Drax Group plc
Annual report and accounts 2013
powering
tomorrow
Welcome to our 2013 report…
17
Our business model
There are several steps in the Drax value chain, with each one providing
incremental value to the business.
source
generate
supply
20
Looking
back and to
the future
Chief Executive’s statement
During 2013, we made important
progress in our journey to deliver
transformation of the Group.
Dorothy Thompson CBE
Chief Executive
28
Solid performance
Operational and financial performance
We delivered a solid operational performance in 2013.
However, EBITDA was lower than last year due to the rising costs of carbon.
Total revenue
2,062
£m
(2012: £1,780 million)
EBITDA
230£m
Net cash
71£m
Gross profit
445£m
(2012: £311 million)
(2012: £511 million)
Load factor
80%
(2012: 82%)
Carbon dioxide
emissions
725t/GWh
Underlying basic
earnings per share
Total recordable
injury rate
35pence per share
0.29
(2012: £298 million)
(2012: 784t/GWh)
(2012: 52 pence per share)
(2012: 0.17)
64
Corporate governance
“Drax is committed to good
corporate governance,
which is a cornerstone
to a successful and
sustainable company.”
Charles Berry
Chairman
50
Sustainable business review
Sustainability underpins all that we do and
the future of our business encompasses all
three aspects of sustainable development –
environmental, social and economic.
Strategic report
Overview
02 2013 achievements
14
16
20
24
Chairman’s introduction
Our business today
Chief Executive’s statement
Principal performance indicators
Marketplace,
performance and risk
26
Marketplace
28
Operational and financial
performance
46
Principal risks and uncertainties
Sustainable business review
50
Sustainable business review
Governance – Directors’ report
58
The Board of directors
59 Directors’ biographies
62 The Executive Committee
63
Executive Committee
members’ biographies
64
Corporate governance
72 Directors’ responsibilities statement
73
77
78
Audit Committee report
Nominations Committee report
Remuneration Committee report
Financials
99
Independent auditor’s report
102
Consolidated income statement
103
Consolidated statement
of comprehensive income
104
Consolidated balance sheet
105
Consolidated statement of
changes in equity
106
Consolidated cash flow statement
107
Notes to the consolidated
financial statements
142
Company balance sheet
143
Notes to the Company
balance sheet
146
Shareholder information
151
Glossary
01
Drax Group plc
Annual report and accounts 2013
We live in a world reliant on energy.
It is an essential part of life.
As pioneers of sustainable power,
we are working hard to transform
what we do today, to help ensure we
play our part in powering tomorrow.
Our future lies in leading the way in
providing cost-effective, low carbon
and reliable renewable power.
This transformation
is underway…
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Drax Group plc
3
Annual report and accounts 2013
03
Drax Group plc
Annual report and accounts 2013
virtuous cycle
We have made good progress on
securing supplies of sustainable
biomass for the near-term;
we continue negotiations for
long-term supplies.
We only source sustainable biomass, predominantly
from sustainably managed forests. These are
production forests where the rate of growth is at
least equal to the rate of harvest, which means there
is no depletion in the forest carbon stock.
Read more:
Securing sustainable
biomass supplies
See page 20
Read more:
Biomass sustainability
and procurement
See page 56
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Drax Group plc
Annual report and accounts 2013
first steps
We are well underway with
constructing our biomass facilities
in the US.
During the year construction began on
our two pellet plants, one in Louisiana and one
in Mississippi, and our port facility in Louisiana.
Commercial operations will start in the
first half of 2015.
Read more:
Securing sustainable
biomass supplies
See page 20
05
Drax Group plc
Annual report and accounts 2013
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Drax Group plc
Annual report and accounts 2013
joined up
We launched the UK’s first
purpose-built biomass rail freight
wagon and the first 50
are now operational.
The new, bigger and better rail wagons push
the boundaries of rail engineering. They are
designed to keep the biomass they carry dry,
move more of it at a time and speed up the
process of delivery.
Read more:
UK biomass logistics
See page 20
07
Drax Group plc
Annual report and accounts 2013
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Drax Group plc
Annual report and accounts 2013
innovation
works
We converted our first generating
unit to burn sustainable biomass in
place of coal and commissioned new
facilities to support it.
The first converted unit has been running
successfully since April 2013. By the end of 2013
the unit was fully supported by new, bespoke
biomass receipt, storage and distribution systems.
Read more:
Biomass conversion
See page 20
Read more:
Outage and plant
utilisation levels
See page 36
09
Drax Group plc
Annual report and accounts 2013
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Drax Group plc
Annual report and accounts 2013
11
D
Drax Group plc
Annual report and accounts 2013
staying ahead
We remain committed to maintaining
operational excellence at Drax Power
Station, with leading performances
from safety to maintenance.
Two major planned outages were completed
during 2013 on time and to budget with no
recordable injuries. Generation output remained
high for the fourth consecutive year.
Read more:
Coal-fired generation
performance
See page 22
Read more:
Outage and plant
utilisation levels
See page 36
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Drax Group plc
Annual report and accounts 2013
13
Drax Group plc
Annual report and accounts 2013
well placed
We are winning significant
new contracts with our renewable
power offer for our retail
business customers.
Our contracts are simple, flexible and designed
to meet our customers’ specific requirements,
and all are backed by an excellent standard
of customer service.
Read more:
Retail performance
See page 22
Read more:
Retail growth
See page 37
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14
Drax Group plc
Annual report and accounts 2013
Chairman’s introduction
Significant progress
for the Group
Providing electricity from sustainable biomass has great
potential and it has an important role as a low carbon,
cost-effective and reliable renewable technology in the
future energy mix of the UK.
Charles Berry
Chairman
15
Drax Group plc
Annual report and accounts 2013
In perspective
Earnings and dividend
The Board and governance
Our commitment to becoming a
leading provider of sustainable power
is stronger than ever. As a Group we
made significant progress in this
respect during 2013, from starting the
construction of wood pellet plant and
port facilities in the US, through the
conversion of our first generating unit at
Drax Power Station to burn sustainable
biomass in place of coal, to increasing
sales of renewable power to business
customers in the UK.
The energy sector faces many
challenges. Whether concerns centre
on security of supply, affordability or
decarbonisation, as a Group we are
pleased to say that we are working hard
to provide power which is secure and
reliable, cost-effective and low carbon.
The regulatory framework which shapes
the UK energy industry fully recognises
the valuable and strategic role that
sustainable biomass has to play in the
energy mix. Importantly, establishing
that framework will unlock the potential
of this new and vibrant biomass
industry and promote growth through
investment and job creation.
Our achievements in 2013 position us
well to secure an attractive future for
our business and our shareholders.
We are firmly on track to deliver the
many benefits that biomass has to
offer as an energy source.
Our earnings (EBITDA(1)) for the year
were slightly ahead of expectations
at £230 million.
These are lower than in 2012
(£298 million) reflecting the increasing
costs of carbon (£120 million), driven by
the introduction of the UK government’s
carbon price support mechanism from
1 April 2013 and the removal of free
allowances under the EU ETS.
In accordance with our dividend policy,
the Board proposes a final dividend in
respect of 2013 of 8.9 pence per share,
equivalent to £36 million. This would give
total dividends for the year of £71 million
(2012: £97 million).
Corporate reporting
During 2013, a number of changes
were introduced to the legislation
and regulations governing reporting
requirements. The approach we
have adopted over recent years
satisfies many of the new disclosure
requirements. Nevertheless, we have
incorporated new features in this
Annual report and accounts which
enhance some aspects, such as
greenhouse gas emissions reporting,
which can be found on page 51 and
introduce others in our Governance
section starting on page 64.
We have an effective Board with
good and complementary skills,
knowledge and experience across
all directors, both executive and
non-executive. The Board takes
the lead in setting the tone for good
governance throughout the Group.
As a Board we ensure that our
conduct is focused on improving
our business, driving our strategic
priorities, and behaving responsibly.
Issues such as succession planning,
career development and diversity
are kept under review as a matter
of course.
More information can be found in
the Governance section of the report
starting on page 64.
Our people
We report on a year that has seen
unprecedented change across the
Group. Significant achievements
have been made by our people and
my sincere thanks go to all Group
staff for their tireless commitment
and hard work.
Charles Berry
Chairman
18 February 2014
(1) EBITDA is defined as profit before interest, tax, depreciation, amortisation and unrealised gains and losses on derivative contracts.
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Drax Group plc
Annual report and accounts 2013
Our business today
The UK’s electricity mix
In 2012 (latest figures available), generation from gas fell
mainly due to high gas prices, particularly relative to coal,
as well as greater generation from renewables.
Contribution to the UK’s electricity mix by fuel type
Coal
39%
Gas
28%
Nuclear
19%
Renewables
11.3%
Other
2.5%
Renewables breakdown
Bioenergy 1
67.8%
Wind
24.2%
Hydro
6.5%
Wave, tidal
and solar PV2
1.5%
Notes:
1 Landfill gas, sewage sludge digestion, energy from waste combustion, animal biomass, plant biomass, anaerobic digestion,
co-firing with fossil fuels.
2 Photovoltaics.
Source: Digest of UK Energy Statistics, 2013. Figures may not add up to 100 due to rounding.
17
Drax Group plc
Annual report and accounts 2013
Our business model
Our overriding objective is to maximise the value of the
Drax business. There are several steps in the Drax value chain,
with each one providing incremental value to the business
and ultimately maximising that value and delivering
our gross margin.
source
generate
supply
Fuel
How we maximise value…
kWe burn sustainable biomass currently
in one converted unit, which earns ROCs
and LECs.
kIn our coal units we have the ability
to burn other fuels, such as petcoke
and pond fines, which can be
economically advantageous.
kBy diversifying our fuel sources not only
are we less reliant on a single fuel type,
but we are also able to capture value from
commodity market cycles, and in the case
of biomass avoid the cost of carbon.
kOur investments in the US help secure
the timely delivery of reliable wood pellet
supplies to Drax Power Station, and
consolidate third party and own supplies
to secure more efficient and cost-effective
delivery logistics.
Generation
How we maximise value…
kThrough our turbine upgrade project we
secured our position as the most efficient
coal-fired power station in the UK, and with
it and our increasing use of biomass we are
delivering coal and CO2 savings.
kWith leading operational performances
across all aspects of the generation business,
from safety to maintenance, we are able to
deliver high availability and reliability.
kIn addition, the flexibility of our despatch
allows us to respond quickly to changes
in demand.
Environment
How we maximise value…
kThrough burning increasing volumes of
sustainable biomass and our efficiency
improvements we are able to significantly
reduce the amount of coal we burn, save on
carbon costs and reduce emissions of CO2.
kWe generate additional revenue through
sales of our by-products, reducing
disposal costs, and creating its own
revenue stream. By reducing emissions of
SO2, we produce gypsum which, like ash,
is sold to the construction industry.
kWe are investing to continue to
meet increasingly stringent emission
control requirements.
Trading
How we maximise value…
kAs the largest power station in the UK
we are able to utilise economies of scale
through, for example, procuring fuel at
competitive prices.
kWe are always looking to increase the
trading options available to us, for example,
through our retail business.
kWe benefit from having a physical asset
to trade around and through a seamless
interface with the operations side of the
business, enabling us to extract value in all
market conditions.
Retail
How we maximise value…
kWe have already achieved significant
growth in a competitive marketplace and
have become established as a recognised
supplier to businesses across the UK.
kWe have plans to grow further and deliver
our tailor-made supply contracts to even
more business customers.
kOur retail business increases the trading
options available for our power output,
providing an important, credit-efficient
and direct route to market, as well as a
route to market for our ROCs and LECs.
Read more:
Operational and financial performance
28–45
Read more:
Sustainable business review
50–57
Read more:
Marketplace
26–27
Influenced by a number of risk 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.
Read more:
Principal risks and uncertainties
46–49
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Drax Group plc
Annual report and accounts 2013
Our business today
Scale, efficiency
and service
Drax Group has three principal activities: sourcing fuel
(including sustainable biomass); electricity production;
and electricity sales to the wholesale market and
business customers.
source
generate
supply
Fuel
We use a range of fuels, including coal,
sustainable biomass and others, for example,
petcoke and pond fines, which can be
economically advantageous. As our business
transformation takes shape we will burn
predominantly sustainable biomass. In the
US we are investing in wood pellet plants
and a port facility to deliver a secure and
reliable wood pellet supply.
1.6million tonnes of biomass burnt
0.8million tonnes of economically
8.5million tonnes of coal burnt
advantageous fuel burnt
Generation
Drax Power Station is the largest 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.
3,960
MW connected capacity
at Drax Power Station
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 progress our biomass
conversion project our carbon footprint
will reduce dramatically. We sell the
by-products of our operations to the
construction industry.
sustainable biomass in place of coal
2.7million tonnes of CO2 saved through burning
0.7million tonnes of gypsum sold
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.
26.2TWh net sales of power generated
Retail
Our retail business, Haven Power,
is focused on providing businesses
with power contracts that are simple,
flexible and designed to meet their
specific requirements. Importantly,
these contracts are backed by an
excellent standard of customer service.
8.1TWh net power supplied
59% of sales growth by volume
19
Drax Group plc
Annual report and accounts 2013
Achieving our vision
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.
enabled by...
our strategy...
We have three key strategic initiatives
to enable us to achieve our vision, namely:
1
Creating our biomass fuel supply business in the US.
2
Our project to convert Drax Power Station into a
predominantly biomass-fuelled generating asset.
3
Our programme for the expansion of our
retail business, Haven Power.
delivered through six key priorities...
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Deliver excellent
people
leadership across
our business
Deliver our
biomass strategy
Maintain operational
excellence
Maximise
profitability from
our coal generation
capacity
Grow our
retail business
Maintain an
optimal supporting
capital structure
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our performance...
Total revenue
2,062
£m
(2012: £1,780 million)
EBITDA
230
£m
(2012: £298 million)
Net cash
71
£m
(2012: £311 million)
Gross profit
445
£m
(2012: £511 million)
Load factor
80
%
(2012: 82%)
Carbon dioxide emissions
Underlying basic earnings
Total recordable injury rate
725
t/GWh
(2012: 784t/GWh)
35
pence per share
(2012: 52 pence per share)
0.29
(2012: 0.17)
Read more:
Operational and financial
performance
28–45
Read more:
Principal performance
indicators
24–25
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Drax Group plc
Annual report and accounts 2013
Chief Executive’s statement
Looking back at our
achievements; looking forward
to the challenges
and opportunities ahead
Review of the year
Drax is evolving from its beginnings as
a power station owner and operator
to a Group producing predominantly
renewable power with activities that
span the supply chain for the provision
of biomass generated renewable power
that is sustainable, low carbon, cost-
effective and reliable. During 2013,
we made important progress in our
journey to deliver this transformation
of the Group.
Our vision for Drax is to be a bold,
customer oriented power generation
and retail business, driven by biomass
innovation. Our key initiatives in 2013 to
enable us to achieve our vision were: our
biomass fuel supply business in the US,
our biomass conversion project at Drax
Power Station, and our programme for
the expansion of Haven Power Limited
(“Haven Power”) through growing our
electricity sales to businesses. In each of
these we made notable progress during
the year bringing us closer to both
achieving our vision and delivering on
our overriding objective of maximising
the value of the Drax Group.
Earnings
Our earnings for 2013 reflect good
operations and good progress in
delivering reliable biomass generation.
As expected, at £230 million EBITDA is
down on last year (2012: £298 million)
as a result of increased carbon costs
through both the cessation of the
carbon emissions allocation under the
EU ETS and the introduction of the UK
government’s carbon price support
mechanism in April 2013.
Securing sustainable
biomass supplies
Our developments in the US are an
important part of our business model.
They help us to optimise the biomass
supply chain from North America which
is still in its infancy, but is the main source
of sustainable biomass fuel. The drivers
for our upstream investments are
twofold: securing the timely delivery
of reliable wood pellet supplies to Drax
Power Station and consolidating third
party and own supplies to secure
more efficient and cost-effective
delivery logistics.
Construction of two 450 thousand
tonnes per annum wood pellet plants –
Amite (Mississippi) and Morehouse
(Louisiana) – and a port facility at Baton
Rouge (Louisiana) progressed well during
the year. All three construction projects
are progressing to schedule and budget.
We are targeting the first quarter of 2015
for the start of commercial operations at
Amite and Baton Rouge and the second
quarter for Morehouse, with full capacity
reached six months later.
Aside from our investments to secure
a self-supply of sustainable biomass,
we have made good progress towards
securing near-term volumes of wood
pellets from suppliers in the market
with more than 4 million tonnes
contracted for April 2014 to March
2015. We continue our negotiations
for long-term volumes.
Sustainability is critical to our biomass
strategy. All our biomass, whether in raw
fibre or pellet form is procured against
our own robust sustainability criteria.
These include requirements for high
greenhouse gas emission reduction
and habitats and biodiversity protection,
as well as due consideration for the
important socio-economic factors
in the source areas.
A programme of independent audits
verifies that all our suppliers comply with
our sustainability criteria.
Our calculations show that the range of
sustainable biomass materials we have
burnt over the last few years has a low
carbon footprint. In 2013, the average
greenhouse gas emissions were
significantly below 79gCO2/MJ which is
the maximum under the UK government’s
framework for sustainability requirements
for biomass that are expected to become
mandatory in 2015.
UK biomass logistics
Initial long-term contracts have been
secured with UK port operators to
provide us with biomass import facilities.
Further contracts are under negotiation.
The development of these facilities is
on schedule.
We have concluded our first long-term
freight contracts at fixed prices. We were
particularly pleased to be able to secure
through these contracts good protection
against future increases in oil-related
freight costs, typically a major component
of total freight costs. The first 50 of
the bespoke biomass rail wagons are
operational transporting biomass from
the ports to the power station.
Biomass conversion
The conversion of our first generating
unit to burn sustainable biomass in place
of coal is proving successful.
The converted unit was initially fuelled
using existing storage and distribution
systems originally built to facilitate
biomass co-firing. Construction of new
bespoke facilities for the receipt, storage
and distribution of biomass remained on
schedule and within budget throughout
the year. From September 2013, we began
to commission the new systems.
Our notable achievements
for 2013 were…
Industry-leading safety performance amidst
high generation output levels, and significant
project and construction activity across
the Group.
Secured the first private funding to be
underpinned by the government’s UK
Guarantees Scheme.
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Drax Group plc
Annual report and accounts 2013
Dorothy Thompson CBE
Chief Executive
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Successfully delivered our first biomass
converted generating unit with truly
world-class performance.
Initiated construction of our first two
wood pellet plants and port facility in the
US, with construction well advanced by
the end of the year.
First 50 of the new, bespoke biomass rail
freight wagons fabricated and in operation –
the first new freight wagons to be approved
in the UK for over a decade.
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Drax Group plc
Annual report and accounts 2013
Chief Executive’s statement
By the end of the year the facilities were
fully supporting the first converted unit,
overcoming many of the expected
reliability issues with fuel delivery we
experienced in the first half of the year.
This contributed to the improved load
factor seen in the second half of the year,
giving a load factor for the full year of 75%.
However, we have experienced weaker
performance in our construction
activities, particularly at two of our
construction sites in the US which led to
an increase in the total recordable injury
rate. Working with our contractors we
have significantly increased the safety
management and supervision at
these sites.
Retail performance
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. It also provides a
good route to market for the Renewables
Obligation Certificates and Levy
Exemption Certificates earned when
we generate renewable power.
During 2013, Haven Power delivered
another year of substantial growth in a
highly competitive market with retail
sales 59% higher, in volume, than in 2012.
Sales growth remains a key priority for
the business.
An excellent standard of customer
service is central to our proposition
for this business. We are a consistent
high performer in the Datamonitor
Energy Users survey and have a good
renewals record.
Legislative framework –
contracts for difference
and capacity market
In December 2013, the Energy Act
became law. At the heart of the Act 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.
Electricity market reform also includes
the introduction of a capacity mechanism
into the electricity market to mitigate
future risks to the security of
electricity supplies.
Coal-fired generation
performance
As in previous years, our load factor at
80% was high compared to other thermal
capacity on the system and we delivered
strong generation output for the fourth
consecutive year. With good availability
and reliability throughout 2013 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.
For the year, our forced outage rate,
which measures any reduction in plant
availability excluding planned outages,
was 6.8%. This is higher than our
long-term target of 5%. In the first half of
the year we had a forced outage rate of
7.6%. During this period we carried out
performance tests on our boilers using a
wide range of marginal coal material to
establish the most economic fuel diet.
This resulted in a higher number of plant
integrity issues than we would typically
expect. The forced outage rate in the
second half of the year was lower and
more in line with our long-term target.
This has been set through extensive
benchmarking with UK and international
coal-fired plants to determine the
optimum balance between performance
and cost.
Health and safety
Two planned unit outages were
undertaken during 2013, and both were
completed on time and to budget without
any recordable injuries. With two outages
and considerable biomass project work
activity, the number of engineering
man-hours worked throughout the year
was significant. Our safety statistics
for the Group continued to be industry-
leading, reflecting the emphasis we
place on safety.
The contracts provide the necessary
certainty to underpin the long-term
commitments required to secure the
supply chain for sustainable biomass
fuel for these units. This includes term
contracts for UK port facilities, pellet
supplies and overseas logistics facilities,
as well as further direct investment by Drax
in the supply chain in the UK and overseas.
Our applications for early CfDs for the
conversion of two of our units were
successful with the units provisionally
ranked equal first amongst 16 projects.
The strike price for these contracts has
been confirmed as £105/MWh (in 2012
prices). Currently, the contracts are
scheduled to become effective, and so
allow the first payments, in April 2015,
subject to EU State Aid clearance.
Against this timetable we are now
targeting the conversion of our second and
third units to biomass in April 2015 and,
at the earliest, the fourth quarter of 2015.
In advance of these conversions we intend
to modify one of our coal units at the power
station to operate as an enhanced co-firing
unit from May of this year. As an enhanced
co-firing unit it will attract 0.9ROC/MWh
under the Renewables Obligation (“RO”).
This unit will then be used for the second
unit conversion in April 2015.
During 2014, we will progress the
construction works necessary to support
these conversions as well as the required
development of the supply chain, including
further UK port development and the
fabrication in the UK of more bespoke
railway wagons. Our target is for three
converted units to be fully operational and
supplied with sustainable biomass through
a well secured supply chain in 2016.
Applications for enduring CfDs are to
be made in the second half of 2014.
Any units not converted under the RO
or the early CfDs will be eligible to apply.
The government is currently consulting
on proposals for the contract allocation
process and budget management under
the Levy Control Framework which
sets the limits on the total amount of
subsidy available.
The government plans to award
early CfD contracts in Spring 2014.
These enable investment in advance of
the CfD mechanism coming into force
and importantly underpin further work
on our second and third unit conversions.
The government continues to work on
its proposals to introduce a capacity
market for electricity. These have not yet
been finalised, but it is our view that the
current designs do not make a compelling
economic case for the Drax coal units.
New and innovative biomass rail receipt,
storage and distribution facilities in operation
and supporting the first unit conversion.
All of Haven Power’s customers were
successfully transferred on to the new
billing system.
Through Haven Power, increased our retail sales
of power for the year by 59% (by volume) and our
forward sales by over 50%.
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Drax Group plc
Annual report and accounts 2013
Legislative framework –
sustainability criteria
In January 2014, the government
published the draft RO (Amendment)
Order 2014 which includes the
requirement for the Office for Gas and
Electricity Markets (“Ofgem”) to produce
guidance on sustainability criteria for
biomass. We continue to engage with
government and Ofgem on the
implementation of these criteria.
We firmly believe that robust, mandatory
sustainability criteria are vital to maintain
and enhance public acceptance, and
ensure that sustainable practices are
implemented. Together with five other
European biomass users we are involved
in the work of the Sustainable Biomass
Partnership which aims to establish
and manage a biomass assurance
framework to demonstrate that solid
biomass is derived from legal and
sustainable sources.
Carbon capture and storage
Together Drax, Alstom UK Limited and
BOC (a member of The Linde Group) have
formed the project company, Capture
Power Limited (“Capture Power”).
In December 2013, the government
awarded Capture Power a Front End
Engineering and Design (“FEED”) contract
for its planned, state-of-the-art 426MW
carbon capture and storage (“CCS”)
demonstration project – the White Rose
CCS Project. The FEED contract also
includes the planned development of a
carbon dioxide (“CO2”) transportation and
storage solution – the Yorkshire Humber
CCS pipeline – to be undertaken by
National Grid.
The award of the contract marks a major
next step in the UK CCS Commercialisation
Programme. The FEED study is a two-year
programme of detailed engineering,
planning, commercial and financial work
to finalise and de-risk all aspects of the
proposal ahead of taking the final
investment decision and proceeding to
financial close and the commencement
of construction.
The project will be dependent on
successful outcomes from external
funding processes and electricity market
reform mechanisms to incentivise low
carbon technologies.
Looking ahead
As noted above, from May this year one of
our coal units will operate as an enhanced
co-firing unit burning at least 85%
biomass. We will use this unit to conduct
further research and development into
the types of biomass that can be
effectively burnt, to develop our optimum
nitrogen oxides (“NOX”) abatement
solution on converted units, and to build
up biomass supplies for the second unit
conversion in April 2015.
During the year we will make further
investments in improving the
performance of our biomass units.
Through these investments we are
confident that we will now be able
to deliver capacity to the grid from
a converted unit of 630MW burning
standard biomass. This is only 15MW
less than when fuelled with coal. At this
output our efficiency rates will be just
0.5 percentage points less than coal
efficiency rates. This is materially better
performance than we originally expected
reflecting further technical progress
and investment.
Our overall target is to achieve a capacity
of 645MW using standard woody
biomass. We have already demonstrated
that we can achieve this higher output
under special conditions when using
particularly high calorific sustainable
wood pellets.
In March this year, we expect to have
two domes, half of our new 300,000
tonne biomass storage facility, fully
operational. We expect the full capacity
to be operational in the third quarter.
We anticipate that the Port of Hull facility
will be fully operational in March 2014
and the Port of Immingham by the end
of the year. In the second quarter of 2014
we envisage there being 100 biomass
rail freight wagons in operation.
At the earliest, we now expect to convert
our third unit in the fourth quarter of
2015. The initial load factor for this unit
will depend on biomass supply chain
development. We are moving forward
with the engineering designs, planning
and biomass sourcing strategy for the
conversion of a fourth unit and would
hope to be able to progress the
investment decision on this unit as soon
as the regulatory position is clear with
a view to conversion in 2016.
We believe that there is significant
value to the Group in increasing
our own supplies of wood pellets.
We are now moving forward with the
development of new sites to establish
additional wood pellet plants in the US.
We plan to continue to grow our retail
sales through Haven Power, which is on
track to achieve 12–15TWh of annual
sales over the next few years.
During 2013, we arrived at a lead case
technical solution to ensure compliance
with the more stringent emissions
standards of the Industrial Emissions
Directive from 2016. The solution involves
low NOX burners on all six units, selective
non-catalytic reduction (“SNCR”)
technology and more selective coal
procurement. We will trial SNCR and low
NOX burners on one coal unit and our
enhanced co-firing biomass unit during
this year to verify our analysis.
As we move from being a coal-fired
generator burning some biomass to
become an integrated Group sourcing
biomass, generating renewable electricity
and selling it to business customers,
the commercial structure of the
Group will change. As we progress this
transformation we will remain committed
to developing in parallel the optimal
capital structure for the Group.
We are confident that this transformation
will deliver an attractive future for the
business and our shareholders. It will
also deliver a significant amount of
cost-effective renewable power to UK
consumers and make a meaningful
contribution to the UK’s 2020 climate
change targets.
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Dorothy Thompson CBE
Chief Executive
18 February 2014
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Developed an optimal solution for
compliance with the Industrial Emissions
Directive, not based on selective catalytic
reduction technology.
Applications to the government for early
CfDs for two biomass unit conversions
provisionally ranked equal first amongst
16 renewables projects.
Together with our Capture Power partners,
won a two-year FEED study award under
the UK government’s CCS Commercialisation
Programme.
24
Drax Group plc
Annual report and accounts 2013
Principal performance indicators
Monitoring our performance
Our principal performance indicators provide a snapshot
of how we are performing against our overriding objective to
maximise the value of the Drax business, and the progress we are
making against our strategic initiatives and key priorities.
Maximise the value
of the Drax business
Grow our
retail business
Net sales
TWh
Average achieved
price of electricity
£/MWh
Retail customer volumes
TWh
26.4
27.1
26.2
55.6
51.3
51.0
2011
2012
2013
2011
2012
2013
8.1
5.1
2012
2013
3.3
2011
The aggregate of net merchant sales
and net Balancing Mechanism activity
Power revenues divided by volume of
net sales (includes imbalance charges)
Net sales distributed through our
retail supply arm, Haven Power
Why we measure
Net sales tracks the volume of power we
can sell at positive margins.
Comment
Following a record output in 2012, 2013
net sales were lower reflecting higher
outage rates. With a double outage and
the conversion of our first unit to run on
biomass, we have retained good availability
levels, allowing us to take advantage of
good margins available.
Why we measure
The average achieved price of electricity
tracks the power price component of the
dark green and bark 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. Following a period of
volatility in 2011 and early 2012, power prices
have remained relatively stable through to
the end of 2013.
Average cost of fuel
excluding carbon
£/MWh
Average cost of carbon
£/tonne
Why we measure
A measure of the rate of growth in our
retail business.
Comment
Our retail business, Haven Power, continued
to deliver good growth during 2013, largely
as a result of the planned expansion of the
customer base.
Maintain an optimal
supporting capital
structure
Net cash
£m
33.3
30.6
27.9
12.0
6.3
6.1
225
311
2011
2012
2013
2011
2012
2013
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
and including the value of renewable support)
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 have driven our average
fuel costs down over the last three years.
This has been partially offset by increased
use of biomass, as biomass is more expensive
than coal.
Why we measure
The average cost of carbon (excluding
carbon price support) tracks the carbon
cost component of the dark green
spread achieved.
Comment
Market prices for carbon fell dramatically in
the second half of 2011 and have remained
low since. The fall in prices reflected
concerns over the Eurozone economies
and the risk of oversupply, which are yet
to be mitigated by political intervention
as described in Commodity markets.
2011
2012
71
2013
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
As we progress our biomass transformation
significant capital expenditure has been invested
during 2013, funded by the term loans and share
placing proceeds. Lower profits and higher
volumes of ROC assets held on the balance
sheet have combined to reduce net cash.
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Drax Group plc
Annual report and accounts 2013
Maintain operational
excellence
Deliver our
biomass strategy
Plant availability
%
Load factor
%
Carbon dioxide emissions
t/GWh
88%
86%
84% 88%
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80%
82%
80%
760
784
725
2011
2012
2013
2011
2012
2013
2011
2012
2013
Average percentage of time the units
were available for generation
Net sent out generation as a percentage
of total available generation capacity
Why we measure
Availability tracks our operating
performance, enabling assessment of,
and providing guidance for, our operational
regime and maintenance investment plans.
Comment
From 2013, we present availability for both
our biomass and coal units separately.
The operational performance of our coal
units continues to be industry-leading and
our first biomass unit is performing very
well (note: biomass availability is based on
585MW capacity).
Why we measure
Load factor tracks our operating
performance and the competitiveness
of Drax Power Station.
Comment
Generation output is driven by market
conditions and plant availability. Output in
2013 was 26.2TWh, slightly lower than the
record level of 2012.
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
With our progression towards becoming
a predominantly biomass-fuelled power
station, we are realising significant savings
in carbon dioxide emissions. Our biomass
unit, converted in April, delivered 2.7 million
tonnes of carbon dioxide savings in 2013.
However, there is still work to be done to
bring this metric down further.
Lost time injury rate
Total recordable injury rate
Biomass burnt
million tonnes
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0.17
0.10
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2012
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1.6
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The frequency rate is calculated on the
following basis: lost time injuries/hours
worked x 100,000
The frequency rate is calculated on the
following basis: (lost time injuries + worse than
first aid injuries)/hours worked x 100,000
Why we measure
These injury rate metrics track our health and safety performance and enable us to maintain
a strong health and safety culture.
Comment
During 2013 we undertook our first conversion of a unit to be fuelled entirely by biomass, as
well as planned outages for two of our coal units and commenced construction work in the US.
Alongside this significant activity, our safety record continues to be strong. However, weaker
safety performance in the US has increased our injury rates during 2013. We have responded
with greater supervision at these sites and will continue our commitment to delivering a positive
health and safety culture across our operations.
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
Following the conversion of our first unit
to run fully on biomass from April 2013,
we have seen a significant increase in our
biomass volumes burnt. We will continue to
increase these volumes as we progress our
biomass transformation.
Read more:
Operational and financial performance
28–45
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Annual report and accounts 2013
Marketplace
Where we sell
our power
Complex arrangements and mechanisms govern
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
is characterised by six large vertically
integrated companies, with interests
in both the generation and supply of
electricity, and a number of smaller
“independent” companies, some of
which are purely generation or supply
companies and others which have an
interest in both. Drax is an independent
company, with interests in both
generation and supply in the market.
Today, the energy mix benefits from
a diversity of fuel sources, including
gas, coal, nuclear and renewables.
This diversity is a key contributor to
security of supply.
In 2012 (the latest figures available(1)),
the generating capacity of the UK’s
major power producers was 81,742MW.
The final consumption of electricity in
2012 was approximately 318TWh.
Drax has a 5% share in the generation
capacity market and typically meets
7–8% of the UK’s electricity needs.
Through our retail company, Haven
Power, we serve businesses of all sizes,
together accounting for sales of over
8.1TWh of power in 2013.
Various mechanisms exist to allow
power to be traded at the wholesale
level. Trading can take place bilaterally
or on exchanges, and contracts for
electricity can be struck over timescales
ranging from several years ahead to
on-the-day trading markets. It can
also be traded for specific periods, for
example, specific half hours or specific
seasons. The wholesale electricity
market trades across three sub-markets:
, long-term forward market allowing
contracts to be struck up to several
years ahead of delivery in response
to market participants’ requirements;
, short-term bilateral market operated
through power exchanges which gives
market participants the opportunity to
fine tune their contractual positions;
and
, Balancing Mechanism (real-time
market) through which the System
Operator accepts offers and bids
for electricity to enable it to balance
supply and demand on the system.
Wholesale prices
Power prices are driven by a number
of factors, such as 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.
As well as selling power through
the wholesale electricity market,
we are selling an increasing proportion
of our output directly to business
customers through our retail company,
Haven Power. This provides us with
a credit-efficient route to market for
power, as well as a good route to market
for Renewables Obligation Certificates
and Levy Exemption Certificates earned
by our renewable power generation.
Notes:
(1) Digest of UK Energy Statistics, 2013.
