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POWERING TODAY,
FOR TOMORROW
Drax Group plc
Annual report and accounts
2017
DRAX GROUP INVESTMENT CASE AND 2025 AMBITION
CONTENTS
– Critical to decarbonisation of the UK’s energy system
– Underlying growth in the core business and attractive
investment opportunities
– Increasing earnings visibility, reducing commodity exposure
– Strong financial position and clear capital allocation plan
These objectives are underpinned by safety, sustainability and
expertise in our core markets, which support our ambition to
deliver 2025 EBITDA in excess of £425 million – more than a third of
which is expected to come from our B2B Energy Supply and Pellet
Production businesses.
£545m
GROSS PROFIT
(2016: £376m)
£367m
NET DEBT
(2016: £93m)
0.27
TOTAL RECORDABLE INJURY RATE
(2016: 0.22)
376k
RETAIL METER POINTS
(2016: 41k)
2017 HIGHLIGHTS
£3,685m
TOTAL REVENUE
(2016: £2,950m)
£229m
EBITDA(1)
(2016: £140m)
12.3p
DIVIDEND PER SHARE
(2016: 2.7p)
15%
PERCENTAGE OF TOTAL
UK RENEWABLE ELECTRICITY
GENERATED(2)
(2016: 16%)
822k
WOOD PELLETS PRODUCED
(2016: 607k)
(1) EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items
that do not reflect the underlying trading performance of the business
(2) Drax estimates that it produced around 15% of the UK’s renewable electricity between Q4 2016 and Q3 2017
This is based upon the latest BEIS Energy Trends 6.1 data
Strategic report
Introduction
Our business model
IFC 2017 highlights
1
2
4 Market context
8
12 Chairman’s statement
14 Chief Executive’s review
18 Performance review
Our strategic objectives
Pellet Production
Power Generation
B2B Energy Supply
30 Building a sustainable business
42 Stakeholder engagement
46 Group financial review
50 Viability statement
51 Principal risks and uncertainties
Governance
58 Board of directors
62 Letter from the Chairman
64 Corporate governance report
71 Nomination Committee report
76 Audit Committee report
81 Remuneration Committee report
108 Directors’ report
111 Directors’ responsibilities statement
Financial statements
112
Independent auditor’s report to
the members of Drax Group plc
119 Financial statements
121 Financial statements contents
122 Consolidated financial statements
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of changes
in equity
Consolidated cash flow statement
127 Financial performance
138 Operating assets and working capital
144 Financing and capital structure
148 Other assets and liabilities
153 Our people
161 Risk management
169 Reference information
172 Company financial statements
Company balance sheet
Company statement of changes
in equity
174 Notes to the Company
financial statements
Shareholder information
181 Company information
182 Glossary
Drax Group plc Annual report and accounts 2017
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“THE UK IS UNDERGOING
AN UNPRECEDENTED
ENERGY REVOLUTION WITH
ELECTRICITY AT ITS HEART”
WILL GARDINER
CHIEF EXECUTIVE, DRAX GROUP PLC
Drax Group plc plays a vital role in helping change the way energy
is generated, supplied and used. The Group operates an integrated
value chain across three principal areas of activity: sustainable wood
pellet production, flexible reliable electricity generation and energy
sales and services to business customers.
Inside this report
Our business model describes our activities and how
we generate value from the resources we use
Page 2
Our strategic objectives are ambitious, low-carbon
and focused on profitable growth
Page 8
Our new Group CEO, Will Gardiner, reviews the year
and progress against our strategy
Page 14
Sustainability is at the heart of our business and this year we have
published a comprehensive overview of our sustainability progress
on our website, which is summarised in this report
Page 30
2
Drax Group plc Annual report and accounts 2017
OUR BUSINESS MODEL
THROUGH OUR INTEGRATED VALUE CHAIN AND FLEXIBLE
LOWER-CARBON ENERGY PROPOSITION, WE ARE SUPPORTING
THE UK’S ELECTRICITY REVOLUTION.
OUR CORE ACTIVITIES
Our activities are underpinned by safety, sustainability, operational excellence and expertise in our markets.
PELLET PRODUCTION
A LEADING PRODUCER OF
WOOD PELLETS FROM
SUSTAINABLE LOW-VALUE
COMMERCIAL FORESTRY
RESIDUES.
Manufacture and supply of good
quality wood pellets to our Power
Generation business for use in the
generation of low-carbon electricity.
POWER GENERATION
GENERATES 6% OF THE UK’S
ELECTRICITY AND 15% OF ITS
TOTAL RENEWABLE ELECTRICITY.
Produces reliable, flexible low-carbon
electricity from sustainably sourced
wood pellets and provides system
support services to the electricity grid
from biomass and coal generation.
Revenues
£136m
Our assets:
– 2 x 525k tonne pellet plants (operational)
– 1 x 450k tonne pellet plant (commissioning)
– 2.1m tonne throughput export facility
822,000t
pellets produced
Our focus:
– Operational excellence – good quality,
low-cost pellets
Employees
258
– Continuous improvement and leverage
benefits of asset portfolio
– Increase in wood pellet production capacity
Current sites
Revenues
£2.7bn
Generation
20.0TWh
Our assets:
– 3 x 645MW biomass generation and system
support, with plans to convert another coal
unit to biomass
– 3 x 645MW coal generation and system
support
65%
Renewables
Developing options:
– 4 x 299MW Open Cycle Gas Turbines (OCGT)
– 3.6GW coal-to gas repowering and
Employees
804
200MW battery
Our focus:
– Optimise returns
– Expand to support low-carbon future
and system support
– Options for long-term efficiencies
B2B ENERGY SUPPLY
A LEADING SUPPLIER OF LOW-
CARBON ENERGY SOLUTIONS
TO INDUSTRIAL AND BUSINESS
CUSTOMERS.
Supplier of power, gas and value-adding
services to industrial, corporate and
small businesses. Our assets represent
10% of the B2B power market.
Revenues
£2.0bn
Our assets:
– Opus Energy
– Haven Power
Our focus:
– Profitable B2B energy supply business
– Innovative customer propositions
– To be customer-centric
– Make sustainability simple
Customer meters
>375k
Power sales
20.1TWh
Employees
1,311
Drax Power Station
Options for Open Cycle
Gas Turbine projects
Current sites
AMBITION FOR 2025
EBITDA
>£75m
capability
Page 10
– Targeting 30% self-supply
AMBITION FOR 2025
EBITDA
>£300m
– Includes the development
of four OCGTs if successful
in capacity market
auctions
Page 11
AMBITION FOR 2025
EBITDA
>£80m
– Growth in market share
whilst maintaining margins
Page 11
Drax Group plc Annual report and accounts 2017
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AMBITION FOR 2025
USING
VALUE CREATED
MORE INFO
GENERATING VALUE FROM OUR RESOURCES
Careful use of our resources allows us to create sustainable long-term value
for stakeholders whilst helping deliver our strategy.
EBITDA
>£75m
– Targeting 30% self-supply
capability
Page 10
AMBITION FOR 2025
EBITDA
>£300m
– Includes the development
of four OCGTs if successful
in capacity market
auctions
Page 11
FINANCIAL
– Broader base of core assets
– Efficient debt, foreign exchange and trading
facilities to support strategy
– Revised dividend policy
Page 46
– Profit growth, earnings
visibility and reduced
commodity exposure
– Attractively priced
financing and stable
credit rating
– Acquisition of value-
enhancing assets and
long-term growth
– Sustainable and
growing dividend
MANUFACTURING
– Investment in high-quality generation capabilities
– Good quality pellets at lowest cost
– Output and efficiency are key targets
– 13.0TWh biomass-fired
electricity
– 822,000 wood pellets
produced
Page 18–25
INTELLECTUAL
– Experts and world leaders in sustainable
biomass generation and logistics
– “Intelligent sustainability” for our customers
– Innovation is key to business development
– Biomass generation
represents 65% of
total generation
HUMAN
– Excellent health and safety
– Our people provide a wide range of knowledge
– TRIR 0.27
– 18,500 jobs supported
across the UK
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and skills
– Our values (Honest, Energised, Achieving,
Together) guide the way we work
NATURAL
– Only source biomass fibre from working forests,
where surplus stock is available as well as wood
shavings and sawdust from commercial processes
– Largest single source of renewable electricity
AMBITION FOR 2025
in the UK
EBITDA
>£80m
– Growth in market share
whilst maintaining margins
Page 11
SOCIAL
– Each business has strong links to its local
communities and we focus our charitable
support on the areas where we operate
– We welcome visitors and our people
volunteer in local communities
– Biomass power is at
least 80% lower carbon
than coal
– 100% renewable power
available to supply
customers
– 13,200 visitors to
Drax Power Station
– 5,200 people reached
via our outreach
programme
Page 22
Page 40
Page 30
Page 42
PELLET PRODUCTION
A LEADING PRODUCER OF
WOOD PELLETS FROM
SUSTAINABLE LOW-VALUE
COMMERCIAL FORESTRY
RESIDUES.
Manufacture and supply of good
quality wood pellets to our Power
Generation business for use in the
generation of low-carbon electricity.
POWER GENERATION
GENERATES 6% OF THE UK’S
ELECTRICITY AND 15% OF ITS
TOTAL RENEWABLE ELECTRICITY.
Produces reliable, flexible low-carbon
electricity from sustainably sourced
wood pellets and provides system
support services to the electricity grid
from biomass and coal generation.
Revenues
Our assets:
£136m
– 2 x 525k tonne pellet plants (operational)
– 1 x 450k tonne pellet plant (commissioning)
– 2.1m tonne throughput export facility
822,000t
pellets produced
Our focus:
– Operational excellence – good quality,
low-cost pellets
Employees
– Continuous improvement and leverage
258
benefits of asset portfolio
– Increase in wood pellet production capacity
Current sites
Revenues
Our assets:
£2.7bn
– 3 x 645MW biomass generation and system
support, with plans to convert another coal
Generation
20.0TWh
65%
Renewables
Employees
804
– 3 x 645MW coal generation and system
unit to biomass
support
Developing options:
– 4 x 299MW Open Cycle Gas Turbines (OCGT)
– 3.6GW coal-to gas repowering and
200MW battery
Our focus:
– Optimise returns
– Expand to support low-carbon future
and system support
– Options for long-term efficiencies
B2B ENERGY SUPPLY
A LEADING SUPPLIER OF LOW-
CARBON ENERGY SOLUTIONS
TO INDUSTRIAL AND BUSINESS
CUSTOMERS.
