet plants, one in each of the
states of Mississippi and Louisiana, with a combined
capacity of 900,000 tonnes a year, and to invest in
a port facility in Louisiana with an export capacity
of 3 million tonnes a year. We are now finalising the
construction arrangements for these facilities.
In addition, terms have been agreed with UK
port operators to provide us with biomass import
facilities. This will involve the development of
new facilities and the expansion of existing ones.
Finally, the fabrication of bespoke rail wagons
to transport biomass from the ports to the power
station is underway.
Biomass sustainability
All our biomass is procured against our own 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 or forest-to-furnace, is now well
developed, especially in the UK where a mandatory
life cycle standard is scheduled to come into effect
later this year.
With a number of years’ experience of calculating
the life cycle carbon footprint of all the biomass
we procure, we are confident that our sustainable
biomass fuel sources will meet the UK’s new
mandatory standard which will ensure we continue
to earn regulatory support.
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 2012, the average
greenhouse gas saving, over the full life cycle,
resulting from burning sustainable biomass in place
of coal was above 80%.
1
2
Securing supplies of
sustainable biomass
Further progress has been made in securing
rights for the supply of sustainable biomass.
Additionally, at the end of 2012 the decision
was taken to invest upstream through the
development of US-based pellet plants.
Increasing capacity
of US port handling
In support of our US-based pellet plant
operations and wood pellet supply
contracts, the decision has been taken
to invest in a US port facility, in the state
of Louisiana.
3
4
UK handling and
transportation
Agreements are in place for the expansion
of UK port throughput capability to support
our imports of sustainable biomass pellets.
Bespoke rail wagons have been designed
and are being fabricated to transport the
pellets from the ports to the power station.
Pioneering the conversion
of existing generating units
Development of the necessary infrastructure
at Drax Power Station is well advanced, from
a new rail unloading facility, through storage
domes and delivery system to the modified
boilers. In terms of the sheer scale and
quality, the transformation is unparalleled.
Drax Group plc
Annual report and
accounts 2012
11
2
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One of our key priorities…
Deliver our biomass strategy
Putting an
infrastructure
in place
The biomass supply chain is not yet well
established. We are investing and working with
partners to build and strengthen each of the links
in the supply chain from field or forest-to-furnace.
3
4
12 Drax Group plc
Annual report and
accounts 2012
One of our key priorities…
Maintaining operational excellence
Making the
best better
The power station is now benefiting from the
completion of the £100 million project to upgrade
our high and low pressure turbines, which is
delivering an overall efficiency improvement
and a reduction in emissions of carbon dioxide.
The three generating units being converted to
biomass will also benefit from investment in
upgrading the intermediate pressure turbines,
which is due to commence in 2014.
Drax Group plc
Annual report and
accounts 2012
13
Chief Executive’s statement
CfD will replace the Renewables Obligation in 2017
for new renewable generation facilities, but not
those already in operation. We are exploring the CfD
mechanism for biomass and have participated in a
call for evidence, launched by National Grid as part
of its potential role as delivery body, to support the
development of strike prices under the mechanism.
We have also had preliminary discussions with the
Department of Energy & Climate Change on the
possibility of securing long-term contracts to enable
early investment in advance of the CfD mechanism
coming into force.
Looking ahead
We enter 2013 with a strong hedge from forward
power sales, but with no national carbon emissions
allocation under Phase III of the EU ETS and, from
April, increased carbon costs under the UK carbon
price support mechanism. Both of these changes
are recognised in current stock 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 fuels.
With a commitment to deliver value to our
shareholders, we are now in full execution mode to
transform Drax into a predominantly biomass-fuelled
generator. In doing so we are confident that we will
not only secure an attractive future for the business
and our shareholders, but also deliver a significant
amount of cost-effective renewable power for the
consumer and make a meaningful contribution to
the UK’s 2020 climate change targets.
Dorothy Thompson
Chief Executive
18 February 2013
Further carbon abatement
In addition to the carbon dioxide (“CO2”) savings
through burning sustainable biomass in place of
coal, we have also progressed other carbon
abatement activities.
The low pressure and high pressure turbine modules
of all six generating units have now been replaced
and are operating as expected. This means we are
operating at an overall, coal-based efficiency for
the power station of around 40%, and through this
upgrade alone we are reducing our CO2 emissions
by 1 million tonnes a year.
We have also taken the decision to upgrade the
intermediate pressure turbines of the three
generating units that will be converted to biomass.
The first will be undertaken during 2014. This will
deliver further efficiency improvement benefits.
Siemens will again be responsible for the
manufacture and assembly of the turbines from
its facility in Mülheim with installation support
from Siemens in Newcastle.
Together Drax, Alstom UK and BOC (a member
of The Linde Group) have formed a consortium
in support of the White Rose Carbon Capture
and Storage (“CCS”) Project, a proposed 426MW
oxyfuel CCS demonstration project based at the
Drax Power Station site. At the beginning of July
2012 the consortium, in conjunction with National
Grid Carbon Limited, submitted a bidder proposal
for funds through the UK CCS Commercialisation
Programme, which was launched in April 2012.
At the end of October 2012, the White Rose CCS
Project was one of four shortlisted for the next
phase of the UK competition. The consortium is
fully engaged in the process, but the project will be
dependent on successful outcomes from external
funding processes and Electricity Market Reform
mechanisms to incentivise low carbon technologies.
Legislative framework
In November 2012, the Energy Bill was introduced
to Parliament marking the start of its passage
through both the House of Commons and the
House of Lords. At the heart of the Bill is Electricity
Market Reform, which will see, amongst other things,
the introduction of Contracts for Difference (“CfD”)
providing long-term contracts and a stable revenue
stream enabling investment in low carbon generating
technologies, and a capacity market to mitigate
future risks to the security of electricity supplies.
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14 Drax Group plc
Annual report and
accounts 2012
Principal performance indicators
Monitoring our performance…
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 the value of the Drax business
Deliver our
biomass strategy
Net sales
TWh
Average achieved
price of electricity
£/MWh
Sustainable biomass burnt
tonnes
26.4
26.4
27.1
51.6
55.6
51.3
907,000
700,000
565,000
R&D
2010
2011
2012
2010
2011
2012
2010
2011
228,000
475,000
R&D
2012
The aggregate of net merchant sales
and net Balancing Mechanism activity
Power revenues divided by volume of
net sales (includes imbalance charges)
Why we measure
Net sales tracks the volume of power we can
sell at positive margins.
Comment
Our high availability and superior efficiency
in comparison to other coal-fired generators
allowed us to take advantage of good margins
available, driving the increase in net power sold.
Why we measure
The average achieved price of electricity tracks
the power price component of the dark green
spread achieved.
Comment
Our average achieved price of electricity reflects
the contracted position at the start of the year,
as well as power prices during the period.
2011 benefited from earlier forward power
sales captured at enhanced prices reflecting
the impact of world events on market prices
for power.
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
Very little commercial biomass was burnt
during the year, as the margins remain weak
at current support levels. However we did
undertake further R&D trials in 2012.
Average cost of fuel
excluding carbon
£/MWh
Average cost of carbon
£/tonne
Carbon dioxide emissions
t/GWh
33.3
30.6
12.6
12.0
784
784
760
25.7
6.3
2010
2011
2012
2010
2011
2012
2010
2011
2012
Fuel costs excluding carbon divided by
volume of net sales
Carbon costs divided by volume of
allowances purchased
Why we measure
The average cost of fuel excluding carbon tracks
the fuel cost component of the dark green and
bark spread achieved, and reflects the value
captured from effective fuel procurement and
diversified fuel sources.
Comment
Falling coal prices and lower volumes of biomass
burn combined to decrease our average cost
of fuel in 2012. Average fuel costs for 2012 are
calculated net of fuel sales of £17 million.
Why we measure
The average cost of carbon tracks the
carbon cost component of the dark green
spread achieved.
Comment
A large proportion of our 2012 carbon
contracts were locked in during 2011, when
we sold the related power. Carbon prices
fell significantly in the second half of 2011,
reducing our average cost.
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
Savings were made in 2011 and 2012 from
the turbine upgrade project and from burning
sustainable biomass, the total volume of which
was higher in 2011.
Drax Group plc
Annual report and
accounts 2012
15
Maintain operational excellence
Grow our retail business
Plant availability
%
Load factor
%
Retail customer volumes
TWh
92
88
86
80
80
82
5.1
3.3
2010
2011
2012
2010
2011
2012
1.4
2010
2011
2012
Average percentage of time the units were
available for generation
Net sent out generation as a percentage
of total available generation capacity
Net sales distributed through our retail
supply arm, Haven Power
Why we measure
Availability tracks our operating performance,
enabling assessment of, and providing guidance
for, our operational regime and maintenance
investment plans.
Comment
The 2012 plant availability continues to
demonstrate our leadership position in the
coal-fired generation sector, with the impact
of a double planned outage marginally lowering
availability in comparison to 2011 levels.
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
An increase in generation output (net sales)
in 2012 resulted in a higher load factor,
and highlights our competitive position
in the marketplace.
Comment
Our retail business, Haven Power, continued to
deliver good growth during 2012, largely as a
result of the planned expansion of the industrial
and commercial customer base.
Lost time injury rate
(“LTIR”)
Total recordable injury rate
(“TRIR”)
0.13
0.26
Maintain an optimal
supporting capital structure
Net cash
£m
0.17
0.10
311
204
225
0.08
0.06
2010
2011
2012
The frequency rate is calculated on
the following basis: lost time injuries/
hours worked x 100,000
2011
2010
2012
The frequency rate is calculated on the
following basis: (lost time injuries + worse than
first aid injuries)/hours worked x 100,000
Why we measure
These injury rate metrics track our health and safety performance and enable us to maintain a
positive health and safety culture.
Comment
Our safety record continues to be industry-leading and was delivered alongside a significant amount
of project activity and a double planned outage during 2012.
2010
2011
2012
Includes cash and short-term investments,
less borrowings net of deferred finance costs
Why we measure
Monitoring net cash ensures an efficient capital
structure is maintained to support our business,
alongside sufficient liquidity to manage our
future obligations.
Comment
Share placing funds raised and higher capital
expenditure were offset to give an overall
increase in our net cash position at the end
of the year.
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16 Drax Group plc
Annual report and
accounts 2012
Marketplace
Where we sell our power…
From a nationalised, centrally planned system, the UK electricity sector has
been transformed since the beginning of its privatisation in 1990. 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.
The structure of the electricity market
The wholesale electricity market
The electricity market in Great Britain (“GB”) is
characterised by six large vertically integrated
companies and a number of smaller “independent”
companies. Drax is an independent company,
which until 2009 was solely focused on the
generation of electricity.
Today, the energy mix benefits from a diversity
of fuel sources, including gas, coal, nuclear and
renewables, which is a key contributor to security
of supply.
In 2011 (the latest figures available(1)), the generating
capacity of the UK’s major power producers was
81,750MW. The final consumption of electricity in
2011 was approximately 318TWh.
The six large vertically integrated players have
control, either through ownership or long-term
contracts, of some 65% of the total generation
capacity and have a combined interest of over
93%(2) in the supply market, with nearly all of the
domestic gas and electricity accounts.
Drax has a 5% share in the generation capacity
market and typically meets 7% of the UK’s electricity
needs. Through our retail company, Haven Power,
we serve businesses of all sizes, together accounting
for sales of over 5TWh of power in 2012.
Various mechanisms exist to allow power to be
traded at the wholesale level in GB. Trading can take
place via forward and futures markets and power
exchanges, and through 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 through
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.
Notes:
(1) Digest of UK Energy Statistics, 2012.
(2) New Power, Issue 45, October 2012.
Our role in the electricity supply chain
Our interests in the electricity supply chain cover the generation,
wholesale and retail markets.
Wholesale
market
Various mechanisms exist
st
e
to allow our power to be
e
traded at the wholesale
level in Great Britain.
et
Forward contract market
(several years before)
Short-term market
(24 hours before)
Balancing Mechanism
(one hour before)
Generation
Drax Power Station typically
meets around 7% of the UK’s
electricity needs. There are two
routes to market for our power.
Retail
H
Haven Power is our retail
company serving the
electricity needs of
business customers and
b
ppr
providing a direct route to
market for our power.
SMEs
(Small and medium-
sized enterprises)
I&C
(Industrial and commercial
businesses)
UK plant capacity
(major power producers), 2011*
MW
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Drax Group plc
Annual report and
accounts 2012
17
Wholesale prices
Power prices are driven by a number of factors,
such as underlying commodity prices, the availability
of generating capacity on the electricity system,
and the physical positions taken by individual
market participants.
The wholesale market operates on price and the
relative prices of gas and coal, along with the
operating efficiencies of the various power stations,
will determine which of gas-fired generation or
coal-fired generation is the more expensive and so
operates at the margin. If gas prices are high then
gas-fired generation becomes the marginal plant.
With a coal-based operating efficiency of around
40%, Drax Power Station is at the top of the
so-called merit order for UK coal-fired generation.
So, we will be the first of the coal-fired plants to
be called on to generate even when coal-fired
generation is at the margin.
Commodity markets
The trends in commodity prices witnessed in 2011
and 2012 are described further in the following
paragraphs and are illustrated in the accompanying
charts overleaf.
A
Gas
After a significant step up in prices following the
Fukushima disaster in 2011, continued restrictions
on nuclear generation kept upward pressure on the
global liquefied natural gas (“LNG”) market during
2012. The resulting rise in Asian LNG prices limited
the attractiveness of the UK spot market, leading
to falling imports of LNG.
UK spot gas prices remained strong throughout 2012.
With the ongoing decline in production from the
UK Continental Shelf, UK gas prices continue to be
pulled upwards towards oil indexed European prices
(and international LNG prices) to attract imports.
European and UK gas prices remain at a premium to
US prices, where advances in technology are leading
to a large supply of low priced shale gas, adding to
already significant reserves which may enable the
US to become self-sufficient. However, shale gas
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.
B
Power
Power prices continue to be driven by the gas
market. With a peak in the first half of 2011 following
the Japanese earthquake, prices fell back on mild
weather towards the end of the year but recovered
early in 2012 and remained relatively stable
throughout the second half of the year.
* Source: Digest of UK Energy Statistics, 2012.
Due to rounding percentages may not add up to 100.
Shares of UK electricity
generation by fuel, 2011*
%
UK electricity generated from %
renewable sources, 2011*
UK electricity demand
by sector, 2011*
%
Renewables:
9.4%
Other fuels:
2.5%
Nuclear:
19%
Bioenergy: co-firing
with fossil fuels
8.6%
Onshore wind:
30%
Commercial:
21%
Domestic:
30%
Bioenergy:
other (sewage
sludge digestion,
anaerobic
digestion, etc)
14.6%
Bioenergy:
landfill gas
14.5%
Hydro:
16.5%
Gas:
40%
Coal:
30%
Losses:
8%
Fuel
industries:
8%
Transport:
1%
Offshore wind:
14.9%
Solar photovoltaics:
0.7%
Public
administration:
5%
Agriculture:
1%
Industry:
27%
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18 Drax Group plc
Annual report and
accounts 2012
Marketplace
C
Coal
Asian demand, particularly from China, pushed
global steam coal market prices to a peak in
mid-2011. Since that point, coal prices have steadily
fallen. The low US gas prices described above have
forced a dramatic increase in US coal exports.
Combined with a rise in Colombian and Australian
shipments to Europe, this has resulted in a weak
global short-term market characterised by low
international prices and high stocks in Europe.
Although Asian demand has continued to grow, it
has been insufficient to absorb the excess supply.
These market dynamics, as well as increasing
operating costs, have increased the pressure
on UK domestic coal producers.
D
Carbon
Carbon prices also rose in the immediate aftermath
of the Japanese earthquake, but then dropped
sharply in the second half of 2011 amid fears for
the Eurozone economies.
This trend continued throughout 2012, with
prices falling to record lows around the end of
the year. With any Phase II surplus bankable into
Phase III, pricing has been driven by political and
macroeconomic factors. The increasing renewable
generation build rate and the slow pace of economic
recovery have led to a large over-supply of carbon
allowances in Phase III. The EU is considering a range
of options to remedy this over-supply, but these are
by no means certain to proceed.
E
Dark green spread
The combination of stable power prices and lower
coal and carbon prices drove an improvement in
dark green spreads during 2012.
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 are renewable and can be sustainable.
The three most common types of biomass used
to generate electricity are forestry products
and residues, agricultural residues, and energy
crops. Recovered materials offer another,
very useful, source.
Forestry products and residues
Sustainably produced woody biomass can be
produced from managed forests and forestry
residues, such as thinnings, tree tops and branches.
The economics of forest management usually mean
that energy is well down the list of potential uses for
wood. Timber, the most valuable part of a tree, is
generally used for furniture and building materials,
while smaller diameter wood can be used for fence
posts or by the paper and wood panel industries.
This leaves the lower value thinnings and branches
for energy production as they often have no other
commercial use. In some geographic regions, decline
of industries such as construction and paper and
pulp means that energy producers may be able
to afford fibre previously supplied to these, currently
declining, markets. This is welcomed by the forest
owners who need to harvest mature trees and
thereby maintain investment in sustainable
forest management.
Forward gas price
Summer 12
Winter 12
Summer 13
Winter 13
A
pence per therm
Forward power price
Summer 13
Summer 12
Winter 13
Winter 12
B
£/MWh
Forward coal price (AP12)
Calendar year 14
Calendar year 12
Calendar year 13
C
$/tonne
80
60
40
20
70
60
50
40
30
20
10
140
120
100
80
60
40
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Drax Group plc
Annual report and
accounts 2012
19
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, the Government’s 2012 update to the Renewable
Energy Roadmap reports on analysis which indicates
that by 2020 as much as 11% of the UK’s total
primary energy demand (across heat, transport
and electricity) could come from bioenergy.
Biomass procurement
Our biomass is procured against our robust
sustainability policy which is independently audited.
We are in our fifth year of monitoring the carbon
footprint of all the biomass we burn. More on our
sustainability policy can be found in Corporate
and social responsibility.
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.
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.
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.
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.
Forward carbon price
December 13
December 11
December 14
December 12
D
¤/tonne
Dark green spread
Summer 12
Winter 12
Summer 13
Winter 13
E
£/MWh
25
20
15
10
5
25
20
15
10
5
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20 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
Strength across our operations…
Introduction
Our 2012 profit reflects continued strength in our operations. We also delivered
another year of industry-leading safety statistics, against a backdrop of
significant project activity at the Drax site, including a planned double outage and
commencement of construction on our new biomass storage and handling facilities.
EBITDA was £298 million for the year ended 31 December 2012 compared to
£334 million in 2011 and underlying basic earnings per share were 52 pence
compared to 56 pence last year.
A year-on-year increase in gross margin reflects a record level of generation
at the power station. This was offset at EBITDA level by higher operating costs
of the planned double outage and costs we incurred, following the Government’s
confirmation of regulatory support for biomass, as we accelerated our plans
to put ourselves in the best possible position to convert a first unit to biomass
in April 2013.
Our retail business, Haven Power Limited (“Haven Power”) continued to deliver
good growth during 2012. Sales increased from 3.3TWh in 2011 to 5.1TWh in 2012,
largely as a result of the planned growth of the industrial and commercial
customer base.
Towards the end of the year we secured the financing required to support our
biomass transformation plans, with the successful completion of a share placing,
agreement of new term loan facilities, and the refinancing of our working capital
and letter of credit facilities. With net cash of £311 million at the year end, we have
in place a strong financial platform from which to realise our ambitions.
At the upcoming Annual General Meeting, the Board will recommend a final dividend
for 2012 of 10.9 pence per share, taking total dividends for the year to £97 million.
This review includes further explanation and commentary in relation to our principal
performance indicators and the results for the year.
14 More on:
Principal performance indicators
Drax Group plc
Annual report and
accounts 2012
21
Year ended
31 December 2012
£m
1,779.8
Year ended
31 December 2011
£m
1,835.9
(929.2)
(141.7)
(167.8)
(30.2)
(1,268.9)
510.9
(212.5)
298.4
(58.5)
(36.1)
203.8
(13.6)
190.2
(41.5)
15.1
–
(26.4)
22
22
27
27
(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
Results of business
Total revenue
Fuel costs in respect of generation(1)
Cost of power purchases(2)
Grid charges(3)
Other retail costs(4)
Total cost of sales
Gross profit
Other operating and administrative expenses excluding depreciation,
amortisation and unrealised (losses)/gains on derivative contracts(5)
EBITDA(6)
Depreciation and amortisation
Unrealised (losses)/gains on derivative contracts
Operating profit
Net finance costs
Profit before tax
Tax (charge)/credit
— Before exceptional items and impact of corporation tax rate change
— Impact of change in rate of corporation tax on deferred tax
— Exceptional items
Tax (charge)/credit
Profit for the year attributable to equity shareholders
163.8
464.6
Earnings per share
— Statutory basic
— Statutory diluted
— Underlying basic(7)
— Underlying diluted(7)
All results relate to continuing operations.
Notes:
pence per share
44
44
52
51
pence per share
127
126
56
55
(1) Fuel costs in respect of generation consists predominantly of coal, sustainable biomass and carbon dioxide (“CO2”) emissions allowances, together with pond fines,
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, LECs, metering and Feed-in Tariff levelisation.