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Drax Group plc
Annual report and accounts 2013
Our role in the electricity supply chain
Our interests in the electricity supply chain cover
the generation, wholesale and retail markets.
generate
supply
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Generation
Retail
Drax Power Station typically meets
around 7–8% of the UK’s electricity
needs. There are two routes to
market for our power.
Haven Power is our retail company
serving the electricity needs of
business customers and providing
a direct route to market for our power.
Wholesale market
Various mechanisms exist to
allow our power to be traded at the
wholesale level in Great Britain.
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Supplying:
SMEs
(Small and medium-
sized enterprises)
I&C
(Industrial and
commercial businesses)
7–8%
Drax Power Station typically meets around
7–8% of the UK’s electricity needs
Forward contract market
(month to several years before)
Short-term market
(24 hours before)
Balancing Mechanism
(one hour before)
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Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Strength across
our operations
We have continued to deliver strong operational performance
during a year of significant project activity. Our EBITDA is lower
than last year, reflecting increased carbon costs.
Tony Quinlan
Finance Director
Introduction
Our EBITDA for the year ended 31 December
2013 was £230 million, compared to
£298 million in 2012. This reflects the
increased carbon costs incurred through
the ending of free carbon dioxide (“CO2”)
emissions allowances and the introduction
of the carbon price support (“CPS”)
mechanism. Together these measures
added £120 million to our fuel costs in 2013.
Our continued strength in operations
has allowed us to benefit from attractive
dark green spreads during the year,
mitigating to some extent the impact
of additional carbon costs.
2013 was a year of significant project
activity across our operations.
We undertook a double outage during
the year, our first unit was converted
to run fully on biomass in April and
construction work continues in the UK
and has commenced in the US on our
biomass transformation project.
At Haven Power Limited (“Haven
Power”), our retail business, we have
continued to deliver good sales volume
growth, with 8.1TWh of sales in the year
ended 31 December 2013, compared to
5.1TWh in 2012.
During 2013, £286 million was invested
on capital expenditure projects, of which
£228 million related to our biomass
transformation plans. At the Drax Power
Station site this includes the new biomass
receipt, storage and distribution facilities.
Commissioning for the facilities required to
fuel our first biomass unit was completed
at the end of 2013. In the US Gulf, work
commenced on the development of two
wood pellet plants and a port operation,
targeting commercial operations dates
in the first half of 2015.
In support of our biomass transformation
plans, in April 2013 we announced
that we had secured a £75 million
amortising loan facility with Friends
Life, underpinned by a guarantee from
HM Treasury under the Infrastructure
UK Guarantee scheme.
This replaced £50 million of the
£100 million amortising loan
facility agreed with the UK Green
Investment Bank in December 2012.
Alongside these facilities we have a
£100 million amortising loan facility
with M&G UK Companies Financing
Fund, secured in 2012, and our
£400 million working capital and
letter of credit facility.
With £225 million of loans drawn down,
net cash at 31 December 2013 was
£71 million. Supported by the proceeds
of our share placing in 2012 this provides
the financial platform from which we are
realising our biomass transformation.
At the forthcoming Annual General
Meeting, the Board will recommend a
final dividend for 2013 of 8.9 pence per
share, taking total dividends for the year
to £71 million.
This review includes further explanation
and commentary in relation to our
principal performance indicators and
results for the year.
29
Drax Group plc
Annual report and accounts 2013
Key developments in the year
EBITDA
£230m
2013
£298m
2012
Retail sales
8.1TWh
2013
5.1TWh
2012
EBITDA for the Group is our key measure of
profit or loss. The reduction in 2013 is driven by
additional carbon costs at a gross margin level,
see page 34 for more details.
This is a principal performance indicator for us,
see page 37 for more details.
Underlying EPS
pence
35 per share
2013
52 pence per share
2012
Capital investment
£286m
2013
£224m
2012
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The reduction in EBITDA has driven the fall
in this metric, see page 40 for more details.
The majority of this spend in the last two years
has related to our biomass transformation
project, and we will continue to see high levels of
capital expenditure through to the completion
of this work, see page 42 for more details.
Net cash
£71m
2013
£311m
2012
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Share price
at the year end
801 pence
2013
545 pence
2012
Throughout our biomass transformation,
cash generated alongside the funding
platform we have set up will be important in
supporting the significant expenditure required.
See page 41 for more details.
Whilst medium-term earnings are under
pressure due to the increase in carbon costs,
our share price rise reflects the strong outlook
for the Group as it transforms itself into
a predominantly biomass-fired generator.
The delivery of our biomass transformation
is a key aspect of this.
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Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Simplifying the numbers
There are two core elements to our gross profit:
the dark green spread and the bark spread.
source
generate
supply
Fuel
Our cost of sales comprises fuel costs in respect of generation, grid charges, other retail
costs and cost of power purchases, the largest element being fuel costs.
Fuel costs in respect of generation rose from £929 million in 2012 to £946 million in 2013.
This figure includes the cost of coal and sustainable biomass burnt (net of the value of renewable
support) and carbon allowances purchased. The power station’s output for the year drives the
requirement for the volume of fuel, although the fuel mix also influences total fuel costs.
In 2013 we entered Phase III of the EU ETS with no free carbon emissions allowances
from the start of the year, compared to the 9.5 million tonnes of free allowances received
in 2012. This increased the cost of carbon by £58 million in 2013. In addition, from April 2013
the CPS mechanism came into effect, creating a levy on our coal purchases, and adding
£62 million to fuel costs in 2013. In total carbon costs increased by £120 million as a result of
these two factors in 2013. This was offset to a limited extent by increased biomass burn which
reduced our carbon emissions allowances requirement.
Volume
In 2013 our net sales were 26.2TWh compared to a record 27.1TWh in 2012. Generation volumes
are driven by plant availability and commodity market conditions.
Generation increases when availability is high and commodity prices make it profitable for us
to generate.
Operational performance remained strong in 2013. However with the planned double outage
and the conversion of our first unit to run on biomass, the load factor for the plant as a whole
was lower at 80% compared to 82% last year. Dark green and bark spreads remained strong
in 2013 as described on page 33.
Income
Our revenue is comprised of power sales, ROC and LEC sales, ancillary services income and
other income, the largest element being power sales, followed by ROC and LEC sales.
We sell power into the wholesale market and through our retail arm, Haven Power, to business
customers in the Industrial and Commercial and Small and Medium Enterprise markets.
The revenue achieved is influenced by market prices, the timing of securing the sales and
power station output.
ROC and LEC sales represent an increasing element of our total revenue as we expand our
output from biomass generation. This revenue stream is influenced by the number of ROCs
we generate, the price we can achieve for ROCs in the market and the timing of the sales.
Haven Power, whilst a low margin business, offers a route to market for the ROC and LEC
output of our generation business.
Today
With one unit (out of six) converted so far, our results are primarily still driven by the
performance of our coal operations and the dark green spreads we can achieve…
31
Drax Group plc
Annual report and accounts 2013
Dark green spread
The difference between the power price
and the cost of coal and carbon.
Bark spread
The difference between the power price and
the cost of biomass net of renewable support.
Coal and carbon
The cost of our coal and carbon is driven by market prices at the
time we secure the purchases. Our aim is to match the timing of
our coal and carbon purchases to the related power sales in order
to lock in a margin (or spread).
We are able to burn a variety of fuels including petcoke, pond fines
(a coal mining residue) and a wide range of coals, all of which allows us
to maximise value where alternatives are economically advantageous.
Under the EU ETS we are obliged to submit carbon emissions
allowances equivalent to the tonnes of carbon we emit through
burning fossil fuels. The volume of allowances we are required to
purchase is dependent on the volume and quality of coal we burn
and the efficiency of the station.
Sustainable biomass
The cost of biomass burnt is made up of two elements, the gross
cost of purchasing the fuel, less the value of the renewable
support receivable.
The gross cost of the fuel includes the cost of the raw material,
processing costs, logistics, handling and storage costs, and is
influenced by exchange rates where the fuel is contracted in
a foreign currency.
The renewable support reflects the value of the ROCs and LECs
earned through generating electricity from burning sustainable
biomass. This value is recognised as a reduction in the cost of
sales when the related biomass is burnt.
Upon sale the value of the ROCs and LECs is recognised in revenue
and reversed from cost of sales.
Operational performance
Whilst the market spreads available, in comparison to our short run marginal cost of producing, determine whether it is
optimal to generate, the operational performance of the power station determines whether we are able to generate and
benefit from good market spreads.
Our availability metrics show the amount of time we are able to generate if required. This is influenced by both planned and
forced outage rates. We assess the optimal time to undertake planned outages, based on expected market spreads available.
In comparison, forced outage rates are driven by the maintenance needs of the plant, for example, leaks in boiler tubes
requiring repair.
We have a long-term target of 5% for our forced outage rate, set based on extensive benchmarking of industry-leading
standards. Our operational statistics continue to demonstrate our leadership position in the coal-fired generation sector.
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Read more:
Generation operating performance
See page 36
Power
We sell power to the wholesale and
retail markets.
The price achieved for power sold into the
wholesale market is based on market prices
at the time we secure the power. The timing
of our sales is driven by our hedging strategy,
but can be influenced by liquidity in the market
and requirements for collateral.
Our retail business provides an alternative
route to market for our power, which does
not usually require us to post collateral.
Haven Power sells to business customers,
swapping collateral risk for credit risk which
can be, and is, managed carefully.
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ROC and LEC income
Upon sale to a counterparty, ROC and LEC revenue is recognised,
moving the value from cost of sales to revenue.
Sales have historically been made following the end of a compliance
period, causing a peak in revenue, ROC and LEC cost of sales, and cash
in the third quarter of a year.
Tomorrow
…as we move towards becoming a predominantly biomass-fired generation business,
the cost of sustainable biomass, the value of renewable support and therefore the
bark spread will increasingly drive our profitability.
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Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Forward power prices
£/MWh
Generation
Summer 2012
Winter 2012
Summer 2013
Winter 2013
Summer 2014
Winter 2014
Commodity markets
75
70
65
60
55
50
45
40
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Forward coal prices
$/tonne
Calendar year 2012
Calendar year 2013
Calendar year 2014
Calendar year 2015
160
140
120
100
80
The margins of our generation business are driven by commodity market movements
and the timing of our fuel purchases and power sales. For our coal generation
capacity the margins available are reflected in the dark green spread, the difference
between the price of power we sell and the cost of the coal and carbon we purchase.
For our newly converted biomass unit, the margins available are reflected in the bark
spread, the difference between the price of power we sell plus renewable support
and the cost of the biomass we purchase.
The trends in commodity prices witnessed in the last few years are described in the
following paragraphs and illustrated in the accompanying charts.
Power and gas
Following a period of volatility in 2011 and early 2012, power prices have remained
relatively stable over the 18 months to 31 December 2013. The gas market continues
to drive power prices.
The impact of the Fukushima disaster and limited Japanese nuclear generation
continued to provide support to the global liquefied natural gas (“LNG”) market
throughout 2013. UK gas prices remained strong and stable through 2013 with prices
being pulled upwards towards oil indexed European prices (and international LNG
prices) in order 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. However, shale gas developments outside the US are in their
infancy and will in all probability, 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.
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Market prices for international coal have fallen steadily from a peak in mid-2011.
Coal
Forward carbon prices
€/tonne
December 2011
December 2012
December 2013
December 2014
25
20
15
10
5
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Whilst global demand has grown through 2013, the low US gas prices described
above forced increases in US coal exports. Combined with rising supplies from
Indonesia and Australia, this has resulted in a weak global short-term market
characterised by low international prices and high stocks in Europe. With high stock
levels also being held in China, any increase in Asian demand has been insufficient
to absorb the excess supply.
These market dynamics, as well as increasing operating costs, have continued to
put pressure on UK domestic coal producers.
Carbon
Following the dramatic fall in market prices for EU ETS carbon allowances in the
second half of 2011, amid fears for the Eurozone economies, the downward trend
continued through 2012 and 2013.
The combination of slow economic growth and any Phase II surplus bankable into
Phase III, drove carbon prices to new lows during 2013 before they recovered slightly
towards the end of the year.
With an over-supplied market, the main price driver is political intervention and the
“back-loading” debate (postponing the sales of emissions allowances to restrict
current supplies). Although the back-loading proposals are not finalised the likelihood
of implementation has increased with the EU providing the required authorisation for
the European Commission. However, the timing and the profile of the volumes to be
removed still remains uncertain.
33
Drax Group plc
Annual report and accounts 2013
The biomass supply chain
We source sustainable biomass to
fuel our renewable generation.
Biomass
The majority of biomass used for large scale power generation is priced in US dollars
or euros. Movements in these exchange rates have driven the changes in biomass
costs during the period.
At the start of 2013 we saw a weak US dollar, relative to sterling, driving market
biomass prices down. The dollar recovered mid-way through the year, but
weakened again towards the end of the year, as can be seen in the chart on page 39.
As explained in Unrealised gains and losses on derivative contracts below, the
extensive foreign currency hedging programme we are putting in place provides us
with some protection from these fluctuations in exchange rates. However, as a result
this will inevitably drive some volatility through the unrealised gains and losses line
in our income statement (a non-cash item, excluded from underlying earnings).
Dark green spread and bark spread
As a result of the relatively stable power prices and low coal and carbon prices, we
have seen attractive dark green spreads during 2013. However, the introduction of
both full auctioning of EU emissions allowances from the start of the year and the
CPS mechanism from April has increased costs for coal-fired generators.
Having fallen during the year, market bark spreads rose at the year end to levels similar
to those at the start of the year. The movements have principally been driven by
currency effects described above.
Looking forward, the UK government’s CPS mechanism, whilst strengthening the
case for biomass generation, is likely to erode the competitive position of coal-fired
plant. Our biomass transformation project means the bark spread will become an
increasingly important element of our gross margin.
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Forest product industry
The global forest product
industry is already a large, well-
established marketplace, serving
the building, furniture and paper
industries with the higher quality,
more expensive portions of
the tree. We are able to use the
thinnings and residues from
the existing forestry industry
that sometimes have no other
alternative use.
Harvesting
residues
Small
dimension
e.g. Pulpwood
Large
dimension
e.g. Sawlog
Pellets
Pellets
Wood
panel
mills
Pulp/
paper
mills
Sawmills
Wood pellet market
The raw fibre can be
turned into pellets to allow
more efficient handling
and transportation.
With third party contracts
agreed alongside our own
pellet plants in development,
we have made good
progress in 2013 in securing
the near-term sustainable
supplies needed for our
biomass transformation.
Renewable energy
The wood pellets delivered
to the power station are either
stored or delivered to our
converted unit to generate
renewable power.
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Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Generation gross profit
£120m
Additional carbon costs in 2013
as a result of CPS mechanism
and phase III of EU ETS.
Generation gross profit
Revenue
Power sales
ROC and LEC sales
Ancillary services income
Other income (1)
Cost of sales
Fuel costs in respect of generation
Cost of power purchases
Grid charges
Gross profit
(1) Includes £28 million (2012: £17 million) for fuel sales.
Year ended
31 December
2013
£m
Year ended
31 December
2012
£m
1,668.9
1,527.4
62.8
12.1
36.1
62.6
14.5
25.5
1,779.9
1,630.0
(945.8)
(334.1)
(70.4)
(929.2)
(138.4)
(66.3)
(1,350.3)
(1,133.9)
429.6
496.1
The generation gross profit for the year ended 31 December 2013 was £430 million,
compared to £496 million in 2012. Whilst the dark green spreads, which currently
account for the majority of our gross profit, remained strong the impact of additional
carbon costs meant that profits for 2013 were lower.
The introduction of the UK CPS mechanism from April 2013 adds a levy to our coal
purchases and increases the cost of the coal we burn. In addition, from 2013 we entered
Phase III of the EU ETS with the removal of free CO2 emissions allowances, compared
to the 9.5 million tonnes of free CO2 allowances received in 2012 under Phase II.
The combined cost of these measures added £120 million to our fuel costs in 2013.
The rising cost of carbon will continue to erode the profit margins of coal generating
plant. This very much supports the economic case for the strategy we have
developed to become a predominantly biomass-fuelled power generator.
Revenue
Total generation revenue for the year ended 31 December 2013 was £1,780 million,
compared to £1,630 million in 2012.
Excluding £334 million of power purchased in the market (2012: £138 million), our
generation revenue of £1,335 million was lower than the equivalent comparative for
2012 (£1,389 million). This decrease reflects the reduction in net power sold (electrical
output), at an average achieved electricity price (£51.0 per MWh) broadly in line
with last year (£51.3 per MWh). The output in 2012 represented a record level for the
plant as a result of the combination of high availability and good margins available in
the market.
Generation revenue also includes sales of Renewables Obligation Certificates
(“ROCs”) and Levy Exempt Certificates (“LECs”), totalling £63 million in both 2013
and 2012.
We recognise the value of the ROCs and LECs earned as generated, reducing
fuel costs in respect of generation. The recognition of a sale is matched by a
corresponding cost of sale. The ROCs and LECs, earned through generating
electricity from burning biomass, are held on our balance sheet until sold.
The timing of ROC sales is largely driven by a combination of Renewables Obligation
(“RO”) deadlines and commercial considerations. Consequently, the majority of the
ROCs generated in 2013 will be sold in 2014.
ROC and LEC assets
on the balance sheet
As at 1 January
ROCs and LECs generated
ROCs and LECs purchased
2013
£m
18.7
143.9
37.6
2012
£m
32.1
32.0
11.4
ROCs and LECs sold/utilised
(60.7)
(56.8)
As at 31 December
139.5
18.7
35
Drax Group plc
Annual report and accounts 2013
In April 2013, we converted our first unit to run fully on biomass under the ROC
regime. As a result of the increased biomass burn and as demonstrated by the table
at the foot of the opposite page, we have generated considerably more ROCs and
LECs during the year ended 31 December 2013, than during 2012.
Total generation revenue includes sales fulfilled by purchasing power in the market.
We purchase power 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 during outages. The cost of these
purchases is included in cost of sales.
Whilst net power sold at 26.2TWh in 2013 reflects a reduction from 27.1TWh in 2012,
this gross up for power purchased in the market resulted in the overall increase in
total generation revenue.
Cost of sales
As explained on pages 30 to 31, our fuel costs are driven by a combination of market
prices at the time of securing the fuel and the mix of different fuels burnt during
the period. In addition, as noted above UK and EU legislation (CPS mechanism and
Phase III of the EU ETS) to incentivise renewable energy has increased the cost of
burning coal.
Our average cost of fuel (excluding CO2 emissions allowances) for the year ended
31 December 2013 was £27.9 per MWh, compared to £30.6 per MWh in 2012. As the
largest component of our fuel burnt, coal prices still drive the average fuel cost, with a
falling international market price contributing to the decrease in the year.
Fuel burn composition (heat)
%
Advantaged fuels:
3%
Biomass:
12%
Biomass accounted for 12% of our total fuel burnt by heat content in 2013 (2012: 5%),
the increase reflecting the conversion of our first unit fuelled by biomass from April
2013. As we progress our transformation, biomass costs will account for a greater
proportion of the fuel costs in respect of generation.
Coal:
85%
Within costs of sales, net biomass costs are made up of the cost of the fuel delivered
to site less the value of renewable support received. The cost of the fuel includes
raw material and delivery costs. The renewable support reflects the value assigned
to ROCs and LECs earned through generating electricity from burning biomass.
The value of the renewable support therefore reduces the net biomass cost.
As described in Revenue above, upon sale of the ROCs and LECs the income is
recognised in revenue and the value of the ROC or LEC (previously held in the balance
sheet) is recorded separately in cost of sales.
Also included within fuel costs in respect of generation is the cost of CO2 emissions
allowances purchased. For Phase III of the EU ETS (2013 – 2020) we have no free
carbon allowances (2012: 9.5 million tonnes) and are therefore required to meet
the full cost of CO2 tonnes emitted from coal generation through purchases of
allowances in the market. This resulted in the increase in our purchased allowances
requirement from 13.1 million tonnes (at an average price of £6.3 per tonne) in 2012
to 20.3 million tonnes in 2013 (at an average price of £6.1 per tonne), although
this is offset by the increase in biomass burn, reducing our total CO2 emissions
allowances requirement.
Generation cost of sales also includes grid charges, which continue to rise as more
intermittent generation impacts on system balancing costs, and power purchases –
the cost of power purchased in the market as outlined above.
Coal
Biomass
Biomass (R&D)
Advantaged fuels
2013
85%
12%
0%
3%
2012
Change
90%
2%
3%
5%
−5%
+10%
−3%
−2%
Fuel burnt (million tonnes)
Year
ended
31
December
2013
Year
ended
31
December
2012
8.5
1.6
–
0.8
9.6
0.2
0.5
0.8
Coal
Biomass
Biomass – R&D
Advantaged fuels
20.3m
20.3 million tonnes of CO2 emissions
allowances purchased in 2013
(2012: 13.1 million tonnes,
before 9.5 million tonnes of
free allowances).
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Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Outage and plant utilisation levels
Generation operating performance
Biomass
2013
Coal
2012
Health and safety
Planned outage
rate (%)
Forced outage
rate (%)
Availability (%)
Electrical output
(net sales) (TWh)
5.4
10.0
9.6
6.8
88
6.8
84
4.8
86
2.9
23.3
27.1
2.9TWh
generated from our first
converted biomass unit
80%
Load factor for the coal plant
(2012: 82%)
A significant amount of project work has been undertaken during 2013, with a double
planned outage and the conversion of our first unit to run on biomass, in place of coal.
In addition we completed the build of our biomass receipt, storage and distribution
systems to support this first converted unit, whilst in the US work continues apace
on the construction of two pellet plants and a port facility.
Against this backdrop we have continued to deliver good safety statistics with a
lost time injury rate and total recordable injury rate of 0.09 and 0.29, respectively,
for the year ended 31 December 2013 compared to 0.06 and 0.17 in 2012. Our safety
performance in the UK continues to be industry-leading. However, performance
at our US construction sites is not yet meeting Drax standards. As described in the
Chief Executive’s statement we have taken action to bring US performance up to
our UK standards.
Outage and plant utilisation levels
Biomass
Our first unit was converted to biomass in April using, on a temporary basis, the
storage and distribution systems originally built for biomass co-firing. Through the
final quarter we began commissioning our new on-site biomass receipt, storage and
distribution systems, with those systems required to support our first converted unit
being completed towards the end of the year.
Planned outages, mainly in the first half of the year, for scheduled inspections and to
allow for planned upgrades to the rail loop, resulted in a planned outage rate of 5.4%
for our biomass unit. The forced outage rate for the period of 6.8% largely reflects
expected issues for a newly converted unit, and we have seen a steady improvement
through the period as we gained more experience. Availability for the biomass plant
for the period was therefore 88%.
The load factor for our biomass unit was initially constrained by the use of temporary
systems, which resulted in expected reliability issues with fuel delivery. Many of these
issues were overcome through the introduction of the new facilities towards the end
of the year. As a result the load factor for the period was 75%.
Coal
We have continued to deliver good operating performance from our coal units.
The planned outage rate for our coal plant for the year ended 31 December 2013 was
10%, compared to 9.6% in 2012, reflecting the two unit outages undertaken in both
years. Our maintenance regime includes a major planned outage for each of our six
units once every four years. Consequently, there is an irregular pattern to planned
outages and associated expenditure, since in two of the four years two units will
each undergo a major planned outage. One unit will undergo a major outage in 2014.
The forced outage rate for our coal plant of 6.8% for the year ended 31 December
2013 (2012: 4.8%) was higher than our long-term target of 5%. We have continued to
test a wide variety of advantaged fuels, for example coals with lower cost than the
standard bituminous coal that we burn. In the first half of the year, some of these
fuels have resulted in a higher number of plant integrity issues than we typically
experience. However, the testing work is an important component of our drive
to optimise value from our fuel mix, as well as the work to define our solution for
compliance with the Industrial Emissions Directive (see Chief Executive’s statement).
Coal plant availability for the year ended 31 December 2013 was therefore 84%.
Although slightly lower than availability of 86% for 2012, this continues to demonstrate
a leadership position amongst coal-fired plant. With strong plant despatch economics,
the resulting load factor of 80% compares favourably with the average for other UK
coal and gas plants.
The load factor of 80% for the plant as a whole for the year ended 31 December
2013 was down by 2% on 2012, reflecting a decrease in electrical output (net sales)
to 26.2TWh in 2013, compared with the record output of 27.1TWh in 2012.
37
Drax Group plc
Annual report and accounts 2013
8.1TWh
Retail sales in 2013 (2012: 5.1TWh)
Retail
Retail gross profit
Revenue
Cost of sales
Cost of power purchases
Grid charges
Other retail costs
Net generation split by customer
%
Retail:
34%
Gross profit
Growth
Year ended
31 December
2013
£m
Year ended
31 December
2012
£m
750.6
451.4
(455.1)
(168.4)
(111.6)
(735.1)
(278.9)
(101.5)
(56.2)
(436.6)
15.5
14.8
Wholesale:
66%
Wholesale
Retail
2013
66%
34%
2012
Change
80%
20%
−14%
+14%
“During 2013, we delivered
another year of substantial
growth in a highly
competitive market.”
Peter Bennell
Chief Executive, Haven Power
The strategic value to the Group of Haven Power, the Group’s retail business, is the
alternative credit-efficient route to market it provides for our power, ROCs and LECs.
Whilst margins in the I&C market are very tight, the volumes available are much
greater with c. 50% of the total electricity supplied in the UK in 2013 being delivered to
the I&C market, compared to c.15% delivered to the SME market. In total, the business
electricity market is c.190TWh per annum, and differs from the wholesale market in
that collateral support is not usually required for forward power sales. In selling power
into the retail market, rather than wholesale, the Group swaps collateral risk for credit
risk, which is managed by assessing the financial strength of our customers.
In addition, Haven Power provides access through this market for the Group’s
renewable power. The ROCs and LECs, earned through burning biomass in the
generation business, can be utilised by the retail business.
We are on track to deliver retail sales of 12–15TWh by 2015 at Haven across the I&C
and SME markets. Haven Power has well established credit management policies,
with both strong initial acceptance criteria and robust credit management processes,
coupled with regular monitoring and independent review. This is evident from our
low bad debt experience to date. During the year we completed the migration of
customers onto our new billing system, which together with our strong account
management model, provides the foundation to grow our customer base.
Renewable power and climate change levy exempt power together currently
account for c.50% of Haven Power sales. With our growth targets for the business,
Haven Power should utilise all the ROCs generated from our current converted unit
and a substantial proportion of the LECs from the planned unit conversions.
Gross margin
As Haven Power continues to deliver good volume growth, movements in the
financial metrics are largely driven by volumes. In the year ended 31 December 2013,
sales volumes rose 59% from 5.1TWh in 2012, to 8.1TWh. This drove an increase
in revenue from £451 million in 2012, to £751 million in 2013.
The majority of the growth at Haven Power has come from the more competitive
I&C market which has a lower gross margin than the SME market. In addition, rising
grid charges and other retail costs of sales including Feed-in Tariff costs, driven up by
increasing amounts of intermittent renewable generation, combined to drive a gross
profit of £16 million, up marginally on £15 million in 2012.
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38
Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Group summary financial performance
Group results
Generation gross profit
Retail gross profit
Total gross profit
Operating and administrative expenses
EBITDA
Depreciation
Unrealised losses on derivative contracts
Operating profit
Finance costs
Profit before tax
Tax credit/(charge)
Profit after tax
Basic earnings per share
Underlying earnings per share
Year ended
31 December 2013
£m
Year ended
31 December 2012
£m
429.6
15.5
445.1
215.1
230.0
(64.8)
(110.2)
55.0
(23.2)
31.8
19.6
51.4
496.1
14.8
510.9
(212.5)
298.4
(58.5)
(36.1)
203.8
(13.6)
190.2
(26.4)
163.8
Pence per share
Pence per share
13
35
44
52
Group operating and
administrative expenses
£m
220
210
200
190
2
1
0
2
s
t
s
o
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P
S
E
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£230m
Group EBITDA (2012: £298 million)
Group operating and administrative expenses
Group operating and administrative expenses before depreciation were £215 million
for the year ended 31 December 2013 compared to £213 million in 2012, reflecting an
inflationary increase in our cost base and investment in the growth of both our retail
business and the operations in the US.
2012 operating costs included £5 million in relation to compliance measures under
the Community Energy Savings Programme (“CESP”) which completed last year
(see page 43 for more details).
We remain focused on achieving strong operational cost performance and we will
continue to carefully control our underlying cost base.
Group EBITDA
The Group EBITDA is primarily driven by the factors influencing the gross margin.
The fall in EBITDA for the year ended 31 December 2013 to £230 million, from
£298 million in 2012, is therefore a result of the increasing costs of carbon following
the removal of free carbon allowances under Phase III of the EU ETS and the
introduction of the CPS mechanism during 2013.
Whilst these additional costs and the government’s trajectory for increasing CPS over
time, erode the profitability of our coal-fired generation plant, they strengthen the
case for biomass generation. We are making a significant investment in our biomass
transformation; however our financial performance must be viewed in this context
until our biomass operations reach an appropriate scale.
Depreciation
Depreciation was £65 million for the year ended 31 December 2013, compared
to £59 million in 2013. As we continue to invest in our biomass transformation,
our depreciation charge will increase as new investment comes on stream over
the coming years.
39
Drax Group plc
Annual report and accounts 2013
Currency spot rates
USD:GBP
CAD:GBP
EUR:GBP
1.8
1.6
1.4
1.2
2
1
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Unrealised gains and losses on derivative contracts
The Group enters into forward contracts for the sale of power and the purchase of
coal, biomass and carbon emissions allowances which are the elements which make
up the gross profit of the business as described on pages 30 to 31. In addition, where
contracts for the purchase of fuel or carbon allowances are denominated in a foreign
currency, the Group enters into forward foreign currency contracts.
These contracts aim to de-risk the business, providing secure cash flows into the
future. The accounting for these contracts at rising volumes increases volatility in
the unrealised gains and losses line in the income statement.
Where possible, we take the own use exemption for contracts entered into and held
for our own purchase, sale or usage requirements, including forward domestic coal
and biomass contracts and therefore we do not reflect their value in our accounts
until the contracts close out (unlike derivatives which we mark-to-market).
Forward contracts which meet the definition of derivatives under IFRS and do not
qualify for the own use exemption, are included in our accounts at their fair value
at the balance sheet date, derived largely by reference to market prices at that
date. Unrealised gains and losses arise on the movements in the fair value of these
contracts between balance sheet dates.
Where the derivative contracts meet the definition of an effective hedge under
IFRS, the movement in their fair value is recognised through the hedge reserve,
a component of shareholders’ equity in the balance sheet. This is largely the case
for our forward power and carbon contracts, as well as some of our forward foreign
exchange contracts.
Where they do not meet the definition of an effective hedge (from an accounting
perspective, even though they represent an economic hedge), the movement in
their fair value is reflected in the income statement as an unrealised gain or loss on
derivative contracts. This encompasses some of our forward foreign exchange and
financial coal contracts.
Unrealised losses on derivative contracts recognised through the income statement
were £110 million in the year ended 31 December 2013 compared to £36 million in
2012. In both years the figure was largely driven by movements in the fair value of
our forward foreign exchange contracts.
These contracts reflect an extensive hedging programme to support our biomass
procurement activities. The programme covers all contracted and a substantial
proportion of as yet un-contracted but forecast purchases and provides a significant
degree of protection from adverse currency movements.
A weakening US dollar at both year ends resulted in unrealised losses on these
contracts, as market rates were preferential in comparison to contracted rates.
The volumes of these contracts have increased significantly during the year as we
look to de-risk the business by securing our cash flows in sterling.
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. We therefore
look to underlying profit (excluding unrealised gains and losses on derivative
contracts) as our performance indicator.
For more information on our derivative contracts see note 19 to the consolidated
financial statements.
Interest
Net finance costs for the year ended 31 December 2013 were £23 million compared
to £14 million in 2012, the increase predominantly arising from the interest paid
on borrowings, as we drew down £100 million in December 2012 and a further
£125 million in April 2013.
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40
Drax Group plc
Annual report and accounts 2013
Operational and financial performance
£142m
Underlying profit after tax
(2012: £193 million)
Tax
Tax reconciliation 2013
Profit before tax
Tax at 23.25%
Reconciling items:
Impact of rate change
Prior year adjustments
Other
Total tax (credit)/charge
Statutory
Underlying
£m
31.8
7.4
(22.3)
(7.3)
2.6
(19.6)
%
23
(70)
(23)
9
(61)
£m
142.0
33.0
(28.6)
(7.3)
2.6
0.3
%
23
(20)
(5)
2
0
The 2013 tax credit of £20 million, compares to a £26 million tax charge in 2012.
The reduction is driven by the £22 million impact of a 3% reduction in corporation tax
rates (2012: £15 million from a 2% reduction). In addition, the 2013 tax charge includes
the impact of research and development claims, now agreed with HMRC, resulting in
a credit of £7 million in respect of prior years. 2012 includes the impact of a revision to
previous years’ capital allowances claims agreed with HMRC, resulting in a tax credit
of £8 million recognised in the comparative period.
The underlying effective rate of tax (excluding the after tax impact of unrealised
gains and losses on derivative contracts) is 0% in 2013, compared to 15% in 2012, the
difference arising predominantly from the impact of the corporation tax rate changes
as described above.
In 2014 we expect underlying rates to more closely align with UK corporation
tax rates.
The tax paid during the year was £18 million (2012: £54 million), principally reflecting
lower profitability and tax rates in 2013 as described in Liquidity and capital resources.
These payments were offset by tax refunds in respect of prior year credits noted
above, bringing net taxes paid for 2013 to £11 million (2012: £51 million).
Profit after tax and earnings per share
Profit after tax for the year ended 31 December 2013 was £51 million, compared to
£164 million in 2012, driving basic earnings per share of 13 pence in 2013, compared
to 44 pence in 2012.
We measure underlying earnings per share (excluding the after tax impact of
unrealised gains and losses) as this strips out the volatility on our derivative
contracts (non-cash items) which do not meet hedge effectiveness criteria under
IFRS as described above. With underlying profit after tax of £142 million in 2013
(2012: £193 million), underlying earnings per share for the year ended 31 December
2013 was 35 pence per share, compared to 52 pence in 2012.
The reduction in underlying earnings per share in 2013 principally reflects the impact
of additional costs of carbon on our profitability as outlined above.