Supplier of power, gas and value-adding
services to industrial, corporate and
small businesses. Our assets represent
10% of the B2B power market.
Revenues
Our assets:
£2.0bn
– Opus Energy
– Haven Power
Customer meters
Our focus:
>375k
Power sales
20.1TWh
Employees
1,311
– Profitable B2B energy supply business
– Innovative customer propositions
– To be customer-centric
– Make sustainability simple
4
Drax Group plc Annual report and accounts 2017
MARKET CONTEXT
“THE ENERGY SECTOR IS
CHANGING RAPIDLY, WITH
SIGNIFICANT POTENTIAL
BENEFITS FOR CONSUMERS”
STATE OF THE ENERGY MARKET 2017 REPORT – OFGEM
The boundaries between generators, suppliers and users are
blurring as more users are choosing to generate their own
energy or seeking to manage their energy use proactively.
At the same time, the energy market is more competitive
with new market entrants.
Drax Group plc Annual report and accounts 2017
5
UK electricity
generation(1)
337TWh
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% of the B2B market
served by Drax(3)
10%
Percentage of UK generation
from renewables(2)
27%
Drax generation
in 2017
20TWh
(1) Total UK generation Q4 2016 - Q3 2017 BEIS Energy Trends 5.1
(2) Total renewable generation Q4 2016 - Q3 2017 BEIS Energy Trends 6.1 /
Total UK generation Q4 2016–Q3 2017 BEIS Energy Trends 5.1
(3) www.cornwall-insight.com/documents/supply-markets/
business-electricity-market-share-survey
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Drax Group plc Annual report and accounts 2017
MARKET CONTEXT CONTINUED
ACROSS PELLET PRODUCTION,
POWER GENERATION AND
B2B ENERGY SUPPLY, DRAX’S
BUSINESSES ARE RESPONDING
TO THE NEEDS OF A CHANGING
ENERGY SYSTEM
Drax generation mix 2017
Biomass
Coal
65%
35%
Smart meter installations
2012 to 2017
120,000
100,000
80,000
60,000
40,000
20,000
0
2012
2013
2014
2015
2016
To Q3
2017
Source: www.gov.uk/government/statistics/statistical-release-
and-data-smart-meters-great-britainquarter-
3-2017
POWER GENERATION
2017 saw the continuation of key themes
which characterised 2016: the further
deployment of intermittent renewables and
the impact of less thermal generation. Coal
continued to play a less significant role than
in the past, reflecting diminishing economic
returns, principally due to the UK carbon tax
and uncertainty against a backdrop of the
UK Government’s ambition to end unabated
coal generation by 2025. Coal produced
7% of UK power compared to 43% in 2012.
Forward prices remained low in 2017 by
historical standards. More distributed
generation and the increase in intermittent
renewables are driving increased levels of
volatility in short-term prices and a need for
assets to provide system support services.
In June 2017 National Grid set out its
“System Needs and Product Strategy”
(SNAPS) consultation which outlined the
system balancing needs (Response, Reserve,
Reactive Power, Black Start and Inertia) and
set out how these products are likely to
develop over time. The large scale, flexible
and low-carbon proposition of biomass and
options to develop new gas generation
assets means Drax is well placed to provide
these services. With more wind, solar and
nuclear planned for the coming decade,
Drax is well positioned to support the system
in the long term.
The need to decarbonise heating, transport
and other sectors of the economy may lead
to an absolute increase in the level of power
demand in the UK.
In the near-term, there continues to be an
important role for the efficient coal assets
Drax operates, often not as baseload
generation but in the provision of system
support services such as flexible generation
at times of peak and low demand. In the past
these services were typically provided
by large thermal plant, but with fewer
generation assets now able to provide
these services the value of this market
should increase.
GB ELECTRICITY MIX
Generation type
Coal
Gas
Biomass
Wind
Solar
Nuclear
Other
Source: electricinsights.co.uk (Calendar years)
2017
TWh
20.6
119.3
14.5
44.6
10.4
65.6
19.2
2016
TWh
28.0
127.3
14.2
30.6
9.6
66.8
20.4
2012
TWh
137.3
83.1
2.1
17.6
1.2
66.0
8.8
Drax Group plc Annual report and accounts 2017
7
The market trends
seen in 2016 continued
in 2017.
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PELLET PRODUCTION
2017 saw an increase in spot market prices
for wood pellets. Our focus on long-term
contracts and self-supply offers us
protection from price rises. By approaching
the market in this way we see opportunities
to create value, such as through the addition
of further pellet capacity to progress
towards our target to self-supply up to 30%
of our requirement.
For the volume of biomass procured from
third parties, our approach remains to
source sustainable pellets underpinned by
long-term contracts with fixed formula
pricing and to actively hedge our long-term
foreign exchange requirement. This
approach gives us good long-term visibility
of our biomass costs over a five-year period.
B2B ENERGY SUPPLY
In the context of a converging energy
market, business to business (B2B)
customers are seeking more support from
their energy suppliers, including: competitive
prices, expert support, renewable offers and
flexible terms.
Smart meters are becoming a central part of
the customer experience and their benefits
are starting to be seen across the market. As
of October 2017, 7.7 million smart meters had
been installed in the UK and research by
Smart Energy GB(1) shows they are driving
behavioural change, with 86% of customers
who have had a meter installed making
energy saving changes.
Through our brands, Opus Energy and Haven
Power, in the B2B market our offers are
distinctive, tailored to the needs of
customers which will allow the Group to
play a significant role in the changing
energy market.
In October 2017 the Government published
a Bill to implement an energy price cap on
default tariffs in the domestic supply market
(commonly known as Standard Variable
Tariffs). Drax is monitoring this development
closely but we do not operate in the
domestic market.
Balancing use of system charge (£m)
2017
2016
2015
2014
1,285
1,046
1,015
1,027
Source: www.nationalgrid.com/uk/electricity/market-operations-
and-data/system-balancing-reports
Thermal generation vs renewable (TWh)
250
200
150
100
50
0
2010
2011
2012
2013
2014 2015 2016 2017
Renewable energy
Thermal
Source: electricinsights.co.uk (Calendar years)
(1) www.smartenergygb.org
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Drax Group plc Annual report and accounts 2017
OUR STRATEGIC OBJECTIVES
MEETING THE NEEDS
OF A CHANGING ENERGY
LANDSCAPE AND CREATING
VALUE FOR STAKEHOLDERS
Underpinned by safety, sustainability, operational excellence
and expertise in our markets.
2016 EBITDA(1)
£140m
2017 EBITDA
£229m
2025 EBITDA ambition
£425m
(1) EBITDA is defined as earnings before interest, tax, depreciation, amortisation
and material one-off items that do not reflect the underlying trading
performance of the business
Drax Group plc Annual report and accounts 2017
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PROGRESSING THE STRATEGY
GROUP
Our ambition
for EBITDA
>£425m
by 2025
Progress in 2017
– EBITDA growth in all areas,
up 64% year-on-year
– Higher quality earnings – CfD
contract and acquisition of
Opus Energy
– New dividend policy – a
sustainable and growing dividend
– Refinancing completed
Page 14
Our ambition
for EBITDA
>£75m
by 2025
PELLET PRODUCTION
Progress in 2017
– Now profitable at EBITDA level
– Pellet production, up 35% year-
on-year
– Acquisition of LaSalle Bioenergy
completed, now commissioning
– Increased capacity at Amite and
Morehouse plants
Page 18
Our strategic achievements
are linked to remuneration.
Page 81
POWER GENERATION
Our ambition
for EBITDA
>£300m
by 2025
Progress in 2017
– Improvement in EBITDA, 37% year-on-
year increase
– Increase in non-commodity revenues – CfD,
ROC and capacity payments
– Continued reduction in carbon emissions
– Development of system support services
– Successful completion of major planned
outage programme on CfD unit
– Commenced planning application for
coal-to-gas repowering and battery
storage option
– Progressed and de-risked OCGT projects
Page 22
B2B ENERGY SUPPLY
Our ambition for EBITDA
>£80m
by 2025
Progress in 2017
– Acquisition of Opus Energy, on-boarding
progressing well
– Haven Power now profitable at EBITDA level
– Continued growth in customer numbers
– Progressing IT replatforming to provide
better information and operational
improvements
Page 26
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Drax Group plc Annual report and accounts 2017
OUR STRATEGIC OBJECTIVES CONTINUED
PROGRESSING OUR
STRATEGY FOR 2025
During 2017 we made excellent progress in
delivering our strategy for 2025 and beyond.
PELLET PRODUCTION
ACQUISITION OF
LASALLE BIOENERGY
(LASALLE)
In April we completed the
acquisition of LaSalle which
will provide an additional 450k
tonnes of pellet capacity and
make a meaningful contribution
to our target of self-supplying
30% of our pellet requirement
for power generation.
LaSalle was acquired for
$35 million and after a $27 million
investment programme the unit
is now commissioning.
The plant is located in close
proximity to our existing assets
in the US Gulf region and will
deliver significant operational
and financial benefits, once
fully commissioned.
OTHER DEVELOPMENTS
LOOKING AHEAD
As the UK transitions to a low-carbon
economy, major carbon savings will need
to be delivered across generation heating
and transport.
If the UK is to achieve its aims it will need to
electrify heating and transport, which will
increase power demand and require new
sources of generation.
We take a long-term approach, seeking to
identify options which can deliver value-
accretive growth to 2025 and beyond.