(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 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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22 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
Segmental information
Year ended
31 December 2012
£m
Year ended
31 December 2011
£m
1,641.0
69.2
17.4
7.6
1,735.2
275.5
(174.8)
1,835.9
(1,020.8)
(172.0)
(58.0)
(1,250.8)
(170.9)
(59.5)
(28.7)
(259.1)
174.8
(1,335.1)
484.4
16.4
500.8
(148.3)
(18.9)
(167.2)
336.1
(2.5)
333.6
A
£m
Revenue A
Power sales
ROC and LEC sales
Ancillary services income
Other income
Total generation revenue
Retail revenue
Intercompany sales
Total Group revenue
Cost of sales
Fuel costs in respect of generation
Generation cost of power purchases
Generation grid charges
Total generation cost of sales
Retail cost of power purchases
Retail grid charges
Other retail costs
Total retail cost of sales
Intercompany purchases
Total Group cost of sales
Gross profit
Generation gross profit
Retail gross profit
Total Group gross profit
Operating and administrative expenses
Generation operating and administrative expenses
Retail operating and administrative expenses
Total Group operating and administrative expenses
EBITDA
Generation EBITDA
Retail EBITDA
Total Group EBITDA
24
25
1,527.4
62.6
14.5
25.5
1,630.0
451.4
(301.6)
1,779.8
(929.2)
(138.4)
(66.3)
(1,133.9)
(278.9)
(101.5)
(56.2)
(436.6)
301.6
(1,268.9)
496.1
14.8
510.9
(193.1)
(19.4)
(212.5)
303.0
(4.6)
298.4
Revenue bridge
2012
2011
2,100
2,000
1,900
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
2,100
2,000
1,900
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
Generation
Retail
Intercompany Group
Generation
Retail
Intercompany Group
Drax Group plc
Annual report and
accounts 2012
23
Generation results
B
Revenue
Total generation revenue for the year ended
31 December 2012 was £1,630 million compared
to £1,735 million in 2011. Total generation revenue
in 2012 includes power sales of £1,527 million
(2011: £1,641 million), ROC and LEC sales of
£63 million (2011: £69 million), ancillary services
income of £15 million (2011: £17 million) and other
income of £26 million (2011: £8 million).
Net power sold increased to 27.1TWh in 2012,
compared to 26.4TWh in 2011, but at a lower average
achieved electricity price of £51.3 per MWh compared
to £55.6 per MWh in 2011, resulting in the overall
reduction in revenue from power sales in the year.
Our average achieved price of electricity reflects the
contracted position at the start of the year, as well as
power prices during the period. 2011 benefited from
earlier forward sales captured at enhanced prices,
as well as higher power prices in the year, with prices
peaking in the first half following the Japanese
earthquake (see Commodity markets).
Margins available to coal-fired generators improved
in 2012, largely as a result of lower international
coal and carbon prices. Our high availability and
superior efficiency in comparison to other coal-fired
generators has allowed us to take advantage of
the good margins available, driving the increase
in net power sold.
Revenue from the sale of ROCs and LECs is a
function of both the movement in ROC and LEC
assets in the balance sheet, and the volume of
biomass burnt in the period. ROC and LEC assets
held in the balance sheet fell from £32 million at
the end of 2011 to £19 million at 31 December 2012.
This was offset by lower levels of biomass burn in
2012 (see Fuel costs). As a result ROC and LEC sales
were £63 million in 2012 compared to £69 million in
2011 (including sales to Haven Power).
We changed our accounting policy for ROCs in 2012
so that they now match the value generated to the
period in which biomass is burnt rather than the
period in which ROCs are sold. However, with support
for biomass at only 0.5ROC/MWh until April 2013,
the change in policy had negligible impact on our
financial results in this annual report and accounts.
Ancillary services income decreased slightly
from £17 million to £15 million. This revenue arises
from the services we provide to National Grid to
balance system supply and demand. As a flexible
generator, Drax continues to play a significant role
in supporting the balancing of the system.
Other income of £26 million in 2012 includes
£9 million for the sale of by-products (2011: £8 million)
and £17 million for fuel sales. During 2012 certain
coal inventories (at port) were sold to a third party
for stock management purposes.
C
Fuel costs
(coal, sustainable biomass and other fuels)
Fuel costs were £929 million in 2012, compared to
£1,021 million in 2011.
We burnt approximately 9.6 million tonnes of coal
in the year ended 31 December 2012, compared
to approximately 9.1 million tonnes in 2011 reflecting
higher generation and lower biomass burn.
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 90% of total fuel burnt
(by heat content) in 2012 and 87% in 2011.
Generation revenue analysis
Power sales (£m)
Other income (£m)
Net power sold (TWh)
Average achieved price (£/MWh)
B
Fuel burn composition (heat)
C
%
£51.3/MWh
27.1TWh
£55.6/MWh
£51.6/MWh
26.4TWh
26.4TWh
£103m
£1,527m
£94m
£1,641m
£68m
£1,528m
Biomass
R&D:
3%
Biomass:
2%
Petcoke:
1%
Pond fines:
4%
Petcoke:
1%
Biomass:
5%
Pond fines:
3%
Biomass
R&D:
4%
2012
2011
2012
2011
2010
Coal:
90%
Coal:
87%
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24 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
We also burnt 0.1 million tonnes of petcoke and
0.6 million tonnes of pond fines in both years.
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.
In 2012, we burnt 0.7 million tonnes of biomass
(2011: 1.3 million tonnes) representing 5% of total
fuel burnt by heat content (2011: 9%). The majority
of the biomass we burnt in 2012 related to our
research and development (“R&D”) trial work.
Very little commercial biomass was burnt during
the year, as the margins remain weak at current
support levels.
The average cost of fuel per MWh (excluding CO2
emissions allowances) was £30.6 for the year
ended 31 December 2012 (net of £17 million fuel
sales described above), compared to £33.3 in 2011.
The decrease in average fuel prices was driven by
the falling price of international coal (see Commodity
markets) and the fuel mix, with much lower biomass
burn in 2012.
Fuel costs (CO2 emissions allowances)
For Phase II of the EU ETS (2008–2012), Drax had
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 2012, in excess of
those allocated under the UK NAP, was
approximately 13.1 million tonnes compared to
approximately 11.6 million tonnes in 2011. This was
a result of higher generation and the change in
fuel mix described above.
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 2012
was £6.3 per tonne compared to £12.0 per tonne
in 2011. This reflects the significant fall in carbon
prices since mid-2011 (see Commodity markets).
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 2012, the cost of purchased power for the
generation business was £138 million, compared to
£172 million incurred in 2011, reflecting lower average
power prices in 2012 (see Commodity markets).
Grid charges
Grid charges for generation for the year ended
31 December 2012 were £66 million, compared
to £58 million in 2011. The increase resulted from
higher generation and an increase in the rate
charged by National Grid to reflect the impact of
increased intermittent generation on system
balancing costs.
Higher net power sold and improved dark green
spreads resulted in generation gross profit for the
year ended 31 December 2012 of £496 million
compared to £484 million in 2011.
D
Operating and administrative expenses
Generation other operating and administrative
expenses before depreciation and amortisation were
£193 million for the year ended 31 December 2012,
compared to £148 million in 2011, an increase of
£45 million.
Group operating and administrative expenses £m
D
220
200
180
160
2011 costs
Double outage
and rates
Investment
in growth
Inflation
Plan
acceleration
2012
costs
Drax Group plc
Annual report and
accounts 2012
25
This is in line with our strategy to target a 10–15TWh
business at Haven Power, with retail sales being a
credit-efficient alternative to selling power in the
wholesale market. Whilst the markets in which Haven
Power operates remain highly competitive, we have
been successful in securing growth through good
customer service, and our bad debt experience
remains low.
Cost of power purchases
Retail cost of power purchases were £279 million
for the year ended 31 December 2012 compared to
£171 million in 2011. Haven Power purchases power
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 Haven Power’s cost of power purchases is a result
of the significant increase in sales volumes.
Grid charges
Haven Power incurred £102 million of grid charges
during the year ended 31 December 2012 and
£60 million during the year ended 31 December 2011.
Charges have increased as a result of higher sales
volumes together with substantial increases in the rates
charged by the network operators and National Grid.
Other retail costs
Other retail costs which include broker fees, ROCs,
LECs, Feed-in-Tariff levelisation and metering were
£56 million in the year ended 31 December 2012,
compared to £29 million in 2011. In addition to the
effect of higher volumes, costs have increased in
2012 due to large increases in the Renewables
Obligation and the Feed-in-Tariff levelisation costs
resulting from the continued high uptake of solar
photovoltaic subsidies.
Retail gross profit for the year ended
31 December 2012 was £15 million compared
to £16 million in 2011.
E
Most of this increase (£38 million) was captured in
our operating cost guidance set out at the beginning
of 2012. This included £20 million as a direct result
of the planned double outage in 2012 (single outage
in 2011), together with a structural uplift in business
rates charges. Investment in growth, including the
completion of our biomass R&D work, added a
further £10 million, and cost inflation of £8 million
(5%) followed three successive years holding
underlying costs level.
Following the Government’s confirmation of the
regulatory support for biomass in the second half of
the year, we accelerated our plans to put ourselves
in the best possible position to convert the first unit
to biomass in April 2013. We incurred additional
preventative maintenance, system and other costs
of around £7 million in 2012 to execute these plans.
We remain focused on achieving strong operational
cost performance and we will continue to carefully
control our cost base.
As a result of the double planned outage and
the acceleration of our biomass transformation
plans, generation EBITDA for the year ended
31 December 2012 was £303 million compared
to £336 million in 2011.
Retail results
E
Revenue
Retail sales volumes increased from 3.3TWh in the
year ended 31 December 2011 to 5.1TWh in 2012. This
reflects planned growth in Haven Power’s industrial
and commercial customer base and increased sales
to the small and medium size enterprise market.
As a result, retail revenue was £451 million for
the year ended 31 December 2012, compared to
£276 million in 2011.
Net generation split by customer (1)
Retail:
20%
Retail:
13%
2012
2011
Wholesale:
80%
Wholesale:
87%
(1) Retail sales based on volume at National Balancing Point.
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26 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
Operating and administrative expenses
Retail operating and administrative expenses
excluding depreciation and amortisation were
£19 million for the year ended 31 December 2012,
consistent with 2011. Higher staff costs to support
the continued growth in the business have been
offset by a reduction in other operating and
administrative expenses.
Retail EBITDA for the year ended 31 December
2012 was a loss of £5 million compared to a loss
of £3 million in 2011.
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.
Central costs
Depreciation and amortisation
Depreciation and amortisation was £59 million for
the year ended 31 December 2012 and £57 million
for the year ended 31 December 2011.
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 relates
to the mark-to-market of our forward contracts for
power yet to be delivered, as well as the mark-to-
market on other commodities and foreign exchange
contracts. The following table shows the movements
in unrealised gains and losses and where they are
recorded in our financial statements.
Net unrealised gains/(losses) in the balance
sheet at 1 January
Unrealised (losses)/gains recognised
in the income statement
Fair value (losses)/gains recognised in the
hedge reserve (a component of equity)
Premium on options
Net unrealised (losses)/gains in the
balance sheet at 31 December
Year ended
31 December
2012
£m
Year ended
31 December
2011
£m
30.7
(61.0)
(36.1)
89.8
(105.7)
0.8
2.6
(0.7)
(110.3)
30.7
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 unrealised gain. Offsetting this was
an unrealised loss on coal and carbon contracts,
resulting in a net unrealised gain in the balance
sheet of £31 million at 31 December 2011.
The fair value losses of £106 million recognised in
the hedge reserve in 2012 reflect the unwinding
of the 2011 year end position as the power was
delivered. Relatively stable power prices through
most of 2012, resulted in the average contracted
power price ending the year at a similar level to
market prices.
The unrealised losses recognised in the income
statement of £36 million for the year ended
31 December 2012 and unrealised gains of
£90 million in 2011 arise from mark-to-market
movements on our derivative contracts which
do not qualify for hedge accounting; largely
financial coal and foreign exchange.
As we look to secure an increasing number of
international contracts for the supply of biomass to
support our strategy for renewable generation, we
have entered into forward foreign exchange contracts
to limit our exposure to fluctuations in exchange
rates. A weakening US dollar at the end of 2012
resulted in unrealised losses recognised through
the income statement and in the balance sheet at
31 December 2012 in respect of these contracts.
This combination of factors resulted in the
recognition of an unrealised loss of £110 million
in the balance sheet at 31 December 2012.
In considering mark-to-market movements, it is
important to recognise that profitability is driven
by our strategy to deliver market level dark green
or bark spreads, not by the absolute price of any
single commodity 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 2012 was £204 million compared
to £366 million in 2011.
Drax Group plc
Annual report and
accounts 2012
27
Interest
Net finance costs for the year ended 31 December
2012 were £14 million compared with £28 million
in 2011.
Finance costs for 2011 include interest and other
charges associated with the balance of a term loan
of £135 million which was repaid in full in July 2011,
resulting in lower costs for 2012. However, finance
costs for 2012 did include £6 million in respect of
the refinancing completed in December.
Tax
The tax charge before exceptional items was
£26 million (an effective rate of 14%), compared
to £71 million in 2011 (an effective rate of 21%).
2012 includes the impact of a revision to previous
years’ capital allowances claims now agreed with
HMRC, resulting in a tax credit of £8 million recognised
in the period.
The tax charge includes the impact of a 2% reduction
in corporation tax rate for both years on current and
deferred taxes, resulting in a £15 million tax credit in
2012 (2011: £16 million). The effective tax rate before
exceptional items and the impact of changes in the
corporation tax rate was 22% in 2012 (2011: 26%).
The exceptional tax credit of £198 million in the year
ended 31 December 2011 reflects the agreement
reached with HMRC over the Eurobond tax position
and a number of other legacy issues.
As a result of the above factors, profit attributable
to equity shareholders for the year ended
31 December 2012 was £164 million compared
to £465 million in 2011, and basic and diluted
earnings per share were 44 pence compared to
127 pence and 126 pence, respectively, in 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 £193 million for the year
ended 31 December 2012, compared to £202 million
in 2011. Underlying basic and diluted earnings per
share were 52 pence and 51 pence respectively
in 2012, compared to 56 pence and 55 pence,
respectively, in 2011.
Other key factors affecting the business
Outages and plant utilisation levels
F
Electrical output (net sales) (TWh)
Load factor (%)
Availability (%)
Winter forced outage rate (%)
Forced outage rate (%)
Planned outage rate (%)
Total outage rate(1) (%)
Notes:
Year ended
31 December
2012
Year ended
31 December
2011
27.1
81.6
86.0
3.7
4.8
9.6
14.0
26.4
79.7
88.4
3.9
5.8
6.2
11.6
(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.
Production performance was once again very strong
in 2012. Plant availability of 86.0% for the year ended
31 December 2012, compared to 88.4% in 2011,
demonstrates our leadership position in the coal-fired
generation sector, with the impact of a double
planned outage only marginally lowering availability.
The forced outage and Winter forced outage rates
for the year ended 31 December 2012 were 4.8%
and 3.7% respectively, compared to 5.8% and 3.9%
in 2011. Forced outage rates remain consistent with
our long-term target of circa 5%.
F
%
Double
outage
Operating performance
Forced outage rate
Planned outage rate
Winter forced outage rate
Double
outage
Single outage
12
10
8
6
4
2
2008
2009
2010
2011
2012
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28 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
The planned outage rate achieved for the year
ended 31 December 2012 was 9.6%, compared to
6.2% in 2011, with two major planned outages
completed in 2012, compared to one major outage
in 2011. 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 2013.
As a result of this performance, and the plant
despatch dynamics described in Generation
results above, our load factor for the year ended
31 December 2012 was 81.6% compared to 79.7%
in 2011. This is equivalent to 95% utilisation when
available, and reflects an increase in electrical
output (net power sales) to 27.1TWh in 2012
compared with 26.4TWh in 2011.
Health and safety
Our lost time injury rate and total recordable injury
rate were 0.06 and 0.17 respectively for the year
ended 31 December 2012 compared to 0.08 and
0.10 respectively in 2011. Our safety record continues
to be industry-leading and was delivered alongside
a significant amount of project activity and a double
outage in 2012. Our commitment to deliver a positive
health and safety culture will continue.
Liquidity and capital resources
Net cash was £311 million as at 31 December 2012,
compared to £225 million at 31 December 2011.
Cash and short-term deposits were £402 million as
at 31 December 2012, compared to £233 million at
31 December 2011. An analysis of cash flows for both
years is set out in the following table.
Robust sub-investment grade business model
G
Robust sub-investment grade business model
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Stable BB+ debt rating
Analysis of cash flows
EBITDA
Decrease in ROC assets
Increase in carbon assets
Increase in working capital
Other
Cash generated from operations
Income taxes paid
Other (losses)/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 (used in)/from investing
activities
Cash flows from financing activities
Equity dividends paid
Proceeds from issue of share capital
Repayment of borrowings
New borrowings
Other financing costs paid
Net cash from/(used in) financing
activities
Net increase/(decrease) in cash and cash
equivalents
Cash at 1 January
Cash at 31 December
Short-term investments at 31 December
Borrowings at 31 December
Net cash at 31 December
Year ended
31 December
2012
£m
Year ended
31 December
2011
£m
298.4
333.6
13.4
(39.0)
(9.3)
(0.3)
263.2
(50.6)
(0.8)
(8.7)
203.1
1.0
–
(51.2)
(1.5)
281.9
(67.7)
0.7
(16.4)
198.5
(206.0)
(43.8)
–
(206.0)
65.0
21.2
(95.7)
187.7
(10.5)
100.0
(9.7)
(123.7)
–
(135.4)
10.0
(3.8)
171.8
(252.9)
168.9
(33.2)
202.8
371.7
30.0
(90.7)
311.0
236.0
202.8
30.0
(7.6)
225.2
Cash generated from operations was £263 million
in the year ended 31 December 2012, compared to
£282 million in 2011.
This includes the fall of £35 million in EBITDA,
partially offset by a decrease in ROC and LEC assets
in 2012 of £13 million compared to £1 million in 2011
(as described in Generation results).
Also included in cash generated from operations
for 2012 is an outflow of £39 million for carbon
allowances purchased in advance for future periods
(2011: £nil).
The working capital outflow of £9 million in 2012 is
driven by an increase of £30 million in the value of
biomass stocks, offset by a reduction of £11 million
in the value of coal stocks. Biomass and coal
stock levels both increased at 31 December 2012
by 0.2 million tonnes (to 0.4 million tonnes and
1.6 million tonnes respectively) compared to
the previous year end. However, as described
in Commodity markets, coal prices have fallen
significantly over the last 18 months.
Drax Group plc
Annual report and
accounts 2012
29
The working capital outflow in 2011 of £51 million
largely reflects an increase in the value of coal
stocks (£24 million), and a lower carbon creditor
(£21 million), both driven by commodity market
price movements during 2011.
Income taxes paid were £51 million in the year ended
31 December 2012, compared to £68 million in 2011.
2012 payments include settlement of the 2011
liability, as well as payments on account for 2012.
Net cash flows from investing activities include
payments in respect of capital expenditure of £206
million for the year ended 31 December 2012 and
£44 million in 2011 (see Capital expenditure). 2011
also includes a reduction in short-term investments
of £65 million comprising short-term deposits with
a maturity of more than three months at inception.
Net cash from financing activities was £172 million
in the year ended 31 December 2012, compared to
net cash used in financing activities of £253 million
in 2011. The 2012 amount includes equity dividends
paid of £96 million, net proceeds on the issue of
share capital of £188 million and new borrowings
drawn down in the year of £100 million. The 2011
amount includes equity dividends paid of £124 million
and term loan repayments of £135 million (see Capital
resources and refinancing).
The increase in cash and cash equivalents was
therefore £169 million in the year ended 31 December
2012, compared to a decrease of £33 million in 2011.
The Group’s policy is to invest available cash in short-
term bank, building society or other low risk deposits.
G
Capital resources and refinancing
On 25 October 2012, we announced the placing
of approximately 36.5 million new ordinary shares.
The placing raised £188 million net of expenses
and was undertaken, alongside the other financing
activities described below, to secure the funding for
our biomass transformation.
In July 2012 we announced agreement of a new
£100 million amortising term loan facility with
Prudential M&G UK Companies Financing Fund,
subsequently fully drawn down just before year
end. In December 2012 we secured up to a further
£100 million amortising term loan facility, with the
UK Green Investment Bank. Both loans have six to
eight year maturities.
Also in December 2012 we completed the
refinancing of our £310 million revolving credit
facility, due to mature in April 2014, repaying in the
process the £10 million term loan previously drawn.
This facility was replaced with a £400 million
working capital and letter of credit facility which
matures in April 2016. The margin on this new
facility is 225 basis points above LIBOR.
Finally, as part of this refinancing, we have also
successfully executed a new commodity trading
facility. This is an innovative new structure, we
believe the first of its kind in Europe, which allows us
to transact prescribed volumes of commodity trades
at attractive pricing without the requirement to post
collateral. It works by offering trading counterparties
uncapped access to the security package available
to our senior lenders. Interest in this new facility has
been strong, and we already have a number of
counterparties signed-up.
Standard and Poor’s have assigned a credit rating
of BB+ to our new debt facilities. Over the past
three years we have taken a number of steps to
restructure our business and trading arrangements
to enable us to operate successfully as either an
investment grade or sub investment grade entity.
These steps include the growth of Haven Power,
execution of bilateral agreements with trading
counterparties to cap collateral exposure, a shorter
tenor to our trading strategy, implementation of
the new commodity trading facility and increasing
the quantum of our working capital/letter of
credit facility.
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 the Chief
Executive’s statement, this Operational and
financial performance and the Principal risks and
uncertainties section which follows. 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 new 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 our
capital investment plans and 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.
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30 Drax Group plc
Annual report and
accounts 2012
Operational and financial performance
Seasonality of borrowing
Our business is seasonal with higher electricity prices
and despatch in the Winter period and lower despatch
in the Summer months, when prices are lower and
plant availability is affected by planned outages.
Accordingly, cash flow during the Summer months
is materially reduced due to the combined effect
of lower prices and output, while maintenance
expenditures are increased during this period due
to major planned outages. The Group’s £400 million
working capital and letter of credit facility assists
in managing the cash low points in the cycle where
required (see Capital resources and refinancing).
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 2012 represented approximately
23 days of average daily purchases through the year
(2011: 22 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.
Capital expenditure and
biomass transformation
Fixed asset additions were £224 million in the year
ended 31 December 2012, compared to £45 million
in 2011.
H
2012 includes £180 million (2011: £5 million) of
expenditure for our biomass transformation, being
construction in progress for fuel delivery, storage
and distribution systems.