41
Drax Group plc
Annual report and accounts 2013
Liquidity and capital resources
Analysis of cash flows
EBITDA
(Increase)/decrease in ROC assets
Decrease/(increase) in carbon assets
Increase/(decrease) in working capital
Other
Cash generated from operations
Income taxes paid
Other gains/(losses)
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 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 financing activities
Net (decrease)/increase 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
“We have built a strong
financial platform from
atform from
which we are realising our
e realising our
biomass transformation.”
nsformation.”
el Scott
Michael Scott
orate Finance
Head of Corporate Finance
Year ended
31 December
2013
£m
Year ended
31 December
2012
£m
230.0
(120.8)
12.5
48.0
0.8
170.5
(10.6)
2.2
(19.8)
142.3
(301.7)
10.0
(291.7)
(78.8)
1.9
(0.7)
125.0
(2.4)
45.0
(104.4)
371.7
267.3
20.0
(216.1)
71.2
298.4
13.4
(39.0)
(9.3)
(0.3)
263.2
(50.6)
(0.8)
(8.7)
203.1
(206.0)
–
(206.0)
(95.7)
187.7
(10.5)
100.0
(9.7)
171.8
168.9
202.8
371.7
30.0
(90.7)
311.0
Cash generated from operations
Cash generated from operations of
£171 million in 2013, compared to
£263 million in 2012, incorporates a fall in
EBITDA caused by the rising cost of carbon.
This is compounded by the increase in
ROC and LEC assets of £121 million,
following the conversion of our biomass
unit. As noted above, the value of our ROCs
and LECs generated is held in the balance
sheet until the assets are sold to a third
party – the timing of which is driven by RO
deadlines and commercial considerations.
This outflow was only partially mitigated
by the inflows from reductions in carbon
assets and working capital.
Net cash flows from operating activities
Falling profits, lower corporation tax rates
and higher capital allowances arising
from our capital investment have resulted
in lower net income taxes paid at
£11 million in the year. 2013 taxes paid
relate to settlement of the 2012 liability
and 2013 payments on account, and are
shown net of £7 million of refunds in
relation to previous years, arising from the
research and development claims agreed
with HMRC during the period.
Net cash used in investing activities
Purchases of property, plant and
equipment of £302 million in 2013
(2012: £206 million) are reflective of the
significant amount of investment across
the business as we continue to invest in
our biomass transformation, see more
detail on page 42.
Net cash flows from financing activities
In order to support our biomass
transformation we completed a
refinancing, which included a share
placing and the drawing down of
£100 million against our loan facilities
towards the end of 2012, subsequently
enhanced in 2013 with the drawing down
of an additional £125 million against our
loan facilities, as described in Financing
and cash flow management.
Net cash
From £402 million at 31 December 2012 the
decrease in cash and cash equivalents of
£104 million during the year leaves cash
and short-term investments of £287 million
at 31 December 2013. Increased borrowings
have been used to support cash generated
from operations in funding the capital
investment programme. As such net
cash (after deducting borrowings) is
lower at 31 December 2013 at £71 million
compared to £311 million in 2012.
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42
Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Financing and cash flow management
In April 2013, we agreed a new £75 million amortising term loan facility with Friends
Life, underpinned by a guarantee from HM Treasury under the Infrastructure UK
Guarantee Scheme. This replaced £50 million of the £100 million amortising term
loan facility agreed with the Green Investment Bank, signed in December 2012.
The new loan facility enhances the existing financing structure executed last year
by providing additional liquidity to the Group and ensuring a smoother profile of debt
maturities. Furthermore, the all-in cost of the new facility is very competitive.
The financing structure also incorporates the remaining £50 million amortising term
loan from the Green Investment Bank, a £100 million amortising term loan facility with
the M&G UK Companies Financing Fund and a £400 million working capital and letter
of credit facility. The term loans have varying maturity profiles ranging from four to eight
years, whilst the working capital and letter of credit facility is due to mature in April 2016.
In addition, a commodity trading facility also executed in December 2012, allows us to
transact prescribed volumes of commodity trades (dark green spreads) at attractive
prices without the requirement to post collateral. This facility has been operating
well, offering trading counterparties access to the security package available to our
senior lenders. Combined with other steps taken over the past three years to limit
our requirements to post collateral, this is allowing the Group to operate comfortably
with a sub-investment grade business model.
Finally, towards the end of 2013 we completed our first ROC monetisation facility.
As described above, cash for ROC sales can often flow back to renewable generators
some time after the associated power was produced. This can result in significant
working capital absorption, with ROC income often received more than 12 months after
we have paid for the related biomass. We have agreed an £80 million facility with Lloyds
Bank Commercial Finance Limited, which allows Drax to sell ROC receivables.
Capital expenditure
Fixed asset additions were £286 million in the year ended 31 December 2013,
compared to £224 million in 2012. This includes £228 million on our biomass
transformation project (2012: £180 million).
At the Drax Power Station site we completed the commissioning of the new receipt,
storage and distribution systems for our first converted unit by the end of 2013,
and we expect to have largely completed the on-site investment required to support
three converted units by the end of 2014. These systems will provide us with the
ability to unload rail wagons efficiently, store up to around 300 thousand tonnes
of biomass on-site and deliver it direct to the combustion system.
Our investment in upstream supply chain infrastructure continues, with the
construction of our two pellet plants in Mississippi and Louisiana and our port
development at Baton Rouge (also Louisiana) having started in the Summer.
All three projects remain on schedule and on budget. We are targeting the first half
of 2015 for commercial operations to begin reaching full capacity within six months.
We expect to spend £650–£700 million in total on progressively converting three
generating units to biomass together with the supporting infrastructure and
systems required, completing the two US pellet plants and port facility and ensuring
compliance with the requirements of the Industrial Emissions Directive (“IED”).
Extensive research has been undertaken over the past few years to determine the
optimal solution for IED compliance. As described in the Chief Executive’s statement,
a lead solution has been identified and initial trials towards this will commence in 2014.
The estimated capital cost is £75 million to £100 million over four years.
In addition, as described in the Chief Executive’s statement, we have now developed
technical solutions to deliver output of 630MW in a biomass unit, with efficiency
only 0.5% lower than that of a coal unit. We estimate that capital investment of
approximately £90 million (over three years) is required to secure these performance
improvements. Beyond this, we are evaluating further investments in the supply
chain, (including options for additional pelleting facilities in the US) and the
conversion of a fourth unit to biomass.
£286m
Capital expenditure
(2012: £224 million)
43
Drax Group plc
Annual report and accounts 2013
Other information
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 review and the Principal risks and uncertainties section which follows.
Our cash flows and borrowing facilities are described above. In addition, notes 19
to 21 to the consolidated financial statements explain our approach to capital risk
management and give details of financial instruments and hedging activities, and
exposure to credit, counterparty and liquidity risk.
We have significant headroom in our new banking facilities, 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,
demonstrates that we expect to 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.
Read more:
Capital risk management
See page 128
Seasonality of borrowing
£400m
working capital facility
Read more:
Financing and cash flow
management
See page 42
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 Financing and cash flow management).
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Contingent liability
We were obliged under 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. 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 failed to comply fully with its obligation under the
agreement, leaving a significant shortfall against our CESP obligation. Having notified
the counterparty of our contractual claim for breach of contract we continue to
consider legal options available to us. We entered into further agreements with
additional third parties in order to rectify this shortfall so far as practicable.
e
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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 34 to the consolidated financial statements for further details.
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44
Drax Group plc
Annual report and accounts 2013
Operational and financial performance
Future developments
Regulatory developments
As set out in the Chief Executive’s statement, in December we received confirmation
from the government that two Drax units are provisionally ranked equal first among
the applications for Investment Contracts under the Final Investment Decision
Enabling Contracts for Difference (“CfD”).
Looking forward, if awarded, this would result in our units operating under three
different regimes; coal, biomass under the RO and biomass under the CfD. We are
participating in the CfD process as it develops through to finalised Investment
Contracts, which are expected to take effect from April 2015.
As outlined in the Chief Executive’s statement, we will modify one of our coal units
during 2014 to operate as an enhanced co-firing unit, enabling us to support a full
conversion in April 2015. However, in the interim, the operation of one of our units as
enhanced co-firing, receiving 0.9ROC/MWh, rather than 1ROC/MWh applicable to
a converted unit, will have a corresponding impact on the profits achievable in the
near-term.
Also in December 2013 Capture Power Limited, the consortium of Drax, Alstom
UK Limited and BOC (a member of The Linde Group) was awarded the Front
End Engineering and Design contract, for its planned 426MW oxy-combustion
demonstration project located on the Drax Power Station site.
A two-year process now commences with the negotiation of an engineering,
procurement and construction contract and a CfD contract, all dependent
on successful funding applications and adequate incentives for low carbon
technologies from the electricity market reform. Drax has committed to invest
£4 million in the project during this initial phase.
Positions under contract
As at 10 February 2014, the positions under contract for the sale of
power for 2014 and 2015:
Power sales (TWh) comprising:
2014
22.1
2015
7.2
– Fixed price power sales (TWh) at an average achieved price (per MWh) 19.7 at £52.9 5.3 at £55.5
– Fixed margin and structured power sales (TWh)
2.4
1.9
“We are transforming
“We
our business to become
our b
a predominantly biomass-
a pred
fuelled power provider with
fuelled
interests throughout the
intere
supply chain from biomass
supply
processing to retail sales to
proces
business customers.”
bus
Mark Strafford
Inve
Investor Relations Manager
45
Drax Group plc
Annual report and accounts 2013
£71m
Total dividends were £71 million
(2012: £96 million)
8.9p
Final dividend was 8.9 pence per share
(2012: 10.9 pence per share)
Distributions
Distribution policy
The Board has previously committed to distribute 50% of underlying earnings (being
profit attributable to equity shareholders adjusted to exclude the after tax impact of
unrealised gains and losses on derivative contracts) in each year. Underlying earnings
for the year ended 31 December 2013 were £142 million.
As detailed in the Chief Executive’s statement, we are transforming our business
to become a predominantly biomass-fuelled power generator, vertically integrated
through the biomass supply chain to retail sales to business customers. As our
business model changes we will develop, in parallel, an optimal capital structure
and distribution policy, aligned to the future of the business.
Dividends paid
On 18 February 2013 the Board resolved, subject to approval by shareholders at the
Annual General Meeting (“AGM”) on 24 April 2013, to pay a final dividend for the year
ended 31 December 2012 of 10.9 pence per share (£44 million). The final dividend was
paid on 17 May 2013.
On 29 July 2013, the Board resolved to pay an interim dividend for the six months
ending 30 June 2013 of 8.7 pence per share (£35 million), representing 50% of
underlying earnings for the period. The interim dividend was paid on 11 October 2013.
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 2013
of 8.9 pence per share (£36 million), payable on or before 16 May 2014.
Shares will be marked ex-dividend on 23 April 2014.
This Operational and financial performance review forms part of the Strategic report,
along with our 2013 achievements, the Chairman’s introduction, an outline of Our
business today, the Chief Executive’s statement, Marketplace description, Principal
risks and uncertainties and Sustainable business review (pages 1 to 57). The Strategic
report was approved by the Board on 18 February 2014.
Tony Quinlan
Finance Director
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46
Drax Group plc
Annual report and accounts 2013
Principal risks and uncertainties
A structured approach
to risk management
The effective management of risks within the Group
underpins the delivery of our key priorities.
Philip Hudson
Director of Corporate Affairs
and Company Secretary
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Board
responsible
for the
system of risk
management
and internal
control
Audit
Committee
review
the risk
registers
and internal
controls
Risk Management Committees
Periodic review of risk register.
Identify, monitor and manage risks
Policy and review
Operating companies
Maintain an effective system of risk management and internal control
Risk
The Group has a comprehensive
system 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 2013 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
During the year the Group enhanced
its risk management system with
the establishment of a Group Risk
Management Committee. It is chaired by
the Director of Corporate Affairs and its
members are the chairs of each of the
business risk management committees.
The Group Risk Management Committee
is responsible for monitoring the risk
management process on a Group wide
basis. It also oversees the process
in relation to cross-Group risks and
assists the business risk management
committees in risk analysis and
identification of best practice, and
provides additional assurance on the
risk control environment to the Audit
Committee and the Board.
There are six business risk
management committees:
1 Treasury and commodity risk
management committee
2 Safety, health, environmental and
production integrity committee
3 New developments risk
management committee
4 Corporate services risk
management committee
5 Haven Power risk
management committee
6 Drax Biomass International risk
management committee
Each Committee is responsible for
ensuring that all risks associated with
its specific area of the business are
identified, analysed and managed
systematically and appropriately.
Each Committee has terms of reference
that require systems and controls
to be approved, implemented and
monitored in order 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
47
Drax Group plc
Annual report and accounts 2013
Risk management process
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 the suitability and effectiveness
of risk management processes and
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.
Internal control
In addition, the Group has a
comprehensive and well defined
internal control system 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 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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Potential impact
, Volatility in financial results.
Associated objective and key priorities
Maximise the value of the Drax business
Change
Examples of mitigating activities
, Well understood progressive hedging
strategy with forward power and ROC sales
combined with corresponding purchases
of fuel and CO2 emissions allowances when
profitable and appropriate to do so.
, Apply for conversions under the CfD regime,
removing some income volatility from
key commodity exposures.
48
Drax Group plc
Annual report and accounts 2013
Principal risks and uncertainties
Commodity market price risk
Context
The commodity markets in which
we trade are inherently volatile, and
generation remunerated through
the Renewables Obligation increases
the risk in relation to the ROC market
Risk
, We 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), the price
of CO2 emissions allowances and the market
price of ROCs.
Counterparty risk
Context
The recent recession and uncertain
economic growth potentially impact
on counterparty risk
Risk
, We 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.
, We 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
, Additional costs associated with securing
fuel and other goods and services from
other suppliers.
, Failure to secure fuel from other suppliers
resulting in limitation of operations.
, Adverse 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
Maximise the value of the Drax business
Power and renewables market liquidity risk
Context
Potential impact
, Inability to hedge short to medium-term
Liquidity in the power and ROC markets
exposure to electricity prices through
is dependent on there being a sufficient
wholesale market trading.
number of counterparties willing to
trade actively
, Increased exposure to short-term
market volatility.
Risk
, The 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.
, Inability to sell all of our electricity output,
or ROCs.
, Lower revenues and increased costs to achieve
trading objectives.
, Adverse effect on financial results
and cash flows.
Associated objective and key priorities
Grow our retail business
Maximise the value of the Drax business
Maximise profitability from our coal
generation capacity
Deliver our biomass strategy
Change
Examples of mitigating activities
, Diversified fuel supply in terms of source
and counterparties.
, Diversified logistics routes.
, Target to optimise holding of fuel stocks.
, Close monitoring and reporting of
concentration risk in suppliers and
power counterparties.
, Full suite of power counterparties with
strong credit ratings.
, Power trading contracts generally include
provisions that force counterparties to post
collateral where their credit rating drops,
subject to certain restrictions.
, Close monitoring and reporting of potential
credit and collateral risk.
Change
Examples of mitigating activities
, Grow direct sales through Haven Power,
our electricity supply business.
, Initiatives to be active and responsive make
Drax an attractive business partner.
, Oppose structural changes that impact
our market access, such as clearing
and margining.
, Work with other independent generators
(via Independent Generators Group) to
achieve positive market and regulatory
changes to improve liquidity.
, Secure longer-term structured deals when
profitable to do so.
, Apply for conversions under the CfD regime,
reducing our reliance on the liquidity of the
ROC market.
49
Drax Group plc
Annual report and accounts 2013
Biomass market risk
Context
The biomass market is still in its relative
infancy and investment in the supply
chain is required
Risk
, We could fail to secure sustainable biomass
supplies and/or logistics arrangements
which meet our hurdle return rates and
operational requirements.
, Most 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
, Plant 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.
, As 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. Whilst successful first
conversion of a unit to biomass has been achieved,
further units are planned.
, Good progress has been made on our US
investments however, project execution
risk remains.
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
, Changes to the current regulatory regime
surrounding renewables, CPS mechanism
and other legislation could adversely affect
our biomass strategy.
, The EU, UK and local environmental and
health and safety laws and regulations cover
many aspects of our operations including
limits on emissions to air and water, noise, soil/
groundwater contamination, waste, and health
and safety standards.
Potential impact
, Inability to progress the biomass
growth strategy.
, Adverse effect on financial results
and cash flows.
Associated objective and key priorities
Deliver our biomass strategy
Change
Examples of mitigating activities
, Contract with suppliers where a robust
operational plant and logistics infrastructure
is already in place; work with new suppliers to
help develop such infrastructure.
, Invest in the supply chain whilst in its infancy
to ensure security and timing of supplies.
, Hedge currency exposures or secure
contracts in sterling to the extent that it
is appropriate.
Potential impact
, Personnel injury.
, Lower revenues.
, Increased costs and contractual penalties.
, Adverse effect on financial results
and cash flows.
Associated objective and key priorities
Maintain operational excellence
Deliver excellent people leadership
across our operations
Change
Examples of mitigating activities
, Comprehensive risk-based plant investment
and maintenance programme.
, Maintaining a trained and
competent workforce.
, Strong health and safety culture.
, Target to optimise holding of spare
components for use in the event of plant
failure, particularly long lead time items.
, Business continuity plan for IT systems.
, Ensure adequate insurance in place to cover
losses from plant failure where possible.
, Significant amounts of research and
development work have been undertaken
in terms of handling and burning biomass.
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Potential impact
, Less funding available for plant retrofit/
investment costs to meet increasingly stringent
environmental requirements.
, Lower load factors/generation levels.
, Adverse effect on financial results
and cash flows.
Associated objective and key priorities
Deliver our biomass strategy
Maintain operational excellence
Change
Examples of mitigating activities
, Briefing, representation and engagement
at EU and UK level.
, Development of abatement and alternative
generation options.
, Apply for conversions under the CfD
regime and grandfathered ROC regime to
provide increased certainty over future
revenue streams.
, Pricing of biomass contracts to allow for
adverse commodity market movements.
, Regular third party assurance over
system effectiveness.
, Strong safety culture and related training.
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Drax Group plc
Annual report and accounts 2013
Sustainable business review
Committed to
sustainability
Sustainability underpins all that we do and the future of
our business encompasses all three aspects of sustainable
development – environmental, social and economic.
Our approach to a
sustainable business
We have a major role to play in helping to
protect and enhance the environment.
This is in line with the wider goals of
sustainable development. Our approach
contributes to a sustainable, low carbon
economy and offers opportunities for
economic growth and job creation.
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 of
our wider stakeholder group. For us, a
sustainable business is about achieving
a balance between the commercial and
regulatory rigours of the competitive
sector and operating responsibly.
The Board establishes the policies in
respect of sustainable development,
such as our business conduct,
environmental, and health and safety
programmes. The Board’s policies are
implemented by dedicated specialists
who make sure effective processes
and procedures are in place to assure
compliance and to identify and to report
on risks and opportunities.
As in previous years we have continued
to invest, not only to comply with
environmental and health and safety
requirements, but, where practicable,
to go further. In 2013, 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.
Materiality
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 environmental,
social and economic impacts and those
that would substantively influence
the assessments and decisions of
stakeholders. Further sustainability
reporting is available on our website
at: www.drax.com/sustainability/
Engaging with our stakeholders
Drax and shareholders:
kReports and
announcements
kWebsite
kRoad shows
kFace-to-face
meetings
kVisit programmes
Drax and local
community:
kSponsorship
kFundraising events
kThemed campaigns
kVisitor programme
kExhibitions
kNewsletters
Drax and employees:
kBriefing sessions
kIntranet
kWritten Group briefs
kDrax Power
Open Forum
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
Drax and media:
kPress releases
kFace-to-face
meetings
kVisit programme
Drax and government
agents/regulators:
kFace-to-face
meetings
Drax and NGOs and
opinion formers:
kFace-to-face
meetings
kCorrespondence and
kBriefing papers
data submission
kVia trade associations
Drax and trading
counterparties:
kFace-to-face
meetings
kIndustry events
Drax and suppliers
and customers:
kFace-to-face
meetings
kConferences
kContractor briefings
kContractor safety
conference
51
Drax Group plc
Annual report and accounts 2013
Our environment
Towards a low
carbon economy
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
strategic carbon abatement initiative
to generate increasing amounts of
electricity from sustainable biomass
in place of coal.
During 2013, significant progress
was made on executing our plan
to transform the business into a
predominantly biomass-fuelled
generator. We converted our first
generating unit to burn sustainable
biomass in place of coal at the
beginning of April. Through increasing
the amount of sustainable biomass
burnt in place of coal we will
significantly reduce our carbon
footprint from 2012 levels.
Our electricity supply business,
Haven Power, has been successful
in selling the increased output of
renewable power generated from our
biomass conversion to our customers.
Renewable power sales are exempt
from the Climate Change Levy so
even after our price premium many
customers can make savings whilst
enjoying the benefits of power from
sustainable biomass.
In partnership with Alstom UK Limited
and BOC (a member of the Linde Group)
and in association with National Grid, we
are involved in a Front End Engineering
and Design (“FEED”) study to develop a
426MW oxy-combustion carbon capture
and storage (“CCS”) demonstration
plant at the Drax Power Station site.
The 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
funded programmes.
Environmental performance
and compliance
Environmental compliance of our power
station and associated landfill site is
managed through an environmental
management system. This system is
externally certified to the international
standard ISO 14001 and is subject to
external audit twice a year.
We completed a trial with the
Environment Agency in 2013 as part
of 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. The effectiveness of the scheme
is being assessed by the Environment
Agency and we await their proposals.
There were no major breaches of our
environmental consents during 2013.
Emissions to air
In accordance with the Companies Act
2006 we set out our carbon reporting
information for direct emissions
(“Scope 1”) from activities such as
fuel combustion and processing, and
indirect emissions (“Scope 2”) being
the equivalent emissions created
by the generation of the electricity,
heat or steam we purchase. Scope 1
for Drax covers the emissions arising
from burning fossil fuels, namely
coal, to generate electricity and the
operation of some of our plant at the
power station, for example, our flue-gas
desulphurisation system. The Group’s
Scope 2 emissions arise mainly from
electricity purchased to run operations
across our various sites.
We are also required to disclose
emissions of biologically sequestered
carbon, which includes emissions
released through burning biomass
to generate electricity.
Through implementing our strategy
to become a predominantly biomass-
fuelled generator we aim to reduce
our Scope 1 and 2 emissions. As a
result there will be a rise in biologically
sequestered carbon emissions.
We collate data on our carbon dioxide
emissions from fuel combustion as
part of our measurement and reporting
plan under the EU ETS. This includes
all Scope 1 and the biologically
sequestered carbon figures. For Scope
2 reporting we use the Greenhouse Gas
Protocol, A Corporate Accounting and
Reporting Standard (revised edition)
and the Government’s published GHG
conversion factors to determine the level
of carbon emissions.
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Drax Group plc
Annual report and accounts 2013
Sustainable business review
The majority of our emissions arise
through the combustion of fossil
fuel for generating electricity. As this
single figure can shadow smaller, but
still important trends, we have set a
materiality threshold of 100 thousand
tonnes, equivalent to approximately
0.5% of the reporting year’s emissions,
to ensure we strike the right balance
between demonstrating important
trends and limiting data to a
meaningful level.
Carbon dioxide emissions, calculated
under the EU ETS, as a ratio of electricity
generated, before deductions for that
used on-site, is a principal performance
indicator for the Group. This metric
has also been selected for mandatory
carbon reporting.
Beyond carbon dioxide 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.
All emissions in 2013 were within the
limits set by the Environment Agency.
Looking ahead, work continues to
develop a solution to comply with the
emission limits which will be in place
beyond 2016 under the Industrial
Emissions Directive.
Total emissions
(kt)
Sulphur dioxide
Nitrogen oxides
Dust
2013
31.7
39.2
0.8
2012
35.1
39.2
0.8
2011
32.1
38.9
0.6
2013
kt
2013
t/GWh
2012
kt
2012
t/GWh
Discharges to water
Activity
Scope 1
Fossil fuel
combustion
20,162
720 22,513
777
Operations
157
6
180
7
Total Scope 1 20,320(2) 725 22,693(1) 784
Scope 2
Purchased
electricity
Total Scope 1
and 2
Biologically-
sequestered
carbon
(biomass
combustion)
Gross
generation
TWh
293
10
341
10
20,612
736 23,038
794
2,799(2)
1,214(1)
28
29
Notes:
(1) Externally verified by Lloyd’s Register Quality Assurance.
(2) During 2014 will be subject to the same audit as 2012 figures.
Figures may not add up due to rounding.
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 so as to ensure all
discharge consent limits are met.
Water abstraction
(Mt)
River Ouse water
Mains water
Borehole water
2013
56.9
0.3
1.9
2012
56.7
0.2
1.8
2011
57.7
0.2
2.1
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 2013, ash
was sold in conformity with European
construction product standards and in
compliance with the Waste Recycling
Action Programme quality protocol.
This has helped us to sell over 80%
of the 1.3 million tonnes of ash
produced in 2013 as replacement for
virgin aggregates and as a cement
replacement product.
In 2013, construction was completed on
the lightweight aggregate production
facility on-site, which is owned and
operated by Lytag Ltd, a company based
in Escrick, North Yorkshire. The facility
manufactures lightweight aggregate
from pulverised fuel ash.
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 2013, we contributed £73,000
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 2013, we met our target to divert 90%
of non-ash waste from landfill.
53
Drax Group plc
Annual report and accounts 2013
“We are committed to
developing and maintaining
a positive health and
safety culture.”
Matthew Houlden
Trainee Health & Safety Advisor
Our people
Health and safety
Health and safety is at the heart of our
business. Protecting our employees,
contractors and all visitors from injury
is fundamental to our philosophy.
We are committed to developing and
maintaining a positive health and safety
culture in which statutory requirements
are viewed as a minimum standard and
leading performance as our goal.
Personal safety statistics
Fatality
Time losing injuries
Restricted work
injuries
Medical treatment
injuries
First aid injuries
2013
2012
2011
0
6
4
10
297
0
3
2
3
0
3
1
0
220
207
RIDDOR(1) reportable
11
4
5
Note:
(1) Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations.
The increase in the injury statistics
above arose from weaker performance
at two of our US construction sites.
Working with our contractors we
have significantly enhanced safety
management and supervision at
these sites.
Attaining leading performance
The lost time injury rate and total
recordable injury rate for 2013 at 0.09
and 0.29 respectively remain industry-
leading. This performance was achieved
in the context of significant construction
work that took place during the year.
Over one-third of the 6.9 million hours
worked across the Group was in higher
risk construction activities. 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.
We have retained 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 for our biomass
pellet plant, based at Goole in the
East Riding of Yorkshire. The standard
is approved by Lloyd’s Register
Quality Assurance.
In addition to this, we were once again
awarded the The Royal Society for the
Prevention of Accidents Gold Medal
Award having achieved Gold Award
standards for nine 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, which is based on the Health
and Safety Executive’s approach to
achieving a balance between the
systems and behavioural aspects of
management, treating health and safety
management as an integral part of good
management generally, rather than as a
stand-alone system.
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.
Health and wellbeing
We are committed to promoting the
health and wellbeing of all our staff
and ensuring a professional response
to first aid and emergency situations
should any occur. We have published
occupational health policies which
address industrial disease risks,
and our occupational health team
undertakes regular programmes to
screen colleagues in accordance with
risk, exposure and Health and Safety
Executive requirements.
Health and wellbeing-based
programmes and initiatives are
run throughout the Group to raise
awareness and promote a healthy
lifestyle. 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.
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54
Drax Group plc
Annual report and accounts 2013
Sustainable business review
Employees
Employment
The Group employed 1,280 people
at the year end, an increase of
10%. The pie charts provide a
breakdown of headcount across
the Group’s businesses. Most of our
employees work full-time and are
on permanent contracts.
At Drax Power Limited the annual staff
turnover rate for 2013 was only 5%,
most of which was due to retirements.
Haven Power’s annual staff turnover
rate was indicative of the business and
demographic profile of the workforce,
although following a number of
initiatives to improve staff retention
it fell from 36% in 2012 to 24% in 2013.
Five employees left our US operations in
2013, resulting in an annualised turnover
rate of 21%.
Gender split both across the Group
and the senior management team is
illustrated in the pie charts. Our biggest
challenge continues to be attracting
female applicants, whether apprentices,
graduates or more senior roles, to
production and engineering positions.
The Board’s policy on diversity is given
in the Nominations Committee report
on page 77.
Employee engagement
Some 51% of the Group’s workforce is
covered by collective bargaining, and
for the remainder who are employed
on individual employment contracts
we have representative employee
consultation and information
arrangements in place. An annual
employee engagement survey is
conducted at Haven Power, and at
Drax Power an employee survey and a
stress survey, as designed by the Health
and Safety Executive, is conducted in
alternate years. The surveys allow for
analysis, feedback and action plans.
We use a variety of communication
channels to ensure that all colleagues
are kept fully informed of developments
in the Group’s operations and provided
with the opportunity to give feedback.
Employee policies and relations
We have a suite of policies designed to
support our people at work, including
those to assist, where appropriate, a
variety of work/lifestyle preferences,
procedures for raising grievance or
safety concerns, and diversity and
inclusion in the workplace. We make
every effort to provide long-term
employment security and we maintain
high standards in employment practices.
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 development reviews.
Each year, Drax Power Limited
recruits for the four-year apprentice
training programme covering power
station operations and engineering
maintenance. In 2013, we took on eight
apprentices across the three disciplines
of mechanical, electrical, and control
and instrumentation.
This year, 12 participants in our supervisor
development programme were each
awarded a Certificate in Professional
Development from Coventry University.
We also commenced a structured
two-year UK graduate development
programme for 15 recent graduates who
have joined various departments across
the Group.
During the year, Drax and the
trade union, Unite, signed a learning
agreement committing to working
in partnership to promote and
support lifelong learning and
ensuring equal access to learning
opportunities. The agreement’s
aims include establishing a learning
culture within the workplace, and
supporting employees to gain skills
and qualifications to support their
future employability and the
business’ needs.
We have a structured process of
succession planning for senior roles
with a specific career management
discussion integrated within the existing
appraisal process. The process identifies
succession potential and gaps, which
in turn inform individual development/
recruitment planning.
Reward and recognition
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.
“Each year Drax Power
Limited recruits for the
four-year apprentice training
programme covering power
station operations and
engineering maintenance.”
Oliver Fish, Apprentice
pp
ard Jaehrig, Apprentice
Richard Jaehrig, Apprentice
55
Drax Group plc
Annual report and accounts 2013
Drax Group total workforce
Employment contracts
Our stakeholders
1,280
as at 31 December 2013
Part Time:
76
Full Time:
1,204
Employment gender
Employment status
Female:
308
Temporary:
13
Male:
972
Permanent:
1,267
Senior management
group gender diversity
Senior management group
composition by department
Female:
11
Chief Executive:
1
Strategy and
Regulation:
5
Finance, IT,
Procurement
and Risk:
7
Fuel
purchasing
and US:
8
Male:
35
Retail, Trading
and Logistics:
12
Production:
7
Corporate
Affairs:
6
Engaging with
our stakeholders
Like most businesses, our stakeholders
are many and diverse, including our
shareholders, employees, customers,
energy consultants, 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.
Business conduct
We are committed to high ethical
standards and to conducting our
business with honesty, integrity and
in accordance with applicable laws
and regulations. Honesty and integrity
not only underpin how we do business,
but how we expect our customers,
suppliers, agents, partners, contractors
and consultants to do business, whether
in the UK, US or beyond.
In order to prevent bribery and
corruption we take responsibility
for maintaining a culture within
the Group in which bribery is never
acceptable. In protecting fundamental
human rights, Drax does not tolerate the
use of underage workers or any concept
of forced labour, at the same time
ensuring our suppliers’ activities have
a minimal impact on the environment
and local communities. Any supplier
found to be complicit in a breach of such
standards, either directly or indirectly,
will be barred from further participation
in our supply chain activities.
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.
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 safety, fraud or other illegal or
unethical conduct that they may have
witnessed or are concerned about.
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56
Drax Group plc
Annual report and accounts 2013
Sustainable business review
Supply chain
Non-fuel procurement
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 where possible.
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 buy coal from a range of sources
with the objectives of managing our
commercial exposures, environmental
obligations and diversity of supply.
We purchase around 40% of our coal
from UK deep and surface mines with
the remainder coming from major supply
basins around the world, including the
US, Colombia and Russia.
When buying from overseas we have
continued to require, through our
contracts, minimum standards with
suppliers in respect of compliance with
legislation, human rights, labour relations,
health and safety arrangements and
business ethics. In order to support our
focus on responsible procurement, we
have joined the Bettercoal initiative, a
not-for-profit organisation that promotes
continuous improvement in corporate
responsibility in the coal supply chain.
Biomass sustainability
and procurement
It is a prerequisite that all our biomass
must be purchased from sustainable
sources. To ensure this we have
implemented a sustainability policy
which embeds comprehensive criteria
into our procurement activities.
Our Biomass Sustainability Management
System ensures commitment to
our policy.
We are leading 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:
, significantly reduce greenhouse
gas emissions compared to coal-
fired generation;
, not result in a net release of carbon
from the vegetation and soil of either
forests or agricultural lands;
, not endanger food supply or
communities where the use of
biomass is essential for subsistence
(for example heat, medicines,
building materials);
, not adversely affect protected
or vulnerable biodiversity and,
where possible, give preference
to biomass production that
strengthens biodiversity;
, deploy good practices to protect and/
or improve soil, water (both ground
and surface) and air quality;
, contribute to local prosperity in the
area of supply chain management and
biomass production; and
, 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 government’s sustainability
criteria. 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.
Customer relations
Customers and their consultants are
at the heart of our retail business. All of
our customers have named account
managers who are responsible for
the service that we deliver. We have a
growing reputation for providing good
service and this supports a good level
of renewal at the end of customers’
supply contracts.
During 2013, Ofgem introduced new
requirements under its retail market
review, including a requirement to treat
customers fairly. Despite being already
compliant with many of the changes
we took the opportunity to improve
our customer service and, in particular,
our assurance of fair treatment.
There is currently unprecedented
change that touches virtually all
elements of the retail market value
chain and during the year we ran
a number of events for customers,
prospective customers and their
consultants to inform them about
selected developments.
For our larger customers, we introduced
an online portal providing 24/7
access to bills and statements as well
as consumption data and flexible
purchasing information.
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.drax.com. 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,
and 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.
57
Drax Group plc
Annual report and accounts 2013
“During 2013, we played host
to some 10,000 visitors.”
Pauline Butler
Lead Station Guide
Public affairs
Community 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 presentation of collective
positions on energy policy matters.
No political donations were made
in the UK or elsewhere during 2013
(2012: 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 uncertainty 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,
through 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.
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 2013, the Group gave financial
support of £200,000 (2012: £182,000)
in total across a range of charitable and
non-charitable community causes.
Of that total, charitable donations
amounted to £142,000 (2012: £127,000).
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.
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.
Campaigns such as “Cricket in the
Community”, “Art in the Community”
and the “Community Pride Awards” are
now established in the annual calendar
of community events and continue to
prove popular.
Visitors to Drax
During 2013, we played host to
some 10,000 visitors. 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.
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58
Drax Group plc
Annual report and accounts 2013
The Board of directors
Membership and process
Role of the Board
Composition
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.drax.com.
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.