To that end we continue to look for
opportunities through Research and
Innovation (R&I) to support our ambitions
for 2025, identifying additional sources of
value from our core areas of activity – Pellet
Production, Power Generation and B2B
Energy Supply.
50%
increase in production
capacity allowing us to
process 1.5 million tonnes
of pellets per year
PELLET PRODUCTION
ADDITIONAL LOW-COST
PELLET CAPACITY AT
AMITE AND MOREHOUSE
During 2017 we installed and commissioned 150kt of
additional unloading and storage capacity at our Amite
and Morehouse pellet plants, which allows us to receive
and process a greater amount of lower cost residues
from commercial forestry and lumber mill processes.
These facilities will help reduce our overall biomass cost.
FLEXIBLE, LOW-CARBON
AND RELIABLE – THE LONG-TERM
NEED FOR BIOMASS ELECTRICITY
Demand for low-carbon electricity is
set to increase with more intermittent
renewables and less thermal generation
available to support the system.
National Grid’s System Needs and
Product Strategy report suggests that
within four years the generation schedule
presented by the market will be
inadequate to maintain security of
supply up to 60% of the time, without
some form of intervention.
We therefore see a long-term role for
biomass in the UK generation market.
To help deliver this, our R&I team is
highly focused on opportunities to drive
efficiencies into our supply chain and
reduce biomass costs.
www.nationalgrid.com/uk/electricity/
balancing-services/future-balancing-
services
POWER GENERATION
OPEN CYCLE GAS
TURBINE (OCGT)
DEVELOPMENT
During the year we progressed development
of four OCGT projects which will begin
construction once we have secured a 15-year
capacity contract for their power. These plants
will take three years to build and commission
before the delivery period for the contract
commences.
Once operational, the plants will each provide
299MW of fast, flexible gas generation to meet
peak power demand and provide system
support services.
Page 23
Drax Group plc Annual report and accounts 2017
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B2B ENERGY SUPPLY
ACQUISITION OF
OPUS ENERGY
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In February 2017 the Group acquired Opus
Energy, a leading player in the SME sector
of the B2B energy supply market. Opus
Energy has now been successfully
integrated with the Group alongside our
existing Haven Power business, positioning
the Group as the fifth largest B2B energy
supply operator in the UK.
POWER GENERATION
COAL TO BIOMASS
CONVERSION
In January 2018 the UK government
confirmed support for conversion of a
fourth unit to biomass fuel. The conversion
of unit 4 will complete during 2018 allowing
us to optimise generation across three ROC
accredited units.
COAL-TO-GAS REPOWERING
We are developing an option for up to 3.6GW of gas generation by
repowering two of our remaining coal units at Drax Power Station.
This would utilise existing infrastructure to deliver a lower cost
solution for new Combined Cycle Gas Turbines (CCGT) and reduce
carbon emissions versus coal, with a wide operating range covering
baseload and peaking generation, in addition to system support
services. Alongside this we are developing an option for a new
200MW battery storage facility through which we could provide
immediate system support services as part of the UK’s energy
revolution.
These developments are progressing through a public consultation
after which they could participate in a future capacity market
auction and receive a 15-year capacity agreement, which would
underpin the investment decision.
ACADEMIC PARTNERSHIPS
FOR FUTURE INNOVATION
We are funding postgraduate research at Sheffield University’s
Centre for Doctoral Training in Energy Storage and its Applications.
Can flow batteries support the national high voltage transmission
system, once dominated by thermal generators? How will customers
interact with us, using smart technology to turn their company car
fleets into mini power plants? And how may we be able to scrub the
flue gas – and potentially capture or use carbon dioxide emissions?
Find out more: www.drax.com/sheffielduni
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
CHAIRMAN’S STATEMENT
“OUR FLEXIBLE, LOW-CARBON
AND CUSTOMER-FOCUSED
APPROACH WILL DELIVER
HIGH QUALITY EARNINGS AND
OPPORTUNITIES FOR GROWTH”
PHILIP COX CBE
CHAIRMAN, DRAX GROUP
INVESTMENT CASE
1 Critical to decarbonisation
of the UK’s energy system
2 Underlying growth in the
core business and attractive
investment opportunities
3 Increasing earnings visibility,
reducing commodity exposure
4 Strong financial position and
clear capital allocation plan
Drax Group plc Annual report and accounts 201713Drax Group plc Annual report and accounts 201713In 2017 we made significant progress with the strategy we announced in December 2016. First, we completed the acquisition of Opus Energy – a leading challenger brand in the UK Small and Medium-sized Enterprise (SME) energy market; second, we acquired a third biomass pellet plant (LaSalle Bioenergy), which significantly increases our pellet production capacity; and third, we continued to develop options for flexible gas generation at four sites around the UK. We also began developing longer-term options for growth, with the exploration of coal-to-gas repowering at Drax Power Station, as we look to provide new sources of flexible generation backed up by long-term capacity contracts. To support our strategy, we completed a refinancing in May and announced a new dividend policy in June.At the same time, we have continued to provide a significant amount of the UK’s renewable electricity. With confirmation of Government support for further biomass generation at Drax Power Station we plan to continue our work to develop a low-cost solution for a fourth biomass unit conversion, allowing us to provide even more renewable electricity, whilst supporting system stability at minimum cost to the consumer.Opus Energy performed well, delivering on the plans we set out at the time of acquisition and, in North America, LaSalle Bioenergy is successfully commissioning. This performance alongside safety, sustainability and expertise in our core markets acts as a strong base from which the business can grow and deliver long-term sustainable value.We have a major role to play in supporting the UK energy system, as it becomes increasingly ambitious in decarbonising, first the electricity sector and subsequently transport and heating. In doing so, through our flexible, low-carbon and customer-focused approach we aim to deliver higher quality earnings, with a reduction in commodity exposure alongside opportunities for growth.Our people – employees and contractors – remain a key asset of the business. Their safety remains at the centre of our operational philosophy and we have performed well in this regard, although we continue to work to improve our performance across the Group.RESULTS AND DIVIDENDEBITDA in 2017 of £229 million was significantly ahead of 2016 (£140 million). This increase was principally from producing high levels of renewable power from sustainable biomass. We also benefited from our growing B2B Energy Supply and Pellet Production businesses. Through these activities we are improving the visibility of our earnings.In June we announced a new dividend policy. This policy is to pay a dividend which is sustainable and expected to grow as the implementation of the strategy generates an increasing proportion of stable earnings and cash flows. In determining the rate of growth in dividends the Board will take account of contracted cash flows, the less predictable cash flows from the Group’s commodity based business and future investment opportunities. If there is a build-up of capital the Board will consider the most appropriate mechanism to return this to shareholders.At the 2017 half year results we confirmed an interim dividend of £20 million (4.9 pence per share) representing 40% of the full year expected dividend of £50 million (12.3 pence per share) (2016: £10 million, 2.5 pence per share). Accordingly, the Board proposes to pay a final dividend in respect of 2017 of £30 million, equivalent to 7.4 pence per share. In addition, the Board has decided to announce a £50 million share buy-back programme, which will take place during 2018, which is consistent with our capital allocation policy.CORPORATE GOVERNANCEIn September, Dorothy Thompson CBE announced her intention to stand down as Group Chief Executive Officer (CEO). I would like to thank Dorothy for her enormous contribution to the Group over the last 13 years. During her tenure Dorothy led the transformation of the business and leaves the Group in a strong position with a clear strategy that lays the foundations for further success in a changing energy sector.Dorothy is succeeded by Will Gardiner, who was previously Group Chief Financial Officer (CFO) and a key architect of the strategy. His appointment follows a thorough review of internal and external candidates and is a natural progression after two years working alongside Dorothy developing a strategy which I am confident will create significant benefits for all Drax’s stakeholders. A process to appoint a permanent CFO is underway and Den Jones has been appointed as Interim CFO. Den is highly experienced, having previously served as CFO of both Johnson Matthey and BG Group. Drax remains committed to the highest standards of corporate governance. The Board and its committees play an active role in guiding the Company and leading its strategy. We greatly value the contribution made by our Non-Executive Directors (NEDs) and during a time of transition their role is especially important. We indicated last year that we were seeking additional NEDs with experience in sustainability and energy supply to complement our already experienced Board. I am therefore delighted to welcome two new NEDs to the Drax Board. Firstly, David Nussbaum, whose in-depth knowledge of sustainability will support our continued focus in this area; and secondly, Nicola Hodson, whose experience in technology, business transformation and energy, will provide real value as the Group delivers its strategy. Sustainability remains at the heart of the business, both the specific sustainability of biomass and more broadly the long-term sustainability of the business. As such I am pleased to note that alongside this year’s annual report and accounts the Group has published a a comprehensive overview of our sustainability progress in 2017 on our website www.drax.com/sustainability. Full details of our corporate governance can be found on page 64.OUR PEOPLEAs the Group grows I would also like to welcome colleagues from Opus Energy and our other developments. On-boarding is proceeding well and by working together in our common goal to help change the way energy is generated, supplied and used, we are creating real value for all stakeholders.I must thank all the employees and contractors who have worked so hard to help the Group succeed in the last 12 months. It is through their skill, expertise and hard work that we are able to deliver our strategy for the business. My sincere thanks to colleagues for their commitment and hard work.It only remains for me to say that your Board remains totally committed to the complementary aims of delivering sustainable long-term value for the Group, and of helping our country build a low-carbon economy.PHILIP COX CBECHAIRMANStrategic reportGovernanceFinancial statementsShareholder information 14
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
CHIEF EXECUTIVE’S REVIEW
“WE ARE PROGRESSING
OUR STRATEGY AGAINST
A BACKDROP OF
FUNDAMENTAL CHANGE IN
THE UK ENERGY MARKET”
WILL GARDINER
CHIEF EXECUTIVE, DRAX GROUP
KEY MILESTONES IN 2017
1 Acquisition of Opus Energy
2 Refinancing complete
3 Acquisition and commissioning
of LaSalle Bioenergy
4 Confirmation of new dividend policy
5 Commenced planning application
for coal-to-gas repowering
and battery storage option
PERFORMANCE
1 Significant growth in EBITDA
across all areas of the Group
2 Mixed results in Group scorecard
3 Positive safety record continued
4 Stretching operational
targets not achieved
5 Strong contribution from
B2B Energy Supply
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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MARKET BACKGROUND
The UK is undergoing an energy revolution
– a transition to a low-carbon economy
requiring new energy solutions for power
generation, heating, transport and the wider
economy. Through our flexible, lower carbon
electricity proposition and business to
business (B2B) energy solutions, the Group
is positioning itself for growth in this
environment. More details can be seen
on page 4.