Total capital expenditure guidance 2013
H
Total capital
expenditure 2013
c.£250–£300m
Biomass
transformation
£200–£250m
Other
projects
£50m
2012 also includes the final instalment of our turbine
upgrade project, which was completed on time and
to budget. Since 2007, we have invested around
£100 million to upgrade the high pressure and low
pressure turbine modules on all six generating units
to improve efficiency. The technology is performing
to guarantee with all units achieving an overall
baseload efficiency (that is, the ratio of energy
out to energy in when operating at full capacity)
approaching 40% at full load. This represents a
5% improvement on original baseload efficiency
of 38% and annual savings of 1 million tonnes of
CO2 emissions allowances and approximately half
a million tonnes of coal.
Looking forward, we expect total biomass
transformation capital investment to be in
the region of £650–£700 million (including
the expenditure already incurred in 2012).
This investment will allow us to progressively
convert three generating units to biomass.
Approximately half of the total capital cost is
investment in substantial equipment installations
and modifications at the Drax Power Station site
which commenced in 2012 as described above.
The remainder is investment in upstream supply
chain infrastructure, mainly pelleting facilities in
the US, and any necessary work to ensure the plant
is compliant with the Industrial Emissions Directive.
Our US pellet operations will be based on the
Gulf Coast and will comprise of two pellet plants
with combined capacity of 900,000 tonnes of
pellet production per annum and a port facility with
export capacity of up to 3 million tonnes per annum.
We expect to incur capital expenditure for the
biomass transformation of around £200–£250
million in 2013. By the end of 2014 we anticipate
the Drax site development will be substantially
complete and our US based pellet operations
to be very well advanced.
With the phased introduction of new plant and
equipment, supported by the use of our existing
biomass co-firing systems, we expect to convert our
first unit in April 2013 and our second unit in 2014.
Timing of the second and third unit conversion will
depend on our progress with fuel sourcing.
The Chief Executive’s statement provides more
information in relation to our biomass
transformation plans.
Drax Group plc
Annual report and
accounts 2012
31
Contingent liability
We were obliged under the Community Energy
Saving Programme (“CESP”) to deliver energy
saving measures to domestic consumers during
the period 1 October 2009 to 31 December 2012.
We entered into an agreement with a third party,
pursuant to which the third party was obliged
to deliver our CESP obligation for a total cost of
£17 million. The third party has failed to comply fully
with its obligation under the agreement, leaving a
significant shortfall against our CESP obligation.
We will be considering legal proceedings for breach
of contract against this third party. We have entered
into further agreements with additional third parties
in order to rectify this shortfall so far as practicable.
At this stage it is not possible to predict whether any
enforcement action may be imposed. No additional
provisions have been recognised in respect of this
matter as we are not able to reliably measure what
the financial impact, if any, might be. See note 32
to the consolidated financial statements for
further details.
Future developments
Positions under contract for 2013, 2014 and 2015
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 and bark spreads
across all traded market periods and, as part of this
strategy, we retain power to be sold into the prompt
(within season) power markets.
As at 11 February 2013, the positions under contract
for 2013, 2014 and 2015 were as follows:
Power sales (TWh) comprising:
2013
22.1
2014
11.2
2015
2.9
– Fixed price power sales (TWh) at an
average achieved price (per MWh)
19.7 at
£51.9
8.6 at
£53.6
1.0 at
£56.5
Under this contract 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 2.4 million tonnes in both 2013 and
2014, and approximately 1.8 million tonnes in 2015.
The contract provides the Group with a series of
fixed dark green spreads agreed in October 2009.
Distributions
Distribution policy
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 for the year
ended 31 December 2012 were £193 million.
Dividends paid
On 20 February 2012 the Board resolved, subject
to approval by shareholders at the Annual General
Meeting (“AGM”) on 18 April 2012, to pay a final
dividend for the year ended 31 December 2011 of
11.8 pence per share (£43 million). The final dividend
was paid on 11 May 2012.
On 30 July 2012, the Board resolved to pay an interim
dividend for the six months ended 30 June 2012
of 14.4 pence per share (£53 million), representing
50% of underlying earnings for the period. The
interim dividend was paid on 12 October 2012.
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 2012 of 10.9 pence per share
(£44 million), payable on or before 17 May 2013.
Shares will be marked ex-dividend on 24 April 2013.
– Fixed margin and structured power
sales (TWh)
CO2 emissions allowances hedged,
including UK NAP allocation, market
purchases, structured contracts,
and benefit of biomass
(TWh equivalent)
Solid fuel at fixed price/hedged,
including structured contracts
(TWh equivalent)
2.4
2.6
1.9
This Operational and financial performance was
approved by the Board on 18 February 2013.
20.9
10.5
2.7
23.0
17.6
9.5
Tony Quinlan
Finance Director
Fixed price power sales include approximately
0.2TWh supplied in the period 1 January 2013
to 11 February 2013 under the five year 300MW
baseload contract, which commenced on 1 October
2010, with Centrica.
Fixed margin power sales include approximately
2.4TWh in 2013, 2.6TWh in 2014 and 1.9TWh in 2015
in connection with the above contract.
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32 Drax Group plc
Annual report and
accounts 2012
Principal risks and uncertainties
A structured approach…
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 policies set by the Board.
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, determining risk appetite 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 2012 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 six risk management committees:
1
Treasury and commodity risk
management committee
2 Safety, health, environmental and
production integrity committee
3 Business development risk
management committee
4 Corporate risk management committee
5 Haven Power risk management committee
6 US business 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
R
i
s
k
Board
responsible
for the
system of risk
management
and internal
control
Audit
Committee
review
internal
controls
and the
risk registers
Risk Management Committees
Quarterly review of risk register.
Identify, monitor and manage risks
Policy and review
Operating companies
Maintain an effective system of internal control and risk management
Risk
Drax Group plc
Annual report and
accounts 2012
33
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 it
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 at least a
quarterly basis.
Risks are then logged with reference to impact
and probability as follows:
Probability
Low
Medium
High
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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.
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.
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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34 Drax Group plc
Annual report and
accounts 2012
Principal risks and uncertainties
Commodity market price risk
Context
We experienced volatility in the
commodity markets in which we traded
during 2012
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 fuel under contracts with
a number of large UK and international
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
kVolatility in financial results.
Associated objective and key priorities
kMaximise the value of the
Drax business.
Potential impact
kAdditional costs associated with securing
fuel and other goods and services from
other suppliers.
kFailure to secure fuel 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.
Power and renewables market liquidity risk
Context
Liquidity in the markets 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.
Risk
kThe market structure and 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 power and other
commodities, including ROCs.
kIncreased exposure to short-term
market volatility.
kInability to sell all of our output.
kLower revenues and increased costs
to achieve trading objectives.
kAdverse effect on financial results
and cash flows.
Associated objective and key priorities
kGrow our retail business.
kMaximise the value of the Drax business.
kMaximise profitability from our coal
generation capacity.
kDeliver our biomass strategy.
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
Change
Examples of mitigating activities
kDiversified fuel 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 fuel 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 where their credit rating drops,
subject to certain restrictions.
Change
Examples of mitigating activities
kGrow direct sales through Haven Power,
our electricity supply business.
kInitiatives to be active and responsive 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.
Drax Group plc
Annual report and
accounts 2012
35
Potential impact
kInability to progress the biomass
growth strategy.
kAdverse effect on financial results
and cash flows.
Associated objective and key priorities
kDeliver our biomass strategy.
Examples of mitigating activities
kContract with suppliers where a robust
operational plant and logistics infrastructure
is already in place; work with new suppliers
to help develop such infrastructure.
kHedge currency exposures or secure
contracts in sterling to the extent that it
is appropriate.
Change
Potential impact
kPersonnel injury.
kLower revenues.
kIncreased costs and contractual penalties.
kAdverse effect on financial results
and cash flows.
Associated objective and key priorities
kMaintain operational excellence.
kDeliver excellent people leadership
across our operations.
Change
Examples of mitigating activities
kComprehensive risk-based plant investment
and maintenance programme.
kMaintaining a trained and
competent workforce.
kStrong health and safety culture.
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.
kSignificant amounts of research and
development work have been undertaken
in terms of handling and burning biomass.
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
and cash flows.
Associated objective and key priorities
kDeliver our biomass strategy.
kMaintain operational excellence.
Change
Examples of mitigating activities
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.
Biomass market risk
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 could fail to secure sustainable
biomass supplies and/or logistics
arrangements which meet our hurdle
return rates and operational requirements.
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.
Plant operating risk
Context
Equipment failure and the impact
on personnel and operations
Risk
kPlant failure may be caused by the
underperformance or outright failure of
plant, transmission assets or other
equipment and components including the
IT systems used to operate the plant or
conduct trading activities. The duration of
the resultant forced outages is influenced
by the lead time to manufacture and
procure replacement components and to
carry out repairs.
kAs we progress our plans to convert to a
predominantly biomass-fuelled generator,
we are exposed to a broader range, and
increased level, of technical risk.
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
kChanges to the current regulatory regime
surrounding renewables, Carbon Price
Support and other legislation could
adversely affect our biomass strategy.
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.
Note: Ratings risk is no longer listed in the principal risks and uncertainties, following
the development and implementation of a sub-investment grade business model,
as set out in Operational and financial performance.
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36 Drax Group plc
Annual report and
accounts 2012
Corporate and social responsibility
Committed to responsibility…
Our approach to corporate and social responsibility
We operate our business within a framework of increasingly stringent and
challenging legislative and regulatory requirements. We are, however, mindful
of the still tougher expectations held by our wider stakeholder group. For us,
corporate and social responsibility is about achieving a balance between the
commercial and regulatory rigours of the competitive sector within which we
operate and our commitment to our stakeholders as a whole.
The Board has ultimate control of policies in respect of both the wider corporate
responsibility, such as our 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 2012, 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.
Drax and shareholders:
kRoad shows
kFace-to-face
meetings
kReports and
announcements
kWebsite
kVisit programmes
Drax and employees:
kOpen Forum
kBriefing sessions
Drax and Parliament:
kBriefing papers
kFace-to-face
meetings
kWritten and oral
evidence
kVisit programmes
Drax and Government
departments:
kFace-to-face
meetings
kConsultation
responses
kVisit programmes
kVia trade
associations
Drax and
European Union:
kBriefing papers
kFace-to-face
meetings
kVia trade
associations
Drax and local
government:
kLiaison meetings
kAnnual consultative
committee meeting
kExhibitions
kNewsletters
Engaging with our stakeholders
Drax and local
community:
kSponsorship
kFundraising events
kThemed campaigns
kVisitor programme
kExhibitions
kNewsletters
Drax and media:
kPress releases
kFace-to-face
meetings
kVisit programme
Drax and Government
agents/regulators:
kFace-to-face
meetings
kCorrespondence
and data
submission
kVia trade
associations
Drax and NGOs and
opinion formers:
kFace-to-face
meetings
kBriefing papers
Drax and suppliers
and customers:
kFace-to-face
meetings
kContractor briefings
kContractor safety
conference
Drax and trading
counterparties:
kFace-to-face
meetings
kIndustry events
Drax Group plc
Annual report and
accounts 2012
37
Materiality
Climate change and the environment
Given the diversity of our stakeholders there are a
wide range of topics and performance measures
on which we could report. In determining which to
report we consider their materiality in terms of their
relevance to the Company and their importance
to stakeholders.
Throughout this Annual report and accounts
we aim to report on topics and performance
measures that represent our significant economic,
environmental, and social impacts and those that
would substantively influence the assessments
and decisions of stakeholders. Further reporting
is undertaken in accordance with the Global
Reporting Initiative framework and is available
on our website at:
www.draxgroup.plc.uk/corporate_responsibility/gri/
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,
US or beyond. We are committed to preventing
bribery and corruption and take responsibility for
maintaining a culture within the Group in which
bribery is never acceptable.
We ensure that all third parties we deal with are
reputable, by means of carrying out “Know Your
Customer” due diligence checks and searches,
and have formed an Ethics and Business
Conduct committee to escalate problematic
counterparty requests.
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.
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.
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 delivering on our commitment to generating
electricity from sustainable biomass and continuing
to improve thermal efficiency as the major, strategic
carbon abatement initiatives.
The centre of our improved thermal efficiency
programme at the power station over the last five
years has been the £100 million upgrade of the high
pressure and low pressure steam turbines of each
of our six generating units. In 2012 we saw the
completion of the programme, which was the largest
steam turbine modernisation programme in UK
history. The project was delivered within budget and
planned timescale, and the plant is benefiting from
an increase in overall efficiency and a reduction in
CO2 emissions.
The biomass future for the Group is now more
certain, with clarity on the support level for
the technology provided by the Government,
the committed financing and the expertise gained
from our extensive research and development in
this area. Major works were undertaken in 2012
towards the construction of dedicated biomass
receipt, handling and storage facilities. This work
will continue in 2013 and 2014 as we press ahead to
become a predominantly biomass-fuelled generator.
Through increasing the amount of sustainable
biomass burnt in place of coal we will significantly
reduce our carbon footprint on today’s levels.
The average greenhouse gas saving across the
range of sustainable biomass materials burnt in
place of coal in 2012 was above 80% using the
life cycle emissions of coal burnt at Drax Power
Station as the baseline.
In addition to our thermal efficiency and biomass
development work, in partnership with Alstom
UK Limited and National Grid Carbon Limited,
we continued to develop plans to build a 426MW
oxyfuel 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. Viability of the project is dependent
on external funding and the introduction of a market
mechanism to support low carbon technology
uptake. To that end we are participating in UK
and EU funding programmes.
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38 Drax Group plc
Annual report and
accounts 2012
Corporate and social responsibility
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 compliance of our power station
and associated landfill site is managed 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 are currently undertaking a trial with the
Environment Agency in the Environmental
Permitting Compliance Assurance Scheme.
The scheme is intended to reduce regulatory burden
on the best performing sites, whilst maintaining
an adequate level of oversight through combining
assessment of specific legal compliance with
certification to ISO 14001. We expect to conclude
the trial in 2013, and we will continue to work with
the Environment Agency to determine the ongoing
approach to regulation in the future.
We are pleased to report that there were no major
breaches of our environmental consents during 2012.
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.
We saw a record level of generation in 2012,
which resulted in corresponding increases in mass
emissions from the power station. All emissions
were, however, within the limits set by the
Environment Agency.
Looking ahead, work continues to develop a solution
to optimise compliance with the anticipated emission
limits which will be in place beyond 2016 under the
Industrial Emissions Directive.
Total emissions (kt)
Sulphur dioxide
Nitrogen oxides
Dust
2012
35.1
39.2
0.8
2011
32.1
38.9
0.6
2010
27.3
40.4
0.6
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.
Procedures are in place to manage and monitor
the drainage and water systems on-site to ensure
all discharge consent limits are met.
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 2012, ash was sold
in conformance with European construction
product standards and in compliance with the
Waste Recycling Action Programme (“WRAP”)
quality protocol.
This has helped us to sell over 60% of the
1.5 million tonnes of ash produced in 2012 as
replacement for virgin aggregates and as a
cement replacement product.
In 2012, construction started on the lightweight
aggregate production facility on site, which is
owned and will be operated by Lytag Ltd, a company
based in Escrick, North Yorkshire. The facility will
manufacture lightweight aggregate from pulverised
fuel ash; production is expected to start in 2013.
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 for 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 2012, we contributed
£62,888 towards local community-based projects
designed to bring about sustainable environmental
benefits and contribute to the social and economic
regeneration of the area.
We continue to manage waste from our operations
in a responsible manner. In 2012 we met our target
to divert 90% of non-ash waste from landfill.
Alternative fuels
To safeguard cost-effective power production,
our fuel strategy recognises the need to procure 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.
Water abstraction (Mt)
River Ouse water
Mains water
Borehole water
2012
56.7
0.2
1.8
2011
57.7
0.2
2.1
2010
64.8
0.2
1.8
The use of petcoke is now routine and our monitoring
indicates that there is no discernible environmental
impact on the local air quality. In line with our policy
on openness and transparency all data are discussed
with the Environment Agency and local councils.
Drax Group plc
Annual report and
accounts 2012
39
Supply chain
Non-fuel procurement
Overall, we 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-sized 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. By applying these wider principles our
procurement practices go beyond meeting simple
tender requirements to delivering improved value
and real cost savings throughout the supply chain.
Coal procurement
We currently purchase around 9 to 10 million tonnes
of steam coal each year. This will fall gradually as
three of our generating units are converted to
burn sustainable biomass, starting from this
year. We buy from a range of sources with the
objectives of managing our commercial exposures,
environmental obligations and diversity of supply.
We continue to purchase just under 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.
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.
We are at the forefront of the introduction of
credible sustainability standards into biomass
procurement activities. 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;
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.
We work collaboratively with our suppliers to ensure
compliance with the UK’s sustainability requirements
under the Renewables Obligation. Confidence in the
sustainability of the biomass is achieved through a
programme of information exchange, documentary
evidence, due diligence activities and independent
third-party verification.
Biomass sustainability and procurement
Biomass use is a high priority, but it is a
prerequisite that all our biomass must be purchased
from a sustainable source. To ensure this we have
implemented a sustainability policy which embeds
comprehensive criteria into our procurement
activities with the aim of assuring the sustainability
of the biomass supply. Our Biomass Sustainability
Management System ensures commitment to
our policy.
Later this year, the Government is scheduled to
introduce a legislative requirement to comply
with sustainability criteria in order to receive
regulatory support. This will necessitate an annual
limited assurance audit for compliance purposes.
In preparation for this we have commissioned
external auditors to undertake an ISAE 3000
audit of our performance and system robustness,
which will be fully integrated within the Biomass
Sustainability Management System.
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.
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40 Drax Group plc
Annual report and
accounts 2012
Corporate and social responsibility
Personal safety statistics
Fatality
Time Losing Injuries
Restricted Work Injuries
Medical Treatment Injuries
First Aid Injuries
RIDDOR(1) reportable
Notes:
2012
2011
2010
0
3
2
3
0
3
1
0
220
4
207
5
0
4
0
5
148
6
(1) Reporting of Injuries, Diseases and Dangerous Occurrences Regulations.
Attaining leading performance
The lost time injury rate and total recordable
injury rate for 2012 at 0.06 and 0.17 respectively,
remain industry-leading. Maintaining this level of
performance is commendable given the significant
construction work that took place during the year
and number of man-hours worked, which at the Drax
Power Station site totalled some 4 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
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 pleased, once again,
to be awarded the RoSPA Gold Medal Award
having achieved Gold Award standards for eight
consecutive years.
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.
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.
Our active involvement with the programmes of
our trade body, Energy UK, and the Coal Generators
Forum, GENSIP, continues to provide new ideas
and a stimulus to drive our health and safety
improvement efforts forward.
Employees
Employment
The Group employed 1,163 people at the year end.
Most of our employees work full-time and are on
permanent contracts. Recruitment activity during
2012 saw the headcount at our operating subsidiary,
Drax Power Limited, increase by 26 and we now
employ 15 staff in our US office under Drax Biomass
International.
Turnover of staff remains low at Drax Power Limited
with an annual staff turnover rate of 5.8%, mostly
due to voluntary retirement. The average length
of service is 13 years and 32% of the workforce
has been with the company for 20 years or more.
This high level of retention is particularly pleasing
as our business requires skills and experience which
are difficult to source externally. Absence rates are
consistently low, at around 2% per annum.
At Haven Power, the annual staff turnover rate
is 35.9%, which is indicative of the nature of
the business and the demographic profile
of the workforce.
We maintain high standards in employment
practices. For example, equality and inclusion
is respected, and managers and employee
representatives are trained and supported to ensure
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
Some 45% of our UK workforce (520 people) 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.
Employees in the corporate functions and senior
production staff at Drax Power Limited, and all staff
at Haven Power and Drax Biomass International 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.
Drax Group plc
Annual report and
accounts 2012
41
At Haven Power monthly staff briefings are
delivered by the management team. The staff
briefings provide an update on current performance
against the Business Plan and communicate key
business updates. Staff forums and one-to-one
discussions also take place routinely. In addition,
monthly team meetings and various events are
facilitated throughout the year promoting staff
engagement. The intranet continues to grow
providing a central location for news stories,
documentation and briefings.
Diversity and equality
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.
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
Our pay and benefits are competitive. We benchmark
our reward packages at every level in the organisation
against the industry sector and the market as a whole,
nationally or locally, as appropriate to the role.
We also participate in specialist industry meetings
to exchange information and developments in
employment policy.
Through a range of share plans we encourage all UK
employees to build a personal stake in the ownership
of the business.
Recognition
The achievements of our staff have been recognised
through a number of awards and shortlistings for
awards from external bodies during 2012.
The Forest Footprint Disclosure scheme is an
innovative initiative assisting businesses in assessing
their impact on the world’s forests. For the fourth year
running, Drax was ranked as the leader in the utilities
sector based on the comprehensive sustainability
criteria in our business procurement activities.
Learning and development
Our personal and career development processes
across the Group 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 2012, we continued our supervisor development
programme in partnership with Coventry University.
Through a series of workshops, an action learning
project and a 12-week secondment into a supervisory
position, the participants were able to develop their
leadership capability. This year’s project was
implemented in partnership with the Smallpeice
Trust, an independent educational charity that
runs hands-on Science, Technology, Engineering
and Mathematics (STEM) activities for pupils in
Years 6–12.
Each year we recruit for our sponsored four-year
apprentice training programme covering power
station operations and engineering maintenance.
In 2012, we took on ten apprentices across the
three disciplines of mechanical, electrical and
control & instrumentation.
Succession planning
In 2012, we introduced a structured process of
succession planning for senior roles with a specific
career management discussion integrated within
the existing appraisal process. The process follows
an annual cycle of discussion, implementation
and review, and identifies succession pipelines
and gaps, and provides a framework for individual
development/recruitment planning.
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.
Open Forums for Drax Power Limited staff
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.
In addition, our all-employee communication
methods include monthly team briefs and e-mail
and intranet communications.
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42 Drax Group plc
Annual report and
accounts 2012
Corporate and social responsibility
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 2012
Datamonitor Survey.
We were among the finalists for the Capital
Project Management Award of the Utility Industry
Achievements Awards 2012 for our turbine upgrade
project, a five-year-long project which was
completed in 2012.
For the second time in the past three years we were
acknowledged for upholding good governance and
professional standards at the ICSA (Institute of
Chartered Secretaries and Administrators) Hermes
Transparency in Governance Awards 2012, through
winning the “Best sustainability and stakeholder
disclosure – FTSE250”.