Chairman
Charles Berry
Number of meetings held in 2013
7
The Board has
seven scheduled
meetings each
year, and arranges
additional meetings
if the need arises.
3
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.
1
In addition,
the Board meets
at least annually to
consider strategy.
The schedule of matters reserved are reviewed annually by the Board
and are available on the Group’s website at www.drax.com
All of the directors listed below served throughout the year and continued
to be directors as at 18 February 2014. Their biographical details appear on
pages 59 to 61. Tim Barker (formerly Senior Independent Director) served
until his retirement on 24 April 2013.
Executive:
4
Non-
executive:
4
Chairman
Charles Berry
Independent
non-executive
directors
Tim Cobbold
Melanie Gee
David Lindsell
Tony Thorne
Executive
directors
Dorothy Thompson
Chief Executive
Tony Quinlan
Finance Director
Peter Emery
Production Director
Paul Taylor
Retail and Trading
Director
Attending by invitation
Philip Hudson
Company Secretary
Board diversity
The following chart illustrates the proportion of female and
male directors.
Male:
77.8%
Female:
22.2%
59
Drax Group plc
Annual report and accounts 2013
Directors’ biographies
Charles Berry
Chairman
Dorothy Thompson CBE
Chief Executive
Tony Quinlan
Finance Director
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.
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.
Appointment to the Board:
15 December 2005 and was appointed
Chairman on 17 April 2008.
Appointment to the Board:
20 October 2005, having joined Drax
in September 2005.
Committee membership:
Nominations (Chairman) and Remuneration.
Committee membership:
Executive.
External appointments:
A non-executive director and Chairman of
Senior plc and The Weir Group PLC.
External appointments:
A non-executive director of Johnson
Matthey 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, Impax Environmental
Markets, Securities Trust of Scotland and of
THUS Group plc.
Qualifications:
BSc (Hons) in Electrical Engineering
and MSc in Management.
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.
As Finance Director, Tony is responsible
for the financial management of
the Group, and for relationships with
the Group’s bankers and financial
advisers. In addition to the Finance
function, he has the Investor Relations,
Risk Management, IT, Facilities, and
Procurement functions reporting to him.
Appointment to the Board:
1 September 2008.
Committee membership:
Executive. Tony is also on the Board of
the Group’s US subsidiary, Drax Biomass
International Inc.
External appointments:
A non-executive director of the Port of London
Authority, where he chairs the Audit Committee.
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).
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60
Drax Group plc
Annual report and accounts 2013
Directors’ biographies
Peter Emery
Production Director
Paul Taylor
Tim Cobbold
Retail and Trading Director
Independent non-executive 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.
As Retail and Trading Director, Paul
has responsibility for the trading of
power, other associated commodities
and freight and logistics. 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’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
a serving Chief Executive in a different
sector provides an added dimension
to his contribution.
Appointment to the Board:
20 October 2005, having joined Drax
in June 2004.
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.
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:
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).
61
Drax Group plc
Annual report and accounts 2013
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
Senior 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 undertakes
expansion into global markets.
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Appointment to the Board:
1 January 2013.
Committee membership:
Audit, Nominations and Remuneration.
External appointments:
A senior adviser 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 Adviser
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. Melanie was an alternate member of
The Takeover Panel between 2006 and 2013.
Qualifications:
MA in Mathematics.
Appointment to the Board:
1 December 2008.
Committee membership:
Audit (Chairman), Nominations
and Remuneration.
Appointment to the Board:
29 June 2010.
Committee membership:
Remuneration (Chairman),
Audit and Nominations.
External appointments:
A non-executive director of Premier Oil plc
and HellermannTyton Group PLC.
External appointments:
Chairman of the South East Coast
Ambulance Service.
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.
Qualifications:
Fellow of the Institute of Chartered Accountants
in England and Wales (FCA).
Previous experience:
Tony was Chief Executive of DS Smith plc, the
international packaging and office products
group, from 2001 until his retirement from
the Board in May 2010. Previously he was
President of SCA’s corrugated packaging
business. Prior to this he spent 20 years with
Shell International, working throughout the
world in senior management roles, including
strategic planning and President of the
Shell companies in Mexico.
Qualifications:
BSc (Hons) in Agricultural Economics.
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62
Drax Group plc
Annual report and accounts 2013
The Executive Committee
Membership and process
Role of the Committee
Committee members
The Executive Committee is the Chief Executive’s committee
and assists her in the execution of her duties focusing
on strategy, financial structure, planning and performance,
succession planning, organisational development and
Group-wide policies.
Chairman
Dorothy Thompson CBE
The biographical details of the members below appear on pages 59 and
60 (executive directors) and page 63 (senior management)
Executive:
3
Senior
management:
3
Number of meetings held in 2013
12
The Committee has 12 scheduled meetings each year,
and arranges additional meetings if the need arises.
Chairman
Dorothy Thompson
Chief Executive
Executive
directors
Tony Quinlan
Finance Director
Peter Emery
Production Director
Paul Taylor
Retail and Trading
Director
Senior
management
Philip Hudson
Director of
Corporate Affairs and
Company Secretary
Andrew Koss
Director of Strategy
Matthew Rivers
Director of Fuel
Attending by invitation
Phil White
Deputy Company Secretary (Secretary to the Committee)
Other senior managers as appropriate to present specific subject matter.
Committee diversity
The following chart illustrates the proportion of female and male
Committee members.
Male:
85.7%
Female:
14.3%
63
Drax Group plc
Annual report and accounts 2013
Executive Committee members’ biographies
Philip Hudson
Director of Corporate Affairs
and Company Secretary
As Director of Corporate Affairs and
Company Secretary, Philip is responsible
for the Group’s legal and corporate
compliance and for the application
of good standards of corporate
governance. He has the Company
Secretariat, External Communications,
Human Resources and Legal functions
reporting to him. Philip is also Chair of
Trustees for the Drax section of the
Electricity Supply Pension Scheme.
Andrew Koss
Director of Strategy
Matthew Rivers
Director of Fuel
Andrew has responsibility for regulatory
issues, environmental strategy and
business development. Andrew joined
Drax in 2005 to lead the refinancing
as part of the initial public offering in
that year. He has subsequently held
a number of positions, leading the
corporate finance, investor relations and
commodity risk management functions.
Matthew is responsible for our biomass
and coal purchases. Successful biomass
sourcing is at the core of the realisation
of our strategy. An important part of
Matthew’s biomass responsibilities is
that he has Group level responsibility
for our upstream investment activities
in the US. These activities are growing
rapidly as we move from the initial
development phase into commissioning
pellet plants and running an
operational business.
Appointment to the Executive Committee:
8 May 2007 upon joining Drax.
Previous experience:
Philip joined Drax as General Counsel and
Company Secretary. He was previously at Kelda
Group plc (owner of Yorkshire Water), where
he held the same role. Philip has previously
been a solicitor in private practice. He also spent
several years as a solicitor in the in-house legal
department at Powergen.
Qualifications:
LLB (Hons), Solicitor.
Appointment to the Executive Committee:
1 November 2013, having joined Drax
in June 2005.
Appointment to the Executive Committee:
1 November 2013, having joined Drax
in November 2011.
Previous experience:
Prior to joining Drax, Andrew was Deputy Group
Treasurer at Provident Financial plc. He has also
worked in investment banking managing middle
office functions for derivatives trading at UBS
and Dresdner Kleinwort Benson.
Qualifications:
BSc (Hons) Maths, Associate of the Institute
of Chartered Accountants England and Wales
(ACA). Member of the Association of Corporate
Treasurers (MCT).
Previous experience:
Matthew has previously been the Director
Energy Biomass and then Director Overseas
Wood & Biomass Sourcing at UPM in Finland.
Prior to that, Matthew was Managing Director
of Forestal Oriental Uruguay, responsible for
plantation management and wood supply.
Matthew has also been Managing Director,
UPM Tilhill, the UK’s largest private sector forest
management and timber harvesting business.
Qualifications:
BSc (For) Hons, MBA, FICFor, CEnv.
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64
Drax Group plc
Annual report and accounts 2013
Corporate governance
A commitment to
good governance
Drax is committed to good corporate governance,
which is a cornerstone to a successful and
sustainable company.
Charles Berry
Chairman
Chairman’s letter
I am pleased to present the Group’s Corporate governance
report for 2013 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 a cornerstone of
management within the Group and it is the Board that sets
the tone and takes the lead.
As Chairman, it is my role to ensure that Drax is led by an
effective Board. 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.
An important part of my role is to ensure that the Board
contains the right balance of skills, expertise and experience.
We have an established policy which ensures that diversity
(including gender diversity) is one of the factors taken into
account when considering appointments to the Board and
other senior roles.
The Board has reviewed the requirements of the UK Corporate
Governance Code and we comply with it except currently in
relation to provisions on tendering the audit process. A more
detailed report on our corporate governance arrangements
is set out on the following pages.
During 2013, we continued to strengthen our internal control
and risk management processes to ensure that they remain
effective and are embedded in operations as the Group’s
business evolves in scope and dimension.
Charles Berry
Chairman
65
Drax Group plc
Annual report and accounts 2013
Our governance framework
Governance structure
The Chairman
The Board
Audit Committee
Remuneration Committee
Nominations Committee
Chief Executive
Assurance
Group Risk
Management
Committee
Accountability
Executive Committee
Drax Biomass
International Risk
Management
Committee
Treasury and
Commodity
Risk Management
Committee
Haven Power
Risk Management
Committee
New Developments
Risk Management
Committee
Corporate Services
Risk Management
Committee
Safety, Health,
Environment and
Production Integrity
Committee
Risks:
Development,
Engineering,
Corporate, Legal,
Financial etc.
Risks:
Treasury, Commodity
and Trading
Risks:
Haven operational
Risks:
Strategic
development,
New business
project execution
Risks:
Regulatory,
Compliance, HR, IT,
Reputational and
Corporate Finance
Risks:
Health and Safety,
Technical plant
and Environmental
performance
How the Board functions
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 2013, 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 Listing, Prospectus,
Disclosure and Transparency Rules and the Companies Act.
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, External
Communications, Group Legal and Human Resources
functions, and for the management of the Group’s internal
control and risk management framework and processes.
The Company’s Articles of Association (the “Articles”) give the
directors power to authorise 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.
Selection, appointment, review and re-election
Notwithstanding the provisions of the Articles (which provide
that one-third of directors shall retire by rotation each year
and are eligible for re-election by shareholders at the Annual
General Meeting (“AGM”), and in accordance with the UK
Corporate Governance Code, the Company will continue to
propose all directors for annual re-election. Accordingly, each
of the current directors will retire at the forthcoming AGM
and, being eligible, offer themselves for re-election.
The evaluation of the Board described below concluded that
the directors offering themselves for re-election continue
to demonstrate commitment, management and industry
expertise in their particular role and perform effectively.
The 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 94.
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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 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
both in the UK and the US. Periodically, they also meet with
senior management to be briefed on the Group’s business and
specific Board training days are arranged, where appropriate,
involving presentations on relevant topics.
66
Drax Group plc
Annual report and accounts 2013
Corporate governance
It is the Board’s policy that each non-executive director will
be appointed for a term of three years which, subject to the
Board being satisfied as to the director’s performance and
commitment, and a resolution to re-elect at the appropriate
AGM, may be renewed by mutual agreement. However, it is
the Board’s policy not to extend the aggregate period of
service of any independent non-executive director beyond
nine years, and any proposal made to extend a non-executive
director’s aggregate period of office beyond six years is the
subject of a rigorous review. Such reviews in cases where a
director remains in office after six years, will be conducted
annually, as part of the evaluation of the Board.
The Board is satisfied that all the directors are able to devote
sufficient time to their duties as directors.
Performance reviews and directors’ development
The effectiveness of the Board is vital to the success of the
Group. The Board conducted a review of its effectiveness
and that of its committees with the assistance of external
facilitation during the period 2007 to 2011. In 2012, the
performance review was undertaken internally, led by the
Chairman and facilitated by the Company Secretary. In 2013,
we have reverted to using an external facilitator in Armstrong
Bonham Carter. The review concluded that each of, the Board,
its individual directors and its committees continued to be
effective. No significant areas of concern were identified.
The review did, however, give rise to some suggestions
to improve the overall effectiveness of the Board. In the light
of these comments, the Board will continue to develop
its processes in the areas of strategy development, people
leadership and the monitoring of risk.
Committees of the Board
The table below details the standing committees established by the Board and the membership thereof:
Committee
Tim Barker(3)
Charles Berry
Tim Cobbold
Peter Emery
Melanie Gee
Philip Hudson(4)
David Lindsell
Tony Quinlan
Paul Taylor
Dorothy Thompson
Tony Thorne(5)
Notes:
Audit
Nominations
Remuneration
Executive(1
)
Group Risk(2)
Member
Invited to attend
Member
–
Member
Secretary
Chairman
Invited to attend
–
Invited to attend
Member
Chairman
Member
–
Member
Secretary
Member
–
–
–
Chairman
Member
Member
–
–
–
–
–
–
–
Member
Member
Member
Secretary
Member
–
–
–
–
Member
Chairman
–
Member
Member
–
Member
Member
Invited to attend
Chairman
Invited to attend
Member
Member Member/Chairman
–
–
(1) 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. In addition
to those named above, Andrew Koss (Director of Strategy) and Matthew Rivers (Director of Fuel) are also members. Phil White (Deputy Company Secretary) acts as
Secretary to the Executive Committee.
(2) In addition to those named above, Janet Gallagher (SVP Legal, US) and Rachel Kemsley (Finance Director, Haven Power) each of whom chairs a risk committee which
reports to this Committee, are members.
(3) Up until his retirement as a director of the Company at the conclusion of the Annual General Meeting on 23 April 2013, Tim Barker had been Chairman of the
Remuneration Committee and a member of each of the Audit and Nominations Committees.
(4) Philip Hudson is the Director of Corporate Affairs and Company Secretary.
(5) Tony Thorne was appointed Chairman of the Remuneration Committee effective from Tim Barker’s retirement. Up until that time, he had been a member of that committee.
67
Drax Group plc
Annual report and accounts 2013
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 the
committees are reviewed annually by each committee and
then by the Board and are available on the Group’s website
at www.drax.com
In April 2013 a Group Risk Management Committee (“GRMC”)
was established to coordinate the activities of the six
established operational risk committees. As the Group’s
business has become more complex, the GRMC now provides
greater oversight of the risk management process in the
Group, group risk optimisation and cross group risk issues.
Two meetings of the GRMC have been held this year.
The purpose of the GRMC is to:
(cid:3)
monitor the risk management process on a Group-wide basis.
(cid:3)
maintain the Consolidated Risk Register and Cross-Group
Risk Register.
(cid:3)
oversee the risk management process in relation to
cross-Group risks.
(cid:3)
provide an escalation route for Risk Committees who
disagree on materiality or probability of a shared or
common risk.
(cid:3)
assist in the risk analysis conducted within the business
units and identify areas where best practice in one area can
be transferred to another.
(cid:3)
provide additional assurance on the control environment.
Board and Board Committee attendance
(cid:3)
make recommendations to improve effectiveness
of internal controls.
(cid:3)
make recommendations for changes in procedures
and policies.
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.
The table below shows the number of meetings and attendance at them by directors of the Board, Audit, Nominations and
Remuneration Committees during 2013. The number in brackets represents the maximum number of meetings that each
individual was entitled to and had the opportunity to attend.
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Tim Barker
Charles Berry
Tim Cobbold
Peter Emery
Melanie Gee
David Lindsell
Tony Quinlan
Paul Taylor
Dorothy Thompson
Tony Thorne
Notes:
Time on the Board
(years/months)
Time with Drax(1)
(years/months)
7/2
8/0
3/3
8/2
1/0
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5/4
2/4
8/2
3/6
8/6
8/0
3/3
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1/0
5/1
5/4
9/6
8/3
3/6
Board(2)
3(3)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
7(7)
Audit
Committee
Nominations
Committee
Remuneration
Committee
2(2)
–
4(4)
–
4(4)
4(4)
–
–
–
2(2)
4(4)
4(4)
–
4(4)
4(4)
–
–
–
3(3)
7(7)
7(7)
–
7(7)
7(7)
–
–
–
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(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 2013.
(2) In addition to the Board meetings identified above, there have also been three meetings held by telephone to discuss various matters, one of which was held
to specifically approve the US pellet plants investments and one meeting was held devoted to strategy. There was full attendance at each of these meetings.
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Drax Group plc
Annual report and accounts 2013
Corporate governance
Time commitment
Relations with shareholders
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-executives’ 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.
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
US. These took place following both the preliminary and half
year results announcements in 2013. Makinson Cowell
Limited, an independent capital markets consultancy firm and
part of the KPMG Group, is engaged by the Group to advise
and assist in relation to communications with shareholders.
The Company’s private registered shareholders hold, in
aggregate, approximately 0.6% 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 57 provide 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.
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 73 to 98.
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 2013, there has been full compliance with the
principles of the UK Corporate Governance Code (the “Code”)
issued in September 2012 and applicable for this financial
year, and this compliance is illustrated in the details set out in
this report. However, the Board has, on the recommendation
of the Audit Committee, taken the decision not to comply for
the time being with provision C.3.7. of the Code, to put the
external audit contract out to tender at least every ten years.
A detailed explanation is included within the Audit Committee
report on page 75.
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.
69
Drax Group plc
Annual report and accounts 2013
Statutory information
Annual General Meeting
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 1116⁄29 pence each. There are no restrictions
on the voting rights of the ordinary shares.
Shares in issue
At 1 January 2013 As at 31 December 2013
As at 18 February 2014
401,587,564
402,566,332
402,568,006
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.
During the period, 978,768 ordinary shares in the Company
were issued as follows:
(cid:3) 600,248 shares under the rules of the Group’s Savings-
Related Share Option Plan (“SAYE Plan”) to 305
participants who held options under the 3-year 2010 Grant
which matured on 1 May 2012 and four individuals who had
retired from the Group; and
(cid:3) 378,520 shares under the rules of the Group’s Bonus
Matching Plan (“BMP”) to 66 participants in the BMP. The
shares issued represented 0.07% of the Company’s issued
ordinary share capital prior to those shares being issued.
No other ordinary shares were issued during the year and the
Company held no treasury shares during 2013.
In January 2014, a total of 1,674 shares were issued under the
rules of the SAYE Plan to two participants who had retired
from the Group.
Authority to purchase own shares
At the AGM held on 24 April 2013, 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 2013.
Rights and obligations attaching to shares
The rights and obligations attaching to the ordinary shares are
set out in the Articles. The Articles may only be changed by
the shareholders by special resolution.
Variation of rights
Subject to statute, the Articles specify that rights attached to
any class of shares may be varied with the written consent of
the holders of not less than three-quarters in nominal value
of the issued shares of that class, or with the sanction of an
extraordinary resolution passed at a separate General Meeting
of the holders of those shares. At every such separate General
Meeting the quorum shall be two persons holding or
representing by proxy at least one-third in nominal value of
the issued shares of the class (calculated excluding any shares
held as Treasury shares). The rights conferred upon the
holders of any shares shall not, unless otherwise expressly
provided in the rights attaching to those shares, be deemed
to be varied by the creation or issue of further shares ranking
pari passu with them.
Transfer of shares
All transfers of shares which are in certificated form may be
effected by transfer in writing in any usual or common form
or in any other form acceptable to the directors and may be
under hand only. The instrument of transfer shall be signed by
or on behalf of the transferor and (except in the case of fully
paid shares) by or on behalf of the transferee. The transferor
shall remain the holder of the shares concerned until the
name of the transferee is entered in the register. All transfers
of shares which are in uncertificated form may be effected by
means of the CREST system.
The directors may decline to recognise any instrument of
transfer relating to shares in certificated form unless it:
a) is in respect of only one class of share; and
b) is lodged at the transfer office (duly stamped if required)
accompanied by the relevant share certificate(s) and such
other evidence as the directors may reasonably require to
show the right of the transferor to make the transfer (and, if
the instrument of transfer is executed by some other person
on his/her behalf, the authority of that person so to do).
The directors may, in the case of shares in certificated form,
in their absolute discretion and without assigning any reason
therefore, refuse to register any transfer of shares (not being
fully paid shares) provided that, where any such shares are
admitted to the Official List of the London Stock Exchange,
such discretion may not be exercised in such a way as to
prevent dealings in the shares of that class from taking place
on an open and proper basis. The directors may also refuse to
register an allotment or transfer of shares (whether fully paid
or not) in favour of more than four persons jointly.
If the directors refuse to register an allotment or transfer, they
shall send within two months after the date on which the
letter of allotment or transfer was lodged with the Company,
to the allottee or transferee, notice of the refusal.
A shareholder does not need to obtain the approval of the
Company, or of other shareholders of shares in the Company,
for a transfer of shares to take place.
The Articles provide that the directors must give reasons
for any refusal to register a transfer of shares in accordance
with the Companies Act.
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70
Drax Group plc
Annual report and accounts 2013
Corporate governance
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.
Shares are held by the trustee on behalf of employees in
respect of the Group’s Share Incentive Plan. The voting rights
attached to such shares are not directly exercisable by the
employees. The employee may direct the trustee on how to
vote at the AGM and the trustee may only cast its vote in
respect of shares/voting rights over which it has received
a valid direction from employees.
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.
Interests in voting rights
As at 18 February 2014, the Company has been notified, in accordance with the Financial Conduct 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
Invesco plc
31.01.2014
–
108,558,665
Artemis Investment
Management LLP
Schroders plc
AXA S.A.
10.02.2014
19,257,920
1,959,839
07.11.2013
–
19,063,586
17.12.2009
1,704,050
14,952,477
Legal & General Group Plc
20.07.2010
14,478,741
–
Note:
(1) As at the date of the last TR1 notification made to the Company by the investor.
–
–
–
–
–
Total number of
voting rights held
% of the
issued share
capital held(i)
108,558,665
26.96%
21,217,759
19,063,586
16,656,527
14,478,741
5.27%
4.74%
4.57%
3.96%
71
Drax Group plc
Annual report and accounts 2013
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.
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.
Under a £50 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 a £75 million guarantee issued by The Lords
Commissioners of Her Majesty’s Treasury dated 23 April 2013
in respect of a £75 million guaranteed loan note instrument
issued by Drax Finance Limited to Friends Life Limited, on a
change of control, if the guarantor requires, it may by giving
notice to Drax Finance Limited within 30 days of receiving
notice from Drax Finance Limited that a change of control
has occurred, require redemption of the outstanding loan
notes and repayment of any outstanding amounts due
under the guarantee within three business days of such
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.
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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 73 to 76.
Directors’ report
The directors present their annual report on the affairs of the
group, together with the financial statement and auditor’s
report for the year ended 31 December 2013. The Corporate
governance section set out on pages 64 to 71 forms part of
this report.
No significant events since the balance sheet date have
arisen. An indication of likely future developments in the
business of the Company and details of research and
development activities are included in the Strategic report on
pages 1 to 57.
Information about the use of financial instruments by the
Company and its subsidiaries is given in note 19 to the
consolidated financial statements.
By order of the Board.
Philip Hudson
Company Secretary
18 February 2014
Registered office:
Drax Power Station
Selby
North Yorkshire YO8 8PH
Registered in England and Wales No. 5562053
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Drax Group plc
Annual report and accounts 2013
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;
(cid:3) the strategic 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; and
(cid:3) the Annual report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
By order of the Board
Dorothy Thompson
Chief Executive
CBE
Tony Quinlan
Chief Financial Officer
18 February 2014
18 February 2014
73
Drax Group plc
Annual report and accounts 2013
Audit Committee report
Membership and process
Role of the Committee
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;
(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; and
(cid:3) advise the Board on whether the Committee believes the Annual
report and accounts are fair, balanced and understandable.
Terms of reference
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.drax.com
Following the review in July 2013, the terms of reference were updated to
reflect the Committee’s responsibilities in respect of the Annual report and
accounts, as set out in the revised UK Corporate Governance Code.
airman
Committee Chairman
David Lindsell
entent
Senior independent
non-executive director
rector
Attending by invitation
Chairman of the Board, Chief
Executive, Finance Director, Group
Financial Controller, Head of Risk
Management, External auditor,
Internal auditor.
Committee members
Tim Cobbold, Melanie Gee and Tony
Thorne all of whom are independent
non-executive directors. Tim Barker
(formerly Senior Independent
Director) had been a member of the
Committee until his retirement
on 23 April 2013.
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.
Number of meetings held in 2013
4
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.
At meetings in February and July 2013, 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:
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.
Main activities during the year
During the year, the Committee undertook its duties in
accordance with an agreed annual work plan. The routine
items which are put to each meeting are as follows:
(cid:3)the Committee’s rolling annual plan review, reports from the
internal audit function on the progress of their programme
for the year including fee analysis and new internal audit
reports. The Committee continues to focus on specifically
identified strategic risk areas, as well as ensuring the
provision of a core compliance assurance service. No
significant weaknesses were identified in any of the internal
audit reports although certain improvements in processes
and procedures were made as a result of reviews.
(cid:3)at these meetings, 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. Our principal accounting policies are
set out in the notes 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.
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74
Drax Group plc
Annual report and accounts 2013
Audit Committee report
Reviewing the 2013 Annual report and accounts
At the meeting in February 2014, the Committee reviewed
the content of the 2013 Annual report and accounts,
alongside a paper on accounting issues and judgements
impacting the accounts. The significant issues and
judgements considered were as follows:(cid:3)
(cid:3)ROCs and LECs – The value of ROCs and LECs is recognised
as they are earned through generating electricity from
burning biomass. Accordingly, the value is deducted from
the cost of the biomass burnt and held on the balance
sheet until sold. The valuation is necessarily based on
assumptions regarding future sales prices of
these instruments in the market. The Committee was
satisfied that the assumptions made by management
were appropriate and that the Company’s accounting
policy for ROCs and LECs has been applied in a manner
consistent with the previous year (see note 13 to the
consolidated financial statements).
(cid:3)Derivatives – As explained in more detail in note 19 to the
consolidated financial statements, the Group enters into
commodity contracts to manage its exposure to
commodity price movements and forward foreign
currency exchange contracts to manage its exposure to
transactions denominated in currencies other than sterling.
The Committee gained assurance regarding the valuation
of and movements in the Group’s derivative contracts
through management reports on derivative valuations
supported by market data, detailed reports of the year
end positions, and discussion with management
regarding the approach taken to fair value measurement
and the application of hedge accounting. The Committee
also noted that an independent review of internal controls
over certain aspects of trading and treasury activities
during the year had raised no significant issues.
(cid:3)Property, plant and equipment – The net book value of the
Group’s property, plant and equipment was £1.6 billion at
31 December 2013 (see note 11 to the consolidated financial
statements). The useful economic lives of assets making
up a large proportion of this balance are based on the
assumed economic life of the Drax Power Station as a
whole. This assumption therefore has a material impact on
the depreciation charge in the income statement and the
carrying value of the assets concerned. The Committee
received a report on the outcome of a full review by
management of the useful economic life of Drax Power
Station and was satisfied that the 35 year life set in 2004
remained appropriate.
Explanation of the critical accounting judgements, estimates
and assumptions is set out in detail in note 3 to the
consolidated financial statements.
In addition, other matters relating to the application of
accounting policies or accounting treatment have been
considered during the year at the February, July and
November 2013 meetings, and again at the February 2014
meeting in relation to our financial reports:
(cid:3)
these included the accounting judgements, estimates and
assumptions in relation to obligations under the Community
Energy Savings Programme, retirement benefit obligations
(pension), taxation and impairment. Further detail on
these areas can be found in note 3 to the consolidated
financial statements.
(cid:3)
in addition, other accounting issues, namely in relation to
application of accounting policies or accounting treatment
(carbon, coal and biomass stock) and new items in the
financial statements (oil and freight trading and port
contracting) were reviewed. Where applicable our
accounting policies are set out in the relevant note to
the consolidated financial statements.
The Committee met twice in the absence of management
with each of the external (February and July) and internal
auditor (April and November). 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.
In addition to the routine items outlined above, there were
a number of specific items which are put to the meetings
as follows:
Meeting
Item under review
February
April
July
November
Effectiveness of internal controls and consideration of fraud
Disclosure of information to auditors
Assessment of effectiveness of external audit process
Review of Senior Accounting Officer reporting
Review of risk management processes
Auditor independence policy review
Whistle-blowing reporting policy review
Ethics and Business Conduct Steering Committee review
Review of the requirements of the UK Corporate
Governance code in respect of audit tenders without
internal and external auditors present
Review of the external auditor’s management letter
Treasury controls review
Audit Committee terms of reference – annual review
Effectiveness of internal controls, consideration of fraud,
review of risk register and biomass sustainability report
Review of finance team
Biomass pricing controls review
Review and approval of the external auditor terms of engagement
At the meeting in February 2014, in line with the Financial
Reporting Council’s Guidance on Audit Committees, the
Committee undertook a review of its own effectiveness and
concluded that the composition of its membership, the
manner in which it operates and the reviews that it
undertakes throughout the year all contribute to the
continued effective functioning of the Committee.
75
Drax Group plc
Annual report and accounts 2013
External auditor effectiveness
At the February 2014 meeting, the Committee reviewed
the effectiveness of the external auditor, Deloitte LLP.
This process incorporated feedback from management and
key individuals across the Group, as well as its own experience.
The assessment considered the robustness of the audit
process, the quality of delivery of the audit plan, the quality
of reporting on findings and recommendations to the
Committee and management, and the quality of the audit
team and service provided.
Having reviewed Deloitte’s performance during the year and
satisfied itself of their continuing independence and
objectivity within the context of applicable regulatory
requirements and professional standards (see below), the
Committee has invited the Board to recommend the
reappointment of Deloitte LLP as auditor at the forthcoming
Annual General Meeting (“AGM”) and a resolution to that
effect appears in the notice of the AGM.
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.drax.com
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 113. 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 five years. His successor,
James Leigh, will take responsibility in respect of the
2014 audit.
No contractual obligations exist that restrict the Group’s
choice of external auditor.
Audit tendering
As set out in the Corporate governance section, the
Committee recommended that the Board decide not to
comply for the time being with provision C.3.7 of the UK
Corporate Governance Code (the “Code”), as revised in
September 2012, which stipulates that the external audit
contract should be put out to tender at least every ten years.
Deloitte LLP has been the auditor of the Drax group of
companies since 1999, and was appointed as auditor of Drax
Group plc on its incorporation in 2005. During this period the
audit has not been put out to tender. In order to comply with
the new Code provision effective for this financial period, we
would need to put the audit out to tender for the 2014 year
end. The rationale for non-compliance reflects the importance
we place on the period of transformational change the
business is undergoing to become a predominantly biomass-
fired power station. The incumbent auditor has accumulated
knowledge and experience that allows it to carry out effective
and efficient audits during this period of change and provide
insightful and informed challenge. In addition, to conduct a
thorough competitive audit tender process would require
substantial Board and management participation at a time
when the transformation of the business is placing greatly
increased demands on them.
In coming to a recommendation the Committee considered
how, notwithstanding its recommendation to defer putting
the external audit contract out to tender, the Group would
adhere to the principle of the Code to maintain an appropriate
relationship with the auditor. The independence and the
effectiveness of the external auditor are reviewed annually by
the Committee and no weakening in the level of the auditor's
scepticism or in its desire to challenge management's
judgements and assumptions in relation to financial reporting
has been noted. In addition, there is a well-established policy
regarding the provision of non-audit services by the auditor,
and fees paid to the external auditor for audit and non-audit
services are reviewed at each Committee meeting, with
restricted dele
without the Committee's approval.
gated authority to approve non-audit services
In the light of these policies and procedures, the Committee
is satisfied that an appropriate relationship has been
maintained with the auditor.
The Committee has undertaken to review this decision
on an annual basis, including consideration of legislative
developments, with the current intention of going through
a full audit tender process for the 2016 year end, in line with
the completion of the substantial part of the biomass
transformation project.
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76
Drax Group plc
Annual report and accounts 2013
Audit Committee report
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 2013
included: stock management (coal and biomass); by-product
revenue; purchasing and expenditure processes from
budgeting through to payment of invoices; compliance with
the Bribery Act; key financial controls over business planning
and capital budgeting; IT key controls and portfolio
management; review of the US operations key controls;
controls over capital project management; review of demand
forecasting and credit risk management at Haven Power
Limited (“Haven Power”) as well as key financial controls
over revenue and indirect taxes at Haven Power.
The Chairman of the Committee, independent of management,
maintains regular and direct contact with both the internal
and external auditor.
Fair, balanced and understandable view
At the February 2014 meeting, the Committee reviewed
the content of this 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.
This report was reviewed and approved by the Audit
Committee on 18 February 2014.
David Lindsell
Chairman of the Audit Committee
77
Drax Group plc
Annual report and accounts 2013
Nominations Committee report
Membership and process
Role of 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.
Committee Chairman
Charles Berry
Chairman of the Board
Terms of reference
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.drax.com.
Attending by invitation
Chief Executive, Head of Human
Resources.
Committee members
Tim Cobbold, Melanie Gee, David
Lindsell and Tony Thorne all of whom
are independent non-executive
directors. Tim Barker (formerly Senior
Independent Director) had been a
member of the Committee until his
retirement on 23 April 2013. The
Company Secretary acts as Secretary
to the Committee.
Number of meetings held in 2013
4
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.
At its meeting in November, the Committee 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.
The Committee also reviewed the composition of the Board
and concluded that following the appointment of an
additional non-executive director at the start of the year and
the retirement of Tim Barker in April, the composition of the
Board was appropriate for the business at this time.
At the conclusion of the Annual General Meeting (“AGM”)
held on 24 April 2013, Tim Barker retired as a director of the
Company and from the committees on which he served.
The Committee initiated a review of the effectiveness of the
Board, its committees and individual directors and the outcome
is reported in the Corporate governance report on page 66.
The Board met on 11 February 2014, 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 66 concluded that the directors offering themselves for
re-election continue to demonstrate commitment to their
particular role and perform effectively.
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During the course of the year, the Committee undertook a
senior management evaluation and development exercise with
the assistance of Russell Reynolds Associates. The objective
was to identify the particular attributes and development needs
of potential successors to board and Executive Committee
roles. Various targeted development programmes have been
identified and implemented for particular individuals to
enhance the quality of potential internal successors.
The Committee recognises the strength that can be achieved
through diversity in its wider sense in the Group’s management.
In particular, 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.
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 Nominations
Committee on 18 February 2014.
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Charles Berry
Chairman of the Nominations Committee
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Membership and process
Role of the Committee
The Committee’s principal responsibilities are:
(cid:3) recommending to the Board the remuneration strategy and framework
for the executive directors and senior managers;
(cid:3) determining, within that framework, the individual remuneration
packages for the executive directors and senior managers;
(cid:3) approval of the design of annual and long-term incentive arrangements
for executive directors and senior managers, including agreeing the
annual targets and payments under such arrangements;
(cid:3) determining and agreeing the general terms and conditions of service
and the specific terms for any individual within the Committee’s remit,
either on recruitment or on termination;
(cid:3) determining the policy for, and scope of, executive pension
arrangements; and
(cid:3) to oversee any major changes in employee benefit structures throughout
the Group and review remuneration trends across the Group.