OUR STRATEGY
Our purpose is to help change the way
energy is generated, supplied and used.
Through addressing UK energy needs, and
those of our customers, our strategy is
designed to deliver growing earnings and
cash flow, alongside significant cash returns
for shareholders.
Our ambition is to grow our EBITDA to over
£425 million by 2025, with over a third of
those earnings coming from Pellet
Production and B2B Energy Supply to create
a broader, more balanced earnings profile.
We intend to pay a sustainable and growing
dividend to shareholders. Progression
towards these targets is underpinned by
safety, sustainability, operational excellence
and expertise in our markets.
SUMMARY OF 2017
We made significant progress during 2017,
but were below our expectations on the
challenging scorecard targets we set
ourselves in pellet production and biomass
availability, the latter reflecting the
significant incident we experienced on our
biomass rail unloading facilities at the end
of 2017, which extended into January 2018.
Energy Supply performed well with Opus
Energy in line with plan and Haven Power
exceeding its targets. Through a
combination of this performance and the
progress of our strategy we have delivered
EBITDA of £229 million, significantly ahead
of 2016 (£140 million) and with each of our
three businesses contributing positive
EBITDA for the first time.
The Group scorecard is reported in full in the
Remuneration Report and the KPIs are also
shown on the following pages of this review.
They reflect the diversity of our operations
and our need to maintain clear focus on
delivering operational excellence.
On a statutory basis we recorded a loss of
£151 million, which reflects unrealised losses
on derivative contracts, previously
announced accounting policy on the
accelerated depreciation on coal-specific
assets as well as amortisation of newly-
acquired intangible assets in Opus Energy.
We also calculate underlying earnings, a
profit after tax of £2.7 million, which excludes
the effect of unrealised gains and losses on
derivative contracts and, to assess the
performance of the Group without the
income statement volatility introduced by
non-cash fair value adjustments on our
portfolio of forward commodity and
currency futures contracts.
During the year we refinanced our existing
debt facilities, reducing our debt cost. We
also confirmed a new dividend policy which
will pay a sustainable and growing dividend
(£50 million in respect of 2017), consistent
with our commitment to a strong balance
sheet and our ambitions for growth. At year
end our net debt was £91 million below our
2x net debt to EBITDA target, providing
additional headroom. There is more detail on
our financial performance in the Group
Financial Review on page 46.
In the US, our Pellet Production operations
recorded year-on-year growth in output of
35%, with our first two plants now producing
at full capacity. During the second half of
2017 we also completed the installation of
additional capacity enabling our Morehouse
and Amite facilities to handle a greater
amount of residue material, supporting
efforts to produce good quality pellets at the
lowest cost.
As part of our target to expand our biomass
self-supply capability we completed the
acquisition of LaSalle Bioenergy (LaSalle)
adding pellet production capacity. LaSalle
commenced commissioning in November
2017 and due to its close proximity to our
existing US facilities, once complete, will
provide further opportunities for supply
chain optimisation.
As in 2016, we benefited from the flexibility
of self-supply. This often overlooked
attribute of our supply chain enables us to
manage biomass supply across the Power
Generation business’ planned outage
season and to benefit from attractively
priced biomass cargoes in the short-term
spot market.
£229m
EBITDA
(2017: £140m)
In Power Generation, we experienced a
significant incident on our biomass rail
unloading facilities, including a small fire on
a section of conveyor. We fully investigated
the incident and following repairs over the
Christmas period have now recommissioned
the facility, with enhanced operating
procedures. This is a timely reminder of the
combustible nature of biomass and the need
for strong controls and processes to protect
our people and assets.
Our biomass units continued to produce
high levels of renewable electricity from
sustainable wood pellets for the UK market
– Drax produced 15% of the UK’s renewable
electricity – enough to power Sheffield,
Leeds, Liverpool and Manchester combined.
In doing so, we are making a vital
contribution to the UK’s ambitious targets
for decarbonisation across electricity
generation, heating and transport – an 80%
reduction by 2050 vs. 1990 levels.
We benefited from the first year of operation
of our third biomass unit under the Contract
for Difference (CfD) scheme which provides
an index-linked price for the power produced
until March 2027. The unit underwent a
major planned outage between September
and November, with a full programme of
works successfully completed.
The flexibility, reliability and scale of our
renewable generation, alongside an
attractive total system cost, means we are
strongly placed to play a long-term role in the
UK’s energy mix. To that end we continue to
see long-term biomass generation as a key
enabler, allowing the UK Government to
meet its decarbonisation targets and the
system operator to manage the grid.
The UK Government recently confirmed
support for further biomass generation at
Drax Power Station and we now plan to
continue our work to develop a low-cost
solution for a fourth biomass unit, allowing
us to provide even more renewable
electricity, whilst supporting system stability
at minimum cost to the consumer.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
CHIEF EXECUTIVE’S REVIEW CONTINUED
Our heritage is coal, but our future is flexible
lower-carbon electricity. We are making
progress with the development of four new
standalone OCGT plants situated in eastern
England and Wales and our work to develop
options for coal-to-gas repowering with
battery technologies. If these options would
be supported by 15-year capacity market
contracts, providing a clear investment
signal and extending visibility of contract-
based earnings out to the late 2030s.
In B2B Energy Supply, we completed the
acquisition of Opus Energy, a supplier of
electricity and gas to corporates and small
businesses. The transaction completed in
February 2017 and Opus Energy has
continued to operate successfully within the
Group, achieving its targets and making an
immediate and significant contribution
to profitability. Alongside this good
performance we have also implemented
the operational steps necessary to realise
further operational benefits of the
acquisition, and we now source all of
Opus’ power and gas internally.
Haven Power delivered a strong
performance with the sale of large volumes
of electricity to industrial customers.
Through our customer focus and
efficiencies, margins have improved and
the business generated a positive EBITDA
for the first time.
Together, our B2B Energy Supply business
now has over 375,000 customer meters,
making it the fifth largest B2B power
supplier in the UK. We are delivering
innovative low-carbon power solutions, with
46% of our energy sold from renewable
sources. As the power system transforms,
we will be working closely with our
customers to help them adapt to a world
of more decentralised and decarbonised
power. We see this as a significant
opportunity for the Group in the medium
to long term.
In October 2017 we completed the sale of
Billington Bioenergy (BBE) to Aggregated
Micro Power Holding (AMPH). Consideration
for the transaction was £2.3 million,
comprised of £1.6 million of shares in AMPH
and £0.7 million of cash.
The sale of BBE is aligned with our strategy
to focus on B2B energy supply. However,
through our shareholding in AMPH, we will
retain an interest in the UK heating market,
whilst gaining exposure to the development
of small-scale distributed energy assets.
POLITICAL, REGULATORY AND
ECONOMIC BACKGROUND
We continue to operate in a changing
environment. The full impact of the UK’s
decision to leave the EU is still unknown.
The immediate impact on the Group was a
weakening of Sterling and an associated
increase in the cost of biomass, which is
generally denominated in other currencies.
Through our utilisation of medium-term
foreign exchange hedges the Group
protected the cash impact of this weakness.
In 2017, Sterling has generally strengthened,
and we have been able to extend our hedged
position out to 2022 at rates close to those
that we saw before Brexit.
In terms of UK energy policy, the
Government’s main focus has been on
what it sees as unfair treatment of domestic
consumers on legacy standard variable tariff
(SVT) contracts. SVT are not a common
feature of the B2B market. At the
microbusiness end of this market, which
is closer in size to domestic, most of our
customers are on fixed price products
and are active in renewing contracts.
The UK Government’s response to its
consultation on the cessation of coal
generation by 2025 has confirmed an end to
non-compliant coal generation by October
2025. We believe our assets, projects and
ability to support our customers’ electricity
management will support the Government’s
ambition to maintain reliability when coal
generation ceases.
B2B Energy Supply customer meters
>375k
Running a resilient, reliable grid is not simply
about meeting the power demand on the
system; there are also system support
services which are essential to its effective
operation. As the grid decentralises and
becomes dependent on smaller, distributed
generation, the number of plants able to
provide these services is reducing. Biomass
generation, our proposed OCGTs and our
repowering project would allow us to meet
these needs, but this will not come for free.
A reliable, flexible, low-carbon energy system
will require the right long-term incentives.
In November 2017, the Government
confirmed that the UK will maintain a total
carbon price (the combined UK Carbon Price
Support – CPS – and the European Union
Emissions Trading Scheme – EU ETS) at
around the current level. CPS has been the
single most effective instrument in reducing
the level of carbon emissions in generation
and we continue to support the pricing of
carbon, a view echoed in a report prepared
for the UK Government by the leading
academic Professor Dieter Helm. (www.biee.
org/wpcms/wp-content/uploads/Cost_of_
Energy_Review.pdf)
Against this backdrop we continue to
make an important contribution to the
UK economy. According to a study
published by Oxford Economics in 2016
(Draximpact.co.uk), Drax’s total economic
impact – including our supply chain and
the wages our employees and suppliers’
employees spend in the wider consumer-
economy was £1.7 billion, supporting
18,500 jobs across the UK.
SAFETY, SUSTAINABILITY AND PEOPLE
The health, safety and wellbeing of our
employees and contractors is vital to the
Group, with safety at the centre of our
operational philosophy. We also recognise
the growing need to support the wellbeing
of our employees and their mental health.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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Total Recordable Injury Rate
0.27
(2016: 0.22)
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During the year we continued to use Total
Recordable Injury Rate (TRIR) as our primary
KPI in this area. Performance was positive,
at 0.27, but we expect this to improve in the
coming year.