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.
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.
Some categories of worker are exposed to materials
which may pose a risk to health, such as chemicals
and process 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
who travel frequently on business.
Each year we have a planned programme of health
promotion. In 2012, Drax Power Limited received
the bronze level Healthy Heart award from Heart
Research UK in recognition of various initiatives
including a “Quit Smoking” programme and other
campaigns to encourage healthy diet, exercise
and lifestyle.
At Haven Power we aim to create a supportive,
healthy and safe environment for all employees.
Our employment policies aim to promote an
environment that ensures the health and wellbeing
of all employees, creating a dynamic environment
where people can excel including health screening
and occupational health support where required.
We run a variety of initiatives throughout the year
promoting a healthy lifestyle including “quit smoking”
days, cancer awareness, walk to work and other
employee-driven events that focus on improving
individual wellbeing.
All of the UK 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.
Pension provision and retirement
There are 356 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 UK 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 UK 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.
At Drax Power Limited, our phased retirement policy
means that any employee aged 55 or over may apply
to take accrued retirement benefits and continue to
work part-time subject to operational requirements.
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.
A flexible retirement policy is operated at Haven
Power, and employees may voluntarily retire at a
time of their choosing. Employees aged 65 or over,
who are members of the Haven Power Personal
Pension Plan remain entitled to the benefits of
the scheme.
Drax Group plc
Annual report and
accounts 2012
43
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, and other potential
investors in the Group, again to assist them in their
understanding of the announcements, but also to
ensure that the Board is aware of their views and
concerns. To aid our communication with private
investors, the investor section of our website has
been developed to be a readily accessible and
transparent source of information to enhance
understanding of the business.
External relations
As in previous years, we maintained our
engagement with public affairs audiences on issues
with implications for our business. With 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.
No political donations were made in the UK or
elsewhere during 2012 (2011: 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.
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
fundraising 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 2012, the Group gave financial support of
£182,000 (2011: £137,000) in total across a range
of charitable and non-charitable community causes.
Of that total, charitable donations amounted to
£127,000 (2011: £94,000).
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44 Drax Group plc
Annual report and
accounts 2012
Contributing to the
local community
We are committed to being a good neighbour
to our local community and our “caring for the
community” philosophy involves being part of local
and regional communities. Our involvement takes
the form of sponsoring a variety of local charities
and fundraising events, promoting our own
campaigns and maintaining open communications
channels with the region’s key opinion formers.
Drax Group plc
Annual report and
accounts 2012
45
Corporate and social responsibility
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.
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 2012, some £53,000 of the total
donations made were through these schemes.
Now in its eighth year, the outage charity scheme
raised £12,000 during the year’s two planned
outages. Through the scheme £500 is donated for
every seven days that goes by without an injury
requiring more than first aid treatment. The money
was divided equally between four charities chosen
by Drax staff and our contractors. A further £1,000
was donated to local charities following a fundraising
event held at our annual safety conference for
contractors and staff.
For the sixth year running we held a charity
corporate golf tournament at Fulford Golf Club,
York. The event raised just under £15,000 for
the Yorkshire Air Ambulance, which provides a
crucial emergency service for the region. We were
honoured to receive a recognition award from the
Yorkshire Air Ambulance for the donations made
over the years, approaching some £50,000,
through the golf tournament.
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 nature
reserve that lies at the heart of our ash disposal site.
Established as 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.
Educational visits are complemented by the Skylark
Centre which provides 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. These facilities were enhanced
during 2012 with the construction of a new Skylark
Centre building equipped with the latest technology
to assist the schoolchildren with their nature studies.
The new centre was opened by Olympic gold
medallist, Nicola Adams.
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 sixth year we ran the Drax Cup, a cricket
competition for teams of girls and boys under
the age of nine. Some 300 primary schools across
Yorkshire took part in the knock-out tournament
organised by the Yorkshire County Cricket Club
(“Yorkshire CCC”) in conjunction with the Yorkshire
Cricket Board and the Yorkshire Schools’ Cricket
Association. This year the winning school was
Bedale Primary School in North Yorkshire.
Under the “Art in the Community” banner, we held
our sixth art competition for primary and secondary
schools. Some 24 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 fifth year in 2012.
Children aged 7 to 10 learnt how to design and make
masks and kites using a variety of materials along
with t-shirt painting and jigsaw making, while a
masterclass for 12 to 16 year-olds helped them learn
more about the skills and techniques involved in
using watercolour and mixed media.
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 2012,
we played host to some 6,500 visitors.
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46 Drax Group plc
Annual report and
accounts 2012
The Board of directors
The Board of directors
As at 18 February 2013, the Board consisted of the non-executive Chairman, five independent non-executive directors and four
executive directors. The current directors are Tim Barker, Charles Berry, Tim Cobbold, Peter Emery, Melanie Gee, David Lindsell,
Tony Quinlan, Paul Taylor, Dorothy Thompson and Tony Thorne. Biographical notes of the directors appear below.
Charles Berry
Chairman
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
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.
Tony Quinlan
Finance Director
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.
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 of Senior plc, a non-executive
director of The Weir Group PLC, 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.
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.
Appointment to the Board:
1 September 2008.
Committee membership:
Executive. Tony is also Chairman of the Group’s US subsidiary,
Drax Biomass International Inc.
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) in Chemistry with Business Studies and an Associate of the Institute
of Chartered Accountants in England and Wales (ACA).
Drax Group plc
Annual report and
accounts 2012
47
Appointment to the Board:
20 October 2005, having joined Drax in June 2004.
Committee membership:
Executive.
External appointments:
A non-executive director of NG Bailey Limited. 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, Fellow of the Institute of Materials, Minerals
and Mining (FMIMM) and completed the Advanced Management Programme
at INSEAD in 2007.
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.
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.
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Peter Emery
Production Director
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, plant operations, engineering support,
maintenance and plant design. Peter also has responsibility for leading
the Company’s carbon capture and storage activity.
Paul Taylor
Retail and Trading Director
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
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.
Each of the independent non-executive directors detailed in this section served the Group throughout the year ended
31 December 2012, with the exception of Melanie Gee who was appointed to the Board on 1 January 2013. No person,
other than those mentioned above, served as a director or as an alternate director at any time during the year.
48 Drax Group plc
Annual report and
accounts 2012
The Board of directors
Tim Cobbold
Independent non-executive director
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 an alternative dimension
to his contribution.
Melanie Gee
Independent non-executive director
Melanie’s blend of financial and corporate experience means that she
is well placed to contribute significantly to the Board and its Committees.
Her advisory role in a City firm brings added insight to the Board.
David Lindsell
Independent non-executive director
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
Tony’s experience of operating in different geographical territories is of
great importance as Drax considers expansion into global markets.
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).
Appointment to the Board:
1 January 2013.
Committee membership:
Audit, Nominations and Remuneration.
External appointments:
A senior advisor to Lazard & Co. Limited and a non-executive director of
The Weir Group PLC.
Previous experience:
Melanie joined Lazard & Co. Limited in 2008 as a Managing Director and
became a Senior Advisor at the end of 2012. Prior to that, she was at UBS
Investment Bank (1982 to 2007), where she held a number of senior positions
in Corporate Finance.
Qualifications:
MA in Mathematics.
Appointment to the Board:
1 December 2008.
Committee membership:
Audit (Chairman), Nominations and Remuneration.
External appointments:
A non-executive director of Premier Oil plc.
Previous experience:
David was a partner at Ernst & Young for nearly 30 years. He specialised in
audit and assurance services and has extensive experience across a range of
industry sectors. He was Deputy Chairman of the Financial Reporting Review
Panel from 2008 to 2012 and has served on a number of professional
bodies relating to financial reporting, including the IFRS Advisory Council,
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).
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.
Drax Group plc
Annual report and
accounts 2012
49
Corporate governance
A cornerstone of success…
What good corporate governance means at Drax
“ 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.”
Charles Berry
Chairman
Chairman’s letter
I am pleased to present the Group’s Corporate governance report for 2012 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 guides our decision making.
Good governance at all levels is taken seriously within the Group and it is the Board that sets the tone and takes the lead.
Good governance should be second nature to everyone within the Group 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. As in previous years, during 2012,
we continued to strengthen our internal control and risk management processes to ensure that they remain effective and are
embedded in business operations across the Group.
I believe the drive for transparent reporting has continued to improve business conduct in recent years. The UK Corporate
Governance Code issued by the Financial Reporting Council emphasises that organisations should actively consider the make
up and diversity of their boards. We have an established policy which ensures that gender diversity is one of the factors taken
into account when considering appointments to the Board and other senior roles.
I am pleased to report that the Board has reviewed the requirements of the UK Corporate Governance Code and we comply
with it and we intend to continue to observe it, to ensure ongoing good governance is maintained. A more detailed report on
our corporate governance arrangements is
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 for the year ended 31 December 2012 on pages 1 to 82.
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 59 to 82.
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 2012, there has been full compliance with the
provisions of the UK Corporate Governance Code issued in June 2010 and applicable to this financial year.
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50 Drax Group plc
Annual report and
accounts 2012
Corporate governance
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, which are constituted as Board meetings held by
telephone if required to address matters for formal decisions. In addition, the Board meets at least annually to consider
strategy. In October 2012, the Board also met specifically to consider and approve proposals for the issue and placing of
shares and for entering into financing arrangements to support the Company’s planned investments.
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 2012, no director sought independent professional 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 Communications, 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 that has operated
effectively 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.
Drax Group plc
Annual report and
accounts 2012
51
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 Annual General Meeting (“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 Charles Berry, Tim Cobbold, Peter Emery,
David Lindsell, Tony Quinlan, Paul Taylor, Dorothy Thompson and Tony Thorne will retire at the forthcoming AGM and,
being eligible, offer themselves for re(cid:770)election.
Tim Barker will retire at the conclusion of the forthcoming AGM and will not seek 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. Melanie Gee has been appointed to the Board after the last AGM and, therefore,
will retire and offer herself for election by shareholders at the forthcoming AGM.
The evaluation of the Board described below 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 69.
It is the Board’s policy that each non-executive director will be appointed for a term of three years which, subject to the
Board being satisfied as to the director’s performance and commitment, and a resolution to re-elect at the appropriate AGM,
may be renewed by mutual agreement. However, it is the Board’s policy not to extend the aggregate period of service of
any independent non(cid:770)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.
Performance reviews and directors’ development
The effectiveness of the Board is vital to the success of the Group. For each of the previous five years the Board has conducted
a review of its effectiveness and that of its committees with the assistance of external facilitation. In 2012, the performance
review was undertaken internally, led by the Chairman and facilitated by the Company Secretary. The review concluded that
the Board, its individual directors and its committees continued to be effective. There were no significant areas of concern.
The review did, however, identify areas in which processes could be improved to enhance the Board’s effectiveness in
monitoring performance as the Group implements its biomass transformation plans which will increase the scope and
complexity of the Group’s operations. In particular:
–(cid:3) enhanced reporting on major capital projects, including those in the US, will be incorporated into regular Board reporting;
–(cid:3) specific measures were identified to assist directors in maintaining appropriate knowledge and understanding of
commodity market conditions in which the Group operates and to enable them to assess the risks inherent in trading
activities; and
–(cid:3) there is a continuing need to keep the Group’s Bribery Act compliance processes under review in the light of the expansion
of jurisdictions in which the business will be operating.
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 a meeting 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, where appropriate, involving presentations on relevant topics.
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52 Drax Group plc
Annual report and
accounts 2012
Corporate governance
Committees of the Board
The table below details the standing committees established by the Board and the membership thereof:
Audit Committee
Nominations Committee
Remuneration Committee
Executive Committee(1)
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Melanie Gee(2)
Philip Hudson(3)
David Lindsell
Tony Quinlan
Paul Taylor
Member
Member
Invited to attend
Chairman
Member
–
Member
Secretary
Chairman
Invited to attend
–
Member
–
Member
Secretary
Member
–
–
–
Chairman
Member
Member
–
Member
Secretary
Member
–
–
–
–
–
Member
–
Member
–
Member
Member
Invited to attend
Chairman
Dorothy Thompson
Invited to attend
Tony Thorne
Member
Member
Member
–
Notes:
the Executive Committee.
(1)(cid:3) The Executive Committee is a committee through which the Chief Executive discharges her duties in respect of the day-to-day management of the Group. The Deputy Company Secretary acts as Secretary to
(2)(cid:3) Melanie Gee was appointed a member of each of the Audit, Nominations and Remuneration Committee upon being appointed as a director of the Company on 1 January 2013.
(3)(cid:3) Philip Hudson is the Company Secretary.
Details of the work of the Audit, Nominations and Remuneration Committees are given in the respective reports of those
Committees. 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.
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, 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.
Drax Group plc
Annual report and
accounts 2012
53
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 during 2012. 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
David Lindsell
Tony Quinlan
Paul Taylor
Dorothy Thompson
Tony Thorne
Notes:
Time on
the Board
(years/months)
Time
with Drax(1)
(years/months)
Board(2)
Audit
Committee
Nominations
Committee
Remuneration
Committee
7/2
7/0
2/3
7/2
4/0
4/4
1/4
7/2
2/6
8/6
7/0
2/3
8/6
4/0
4/4
8/6
7/3
2/6
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
4(4)
–
4(4)
–
4(4)
–
–
–
3(3)
3(3)
3(3)
–
3(3)
–
–
–
3(3)
3(3)
3(3)
–
3(3)
–
–
–
4(4)
3(3)
3(3)
(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 2012.
(2) In addition to the Board meetings identified above, there have also been three meetings held by telephone to discuss various matters and one meeting held to specifically approve funding arrangements
including the placing of shares, and one meeting to consider strategy. There was full attendance at each of these meetings.
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.
Internal control
Details of the Group’s system of internal control and risk management are contained in the Principal risks and uncertainties
section 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 2012. Makinson Cowell Limited, an independent capital markets consultancy firm, is engaged
by the Group to advise and assist in relation to communications with shareholders.
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54 Drax Group plc
Annual report and
accounts 2012
Corporate governance
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.
The directors consider that this Annual report and accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s performance, business model and strategy.
Pages 1 to 45 provides an assessment of the Group’s affairs. The Annual report and accounts is available to shareholders
at least 20 working days before the AGM. Registered shareholders receive a Form of Proxy which 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 are announced to the London Stock Exchange and placed on the Group’s website as soon as practicable
after the conclusion of the AGM.
Statutory information
Annual General Meeting (“AGM”)
A separate document contains the notice convening the AGM and a description of the business to be conducted.
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 2012, 364,862,718 shares were in issue and at 31 December 2012,
401,587,564 shares were in issue. As at 18 February 2013, 401,590,233 shares were in issue.
Issue of shares
Subject to the provisions of the Companies Act 2006 (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.
The table below shows the shares issued during the course of 2012.
Date of issue
10 February 2012
30 April 2012
Number of
shares issued
Description of issue
1,776 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(1).
246,017 Issued in satisfaction of shares vesting in accordance with the rules of the Group’s Bonus
Matching Plan to 66 participants in the Plan. The shares issued represented 0.07% of the
Company’s issued ordinary share capital prior to those shares being issued.
14 September 2012
873 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(1).
29 October 2012
36,474,627 Placed by Deutsche Bank AG, London Branch and UBS Limited, who acted as joint lead
managers and book runners, at a placing price of 520 pence per share, raising gross
proceeds of approximately £190 million. The Placing Shares issued represented 9.9 per
cent of the Company’s issued ordinary share capital prior to the Placing.
24 December 2012
1,553 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(1).
Note:
(1) The shares issued represented a negligible percentage of the Company’s issued ordinary share capital prior to those shares being issued.
On 31 January 2013, a total of 2,669 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.
No other ordinary shares were issued during the year.
9.15%
5.00%
4.57%
3.96%
3.03%
Drax Group plc
Annual report and
accounts 2012
55
Substantial shareholdings
As at 18 February 2013, 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(i)
Invesco plc
Schroders plc
Black Rock Inc.
AXA S.A.
01.03.2010
30.10.2012
15.01.2013
–
–
–
108,072,751
36,692,038
17.12.2009
1,704,050
14,952,477
Legal & General Group Plc
15.07.2010
14,478,741
–
19,091,696
1,003,703
20,095,399
–
–
16,656,527
14,478,741
–
108,072,751
29.62%
52,020
36,744,058
Kames Capital
06.02.2013
9,129,740
2,840,365
215,844
12,185,949
Total shares held by
substantial shareholders(1)
Note:
(1)(cid:3) As at last TR1 notification made.
25,312,530 181,649,327
1,271,567 208,233,425
55.33%
As part of the share placing on 29 October 2012, Invesco plc subscribed for 10.7 million shares at a price of 520 pence per share.
Invesco plc has not had cause to issue a further TR1 notification to the Company since that detailed above and therefore the
10.7 million shares are not included in the totals contained in the table above.
Authority to purchase own shares
At the AGM held on 18 April 2012, 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 2012 and the Company held no Treasury shares during 2012.
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).
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56 Drax Group plc
Annual report and
accounts 2012
Corporate governance
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 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.
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 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.
Drax Group plc
Annual report and
accounts 2012
57
Other significant agreements
Under a £100 million amortising term loan facility agreement dated 20 December 2012 between, amongst others, Drax
Finance Limited and the Prudential M&G UK Companies Financing Fund, 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 £100 million amortising term loan facility agreement dated 20 December 2012 between, amongst others, Drax
Finance Limited and the Green Investment Bank, 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 £400 million revolving credit facility agreement dated 20 December 2012 between, amongst others, Drax Power
Limited and Barclays Bank PLC (as facility agent), on a change of control, if any lender requires, it may by giving notice to Drax
Power Limited and the facility agent within 30 days of receiving notice from Drax Power Limited that a change of control has
occurred, cancel its commitments and require the repayment of its share of any outstanding amounts within three business
days of such cancellation notice being given.
Under the terms of the above 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.
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 Group. 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 59 to 61.
By order of the Board.
Philip Hudson
Company Secretary
18 February 2013
Registered office:
Drax Power Station
Selby
North Yorkshire YO8 8PH
Registered in England and Wales No. 5562053
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58 Drax Group plc
Annual report and
accounts 2012
Corporate governance
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
18 February 2013
Tony Quinlan
Finance Director
18 February 2013
Drax Group plc
Annual report and
accounts 2012
59
Audit Committee report
“During 2012, the Committee continued to focus on specifically
identified strategic risk areas, whilst ensuring the provision
of a core compliance assurance service offers comfort
to stakeholders that effective controls are in place.”
David Lindsell
Chairman of the Audit Committee
Membership and process
Throughout 2012, 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 2012 and the members’ attendance record is set out on page 53. 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.
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 2012, 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 on the application of accounting policies on
significant estimates and judgements made in preparing the financial statements, and on the methods used to account
for any significant or unusual transactions. The summary of the key accounting judgements, estimates and assumptions
and our principal accounting policies, all of which have been considered by the Committee, are set out in Note 3 to the
accounts. In respect of all such matters, the external auditor concurred with the judgements made by management and the
Committee was satisfied that the accounting policies were applied appropriately and the estimates and judgements made
were appropriate. In addition, the Committee also satisfied itself of the independence and objectivity of the external auditor
on the basis set out below under the Independence of the external audit section of the report;
–(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
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60 Drax Group plc
Annual report and
accounts 2012
Audit Committee report
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 November 2012, the Committee reviewed the structure and resources of the finance team and treasury function
processes and controls;
–(cid:3) the Committee reviews the operation of the Company’s risk management system, encompassing operational as well as
financial controls. At meetings in April and November 2012, the Committee reviewed the Company’s risk register and in
February and November 2012, it undertook a review of the effectiveness of the system of internal controls. The Committee
was satisfied that appropriate frameworks and controls were well embedded into the business and that the system of
internal controls was effective;
–(cid:3) in April 2012, 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 at the February 2012
meeting;
–(cid:3) during 2012, PricewaterhouseCoopers LLP (“PwC”) conducted a further phase on the review of effectiveness of controls
applicable to Drax Power Limited’s commodity trading activities. In November 2012, the results of this further phase were
presented to the Committee. The report did not identify any significant weaknesses in the controls in place although certain
improvements in processes and procedures are to be implemented as a result of the reviews;
–(cid:3) during the year, the Committee met twice 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) the Committee has reviewed the content of the Annual report and accounts and advised the Board that, in its view, taken
as a whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the
Group’s performance, business model and strategy.
Independence of the external audit
The Group has an Auditor Independence Policy, in accordance with which, the Committee annually reviews the quality
and cost effectiveness of the external audit and the independence and objectivity of the external auditor. The Auditor
Independence Policy can be found on the Company’s website at www.draxgroup.plc.uk
The provisions of the Policy include:
–(cid:3) seeking confirmation that the auditor is, in its professional judgement, independent of the Group and obtaining from it 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.
The Committee receives reports from the external auditor on its own processes and procedures to ensure its independence
and objectivity and to ensure compliance with the relevant standards.
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 97. 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 four years.
No contractual obligations exist that restrict the Group’s choice of external auditor.
Drax Group plc
Annual report and
accounts 2012
61
Internal audit
Grant Thornton UK LLP undertakes the Group’s internal audit function. The Committee periodically reviews whether the
internal audit function is likely to be more effective or efficient if provided internally. In view of the nature and scope of the
Group’s business and its management structure, the Committee considers that it continues to be more effective and efficient
for core internal audit functions to be undertaken by an external service provider, augmented as appropriate by additional
reviews that require specialist expertise.
The Committee receives reports at each meeting regarding the internal 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 2012 included: Group payroll and PAYE; Drax Power Limited key financial controls
on revenue and financial reporting and on treasury and expenditure; VAT and international trade; ROC accreditation; fuel –
covering coal and biomass procurement and logistics; IT key controls and strategy; Know Your Customer and Bribery Act
Compliance; Haven Power Limited key financial controls and physical security.
External auditor
Deloitte LLP was appointed auditor of the Group in 2005 and has been reappointed at each subsequent Annual General
Meeting. It 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 its performance during the year and satisfied itself of its 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 18 February 2013.