Terms of reference
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.drax.com
Committee Chairman
Tony Thorne
Chirman of the
Remuneration Committee
Attending by invitation
Chief Executive, Head of Human
Resources, External remuneration
advisers.
Committee members
Charles Berry, Tim Cobbold, Melanie
Gee and David Lindsell. Tim Barker
(formerly Senior Independent
Director) had been a member of the
Committee until his retirement
on 24 April 2013.
The Company Secretary acts as
Secretary to the Committee.
Number of meetings held in 2013
7
Annual statement to shareholders from the Chairman of the Remuneration Committee
This is my first year as Chairman of the Remuneration Committee and I would first like to thank my predecessor, Tim Barker,
for his contribution as Chairman and his assistance during the handover period.
In last year’s report we adopted a number of the improved reporting measures which are now legislative requirements under
the Large and Medium sized Companies (Accounts and Reports) (Amendments) Regulations 2013. This year we have made
further changes to reflect both the final Regulations and published investor guidance. The remuneration report is in two parts:
the Directors’ Remuneration Policy sets out the proposed policy for three years between the 2014 Annual General Meeting and
the 2017 Annual General Meeting; the annual report on remuneration sets out payments and awards made to the directors
and details the link between company performance and remuneration for the financial year ending on 31 December 2013.
Tim Barker noted in last year’s report that we would be reviewing executive remuneration to ensure that it properly reflects
changes to the business and directors’ roles. The Committee has undertaken this review during 2013. We are grateful for the
support and assistance from shareholders received during our consultation on the proposed changes to directors’ remuneration
and on the proposed remuneration policy.
The context for this year’s review of executive remuneration is the progress in the implementation of Drax’s biomass strategy,
which is transforming the business from a position of having a limited life, to one with a sustainable long-term future with
opportunities to develop. Since 2008 the executive team has led the way in the UK in the fuelling of coal plants with
sustainable biomass.
The Committee reviewed with careful consideration the extent to which the scope and dimensions of the executive director
roles have increased, namely:
1) Biomass strategy
Consistent with positioning itself as a major player in renewables generation, Drax is well advanced with its programme to
invest around £700 million to transform Drax into a predominantly renewable generator through biomass. One of Drax’s six
generating units has been converted to biomass, and the significant construction and engineering project at Drax will provide
the infrastructure to enable the plant to receive, process and handle biomass to fuel its converted units.
Providing cost effective biomass fuel to these units will be an essential element of Drax’s long-term success. To this end,
management is leading the establishment of an international supply chain involving long-term biomass supply contracts, rail
and port facilities, shipping arrangements and the development of biomass processing facilities. This development already
includes a US subsidiary business which is constructing biomass pelleting plants and port facilities, and international expansion
can be expected to continue.
Sustainability of biomass sources is crucial. Drax has taken a leading position in pressing for the implementation of robust
sustainability standards.
79
Drax Group plc
Annual report and accounts 2013
2) Trading strategy
As a result of implementing the biomass strategy the business has the potential for much enhanced returns as compared to
coal but it has introduced a greater dimension into its trading. Drax has moved from a position of hedging the three legs of
the dark green spread (the difference between the revenue from electricity generation and the costs of buying coal and carbon
allowances) on a short to medium-term basis, to a position where, because of the need for long-term contracting to develop
the biomass market, most of it in jurisdictions outside the UK, a more complex trading strategy is being operated. This involves
treasury and commodity trading activities to manage risks associated with long-term contracting of biomass, foreign exchange,
freight, and oil, together with the management of collateral risk to ensure that the business remains robust to a sub-investment
grade debt rating. In addition, Drax is managing the increasing compliance obligations associated with financial regulation.
3) Haven Power
Haven Power joined the Group in 2009, and has developed from a relatively small supplier to small and medium sized businesses,
into a business with a significant industrial and commercial customer base playing an increasingly important and integrated role
in the Group’s trading strategy.
4) Market regulation
Renewable plant is currently made economically viable through the Renewables Obligation (RO). Drax management has, for
many years, been actively engaged with government in promoting reforms which will achieve increased certainty to support
investment in renewables, particularly biomass. To date, this has been achieved through the setting of RO bands and
grandfathering of the RO. The UK government’s Electricity Market Reform package includes other measures, particularly in
relation to contracts for differences and capacity payments, which will be critical to Drax’s strategy and commercial choices.
Active engagement in the development and implementation of these measures, and the commercial decisions arising from
them, will continue to be central to Drax’s strategy and future success.
Change to executive directors’ terms
The review led the Committee to conclude a need to reflect these changes in the executives’ remuneration. The strategic
complexity of the business is high at this point in our development, and the decisions made by our executive directors in the
coming years will be critical for the long-term future of the Company.
Following consultation with our ten largest shareholders, the Committee decided to make a number of changes to the structure
of the executive directors’ remuneration.
Annual bonus potential will be increased from 2014 so that the Chief Executive’s target annual bonus will increase from
65% to 75% of salary, and the target annual bonus of the other executive directors will increase from 60% to 70% of salary.
Maximum bonus will continue to be capped at twice the target bonus, i.e. 150% and 140% respectively.
The proportion of the annual bonus to be deferred into shares for three years will be increased from 25% to 35%.
We have also decided to increase directors’ shareholding requirements. The Company’s guidelines currently require executive
directors to build up a shareholding to the value of their annual salary. The Committee has decided to increase this to 175% of
salary for the Chief Executive and 125% of salary for the other executive directors.
The Committee is confident that we have a strong executive team, and the new remuneration arrangements are designed to
retain the team to deliver the opportunities that have been created for shareholders and to reward the executives for that delivery.
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During the year the Committee also reviewed the terms of executive directors’ service agreements, following which the Company
entered into new service agreements with all four of the executive directors. The main changes to the contracts were to amend
notice provisions so that all directors’ contracts are terminable on 12 months’ notice from either party, to enable the Company
to make phased payments in lieu of notice and to ensure that there are appropriate restrictions on the directors’ ability to work
for competitors or solicit staff after leaving the Company.
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Wider employee population
In respect of the wider employee population in the Group, a two year pay agreement was implemented for employees in the
collective bargaining unit, resulting in annual basic pay increases of RPI plus 0.4% for 2013 and 2014, plus any annual incremental
progression for employees not yet at the top of their pay scale.
Executive director basic pay increased by 3.50% during 2013, whilst the average annual change in basic pay for all other Group
employees employed continuously from 1 January 2013 to 31 December 2013 was 5.02%.
Last year’s report noted that the Committee had agreed that additional steps should be taken to make employees aware of
the likely level of their retirement benefits and to encourage them to review their contributions. It also noted that additional
contributions by the Group may be needed dependent upon the terms applicable to the relevant schemes. I am pleased
to report that the awareness sessions have been very effective.
We have now successfully implemented pension auto-enrolment for our UK employees. 93.50% of all Group employees in the
UK are now members of a Drax occupational pension scheme.
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Assessment of remuneration relating to 2013 and 2014 targets
At its meeting in February 2014 the Committee considered a number of matters on remuneration either paid in or relating to 2014.
The Annual report on remuneration includes details of the Committee’s assessment of 2013 performance. As expected, 2013
profits were lower than in 2012 due to the additional cost of carbon. Nevertheless it was a significant year of achievement for
the Company. In particular, the conversion of the first generating unit to burn sustainable biomass, the associated supply chain
developments, the regulatory developments towards contracts to determine the earnings of further biomass units, and the
volume growth of the retail business are all major steps towards securing the Company’s long-term future. The Committee’s
assessment of the Scorecard was at 1.52, which means that the cap of 1.5 applies. We also assessed the executive directors’
performance against their performance objectives as being towards the upper end of the range between target and maximum.
As a result of the combination of the corporate and personal scores, annual bonuses for 2013 to be paid in March 2014 will be
capped at the maximum level. The details of the scoring are set out on page 90 of the Annual report on remuneration.
The Committee also considered targets for 2014. These have been established to be at least as challenging as those for 2013.
A description of the 2014 corporate targets is set out in the Annual report section of this report, with such detail as can be
provided whilst safeguarding commercial confidentiality.
The Committee also considered the vesting of the Bonus Matching Plan awards made in 2011, which were conditional upon
performance over the three years from the start of 2011 to the end of 2013. As described in the Policy section of this report,
the awards are 50% based on the Company’s relative Total Share
average of the Balanced Corporate Scorecard. The Company’s TSR over the period was 107%, which was in the upper quartile
of the comparator group, and the Committee therefore confirmed vesting of the whole of the TSR element of the award.
The average scorecard score over the same period was 1.48. As a result, the Committee determined that 97.16% of the
Scorecard Award element would vest.
holder Return (“TSR”) performance and 50% on the three year
The Committee also agreed to the grant of 2014 Bonus Matching Plan awards to the executive directors to the value of 150%
of their 2013 annual bonus, and subject to the same performance conditions as described in the policy section of this report.
Directors’ remuneration policy
This remuneration policy, subject to shareholder approval at the 2014 Annual General Meeting (“AGM”), will be effective from
immediately after the AGM on 23 April 2014 and binding upon the Group until the close of the 2017 AGM. There are no planned
changes to the policy over the three year period to which it relates.
The core principles of the remuneration policy are to:
(cid:3) give effect to existing remuneration commitments in accordance with directors’ contracts of employment;
(cid:3) pay market rates of total remuneration;
(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;
(cid:3) ensure that long-term incentives are linked to TSR and to the delivery of Business Plan strategic objectives;
(cid:3) ensure that payments on termination of employment are linked to performance and the exercise of good faith; and
(cid:3) allow the Committee an element of discretion to enable recruitment or termination situations to be managed in the best
interest of the Group.
81
Drax Group plc
Annual report and accounts 2013
Remuneration policy report
Section 1
Key components of remuneration
The remuneration policy for executive directors has been designed to support the delivery of business performance and creation
of shareholder value. We set out in the table below the remuneration policy, and in the notes following the table we provide a
commentary on differences between this policy and that of the remuneration of employees generally.
The following table sets out the policy relating to the key components of executive director remuneration:
Remuneration
component
How this component
relates to Group strategy
How this component operates in practice
Performance measures and
maximum potential value
i) Base salary Base salary helps to
attract, reward and retain
the right calibre of
executive to deliver the
leadership/management
needed to execute the
Group’s vision and
business plan.
Base salary reflects the role, the executive’s skills and experience,
and market level.
To determine market level, the Committee reviews remuneration
data on executive positions at companies which the Committee
consider to be appropriate comparators.
The comparator companies are selected, with advice from the
Committee’s remuneration advisers, taking into account relevant
comparator factors such as, but not limited to, sector, size, and
international presence.
On appointment, an executive director’s base salary is set at the
market level, or below if the executive is not fully experienced
at this level.
Where base salary on appointment is below market level to reflect
experience, it will over time, be increased to align with the market
level, subject to performance.
Base salaries of all executive directors are generally reviewed
once each year.
Reviews cover: individual performance; experience; development
in role; and market comparisons.
The base salaries of executive directors
in post at the start of the policy period
and who remain in the same role
throughout the policy period will not
usually be increased by a higher
percentage than the average annual
percentage increase in salaries of all
other employees in the Group.
The only exceptions are where:
(i) an executive director has been
appointed at below market level to
reflect experience. In this case, the
maximum annual increase to base salary
will be 5% over the normal maximum; or
(ii) there is a particular reason for a higher
increase, such as a change in the scope
or nature of responsibilities.
In the case of the Production Director
and the Retail and Trading Director,
some further adjustment is envisaged
to reflect increasing scope of roles and
increasing experience. The maximum
increase to base salary in any year will
be 5% over the normal maximum.
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Remuneration
component
How this component
relates to Group strategy
How this component operates in practice
Performance measures and
maximum potential value
ii) Annual
bonus
The award of annual
bonuses is directly linked
to personal performance
and to the achievement
of the annual Business
Plan targets.
The multiplicative
formula is designed to
ensure that bonus
payments for high
personal performance
are moderated where
business performance
is below target, or
vice versa.
Strategic and Business plan targets are set by the Board as part of
the Business Plan approval process.
The Committee determines Group performance measures using
a Scorecard.
The Scorecard shows executive directors’ annual targets
and measures of performance (low, target and stretch),
and weightings.
Score is zero if performance is below the low measure.
Maximum score is attributed to the stretch measure.
The Scorecard is amended each year in line with business strategy
and objectives.
Summary Scorecard and performance results are published
in the Annual report on remuneration.
To determine the actual bonus awards, the following formula is used:
Chief Executive’s bonus
Target bonus is 75% of base salary
Actual bonus = basic salary x 75% x company score
x personal score
Bonus is capped at 150% of salary
Other directors’ bonus
Target bonus is 70% of salary
Bonus = basic salary x 70% x company score x personal score
Bonus is capped at 140% of salary
Clawback
The Committee may require a director to repay to the Company such
amount of any annual bonus payment as it considers appropriate
in circumstances of financial misstatement, misconduct or if
assessment of a performance condition is found to have been
based on an error, inaccuracy or misleading information, or in other
circumstances that the Committee considers to justify the
operation of the clawback provision..
In these circumstances, Bonus Matching Plan (“BMP”) clawback
provisions may also apply (see BMP below).
35% of any annual bonus is settled in shares deferred for three years.
No performance conditions are used other than continued service.
If the executive leaves the Group before the normal vesting day,
the shares will vest (pro-rated to the date of leaving) only if the
termination is for a specified reason including redundancy,
retirement or death in service, or, if for any other reason, at the
discretion of the Committee. In any other circumstances the award
is forfeited.
iii) Deferred
annual
bonus
This is the deferred
portion of annual bonus.
The aim of deferral is to
further align executives
to the interests of
shareholders, by linking
share based reward to
long-term sustainable
performance.
Role
Chief Executive
Finance Director
Production Director
Retail and Trading
Director
Maximum bonus
potential (%age of
base salary)
150%
140%
140%
140%
Group performance measures
Group performance measures include
financial, production, strategic and other
Business Plan objectives.
These measures and weightings are
determined by the Board and adopted
by the Committee.
Individual performance measures
The Remuneration Committee
determines the personal objectives for
the Chief Executive. The Chief Executive
proposes personal objectives for the
other executive directors, which are
reviewed and approved by the
Remuneration Committee. Generally,
all executive directors will be awarded a
single score based on their collective
performance in providing effective day to
day leadership of the Group as a unified
leadership team. Personal scores may
differ in circumstances of exceptional
over or under performance.
100% of the shares will vest subject to
continued employment up to the date
of vesting.
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Remuneration
component
How this component
relates to Group strategy
How this component operates in practice
Performance measures and
maximum potential value
iv) Bonus
Matching
Plan (“BMP”)
This is the long-term
incentive plan for
executives.
It links long-term share
based incentives to Total
Shareholder Return
(“TSR”) and to the
achievement of Business
Plan strategic targets.
v) Pension
Pension provision is one
of the components to
attract, reward and retain
the right calibre of
executive in order to
ensure delivery of the
leadership and
management needed to
execute the Group’s
vision and business plan.
The Bonus Matching Plan (“BMP”) is a long-term performance
share plan.
Under the BMP, executive directors 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.
It is the Committee’s policy to grant BMP awards to executive
directors at 1.5 times the amount of the annual bonus unless the
performance of the director or of the business makes an award
at that level inappropriate. No payment is made for the shares.
Vesting is conditional upon service and performance conditions,
and shares vest on the third anniversary of the grant subject to the
achievement of performance conditions determined by the
Committee. To the extent that vesting is determined by reference
to Company Scorecard performance, at the end of the three year
performance period, the Committee will review each of the annual
results going into an average Scorecard calculation and has the
discretion to adjust the final outcome based on events over the
period to ensure that the result is consistent with the underlying
performance progression of the business. In exercising its
discretion the Committee will have particular regard to progress
against the strategic objectives incorporated in the Scorecard.
If the executive leaves the Group before the normal vesting day,
the shares will vest (pro-rated to the date of leaving and phased
over the normal cycle of the performance periods) only if the
termination is for a specified reason including redundancy,
retirement or death in service, or, if for any other reason, at the
discretion of the Committee. In any other circumstances the award
is forfeited.
Performance condition override
The Committee will include an override provision in each grant
under the BMP. This will give the Committee discretion to
determine that no vesting shall occur or vesting shall be reduced
if there are circumstances (relating to the Company’s overall
performance or otherwise) which make vesting as calculated by
reference to the performance conditions alone inappropriate.
Clawback
If a repayment of bonus is required (see “annual bonus” above) the
Committee shall also make an appropriate reduction in the number
of shares that may vest under the BMP (in respect of an award
made pursuant to the annual bonus payment subject to the
clawback).
The Committee may also reduce the number of shares under a
BMP award in circumstances of financial misstatement, or if
assessment of a performance condition is found to have been
based on an error, inaccuracy or misleading information, or in other
circumstances that the Committee considers to justify the
operation of the clawback provision..
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 the HMRC Annual Allowance with the
remainder as cash in lieu of pension.
Maximum number of shares granted
equals shares to the value of 1.5 x annual
bonus for prior year.
Maximum vesting of shares three years
later is subject to performance.
There are two vesting performance
measures (vesting threshold is 15% in
both measures):
i) Up to 50% of shares vest subject to
TSR performance over three years
relative to FTSE51–150 as follows:
Below median = 0% vesting
At median = 15% vesting (threshold)
Upper quartile = 100% vesting.
ii) Up to 50% of shares vest subject to
Company Scorecard performance
averaged over the three year
performance period, as follows:
Score <1 = 0% vesting
Score 1 = 15% vesting (threshold score)
Score 1.5 = 100% vesting
The three year average company
performance score is capped at 1.5.
Example:
Year 1 Score 1.8
Year 2 Score 1.4
Year 3 score 1.4
Three year BMP performance score = 1.5
For both the TSR and Scorecard
conditions vesting between 15%
and 100% is on a straight-line
interpolation.
In accordance with the rules of the BMP,
Dividend Shares are awarded at the time
and in the event that shares vest. They
are calculated based on the dividends
paid following the initial award until the
award vests.
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Maximum is 20% of base salary.
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Remuneration
component
How this component
relates to Group strategy
How this component operates in practice
Performance measures and
maximum potential value
vi) Other
benefits
vii) Share
ownership
In general, other benefits
aim to align directors’
total remuneration
broadly with the market.
In particular, all-employee
share plans incentivise
sustained long-term
performance and
strengthen teamwork by
enabling all employees to
share in the success of
the business. The plans
are vehicles for aligning
staff remuneration with
TSR performance.
The Group’s share
ownership guidelines
align the interests of
executives with
shareholders.
Executive directors receive a car allowance, life assurance (x4 salary),
the opportunity to participate in all-employee share plans on the
same basis as other employees, annual private health assessment
and annual private medical cover.
Relocation expenses and/or second base expenses are paid where
appropriate in individual cases. Directors’ relocation expenses are
determined on a case by case basis. The policy is designed to assist
the director to relocate to a home of similar standing.
The share ownership guideline is that the Chief Executive should
retain shares to the value of 175% of base salary and other directors
should retain shares to the value of 125% of base salary. Until this
level is reached, directors who receive shares by virtue of share plan
awards or who receive deferred bonus shares must retain 50% of
the shares received net (i.e. after income tax and national
insurance contributions). Only shares that have actually vested
count towards the threshold.
Differences between the policy and that of the remuneration of employees generally
The following differences apply between the remuneration of directors and the policy on the remuneration of employees generally:
(cid:3) executive directors and a number of senior employees are eligible for BMP. However, there are differences in terms of levels
of grant.
(cid:3) annual bonus levels vary across the workforce, and the requirement to defer a portion of annual bonus applies only to
executive directors.
(cid:3) employees in the collective bargaining unit have a contractual right to receive an annual bonus subject to Company
performance and continued employment, whereas directors and all other UK based employees participate in a discretionary
bonus scheme.
(cid:3) hourly paid employees qualify for overtime payments.
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Annual report and accounts 2013
Non-executive directors
Remuneration component
How this component operates in practice
Annual fee
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 of chairmen and non-executive directors of other listed companies selected for comparator
purposes 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.
The Chairman receives an annual fee.
Non-executive directors receive an annual base fee.
Additional annual fees are paid:
(cid:3) to the Senior Independent Director (which includes the fee for chairing a Board Committee other
than the Audit Committee);
(cid:3) to the Chair of the Audit Committee;
(cid:3) to the Chair of the Remuneration Committee; and
(cid:3) to the Chair of any other Committee (this is not paid to the Chairman of the Nominations Committee
if he or she is also the Chairman of the Board).
Non-executive directors’ fees are reviewed periodically against market comparators. They were last
reviewed in July 2013. Current fee levels are shown in the annual report on remuneration.
Non-executive directors are not entitled to participate in any performance related remuneration
arrangements.
Travel expenses
Reimbursement of reasonable travel and accommodation expenses as applicable.
Non-executive directors do not receive any benefits in kind, nor are they eligible for any annual performance bonus, pension 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.
Section 2
Approach to recruitment remuneration
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The Committee will apply the core principles on page 80 and the remuneration components set out in the table on pages 81 to
84 determine the remuneration of newly appointed directors. Base salary will be set at a level appropriate to the role and the
experience of the director being appointed. Where this is below the market level, it will be adjusted over time to align with the
market level, subject to good performance. In relation to directors appointed from outside the Company, where the Committee
considers it to be necessary to secure the appointment of the director, the Committee may:
(cid:3) pay “sign-on” compensation for loss of benefits on resignation from a previous employer, such as loss of long-term share
incentives (subject to the right to phase any payment to reflect performance, the requirement to mitigate loss and the right
of the Company to clawback any amount which is subsequently paid to the executive by the former employer, and to
clawback an appropriate proportion of the payment if the executive leaves soon after appointment).
(cid:3) make appropriate payments in circumstances where a director is relocated from outside the UK.
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Section 3
Service agreements
Executive directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’
prior notice.
Under each of the executive directors’ service agreements the Company 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.
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Section 4
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 and pension
Bonus
BMP
£m
Salary, benefits and pension
Bonus
BMP
%
Chief Executive
£0.5m £1.0m
£1.5m £2.0m
£2.5m
£3.0m
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
Notes:
Outperformance
Target
Below threshold
(1)(cid:3) Annual bonus threshold is assumed at 25% of maximum, target at 50% of maximum and outperformance at 100% of maximum bonus.
(2)(cid:3) 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)(cid: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.
Section 5
Policy on loss of office
If an executive director’s employment is brought to an end by either party and if it is necessary to determine a termination
payment, the Committee’s policy, in the absence of a breach of the service agreement by the director, is to determine a
director’s termination payment in accordance with his/her service agreement. The termination payment will be calculated
based on the value of base salary and contractual benefits that would have accrued to the director during the contractual
notice period. The Committee will seek mitigation to reduce the amount of any termination payment to a leaving director
when appropriate to do so, having regard to the circumstances and the law governing the agreement. It may, for example,
be appropriate to consider mitigation if the director has secured another job at a similar level. Mitigation would not be applicable
to a contractual payment in lieu of notice.
In addition, the director may be entitled to a payment in respect of his/her statutory rights. No service agreement includes any
provision for the payment of compensation upon termination. Any compensation payable in those circumstances would need
to be determined at the time and in the light of the circumstances.
All bonus payments are discretionary benefits. The Committee will consider whether a departing director should receive an
annual bonus in respect of the financial year in which, and/or immediately preceding which, the termination occurs, pro-rated
to reflect the period of the performance year completed at the date of termination. The Committee will take into account
performance; co-operation with succession; and any breach of goodwill and adherence to contractual obligations/restrictions.
If the termination is by the Company on less than the specified notice in the director’s service agreement, the Committee will
also consider whether the director should receive an annual bonus in respect of any period of the financial year following
termination for which the director has been deprived of the opportunity to earn annual bonus. If the employment ends in any of
the following circumstances, the director will be treated as a “good leaver” and the director will be eligible for a bonus payment:
(cid:3) redundancy;
(cid:3) retirement;
(cid:3) ill-health or disability proved to the satisfaction of the Company; and
(cid:3) death.
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Annual report and accounts 2013
If the termination is for any other reason a bonus payment will be at the discretion of the Committee. It is the Committee’s policy
to ensure that any such bonus payment properly reflects the departing director’s performance and behaviour towards the
Company. Therefore the amount of any such payment will be determined as described in the table on page 82, taking into
account (i) the director’s personal performance and behaviour towards the Company and (ii) the Group performance. If a bonus
payment is made, it will normally be paid as soon as is reasonably practicable after the Group performance element has been
determined for the relevant period. There may be circumstances in which the Committee considers it appropriate for the bonus
payment to be made earlier, for example, on termination due to ill-health, in which case, “on-target” Group performance score
shall be assumed.
No element of any such bonus payment shall be deferred.
The Committee will consider the extent to which deferred and conditional share awards held by the director under the BMP
should lapse or vest. Any determination by the Committee will be in accordance with the rules of the BMP (as approved by
shareholders). In summary, the rules of the BMP provide that awards will vest (pro-rated to the date of employment termination)
if employment ends for any of the following reasons:
(cid:3) redundancy;
(cid:3) retirement;
(cid:3) ill-health or disability proved to the satisfaction of the Company;
(cid:3) change of ownership; and
(cid:3) death.
If employment ends for any other reason, the rules of the BMP require the Committee to exercise its discretion. In doing so it
will take account of all relevant circumstances, in particular the performance of the Company; the director’s performance and
behaviour towards the Company during the performance cycle of the relevant awards; as well as a range of other relevant
factors, including the proximity of the award to its maturity date. The rules of the BMP also provide that in circumstances where
awards vest, deferred bonus shares vest as soon as reasonably practicable following termination. Awards, which vest subject to
satisfaction of the relevant performance conditions, will be (time) pro-rated and will be phased over the performance cycle of
the relevant awards.
The Committee will consider whether the overall value of any benefits accruing to a leaving director is fair and appropriate
taking account of all relevant circumstances. Examples of circumstances in which the Committee may be minded to award an
annual bonus payment and/or permit the vesting of BMP awards include:
(cid:3) the director’s continued good performance up to and following the giving of notice; and
(cid:3) the director accommodating the Company in the timing of his/her departure and handover arrangements.
Conversely, the Committee may be minded not to allow such payments if the reason for the departure is:
(cid:3) poor performance; or
(cid:3) the director does not continue to perform effectively following notice; or
(cid:3) the director is departing to join a competitor.
Section 6
Context
Wider employee population
In determining executive remuneration, the Committee also takes into account the level of general pay increases within the
Group.
It is the Committee’s policy that annual salary increases for executive directors should not exceed the average annual salary
increase for the wider employee population unless there is a particular reason for a higher increase, such as a change in the
nature or scope of responsibilities.
Views taken from the employee population
In the course of discussions on pay with employee representatives, the Group discusses executive remuneration policy and
provides details of the process by which the Committee establishes executive remuneration packages. The information
provided includes details of the benchmarking of executive director remuneration as well as information benchmarking the pay
of employees in the collective bargaining unit with pay elsewhere in the industry.
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Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Environmental, social and governance issues
The Committee is able to consider corporate performance on environmental, social and governance issues when setting the
remuneration of executive directors. Specific measures can be included in the balanced Corporate Scorecard. The Committee is
able to consider those issues in considering whether to exercise its discretion to adjust the overall score, and in considering the
performance conditions override under the BMP, as described on page 83.
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.
The Company has consulted its ten largest shareholders in relation to the formulation of its directors’ remuneration policy.
Annual report on remuneration
The differences between the remuneration policy for 2013 and the policy on which shareholders will vote at the 2014 AGM are
set out below:
Remuneration component
How this component relates to
Group strategy
How this component operates in practice
Performance measure and maximum
potential value
Base salary
No difference.
No difference
N/A
Annual bonus
No difference.
The target bonus levels in 2013 were
65% and 60% of salary respectively
for the Chief Executive and other
directors.
No clawback provisions for 2013
bonus.
Details of the metrics for the 2013 and
2014 annual bonus are provided later
in this report.
The maximum potential values in 2013
were 130% and 120% of salary
respectively for the Chief Executive
and other directors.
Deferred annual
bonus
No difference.
Bonus matching plan No difference.
The amount of the annual bonus
deferred was 25% in 2013.
No clawback provisions for 2013
deferred bonus.
No clawback provisions for 2013
awards.
Pension
No difference.
Other benefits
No difference.
Share ownership
No difference.
No difference.
No difference.
No difference.
No difference.
No difference.
No difference.
In 2013 the share ownership
guidelines required directors to retain
shares to the value of their base salary.
Base salaries
The base salaries of the executive directors as at 31 December 2013 and 31 December 2012 are shown in the following table:
Peter Emery
Tony Quinlan
Paul Taylor
Dorothy Thompson
Base salary (£000)
31 December 2013
Base salary (£000)
31 December 2012
Percentage increase
306
372
257
546
296
359
248
528
3.5%
3.5%
3.5%
3.5%
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Annual report and accounts 2013
Annual fees
The Chairman’s fees were last reviewed in March 2011. Non-executive directors’ fees were increased with effect from 1 August
2013. Fee rates as at 31 December 2013 and 31 December 2012 are shown in the following table:
Chairman
NED base fee
Senior Independent Director(1)
Audit Committee Chair
Remuneration Committee Chair
Nominations Committee Chair(2)
Notes:
Fees (£000)
31 December 2013
Fees (£000)
31 December 2012
Percentage increase
220
54
10
10
10
7.5
220
52.5
10
10
7.5
7.5
0%
2.9%
0%
0%
33%
0%
(1) This includes the fee for chairing a Board Committee other than the Audit Committee.
(2) This is not paid if the Chairman of the Nominations Committee is also the Chairman of the Board.
Single total figure of remuneration for each director (Audited information)
The table below sets out the single figure of remuneration and breakdown for each executive director for 2013, together with
comparative figures for 2012:
Name
Peter Emery
Tony Quinlan
Paul Taylor
Dorothy Thompson
Notes:
Salary/Fees
(£000)
Pension
(£000)
2013
2012
2013
2012
303
368
255
542
293
356
246
62
74
51
59
71
49
523
108
105
Bonus(1)
(£000)
2012
355
431
298
686
2013
367
446
309
710
(2)
BMP
(£000)
Other benefits
(£000)
2013
2012
2013
2012
2013
997
1,211
609
1,929
–
–
–
–
18
20
17
71
18
1,747
86 2,119
17
1,241
92 3,360 1,406
Total
(£000)
2012
725
944
610
(1) Bonus is the cash value of the annual bonus payable in respect of performance in the relevant year, including the value of bonus deferred and paid in shares after
three years subject only to continued service.
(2) BMP is the value of the BMP Matching Awards vesting in March 2014, together with the Dividend Shares in relation to those vested shares. The value is calculated
based on the average share price over the last quarter of 2013.
The table below sets out the single figure of remuneration and breakdown for each non-executive director for 2013 together
with comparative figures for 2012:
Charles Berry
Chairman of Board
Chairman of Nominations Committee
Tim Barker(1)
Senior Independent Director
Chairman of Remuneration Committee
Tim Cobbold
Melanie Gee(4)
David Lindsell
Senior Independent Director(2)
Chairman of Audit Committee
Tony Thorne
Chairman of Remuneration Committee
(3)
Notes:
(1) Tim Barker retired from the Board on 24 April 2013.
Board fee
(£000)
2012
220
53
53
–
53
53
2013
220
17
53
53
53
53
Other fees
(£000)
2013
2012
2013
Total
(£000)
2012
–
3
–
–
7
10
7
–
220
220
20
53
53
70
60
63
53
–
63
53
10
–
–
–
10
–
(2) David Lindsell was appointed as Senior Independent Director on 24 April 2013.
(3) Tony Thorne was appointed as Chairman of the Remuneration Committee on 24 April 2013.
(4) Melanie Gee was appointed 1 January 2014.
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90
Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Details of performance against metrics for variable pay awards
Annual bonus plan outcome
A summary of the Committee’s assessment in respect of the 2013 Scorecard is set out in the following table:
Target
weighting Performance assessment
Financial
Underlying earnings per share(1)
Interest cover ratio and
controllable costs
20% Earnings per share was above the stretch target. Targets remain confidential.
10% Interest cover ratio of 4 times was above the target but below the stretch
target of 5 times . Controllable costs were marginally greater than the target
of £195 million.
Total financial
30%
Safety and production
Safety
7.5% Total recordable injury rate was 0.3, below the target and ahead of the low
target. The number of RIDDOR occurrences was 11 below the low target.
Plant and operations
12.5% Targets relate to availability and outage rates with a specific target related to
the first converted biomass unit availability. The coal forced outage rate is
determined as appropriate to plant and operations characteristics in the year,
and based on a long-term target of 5%. Specific biomass targets remain
confidential. Overall outage rates and availability were slightly below target.
Total safety and production
20%
Retail
Sales volume
Strategic
Regulatory objectives
10% The target was for a specified volume of contracted sales for 2014.
This remains confidential. Stretch target was achieved.
10% Targets related to progress towards achieving support for biomass
generation under the Contract for Differences (“CfDs”) structure on
appropriate terms and on progress towards sustainability requirements that
are appropriately robust and manageable. At the end of the year two Drax
generating units had been ranked first equal in the application process for
investment CfDs, and government’s position on sustainability standards
reflected many of the Company’s recommendations. Accordingly the
Committee assessed the score as between target and stretch.
Conversion facilities
10% Targets were against the budget and schedule for the capital works
associated with the biomass conversion and biomass burnt during the year.
Specific targets remain confidential. The Committee assessed performance
as between target and stretch based on actual performance.
Biomass supply
10% The target related to the overall volume of biomass contracted for supply
with a view to securing volume for three converted units. The specific targets
remain confidential. The Committee assessed performance as having
achieved the stretch target.
US asset investment
10% Targets related to the schedule and budget for construction of assets
in the US and for O&M mobilisation. The targets remain confidential.
The Committee assessed performance between target and stretch.
Total strategic
Total weighting
Note:
40%
100%
Score
1.73
0.95
2.00
1.75
1.20
2.00
1.13
1.52
(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).
Following this process, and based on the relative weightings and scores as set out in the table, the Committee assessed the
corporate score for 2013 at 1.52. The Committee did not exercise its discretion to adjust the overall score. For the purpose of
calculating annual bonus, the corporate score was capped at 1.50 in accordance with plan rules.
91
Drax Group plc
Annual report and accounts 2013
Personal objectives
Each executive director is primarily assessed based on their performance in delivering the Company’s strategy, enhancing shareholder
value, their overall leadership of the Group and their respective divisions and in implementing the Company’s values. In addition,
each executive director has specific personal objectives covering the following key areas. The specific details remain confidential.