The incident at our biomass rail unloading
facilities in December did not lead to physical
injuries but was nonetheless a significant
event and caused disruption into 2018.
We consequently launched an incident
investigation to ensure our personal and
process safety management procedures
are robust.
To promote greater awareness around
wellbeing we have embedded this in our new
people strategy (see below) and expect to
focus more energy and resources on this
important area during 2018.
Strong corporate governance is at the heart
of the Group – acting responsibly, doing the
right thing and being transparent. As the
Group grows the range of sustainability
issues we face is widening and recognising
the importance of strong corporate
governance, we have published a
comprehensive overview of our
sustainability progress in 2017 on our
website. This also highlights future priorities
to broaden our approach to sustainability
and improved reporting of environment,
social and governance (ESG) performance.
We have also completed the process which
allows us to participate in the UN Global
Compact (UNGC) – an international
framework which will guide our approach
in the areas of human rights, labour,
environment and anti-corruption.
During 2017 we published our first statement
on the prevention of slavery and human
trafficking in compliance with the UK
Modern Slavery Act. We have added modern
slavery awareness to our programme of
regular training for contract managers
and reviewed our counterparty due
diligence processes.
We have continued to maintain our rigorous
and robust approach to biomass
sustainability, ensuring the wood pellets we
use are sustainable, low-carbon and fully
compliant with the UK’s mandatory
sustainability standards for biomass. The
biomass we use to generate electricity
provides a 64% carbon emissions saving
against gas, inclusive of supply chain
emissions. Our biomass lifecycle carbon
emissions are 36g CO2/ MJ, less than half the
UK Government’s 79g CO2/ MJ limit.
Our people are a key asset of the business.
Through 2017 we developed a new people
strategy. The strategy focuses on driving
performance and developing talent to
deliver the Group’s objectives. We have
established Group-wide practices, including
a career development and behaviour
framework focused on performance and
personal development.
RESEARCH AND INNOVATION
A key part of our strategy is to identify
opportunities to improve existing operations
and create options for long-term growth. To
that end we have established a dedicated
Research and Innovation (R&I) team led by
the Drax engineers who delivered our
world-first biomass generation and supply
chain solution.
We are actively looking at ways to improve
the efficiency of our operations, notably in
our biomass supply chain. Biomass is our
largest single cost and as such we are
focused on greater supply chain efficiency
and the extraction of value from a wide
range of low-value residue materials.
In B2B Energy Supply we are using our
engineering expertise to help offer our
customers value-adding services and
products which will improve efficiency
and allow them to optimise their energy
consumption.
Page 29 for 2018 priorities
In the following sections we review the
performance of our businesses during
the year.
Drax Group plc Annual report and accounts 201718Drax Group plc Annual report and accounts 201718GROWTH, INCREASED PRODUCTION AND POSITIVE EBITDAPERFORMANCE REVIEW: PELLET PRODUCTION£6mEBITDA£136mRevenues822ktPellets produced Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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CASE STUDY
Low-cost, high-impact
capacity increase
By-products of higher value wood industries, such as sawdust from sawmills,
offer a low-cost source of residues for use in our pellet production process
and during 2017 we added an additional 150k tonnes of capacity at our pellet
plants to allow us to use more of this material. By investing in giant hydraulic
platforms known as “truck dumps”, operators at Amite and Morehouse can
unload a 50-foot truck carrying either sawdust or wood chips and weighing
60 tonnes in less than two minutes, increasing processing capacity, reducing
the cost of processing and increasing the use of lower cost residues.
Find out more: www.drax.com/truckdumps and
www.drax.com/sustainability/sourcing
total installed capacity to 1.1 million
tonnes and increasing the amount of
lower cost sawmill residues we are able
to process and used in our pellets.
At our Baton Rouge port facility greater
volumes of production from our facilities
drove higher levels of throughput
with 17 vessels loaded and dispatched
during the year (2016: 11 vessels).
In April, in line with our strategy to increase
self-supply, we acquired a 450k tonne wood
pellet plant – LaSalle Bioenergy (LaSalle).
Commissioning of the plant began in
November 2017 and we expect to increase
production through 2018. LaSalle is within
a 200-mile radius of our existing facilities.
By leveraging the locational benefits of
these assets we aim to deliver further
operational and financial efficiencies.
PELLET PRODUCTION
Our pellets provide a sustainable, low-carbon
fuel source – one that can be safely and
efficiently delivered through our global
supply chain and used by Drax’s Power
Generation business to make renewable
electricity for the UK. Our manufacturing
operations also promote forest health by
incentivising local landowners to actively
manage and reinvest in their forests.
OPERATIONAL REVIEW
Safety remains our primary concern and
we have delivered year-on-year reduction
in the level of recordable incidents.
Output at our Amite and Morehouse pellet
plants increased significantly, although
was below our target for the year.
We have remained focused on opportunities
to improve efficiencies and capture cost
savings as part of our drive to produce
good quality pellets at the lowest possible
cost. We still have more work to do in this
area to optimise quality and cost, as our
performance was below target for the year.
As part of our plans to optimise and
improve operations we added 150k tonnes
capacity at our existing plants, bringing
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
PERFORMANCE REVIEW: PELLET PRODUCTION CONTINUED
CASE STUDY
Locational benefits
of Gulf cluster
The location of our operations allows us to leverage benefits of multiple
assets and locations for operational efficiencies
All sites within 200-mile radius
Operational efficiencies
– Common plant and joint strategic spare parts
– Maximise reliability, minimise capital outlay
– Flexibility through outage cycle
– Human capital
Shared logistics to Baton Rouge
– Rail and road
– Increased port throughput
Complementary fibre sourcing
– Optimisation of supply between plants
Find out more: www.draxbiomass.com
US ports and transit sites
Current sites
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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PELLET PRODUCTION FINANCIAL PERFORMANCE
Revenue
Cost of sales
Gross profit
Operating costs
EBITDA
KEY PERFORMANCE INDICATORS
Area
Operations
Operations
Financial
KPI
Unit of measure
Fines at disport
%
Output
,000 tonnes
Variable cost/tonne
$/tonne
2017
£m
135.7
(96.7)
39.0
(33.5)
5.5
2017
9.6
822
77
2016
£m
73.6
(55.5)
18.1
(24.4)
(6.3)
2016
7.6
607
82
LOOKING AHEAD
Through 2018 we expect to continue
to deliver growth in EBITDA from our
existing assets. Our focus is on the
commissioning of LaSalle alongside
opportunities for optimisation and
efficiencies in our processes, to deliver
good quality pellets at the lowest cost.
We remain alert to market opportunities
to develop further capacity as part
of our self-supply strategy.
FINANCIAL RESULTS
There was a significant improvement in
2017, with EBITDA of £5.5 million (2016:
£6.3 million negative EBITDA), driven
by increasing volumes of wood pellets
produced and sold to the Power Generation
business. Sales of pellets in the year
ending 31 December 2017 totalled £136
million, an increase of 84% over 2016.
Gross margin increased, reflecting higher
production volumes. Raw fibre procurement,
transportation and processing comprised
the majority of cost of sales and as such
this remains an important area of focus
and an opportunity for the business.
Through incremental investment in plant
enhancements we expect to see further
benefits from efficiencies and greater
utilisation of lower cost residues.
Total operating costs have increased,
reflecting an increase in operations at
Amite, Morehouse and the Port of Baton
Rouge, alongside the addition of LaSalle.
We acquired LaSalle for $35 million and have
invested an additional $27 million as part of
a programme to return the unit to service.
Drax Group plc Annual report and accounts 201722Drax Group plc Annual report and accounts 201722A FLEXIBLE AND RELIABLE GENERATION BUSINESS WITH LONG-TERM EARNINGS STABILITY AND OPPORTUNITIES TO OPTIMISE RETURNS FROM ENERGY MARKET VOLATILITYPERFORMANCE REVIEW: POWER GENERATION£2.7bnRevenues£238mEBITDA13TWhBiomass generation15%UK renewable electricity Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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STRATEGY IN PROGRESS
Gas power station
development
We are developing options for four new OCGT gas power stations, two of
which already have planning permission and could be on the system in the
early 2020s, subject to being awarded a capacity agreement.
A high-tech new control room at Drax Power Station will allow engineers
to have real time remote control of our OCGT assets via a fibre-optic cable
network. Able to fire up from cold and produce power in minutes rather
than hours, our OCGTs will help maintain system security as intermittent
renewable sources of power increase and older thermal plants close.
Investment case
– Option to develop 1.2GW of new OCGT gas
– Investment decisions subject to 15-year capacity agreement
– Multiple revenue streams, with high visibility from capacity contract
– Low capital and operating cost
– Attractive return on capital
– Broader generation asset base and location
Find out more: www.drax.com/about-us/#our-projects
Trading Scheme) would continue at around
the current level (the tax is currently set
at £18/tonne) whilst coal remains on the
system. We believe that CPS has been the
single most effective instrument in reducing
carbon emissions from generation and that
having an appropriate price for carbon
emissions is the right way to provide a
market signal to further reduce emissions
in support of the UK’s long-term
decarbonisation targets.
The UK Government has now confirmed an
end to non-compliant coal generation by
2025. We support this move subject to an
appropriate alternative technology being in
place. With this in mind we have continued
to develop options for our remaining coal
assets to convert to biomass or gas, to
provide the reliable, flexible capacity which
we believe will be required to manage the
increasingly volatile energy system of
the future.
POWER GENERATION
Drax Power Station remains the largest
power station in the UK (almost twice the
size of the next largest). During the year the
station met 6% of the UK’s electricity needs,
whilst providing 15% of its renewable
electricity, alongside important system
support services.
With an increase in intermittent renewables
and a reduction in the responsive thermal
generation historically provided by coal, the
system of the future will require capacity
which is reliable, flexible and able to respond
quickly to changes in system demand and
provide system support services. These
long-term needs inform our biomass
generation and the development of options
for investment in gas – Open Cycle Gas
Turbines (OCGTs) and coal-to-gas
repowering.