David Lindsell
Chairman of the Audit Committee
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62 Drax Group plc
Annual report and
accounts 2012
Nominations Committee report
“ The Committee keeps under review the structure, size and
composition of the Board and also the succession planning
for executive directors and other senior managers.”
Charles Berry
Chairman of the Nominations Committee
Throughout 2012, the Nominations Committee (the “Committee”) consisted of Charles Berry (as Chairman), Tim Barker
(Senior Independent Director), Tim Cobbold, David Lindsell and Tony Thorne all of whom are independent non-executive
directors. The Company Secretary acts as Secretary to the Committee.
The principal duties of the Committee are to keep under review the structure, size and composition of the Board (including
the skills, knowledge and experience required by it), to consider succession planning for the directors and other senior
managers, to identify and nominate candidates to fill vacancies among the directors and to review the time required
from non-executive directors.
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 2012, and the members’ attendance record is set out on page 53.
The Chairman of the Committee reports on the Committee’s proceedings to the following Board meeting and, subject to
redaction in the event that they include personal information, the minutes of each meeting of the Committee are circulated
to all members of the Board.
During 2012, the Company enhanced its succession planning and career development processes. The Committee considered
the revised processes and reviewed the succession plan in relation to senior management roles. The succession plan was
considered to be appropriate taking into account the size and management structure of the Group.
During the course of the year, the Committee also reviewed the composition of the Board and concluded that it was an
appropriate time to appoint an additional non-executive director.
The Committee engaged The Zygos Partnership to conduct a search and selection process. (The Zygos Partnership has no
other connection with the Company other than in relation to previous engagements on search and selection assignments).
The Committee was presented with a list of candidates from which a short list was identified. Following consideration and
interviews with a number of excellent candidates, the Committee recommended to the Board that Melanie Gee be appointed as
a non-executive director. Her appointment became effective on 1 January 2013 and she will retire and offer herself for election
by shareholders at the AGM to be held on 24 April 2013. Melanie’s biography appears on page 48.
It is the Board’s policy to ensure that the proportion of women on the Board is one of the considerations for Board and senior
management appointments. That policy is implemented as part of the recruitment and selection process. Further details of
gender diversity in the Group are included in the Corporate and social responsibility section of the Annual report and
accounts.
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.
At the conclusion of the AGM on 24 April 2013, Tim Barker is to retire as a director of the Company and from the committees
on which he serves.
Drax Group plc
Annual report and
accounts 2012
63
The Committee initiated the review of the effectiveness of the Board, its committees and individual directors and the outcome
is reported in the Corporate governance report on page 51.
The Board met on 12 February 2013, 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 51 concluded that the directors offering themselves for re-election
continue to demonstrate commitment to their particular role and perform effectively.
At that meeting, the Board also reviewed the membership of the various Board committees and appointed David Lindsell as
Senior Independent Director and Tony Thorne as Chairman of the Remuneration Committee, each to replace Tim Barker upon
his retirement.
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 18 February 2013.
Charles Berry
Chairman of the Nominations Committee
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64 Drax Group plc
Annual report and
accounts 2012
Remuneration Committee report
“We believe that the best measures of performance are those
most aligned with the interests of our shareholders. These include
both operational and strategic measures, in particular the
development of a much more sustainable business.”
Tim Barker
Chairman of the Remuneration Committee
A statement to shareholders from the Chairman of the Remuneration Committee
In last year’s report I said that the Remuneration Committee was supportive of many of the proposals that had been
suggested by the Government following reviews by the Department for Business, Innovation and Skills (“BIS”) of narrative
reporting and executive remuneration. This year BIS has made proposals for further regulations in relation to remuneration
reporting for years ending after October 2013 and in this year’s report we have adopted many of those proposals.
We want to build trust in the remuneration process through transparency and accountability, and we have implemented
further measures to promote greater transparency within the Group. In particular, we have explained decisions on executive
director remuneration packages to employee representatives in connection with discussions on remuneration generally.
The Committee’s approach is to enhance the link between both short and long-term performance and executive remuneration
and also to improve the clarity of reporting. We believe that the best measures of performance are those which are most aligned
with the interests of our shareholders, both those relating to the Group’s performance and also individual contribution. We are
now well advanced in a programme to transform our business from predominantly coal-fired generation to predominantly
renewable biomass. Our performance cannot be measured solely in terms of share price or earnings growth, which is why the
Committee places considerable importance on performance measures which underpin our longer term strategic development.
The Committee applies this approach to performance measures in both the annual bonus arrangements and the Bonus Matching
Plan (“BMP”) for executive directors and senior management. These therefore include both operational and strategic measures
to align remuneration more closely 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, including upstream development, and increased
retail sales. The BMP also retains a Total Shareholder Return (“TSR”) measure to ensure more direct alignment of executive
reward with the returns to shareholders.
There is a further introductory point to make. Since the Company listed in 2005, its business has been predominantly
a coal-fired power generation business located at the Drax site. In determining executive directors’ remuneration, the
Committee has been conscious that we have been less broadly based than many other businesses of a comparable market
value. This has been particularly relevant in relation to the positioning of executive directors’ base salaries. The acquisition
and growth of Haven Power, the Group’s retail business, has added to the breadth of the business. As the biomass programme
develops, as explained fully in the reports by the Chairman and the Chief Executive, we will become a more international
and more complex business. In order to attract and retain the senior executives who will be most involved in this strategic
development it will be necessary to take these factors into account. Accordingly, during 2013, the Committee intends to
review the positioning of executive directors’ remuneration in the light of these changes.
Context to the Committee’s decisions
2012 has been a very important year in the development of the Group. The Government has provided clarity on the regulatory
framework to support power generation from renewable biomass. We were therefore able to build on the work of previous
years to deliver solid foundations for the Group’s future as a major renewable power generator. We made excellent progress
with very encouraging results in our biomass research and development and we secured committed financing for our strategic
capital investment from our investors and lenders. We also made excellent progress in the strategic growth of our retail
business. It was also a year of strong operational and financial performance across the business.
The Committee is satisfied that remuneration incentives are compatible with the Group’s risk policies and systems, including
those relating to environmental, social and governance risks.
Drax Group plc
Annual report and
accounts 2012
65
Key Committee decisions in the year
Each year the Committee agrees an annual work schedule. The regular scheduled matters considered by the Committee
in 2012 were:
–(cid:3) review of the performance of the Group by reference to the 2011 Balanced Corporate Scorecard (“Scorecard”),
including the application of the discretionary factor;
–(cid:3) agree the measures and weightings of the 2012 Scorecard;
–(cid:3) 2011 annual bonus awards to executive directors and senior managers by reference to the Scorecard and individual
performance against personal objectives;
–(cid:3) agreeing personal objectives for executive directors and senior managers for 2012;
–(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;
–(cid:3) the 2011 Remuneration Report; and
–(cid:3) review of advisers and the fees paid to them.
At various stages throughout the year the Committee considered the consultation on executive remuneration by BIS, and
has actively participated in the consultation. The Committee considered the Group’s own remuneration policy and practices
in that context. It concluded that the structure and level of executive remuneration in the Group continued to be appropriate.
As noted in the introduction to this report, the Committee intends to review the positioning of executive directors’
remuneration in the light of the development of the Group’s biomass transformation. The Committee has sought to
develop its reporting in line with developing best practice.
The Committee also considered the provision of pension benefits in the Group as a whole. It agreed that additional steps
should be taken to make employees aware of the likely level of retirement benefits and encourage additional contributions.
This may require additional contributions by the Group dependent upon the terms applicable to the relevant schemes.
Policy report
Introduction
This report covers the reporting period from 1 January 2012 to 31 December 2012 and provides details of the remuneration
policy for the Group. This report has been prepared by the Remuneration Committee based on the regulations proposed
by BIS. The regulations will apply to all UK companies listed on a major stock exchange with financial years ending on or after
October 2013.
Remuneration policy
During the year, the Committee reviewed its terms of reference to ensure that they remain sufficiently flexible and appropriate
to meet the different requirements necessary to attract, reward and retain senior managers in all Group companies.
The objectives of the remuneration policy are:
–(cid:3) to enable the Group to recruit, retain and motivate the people 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.
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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 for 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.
The role of the Committee
The principles set out above are put into effect through the Committee’s principal duties, which are to:
–(cid:3) determine and recommend for approval by the Board the framework or broad policy for the remuneration of the
Company’s Chairman, Chief Executive and other executive directors and the senior managers;
–(cid:3) approve the design of, and determine targets for, any performance related pay schemes operated by the Group in respect
of executive directors and senior managers and approve the total annual payments made under such schemes;
–(cid:3) review the design of all share incentive plans for approval by the Board and shareholders. For any such plans, determine
each year whether awards will be made, and if so, the overall amount of such awards, the individual awards to executive
directors and senior managers and the performance targets to be used;
–(cid:3) determine the pension arrangements for executive directors and senior managers;
–(cid:3) ensure that contractual terms on termination of the employment of any executive directors or senior manager, and any
payments made, are fair to the individual, and the Group, that failure is not rewarded and that the duty to mitigate loss
is fully recognised;
–(cid:3) within the terms of the agreed policy determine the individual total remuneration packages of the executive directors
and senior managers including bonuses, incentive payments and share options or other share awards;
–(cid:3) review and note annually the remuneration trends across the Group; and
–(cid:3) oversee any major changes in employee benefits structures throughout the Group.
Throughout 2012, the Remuneration Committee comprised Tim Barker, Senior Independent Director and Chairman of the
Committee, Charles Berry, Chairman of the Company, Tim Cobbold, David Lindsell and Tony Thorne, all of whom are
independent non-executive directors. The Company Secretary acted as Secretary to the Committee.
The Chief Executive is invited to attend meetings of the Committee except when her own remuneration is being discussed.
The Committee met on three occasions during the year and its members’ attendance record is set out on page 53.
Drax Group plc
Annual report and
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67
Policy implementation
Purpose and link to
strategy
Base salary
To provide a
market
competitive base
salary to attract
and retain
executives.
Annual bonus
Award of annual
bonuses linked to
personal
performance and
to the
achievement of
the annual
Business Plan
targets including
strategic
objectives.
Operation
Planned changes
to policy
Opportunity and performance metrics
Base salaries of executive directors are
reviewed each year with any changes
taking effect from 1 April. The review
takes into account individual
performance and market comparisons,
recognising that there is no close listed
comparator to Drax Group plc.
Salary information is derived, inter alia,
from two groups of companies:
(i)(cid:3) Utilities and selected other industrial
companies;
(ii)(cid:3)Non-financial companies with
comparable market capitalisation.
Filters are also applied to exclude
companies from those groups which
are less close comparators to Drax
Group plc in terms of size and
international presence.
The Committee determines Group
performance measures using a
Scorecard (see page 76) 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 measure. Maximum score is
attributed to the stretch measure.
Bonuses are calculated as a percentage
of base salary.
The Committee agreed that with effect from
1 April 2012 base annual salary for each of the
executive directors should be increased by
3.5% to:
–(cid:3) Chief Executive – £527,850
–(cid:3) Finance Director – £358,938
–(cid:3) Production Director – £295,596
–(cid:3) Retail and Trading Director – £248,400
There are no
planned changes
to the current
approach,
although the
Committee does
intend to review
the positioning
of executive
director salaries
in the light of
the changes to
the business.
There are
no planned
changes.
Role
Chief Executive
Finance Director
Production Director
Target
Max
65% 130%
60% 120%
60% 120%
Retail & Trading Director
60% 120%
Group performance
–(cid:3) Assessed against financial, production,
strategic and other Business Plan
objectives.
–(cid:3) Committee has the discretion to adjust the
score by a factor between 0.75x and 1.25x
(i.e. +/–25%) to reflect overall performance
and unexpected developments that are not
directly included in the Scorecard, leading
to an overall percentage score.
Individual performance
The Board determines personal objectives
for each executive director. The Committee
assesses performance and applies an
individual performance multiplier of between
zero and 1.5.
Bonus Awards
To determine the actual bonus awards, the
target bonus is then multiplied by the Group
performance score and the personal score,
subject to a cap of 2x target bonus.
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Purpose and link to
strategy
Operation
Planned changes
to policy
Opportunity and performance metrics
Deferred annual
bonus
To supplement
the long-term
elements of pay
and further align
executives to the
interests of
shareholders.
25% of any annual bonus is settled in
shares deferred for three years.
There are no
planned changes.
This award is forfeited if the executive leaves
the Group other than as a “good leaver” before
the shares vest. No other performance
conditions are used.
Bonus Matching Plan (“BMP”)
To ensure that
long-term
incentives are
linked to Total
Shareholder
Return and to the
achievement of
Business Plan
targets including
strategic
objectives.
The Group operates a Bonus Matching
Plan (“BMP”) as a long-term
performance share plan.
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.
There are no
planned changes.
Maximum award: 1.5 x annual bonus for
prior year.
Performance measures:
50%: Total Shareholder Return (“TSR”)
over three years relative to FTSE51–150.
50%: Average outcome from Scorecard
measures over a three year period. The
averaging calculation is capped at twice the
target level, although the annual results on
which the three year calculation will be made
are not, for this purpose, so capped.
There are no
planned changes
to the current
approach.
These benefits are not based on individual or
Group performance in any year.
Pension
To provide a
complete and
competitive
reward package.
Other benefits
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.
Benefits are reviewed each year with
any changes taking effect from 1 April.
Executive directors also receive other
benefits namely the provision of a car
allowance, life assurance (x4 salary),
private medical cover, relocation
expenses and second base expenses
where appropriate.
Drax Group plc
Annual report and
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69
Remuneration scenarios
The composition and value of the executive directors’ remuneration packages at below threshold, target and outperformance
scenarios under the Drax Group remuneration policy are set out in the charts below.
Salary
Benefits
Pension
Bonus
BMP
£m
Salary
Benefits
Pension
Bonus
BMP
%
Chief Executive
£0.5m
£1.0m
£1.5m
£2.0m £2.5m
Chief Executive
20%
40%
60%
80% 100%
Outperformance
Target
Below threshold
Finance Director
Outperformance
Target
Below threshold
Production Director
Outperformance
Target
Below threshold
Outperformance
Target
Below threshold
Finance Director
Outperformance
Target
Below threshold
Production Director
Outperformance
Target
Below threshold
Retail and Trading Director
Retail and Trading Director
Outperformance
Target
Below threshold
Outperformance
Target
Below threshold
Notes:
1) Annual bonus threshold is assumed at 25% of maximum, target at 50% of maximum and outperformance at 100% of maximum bonus.
2) The BMP award threshold is assumed at 15% of maximum award and outperformance 100% of maximum, with target representing the average of the two.
3) The award of conditional shares under the BMP is based on the individual’s prior year annual bonus and therefore it is assumed that corresponding threshold,
target and maximum bonus is earned for calculating threshold, target and maximum BMP award under each scenario.
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 was a director of the Company at 18 February 2013 or who served as a director
of the Company at any time during the year ended 31 December 2012, the commencement date and term of the service
agreement or contract for services, and details of the notice periods.
Contract term
(years)
Unexpired term at the
date of publication
(months)
Notice period by the
company (months)
Notice period by the
director (months)
Director
Tim Barker
Charles Berry
Tim Cobbold
Melanie Gee
Peter Emery
David Lindsell
Tony Quinlan
Paul Taylor
Contract start date
14 February 2012
17 April 2011
27 September 2010
1 January 2013
3
3
3
3
14 June 2004
Indefinite term
14 February 2012
3
1 September 2008
Indefinite term
1 September 2011
Indefinite term
Dorothy Thompson
26 September 2005
Indefinite term
Tony Thorne
29 June 2010
3
26
16
9
34
n/a
26
n/a
n/a
n/a
6
1
6
1
1
12
1
12
12
12
1
1
6
1
1
6
1
12
6
12
1
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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 £53,750 in fees for that appointment
during 2012.
Tony Quinlan is a non-executive member of the Port of London Authority board and received £22,344 in fees for that
appointment during 2012.
Peter Emery is a non-executive director of NG Bailey Limited and received £12,000 in fees for that appointment during 2012.
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. These are determined in the light of:
–(cid:3) fees the chairmen and non-executive directors of other listed companies selected on the same basis as for executive
directors;
–(cid:3) the responsibilities and time commitment; and
–(cid:3) the need to attract and retain individuals with the necessary skills and experience.
Chairman
The Chairman’s fees are £220,000 per annum.
Other non-executive directors
The fees for non-executive directors are:
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
£10,000 per annum
Termination payment
No service agreement 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.
Share plans
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 remuneration with
TSR performance.
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Annual report and
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71
SAYE
The SAYE plan 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, 2011 and 2012, 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
2012 – 410.00 pence per share
Options may be exercised upon successful completion of the three or five year savings contract to which they are linked.
Details of the SAYE options held by the executive directors are shown in the table in the Audited Information section of
this report.
On 12 February 2013, the Committee agreed that invitations to the SAYE be made again in 2013, 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.
Note:
(1) The SIP Trustee was funded by the Group to purchase the required Free and Matching Shares.
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 the Audited Information section
of this report.
The SIP has not operated since 2009.
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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 Group’s discretionary share plans (e.g. Bonus
Matching Plan).
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 Group has share ownership guidelines for senior executives participating in its performance share plans. They are 100%
and 50% of base salary for executive directors and other senior management 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.
Other matters
Wider employee population
In determining executive remuneration, the Committee also takes into account the level of general pay increases within the
Group. The pay increase in 2012 for staff covered by collective bargaining arrangements was determined by a 33 months
agreement with increases on 1 January 2011 and 2012 at RPI plus 0.3%. The increase was subject to a cap of 4.9%, which
was therefore the level of the general pay increase on 1 January 2012. The agreement continued until 31 December 2012.
Following joint negotiations, a two-year pay offer has been made to all employees within the collective bargaining unit.
The pay offer, which covers the period from 1 January 2013 to 31 December 2014, is based on another “RPI plus” formula.
The average pensionable pay of an executive director is eight and a half times the average of pensionable pay for employees
within the collective bargaining unit.
Views taken from the employee population
In the course of discussions on pay with employee representatives, the Group discussed executive remuneration policy
and provided details of the process by which the Committee established executive remuneration packages. The information
provided included details of the benchmarking of executive director remuneration as well as information benchmarking the
packages of employees in the collective bargaining unit with those elsewhere in the industry.
Shareholder engagement
The Company holds regular meetings with its largest shareholders, and the Committee takes into account any views or
representations of shareholders relating to executive remuneration. During 2012 shareholders did not raise any matters
of concern with the Company with regard to executive remuneration.
Drax Group plc
Annual report and
accounts 2012
73
Implementation report
Pay for performance at Drax Group
The Remuneration Committee believes that the current executive remuneration policy and the supporting reward structure
provide clear alignment with the performance of Drax Group. To maintain this relationship, the Remuneration Committee
periodically reviews the business priorities and the environment in which the Group operates.
Value of £100 invested
The following graph shows how the value of £100 invested in the Company on 31 December 2007 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 2007 to 31 December 2012.
TSR performance – Drax versus FTSE100 and FTSE250
Drax
FTSE100
FTSE250
160
140
120
100
80
60
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
Mar 12
Jun 12
Sep 12
Dec 12
Single total figure of remuneration for each director
The table below sets out the single figure of remuneration and breakdown for each director for 2012.
Current year 2012
Name
Base salary
Tim Barker
Non-executive director
Charles Berry
Chairman
Tim Cobbold
Non-executive director
Peter Emery
Production Director
David Lindsell
Non-executive director
Tony Quinlan
Finance Director
Paul Taylor
Retail and Trading Director
Dorothy Thompson Chief Executive
Tony Thorne
Non-executive director
–
–
–
293
–
356
246
523
–
Fees
63
220
53
–
63
–
–
–
53
Notes:
(1) Bonus is cash bonus paid. 25% of total bonus is deferred into shares.
(2) The BMP figure is the cash market value at the vesting in 2012 of awards made in 2009.
Pension
Other
benefits
Bonus(1)
BMP(2)
–
–
–
59
–
71
49
105
–
–
–
–
18
–
86
17
92
–
–
–
–
266
–
323
224
515
–
–
–
–
80
–
32
55
159
–
Total
63
220
53
716
63
868
591
1,394
53
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Remuneration Committee report
Implementation report (continued)
Previous year 2011
Name
Base salary
Tim Barker
Non-executive director
Charles Berry
Chairman
Tim Cobbold
Non-executive director
Peter Emery
Production Director
David Lindsell
Non-executive director
Tony Quinlan
Finance Director
Paul Taylor
Retail and Trading Director
Dorothy Thompson Chief Executive
Tony Thorne
Non-executive director
–
–
–
284
–
345
225
508
–
Notes:
(1)(cid:3) Bonus is the cash bonus paid 25% of bonus is deferral into shares.
(2)(cid:3) The Executive Share Incentive Plan was the predecessor plan to the BMP.
Fees
63
215
53
–
63
–
–
–
53
Pension
Other
benefits
Bonus(1)
ESIP(2)
Total
–
–
–
57
–
69
39
101
–
–
–
–
18
–
85
15
90
–
–
–
–
257
–
312
216
497
–
–
–
–
–
–
–
–
–
–
63
215
53
616
63
811
495
1,196
53
Details of performance against metrics for variable pay awards
Annual bonus plan outcome
A summary of the Committee’s assessment in respect of the 2012 Scorecard is set out in the following table:
Strategic Area
Elements
Target Weighting
Actual Weighting
Financial performance Group underlying earnings per share(1)
Safety, production
and retail
Cash flow(2) and controllable costs
Safety and plant operation performance
Strategic and other
Business Plan objectives
Retail sales volume
Regulatory − securing appropriate support and sustainability
requirements for biomass combustion
Development of biomass conversion
Biomass procurement targets
Industrial Emissions Directive compliance plan development
Other strategic development initiatives
20%
10%
15%
5%
5%
20%
10%
5%
10%
37.7%
13.6%
20.4%
7.0%
6.3%
30.0%
14.0%
5.0%
8.8%
Notes:
(1)(cid:3) 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)(cid:3) Cash flow for the year excluding the impact of short-term investments, prior to payment of equity dividends.