Director
Objective
Peter Emery
Tony Quinlan
Paul Taylor
(cid:3) Safety, environmental and plant performance;
(cid:3) Strengthening and broadening the scope of safety management process to incorporate
US business;
(cid:3) The Industrial Emissions Directive compliance proposal;
(cid:3) Technical development of biomass conversion project; and
(cid:3) Development of the carbon capture and storage project consistent with agreed objectives.
(cid:3) Strategic developments;
(cid:3) Effective investor communications;
(cid:3) Efficient cash flow and balance sheet management;
(cid:3) Maintenance of core financial controls and system improvements; and
(cid:3) US governance, reporting and execution support.
(cid:3) Commodity trading performance;
(cid:3) Retail sales operations and strategy;
(cid:3) Logistics and optimisation; and
(cid:3) Commercial contribution to regulatory development.
Dorothy Thompson
(cid:3) Development of strategy and clear strategic objectives;
(cid:3) Optimisation of Group performance leadership on vision, values and employee engagement;
(cid:3) Regulatory and external communications;
(cid:3) Leadership for biomass transformation; and
(cid:3) Financial performance.
The Committee assessed the performance of each of the executive directors against the general and specific objectives.
The executive directors, as members of the Executive Committee, were assessed as providing effective day to day leadership
of the Group as a unified leadership team. All of them exceeded the specific personal targets. Accordingly, each was assessed
with a personal score of 1.40.
For 2013 bonus awards, 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 2013
Executive director
Value of bonus
£’000
2013 bonus payment
(as a % of base salary)
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Peter Emery
Tony Quinlan
Paul Taylor
Dorothy Thompson
Note:
(1) The value of bonus shown in the table above is made up of 75% paid in cash and 25% deferred into shares.
Production Director
Finance Director
Retail and Trading Director
Chief Executive
367
446
309
710
Details of deferred bonus share awards (Audited information)
The following deferred bonus shares awarded in respect of the 2010 annual bonus vested in 2013.
120%
120%
120%
130%
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Executive director
Peter Emery
Tony Quinlan
Paul Taylor
Dorothy Thompson
Production Director
Finance Director
Retail and Trading Director
Chief Executive
Value of vesting
£’000
Number of shares
105
128
78
216
16,983
20,538
12,496
34,719
Detail of BMP incentive outcomes (Audited information)
No awards under the BMP which were subject to performance conditions vested in 2013.
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92
Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
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
including awards made during the year:
As at
1 January 2013
Awards made
during the year
Awards vesting
during the year
Awards lapsing
during the year
As at
31 December 2013
Face value
(4)
of awards
–
–
–
1,221,467
203,575
971,431
161,901
814,733
135,789
3,508,896
–
–
–
1,005,908
167,649
799,996
133,331
670,955
111,830
2,889,669
85,171
–
–
–
–
–
–
–
–
85,171
–
14,195
2,698
–
–
–
–
–
–
16,893
–
17,257
3,281
–
–
–
–
–
–
20,538
103,541
–
–
–
–
–
–
–
–
103,541
–
–
3,281
–
–
–
–
101,778
16,963
122,022
–
–
2,698
–
–
–
–
83,817
13,970
100,485
85,171
14,195
–
125,660
20,943
99,937
16,656
–
–
362,562
103,541
17,257
–
152,588
25,431
121,353
20,225
–
–
440,395
–
–
–
152,588
25,431
121,353
20,225
101,778
16,963
438,338
–
–
–
125,660
20,943
99,937
16,656
83,817
13,970
360,983
Peter Emery
2010 Matching Award
2010 Deferred Award
Dividend shares awarded
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
2013 Matching Award
2013 Deferred Award
Total
Tony Quinlan
2010 Matching Award
2010 Deferred Award
Dividend shares awarded
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
2013 Matching Award
2013 Deferred Award
Total
Paul Taylor
2010 Matching Award
2010 Deferred Award
Dividend shares awarded
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
2013 Matching Award
2013 Deferred Award
Total
Dorothy Thompson
2010 Matching Award
2010 Deferred Award
Dividend shares awarded
2011 Matching Award
2011 Deferred Award
2012 Matching Award
2012 Deferred Award
2013 Matching Award
2013 Deferred Award
Total
Notes:
(1) 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.
–
–
–
76,667
12,777
83,981
13,996
70,434
11,739
269,594
–
–
–
243,093
40,515
193,332
32,222
162,146
27,024
698,332
63,003
10,500
–
76,667
12,777
83,981
13,996
–
–
260,924
175,039
–
–
–
–
–
–
–
-
175,039
–
–
5,546
–
–
–
–
162,146
27,024
194,716
63,003
–
–
–
–
–
–
–
–
63,003
–
–
1,996
–
–
–
–
70,434
11,739
84,169
–
10,500
1,996
–
–
–
–
–
–
12,496
–
29,173
5,546
–
–
–
–
–
–
34,719
243,093
40,515
193,332
32,222
–
–
713,374
–
–
–
1,945,959
324,323
1,547,623
257,937
1,297,979
216,327
5,590,148
–
–
–
613,719
102,280
672,268
112,038
563,824
93,971
2,158,100
175,039
29,173
(2) The Deferred Awards referred to above are the share awards made in respect of the deferral of cash bonus awarded each year. Those share awards operate under the
rules of the BMP.
(3) Details of the conditions subject to which the above awards will vest are given on page 83.
(4) The face value of the awards is calculated based on the share price on 31 December 2013.
93
Drax Group plc
Annual report and accounts 2013
Total pension entitlements for defined contribution schemes (audited information)
Executive directors are entitled to non-contributory membership of the Group’s defined contribution pension plan with either
an employer contribution of 20% of base salary, or have contributions to a personal pension, or cash in lieu of pension, or a
combination of any of these up to a maximum contribution of 20% of base salary.
No director was a member of the defined benefit scheme.
Payments for loss of office
No executive directors left the business during the year and therefore no payments for loss of office were made to directors
during the financial year. Tim Barker, a non-executive director, retired from the Board on 24 April 2013. No payment for loss of
office was made.
Shareholder voting
The table below shows the voting outcome for the Remuneration report at the Annual General Meeting held on 24 April 2013.
Approval of Remuneration report
280,377,944 85.63%
13,262,002
4.05%
33,782,677
10.32% 327,422,623
For
(%)
Against
(%)
Abstain
(%)
Total
Statement of directors’ shareholding and share interests (Audited information)
During the year the shareholding guidelines required executive directors who receive shares by virtue of share plan awards or
who receive deferred bonus shares to retain 50% of the shares received net (i.e. after income tax and national insurance
contributions) until the value was equal to their annual salary. From 2014 the requirement has been increased so that the value
to be built up is 175% and 125% of salary respectively for the Chief Executive and other executive directors. Only shares that have
actually vested count towards the threshold. The following table shows the executive directors’ shareholdings and share
interests at 31 December 2013.
Name
Y/E 31 December 2013
Beneficial ownership of director or
connected persons
Deferred Awards not subject to
performance
BMP Awards
subject to
performance
Total
Peter Emery
Tony Quinlan
Paul Taylor
Number
Value at year end(1)
Number
Value at year end(1)
Number
Value at year end(1)
Shares
45,679
)
SIP(2
Share Awards
(3)
SAYE
Options
BMP
Share Awards
2,616
51,569
–
309,414
409,278
£365,663
£20,941
£412,810
– £2,476,859
£3,276,270
18,112
803
62,619
1,821
375,719
459,074
£144,987
£6,428
£501,265
£14,577 £3,007,631
£3,674,887
13,793
2,694
38,512
–
231,082
286,081
£110,413
£21,565
£308,289
– £1,848,811
£2,290,078
Dorothy Thompson Number
97,093
2,616
99,761
1,821
598,571
799,862
Value at year end(1)
£777,229
£20,941
£798,587
£14,577 £4,791,561 £6,402,895
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Notes:
(1) Share price at 31 December 2013 was 800.50 pence per share.
(2) SIP awards (operated until 2009) which are held by a Trustee, are shown above under the “Beneficial ownership” section.
(3) The deferred share awards not subject to performance are the annual bonus deferred shares.
There is no shareholding requirement for non-executive directors. The table below shows the shareholding of the
non-executive directors and their connected persons and the value as at 31 December 2013.
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Name
Charles Berry
Tim Cobbold
Melanie Gee
David Lindsell
Tony Thorne
Number of shares
1,730
1,000
7,900
7,500
7,500
Value (£)
13,849
8,005
63,240
60,038
60,038
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94
Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Provision of shares for share plans – dilution
In accordance with the guidelines of the Association of British Insurers, the Company can satisfy awards under all its share plans
with new issue shares or shares issued from treasury up to a maximum of 10% of its issued share capital in a rolling 10-year
period to employees under all its share plans. Within the 10% limit, the Company can only issue (as newly issued shares or from
treasury) 5% of its issued share capital to satisfy awards under the discretionary or executive plans.
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.
Service agreements
The following table shows for each person who was a director of the Company at 18 February 2014 or who served as a director
of the Company at any time during the year ended 31 December 2013, the commencement date and term of the service
agreement or contract for services, and details of the notice periods.
Director
Contract start date
Contract term (years)
Unexpired term at the date of
publication (months)
Notice period by the
Company (months)
Notice period by the
director (months)
Tim Barker
Charles Berry(1)
Tim Cobbold
Melanie Gee
Peter Emery
14 February 2012
17 April 2011
3 years
3 years
Retired on
24 April 2013
2 months
27 September 2013
3 years
2 years and 7 months
1 January 2013
1 year and 10 months
3 September 2013
Indefinite term
Not applicable
David Lindsell
14 February 2012
3 years
Tony Quinlan
3 September 2013
Indefinite term
Paul Taylor
3 September 2013
Indefinite term
Dorothy Thompson
3 September 2013
Indefinite term
1 year
Not applicable
Not applicable
Not applicable
Tony Thorne
29 June 2013
3 years
2 years and 4 months
1
6
1
1
12
1
12
12
12
1
1
6
1
1
12
1
12
12
12
1
Notes:
(1) A new Letter of Appointment was executed in February 2014 which has an effective start date of 17 April 2014 with a contract term of three years.
Value of £100 invested
The following graph shows how the value of £100 invested in the Company on 31 December 2008 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 2013.
TSR performance – Drax versus FTSE100 and FTSE250
Drax
FTSE100
FTSE250
300
250
200
150
100
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
Mar 13
Jun 13
Sep 13
Dec 13
95
Drax Group plc
Annual report and accounts 2013
Chief Executive’s pay in last five financial years
Year
Dorothy Thompson’s total single figure (£000)
Bonus % of maximum awarded %
BMP Matching Award % of maximum vesting
2009
903
77.38%
–
2010
1,155
100%
–
2011
1,196
100%
–
2012
1,406
100%
2013
3,360
100%
–
98.58%
Percentage change in the Chief Executive’s remuneration compared with the wider employee population
The table below shows how the percentage change in the Chief Executive’s salary, benefits and bonus between 2012 and 2013
compares with the percentage change in the average of each of those components of pay for a group of employees. The
Committee has selected all Group employees below executive director level based in the UK, as these are the vast majority of
Group employees and provide the most appropriate comparator. It excludes employees based in the US, which is a newly
established business with only 33 employees at the end of 2013.
2013
£000
2012
Dorothy Thompson
541.7
523.4
Average for UK employees(3)
42.3
40.4
Notes:
Salary
Percentage
increase
3.5%
4.7%
2013
63.3
5.8
Taxable benefits(1
)
Percentage
increase
2013
£000
2012
Bonus(2)
Percentage
increase
33.5%
710.2
686.2
3.50%
6.2
–6.4%
8.8
7.6
15.79%
£000
2012
47.4
(1)(cid:3) CEO taxable benefits include car allowance, second base allowance and private health care. Other UK employee taxable benefits include private health care, overtime
payments, work pattern (e.g. shift) allowances and other taxable allowances (e.g. abnormal conditions payments, fire and first aid payments).
(2)(cid:3) Bonus includes 25% of total bonus which was deferred for three years and paid in shares subject to continued service. It excludes the value of deferred shares awarded
in respect of the 2010 bonus which vested in 2013 and the comparative of 2009 awards which vested in 2012.
(3)(cid:3) The number of UK employees on which the average is calculated is 914. The data includes all UK employees below executive director who were continuously
employed between 1 Jan 2012 and 31 December 2013. It excludes executive directors and anyone employed for part-year periods.
Relative importance on spend on pay
The table below illustrates the relative importance of spend on pay compared to other disbursements from profit,
i.e. distributions to shareholders and capital expenditure. These were the most significant outgoings from the Company
in the last financial year, other than normal operating costs.
Relative importance on spend on pay
£m
£287,041,163
£224,205,542
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£95,630,050
2012
£78,834,170
2013
2012
2013
2012
2013
£85,245,967
£93,278,341
Dividends £m
Capital expenditure £m
Remuneration £m
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96
Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Statement of implementation of the Remuneration Policy in the following financial year
The Remuneration Policy will be implemented following the AGM in 2014 as follows:
Salaries will be reviewed by the Committee in accordance with the Policy and will take account of the increase in base pay of
the collective bargaining group and other salary reviews in the Group.
Balanced Corporate Scorecard
The Scorecard measures, targets and weightings will be as set out below:
Specific targets that are considered commercially sensitive have not been disclosed. These will be disclosed in the
2014 Annual Remuneration Report so far as possible whilst maintaining commercial confidentiality.
KPI
Financial
Low
Target
Stretch
Group underlying EPS
Confidential
Confidential
Confidential
Interest cover ratio and controllable costs
Confidential
Confidential
Confidential
Total Finance
Biomass Supply
30.0%
Generation constrained due to biomass supply and logistics
(excluding planned constraints)
Confidential
Confidential
Confidential
Total Biomass Supply
Production
Safety – TRIR
Safety – RIDDOR occurrences
Coal FOR (%)
Converted units FOR (%)
Total Production
Retail
5.0%
0.60
12
0.35
8
0.20
2
Confidential
Confidential
Confidential
Confidential
Confidential
Confidential
10.0%
Cumulative 2015 volume (NBP)
5.0% Confidential
Confidential
Confidential
Total retail
5.0%
Corporate
Development of capital structure and dividend policy
Biomass supply – Drax US
Gulf Cluster Completion
New developments
Confidential
Confidential
Confidential
Behind
schedule and
budget
On schedule
and budget
Ahead of
schedule and
under budget
Confidential
Confidential
Confidential
Biomass supplies secured and deliverable 2015
Confidential
Confidential
Confidential
Sustainability: UK mandatory compliance readiness
Audit findings
acceptable
Audit findings
good
Audit findings
excellent
Production – Unit Conversion
Units performance
Retail
Forecast value added 2015 onwards
Total Strategic
Total weighting
Confidential
Confidential
Confidential
Confidential
Confidential
Confidential
50.0%
100.0%
Performance measures for Bonus Matching Plan
The performance measures to be used in 2014 BMP Awards are as described on page 83 in the Remuneration policy report.
Non-executive directors’ fees
No change will be made to non-executive directors’ fees.
97
Drax Group plc
Annual report and accounts 2013
Committee activity and key decisions in 2013
Matters considered and decisions reached by the Committee in 2013 are shown in the table below:
January
February
March
June
July
The meeting had been convened as an additional meeting of the Committee to enable a discussion as to
whether the existing remuneration arrangements were meeting the policy requirements in the light of changes
to the business.
The Committee considered all aspects of the executive directors’ remuneration in detail and as a whole, and
concluded that a review was necessary.
The meeting also considered the 2012 Balanced Corporate Scorecard and decided not to exercise its
discretion to adjust the score, and adopted the score for the purpose of determining relevant aspects of
2012 remuneration.
It also adopted the 2013 Balance Corporate Scorecard for the purpose of determining relevant aspects
of 2013 remuneration.
Approved executive director and senior staff personal scores and annual bonus awards.
Considered and approved the 2012 Annual Remuneration report.
Considered an executive director remuneration benchmarking review by PwC.
Approved awards under the Bonus Matching Plan and all employee SAYE Share Plan.
Considered possible adjustments to executive director remuneration with the assistance of a review and advice
from PwC. An initial proposal was presented to the meeting and it was agreed that it required further development.
Reviewed senior staff salaries.
Agreed to offer a cash alternative at no additional cost to the Company in lieu of pension contributions for
employees affected by changes in the pension lifetime allowance.
Reviewed advisers’ fees and independence.
Reviewed and decided to make no change to the Chairman’s remuneration.
Agreed 3.5% increases in base salary for the executive directors.
Considered and agreed in principle revised proposals for adjustments to executive director remuneration.
Considered the draft remuneration policy.
Agreed the basis and principles upon which shareholder consultation material should be prepared in respect of
proposed remuneration adjustments and the remuneration policy.
Considered and agreed upon:
(i) proposed adjustments to executive directors’ remuneration; and
(ii) the draft remuneration policy
And agreed that the Chairman of the Committee should lead a consultation with shareholders on both matters.
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September
Agreed remuneration packages for Andrew Koss and Matthew Rivers on appointment to the
Executive Committee.
November
Received a report upon the consultation with shareholders and agreed upon the changes to the structure of
executive directors’ remuneration and the remuneration policy.
Agreed to changes to the rules of share plans to comply with legislation.
Agreed to the specific inclusion of clawback and malus provisions in executive incentive schemes.
In 2013, the Remuneration Committee comprised Tim Barker, Chairman of the Committee (until his retirement on 24 April 2013);
Tony Thorne, who was appointed as Chairman of the Committee on 24 April 2013; Charles Berry, Chairman of the Company;
Tim Cobbold; David Lindsell; and Melanie Gee, all of whom are independent non-executive directors. The Company Secretary
acted as Secretary to the Committee.
The Chief Executive was invited to attend meetings of the Committee except when her own remuneration was discussed.
The Committee met on seven occasions during the year and its members’ attendance record is set out on page 67 along with
details of other attendees.
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98
Drax Group plc
Annual report and accounts 2013
Remuneration Committee report
Advisers to the Committee
The adviser to the Committee for the year was PricewaterhouseCoopers LLP (“PwC”). PwC is an independent adviser appointed
by the Committee in October 2010, following a competitive tender process, 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.
PwC was paid £105,000 during 2013 in respect of advice given to the Committee.
The Committee also considers the views of the Chief Executive regarding the performance and remuneration of the other
executive directors and senior staff.
The Committee is also advised by Philip Hudson, the Company Secretary and by Richard Neville, the Head of Human Resources.
Other matters
Wider employee population
The average pensionable pay of an executive director is 8.48 times the average of pensionable pay for all UK employees within
the Group.
External appointments
Remuneration received by executive directors for service as a non-executive director elsewhere is retained.
Dorothy Thompson is a non-executive director of Johnson Matthey plc and received £55,000 in fees for that appointment
during 2013.
Tony Quinlan is a non-executive member of the Port of London Authority board and received £27,750 in fees for that
appointment during 2013.
Peter Emery is a non-executive director of NG Bailey Limited and received £38,750 in fees for that appointment during 2013.
This report was reviewed and approved by the Board on 18 February 2014.
Tony Thorne
Chairman of the Remuneration Committee
99
Drax Group plc
Annual report and accounts 2013
Independent auditor’s report
Opinion on financial statements of Drax Group plc
In our opinion:
(cid:3) the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at
31 December 2013 and of the group’s profit for the year then ended;
(cid:3) the group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
(cid:3) the parent company financial statements have been properly prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
(cid:3) the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the IAS Regulation.
The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income,
the Consolidated and Parent Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of
Changes in Equity, the related group notes 1 to 35 and the related Parent Company only notes 1 to 8. The financial reporting
framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted
by the European Union. The financial reporting framework that
financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
has been applied in the preparation of the parent company
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Going concern
As required by the Listing Rules we have reviewed the directors’ statement contained within Operational and financial
performance that the group is a going concern. We confirm that:
(cid:3) we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial
statements is appropriate; and
(cid:3) we have not identified material uncertainties related to events or conditions that may cast significant doubt on the group’s
ability to continue as a going concern which we believe would need to be disclosed in accordance with IFRSs as adopted by
the European Union.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability
to continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy,
the allocation of resources in the audit and directing the efforts of the engagement team:
Audit risks and key judgements
The useful economic life and carrying value
of fixed assets
The valuation of commodity contracts
The valuation of Renewable Obligation
Certificates (ROCs).
Valuation of coal and biomass stocks
How the scope of our work responded to that risk
We focused on testing the validity and valuation of a sample of additions by
agreeing back to third party evidence. We reviewed management assumptions
over the carrying value and useful economic life of the key plant by consideration
of external market data and other benchmarking. We also considered whether
any additions or redundant assets would result in impairment.
Our work focused on testing management’s judgements and calculations
including testing a sample of trades undertaken and the assumptions involved
in determining valuation and hedge effectiveness.
We verified the number of ROCs generated in the period either to third party
evidence or tested internal calculations where applicable. We reviewed and
compared management’s valuation of ROCs to external market data.
We tested the underlying weighted average cost calculation to source data and
benchmarked this against industry pricing.
We also attended and considered the results of external surveys completed on
the coal stockpile held at the Drax site and obtained, on a sample basis, external
confirmation for stock held by third parties.
The Audit Committee’s consideration of these risks is set out on page 74. Our audit procedures relating to these matters were
designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual
accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described
above, and we do not express an opinion on these individual matters.
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100
Drax Group plc
Annual report and accounts 2013
Independent auditor’s report
Our application of materiality
We determined planning materiality for the group to be £10 million, which is approximately 7% of normalised pre-tax profit
and below 1% of equity. We use normalised pre-tax profit to exclude the effect of volatility from unrealised gains or losses on
derivative contracts, as determined/described in note 9. We determined that normalised pre-tax profit is an appropriate base for
determining materiality as shareholders place significant value on the income statement. We agreed with the Audit Committee
that we would report to the Committee all audit differences in excess of £0.2 million, as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit
Our group audit scope focused primarily on the audit work at three locations. All of these were subject to a full audit. These
three locations represent the principal business units within the group’s two reportable segments and account for all of the
group’s net assets, revenue and profit before tax. They were also selected to provide an appropriate basis for undertaking audit
work to address the risks of material misstatement identified above. The group audit team continued to follow a programme of
planned visits that has been designed so that a senior member of the audit team visits each of the two most significant
locations where the group audit scope was focused every year.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
(cid:3) the part of the Remuneration Committee Report to be audited has been properly prepared in accordance with the
Companies Act 2006; and
(cid:3) the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
(cid:3) we have not received all the information and explanations we require for our audit; or
(cid:3) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
(cid:3) the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration
have not been made or the part of the Remuneration Committee Report to be audited is not in agreement with the accounting
records and returns. We have nothing to report arising from these matters or our review.
Corporate Governance Statement
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the
company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from
our review.
Our duty to read other information in the Annual Report
Under the International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in
the annual report is:
(cid:3) materially inconsistent with the information in the audited financial statements; or
(cid:3) apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course
of performing our audit; or
(cid:3) otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired
during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and
whether the annual report appropriately discloses those matters that we communicated to the audit committee which we
consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
101
Drax Group plc
Annual report and accounts 2013
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the
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 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.
We also comply with International Standard on Quality Control (UK and Ireland). Our audit methodology and tools aim to ensure
that our quality control procedures are effective, understood and applied. Our quality controls and systems include our
dedicated professional standards review team, strategically focused second partner reviews and independent partner reviews.
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.
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 and the parent company’s
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial
and non-financial information in the annual report to identify material inconsistencies with the audited financial statements
and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge
acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Carl D Hughes MA FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
18 February 2014
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102
Drax Group plc
Annual report and accounts 2013
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
Operating and administrative expenses
EBITDA(1)
Depreciation and amortisation
Unrealised losses on derivative contracts
Operating profit
Interest payable and similar charges
Interest receivable
Profit before tax
Tax:
– Before effect of changes in rate of corporation tax
– Effect of changes in rate of corporation tax
Total tax credit/(charge)
Profit for the year attributable to equity holders
Underlying profit for the year(2)
Earnings per share
– Basic and diluted
Years ended 31 December
2013
£m
2012
£m
Notes
4
2,062.1
1,779.8
(945.8)
(352.5)
(238.8)
(79.9)
(929.2)
(141.7)
(167.8)
(30.2)
(1,617.0)
(1,268.9)
445.1
510.9
(215.1)
230.0
(64.8)
(110.2)
55.0
(24.8)
1.6
31.8
(212.5)
298.4
(58.5)
(36.1)
203.8
(15.3)
1.7
190.2
(2.7)
22.3
19.6
(41.5)
15.1
(26.4)
51.4
163.8
142.3
192.8
pence
13
pence
44
5
4
11
19
6
6
7
7
9
9
All results relate to continuing operations.
(1) EBITDA is defined as profit before interest, tax, depreciation, amortisation and unrealised gains and losses on derivative contracts.
Non-statutory measures are described fully in note 2.
(2) Underlying earnings and underlying earnings per share are set out in note 9.
103
Drax Group plc
Annual report and accounts 2013
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
Exchange differences on translation of foreign operations
Fair value losses on cash flow hedges
Deferred tax on cash flow hedges before corporation tax rate change
Impact of corporation tax rate change on deferred tax on cash flow hedges
Other comprehensive expense
Total comprehensive income for the year attributable to equity holders
Notes
32
7
27
7
7
Years ended 31 December
2013
£m
51.4
(2.8)
0.6
2.0
2012
£m
163.8
(9.0)
2.1
–
(58.7)
(105.7)
8.6
2.6
(47.7)
3.7
26.0
–
(86.6)
77.2
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104
Drax Group plc
Annual report and accounts 2013
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
Total shareholders’ equity
As at 31 December
2013
£m
2012
£m
Notes
10
11
19
12
13
14
19
15
16
17
18
19
18
19
22
23
32
24
26
26
26
27
28
37.2
1,581.4
8.7
49.7
1,360.6
7.7
1,627.3
1,418.0
196.5
139.5
246.2
29.6
20.0
267.3
899.1
365.5
9.7
0.2
105.2
480.6
418.5
215.9
212.1
32.4
133.8
41.7
635.9
1,409.9
46.5
1.5
422.5
710.8
(63.9)
292.5
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
1,409.9
1,477.3
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 2014.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
CBE
Tony Quinlan
Finance Director
105
Drax Group plc
Annual report and accounts 2013
Consolidated statement of changes in equity
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 24)
Movement in equity associated with
share-based payments (note 25)
At 1 January 2013
Profit for the year
Other comprehensive expense
Total comprehensive (expense)/income for
the year
Equity dividends paid (note 8)
Issue of share capital (note 24)
Movement in equity associated with
share-based payments (note 25)
At 31 December 2013
Issued
equity
£m
42.1
Capital
redemption
reserve
£m
1.5
Share
premium
£m
420.7
Merger
reserve
£m
710.8
Hedge
reserve
£m
63.3
Retained
profits
£m
Total
£m
65.0
1,303.4
–
–
–
–
4.3
–
46.4
–
–
–
–
0.1
–
46.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
163.8
(79.7)
(6.9)
156.9
(95.7)
183.4
(79.7)
–
–
–
163.8
(86.6)
77.2
(95.7)
187.7
4.7
4.7
1.5
420.7
710.8
(16.4)
314.3
1,477.3
–
–
–
–
–
–
–
–
–
–
1.8
–
–
–
–
–
–
–
–
(47.5)
51.4
(0.2)
51.4
(47.7)
(47.5)
51.2
3.7
–
–
–
(78.8)
(78.8)
–
5.8
1.9
5.8
1.5
422.5
710.8
(63.9)
292.5
1,409.9
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106
Drax Group plc
Annual report and accounts 2013
Consolidated cash flow statement
Cash generated from operations
Income taxes paid
Other gains/(losses)
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 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 financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Years ended 31 December
2013
£m
170.5
(10.6)
2.2
(21.3)
1.5
142.3
(301.7)
10.0
(291.7)
(78.8)
1.9
(0.7)
125.0
(2.4)
45.0
(104.4)
371.7
267.3
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
Notes
29
8
24
18
16
107
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
1
General information
Simplifying the numbers… Throughout this document these boxes will explain in plain English what the disclosures mean,
and why they are important to understanding our financial position and performance. In general, the notes to the financial
statements include additional information required by law, International Financial Reporting Standards (“IFRS”) or other
regulations to facilitate a better, more detailed understanding of the primary financial statements set out on pages 102 to 106.
Delivering our biomass strategy… Where relevant to do so, we have set out key elements of our business model and strategy
(see pages 17 to 19) and how pursuit of this has impacted our financial results.
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 principal operating companies of the Group are disclosed in note 4 to the Company’s separate financial statements, which
follow these consolidated financial statements. The principal activities of the Group are the sourcing of fuel in the US and at
Drax Power Station, the generation and sale of electricity at Drax Power Station, and the sale of electricity to business customers
by Haven Power Limited (“Haven Power”).
2
Basis of preparation
This section describes the accounting standards we have followed in preparing these financial statements and the
interpretation of accounting standards into accounting policies which are relevant to our Group. Wherever possible, we have
explained how our accounting policies work in practice within the relevant note to the consolidated financial statements,
and have not sought to repeat that information here. We have also made some changes in the way we present our income
statement this year, which are described in detail below. We have not changed any of our accounting policies this year,
nor have any new accounting standards had a material effect on our financial statements.
The financial statements have been prepared in accordance with IFRS as 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 43, and on the historical cost basis, except for certain financial assets and liabilities that have been measured at
fair value.
Basis of consolidation
These consolidated financial statements incorporate the financial results of the Company and of all entities controlled by
the Company, made up to 31 December 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.
The impact of all intra-group transactions is eliminated on consolidation.
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Accounting policies
Those accounting policies that are material to the understanding of our financial statements have been incorporated within the
relevant note or are set out below:
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, that being when the ROC or LEC is transferred to
the account of that third party.
Revenue from the sale of electricity direct to customers through our retail business, Haven Power is recorded after deduction
of agreed 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 expected to
be recovered at the point of sale. Energy supplied, but not yet measured or billed is calculated based on consumption statistics
and selling price estimates.
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
2. Basis of preparation (continued)
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. Foreign exchange gains and losses resulting from the retranslation
of these operations are recognised in reserves.
Presentation of financial statements
During 2013 the Group conducted a review of its financial statements and concluded that an alternative presentation of the
income statement would result in more relevant information for users in accordance with IAS 1.
As a result of this review, the Group now presents EBITDA as a separate line item on the face of the income statement.
EBITDA is defined as profit before interest, tax, depreciation, amortisation and unrealised gains or losses on derivative contracts.
As a result of this change, it has also been necessary to split depreciation and amortisation out from operating and
administrative expenses.
EBITDA is the primary financial performance measure reviewed by the Board, as described in note 4. Presentation on the face
of the income statement joins up the financial statements with the commentary in Operational and financial performance,
and also the segmental disclosure provided in note 4. The revised presentation will be maintained in future periods.
In addition, underlying profit after tax for the year has been presented on the face of the income statement for the first time.
Underlying profit after tax excludes the post-tax impact of unrealised gains and losses on derivative contracts, and is used
under our current distribution policy to calculate proposed dividends for the period. A reconciliation from profit for the year
attributable to equity holders to underlying profit after tax is provided in note 9.
The reconciliation of operating and administrative expenses disclosed in the prior year to the current presentation is as follows:
Operating and administrative expenses
Depreciation and amortisation
Total
2012
2012 – Revised
(£271.0m)
(£212.5m)
–
(£58.5m)
(£271.0m)
(£271.0m)
Applying the previous presentation to the current year results would result in operating and administrative costs for 2013 of
£279.9 million.
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Drax Group plc
Annual report and accounts 2013
Adoption of new and revised accounting standards
In 2013, a number of new, amended or revised standards and interpretations became effective. The Group adopted the
following standards from 1 January 2013:
IFRS 1 (amended) – Government loans.(cid:3)
IFRS 7 (amended) – Disclosures: Offsetting financial assets and financial liabilities.(cid:3)
IFRS 10 – Consolidated financial statements.(cid:3)
IFRS 11 – Joint arrangements.(cid:3)
IFRS 12 – Disclosure of interests in other entities.(cid:3)
IFRS 13 – Fair value measurement.(cid:3)
IAS 1 (amended) – Presentation of financial statements – other comprehensive income.(cid:3)
IAS 19 (revised) – Employee benefits.(cid:3)
IAS 27 (revised) – Separate financial statements.(cid:3)
IAS 28 (revised) – Investments in associates and joint ventures.(cid:3)
Annual improvements to IFRS 2009-2011 cycle.
The adoption of these standards and interpretations has not had a material impact on the financial statements of the Group.
The additional disclosures required by IAS 19 (revised) have been included in note 32 to these financial statements.
At the date of authorisation of these financial statements, the following standards and relevant interpretations, which have not
been applied in these financial statements, were in issue but not yet effective (and some of which were pending endorsement
by the EU):
IFRS 9 – Financial Instruments – the latest amendment issued by the International Accounting Standards Board (“IASB”)
removed the mandatory effective date for IFRS 9, to be set once the draft standard is fully completed in 2014.(cid:3)
IAS 32 (amended) – Offsetting financial assets and liabilities – effective for accounting periods beginning on or after
1 January 2014.(cid:3)
IAS 36 (amended) – Recoverable amount disclosures for non-financial assets – effective for accounting periods beginning
on or after 1 January 2014.(cid:3)
IAS 39 (amended) – Novation of derivatives and continuation of hedge accounting – effective for accounting periods
beginning on or after 1 January 2014.(cid:3)
IFRIC 21 – Levies – effective for accounting periods beginning on or after 1 January 2014.(cid:3)
Investment entities (amendments to IFRS 10, IFRS 12 and IAS 27) – effective for accounting periods beginning on or after
1 January 2014.(cid:3)
The Group is in the process of assessing the full impact of adopting IFRS 9. Following the removal of the mandatory effective
date for this standard by the IASB the Group will continue to monitor developments, but intends to adopt the standard in the
earliest permitted accounting period, subject to endorsement by the EU.
Adoption of the other standards in future periods is not expected to have a material impact on the financial statements
of the Group.
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
3
Accounting judgements, estimates and assumptions
The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect
the values of assets and liabilities and the amounts of income and expenditure recorded during the period. These estimates
are based on our reasonable knowledge of the amount, event or actions that require judgement, but the actual amount may
ultimately differ from the initial or subsequent estimates.
Critical accounting judgements, estimates and assumptions
The most important of these judgements – those that carry the most significant risk of an outcome that differs from the
amount recognised in the financial statements – are as follows:
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.
Derivatives – Derivative financial instruments are stated in the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded for 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, discount rate and assumptions around volatility based on historical movements. The inputs include assumptions around
future transactions and market movements, as well as credit risk and are, therefore, subjective.