REGULATORY FRAMEWORK
In October the Government published its
Clean Growth Plan, setting out its plans for
delivery of its legally binding target to reduce
2050 carbon emissions by 80% versus 1990
levels across electricity generation, heating
and transport. This reinforces the Drax
proposition – flexible, reliable, low-carbon
electricity.
In November the Government updated its
intentions regarding the future trajectory of
UK Carbon Price Support (CPS), indicating
that the total cost of carbon tax in the UK
(the total of CPS and the EU Emissions
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Drax Group plc Annual report and accounts 2017
PERFORMANCE REVIEW: POWER GENERATION CONTINUED
CHIEF EXECUTIVE’S REVIEW
Most recently with confirmation of
Government support for further biomass
generation at Drax Power Station we plan
to continue our work to develop a low-cost
solution for a fourth biomass unit,
accelerating the removal of coal-fired
generation from the UK electricity system,
whilst supporting security of supply.
GENERATION CAPACITY
AND SYSTEM SUPPORT
2017 saw the first full year of operation of
our biomass unit under the Contract for
Difference (CfD) mechanism, which provides
index-linked revenues for renewable
electricity out to 2027.
Our other biomass units are supported by
the Renewable Obligation Certificate (ROC)
mechanism which, similar to the CfD, is also
index-linked to 2027. This acts as a premium
above the price of power we sell from these
units. We sell power forward to the extent
there is liquidity in the power markets
which, combined with our fuel hedging
strategy, provides long-term earnings and
revenue visibility.
Lower gas prices, higher carbon costs and
the continued penetration of intermittent
renewables have kept wholesale electricity
prices subdued.
With increasing levels of intermittent
renewables we are continuing to see
opportunities to extract value from flexibility
– short-term power and balancing market
activity, the provision of Ancillary Services
and the value achieved from out-of-
specification fuels. To capture value in this
market we continue to focus resource on
optimising availability and flexibility of both
coal and biomass units. This whole process
requires a high level of teamwork between
the operational and commercial teams
across the Group to capture and protect
value.
Over the period 2017 to 2022 we expect to
earn £90 million from a series of one-year
capacity market contracts for our coal units,
demonstrating that they still have a role
to play. The first of these contracts
commenced in October 2017, adding
£3 million to EBITDA.
Lastly, we continue to source attractively
priced fuel cargoes – out-of-specification
coals and distressed cargoes, which help
keep costs down for the business and
consumers. We do this for both coal and
biomass. This is a good example of how our
commercial and operational teams work
together to identify opportunities to create
value for the business, as these fuels
typically require more complex handling
processes.
You can follow the market and see prices at
electricinsights.co.uk
OPERATIONAL REVIEW
Overall, we delivered a good performance
during 2017 and maintained a strong safety
performance.
We completed a major planned outage on
the unit supported by the CfD contract. This
unit provides stable and reliable baseload
renewable electricity to the network and
long-term earnings visibility for the Group.
The safe and efficient completion of these
complex works is a credit to those involved
and reflects our continued focus on
opportunities for improvement
and efficiencies.
Cooling
Tower
Cooling Water Out
Cooling Water In
Condenser Water
Condenser
section
Steam
Steam Turbine Section
Natural Gas
Air
Generator
Electricity
Steam Out
Emissions to
atmosphere
Emissions to
atmosphere
when in bypass
Exhaust Gas
Heat Recovery
Steam Generator
Bypass Stack
Gas Turbine
Natural Gas
Air
Steam Out
Emissions to
atmosphere
Emissions to
atmosphere
when in bypass
Exhaust Gas
Generator
Electricity
Generator
Electricity
STRATEGY IN PROGRESS
Repowering away
from coal
Options for Drax Power Station to operate into the late 2030s and beyond
moved up a gear in 2017 with the development of an option to repower two
coal units to gas. Drax gave notice of the nationally significant infrastructure
project to the Planning Inspectorate in September 2017. One of the units
could be eligible for the capacity market auction planned for December 2019.
Local community consultations began in November 2017 and continued
in February 2018 on options including up to 3.6GW of new gas generation
capacity, a gas pipeline and 200MW of battery storage in line with
Government plans to end non-compliant coal generation by 2025 and
Drax Group’s strategy of playing a vital role in the future energy system.
Find out more: www.repower.drax.com/
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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The entire organisation has responded to a
number of challenging unplanned events.
Most notably, in December we experienced a
fire on a section of conveyor at our biomass
rail unloading facility and consequently an
unplanned outage from late December 2017
to mid-January 2018. Following investigation
and recommissioning, the facility has
returned to service with enhanced operating
procedures. Although this issue did not
relate to the operation of the biomass-
generating units, the resulting restriction
on fuel deliveries by rail required the
optimisation of generation across our
biomass units, resulting in lower EBITDA
and full year biomass availability than
our target for the year.
FINANCIAL RESULTS
Financial performance has significantly
improved, with EBITDA of £238 million
(2016: £174 million), principally due to the
CfD mechanism.
Value from flexibility was below our target
for the year, principally reflecting a lower
level of Ancillary Service payments
versus 2016.
Our operational performance drives
the results. The financial impact of the
unplanned outage on the rail unloading
facility was mitigated by optimisation of our
available biomass and the use of additional
generation capacity retained for self-
insurance purposes. However, this incident
is a reminder of the need to invest
appropriately to maintain a high level
of operational availability and flexibility.
At the operating cost level, we have reduced
costs reflecting the efficient single outage
and our focus on the implementation of lean
management techniques.
POWER GENERATION FINANCIAL PERFORMANCE
Revenue
Cost of power purchases
Grid charges
Fuel and other costs
Cost of sales
Gross profit
Operating costs
EBITDA
2017
£m
2016
£m
2,719.6
2,490.9
(891.2)
(62.9)
(1,367.1)
(2,321.2)
398.4
(160.9)
237.5
(904.4)
(69.4)
(1,180.1)
(2,153.9)
337.0
(163.2)
173.8
KEY PERFORMANCE INDICATORS
Area
Operations
KPI
Biomass unit
technical availability
Operations
Value from flexibility
Unit of
measure
%
£m
2017
Below
target
88
2016
Below
target
N/A
LOOKING AHEAD
We aim to optimise returns from our core
assets, through reliable, flexible, low-carbon
energy solutions which provide a long-term
solution to the UK’s energy needs. Alongside
this, value in the generation market will be
created from an ability to execute agile
decisions and capture value from volatile
short-term power markets.
We will also continue to explore
opportunities for lower carbon generation,
to exploit our strengths and create
opportunities for the long term. To that end
we will continue to develop options for gas
and pursue efficiencies through our biomass
supply chain.
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Drax Group plc Annual report and accounts 201726Drax Group plc Annual report and accounts 201726PERFORMANCE REVIEW: B2B ENERGY SUPPLYMAJOR INCREASE IN EBITDA, SALES VOLUME AND CUSTOMER METERS£2bnRevenues£29mEBITDA10%B2B market (1)376kMeter points Drax Group plc Annual report and accounts 2017
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STRATEGY IN PROGRESS
An innovative energy
supplier
90% of the electricity that Opus Energy supplied last year came from clean,
renewable sources, at no extra cost to their predominantly small and
medium-sized business customers. For those customers who want it,
100% renewable energy contracts are also available.
This was exactly what All Saints Church in Ascot was looking for to power
their business.
Assistant Church Warden, Chris Gunton, commented: “We wanted to move
to a greener energy supplier, without paying a premium, so approached an
energy broker for guidance. They advised us that Opus Energy were a reliable
company with a good reputation, and when we asked for a quote they were
the most competitive.”
It was a similar story for the Salisbury Museum, in Wiltshire.
“We were looking for an energy supplier that offered great value, combined
with the right length of contract and good ethics,” commented Finance
Manager, Nicola Kilgour-Croft. “Opus Energy ticked all these boxes for us.”
Alongside supplying customers, Opus Energy has Power Purchase
Agreements with over 2,300 independent UK renewable energy generators.
These could be anything from a single wind turbine owned by a village
community, to Europe’s greenest zoo, Hamerton Zoo Park.
Commented Andrew Swales, Director of Hamerton Zoo: “Working with Opus
Energy has given us competitive prices, considerably better documentation
and a highly efficient service. We’d happily recommend them.”
B2B ENERGY SUPPLY
Our B2B Energy Supply business –
comprised of Opus Energy and Haven Power
– is the fifth largest B2B power supplier in
the UK. As the power system transforms,
we will be working closely with our
customers to help them adapt to a world
of more decentralised and decarbonised
power. The key factors influencing our
business are regulation, competition and
our operational performance.
REGULATION AND COMPETITION
The UK Government’s main focus has
been on what it sees as unfair treatment
of domestic consumers on legacy
standard variable tariff (SVT) contracts.
The Government will take forward legislation
which will provide the regulator Ofgem with
the authority to cap these domestic tariffs.
SVTs are not a feature of our business. Our
focus remains on the B2B market. At the
microbusiness end of the market, which is
closer in proximity to domestic, most of our
customers are on fixed price products and
are actively rather than passively renewing
their power supply contracts.
(1) Opus Energy and Haven Power combined represent 10%
of the non-domestic UK power market
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PERFORMANCE REVIEW: B2B ENERGY SUPPLY CONTINUED
The B2B market remains competitive with
65 different suppliers across the market. Our
Haven Power and Opus Energy businesses
offer customer-centric power, gas and
services. We offer simplicity and flexibility
across our products and actively engage
with customers to help them manage their
energy requirements and reduce carbon
emissions.
OPERATIONAL REVIEW
We have remained focused on delivering
an excellent standard of customer service,
which is central to our proposition.
February 2017 saw the completion of the
acquisition of Opus Energy, which has made
good progress integrating into the Group
supported by a dedicated team, who have
been working on systems, people and
commercial projects to ensure our
processes work effectively together.