Drax Group plc
Annual report and
accounts 2012
75
Following this process, and based on the relative weightings and scores as set out in the table, the Committee assessed the
corporate score for 2012 at 1.43. The Committee considered that there were certain elements of the Scorecard where above
target performance was attributable to factors outside the control of management. In particular, the underlying earnings per
share score was positively affected by lower tax and financing costs than anticipated. This was the result of reductions in the
corporation tax rate and delayed refinancing reflecting the Government’s delay in announcing its decision on the review of
support levels for renewable energy. There were, however, other factors where the Committee felt that the Scorecard result
did not adequately represent management performance. These were mainly in relation to achievement of regulatory and
strategic objectives which provide the platform for the development of the biomass transformation. On balance, the
Committee felt that the numerical calculation of the Scorecard reflected a fair assessment of performance, and therefore
decided not to exercise its discretion to adjust the overall score.
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 twice the target bonus.
For bonus awards for 2012, the target bonus for the Chief Executive and the other executive directors was 65% and 60% of
base salary respectively. Their 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.
Actual bonus awards for 2012
Executive director
Peter Emery
Production Director
Tony Quinlan
Finance Director
Paul Taylor
Retail and Trading Director
Dorothy Thompson
Chief Executive
Value of bonus
£’000
2012 bonus payment
(as a % of base salary)
355
431
298
686
120%
120%
120%
130%
Note:
(1) The value of bonus shown in the table above is made up of 75% paid in cash and 25% deferred into shares.
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76 Drax Group plc
Annual report and
accounts 2012
Remuneration Committee report
Details of performance against metrics for variable pay awards (continued)
Annual bonus plan for 2013
The target and maximum bonus percentages for 2013 for the Chief Executive and the other executive directors are the same
as in 2012, and bonus measures and targets have been set using a similar process to that used previously. The Scorecard
weightings are 30% financial, 20% safety and production, 10% retail and 40% strategic.
The weightings are set out in the following table:
Financial
Underlying earnings per share(1)
Interest cover ratio and controllable costs
Total financial
Safety and production
Safety
Plant and operations
Total safety and production
Retail
Sales volume
Strategic
Regulatory objectives
Conversion facilities
Biomass supply
US asset investment
Total strategic
Total weighting
Target weighting
20%
10%
30%
7.5%
12.5%
20%
10%
10%
10%
10%
10%
40%
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).
Drax Group plc
Annual report and
accounts 2012
77
Bonus Matching Plan outcome
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,
2011 and 2012.
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, one-third 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. two-thirds) 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.
The TSR condition
50% of such part of any award that is 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%
100%
33%
33%(1)
The Scorecard condition
Starting with awards made in 2011, the 50% of the BMP award subject to performance conditions will vest by reference
to the Group’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 at twice the target level, although the annual result on which the three year calculation
will be made is not, for this purpose, so capped.
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 Committee will agree 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 progression of the business. In exercising its discretion the
Committee will pay particular regard to progress against the strategic objectives incorporated in the Scorecard, particularly
the unit conversion to biomass generation, securing the biomass fuel supply, construction and operational readiness of the
US asset investment and the continued development of the Haven Power retail business.
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78 Drax Group plc
Annual report and
accounts 2012
Remuneration Committee report
Details of deferred bonus share awards
Executive director
Peter Emery
Tony Quinlan
Paul Taylor
Production Director
Finance Director
Retail and Trading Director
Dorothy Thompson
Chief Executive
Value of vesting
£’000
2012 BMP vesting
(as a % of base salary)
80
32
55
159
27%
9%
22%
30%
Detail of BMP incentive outcomes
No awards under the BMP which were subject to performance conditions vested in 2012.
Total pension entitlements (for defined benefit schemes)
Executive directors are entitled to either non-contributory membership of the Group’s defined contribution pension of 20%
of base salary or have contributions to a personal pension or cash in lieu of pension.
Exit payments made in year
No executives departed the business during the year and therefore no exit payments were made to executives during the
financial year.
Shareholder voting
The table below shows the voting outcome for the Remuneration Report at the Annual General Meeting held on 18 April 2012.
Approval of remuneration report 273,552,487 95.56% 4,292,335
1.50%
8,412,102
2.94% 286,256,924
For
(%)
Against
(%)
Abstain
(%)
Total
Drax Group plc
Annual report and
accounts 2012
79
Total shareholdings of executive directors
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 the payment of income tax and national insurance contributions) shares received until the applicable guideline
is reached.
No shares have vested for the executive directors since the introduction of the performance share plans.
Name
Y/E 31 December 2012
Owned outright
Deferred Awards not subject
to performance
Deferred Awards
subject to
performance
Total
Peter Emery Number
Shares
37,602
SIP(2)
Share Awards(3)
2,616
51,794
Value at year end(1)
£204,743
£14,244
£282,018
SAYE
Options
BMP
Share Awards
0
£0
310,768
402,780
£1,692,132
£2,193,137
Tony Quinlan Number
5,370
803
62,913
2,922
377,482
449,490
Value at year end(1)
£29,240
£4,372
£342,561
£15,910
£2,055,389
£2,447,472
Paul Taylor
Number
4,896
2,694
37,273
2,922
223,651
271,436
Value at year end(1)
£26,659
£14,669
£202,951
£15,910
£1,217,780
£1,477,969
Dorothy
Thompson
Number
77,614
2,616
101,910
2,922
611,464
796,526
Value at year end(1)
£422,608
£14,244
£554,900
£15,910
£3,329,421
£4,337,084
Notes:
(1)(cid:3) Share price at 31 December 2012 was 544.5 pence.
(2)(cid:3) SIP awards (operated until 2009) which are held by the Trustee of the plan, are shown above under the “Owned outright” section.
(3)(cid:3) The deferred share awards not subject to performance are the 25% of annual bonus deferred into shares.
Advisers to the Committee
The advisers to the Committee for the year were as follows:
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 Resource (“HR”) matters to
the Committee as he also has overall responsibility for HR.
Philip, Director of Corporate Affairs is Company Secretary
for the Company and Secretary to the Board and Board
Committees.
Fees paid to PwC totalled £53,500 for the period, the majority of which related to services provided for general advice
to the Committee, market guidance on non-executive fees and valuations for the performance elements of the BMP.
Fees paid to Norton Rose totalled approximately £4,500 for the period, the majority of which related to services provided
in respect of advice on the BMP.
The Chief Executive is invited to attend meetings of the Committee except when her own remuneration is being discussed.
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80 Drax Group plc
Annual report and
accounts 2012
Remuneration Committee report
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 2012.
1. Directors’ emoluments
The emoluments payable in respect of 2012 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
David Lindsell
Tony Quinlan
Paul Taylor(2)
Dorothy Thompson
Tony Thorne
Salary
£000
–
–
–
293
–
356
246
523
–
Fees
£000
63
220
53
–
63
–
–
–
53
Cash bonus in
respect of
2012
£000
Benefits
£000
Pension(1)
£000
–
–
–
266
–
323
224
515
–
–
–
–
18
–
86
17
92
–
–
–
–
59
–
71
49
105
–
Total
2012
£000
63
220
53
636
63
836
536
1,235
53
Total
2011
£000
63
215
53
616
63
811
495
1,196
53
Notes:
(1) Annual contribution by the Group to directors’ pension plans or cash in lieu.
(2) Paul Taylor was appointed to the Board on 1 September 2011. The figure shown above in the column headed “Total 2011 £000” reflects the total amounts
he received as both an employee and a director, for the period 1 January 2011 to 31 December 2011.
2. 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 2012
(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
2012
(number)
Market value
at the date
of award
(pence)
Peter Emery
2009 Matching Award
2009 Deferred Award
69,489
11,581
–
–
Dividend shares awarded(1)
–
3,143
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
Total
85,171
14,195
125,660
20,943
–
–
327,039
–
–
–
–
99,937
16,656
119,736
–
69,489
11,581
3,143
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
85,171
14,195
125,660
20,943
99,937
16,656
495.40
495.40
–
388.02
388.02
401.08
401.08
514.40
514.40
14,724
69,489
362,562
Drax Group plc
Annual report and
accounts 2012
81
As at
1 January 2012
(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
2012
(number)
Market value
at the date
of award
(pence)
385,285
142,856
5,994
81,752
440,395
Tony Quinlan
2009 Matching Award
2009 Deferred Award
81,752
4,716
–
–
Dividend shares awarded(1)
–
1,278
Dividend shares awarded(1)
–
2,182
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
Total
Paul Taylor
2009 Matching Award
2009 Deferred Award
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
Total
Dorothy Thompson
2009 Matching Award
2009 Deferred Award
103,541
17,257
152,588
25,431
–
–
–
–
–
–
121,353
20,225
48,256
8,042
–
–
63,003
10,500
76,667
12,777
–
–
–
–
–
–
83,981
13,996
138,382
23,063
–
–
Dividend shares awarded(1)
–
6,262
2010 Matching Award
2010 Deferred Award
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
Total
175,039
29,173
243,093
40,515
–
–
649,265
–
–
–
–
193,332
32,222
231,816
–
4,716
1,278
–
–
–
–
–
–
81,752
–
–
–
–
–
–
–
–
–
–
–
103,541
17,257
152,588
25,431
121,353
20,225
–
48,256
8,042
2,182
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
63,003
10,500
76,667
12,777
83,981
13,996
–
138,382
23,063
6,262
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
175,039
29,173
243,093
40,515
193,332
32,222
29,325
138,382
713,374
495.40
495.40
–
388.02
388.02
401.08
401.08
514.40
514.40
495.40
495.40
–
388.02
388.02
401.08
401.08
514.40
514.40
495.40
495.40
–
388.02
388.02
401.08
401.08
514.40
514.40
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100,159
10,224
48,256
260,924
Notes:
(1)(cid:3) In accordance with the BMP Rules, Dividend shares are only awarded, at the time and in the event that, awards actually vest. No Dividend shares are awarded
where the initial awards lapse. The number of Dividend shares awarded is calculated based on the actual dividends paid to ordinary shareholders in the period
following the initial award up until the award vests.
(2)(cid:3) The Deferred Awards referred to above are the share awards made in respect of the 25% deferral of cash bonus awarded each year. Those share awards
operate under the rules of the BMP.
(3)(cid:3) Details of the conditions subject to which the above awards will vest are given on page 71.
82 Drax Group plc
Annual report and
accounts 2012
Remuneration Committee report
3. 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 2012
(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
2,922
2,922
Dorothy Thompson
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
2012
(number)
2,922
2,922
2,922
The middle market closing quotation for an ordinary share of the Company on 31 December 2012 was 544.5 pence and the
daily middle market closing quotations during the financial year ranged from 442.0 pence to 574.5 pence.
4. 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 2012 (or appointment if later)
As at 1 January 2012 (or appointment if later)
SIP
shares(1)
SAYE
option shares(2)
Deferred
executive
share awards(3)
SIP
shares(1)
SAYE
option shares(2)
Deferred
executive
share awards(3)
Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Melanie Gee(4)
David Lindsell
Tony Quinlan
Paul Taylor
Ordinary
shares
3,462
1,730
1,000
–
7,500
5,370
4,896
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
803
2,922
440,395
2,694
2,922
260,924
Dorothy Thompson
77,614
2,616
2,922
713,374
Tony Thorne
7,500
–
–
–
Ordinary
shares
3,462
1,730
1,000
–
–
–
–
7,500
2,500
–
63,569
7,500
–
–
803
2,694
2,616
–
–
–
–
–
–
–
–
–
–
327,039
–
–
2,922
385,285
2,922
219,245
2,922
649,265
–
–
37,602
2,616
362,562
30,551
2,616
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 awards made under the BMP and the 25% of annual bonus deferred into shares.
(4) Melanie Gee was appointed as a non-executive director with effect from 1 January 2013. Since the date of her appointment the Company has been in a
Close Period and therefore she has been prohibited from dealing in Drax Group plc shares.
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 2012 and the date upon which this
report was approved by the Board.
This report was reviewed and approved by the Board on 18 February 2013.
Tim Barker
Chairman of the Remuneration Committee
Drax Group plc
Annual report and
accounts 2012
83
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 2012 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 33.
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 2012 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 Company financial statements of Drax Group plc for the year ended 31 December 2012
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
18 February 2013
84 Drax Group plc
Annual report and
accounts 2012
Consolidated income statement
Revenue
Fuel costs in respect of generation
Cost of power purchases
Grid charges
Other retail costs
Total cost of sales
Gross profit
Other operating and administrative expenses
Unrealised (losses)/gains 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
2012
£m
2011
£m
Notes
1,779.8
1,835.9
(929.2)
(1,020.8)
(141.7)
(167.8)
(30.2)
(172.3)
(117.6)
(24.4)
(1,268.9)
(1,335.1)
510.9
500.8
(271.0)
(36.1)
203.8
(15.3)
1.7
190.2
(26.4)
–
(26.4)
(224.4)
89.8
366.2
(30.3)
2.2
338.1
(71.4)
197.9
126.5
163.8
464.6
pence
44
44
pence
127
126
5
19
6
6
7
7
9
9
Drax Group plc
Annual report and
accounts 2012
85
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 (losses)/gains on cash flow hedges
Deferred tax on cash flow hedges before corporation tax rate change
Impact of corporation tax rate change on deferred tax on cash flow hedges
Other comprehensive (expense)/income
Total comprehensive income for the year attributable to equity holders
Notes
30
7
25
7
7
Years ended 31 December
2012
£m
163.8
(9.0)
2.1
(105.7)
26.0
–
(86.6)
77.2
2011
£m
464.6
(3.7)
0.9
2.6
(0.7)
1.9
1.0
465.6
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86 Drax Group plc
Annual report and
accounts 2012
Consolidated balance sheet
Assets
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Derivative financial instruments
Current assets
Inventories
ROC and LEC 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
As at 31 December
2012
£m
2011
£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
49.7
1,360.6
7.7
1,418.0
157.6
18.7
224.8
37.6
30.0
371.7
840 .4
275.9
14.6
0.3
100.4
391.2
449.2
90.4
55.2
31.5
170.7
42.1
389.9
1,477.3
46.4
1.5
420.7
710.8
(16.4)
314.3
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
Total shareholders’ equity
1,477.3
1,303.4
The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for
issue by the Board of directors on 18 February 2013.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
Drax Group plc
Annual report and
accounts 2012
87
Consolidated statement of changes in equity
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
59.5
(276.6)
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)
At 1 January 2012
Profit for the year
Other comprehensive expense
Total comprehensive (expense)/income
for the year
Equity dividends paid (note 8)
Issue of share capital (note 22)
Movement in equity associated with
share-based payments (note 23)
At 31 December 2012
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
42.1
1.5
420.7
710.8
–
–
–
–
4.3
–
46.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
958.0
464.6
1.0
464.6
(2.8)
461.8
465.6
(123.7)
(123.7)
3.5
65.0
163.8
156.9
(95.7)
183.4
3.5
1,303.4
163.8
(86.6)
77.2
(95.7)
187.7
4.7
4.7
–
3.8
3.8
–
–
63.3
–
(79.7)
–
–
–
(79.7)
(6.9)
1.5
420.7
710.8
(16.4)
314.3
1,477.3
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88 Drax Group plc
Annual report and
accounts 2012
Consolidated cash flow statement
Cash generated from operations
Income taxes paid
Other (losses)/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 (used in)/generated from investing activities
Cash flows from financing activities
Equity dividends paid
Proceeds from issue of share capital
Repayment of borrowings
New borrowings
Other financing costs paid
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Years ended 31 December
Notes
27
8
22
18
16
2012
£m
263.2
(50.6)
(0.8)
(10.6)
1.9
203.1
(206.0)
–
(206.0)
(95.7)
187.7
(10.5)
100.0
(9.7)
171.8
168.9
202.8
371.7
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
Drax Group plc
Annual report and
accounts 2012
89
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 explained in Operational and financial performance
on page 29, and on the historical cost basis, except for certain financial assets and liabilities that have been measured at
fair value.
Change in accounting policy
In 2012 the Group changed its accounting policy for the measurement of ROC assets generated by the burning of biomass.
As a result of the change, ROC assets are now measured in accordance with IAS 20: “Accounting for government grants
and disclosure of government assistance”, at fair value. The Group previously valued ROCs based on the attributable,
incremental cost of generating ROCs over the cost of coal.
The change in accounting policy results in recognition that more accurately reflects the substance of generation of ROC
assets during the business cycle particularly as more biomass is burned and ROC income earned. Accordingly, the Group
considers that this will result in more relevant presentation as we implement our biomass transformation plans.
Retrospective application of the change in accounting policy has not had a material impact on the financial statements
of the Group in either the current or prior period and as such corresponding amounts have not been restated as a result
of this change.
Adoption of new and revised accounting standards
In 2012, several amended standards and interpretations became effective. These are IFRS 7 (amended) “Disclosures –
transfers of financial assets”, IFRS 1 (amended) “Severe hyperinflation and removal of fixed dates for first-time adopters”
and IAS 12 (amended) “Deferred tax: recovery of underlying assets”. 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 (amended) “Government loans” – effective for accounting periods beginning on or after 1 January 2013.
–(cid:3) IFRS 7 (amended) “Disclosures: Offsetting financial assets and financial liabilities” – effective for accounting periods
beginning on or after 1 January 2013.
–(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.
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90 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
2. Basis of preparation (continued)
–(cid:3) IAS 1 (amended) “Presentation of financial statements – other comprehensive income” – effective for accounting periods
beginning on or after 1 July 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.
–(cid:3) IAS 32 (amended) “Offsetting financial assets and financial liabilities” – effective for accounting periods beginning on
or after 1 January 2014.
–(cid:3) Annual improvements to IFRS 2009–2011 cycle (various standards) – 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 intends to adopt the standard no later than the accounting
period beginning on or after 1 January 2015, 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.
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.
Drax Group plc
Annual report and
accounts 2012
91
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. Where derivative financial instruments include options
these are valued using an option pricing model. Inputs to the model include market commodity prices, forward price curves,
the term of the option and assumptions around volatility based on historical movements. The inputs include assumptions
around future transactions and market movements and are, therefore, subjective.
ROCs and LECs – ROCs and LECs are stated within the balance sheet at fair value. Inherent to the calculation of this fair value
is an assumption regarding future sales prices in the market. Historic experience indicates that the assumptions used in the
valuation are reasonable; however actual sales prices may differ.
(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 and LECs are recorded at the invoiced value, net of VAT. Revenue is recognised when the risks
and rewards of ownership have been substantially transferred to a third party.
Where goods or services are exchanged for goods or services of a similar nature and value, the exchange is not treated
as giving rise to revenue. Where goods or services are exchanged for goods or services of a dissimilar nature, the exchange
is treated as giving rise to revenue. The revenue is measured at the fair value of goods or services received, adjusted by
the amount of any cash or cash equivalents received or paid. If the fair value of the goods or services received cannot
be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount
of any cash or cash equivalents received or paid.
Revenue from the sale of electricity direct to customers through our retail business, Haven Power is recorded after deduction
of trade discounts, VAT and Climate Change Levy. Revenue is recognised on the supply of electricity when a contract exists,
supply has taken place, a quantifiable price has been established or can be determined and the receivables are likely to
be recovered. Energy supplied, but not yet measured or billed is calculated based on consumption statistics and selling
price estimates.
(D) Segmental reporting
The business activity of the Group consists of the generation and sale of electricity at Drax Power Station, along with the sale
of electricity direct to customers through our retail business, Haven Power. The costs incurred by the US operations have
been included within the generation segment.
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92 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
3. Summary of significant accounting policies (continued)
(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 to the expected decommissioning date of the power station).
The estimated useful lives, beginning in 2004 when they were reset, are currently:
Main generating plant and freehold buildings
Other plant and machinery
Decommissioning asset
Plant spare parts
Years
up to 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.
(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.
Drax Group plc
Annual report and
accounts 2012
93
(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 and LEC assets
The Group is able to claim ROCs and LECs from the Office of Gas and Electricity Markets (“OFGEM”) as a result of burning
renewable fuels instead of coal. ROCs and LECs are recognised as current assets in the period they are generated and
measured at fair value based on anticipated sales prices. At each balance sheet date the Group reviews the fair value of ROC
and LEC assets generated but not sold. Any reductions in fair value are recognised in the income statement in the period
incurred. The Group’s revenue recognition policy in respect of ROCs and LECs sold to third parties is set out in 3(C) above.
(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, in excess of the amount allocated and required for the current financial
year, purchased in the market are recorded at cost, net of any impairment where required, within non-current 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 included in finance costs and therefore deducted in arriving at profit
before tax. The excess of the present value of the defined benefit obligation over the fair value of the plan assets is recognised
as a liability in the balance sheet.
For the defined contribution scheme, the Group pays contributions to publicly or privately administered pension insurance
plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions
have been paid. The contributions are recognised as employee benefit expense when they are due to be paid.
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94 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
3. Summary of significant accounting policies (continued)
(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
Foreign currency transactions
Transactions in foreign currencies are translated into sterling at the exchange rate ruling at the date of the 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.
Foreign operations
The assets and liabilities of foreign operations with a functional currency other than sterling are translated to sterling using
published exchange rates at the reporting date. The income and expenses of such operations are translated to sterling using
the exchange rate prevailing at the date of the transaction.
(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.
The Group designates certain hedging instruments used to address commodity price risk as cash flow hedges. At the inception
of the hedge, the relationship between the hedging instrument and hedged item is documented, along with its risk management
objectives. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging
instruments used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
The Group also uses 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.
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, unless merger relief criteria within Companies Act
(2006) apply, in which case the difference is recorded in retained earnings.
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.
Drax Group plc
Annual report and
accounts 2012
95
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.
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 2012:
Revenue
External sales
Inter-segment sales
Total revenue
Result
Segment EBITDA
Central costs
Depreciation and amortisation
Unrealised losses on derivative contracts
Operating profit
Net finance costs
Profit before tax
Generation
£m
Retail
£m
Eliminations
£m
Consolidated
£m
Year ended 31 December 2012
1,328.4
301.6
1,630.0
451.4
–
451.4
–
1,779.8
(301.6)
(301.6)
–
1,779.8
303.0
(4.6)
–
298.4
(58.5)
(36.1)
203.8
(13.6)
190.2
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96 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
4. Segmental reporting (continued)
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
Depreciation and amortisation
Unrealised gains on derivative contracts
Operating profit
Net finance costs
Profit before tax
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
(57.2)
89.8
366.2
(28.1)
338.1
The accounting policies of the reportable segments are the same as the Group’s accounting policies which are described in
note 3. The revenue and results of both reporting segments presented are subject to seasonality as detailed in Operational
and financial performance, page 30.