ROCs and LECs – ROCs and LECs are stated within the balance sheet at fair value on the date of recognition and subsequently
written down to net realisable value where appropriate. Inherent in the calculation of this fair value and in the estimate of net
realisable 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.
Other accounting judgements, estimates and assumptions
CESP – The Group has a contingent liability in respect of the Community Energy Saving Programme (“CESP”). The assessment
of whether to make a provision for such a liability requires judgement. See note 34 for further details.
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, salary and pension increases,
and mortality rates. These actuarial assumptions are reviewed annually and modified as appropriate. The Group believes that
the assumptions utilised in recording obligations under the scheme are reasonable based on prior experience, market
conditions and the advice of scheme actuaries. However, actual results may differ from such assumptions.
Taxation – In accounting for taxation the Group makes assumptions regarding the treatment of items of income and
expenditure for tax purposes. The Group believes that these assumptions are reasonable based on prior experience and
consultation with advisers. Full provision is made for deferred taxation at the rates of tax prevailing at the period end date
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.
Impairment – The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting
policy detailed in note 10. The recoverable amounts of cash-generating units have been determined based on value in use
calculations. These calculations require the use of estimates.
111
Drax Group plc
Annual report and accounts 2013
4
Segmental reporting
We view our operational business as two distinct areas – or segments – the generation of electricity at Drax Power Station
(“Generation”) and the supply of power to business customers (“Retail”). The respective financial performance of these
segments is shown here (and described in far greater detail in Operational and financial performance starting on page 28).
The costs incurred by our US business, which is still in the development phase, during the current and previous year have
been included in the Generation segment.
The Generation business segment spans all three core activities of the Group in that it incorporates sourcing, generation
and supply (through its sales to the wholesale electricity market).
The Retail business segment contributes to the supply activities of the Group, through sales direct to the small and medium
enterprise and industrial and commercial markets.
Grow our retail business… The information below clearly demonstrates the good sales volume growth achieved by Haven
Power, our retail business, in the year.
Information reported to the Board and for the purposes of assessing performance and making investment decisions is
organised into two operating segments. The measure of profit or loss for each reportable segment, presented to the Board
on a regular basis is EBITDA.
Segment revenues and results
The following is an analysis of the Group’s results by reporting segment for the year ended 31 December 2013:
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
1,311.5
468.4
1,779.9
235.5
Retail
£m
(cid:3)
750.6
–
750.6
(cid:3)
(5.5)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Year ended 31 December 2013
Eliminations
£m
Consolidated
£m
(cid:3)
–
(468.4)
(468.4)
2,062.1
–
2,062.1
(cid:3)
–
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
230.0
(64.8)
(110.2)
55.0
(23.2)
31.8
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Drax Group plc
Annual report and accounts 2013
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 2012:
Generation
£m
Retail
£m
Eliminations
£m
Consolidated
£m
Year ended 31 December 2012
Revenue
External sales
Inter-segment sales
Total revenue
(cid:3)
Result
Segment EBITDA
(cid:3)
Central costs
Depreciation and amortisation
Unrealised losses on derivative contracts
Operating profit
Net finance costs
Profit before tax
1,328.4
301.6
1,630.0
451.4
–
451.4
303.0
(4.6)
(cid:3)
–
(301.6)
(301.6)
(cid:3)
(cid:3)
–
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
1,779.8
–
1,779.8
298.4
(58.5)
(36.1)
203.8
(13.6)
190.2
Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the
management accounts, and accordingly no separate asset disclosure is made here. However, spend on key capital projects
is monitored. Total spend on the biomass transformation project during 2013 was £228 million (2012: £180 million), of which
£117 million relates to construction of assets within our US business.
The accounting policies of the reportable segments are the same as the Group’s accounting policies, which are described in the
notes to the consolidated financial statements. The revenue and results of both reporting segments presented are subject to
seasonality as detailed in Operational and financial performance, page 43.
Major customers
Total revenue for the year ended 31 December 2013 includes an amount of £222.3 million (2012: £355.7 million and £221.8 million)
derived from a single customer (2012: two customers), representing 10% or more of the Group’s revenue for the year. These
revenues arose in the generation segment.
5
Operating expenses
This note sets out the material components of the “Operating and administrative expenses” line on our consolidated income
statement, page 102, including a detailed breakdown of the fees we paid to our auditor, Deloitte LLP, in respect of services
they have provided to us during the year.
The following charges have been included in arriving at operating profit:
Staff costs (note 31)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total other operating and administrative expenses
Years ended 31 December
2013
£m
(cid:3)
93.3
59.0
62.8
215.1
2012
£m
84.3
53.4
74.8
212.5
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Drax Group plc
Annual report and accounts 2013
Auditor’s remuneration
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
(cid:3)
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
(cid:3)
(cid:3)
Years ended 31 December
2013
£000
(cid:3)
293
53
346
(cid:3)
62
8
416
5
5
421
2012
£000
273
52
325
61
37
423
44
44
467
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Finance costs reflect expenses incurred in managing our debt structure (such as interest payable on our bank loans) as well
as foreign exchange gains and losses and the unwinding of discounting on our provision for reinstatement and defined
benefit pension. These are offset by interest income that we generate through efficient use of short-term cash surpluses –
for example through investment in money market funds.
Interest payable and similar charges:
Interest payable on bank borrowings
Foreign exchange losses
Unwinding of discount on provisions (note 22)
Amortisation of deferred finance costs
Net finance cost in respect of defined benefit scheme (note 32)
Other financing charges
Total interest payable and similar charges
Interest receivable:
Interest income on bank deposits
Total interest receivable
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
(cid:3)
(13.5)
(4.0)
(0.9)
(2.9)
(1.7)
(1.8)
(24.8)
(cid:3)
1.6
1.6
2012
£m
(6.1)
(0.6)
(1.0)
(3.2)
(1.1)
(3.3)
(15.3)
1.7
1.7
Following the refinancing of our previous revolving credit facilities in December 2012 (see note 18), the amortisation of
associated deferred finance costs was accelerated, resulting in an additional interest charge of £1.6 million in the 2012
figure above.
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
7
Taxation
The tax charge includes both current and deferred tax. Current tax is the amount payable on this year’s taxable profits
(which are adjusted for items upon which we are not required to pay tax, or in some cases for items upon which we are
required to pay additional tax in respect of tax-disallowed expenditure). Deferred tax is an accounting adjustment which
reflects where more or less tax is expected to arise in the future due to differences between the accounting and tax rules.
The tax (credit)/charge reflects the estimated effective tax rate on profit before tax for the Group for the year ended
31 December 2013 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the
income statement.
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
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.
Changes in the rate of corporation tax
Following the announcement of the 2013 Budget, the Finance Act 2013 (the “Act”) was enacted by Parliament in July 2013.
The Act confirmed reductions in the rate of corporation tax from 23% to 21% from 1 April 2014, and a further reduction in
corporation tax to 20% from 1 April 2015, both of which were substantively enacted during the year, and therefore have been
reflected in the deferred tax balances below.
Tax (credit)/charge comprises:
Current tax
Deferred tax
– Before impact of corporation tax rate change
– Impact of corporation tax rate change
Tax (credit)/charge
Tax on items credited to other comprehensive income:
Deferred tax on actuarial losses on defined benefit pension scheme (note 23)
Deferred tax on cash flow hedges (note 23)
Impact of corporation tax rate change on deferred tax on cash flow hedges (note 23)
(cid:3)
Years ended 31 December
2013
£m
(cid:3)
5.5
(cid:3)
(2.8)
(22.3)
(19.6)
2012
£m
31.4
10.1
(15.1)
26.4
Years ended 31 December
2013
£m
(cid:3)
(0.6)
(8.6)
(2.6)
(11.8)
2012
£m
(2.1)
(26.0)
–
(28.1)
115
Drax Group plc
Annual report and accounts 2013
UK corporation tax is calculated at 23.25% (2012: 24.5%) of the estimated assessable profit for the year. Tax for other
jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The (credit)/charge for the year can be reconciled
to the profit per the income statement as follows:
Profit before tax
Profit before tax multiplied by the rate of corporation tax in the UK of 23.25% (2012: 24.5%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Other
Impact of change to corporation tax rate
Total tax (credit)/charge
8
Dividends
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
31.8
7.4
(cid:3)
(7.3)
1.2
1.4
(22.3)
(19.6)
2012
£m
190.2
46.6
(7.6)
1.3
1.2
(15.1)
26.4
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Dividends are amounts we return to our shareholders and are paid as an amount per ordinary share held. Our current
dividend policy is to return 50% of underlying earnings (see note 9) to our shareholders each year. The remaining 50% is
retained for reinvestment in the future growth of the business.
(cid:3)
Years ended 31 December
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 2013 of 8.7 pence per share paid on
11 October 2013 (2012: 14.4 pence per share paid on 12 October 2012)(cid:3)
Final dividend for the year ended 31 December 2012 of 10.9 pence per share paid on 17 May 2013
(2012: 11.8 pence per share paid on 11 May 2012)
(cid:3)
(cid:3)
2013
£m
(cid:3)
35.0
43.8
78.8
2012
£m
52.6
43.1
95.7
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 2013 of 8.9 pence per share (equivalent to approximately
£36 million) payable on or before 17 May 2014. The final dividend has not been included as a liability as at 31 December 2013.
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
9
Earnings per share
Earnings per share (“EPS”) represents the amount of our earnings (post-tax profits) that are attributable to each ordinary
share we have in issue. Basic EPS is calculated by dividing our earnings by the weighted average number of ordinary shares
that were in issue during the year. Diluted EPS demonstrates the impact if all outstanding share options (such as those to be
issued under our employee share schemes – see note 25), that are expected to vest on their future maturity dates, were
exercised and treated as ordinary shares as at the balance sheet date.
In addition to EPS, we calculate underlying EPS as it reflects the figures upon which our annual dividends are calculated
(note 8). Underlying EPS removes the post-tax effect of fair value movements on derivative contracts from earnings.
Multiplying underlying basic EPS by 50% will give the total dividends per share for the period.
Reconciliations of the earnings and weighted average number of shares used in the calculations 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
Underlying earnings attributable to equity holders of the Company
Number of shares:
Weighted average number of ordinary shares for the purposes of
basic earnings per share (millions)
Effect of dilutive potential ordinary shares under share plans
Weighted average number of ordinary shares for the purposes of
diluted earnings per share (millions)
Earnings per share – basic (pence)
Earnings per share – diluted (pence)
Underlying earnings per share – basic (pence)
Underlying earnings per share – diluted (pence)
Years ended 31 December
2013
£m
(cid:3)
51.4
90.9
142.3
2012
£m
163.8
29.0
192.8
Years ended 31 December
2013
(cid:3)
402.3
4.6
2012
371.7
3.5
406.9
375.2
13
13
35
35
44
44
52
51
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Drax Group plc
Annual report and accounts 2013
10
Goodwill and other intangible assets
Goodwill arises on the acquisition of a business, when the consideration paid exceeds the fair value of the assets acquired.
All of our goodwill relates to the acquisition of Haven Power, our retail business, in 2009. Other intangibles include amounts
paid in respect of carbon emission allowances for future years.
Cost and carrying amount:
At 1 January 2012
Additions at cost
At 1 January 2013
Utilisation
Additions at cost
At 31 December 2013
Goodwill
£m
Carbon
£m
Total
£m
(cid:3)
10.7
–
10.7
–
–
10.7
–
39.0
39.0
10.7
39.0
49.7
(39.0)
(39.0)
26.5
26.5
26.5
37.2
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Goodwill
Goodwill arising on the Haven Power acquisition has been allocated to the Haven Power cash-generating unit. At 31 December
2013, the fair value of goodwill was significantly in excess of its book value reflecting its cash generative profile; accordingly
a sensitivity analysis has not been disclosed.
The recoverable amount of Haven Power is calculated annually, based on a value in use calculation. The key assumptions in this
calculation relate to the discount rate and future cash flows. Management estimates the discount rate using a pre-tax rate that
reflects 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 8% 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.
The charge to the income statement, within fuel costs, reflects the cost of emissions allowances required to satisfy the obligation
for the current year and takes into account generation and market purchases allocated to the current financial year, and the
market price at the balance sheet date.
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11
Property, plant and equipment
This note shows the cost, depreciation and net book value of the physical assets controlled by us that we use in our business.
The cost of an asset is what we paid to purchase or construct the asset. Depreciation is calculated by taking that cost, net of
any residual value, to the income statement evenly over the useful economic life of the asset. An asset’s net book value is
simply its cost less any depreciation (including impairment, if required) charged to date.
We construct many of our assets under long-term projects. Assets that are in the course of construction are not depreciated
until they are ready for us to use in the way intended.
Delivering our biomass strategy… Additions this year include a further £228 million on our biomass transformation project,
which remains on schedule and budget. Key developments in 2013 included the commissioning of the new receipt, storage
and distribution systems at Drax Power Station required to support our first converted unit, and the commencement of
construction of two wood pellet plants in Mississippi and Louisiana and a port facility at Baton Rouge in the US.
Accounting policy
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 (where relevant limited to the expected decommissioning date of the
power station). The estimated useful lives, beginning in 2004 when they were reset, are currently:
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
11. Property, plant and equipment (continued)
Main generating plant and freehold buildings
Other plant and machinery
Decommissioning asset
Plant spare parts
(cid:3)
Years
Up to 35
3–25
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.
Impairment
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 to future cash flows for this purpose 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.
Cost:
At 1 January 2012
Additions at cost
Disposals
Issues/transfers
At 1 January 2013
Additions at cost
Disposals
Issues/transfers
At 31 December 2013
Accumulated depreciation:
At 1 January 2012
Charge for the year
Disposals
At 1 January 2013
Charge for the year
Disposals
At 31 December 2013
Net book amount at 31 December 2012
Net book amount at 31 December 2013
Freehold land
and buildings
£m
Plant and
equipment
£m
Plant
spare parts
£m
171.2
8.6
–
–
179.8
3.6
–
(0.4)
1,445.3
201.8
(0.7)
11.3
1,657.7
267.7
(0.1)
11.0
183.0
1,936.3
43.8
4.3
–
48.1
3.9
–
52.0
131.7
131.0
414.2
53.1
(0.5)
466.8
59.9
(0.1)
526.6
1,190.9
1,409.7
(cid:3)
49.3
13.2
–
(11.3)
51.2
14.3
–
(10.6)
54.9
(cid:3)
12.1
1.1
–
13.2
1.0
–
14.2
38.0
40.7
Total
£m
1,665.8
223.6
(0.7)
–
1,888.7
285.6
(0.1)
–
2,174.2
470.1
58.5
(0.5)
528.1
64.8
(0.1)
592.8
1,360.6
1,581.4
Assets in the course of construction amounted to £448.7 million at 31 December 2013 (2012: £246.7 million).
Plant and equipment includes assets held under finance lease agreements with a carrying value at 31 December 2013
of £1.0 million (2012: £1.0 million).
Additions during the year include £1.9 million (2012: £nil) of capitalised borrowing costs directly attributable to the construction
of specific assets.
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Annual report and accounts 2013
12
Inventories
We hold stocks of fuels and other consumables that we use in the process of generating electricity. This note shows the cost
of coal, biomass, other fuels and plant consumables that we held at the end of the year, including items at Drax Power
Station, and those owned by us but stored in off-site locations.
Our fuel stocks are valued at the lower of the weighted average cost to purchase and net realisable value.
The cost of fuel stocks includes the purchase price, import duties and other taxes (including amounts levied on coal under
the UK carbon price support mechanism) and transport/handling costs.
Delivering our biomass strategy… The increasing cost of carbon, including the carbon price support mechanism, added
£120 million to our fuel costs in 2013. The relative economics of coal and biomass generation going forward underpins our
transformation strategy.
Coal
Biomass
Other fuels and consumables
(cid:3)
(cid:3)
(cid:3)
As at 31 December
2013
£m
141.2
40.9
14.4
196.5
2012
£m
92.5
48.1
17.0
157.6
The cost of inventories recognised as an expense in the year ended 31 December 2013 was £945.8 million
(2012: £823.8 million).
13
ROC and LEC assets
We earn ROC and LEC assets, which are accredited by the Office for Gas and Electricity Markets (“Ofgem”), as a result
of burning renewable biomass to generate electricity. This note sets out the value of such assets we have earned but not
yet sold.
Delivering our biomass strategy and growing our retail business… As we generate more of our electricity by burning
renewable biomass, the volume and therefore the total value of ROC and LEC assets we generate will increase. As Haven
Power grows, it provides us with a credit-efficient and timely route to market for these ROCs and LECs.
ROCs and LECs are recognised as current assets in the period they are generated and initially measured at fair value (reducing
the cost of biomass in the income statement) based on anticipated sales prices. At each reporting date the Group reviews the
fair value of ROC and LEC assets generated but not sold against updated anticipated sales prices. Any impairments required are
recognised in the income statement in the period incurred.
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Fair value and carrying amount:
At 1 January 2012
Generated
Purchased
Utilised/sold
At 1 January 2013
Generated
Purchased
Utilised/sold
At 31 December 2013
ROCs
£m
(cid:3)
30.8
26.8
11.4
(50.6)
18.4
131.6
36.5
(57.1)
129.4
LECs
£m
1.3
5.2
–
Total
£m
32.1
32.0
11.4
(6.2)
(56.8)
0.3
12.3
1.1
(3.6)
10.1
18.7
143.9
37.6
(60.7)
139.5
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
14
Trade and other receivables
Trade and other receivables represents amounts owed to us by our customers for goods or services we have provided but
not yet been paid for. The note includes prepayments, which are amounts paid by us for which we are yet to receive the
goods or service in return (e.g. carbon emissions allowances we have paid for that will be utilised in future years).
Trade and other receivables, given their short tenor, are measured at cost. 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.
Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments and other receivables
(cid:3)
As at 31 December
2013
£m
(cid:3)
118.2
102.3
25.7
246.2
2012
£m
153.8
61.2
9.8
224.8
Trade receivables principally represent sales of electricity to a number of counterparties. At 31 December 2013, the Group
had amounts receivable from five (2012: five) significant counterparties within the generation business, representing 69%
(2012: 78%) 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 immaterial. Counterparty risk is discussed in note 21.
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 £5.6 million (2012: £4.7 million).
This allowance has been determined by reference to past default experience, and includes £5.6 million in relation to Haven
Power (2012: £4.6 million).
The movement in the allowance for doubtful debts is laid out in the following table:
At 1 January
Receivables written off
Provision for receivables impairment
At 31 December
15
Short-term investments
Years ended 31 December
2013
£m
4.7
(1.3)
2.2
5.6
2012
£m
3.0
(0.5)
2.2
4.7
Short-term investments represent cash held on deposits with financial institutions that have a maturity of greater than three
months at inception.
Short-term investments
As at 31 December
2013
£m
20.0
2012
£m
30.0
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Annual report and accounts 2013
16
Cash and cash equivalents
Cash and cash equivalents include cash held in current and other bank accounts that are accessible on demand. It is our
policy to invest available cash on hand in short-term, low risk bank or building society deposits.
Maintaining an optimal capital structure… Additional borrowings drawn down this year (note 18) have been used to support
cash generated from operations (note 29) in funding our capital expenditure programme (note 11) to deliver our biomass strategy.
Cash and cash equivalents
17
Trade and other payables
(cid:3)
(cid:3)
As at 31 December
2013
£m
267.3
2012
£m
371.7
Trade and other payables represent amounts we owe to our suppliers (for goods and services provided), tax authorities and
other creditors that are due to be paid in the ordinary course of business. We make accruals for amounts that will fall due for
payment in the future as a result of our activities in the current year (e.g. fuel we have received but for which we have not yet
been invoiced).
Trade and other payables, given their short tenor, are measured at cost.
(cid:3)
Amounts falling due within one year:
Trade payables
Accruals
Other payables
(cid:3)
(cid:3)
As at 31 December
2013
£m
(cid:3)
17.1
255.9
92.5
365.5
2012
£m
20.3
214.8
40.8
275.9
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The Group recognises a liability in respect of its unsettled obligations to deliver emissions allowances under the EU ETS.
Accruals at 31 December 2013 include £9.2 million (2012: £59.0 million) with respect to the Group’s estimated net liability
to deliver CO2 emissions allowances. Allowances are purchased in the market and are recorded at cost.
18
Borrowings
Borrowings are chiefly comprised of bank loans with fixed maturity repayment profiles between 2016 and 2020.
Maintaining an optimal capital structure… In 2012 we executed a refinancing of our existing facilities, replacing them with a
£400 million revolving credit facility which matures in April 2016, two new term loans of £100 million each with Prudential
M&G and the UK Green Investment Bank, and a commodities trading line that allows trading counterparties to benefit from
the security package offered to our senior lenders instead of us posting collateral for certain volumes of trades.
In April 2013, we agreed a new £75 million amortising term loan facility with Friends Life, underpinned by a guarantee from
HM Treasury under the Infrastructure UK Guarantee Scheme. This replaced £50 million of the £100 million facility with the
UK Green Investment Bank, above.
The new loan facilities, which were fully drawn at the year end, enhance the financing structure executed in 2012 by
providing additional liquidity and a smoother profile of debt maturities.
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.
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
18. Borrowings (continued)
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.
Current:
Finance lease liabilities
(cid:3)
Non-current:
Term loans
Finance lease liabilities
(cid:3)
As at 31 December
2012
£m
0.3
0.3
As at 31 December
2012
£m
90.3
0.1
90.4
2013
£m
(cid:3)
0.2
0.2
2013
£m
(cid:3)
215.8
0.1
215.9
Analysis of borrowings
Borrowings at 31 December 2013 and 31 December 2012 consisted principally of amounts drawn down against bank loans.
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
As at 31 December 2013
Borrowings before
deferred finance costs
£m
Deferred
finance costs
£m
Net
borrowings
£m
225.0
0.3
225.3
(0.2)
225.1
(9.2)
–
(9.2)
–
(9.2)
215.8
0.3
216.1
(0.2)
215.9
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
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Drax Group plc
Annual report and accounts 2013
19
Derivative financial instruments
We enter into forward contracts for the sale of electricity, as well as the purchase of coal, sustainable biomass and CO2
emissions allowances. We use financial coal contracts to swap floating for fixed prices (or vice versa) on fixed volumes of
coal, and enter into forward foreign currency exchange contracts to manage our exposure to transactions denominated in
currencies other than sterling.
We hold these contracts for risk management purposes, to manage key risks facing the business including commodity price
risk, and foreign currency risk (see note 21).
The accounting rules for derivative contracts are complex – we must account for them at fair value, which is in essence the
difference between the price we have secured in the contract, and that we could achieve in the market now, at the balance
sheet date. The tables and narrative below provide additional detail around these values, how they are calculated and the
changes in underlying market conditions that drive their movements.
Managing our principal risks and uncertainties… A successful commercial hedging strategy is critical to our business model.
Our policy is to lock down exposures to commodity price movements and changes in foreign exchange rates using derivative
contracts such as those described above. This strategy aims to de-risk the business, providing security and certainty over
cash flows into the future.
Accounting policy
Where possible, the Group has taken advantage of the own use exemption which allows qualifying contracts to be excluded
from fair value mark-to-market accounting. This applies to certain contracts for physical commodities entered into and held
for our own purchase, sale or usage requirements, including forward contracts for the purchase of biomass, and coal from
domestic sources.
Contracts which do not qualify for the own use exemption – principally power, financial coal, CO2 emissions allowances and
forward foreign currency exchange contracts – are accounted for as derivatives and recorded in the balance sheet at fair value,
with changes in fair value reflected through the hedge reserve (note 27) to the extent that the contracts are designated as
effective hedges in accordance with IAS 39, or the income statement where the hedge accounting requirements are not met.
Derivative financial instruments with a maturity date within 12 months from the balance sheet date are classified as current
assets or liabilities. Instruments with a maturity date beyond 12 months are classified as non-current assets or liabilities.
Fair value accounting
Forward contracts for the sale of power, purchase of coal from international sources, purchase of CO2 emissions allowances,
financial coal (collectively “Commodity contracts”) and foreign currency exchange contracts are marked-to-market and
recorded in the balance sheet at fair value as follows:
As at 31 December 2013
As at 31 December 2012
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Commodity contracts:
Less than one year
More than one year but not more than two years
More than two years
Forward foreign currency exchange contracts:
Less than one year
More than one year but not more than two years
More than two years
Total
Less: non-current portion
Commodity contracts
Forward foreign currency exchange contracts
Total non-current portion
Current portion
Assets
£m
Liabilities
£m
27.8
3.6
0.1
1.8
1.5
3.5
38.3
(3.7)
(5.0)
(8.7)
29.6
(cid:3)
(52.3)
(5.8)
–
(cid:3)
(52.9)
(73.0)
(133.3)
(317.3)
(cid:3)
5.8
206.3
212.1
(105.2)
Assets
£m
(cid:3)
33.0
2.4
–
(cid:3)
4.6
0.6
4.7
45.3
(cid:3)
(2.4)
(5.3)
(7.7)
37.6
Liabilities
£m
(70.6)
(14.2)
–
(29.8)
(10.8)
(30.2)
(155.6)
14.2
41.0
55.2
(100.4)
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The total movement in the fair value of these contracts of £168.9 million (2012: £141.8 million) is recognised in the income
statement or the hedge reserve, dependent upon whether the hedge accounting requirements of IAS 39 are met, as follows:
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Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
19. Derivative financial instruments (continued)
Unrealised losses on derivative contracts recognised in arriving at operating profit
Unrealised losses on derivative contracts recognised in the hedge reserve (note 27)
Total unrealised losses on derivative contracts
Years ended 31 December
2013
£m
(110.2)
(58.7)
(168.9)
2012
£m
(36.1)
(105.7)
(141.8)
Unrealised losses recognised in the income statement are primarily the result of changes in the fair value of our forward foreign
exchange contracts in both the current and prior year. Currency markets were volatile in 2013, which can be seen on the graph
on page 39, with the US dollar (in which many of our fuel purchases are denominated) closing 2013 weaker than in 2012. This,
combined with the significant increase in the volume of currency contracts as we look to secure our sterling cash flows, drives
the income statement movement.
Unrealised losses recognised in the hedge reserve reflect principally the fair value changes on our forward foreign exchange
contracts that are designated in effective hedging relationships in accordance with IAS 39. These are predominantly forward
contracts for the purchase of US and Canadian dollars for highly probable future fuel purchases.
Fair value measurement
(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.
The fair values of all derivative financial instruments are discounted to reflect the credit risk inherent within the instrument.
The Group has reviewed all significant 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.
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 both 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.
20
Other financial instruments
We hold a variety of other non-derivative financial instruments, including cash and cash equivalents, borrowings, payables
and receivables arising from our operations.
Fair value
Cash and cash equivalents (note 16), short-term investments (note 15), trade and other receivables (note 14), and trade and
other payables (note 17) generally have short times to maturity. For this reason, their carrying values approximate to their fair
value. The Group’s borrowings (note 18) relate principally to amounts drawn down against term loans, the carrying amounts of
which approximate their fair values by virtue of being floating rate instruments.
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Annual report and accounts 2013
21
Financial risk disclosures
IFRS require us to provide information that assists you in understanding the nature and extent of risks arising from the
financial instruments we hold, described in the two previous notes. Such risks include liquidity, credit and counterparty risk.
We also describe below the wider financial risks that we manage using financial instruments, for example how derivative
contracts minimise our exposure to commodity market and foreign currency risk.
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 (page 46) 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 securing 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 as they
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 as they reduce the Group’s cash flow exposure resulting from fluctuations in the price of coal.
The Group purchases CO2 emissions allowances under fixed price contracts with different maturity dates from a range
of domestic and international sources. All commitments to purchase CO2 emissions allowances under fixed price contracts
are designated as cash flow hedges as they 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 2013 would increase/decrease by £6.3 million (2012: increase/decrease
by £5.4 million). This is mainly attributable to the Group’s exposure to financial coal derivatives; and
(cid:3) other equity reserves would decrease/increase by £27.0 million (2012: decrease/increase by £32.0 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. The Group has no interest rate swaps
outstanding at the balance sheet date; 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 below.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for 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 2013 would decrease/increase by £1.0 million (2012: decrease/increase by £0.2 million) as a
result of the changes in interest payable during the period.
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126
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
21. Financial risk disclosures (continued)
Foreign currency risk
Foreign currency exchange contracts are entered into to hedge fixed price international coal purchases in US dollars, biomass
purchases in US dollars, Canadian 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 2013 would decrease/increase by £198.9 million (2012: decrease/increase
by £86.5 million). This is mainly attributable to the Group’s exposure to foreign currency exchange contracts entered into
in relation to fuel purchase contracts; and
(cid:3) other equity reserves would decrease/increase by £49.6 million (2012: decrease/increase by £1.1 million) as a result of the
changes in the fair value of hedged foreign currency exchange contracts.
Liquidity risk
The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board
of directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments.
The Group maintains a mixture of cash and cash equivalents, 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
(cid:3)
Term loans, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
(cid:3)
Within
3 months
£m
2.7
–
2.7
279.6
282.3
3 months
– 1 year
£m
8.4
0.2
8.6
85.4
94.0
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
As at 31 December 2013
>1 year
£m
277.9
0.1
278.0
0.5
278.5
Total
£m
289.0
0.3
289.3
365.5
654.8
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
Interest payments are calculated based on forward interest rates estimated at the balance sheet date using publicly available
information. The weighted average interest rate payable at the balance sheet date on our term loans was 4.65% (2012: 5.02%).
127
Drax Group plc
Annual report and accounts 2013
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, 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
(cid:3)
Commodity contracts, net
Forward foreign currency exchange contracts, net
(cid:3)
Within 1 year
£m
549.4
816.6
1,366.0
Within 1 year
£m
571.3
944.6
1,515.9
1–2 years
£m
156.1
739.9
896.0
1–2 years
£m
171.2
485.6
656.8
As at 31 December 2013
>2 years
£m
0.4
2,210.3
2,210.7
Total
£m
705.9
3,766.8
4,472.7
As at 31 December 2012
>2 years
£m
–
1,004.6
1,004.6
Total
£m
742.5
2,434.8
3,177.3
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
(cid:3)
(cid:3)
(cid:3)
As at 31 December
2013
£m
(cid:3)
267.3
20.0
251.8
38.3
577.4
2012
£m
371.7
30.0
229.5
45.3
676.5
Trade and other receivables are stated gross of the provision for doubtful debts of £5.6 million (2012: £4.7 million).
Credit exposure is controlled by counterparty limits that are reviewed and approved by 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.
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128
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
21. Financial risk disclosures (continued)
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), less net cash. Net 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, and retained profits, 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
As at 31 December
2013
£m
(216.1)
267.3
20.0
71.2
2012
£m
(90.7)
371.7
30.0
311.0
Total shareholders’ equity, excluding hedge reserve
1,473.8
1,493.7
22
Provisions
We make a provision for reinstatement to cover the estimated costs of decommissioning, demolishing and remediating our
generation assets at the end of their useful economic lives. The amount represents the present value (i.e. it is discounted to
reflect the time value of money) of the expected costs. Provisions are for liabilities of uncertain timing and/or amount, and as
such by their nature are estimated.
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.
Carrying amount:
At 1 January 2012
Unwinding of discount
At 1 January 2013
Unwinding of discount
At 31 December 2013
Reinstatement
£m
(cid:3)
30.5
1.0
31.5
0.9
32.4
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 based on independent third party advice, updated on a triennial basis.
129
Drax Group plc
Annual report and accounts 2013
23
Deferred tax
Deferred tax is principally an accounting adjustment to reflect the tax charges or credits that are expected to arise in the
future, as a result of differences between the accounting and tax rules relating to certain transactions that happened before
the end of the current year.
The movements in deferred tax assets and liabilities during each year are shown below. Deferred tax assets and liabilities
are offset as there is a legally enforceable right of offset and there is an intention to settle the balances net.
Deferred tax liabilities/(assets)
Financial
instruments
£m
Accelerated
capital
allowances
£m
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 1 January 2013
(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 2013
8.2
(7.5)
–
(26.0)
(25.3)
(19.3)
–
(11.2)
(55.8)
Non trade
losses
£m
(31.6)
7.6
–
–
(24.0)
9.3
–
–
Other
liabilities
£m
3.1
11.4
–
–
14.5
8.4
–
–
Other
assets
£m
(11.0)
1.5
(2.1)
–
(11.6)
(0.7)
(0.6)
–
Total
£m
203.8
(5.0)
(2.1)
(26.0)
170.7
(25.1)
(0.6)
(11.2)
235.1
(18.0)
–
–
217.1
(22.8)
–
–
194.3
(14.7)
22.9
(12.9)
133.8
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Deferred tax assets are recognised to the extent that the realisation of the related tax benefit through future associated taxable
profits is probable.
The Group has not recognised deferred tax assets with an estimated value of £6.1 million at 31 December 2013
(2012: £4.0 million) in respect of UK and US losses that are carried forward against future taxable income.
24
Issued equity
Our ordinary share capital reflects the total number of shares issued, which are publicly traded on the London Stock Exchange.
Maintaining an optimal capital structure… In October 2012 we placed 36.5 million shares (9.9% of our issued capital at that
time) raising net proceeds, after transaction costs, of £187.7 million to help fund the capital investment required for our biomass
transformation. During 2013 this cash has driven investment in our US-based supply chain infrastructure, as described in
Operational and financial performance.
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 (note 26) 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) are met, in
which case the difference is recorded in retained earnings.
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each(cid:3)
Issued and fully paid:
2012 – 401,587,564 ordinary shares of 1116⁄29 pence each(cid:3)
2013 – 402,566,332 ordinary shares of 1116⁄29 pence each(cid:3)
(cid:3)
(cid:3)
(cid:3)
As at 31 December
2012
£m
2013
£m
(cid:3)
100.0
100.0
(cid:3)
–
46.5
46.5
46.4
–
46.4
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130
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
24. Issued equity (continued)
The movement in allotted and fully paid share capital of the Company during the year was as follows:
At 1 January
Issued under employee share schemes
Issue of share capital
At 31 December
Years ended 31 December
2013
(number)
2012
(number)
401,587,564
364,862,718
978,768
250,219
–
36,474,627
402,566,332
401,587,564
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 8 March 2013, a total of 367,438 shares were issued in satisfaction of shares vesting in accordance with the rules of
the Group’s Bonus Matching Plan granted in 2010. From 1 May 2013 a further 593,026 shares were issued in satisfaction
of options vesting in accordance with the rules of the Group’s Savings-Related Share Option Plan, also granted in 2010.
Additionally, on 31 January, 28 March and 11 April a total of 2,669 shares, 2,805 shares and 1,748 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.
25
Share-based payments
We operate two share option schemes for our employees – the Bonus Matching Plan (“BMP”) for directors and senior
executives, and the Savings-Related Share Option (“SAYE”) Plan for all qualifying employees. We incur a cost in respect of
these schemes in our income statement, which is set out below along with a detailed description of each scheme and the
number of options outstanding.