In March we completed the purchase of a
new office facility in Northampton, enabling
the consolidation of four Opus Energy offices
into one and the centralisation of the
operational teams.
Sales volumes at Opus Energy were lower
than target, reflecting our focus on margin
which has remained strong and customer
renewal rates were towards the high end of
expectation. This reflects the continued
commitment to a strong level of customer
service and in recognition of this Opus
Energy was awarded Utility Provider to
Small Businesses of the Year 2017 at the
British Business Awards.
At Haven Power we have continued to
focus on value-adding flexible products
and services particularly to Industrial &
Commercial customers whose needs
extend beyond commodity supply. This is
demonstrated through our ability to help
customers manage and optimise their
power consumption profiles through
collaboration with our carefully selected
partners. Through better systems and
services, customer targeting and a keener
focus on cost to serve we are driving
efficiencies and improved margin at
Haven Power.
B2B ENERGY SUPPLY FINANCIAL PERFORMANCE
Revenue
Cost of power purchases
Grid charges
Other retail costs
Cost of sales
Gross profit
Operating costs
EBITDA
2017
£m
1,999.0
(883.7)
(435.8)
(562.1)
2016
£m
1,326.4
(688.9)
(310.4)
(303.6)
(1,881.6)
(1,302.9)
117.4
(88.0)
29.4
23.5
(27.8)
(4.3)
KEY PERFORMANCE INDICATORS
Area
KPI
Operations
Implementation of new ERP
(Haven Power)
Unit of
measure
2017
Date
Q2 2018
Operations
Sales volume (Opus Energy)
Operations
Renewal rate (Opus Energy)
TWh
%
5.7
Above
Target
2016
N/A
N/A
N/A
Following the acquisition of Opus Energy the
major Enterprise Resource Platform (ERP)
system upgrade was re-planned which has
led to a revised timeline from Q2 2018 onwards.
We continue to actively manage credit
risk by assessing the financial strength
of customers and applying rigorous credit
management processes, with a strong
focus continuing to be placed on billing
and cash collection.
Health and safety remains an area of focus
for the business and we continue to target
a reduction in the level of recordable incidents.
FINANCIAL RESULTS
Financial performance has significantly
improved, with EBITDA of £29 million
in line with our guidance (2016: £4 million
negative). This was principally due to the
acquisition of Opus Energy, which added
10 months of EBITDA, but also improved
financial performance from Haven Power,
which was ahead of plan.
Third Party Costs (TPCs) include grid
charges, the cost of meeting our obligations
under the Renewable Obligation (RO) and
small-scale Feed-in-Tariff schemes. Grid
charges include distribution, transmission
and system balancing costs. TPCs have
continued to increase and now account
for 50% of revenue.
Total operating costs have risen with the
acquisition of Opus Energy. We remain
confident that over time the benefits of
common platforms and knowledge sharing
will lead to efficiencies.
LOOKING AHEAD
In 2018 we will focus on Opus Energy
on-boarding, systems development and
the roll out of smart meters.
We continue to see opportunities for EBITDA
growth in the B2B markets, which we will
deliver through our customer-focused
supply proposition.
Drax Group plc Annual report and accounts 2017
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2018 PRIORITIES
Pellet Production
– Commissioning of LaSalle Bioenergy
– Development of options for
optimisation and efficiencies
– Consistent production and quality
of pellets
– Continued cost reduction and
improvement in EBITDA
Power Generation
– Reliable biomass generation
– Development of fourth biomass unit
– System support services
– Development of OCGT options
– Development of coal-to-gas
repowering option
– Continued cost reduction and growth
in EBITDA
B2B Energy Supply
– Development of value-added services
– Continued cost reduction and growth
in EBITDA
– Investment in systems to support growth
and Smart compliance
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We have made good progress on the delivery
of our strategy and will continue to build on
this as we progress our targets for 2025,
whilst playing an important role in our
markets and helping to change the way
energy is generated, supplied and used.
WILL GARDINER
CHIEF EXECUTIVE, DRAX GROUP
In Power Generation, we continue to explore
ways to optimise our existing operations,
whilst meeting the needs of the changing
UK electricity system.
We remain supportive of the UK
Government’s decarbonisation targets and
will continue our work to deliver four OCGTs
and a low-cost biomass unit conversion
utilising existing infrastructure at Drax
Power Station, alongside developing the
option to repowering the remaining coal
units to gas.
In B2B Energy Supply, we will continue to
grow our B2B offering, with significant
opportunities to grow market share. At
the same time, we will invest in supporting
infrastructure to ensure we can continue
to grow, offer market-leading digital
propositions and smart metering services.
OUTLOOK
Our focus in 2018 remains on the delivery
of our strategy and long-term ambitions for
earnings growth, underpinned by safety,
sustainability, operational excellence and
expertise in our markets. We also recognise
that being the most efficient operator in each
of our markets is a key factor in our success.
Our objective in Pellet Production remains
the commissioning of LaSalle, the
production of good quality pellets at the
lowest cost, cross-supply chain optimisation
and identifying attractive options to
increase self-supply.
Our biomass proposition is strong – reliable,
flexible, low-carbon renewable electricity
and system support which, combined with
an effective fuel hedging strategy, will
provide long-term earnings visibility. We
remain focused on ways to increase supply
chain efficiency and make biomass
competitive beyond 2027. As part of this we
remain focused on the optimisation of our
assets in the US Gulf and reduction in pellet
cost. To support this focus we are moving
our US headquarters from Atlanta to
Monroe, Louisiana, which benefits from
a much closer proximity to these assets.
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Drax Group plc Annual report and accounts 2017
BUILDING A SUSTAINABLE BUSINESS
OUR PURPOSE IS TO HELP
CHANGE THE WAY ENERGY IS
GENERATED, SUPPLIED AND
USED FOR A BETTER FUTURE
Drax’s commitment to improved performance and sustainability is integral
to our purpose and has guided us through years of research, development
and extensive upgrades to our infrastructure. Today we are proud to supply
15% of the UK’s renewable electricity from biomass, positioning us as the
largest single renewable electricity generator in the country.
We have completed the process which allows us to participate
in the United Nations Global Compact (UNGC).
www.drax.com/sustainability
Drax Group plc Annual report and accounts 2017
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GROUP PURPOSE
To help change the way energy is generated, supplied
and used for a better future
WE DETAIL PROGRESS MADE IN 2017 UNDER THESE THEMES
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ACHIEVE
TOGETHER WITH
OUR PEOPLE
DELIVER
FOR OUR
CUSTOMERS
A LOWER
CARBON
COMPANY
RESPONSIBLE
SOURCING
REDUCE OUR
ENVIRONMENTAL
IMPACT
POSITIVE
SOCIAL
IMPACT
comply with all relevant laws and regulations.
We do not tolerate any form of bribery,
corruption or improper business conduct.
Group was not involved in any legal cases
related to corruption and bribery.
Our compliance framework sets out the
ethical principles that our people must
uphold, as outlined in the Group ethics guide,
Doing the Right Thing. The framework was
updated in 2017 to reflect new legislation
and to encourage whistleblowing in all
appropriate circumstances.
The framework is underpinned by policies
and procedures. Our principles regarding
ethics, integrity and anti-bribery and
corruption are supported by the Group
corporate crime policy. Compliance is
overseen by the Group Ethics and Business
Conduct Committee (EBCC). Internal and
external audits ensure compliance with our
ethical principles. Corporate Compliance
also conducts an annual Bribery Act risk
assessment.
We expect the same high standards from
everyone we work with in the United
Kingdom, United States and elsewhere.
Third parties are subject to our due diligence
checks at the time of contracting and on an
ongoing basis through continual monitoring
(via our third party due diligence solution).
ANTI-BRIBERY AND CORRUPTION
Our internal processes ensure consistency
with our zero tolerance approach to bribery
and corruption. Requests to do business in
new countries pass through our country risk
process. Medium and high scoring countries
are reviewed by the Currency and
Commodity Risk Management Committee
(CCRMC), as required. Associated
counterparties are then put forward for
our due diligence process. We refresh due
diligence for high risk counterparties on an
annual basis and all other counterparties are
evaluated every three years. In 2017, Drax
WHISTLEBLOWING
We encourage anyone with a concern to
speak out and report concerns through our
whistleblowing procedure. Employees can
raise issues through internal channels and
an anonymous, third-party hotline is
available to internal and external
stakeholders. Should concerns be raised,
we have a strict non-retaliation policy.
During 2017 there was one whistleblowing
case which was raised. Two investigations
were carried out, one by the local business
and one by the Group team, neither finding
any evidence that Company policy and
procedures had been breached.
OUR PERFORMANCE IN 2017
ACHIEVE TOGETHER WITH OUR PEOPLE
Our people strategy and approach to
developing talent, providing a safe and
healthy workplace and promoting diversity
and inclusion are detailed on page 40 of
this report.
DELIVER FOR OUR CUSTOMERS
We are dedicated to providing our customers
with secure, sustainable energy and
excellent customer service. Our B2B Energy
Supply business includes Opus Energy and
Haven Power, who supply large industrial
and commercial customers, corporate and
small business customers with power, gas
and value-adding services. Both businesses
offer renewable energy options.
Excellent customer service is at the heart
of our business and both Haven Power
and Opus Energy have strict standards
for treating customers fairly, protecting
customer data and privacy, and a clear
complaints procedure if things go wrong.
We are pleased that Haven Power was
shortlisted for “Supplier of the Year” at the
OUR APPROACH TO CORPORATE
SUSTAINABILITY
Our Group strategy positions Drax as a
leading low-carbon energy company in
the UK, and broadens our earnings base to
protect long-term returns to shareholders.
As a result, the business is focused on:
Pellet Production, Power Generation and
B2B Energy Supply.
Our strategy is underpinned by safety,
sustainability, operational excellence
and expertise across our markets.
We provide a summary of our progress and
performance in 2017 against six themes on
the following pages.
Our aim is to build a sustainable business
and improved environment, social and
governance (ESG) performance is a
prerequisite for this. We have published
a comprehensive overview of our
sustainability progress on our website
www.drax.com/sustainability.