Major customers
Total revenue for the year ended 31 December 2012 includes amounts of £355.7 million and £221.8 million (2011: £482.4 million
and £228.5 million) derived from two customers (2011: two customers), each representing 10% or more of the Group’s
revenue for the year. All of these revenues arose in the generation segment.
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
2012
£m
84.3
58.5
53.4
74.8
2011
£m
73.4
57.2
33.4
60.4
271.0
224.4
Drax Group plc
Annual report and
accounts 2012
97
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
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
2012
£000
273
52
325
61
37
423
44
44
467
2011
£000
258
42
300
60
40
400
138
138
538
Years ended 31 December
2012
£m
(6.1)
(3.9)
(1.0)
(1.1)
(3.2)
(15.3)
1.7
1.7
2011
£m
(15.1)
(4.4)
(0.6)
(1.0)
(9.2)
(30.3)
2.2
2.2
Following the refinancing of our revolving credit facilities in December 2012 (see note 18) the amortisation of deferred finance
costs in relation to our previous bank facilities has been accelerated. This resulted in a £1.6 million interest charge in the year
ended 31 December 2012 (2011: £2.6m charge following the refinancing of our previous letter of credit, working capital and
term loan facilities in July 2011).
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98 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
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 2012 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
The 2011 comparative figures include an exceptional tax credit of £197.9 million, following agreement reached with HMRC on
5 April 2011, resulting in the resolution of the Eurobond tax position and certain other smaller legacy tax matters. The 2011
income statement therefore 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 2012 Budget, the Finance Act 2012 (the “Act”) was enacted by Parliament in July 2012.
The Act confirmed reductions in the rate of corporation tax from 26% to 24% from April 2012, and from 24% to 23% from
April 2013, both of which were enacted during the year. In addition, in the 2012 Budget, the Government proposed further
reductions in the rate of corporation tax from 23% to 22% from 1 April 2014, and in the 2012 Autumn Statement announced
an acceleration of this decrease in corporation tax to 21% from 1 April 2014. These proposals had not been substantively
enacted at the balance sheet date.
Tax charge/(credit) 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 charge/(credit)
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)
Years ended 31 December
2012
£m
2011
£m
31.4
61.3
10.1
(15.1)
26.4
–
–
–
26.4
26.2
(16.1)
71.4
(149.5)
(48.4)
(197.9)
(126.5)
Years ended 31 December
2012
£m
(2.1)
(26.0)
–
(28.1)
2011
£m
(0.9)
0.7
(1.9)
(2.1)
Drax Group plc
Annual report and
accounts 2012
99
The tax differs from the standard rate of corporation tax in the UK of 24.5% (2011: 26.5%). The differences are explained below:
Profit before tax
Profit before tax multiplied by the rate of corporation tax in the UK of 24.5% (2011: 26.5%)
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 charge/(credit)
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 2012 of 14.4 pence per share paid on
12 October 2012 (2011: 16.0 pence per share paid on 14 October 2011)
Final dividend for the year ended 31 December 2011 of 11.8 pence per share paid on 11 May 2012
(2011: 17.9 pence per share paid on 13 May 2011)
Years ended 31 December
2012
£m
190.2
46.6
(7.6)
1.3
1.2
(15.1)
26.4
–
26.4
2011
£m
338.1
89.6
(3.8)
1.3
0.4
(16.1)
71.4
(197.9)
(126.5)
Years ended 31 December
2012
£m
2011
£m
52.6
58.4
43.1
95.7
65.3
123.7
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 2012 of 10.9 pence per share (equivalent to approximately
£44 million) payable on or before 17 May 2013. The final dividend has not been included as a liability as at 31 December 2012.
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100 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
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)
10. Goodwill and other intangible assets
Cost and carrying amount:
At 1 January 2011 and 2012
Additions at cost
At 31 December 2012
Years ended 31 December
2012
£m
2011
£m
163.8
29.0
–
192.8
464.6
(64.3)
(197.9)
202.4
Years ended 31 December
2012
2011
371.7
3.5
364.9
2.6
375.2
367.5
44
44
52
51
127
126
56
55
Goodwill
£m
Carbon
£m
Total
£m
10.7
–
10.7
–
39.0
39.0
10.7
39.0
49.7
Goodwill
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 2012, the fair value of goodwill was significantly in excess of its book value; accordingly
a sensitivity analysis has not been disclosed.
Drax Group plc
Annual report and
accounts 2012
101
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.
Carbon assets
Carbon assets arise upon the purchase of CO2 emissions allowances in excess of the amount allocated and required for the
current financial year and are recognised at cost, net of any impairment.
11. Property, plant and equipment
Freehold land
and buildings
£m
Plant and
equipment
£m
Plant
spare parts
£m
Total
£m
Cost:
At 1 January 2011
Additions at cost
Disposals
Issues
Transfers
At 1 January 2012
Additions at cost
Disposals
Issues
At 31 December 2012
Accumulated depreciation:
At 1 January 2011
Charge for the year
Disposals
At 1 January 2012
Charge for the year
Disposals
At 31 December 2012
Net book amount at 31 December 2011
Net book amount at 31 December 2012
1,386.7
46.0
1,603.6
170.9
0.4
–
–
(0.1)
171.2
8.6
–
–
58.7
(6.5)
7.8
(1.4)
1,445.3
201.8
(0.7)
11.3
179.8
1,657.7
39.9
3.9
–
43.8
4.3
–
48.1
127.4
131.7
369.3
51.4
(6.5)
414.2
53.1
(0.5)
466.8
1,031.1
1,190.9
9.6
–
(7.8)
1.5
49.3
13.2
–
(11.3)
51.2
68.7
(6.5)
–
–
1,665.8
223.6
(0.7)
–
1,888.7
10.2
419.4
1.9
–
12.1
1.1
–
13.2
37.2
57.2
(6.5)
470.1
58.5
(0.5)
528.1
1,195.7
38.0
1,360.6
Assets in the course of construction amounted to £246.7 million at 31 December 2012 (2011: £40.0 million).
Plant and equipment includes assets held under finance lease agreements with a carrying value at 31 December 2012 of
£1.0 million (2011: £1.1 million).
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102 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
12. Inventories
Coal
Biomass
Other fuels and consumables
As at 31 December
2012
£m
92.5
48.1
17.0
157.6
2011
£m
103.1
17.9
16.6
137.6
The cost of inventories recognised as an expense in the year ended 31 December 2012 was £823.8 million (2011: £879.5 million).
13. ROC and LEC assets
Fair value and carrying amount:
At 1 January 2011
Generated
Utilised/sold
At 1 January 2012
Generated
Utilised/sold
At 31 December 2012
14. Trade and other receivables
Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments and other receivables
ROCs and LECs
£m
33.1
59.2
(60.2)
32.1
32.0
(45.4)
18.7
As at 31 December
2012
£m
2011
£m
153.8
61.2
9.8
224.8
206.5
55.6
7.2
269.3
Trade receivables principally represent sales of electricity to a number of counterparties. At 31 December 2012, the Group
had amounts receivable from five (2011: three) significant counterparties within the generation business, representing 78%
(2011: 71%) of trade receivables, all of which paid within 15 days of receipt of invoice in line with agreed terms. The ageing
profile, beyond a month, of the Group’s receivables continues to be insignificant. 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 £4.7 million (2011: £3.0 million).
This allowance has been determined by reference to past default experience, and includes £4.6 million in relation to Haven
Power (2011: £3.0 million).
Drax Group plc
Annual report and
accounts 2012
103
Years ended 31 December
2012
£m
3.0
(0.5)
2.2
4.7
2011
£m
2.6
(1.6)
2.0
3.0
As at 31 December
2012
£m
30.0
2011
£m
30.0
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
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
2012
£m
371.7
2011
£m
202.8
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
2012
£m
2011
£m
20.3
214.8
40.8
275.9
16.7
228.8
47.3
292.8
Accruals at 31 December 2012 include £59.0 million (2011: £126.1 million) with respect to the Group’s estimated net liability
to deliver CO2 emissions allowances.
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104 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
18. Borrowings
Current:
Revolving credit facility
Finance lease liabilities
Non-current:
Term loans
Finance lease liabilities
As at 31 December
2011
£m
6.8
0.3
7.1
As at 31 December
2011
£m
–
0.5
0.5
2012
£m
–
0.3
0.3
2012
£m
90.3
0.1
90.4
Refinancing
As set out in Operational and financial performance, on 20 December 2012 we completed the refinancing of our revolving
credit facilities which were due to mature in April 2014. This facility was replaced with a larger £400 million revolving credit
facility which matures in April 2016 and can be used for both letters of credit and working capital purposes. The margin over
LIBOR on our new facility is 2.25%. In addition to the revolving credit facility, we executed two new committed term loans
of £100 million each with the Prudential M&G UK Companies Financing Fund and the UK Green Investment Bank. The loans
have an identical repayment profile, amortising from the date six years after signing with the final repayment eight years after
signing. At the same time as concluding the financing agreements above, we also executed a commodities trading line, which
allows trading counterparties to benefit from the security package offered to senior lenders instead of Drax posting collateral
for certain volumes of trades. The Prudential M&G UK Companies Financing Fund loan of £100 million was fully drawn at the
year end.
Analysis of borrowings
Borrowings at 31 December 2012 and 31 December 2011 consisted principally of amounts drawn down against bank loans and
the revolving credit facility respectively.
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
Revolving credit facility
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
As at 31 December 2012
Borrowings before
deferred finance costs
£m
Deferred
finance costs
£m
Net
borrowings
£m
100.0
0.4
100.4
(0.3)
100.1
(9.7)
–
(9.7)
–
(9.7)
90.3
0.4
90.7
(0.3)
90.4
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
Drax Group plc
Annual report and
accounts 2012
105
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 consist of 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 term loans (2011: revolving credit facility), 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 2012 and 31 December 2011 were as follows:
Commodity contracts:
Less than one year
More than one year but not more than two years
Forward foreign currency exchange contracts:
Less than one year
More than one year but not more than two years
More than two years
Total
Less: non-current portion
Commodity contracts
Forward foreign currency exchange contracts
Total non-current portion
Current portion
As at 31 December 2012
As at 31 December 2011
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
33.0
2.4
4.6
0.6
4.7
(70.6)
(14.2)
(29.8)
(10.8)
(30.2)
45.3
(155.6)
(2.4)
(5.3)
(7.7)
37.6
14.2
41.0
55.2
(100.4)
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)
The amounts recorded in the income statement in respect of derivatives which are marked-to-market were as follows:
Unrealised (losses)/gains on derivative contracts recognised in arriving at operating profit
Years ended 31 December
2012
£m
(36.1)
2011
£m
89.8
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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106 Drax Group plc
Annual report and
accounts 2012
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 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) 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 largely determined by comparison
between forward market prices and the contract price; therefore these contracts are categorised as Level 2.
There have been no transfers during the year between Level 1, 2 or 3 category inputs.
Risk
The Group’s activities expose it to a variety of financial risks including commodity price risk, interest rate risk, foreign
currency risk, liquidity risk, counterparty risk and credit risk. The Group’s overall risk management programme focuses
on the unpredictability of commodity and financial markets and seeks to manage potential adverse effects on the Group’s
financial performance.
The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by the
risk management committees as detailed in 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.
Drax Group plc
Annual report and
accounts 2012
107
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 2012 would increase/decrease by £5.4 million (2011: decrease/increase
by £7.2 million). This is mainly attributable to the Group’s exposure to financial coal derivatives; and
–(cid:3) other equity reserves would decrease/increase by £32.0 million (2011: decrease/increase by £10.5 million) mainly as a result
of the changes in the fair value of commitments to sell power.
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 December 2012 (see note 18),
the Group repaid its outstanding balance against the revolving credit facility, and drew down £100 million of new term loans.
No new interest rate swaps have been taken out to the date of the approval of these consolidated financial statements;
however this risk management tool remains available to the Group. 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 2012 would decrease/increase by £0.2 million (2011: increase/decrease by £0.8 million)
as a result of the changes in interest payable during the period.
Foreign currency risk
Foreign currency exchange contracts are entered into to hedge fixed price international coal purchases in US dollars, biomass
purchases in Canadian dollars, US dollars and euros, and CO2 emissions allowances purchases in euros. As we progress our
biomass transformation plans, we are entering into an increasing volume of forward foreign exchange contracts. Exchange
rate exposures are managed within approved policy parameters utilising a variety of 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 2012 would decrease/increase by £86.5 million (2011: decrease/increase
by £21.2 million). This is mainly attributable to the Group’s exposure to foreign currency exchange contracts entered into
in relation to biomass purchase (2011: financial coal) contracts; and
–(cid:3) other equity reserves would decrease/increase by £1.1 million (2011: decrease/increase by £4.9 million) as a result of
the changes in the fair value of hedged foreign currency exchange contracts.
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108 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
19. Financial instruments (continued)
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.
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.
Term loans, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
Revolving credit facility, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
Within
3 months
£m
3 months–
1 year
£m
1.3
0.1
1.4
240.1
241.5
4.1
0.2
4.3
35.3
39.6
Within
3 months
£m
3 months–
1 year
£m
10.0
0.1
10.1
260.7
270.8
–
0.2
0.2
31.4
31.6
As at 31 December 2012
>1 year
£m
132.9
0.1
133.0
0.5
133.5
Total
£m
138.3
0.4
138.7
275.9
414.6
As at 31 December 2011
>1 year
£m
–
0.5
0.5
0.7
1.2
Total
£m
10.0
0.8
10.8
292.8
303.6
Interest payments are calculated based on forward interest rates estimated at the balance sheet date using publicly available
information. The interest rates payable at the balance sheet dates were as follows:
Term loans
Revolving credit facility
As at 31 December
2012
% p.a.
5.02
–
2011
% p.a.
–
3.12
Drax Group plc
Annual report and
accounts 2012
109
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
Forward foreign currency exchange contracts, net
Within 1 year
£m
571.3
944.6
1,515.9
Within 1 year
£m
197.8
224.7
422.5
1–2 years
£m
171.2
485.6
656.8
1–2 years
£m
60.9
138.9
199.8
As at 31 December 2012
>2 years
£m
Total
£m
–
742.5
1,004.6
2,434.8
1,004.6
3,177.3
As at 31 December 2011
>2 years
£m
(0.9)
381.8
380.9
Total
£m
257.8
745.4
1,003.2
Counterparty risk
As the Group relies on third party suppliers for the delivery of fuel, sustainable biomass and other goods and services, it is
exposed to the risk of non-performance by these third party suppliers. If a large supplier falls into financial difficulty and/or
fails to deliver against the contracts, there would be additional costs associated with securing fuel from other suppliers.
The Group enters into fixed price and fixed margin contracts for the sale of electricity to a number of counterparties.
The failure of one or more of these counterparties to perform their contractual obligations may cause the Group financial
distress or increase the risk profile of the Group.
Credit risk
The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date,
as summarised below:
Financial assets:
Cash and cash equivalents
Short-term investments
Trade and other receivables
Derivative financial instruments
As at 31 December
2012
£m
2011
£m
371.7
30.0
229.5
45.3
676.5
202.8
30.0
272.3
131.6
636.7
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110 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
19. Financial instruments (continued)
Trade and other receivables are stated gross of the provision for doubtful debts of £4.7 million (2011: £3.0 million).
Credit exposure is controlled by counterparty limits that are reviewed and approved at risk management committees.
Where considered appropriate, counterparties are required to provide credit support in the form of a parent company
guarantee, letter of credit, deed of charge, or cash collateral. In addition, 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 Operational and financial performance. 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
20. Provisions
Carrying amount:
At 1 January 2011
Adjustment for change in discount rate
Unwinding of discount
At 1 January 2012
Unwinding of discount
At 31 December 2012
As at 31 December
2012
£m
(90.7)
371.7
30.0
311.0
1,493.7
2011
£m
(7.6)
202.8
30.0
225.2
1,240.1
Reinstatement
£m
6.4
23.5
0.6
30.5
1.0
31.5
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, on a discounted basis. The amount provided represents the
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).
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.
Drax Group plc
Annual report and
accounts 2012
111
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 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 1 January 2012
(Credited)/charged to the income statement
Credited to equity in respect of actuarial losses
Credited to equity in respect of cash flow hedges
At 31 December 2012
Financial
instruments
£m
(16.1)
25.5
–
(1.2)
8.2
(7.5)
–
(26.0)
(25.3)
Accelerated
capital
allowances
£m
254.6
(19.5)
Non trade
losses
£m
–
(31.6)
Other
liabilities
£m
17.6
(14.5)
–
–
235.1
(18.0)
–
–
–
–
(31.6)
7.6
–
–
–
–
3.1
11.4
–
–
Other
assets
£m
(11.9)
1.8
(0.9)
–
(11.0)
1.5
(2.1)
–
217.1
(24.0)
14.5
(11.6)
Total
£m
244.2
(38.3)
(0.9)
(1.2)
203.8
(5.0)
(2.1)
(26.0)
170.7
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)).
The Group did not recognise deferred tax assets with an estimated value of £4.0 million at 31 December 2012
(2011: £3.0 million) in respect of trading losses that are carried forward against future taxable income.
22. Issued equity
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each
Issued and fully paid:
2011 – 364,862,718 ordinary shares of 1116⁄29 pence each
2012 – 401,587,564 ordinary shares of 1116⁄29 pence each
As at 31 December
2012
£m
2011
£m
100.0
100.0
–
46.4
46.4
42.1
–
42.1
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112 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
22. Issued equity (continued)
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
Issue of share capital
At 31 December
Years ended 31 December
2012
(number)
2011
(number)
364,862,718 364,859,988
250,219
36,474,627
2,730
–
401,587,564
364,862,718
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 30 April 2012, a total of 246,017 shares were issued in satisfaction of shares vesting in accordance with the rules of the
Group’s Bonus Matching Plan granted in 2009. Additionally, on 10 February, 14 September and 24 December 2012 a total of
1,776 shares, 873 shares and 1,553 shares, respectively, were issued on early exercise of options under the Group’s Savings-
Related Share Option Plan by three separate individuals whose employment with the Group had terminated due to retirement
(28 September 2011: 274 shares, one individual). No shares were issued in satisfaction of the Bonus Matching Plan for
employees whose employment terminated due to retirement during 2012 (1 April 2011: 2,456 shares, one individual).
Share placing
As part of the funding for the capital investment required for biomass transformation, on 29 October 2012 the Group placed
36,474,627 shares, representing 9.9% of the existing issued ordinary share capital at that time. The placing raised gross
proceeds of £189.7 million. Associated transaction costs of £2.0 million have been deducted directly from equity.
The placing shares have been credited as fully paid and rank equally in all respects with the existing ordinary shares of 1116⁄29
pence each in the capital of the Company, including the right to receive all dividends and other distributions declared, made or
paid in respect of such shares after the date of issue of the placing shares.
The share placing was achieved through a “cash box” placing arrangement, which is legally structured such that the merger
relief criteria within the Companies Act 2006 apply. Accordingly, the funds raised in excess of the nominal value of the
shares issued have been treated as distributable within retained reserves rather than credited to the share premium account.
As a consequence, of the £187.7 million net proceeds raised, share capital increased by £4.3 million with the balance of
£183.4 million increasing retained profits in the year ended 31 December 2012 (note 26).
23. Share-based payments
Costs recognised in the income statement in relation to share-based payments are as follows:
ESIP
BMP
SAYE
Years ended 31 December
2012
£m
–
4.5
0.2
4.7
2011
£m
0.1
3.2
0.2
3.5
Drax Group plc
Annual report and
accounts 2012
113
Share Incentive Plan (“SIP”)
Between 2008 and 2010, 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 2011, or 2012.
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
2012
(number)
Shares acquired
during year
(number)
Shares
transferred
during year
(number)
Shares
held at
31 December
2012
(number)
Cost at
31 December
2012
£000
Nominal
value at
31 December
2012
£000
Market
value at
31 December
2012
£000
SIP
365,048
–
(34,535)
330,513
2,465
38
1,800
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 executives 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 executives up to a 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 2012, 2011 and 2010
BMP awards, of £5.8 million, £5.5 million and £3.0 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
2012
BMP
(number)
ESIP
(number)
2011
BMP
(number)
4,265,511
442,799
2,278,856
1,849,450
(98,049)
(246,017)
–
–
–
2,054,644
(65,533)
(2,456)
(732,869)
(442,799)
–
5,038,026
–
4,265,511
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114 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
23. Share-based payments (continued)
Savings-Related Share Option Plan (“SAYE Plan”)
In April 2012, 2011 and 2010, participation in the SAYE Plan was offered to all qualifying employees. Options were granted for
employees to acquire shares at a price of 410 pence (2011: 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 2012, 2011 and 2010 options granted in connection with the SAYE Plan, of
£0.2 million, £0.2 million and £0.6 million, respectively, is being charged to the income statement over the life of the relevant
contracts. The only other 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
2012
2011
SAYE 3 Year
(number)
SAYE 5 Year
(number)
SAYE 3 Year
(number)
SAYE 5 Year
(number)
755,547
788,889
668,521
906,343
132,050
79,074
138,242
114,159
(33,328)
(17,367)
(50,942)
(66,454)
(4,202)
–
–
–
(274)
–
–
(165,159)
850,067
850,596
755,547
788,889
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
2012
£m
1.5
2011
£m
1.5
2012
£m
420.7
2011
£m
420.7
2012
£m
710.8
2011
£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.
Drax Group plc
Annual report and
accounts 2012
115
Years ended 31 December
2012
£m
63.3
(24.1)
(0.8)
2011
£m
59.5
70.5
0.1
(80.4)
(68.6)
(0.4)
26.0
(16.4)
0.6
1.2
63.3
25. Hedge reserve
At 1 January
(Losses)/gains recognised:
– Commodity contracts
– Forward foreign currency exchange contracts
Released from equity:
– Commodity contracts
– Forward foreign currency exchange contracts
Related deferred tax, net (note 21)
At 31 December
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.