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.
Costs recognised in the income statement in relation to share-based payments during the year are as follows:
BMP
SAYE
(cid:3)
Years ended 31 December
2013
£m
5.5
0.3
5.8
2012
£m
4.5
0.2
4.7
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 2012, or 2013.
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
2013
(number)
330,513
(cid:3)
Shares acquired
during year
(number)
Shares
transferred
during year
(number)
Shares
held at
31 December
2013
(number)
Cost at
31 December
2013
£000
Nominal
value at
31 December
2013
£000
Market
value at
31 December
2013
£000
–
(67,678)
262,835
2,465
30
2,104
SIP
131
Drax Group plc
Annual report and accounts 2013
Bonus Matching Plan
The BMP was introduced in 2009. Under the scheme, 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. For awards made from 2011, a proportion of the shares vesting is
conditional upon performance against the internal Balanced Corporate Scorecard. The fair value of the 2013, 2012 and 2011
BMP awards of £6.1 million, £5.8 million and £5.5 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 BMP awards are as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
(cid:3)
2013
BMP
(number)
2012
BMP
(number)
5,038,026
4,265,511
1,522,574
1,849,450
(86,912)
(98,049)
(316,526)
(246,017)
(969,932)
(732,869)
5,187,230
5,038,026
Savings-Related Share Option Plan
In April 2013 participation in the SAYE Plan was offered to all qualifying employees. Options were granted for employees
to acquire shares at a price of 493 pence (2012: 410 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 options granted in connection with the SAYE Plan of £0.8 million (2012: £0.2 million) is being charged to
the income statement over the life of the relevant 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
2013
2012
SAYE 3 Year
(number)
SAYE 5 Year
(number)
SAYE 3 Year
(number)
SAYE 5 Year
(number)
850,067
850,596
755,547
788,889
423,358
97,804
132,050
(18,604)
(22,260)
(33,328)
(605,052)
(2,338)
–
–
(4,202)
–
79,074
(17,367)
–
–
647,431
926,140
850,067
850,596
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;
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.
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132
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
26
Share premium and other reserves
The share premium account reflects amounts received in respect of issued share capital (see note 24) that exceed the
nominal value of the shares issued.
Other equity reserves reflect the impact of some of our historical transactions, which are described under the table below.
At 1 January and 31 December
Capital redemption reserve
Share premium
Merger reserve
2013
£m
1.5
2012
£m
1.5
2013
£m
422.5
2012
£m
420.7
2013
£m
710.8
2012
£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.
Movements in share premium during 2013 reflect amounts received from the issue of shares under the Group’s employee
share schemes.
27
Hedge reserve
The hedge reserve is a component of our equity reserves. Changes in the fair value of our derivative contracts for purchases
and sales of commodities and foreign currencies are recognised here, to the extent that they qualify as effective hedges
under accounting rules. The cumulative gains and losses unwind and are released as the related contracts mature, and we
take delivery of the associated commodity or currency.
Managing our principal risks and uncertainties… As described in note 19, all of our derivative contracts are entered into for
the purpose of commercial hedging; however not all of these contracts qualify as effective hedges under IAS 39. The
changes in fair value of contracts that do not meet the definition of an IFRS effective hedge are recognised in the income
statement. Managing our principal risks and uncertainties is about locking down exposures to moving prices and securing
market level dark green and bark spreads for the future.(cid:3)
The Group designates certain hedging instruments used to address commodity price risk and foreign exchange 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. Changes in fair value of contracts designated into such hedging relationships are recognised within the
hedge reserve to the extent they are effective.
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 23)
At 31 December
Years ended 31 December
2013
£m
(16.4)
(cid:3)
(6.2)
(69.6)
(cid:3)
15.9
1.2
11.2
(63.9)
2012
£m
63.3
(24.1)
(0.8)
(80.4)
(0.4)
26.0
(16.4)
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. For FX contracts, this is when the associated foreign
currency transaction is recognised. Further information in relation to the Group’s accounting for financial instruments is
included in note 19.
133
Drax Group plc
Annual report and accounts 2013
The expected release profile from equity of post-tax hedging gains and losses is as follows:
Commodity contracts
Forward foreign currency exchange contracts
(cid:3)
Commodity contracts
Forward foreign currency exchange contracts
(cid:3)
28
Retained profits
As at 31 December 2013
Within 1 year
£m
1–2 years
£m
(6.5)
(6.2)
(12.7)
(1.5)
(2.8)
(4.3)
>2 years
£m
0.1
(47.0)
(46.9)
Total
£m
(7.9)
(56.0)
(63.9)
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)
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Retained profits are a component of our equity reserves. The overall balance reflects the total profits we have generated over
our lifetime, reduced by the amount of that profit we have distributed back to our shareholders. The table below reconciles
the movements in our retained profits during the year.
At 1 January
Profit for the year
Actuarial losses on defined benefit pension scheme (note 32)
Deferred tax on actuarial losses on defined benefit pension scheme (note 23)
Exchange differences on translation of foreign operations
Issue of share capital (note 24)
Equity dividends paid (note 8)
Net movements in equity associated with share-based payments
At 31 December
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
314.3
51.4
(2.8)
0.6
2.0
–
(78.8)
5.8
292.5
2012
£m
65.0
163.8
(9.0)
2.1
–
183.4
(95.7)
4.7
314.3
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134
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
29
Cash generated from operations
Cash generated from operations is the starting point of our cash flow statement on page 106. This table makes adjustments
for any non-cash accounting items to reconcile our profit for the year to the amount of physical cash we have generated
from our operations (i.e. sourcing, generating and selling electricity).
Profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax (credit)/charge
Depreciation and amortisation
Unrealised losses on derivative contracts
Defined benefit pension scheme current service cost
Non-cash charge for share-based payments
Years ended 31 December
2013
£m
51.4
(cid:3)
24.8
(1.6)
(19.6)
64.8
110.2
5.8
5.8
2012
£m
163.8
15.3
(1.7)
26.4
58.5
36.1
5.7
4.7
Operating cash flows before movement in working capital
241.6
308.8
Changes in working capital:
Increase in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Total decrease/(increase) in working capital
Decrease/(increase) in carbon assets
(Increase)/decrease in ROC assets
Defined benefit pension scheme contributions
Cash generated from operations
(cid:3)
(38.9)
(21.4)
108.3
48.0
12.5
(120.8)
(10.8)
170.5
(19.9)
44.5
(33.9)
(9.3)
(39.0)
13.4
(10.7)
263.2
30
Reconciliation of net cash
This note reconciles our net cash position in terms of changes in our cash on hand (note 16), short-term investments
(note 15) and borrowings (note 18).
Net cash at 1 January
(Decrease)/increase in cash and cash equivalents
Decrease in short-term investments
Increase in borrowings
Net cash at 31 December
Years ended 31 December
2013
£m
311.0
(104.4)
(10.0)
(125.4)
71.2
2012
£m
225.2
168.9
–
(83.1)
311.0
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Drax Group plc
Annual report and accounts 2013
31
Employees and directors
This note provides a more detailed breakdown of the cost of our employees, including executive directors. The average
number of employees in Operations (staff in our Generation segment), Retail services (employees in our Retail segment) and
Business services (those working in central functions) is also provided.
Delivering excellent people leadership… Biomass conversion secures jobs both at Drax and in the supply chain.
Staff costs (including executive directors)
Included in other operating and administrative expenses (note 5):
Wages and salaries
Social security costs
Other pension costs (note 32)
Share-based payments (note 25)
(cid:3)
Average monthly number of people employed (including executive directors)
Operations
Retail services
Business services
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
(cid:3)
70.3
7.4
9.8
5.8
93.3
2012
£m
63.7
7.0
8.9
4.7
84.3
Years ended 31 December
2013
(number)
2012
(number)
639
343
219
1,201
602
354
194
1,150
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136
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
32
Retirement benefit obligations
We operate a defined benefit and defined contribution pension schemes. The Drax Power Group section of the Electricity
Supply Pension Scheme is a defined benefit scheme; a pension arrangement under which participating members receive a
pension benefit at retirement determined by the scheme rules. Members are typically entitled to annual pensions on
retirement of 1/80th of final pensionable salary for each year of service plus a tax-free lump sum of three times pension.
The Drax Power Limited Pension Plan, a defined contribution scheme, by contrast provides a retirement benefit that is
dependent upon actual contributions made by the Group and members of the scheme.
The income statement charge for the defined benefit scheme is twofold – the current/past service cost is the increase in the
overall liability to pay benefits earned by current employees of the Group in the current/previous periods, the net interest cost
reflects the unwinding of the pension deficit over time, offset by income earned by the scheme’s assets.
The income statement charge for the defined contribution scheme represents the contributions due to be paid by the Group
in respect of the current period.
Defined contribution scheme
The Group operates two defined contribution schemes, The Drax Power Limited Pension Plan and Haven Power Personal
Pension Plan, for all qualifying employees. Pension costs for the defined contribution scheme are as follows:
Total included in staff costs (note 31)
Years ended 31 December
2013
£m
3.9
2012
£m
3.2
As at 31 December 2013, contributions of £0.7 million (2012: £nil) due in respect of the current reporting period had not been
paid over to the scheme. The Group has no further payment obligations once the contributions have been paid.
Defined benefit scheme
The Group operates an approved defined benefit scheme on behalf of the Drax Power Group (“DPG”) section 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 DPG ESPS exposes the Group to actuarial and other risks, the most significant of which are considered to be:
(cid:3)
(cid:3)
Investment risk
The scheme liabilities are calculated using a discount rate set with reference to corporate bond yields;
if assets underperform this yield, this will create a deficit. The Group holds a significant proportion of
growth assets (equities, hedge funds and property) which, though expected to outperform corporate
bonds in the long-term, create volatility and risk in the short-term. The allocation to growth assets is
monitored to ensure it remains appropriate given the Group’s long term objectives.
Interest rate risk
A decrease in corporate bond yields will increase the value placed upon the Group’s liabilities,
although this will be partially offset by an increase in the value of the Group’s bond holdings.
Longevity risk
Inflation risk
The majority of the Group’s obligations are to provide benefits for the life of the member,
so increases in life expectancy will result in an increase in the liabilities of the scheme.
The majority of the Group’s obligations to pay benefits are linked to inflation, and as such higher inflation
will lead to higher liabilities. The majority of the assets held by the scheme are either unaffected or only
loosely correlated with inflation, meaning an increase in inflation will also increase the deficit. In most
cases, caps on inflationary increases are in place, to protect against extreme inflation.
Other risks include operational risks (such as paying out the wrong benefits), legislative risks and other demographic risks.
The Trustees insure certain benefits payable on death before retirement.
A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension. See note 34 for details.
The last funding valuation of the DPG ESPS was carried out by Aon Hewitt, as a qualified independent actuary, as at 31 March
2010. A valuation with an effective date of 31 March 2013 is currently ongoing. Future valuations are required by law at intervals
of no more than three years, therefore the next valuation will take place on or before 31 March 2016.
137
Drax Group plc
Annual report and accounts 2013
The initial results of the latest funding valuation at 31 March 2013 have been adjusted to 31 December 2013, taking into account
experience over the period since 31 March 2013, changes in market conditions and differences in financial and demographic
assumptions. The principal assumptions used are as follows:
Discount rate
Inflation (RPI)
Rate of increase in pensions in payment and deferred pensions
Rate of increase in pensionable salaries
(cid:3)
(cid:3)
As at 31 December
2013
% p.a.
4.5
3.4
3.2
4.4
2012
% p.a.
4.6
3.0
2.9
4.0
The mortality assumptions are based on standard mortality tables which allow for future mortality improvements.
The assumptions are that a member who retired in 2013 at age 60 will live on average for a further 27 years (2012: 26 years)
after retirement if they are male and for a further 29 years (2012: 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 28 years
and 31 years respectively (2012: 27 years and 30 years respectively).
The net liability recognised in the balance sheet is the excess of the present value of the defined benefit obligation over the fair
value of the plan assets, determined as follows:
Defined benefit obligation
Fair value of plan assets
Net liability recognised in the balance sheet
(cid:3)
(cid:3)
As at 31 December
2013
£m
220.9
(179.2)
41.7
2012
£m
199.0
(156.9)
42.1
The amounts recognised in the income statement, within other operating and administrative expenses and finance costs,
are as follows:
Included in staff costs (note 31):
Current service cost
Past service cost
Total included in other operating and administrative expenses
(cid:3)
Included in finance costs (note 6):
Interest on net defined benefit liability
Total included in finance costs
Total amounts recognised in the income statement
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
(cid:3)
5.8
0.1
5.9
(cid:3)
(cid:3)
1.7
1.7
7.6
2012
£m
5.7
–
5.7
1.1
1.1
6.8
Actuarial gains and losses are recognised in the statement of comprehensive income in full, 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
(cid:3)
(cid:3)
Years ended 31 December
2013
£m
(72.6)
(2.8)
(75.4)
2012
£m
(63.6)
(9.0)
(72.6)
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138
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
32. Retirement benefit obligations (continued)
Changes in the present value of the defined benefit obligation are as follows:
Defined benefit obligation at 1 January
Current and past service cost
Employee contributions
Interest cost
Actuarial losses
Benefits paid
Defined benefit obligation at 31 December
Years ended 31 December
2013
£m
199.0
5.9
0.2
9.1
12.2
(5.5)
220.9
2012
£m
182.4
5.7
0.2
8.8
6.0
(4.1)
199.0
Actuarial losses arising from changes in demographic assumptions, changes in financial assumptions and gains arising from
experience were £4.6 million (2012: £nil), £17.1 million (2012: £4.3 million) and £9.5 million (2012: £1.7 million loss) respectively.
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
Interest income on plan assets
Remeasurement gains/(losses)
Employer contributions
Employee contributions
Benefits paid
Years ended 31 December
2013
£m
156.9
7.4
9.4
10.8
0.2
(5.5)
2012
£m
145.4
7.7
(3.0)
10.7
0.2
(4.1)
Fair value of plan assets at 31 December
179.2
156.9
Employer contributions included payment of £5.0 million (2012: £5.0 million) to reduce the actuarial deficit.
The actual return on plan assets in the period was £16.8 million (2012: £4.7 million).
The fair values of the major categories of plan assets were as follows:
Equities(1)(cid:3)
Fixed interest bonds(2)(cid:3)
Property
Hedge funds
Cash and other assets
Fair value of total plan assets
As at 31 December
2013
£m
74.8
71.2
15.9
17.2
0.1
2012
£m
62.3
61.1
14.4
16.9
2.2
179.2
156.9
(1) Under the Group’s long-term asset strategy, 60% of assets are invested in ‘return generating’ asset classes – of which 5% is invested in emerging market equity.
The remaining 40% of assets are invested in ‘liability-matching’ asset classes.
(2) Fixed interest bonds include a mixture of corporate and government bonds. Less than 1% has a sub-investment grade credit rating (i.e. BB+ or lower).
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.
139
Drax Group plc
Annual report and accounts 2013
The assumptions for discount rate, inflation rate, rate of increase in pensions paid and expected return on plan assets all have
a potentially significant effect on the measurement of the scheme deficit. The following table provides an indication of the
sensitivity of the pension deficit at 31 December 2013 to changes in these assumptions:
0.25 percentage point increase/decrease to:
Discount rate
Inflation rate (RPI)(1)
1 year increase/decrease to:
Life expectancy for men and women
(Decrease)/Increase in net liability
£m
(9.8)/10.2
8.6/(8.5)
5.8/(5.9)
(1)(cid:3) The sensitivity of the scheme liabilities to salary and pension increases is closely correlated with inflation. The impact of corresponding decreases in these variables
is included here.
The Group is exposed to investment and other experience risks, as described above, and may need to make additional
contributions where it is estimated that the benefits will not be met from regular contributions and expected investment income.
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
2013
£m
(220.9)
179.2
(41.7)
8.7
9.4
2012
£m
(199.0)
156.9
(42.1)
(1.7)
(3.0)
2011
£m
(182.4)
145.4
(37.0)
(4.3)
0.6
As at 31 December
2010
£m
(167.2)
129.9
(37.3)
(9.6)
3.4
2009
£m
(146.5)
113.4
(33.1)
(23.1)
8.0
The defined benefit obligation includes benefits for current employees of the Group (70%), former employees of the Group who
are yet to retire (5%) and retired pensioners (25%). The weighted-average period over which benefit payments are expected to
be made, or the duration of the liabilities, is currently 22 years.
The Group expects to contribute £17.3 million to its pension plans during the 12 months ended 31 December 2014.
The Company intends to fund the deficit, agreed at the last triennial valuation, over the period to 31 December 2018.
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140
Drax Group plc
Annual report and accounts 2013
Notes to the consolidated financial statements
33
Capital and other financial commitments
We have a number of financial commitments (i.e. a certain, contractual requirement to make a cash payment in the future)
that are not recorded within our balance sheet as the contract is not yet due for delivery. Such commitments include
contracts for the future purchase of coal and biomass, operating leases for land and buildings, contracts for the construction
of assets and contracts for the provision of services.
Delivering our biomass strategy… We have made good progress towards securing near-term volumes of sustainable wood
pellets and continue with negotiations for long-term supplies, which is reflected in the level of future commitments to
purchase fuel, set out below.
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
2013
£m
158.8
23.0
2012
£m
137.0
27.1
Future commitments to purchase fuel under fixed and variable priced contracts
4,048.3
1,448.9
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
(cid:3)
34
Contingent liabilities
As at 31 December
2013
£m
1.2
5.5
7.4
14.1
2012
£m
1.2
4.4
7.4
13.0
Contingent liabilities are potential future outflows of cash that are dependent on a future event that is outside of our control;
the payment either cannot be measured reliably, or is considered to be unlikely.
Community Energy Saving Programme
Drax Power Limited (“Drax Power”) 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 Power’s obligation was to deliver 895,138
lifetime tonnes of CO2 savings. It entered into an agreement with a third party, pursuant to which the third party was obliged
to deliver its 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 Power’s CESP obligation. Drax Power is considering legal proceedings
for breach of contract against the third party.
Drax Power entered into further agreements with additional third parties in order to rectify this shortfall so far as practicable.
Having taken account of the additional measures under those arrangements. the Office for Gas and Electricity Markets
(“Ofgem”) announced in May 2013 that Drax Power had achieved 37.1% of its CESP target at the end of the obligation period.
At the same time Ofgem also announced that it was launching an investigation into those companies that had failed to achieve
their targets, including Drax Power.
The Gas and Electricity Markets Authority (“the Authority”) is the enforcement authority in relation to CESP. Subject to the
findings of Ofgem’s investigation, it 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. 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.
141
Drax Group plc
Annual report and accounts 2013
Representatives of Drax Power had an initial meeting with the Ofgem enforcement team in June 2013, following which it
received a formal information request. Drax Power is co-operating fully with the investigation and has provided a full response
to the information request. In January 2014, Drax Power submitted responses to further information requests. Ofgem informed
Drax Power that it now needed to consider these, and expected to communicate the next steps in the investigation in Autumn
2014, or earlier if possible. Those next steps will be to issue a statement of case, close the investigation, or update the timeframe
for doing so. As a result, it is not possible to predict accurately what, if any, enforcement action may be taken at this stage.
In the absence of any communication on enforcement subject to the findings of the investigation, 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.
Guaranteed Minimum Pension (“GMP”)
The UK government intends to implement legislation to equalise the GMP, resulting in an increase in the value of GMP for
males. This would correspondingly increase the defined benefit pension obligation of the Group (note 32). At present, the
methodology for implementing the equalisation is uncertain and thus the impact cannot be reliably measured. As a result, no
allowance has been made for GMP equalisation in the calculation of the defined benefit obligation within these consolidated
financial statements.
35
Related party transactions
A related party is either an individual with control or significant influence over the Group, or a company that is linked to us by
investment or a related individual. Our primary related parties are our key management personnel.
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
(cid:3)
(cid:3)
(cid:3)
Years ended 31 December
2013
£000
5,485
2,118
136
7,739
2012
£000
3,411
1,775
284
5,470
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 25), as adjusted for non-
market related vesting conditions.
There were no other transactions with directors for the periods covered by these consolidated financial statements.
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Drax Group plc
Annual report and accounts 2013
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 2014.
Signed on behalf of the Board of directors:
Dorothy Thompson
Chief Executive
CBE
Tony Quinlan
Finance Director
As at 31 December
2013
£000
2012
£000
Notes
4
593,666
479,104
550
–
93,515
13,418
10,000
178,177
94,065
201,595
(5,495)
(4,936)
88,570
196,659
682,236
675,763
5
6
6
6
6
46,503
46,390
1,502
1,502
422,488
420,700
211,743
207,171
682,236
675,763
143
Drax Group plc
Annual report and accounts 2013
Notes to the Company balance sheet
1. Basis of preparation
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.
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.
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.
2. Summary of significant accounting policies
(A) Fixed asset investments
Fixed asset investments in subsidiaries are stated at cost less, where appropriate, provision for impairment.
(B) 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) are
met, 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.
3. 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 2014. Drax Group plc
reported a profit for the year ended 31 December 2013 of £77.7 million (2012: £99.6 million).
The Company has no employees other than the directors, whose remuneration was paid by a subsidiary undertaking
and a proportion was re-charged to the Company.
The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2013 was £20,000
(2012: £20,000).
4. Fixed asset investments
Carrying amount:
At 1 January 2013
Capital contribution
At 31 December 2013
Years ended 31 December
2013
£000
2012
£000
479,104
469,766
114,562
9,338
593,666
479,104
Fixed asset investments relate entirely to subsidiary undertakings of the Company.
The capital contribution consists of two elements: a £108,806,000 (2012: £4,578,000) capital injection into a subsidiary, and
£5,756,000 (2012: £4,760,000) 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 25 to the consolidated financial statements.
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144
Drax Group plc
Annual report and accounts 2013
Notes to the Company balance sheet
4. Fixed asset investments (continued)
Principal subsidiary undertakings
Name and nature of business
Drax Finance Limited (holding company)
Drax Power Limited (trading company, power generation)(1)
Drax Fuel Supply Limited (trading company, fuel supply)(1)
Haven Power Limited (trading company, power retail)(1)
Haven Power Nominees Limited (non-trading company)
Drax (International) Limited (holding company)
Drax Biomass International Inc. (holding company)(1)
Morehouse BioEnergy LLC (trading company, fuel supply)(1)(2)
Amite BioEnergy LLC (trading company, fuel supply)(1)(2)
Baton Rouge Transit LLC (trading company, fuel supply)(1)(2)
Capture Power Limited (non-trading company)(1)
Country of incorporation
and registration
Type of share
Group effective
shareholding
England and Wales
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
USA
USA
USA
USA
Common
Common
Common
Common
England and Wales
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
33%
All subsidiary undertakings operate in their country of incorporation and have 31 December year ends.
The Company has taken advantage of the exemption provided in Section 410 of the Companies Act 2006 to disclose only its
principal subsidiaries. A full list of subsidiary undertakings will be annexed to the Company’s next annual return.
Notes:
(1) Held by an intermediate subsidiary undertaking.
(2) Limited liability company registered in Delaware, USA.
5. Called-up share capital
Authorised:
865,238,823 ordinary shares of 1116⁄29 pence each
Issued and fully paid:
2012 – 401,587,564 ordinary shares of 1116⁄29 pence each
2013 – 402,566,332 ordinary shares of 1116⁄29 pence each
As at 31 December
2013
£000
2012
£000
99,950
99,950
–
46,390
46,503
46,503
–
46,390
The movement in allotted and fully paid share capital of the Company during the year was as follows:
At 1 January
Issued under employee share schemes
Issue of share capital
At 31 December
Years ended 31 December
2013
(number)
2012
(number)
401,587,564 364,862,718
978,768
250,219
–
36,474,627
402,566,332 401,587,564
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 8 March 2013, a total of 367,438 shares were issued in satisfaction of shares vesting in accordance with the rules of
the Group’s Bonus Matching Plan granted in 2010. From 1 May 2013 a further 593,026 shares were issued in satisfaction
of options vesting in accordance with the rules of the Group’s Savings-Related Share Option Plan, also granted in 2010.
Additionally, on 31 January, 28 March and 11 April a total of 2,669 shares, 2,805 shares and 1,748 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.
145
Drax Group plc
Annual report and accounts 2013
6. Analysis of movements in equity shareholders’ funds
At 1 January 2012
Share capital issued (note 5)
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 7)
At 1 January 2013
Share capital issued (note 5)
Retained profit for the year
Credited to equity for share-based payments
Equity dividends paid (note 7)
At 31 December 2013
7. Dividends
Share
capital
£000
42,148
4,242
–
–
–
Capital
redemption
reserve
£000
Share
premium
£000
Profit and loss
account
£000
Total
£000
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
113
–
–
–
–
–
–
–
1,788
–
–
–
–
77,650
5,756
1,901
77,650
5,756
(78,834)
(78,834)
46,503
1,502
422,488
211,743
682,236
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 2013 of 8.7 pence per share paid on
11 October 2013 (2012: 14.4 pence per share paid on 12 October 2012)
Final dividend for the year ended 31 December 2012 of 10.9 pence per share paid on 17 May 2013
(2012: 11.8 pence per share paid on 11 May 2012)
Years ended 31 December
2013
£000
2012
£000
35,020
52,576
43,814
78,834
43,054
95,630
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 2013 of 8.9 pence per share (equivalent to approximately
£36 million) payable on or before 17 May 2014. The final dividend has not been included as a liability as at 31 December 2013.
8. 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.
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146
Drax Group plc
Annual report and accounts 2013
Shareholder information
Key dates for 2014
At the date of publication of this document, the following are the proposed key dates in the 2014 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
23 April
23 April
25 April
16 May
mid May
30 June
29 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.com.
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 2013, and the
graph provides an indication of the trend of the share price throughout the year.
Closing price on
31 December 2012
544.5 pence
Low during the year
(25 June 2013)
534.0 pence
High during the year
(31 December 2013)
800.5 pence
Share price graph(1)
1 January to 31 December 2013
Closing price on
31 December 2013
800.5 pence
Share price (p)
800
700
600
Notes:
Jan 13
Feb 13
Mar 13
Apr 13
May 13
Jun 13
Jul 13
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
(1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.
147
Drax Group plc
Annual report and accounts 2013
Market capitalisation
The market capitalisation, based on the number of shares in issue and the closing middle market price at 31 December 2013,
was approximately £3.2 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@drax.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.drax.com/investor/shareholder_info/shareholderfaq.
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Drax Group plc
Annual report and accounts 2013
Shareholder information
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. 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
outlined are usually made by unauthorised companies and individuals. Shareholders should be very wary of any unsolicited
advice, offers to buy shares at a premium or offers of free reports into the Company. Below is the advice from the Financial
Conduct Authority (the “FCA”).
Beware of share fraud
Fraudster use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be
worthless or non-existent, or to buy shares at an inflated price in return for upfront payment. While high profits are promised, if
you buy or sell shares in this way you will probably lose your money.
How to avoid share fraud
(cid:3) Keep in mind that firms authorised by the FCA are unlikely to contact you out of the blue with an offer to buy or sell shares.(cid:3)
(cid:3) Do not get into a conversation, note the name of the person and firm contacting you and then end the call.(cid:3)
(cid:3) Check the Financial Services Register from www.fca.org.uk to see if the person and firm contacting you is authorised by the FCA.
(cid:3) Beware of fraudsters claiming to be from an authorised firm, copying its website or giving you false contact details.(cid:3)
(cid:3) Use the firm’s contact details listed on the Register if you want to call it back.(cid:3)
(cid:3) Call the FCA on 0800 111 6768 if the firm does not have contact details on the Register or you are told they are out of date.(cid:3)
(cid:3) Search the list of unauthorised firms to avoid at www.fca.org.uk/scams.(cid:3)
(cid:3) Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman
Service or Financial Services Compensation Scheme.(cid:3)
(cid:3) Think about getting independent financial and professional advice before you hand over any money. (cid:3)
Remember, if it sounds too good to be true, it probably is!
Report a scam
If you are approached by fraudsters please tell the FCA using the share fraud reporting form at www.fca.org.uk/scams,
where you can find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.(cid:3)(cid:3)
149
Drax Group plc
Annual report and accounts 2013
Shareholder profile
The categories of ordinary shareholders and the ranges and size of shareholdings as at 31 December 2013 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
Note:
(1) Ordinary shares of 1116⁄29 pence each.
Number of
shareholders
1,489
1,313
2,802
Number of
shareholders
115
156
465
623
862
124
246
119
92
As at 31 December 2013
%
53.14
46.86
Number of
shares(1)
2,284,401
400,281,931
100.00
402,566,332
%
0.57
99.43
100.00
As at 31 December 2013
%
4.10
5.57
16.60
22.23
30.76
4.43
8.78
4.25
3.28
Number of
shares(1)
6,364
25,756
171,149
511,338
1,882,655
892,031
8,685,536
29,900,090
360,491,413
%
0.00
0.01
0.04
0.13
0.47
0.22
2.16
7.43
89.55
100.00
2,802
100.00
402,566,332
Shareholders by percentage ownership
as at 31 December 2013
Shareholders by number
as at 31 December 2013
Private
shareholders:
0.57%
Institutional
shareholders:
99.43%
Private
shareholders:
1,489
Institutional
shareholders:
1,313
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Drax Group plc
Annual report and accounts 2013
Shareholder information
Company information, professional advisers and service providers
Drax Group plc
Registered office and trading address
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone +44 (0)1757 618381
Fax +44 (0)1757 612192
www.drax.com
Registration details
Registered in England and Wales
Company Number: 5562053
Company Secretary
Philip Hudson
Enquiry e-mail address
enquiries@drax.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
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
Slaughter and May LLP
One Bunhill Row, London EC1Y 8YY
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Drax Group plc
Annual report and accounts 2013
Glossary
Advantaged fuels
Fuel that gives a price advantage against
standard bituminous coals. Such fuels
include pond fines, off-specification coal
and petcoke.
Ancillary services
Services provided to National Grid used
for balancing supply and demand or
maintaining secure electricity supplies
within acceptable limits. They are
described in Connection Condition 8
of the Grid Code.
Availability
Average percentage of time the units
were available for generation.
Average achieved price
Power revenues divided by volume of
net sales (includes imbalance charges).
Balancing Mechanism
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.
Bark spread
The difference between the power
price and the cost of biomass, net of
renewable support.
Bilateral contracts
Contracts with counterparties and power
exchange trades.
Carbon price support mechanism
(or carbon price floor or carbon tax)
A tax upon fossil fuels (including coal) used
to generate electricity. It is charged as a
levy on coal delivered to the power station.
Company
Drax Group plc.
Contracts for Difference (CfD)
A mechanism to support investment
in low-carbon electricity generation.
The CfD works by stabilising revenues for
generators at a fixed price level known as
the “strike price”. Generators will receive
revenue from selling their electricity into
the market as usual. However, when
the market reference price is below the
strike price they will also receive a top-up
payment from suppliers for the additional
amount. Conversely if the reference price
is above the strike price, the generator
must pay back the difference.
Dark green spread
The difference between the power price
and the cost of coal and carbon.
EBITDA
Profit before interest, tax, depreciation
and amortisation, gains or losses on
disposal of property, plant and equipment
and unrealised gains or losses on
derivative contracts.
EU ETS
The EU Emissions Trading Scheme is a
mechanism introduced across the EU
to reduce emissions of CO2; the scheme
is capable of being extended to cover all
greenhouse gas emissions.
Feed-in Tariff
A long-term contract set at a fixed level
where variable payments are made to
ensure the generator receives an agreed
tariff. The Feed-in Tariff payment would
be made in addition to the generator’s
revenues from selling electricity in
the market.
Forced outage
Any reduction in plant availability
excluding planned outages.
Forced outage rate
The capacity which is not available due to
forced outages or restrictions expressed
as a percentage of the maximum
theoretical capacity, less planned
outage capacity.
Grid charges
Includes transmission network use of
system charges (“TNUoS”), balancing
services use of system charges (“BSUoS”)
and distribution use of system charges
(“DUoS”).
Group
Drax Group plc and its subsidiaries.
IFRS
International Financial
Reporting Standards.
LECs
Levy Exemption Certificates. Evidence of
Climate Change Levy exempt electricity
supplies generated from qualifying
renewable sources.
Levy Control Framework
A control framework for DECC levy-funded
spending intended to make sure that
DECC achieves its fuel poverty, energy
and climate change goals in a way that is
consistent with economic recovery and
minimising the impact on consumer bills.
Load factor
Net sent out generation as a percentage
of maximum sales.
Lost time injury rate
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 Balancing Mechanism
Net volumes attributable to accepted bids
and offers in the Balancing Mechanism.
Net cash/(debt)
Comprises cash and cash equivalents,
short-term investments less overdrafts
and borrowings net of deferred
finance costs.
Net sales
The aggregate of net volumes
attributable to bilateral contracts,
power exchange trades and net
Balancing Mechanism.
Net sales at notional balancing point (NBP)
Net sales at NBP is the volume of power
sold to customers by our Retail business
expressed at the notional balancing
point (NBP). The NBP reflects the
volume of power sold before deduction
of transmission and distribution losses
incurred in transporting this power from
the grid to the customer meter.
Planned outage
A period during which scheduled
maintenance is executed according
to the plan set at the outset of the year.
Planned outage rate
The capacity not available due to planned
outages expressed as a percentage of the
maximum theoretical capacity.
Power exchange trades
Power sales or purchases transacted
on the APX UK power trading platform.
ROCs
A Renewables Obligation Certificate
(ROC) is a certificate issued to an
accredited generator for electricity
generated from eligible renewable
sources. The Renewables Obligation is
currently the main support scheme for
renewable electricity projects in the UK.
Summer
The calendar months April to September.
System operator
National Grid Electricity Transmission.
Responsible for the co-ordination
of electricity flows onto and over
the transmission system, balancing
generation supply and user demand.
Total recordable injury rate (TRIR)
The frequency rate is calculated on the
following basis: (lost time injuries + worst
than first aid)/hours worked x 100,000.
UK NAP
UK National Allocation Plan.
Underlying financial measures
We report financial measures described
as “underlying” such as profit after tax and
earnings per share. Underlying measures
are adjusted to exclude the impact of
gains and losses on derivative contracts
and the associated tax.
Winter
The calendar months October to March.
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Drax Group plc
Annual report and accounts 2013
Notes
Design and production:
Radley Yeldar | www.ry.com
Photography:
Andy Wilson
Henry Thomas
Print:
Park Communications on FSC® certified paper.
Park is an EMAS certified company and its
Environmental Management System is certified
to ISO 14001.
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 Cocoon 100
Offset, a paper containing 100% post consumer
recycled fibre, which is either Process Chlorine
Free (PCF) or Totally Chlorine Free (TCF).
Drax Group plc
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone: +44 (0)1757 618381
Fax: +44 (0)1757 612192
www.drax.com