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
As at 31 December 2012
Within 1 year
£m
1–2 years
£m
>2 years
£m
(11.6)
(0.9)
(12.5)
(3.7)
(0.2)
(3.9)
–
–
–
Total
£m
(15.3)
(1.1)
(16.4)
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
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116 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
26. Retained profits/(accumulated losses)
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)
Issue of share capital (note 22)
Equity dividends paid (note 8)
Net movements in equity associated with share-based payments
At 31 December
27. Cash generated from operations
Profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax charge/(credit)
Depreciation and amortisation
Unrealised losses/(gains) on derivative contracts
Defined benefit pension scheme current service cost
Non-cash charge for share-based payments
Years ended 31 December
2012
£m
65.0
163.8
(9.0)
2.1
183.4
(95.7)
4.7
314.3
2011
£m
(276.6)
464.6
(3.7)
0.9
–
(123.7)
3.5
65.0
Years ended 31 December
2012
£m
163.8
15.3
(1.7)
26.4
58.5
36.1
5.7
4.7
2011
£m
464.6
30.3
(2.2)
(126.5)
57.2
(89.8)
5.4
3.5
Operating cash flows before movement in working capital
308.8
342.5
Changes in working capital:
Increase in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables
Total increase in working capital
Increase in carbon assets
Decrease in ROC assets
Defined benefit pension scheme contributions
Cash generated from operations
(19.9)
44.5
(33.9)
(9.3)
(39.0)
13.4
(10.7)
263.2
(21.0)
(36.6)
6.4
(51.2)
–
1.0
(10.4)
281.9
28. Reconciliation of net cash
Net cash at 1 January
Increase/(decrease) in cash and cash equivalents
Decrease in short-term investments
(Increase)/decrease in borrowings
Net cash at 31 December
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
Drax Group plc
Annual report and
accounts 2012
117
Years ended 31 December
2012
£m
225.2
168.9
–
(83.1)
311.0
2011
£m
204.0
(33.2)
(65.0)
119.4
225.2
Years ended 31 December
2012
£m
63.7
7.0
8.9
4.7
84.3
2011
£m
55.6
6.0
8.3
3.5
73.4
Years ended 31 December
2012
(number)
2011
(number)
602
354
194
1,150
582
352
162
1,096
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118 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
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 2012
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
2012
% p.a.
4.6
3.0
2.9
4.0
5.6
2011
% p.a.
4.8
3.1
3.0
4.1
5.2
The mortality assumptions are based on standard mortality tables which allow for future mortality improvements.
The assumptions are that a member who retired in 2012 at age 60 will live on average for a further 26 years (2011: 26 years)
after retirement if they are male, and for a further 28 years (2011: 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 30 years respectively (2011: 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
As at 31 December
2012
£m
199.0
(156.9)
42.1
2011
£m
182.4
(145.4)
37.0
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 £4.7 million (2011: gain of £8.5 million).
Years ended 31 December
2012
£m
5.7
5.7
8.8
(7.7)
1.1
6.8
2011
£m
5.4
5.4
8.9
(7.9)
1.0
6.4
Drax Group plc
Annual report and
accounts 2012
119
Years ended 31 December
2012
£m
(63.6)
(9.0)
(72.6)
2011
£m
(59.9)
(3.7)
(63.6)
Years ended 31 December
2012
£m
182.4
5.7
0.2
8.8
6.0
(4.1)
199.0
2011
£m
167.2
5.4
0.4
8.9
4.3
(3.8)
182.4
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
Employee contributions reduced from 1 April 2012 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.
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 (losses)/gains
Employer contributions
Employee contributions
Benefits paid
Fair value of plan assets at 31 December
Years ended 31 December
2012
£m
145.4
7.7
(3.0)
10.7
0.2
(4.1)
156.9
2011
£m
129.9
7.9
0.6
10.4
0.4
(3.8)
145.4
Employer contributions included payment of £5.0 million (2011: £5.4 million) to reduce the actuarial deficit.
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120 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
30. Retirement benefit obligations (continued)
The major categories of plan assets as a percentage of total plan assets were as follows:
Equities
Fixed interest bonds
Property
Hedge funds
Cash and other assets
As at 31 December
2012
%
39.7
38.9
9.2
10.8
1.4
2011
%
35.8
49.4
–
11.0
3.8
The pension plan assets do not include any ordinary shares issued by Drax Group plc or any property occupied by the Group.
The Group employs a building block approach in determining the long-term rate of return on pension plan assets. Historical
markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted
capital market principles. The overall expected rate of return on assets is then derived by aggregating the expected return for
each asset class over the actual asset allocation for the scheme.
The net liability recognised in the balance sheet is particularly sensitive to the discount rate assumption, which is determined
by reference to market yields at the balance sheet date on high quality corporate bonds, allowing for the duration of the
scheme’s liabilities. 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 £18 million (2011: £16 million) and a decrease of 0.5% in the discount
rate would increase the net liability recognised in the balance sheet by £20 million (2011: £19 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
As at 31 December
2012
£m
(199.0)
156.9
(42.1)
(1.7)
(3.0)
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
2008
£m
(114.4)
93.8
(20.6)
13.2
(26.1)
Defined contribution scheme
Pension costs for the defined contribution scheme are as follows:
Total included in staff costs (note 29)
Years ended 31 December
2012
£m
3.2
2011
£m
2.9
The Group expects to contribute £10.5 million to its pension plans during the 12 months ended 31 December 2013.
The Company intends to fund the deficit, agreed at the last triennial valuation, over the period to 31 December 2018.
Drax Group plc
Annual report and
accounts 2012
121
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
As at 31 December
2012
£m
137.0
27.1
2011
£m
68.4
22.9
Future commitments to purchase fuel under fixed and variable priced contracts
1,448.9
1,400.7
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
32. Contingent liabilities
As at 31 December
2012
£m
1.2
4.4
7.4
13.0
2011
£m
0.9
3.3
7.2
11.4
Borrowings
In addition to the amount drawn down against the bank loans, 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 2012 the Group’s
contingent liability in respect of letters of credit issued under the revolving credit facility amounted to £77.6 million (2011:
£126.1 million, under the previous £310 million revolving credit facility).
Community Energy Saving Programme
Drax Power Limited was obliged under the Electricity and Gas (Community Energy Saving Programme) Order 2009 (“CESP”)
to deliver energy saving measures to domestic consumers in specific low income areas of Great Britain during the period
1 October 2009 to 31 December 2012 (the “Obligation Period”). Drax’s obligation was to deliver 895,138 lifetime tonnes of CO2
savings. Drax entered into an agreement with a third party, pursuant to which the third party was obliged to deliver Drax’s
CESP obligation, for a total cost of £17 million. The third party has failed to comply fully with its obligation under the agreement,
leaving a significant shortfall against Drax’s CESP obligation. Drax will be considering legal proceedings for breach of contract
against the third party.
Drax has entered into further agreements with additional third parties in order to rectify this shortfall so far as practicable.
Whilst the precise volume of measures achieved through these additional steps remains subject to confirmation by the Office
of Gas and Electricity Markets (“Ofgem”), which administers CESP, Drax has fallen significantly short of its CESP obligation at
the end of the Obligation Period.
The Gas and Electricity Markets Authority (“the Authority”) is the enforcement authority in relation to CESP. It is for Ofgem to
decide whether to open an investigation into any party that has failed to meet its obligation. Subject to the findings of such an
investigation, Ofgem will produce a statement of case or decide that there is no case to answer. In the case of the former, a
recommendation to an enforcement committee of the Authority will be made on enforcement action to impose. The Authority
has wide powers of enforcement, including issuing a penalty or other means of enforcement. Ofgem has also indicated that
a settlement committee of the Authority will be established to consider proposals made by obligated parties to settle
investigations. At this stage, it is not possible to predict accurately what, if any, enforcement action may be imposed.
In the absence of any communication on enforcement from Ofgem prior to their report on compliance to the Secretary of
State in April 2013, it is not practicable to measure reliably the financial impact, if any. Accordingly no provision has been
recognised within the consolidated financial statements in relation to this matter.
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122 Drax Group plc
Annual report and
accounts 2012
Notes to the consolidated financial statements
33. 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
2012
£000
3,411
1,775
284
2011
£000
3,317
1,145
266
5,470
4,728
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.
There were no other transactions with directors for the periods covered by these consolidated financial statements.
Drax Group plc
Annual report and
accounts 2012
123
Company – Independent auditor’s report
To the members of Drax Group plc
We have audited the Company financial statements of Drax Group plc for the year ended 31 December 2012 which comprise the
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
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 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 Company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements. 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 Company financial statements:
–(cid:3) give a true and fair view of the state of the Company’s affairs as at 31 December 2012;
–(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 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 Company, or returns adequate for our audit have not been
received from branches not visited by us; or
–(cid:3) the 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 2012.
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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
18 February 2013
124 Drax Group plc
Annual report and
accounts 2012
Company balance sheet
Fixed assets
Investment in subsidiaries
Current assets
Amounts due from other group companies
Short-term investments
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 18 February 2013.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
As at 31 December
2012
£000
2011
£000
Notes
3
479,104
469,766
13,418
10,000
178,177
12,318
–
101
201,595
12,419
(4,936)
196,659
(2,790)
9,629
675,763
479,395
4
5
5
5
5
46,390
1,502
42,148
1,502
420,700
420,688
207,171
15,057
675,763
479,395
Drax Group plc
Annual report and
accounts 2012
125
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.
(D) 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, unless merger relief criteria within the Companies Act
(2006) apply, in which case the difference is recorded in retained earnings.
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.
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 18 February 2013. Drax Group plc
reported a profit for the year ended 31 December 2012 of £99.6 million, or a loss of £0.6 million before dividends received
from other group companies (2011: a profit for the year of £125.1 million, or a profit of £0.6 million before dividends).
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 £558,000 (2011: £593,000).
The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2012 was £20,000
(2011: £20,000).
3. Fixed asset investments
Carrying amount:
At 1 January 2012
Capital contribution
At 31 December 2012
Years ended 31 December
2012
£000
2011
£000
469,766
466,096
9,338
479,104
3,670
469,766
Fixed asset investments relate entirely to subsidiary undertakings of the Company.
The capital contribution consists of two elements: a £4,578,000 (2011: £100,000) capital injection into a new subsidiary,
and £4,760,000 (2011: £3,570,000) in relation to the share-based payment charge associated with the 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.
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126 Drax Group plc
Annual report and
accounts 2012
Notes to the Company balance sheet
3. Fixed asset investments (continued)
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)
Drax Limited (holding company) (1)
Country of incorporation and
registration
Type of share
Group effective
shareholding
England and Wales
Ordinary
England and Wales
–(2)
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)
England and Wales
Ordinary
Drax Biomass Developments Limited (holding company)
England and Wales
Ordinary
Drax Biomass (Selby) Limited (non-trading company) (1)
England and Wales
Ordinary
Drax Biomass (Immingham) Limited (non-trading company) (1)
England and Wales
Ordinary
Drax Biomass (Tyneside) Limited (non-trading company) (1)
England and Wales
Ordinary
BondPower Limited (non-trading company)
Jersey
Ordinary
Haven Power Limited (trading company, power retail) (1)
England and Wales
Ordinary
Haven Power Nominees Limited (non-trading company)
England and Wales
Ordinary
Drax Power International Limited (non-trading company)
England and Wales
Ordinary
Drax (International) Limited (holding company)
England and Wales
Ordinary
Drax Biomass International Limited (non-trading company)
England and Wales
Ordinary
Drax Biomass International Inc. (holding company) (1)
USA
Common
Drax Biomass Holdings Limited (holding company) (1)
England and Wales
Ordinary
Drax Biomass Transit LLC (holding company) (1)(3)*
Drax Biomass Holdings LLC (holding company) (1)(3)*
Morehouse BioEnergy LLC (trading company, fuel supply) (1)(3)*
Amite BioEnergy LLC (trading company, fuel supply) (1)(3)*
Baton Rouge Transit LLC (trading company, fuel supply) (1)(3)*
USA
USA
USA
USA
USA
Common
Common
Common
Common
Common
Drax CCS Limited (non-trading company)(4)
Capture Power Limited (non-trading company)(1)(5)
England and Wales
Ordinary
England and Wales
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
All subsidiary undertakings operate in their country of incorporation. All subsidiary undertakings have 31 December year ends.
Notes:
(1) Held by an intermediate subsidiary undertaking.
(2) Limited by guarantee.
(3) Limited liability company registered in Delaware, USA.
(4) Formerly Salerosa One Limited.
(5) Formerly Salerosa Two Limited.
* Additions in year.
Drax Group plc
Annual report and
accounts 2012
127
As at 31 December
2012
£000
2011
£000
4. Called-up share capital
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each
99,950
99,950
Issued and fully paid:
2011 – 364,862,718 ordinary shares of 1116⁄29 pence each
2012 – 401,587,564 ordinary shares of 1116⁄29 pence each
–
42,148
46,390
46,390
–
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
Issue of share capital
At 31 December
Years ended 31 December
2012
(number)
2011
(number)
364,862,718 364,859,988
250,219
36,474,627
2,730
–
401,587,564
364,862,718
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 30 April 2012, a total of 246,017 shares were issued in satisfaction of shares vesting in accordance with the rules of the
Group’s Bonus Matching Plan granted in 2009. Additionally, on 10 February, 14 September and 24 December 2012 a total of
1,776 shares, 873 shares and 1,553 shares respectively were issued on early exercise of options under the Group’s Savings-
Related Share Option Plan by three separate individuals whose employment with the Group had terminated due to retirement
(28 September 2011: 274 shares, one individual). No shares were issued in satisfaction of the Bonus Matching Plan for
employees whose employment terminated due to retirement. (1 April 2011: 2,456 shares, one individual)
Share placing
As part of the funding for the capital investment required for biomass transformation, on 29 October 2012 the Group placed
36,474,627 shares, representing 9.9% of the existing issued ordinary share capital at that time. The placing raised gross
proceeds of £189.7 million. Associated transaction costs of £2.0 million have been deducted directly from equity.
The placing shares have been credited as fully paid and rank equally in all respects with the existing ordinary shares of 1116⁄29
pence each in the capital of the Company, including the right to receive all dividends and other distributions declared, made or
paid in respect of such shares after the date of issue of the placing shares.
The share placing was achieved through a “cash box” placing arrangement, which is legally structured such that the merger
relief criteria within the Companies Act 2006 apply. Accordingly, the funds raised in excess of the nominal value of the
shares issued have been treated as distributable within retained reserves rather than credited to the share premium account.
As a consequence, of the £187.7 million net proceeds raised, share capital increased by £4.3 million with the balance of
£183.4 million increasing retained profits in the year ended 31 December 2012 (note 5).
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128 Drax Group plc
Annual report and
accounts 2012
Notes to the Company balance sheet
5. Analysis of movements in equity shareholders’ funds
At 1 January 2011
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 6)
At 1 January 2012
Share capital issued (note 4)
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 6)
At 31 December 2012
6. Dividends
Share
capital
£000
Capital
redemption
reserve
£000
Share
premium
£000
Profit and loss
account
£000
Total
£000
42,148
1,502
420,688
10,050
474,388
–
–
–
42,148
4,242
–
–
–
–
–
–
–
–
–
125,125
3,570
125,125
3,570
(123,688)
(123,688)
1,502
420,688
15,057
479,395
–
–
–
–
12
–
–
–
183,424
99,560
4,760
187,678
99,560
4,760
(95,630)
(95,630)
46,390
1,502
420,700
207,171
675,763
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 2012 of 14.4 pence per share paid on
12 October 2012 (2011: 16.0 pence per share paid on 14 October 2011)
Final dividend for the year ended 31 December 2011 of 11.8 pence per share paid on
11 May 2012 (2011: 17.9 pence per share paid on 13 May 2011)
Years ended 31 December
2012
£000
2011
£000
52,576
58,378
43,054
65,310
95,630
123,688
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 2012 of 10.9 pence per share (equivalent to approximately £44.0
million) payable on or before 17 May 2013. The final dividend has not been included as a liability as at 31 December 2012.
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 assets of certain of its subsidiaries, 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 subsidiary
undertakings of the Company that are party to the security arrangement. The Company itself is not a guarantor of the
Group’s debt.
Drax Group plc
Annual report and
accounts 2012
129
Shareholder information
Key dates for 2013
At the date of publication of this document, the following are the proposed key dates in the 2013 financial calendar:
Annual General Meeting
Ordinary shares marked ex-dividend
Record Date for entitlement to the final dividend
Payment of final dividend
Interim Management Statement
Financial half year end
Announcement of half year results
Interim Management Statement
Financial year end
24 April
24 April
26 April
17 May
mid May
30 June
30 July
mid November
31 December
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 2012, and the
graph provides an indication of the trend of the share price throughout the year.
Closing price on
31 December 2011
545.0 pence
Low during the year
(25 July 2012)
442.0 pence
High during the year
(14 May 2012)
574.5 pence
Share price graph(1)
1 January to 31 December 2012
600
500
400
Closing price on
31 December 2012
544.5 pence
Share price (p)
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Notes:
(1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.
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130 Drax Group plc
Annual report and
accounts 2012
Shareholder information
Market capitalisation
The market capitalisation, based on the number of shares in issue and the closing middle market price at 31 December 2012,
was approximately £2.2 billion.
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 plus network charges.
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.
Drax Group plc
Annual report and
accounts 2012
131
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.
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 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).
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132 Drax Group plc
Annual report and
accounts 2012
Shareholder information
Shareholder profile
The categories of ordinary shareholders and the ranges and size of shareholdings as at 31 December 2012 are set out below:
Analysis of shareholders
Private shareholders
Institutional and corporate holders
Total
Range
1–100
101–200
201–500
501–1,000
1,001–5,000
5,001–10,000
10,001–100,000
100,001–500,000
500,001 and above
Total
Notes:
(1) Ordinary shares of 1116⁄29 pence each.
Number of
shareholders
1,577
1,346
2,923
Number of
shareholders
108
167
506
654
903
121
252
131
81
As at 31 December 2012
%
Number of
shares(1)
53.96
3,047,732
46.04
398,539,832
%
0.76
99.24
100.00
401,587,564
100.00
As at 31 December 2012
%
3.69
5.71
17.31
22.38
30.90
4.14
8.62
4.48
Number of
shares(1)
6,093
27,447
187,783
536,751
2,048,333
878,514
9,272,608
31,022,962
2.77
357,607,073
%
0.00
0.01
0.05
0.13
0.51
0.22
2.31
7.72
89.05
100.00
2,923
100.00
401,587,564
Shareholders by percentage ownership
as at 31 December 2012
Shareholders by number
as at 31 December 2012
Private
shareholders:
0.76%
Institutional
shareholders:
99.24%
Private
shareholders:
1,577
Institutional
shareholders:
1,346
Drax Group plc
Annual report and
accounts 2012
133
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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 advisers
PricewaterhouseCoopers LLP
1 Embankment Place, London WC2N 6RH
Solicitors
Norton Rose LLP
3 More London Riverside, London SE1 2AQ
Slaughter and May LLP
One Bunhill Row, London EC1Y 8YY
134 Drax Group plc
Annual report and
accounts 2012
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
Power revenues divided by volume of net
available for generation.
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).
EBITDA
EU ETS
Forced outage
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
Any reduction in plant availability excluding
mechanism introduced across the EU to
reduce emissions of CO2; the scheme is
capable of being extended to cover all
greenhouse gas emissions.
planned outages.
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 rate
Frequency response service
The capacity which is not available due to
Services purchased by National Grid to
forced outages or restrictions expressed as
a percentage of the maximum theoretical
capacity, less planned outage capacity.
maintain system frequency.
Grid charges
Group
Includes transmission network use of
system charges (“TNUoS”), balancing
services use of system charges (“BSUoS”)
and distribution use of system charges
(“DUoS”).
Drax Group plc and its subsidiaries.
Drax Group plc
Annual report and
accounts 2012
135
IFRSs
LECs
Load factor
International Financial Reporting
Standards.
Levy Exemption Certificates. Evidence of
Climate Change Levy exempt electricity
supplies generated from qualifying
renewable sources.
Net sent out generation as a percentage
of maximum sales.
Lost time injury rate
Net Balancing Mechanism
Net cash/(debt)
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.
Comprises cash and cash equivalents,
short-term investments less overdrafts and
borrowings net of deferred finance costs.
Net merchant sales
Net sales
Occupational health and safety
assessment series (OHSAS)
Net volumes attributable to bilateral
contracts and power exchange trades.
The aggregate of net merchant sales and
The OHSAS specification gives
net Balancing Mechanism.
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
Pond fines
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.
Coal dust and waste coal from the cleaning
and screening process which can be used
for coal-fired power generation.
Power exchange trades
Power revenues
ROCs
Power sales or purchases transacted on
the APX UK power trading platform.
The aggregate of bilateral contracts and
Balancing Mechanism income/expense.
Renewables Obligation Certificates.
Summer
Technical availability
Total recordable injury rate (TRIR)
The calendar months April to September.
Total availability after planned and
The frequency rate is calculated on the
forced outages.
following basis: (lost time injuries + worst
than first aid)/hours worked x 100,000.
UK NAP
Underlying earnings per share
Winter
UK National Allocation Plan.
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.
The calendar months October to March.
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136 Drax Group plc
Annual report and
accounts 2012
Notes
Design and production:
Radley Yeldar | www.ry.com
Illustration:
Graphic Ad
Board photography:
Henry Thomas
Print:
Park Communications Ltd
Park is an EMAS certified CarbonNeutral® Company
and its Environmental Management System is
certified to ISO14001.
100% of the inks used are vegetable oil based, 95%
of press chemicals are recycled for further use and,
on average 99% of any waste associated with this
production will be recycled.
This document is printed on Revive 100 White Silk, a
fully certified FSC® paper containing 100% de-inked
post consumer waste. The pulp used to produce this
product is bleached using a Totally Chlorine Free
(TCF) process.
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
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