GOVERNANCE OF SUSTAINABILITY
We have policies and procedures in place
to manage sustainability and a strong
governance structure ensures these are
implemented.
The Board has ultimate responsibility for
the Group’s sustainability performance,
with operational oversight by the Executive
Committee, chaired by the Group Chief
Executive. The Executive Committee reviews
sustainability performance and progress
regularly. The Group Director of Corporate
Affairs leads Drax’s sustainability programme
and is a member of the Executive Committee.
The Executive Committee has oversight of
risk, ethics and business conduct for the
Group. This responsibility is discharged
through the risk management framework
as described in the principal risks and
uncertainties section.
Page 51
ETHICS AND INTEGRITY
At Drax Group we believe in doing the right
thing. We are committed to conducting
business with honesty and integrity, and we
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
BUILDING A SUSTAINABLE BUSINESS CONTINUED
Energy Awards 2017, and named the UK’s
best performing energy supplier by Third
Party Intermediaries (TPIs) in this year’s
Cornwall Insight Report. Opus Energy won
“Utilities Provider of the Year” at the British
Small Business Awards 2017(1) and was
shortlisted in the National Business Awards
2017.
Our B2B Energy Supply businesses support
customers to be more sustainable. Haven
Power offers industrial and commercial
customers 100% renewable electricity at
an affordable price, powered by biomass
supplied from Drax Power. Opus Energy
offers SME businesses renewable energy,
makes it easy for them to switch suppliers
and reduce their energy costs.
Opus Energy also buys energy from
renewable generators across the UK, from
sources including wind turbines, solar panels
and anaerobic digestion plants. In 2017
this amounted to 992GWh of renewable
energy generated from 2,300 generators.
A LOWER CARBON COMPANY
As a major electricity producer, we have a
significant role to play in the transition to a
low carbon future. We are determined to
continue to reduce our carbon emissions
while providing the power the economy
requires.
Climate change poses both risks and
opportunities for Drax Group. To reduce
the risks to our business, we are committed
to reducing our operational carbon
emissions and emissions from our supply
chain, by transitioning away from coal
and using sustainable biomass, as well as
investing in lower carbon energy sources
such as Open Cycle Gas Turbine (OCGT)
generation plants. We are also exploring
innovative battery technology. We are
enabling the use of solar and wind energy,
with our biomass, gas and potential
battery storage options all supporting the
capacity and stability of the UK energy
grid, providing services such as voltage
control, frequency response and inertia.
We recognise that investors and other
stakeholders increasingly require clear
information about the climate change risks
to our business and we are fully committed
to transparent disclosure of climate
information. We welcomed the
Government’s Clean Growth Strategy to
ensure a green economy and energy are
at the heart of the UK’s industry strategy.
We believe this will provide certainty for
businesses investing in lower-carbon and
renewable capacity, and incentivise the
development of new lower-carbon
(1) www.opusenergyblog.com/opus-energy-winning-brand-
small-businesses/
STRATEGY IN PROGRESS
Providing customers with
great value and good ethics
Founded in 1860, Salisbury Museum is located in a Grade I listed building
opposite Salisbury Cathedral. As a charitable, not-for-profit organisation,
the museum relies on entry fees, grants, donations and the support of its
members to continue its vital work. Finding a business energy supplier that
offered the best prices on the market, as well as the right length of contract
and good ethics, was important for the museum.
SMEs are a key part of the business and we know that a business energy
service that is as smooth and efficient as possible is a top priority. Nicola
Kilgour-Croft, Finance Manager at Salisbury Museum, commented: “The
switching process went through really smoothly, and the facility to receive
invoices via email means I don’t need to spend time on the phone trying to
sort out payment. Having 12-month contracts really works for us.”
technology. The significant investments
we have made to upgrade our units to
renewable biomass, coupled with a
reduction in coal-fired generation,
have resulted in a 73% reduction in
carbon emissions since 2012.
Carbon Emissions
We calculate and report our carbon
emissions in accordance with the
Companies Act 2006 and the European
Union Emissions Trading System (EU ETS),
as disclosed in Table 1.
We are also required to disclose emissions
from biologically sequestered carbon, which
includes emissions released through the
combustion of biomass to generate
electricity. These emissions are shown in
Table 2. The figures do not take into account
the CO2 that has been absorbed from the
atmosphere during the growth of feedstocks
which are used to manufacture the biomass
pellets used at Drax to generate electricity.
The biogenic CO2 emissions resulting from
power generation are counted as zero in
official reporting to both UK authorities and
under the EU ETS as the use of sustainable
biomass is considered to be carbon neutral
at the point of combustion. This
methodology originates from the United
Nations Framework Convention on Climate
Change (UNFCCC).
The majority of our emissions result from the
process of using solid fuel. This can make it
difficult to identify other smaller trends that
are still significant. To counteract this
dominance and to ensure we retain a
balance between highlighting significant
developments and providing meaningful
data, we have adopted a materiality
threshold of 100,000 tonnes of CO2.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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TABLE 1
Fossil fuel, operations and purchased electricity emissions
Activity
Scope 1
Fossil fuel combustion
Operations
Total Scope 1
Scope 2
Purchased electricity
Total Scope 1 and 2
Unit of measure
2017
2016
2015
2014
2013
kt
kt
kt
kt
kt
6,169
<100
6,169
127
6,296
6,021
<100
6,021
151
6,172
13,101
<100
13,101
216
13,317
16,476
20,162
119
157
16,595
20,319
249
293
16,844
20,612
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TABLE 2
Biologically sequestered carbon (biomass combustion) emissions
Activity
Unit of measure
2017
2016
2015
2014
2013
Biologically sequestered carbon
(biomass combustion)
kt
11,766
11,455
10,238
7,150
2,799
TABLE 3
Total emissions per GWh of electricity generated by fossil fuel combustion
Activity
Gross generation
Emissions per GWh of electricity generated
Unit of measure
TWh
t/GWh
2017
21.2
297
2016
20.8
297
2015
28.1
474
2014
28.5
591
2013
28.0
736
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In 2017, our electricity generated from
sustainable biomass was 13 TWh, an increase
of 300MW from 2016. However, our Scope 1
fossil fuel combustion emissions have
increased by 2%. This can in part be
attributed to the fire at our Power
Generation biomass unloading facilities in
December, which did cause an unplanned
outage at two of our biomass units
Emissions from each stage and in each
different supply region are calculated and
reported. The most significant GHG impacts
in the biomass supply chain are the
electricity used in pelletisation and the sea
freight emissions in transport. Pellet mills are
ideally located close to the forest resource
and close to ports in order to minimise
transport emissions.
Biomass Supply Chain Emissions
We monitor every step in the supply chain to
ensure that our sustainability standards are
being met and that greenhouse gas (GHG)
emissions associated with producing our
biomass are calculated according to the
regulatory requirements.
The UK Government has set a limit on the
maximum supply chain GHG emissions
permitted in order for biomass to be eligible
for support under the Renewables
Obligation. The current limit for CO2
emissions from life cycle analysis of biomass
supplies is 79.2g CO2/MJ – reducing to 50g
CO2/MJ by 2025.
In 2017, the average supply chain
greenhouse gas emissions from all of Drax’s
biomass supplies amounted to 36g CO2/MJ.
This is an increase of 6% compared with
2016 because we sourced a higher
proportion of our biomass supplies from the
US. The UK Government has provided a
benchmark figure for GHG emissions from
coal which is 256.9g CO2/MJ; therefore in
the 2016–17 compliance year Drax saved
around 86% of CO2 emissions compared to
the coal benchmark.
DRAX AVERAGE BIOMASS SUPPLY CHAIN GHG EMISSIONS FOR 2017
48.7%
50
40
30
20
10
0
0.2%
2.7%
5.5%
0.9%
9.3%
8.2%
21.6%
2.9%
CULTIVATION
HARVESTING
TRUCK TO
PELLET PLANT
CHIPPING
DRYING
PELLETISING
TRUCK TO
PORT
SHIPPING
RAIL TO DRAX
OUR BIOMASS SUSTAINABILITY
REQUIREMENTS
– Group sustainability policy – in place
since 2008, our policy covers our core
sustainability values on protecting
biodiversity, reduction of greenhouse
gas emissions and contribution to
social values.
– UK Government criteria for sustainable
biomass – we report monthly on
compliance with the UK sustainability
criteria, including life cycle emissions
limits and the land criteria. This covers
the requirements of the Forest Europe
Sustainable Forest Management
criteria, including: maintaining forest
area and carbon stocks; encouraging
the production of forest products;
maintaining the forest ecosystem
health and vitality; conserving and
enhancing biological diversity;
contributing socio-economic benefits;
and ensuring that soil and water
protection is maintained.
– European Union Timber Regulation –
in place since 2013, the EUTR requires
purchasers of wood products to have
coherent due diligence processes in
place to ensure a negligible risk of
trading illegally logged timber.
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Drax Group plc Annual report and accounts 2017
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BUILDING A SUSTAINABLE BUSINESS CONTINUED
RESPONSIBLE SOURCING
Being a responsible business means we
source raw materials, including important
resources such as sustainable biomass and
coal, in a responsible manner. We aim to treat
suppliers fairly and pay them promptly. We
expect our suppliers to uphold the same high
ethical standards we apply to our business,
which are outlined in our Group ethics guide,
Doing the Right Thing.
SUSTAINABLE BIOMASS
We believe the best way to ensure our
biomass is sustainable and legal is through
a combination of proactive supplier
engagement, third party certification and
our own audits and checks. We rely on a
number of forest certification programmes,
including the Sustainable Forest Initiative
(SFI), Forest Stewardship Council® (FSC®)(1),
the Programme for the Endorsement of
Forest Certification (PEFC) and Sustainable
Biomass Program (SBP).
Our requirements are laid out in our Group
sustainability policy: www.drax.com/
sustainability/sustainability-policy/. We
adhere to the UK Government criteria for
sustainable biomass, the Forest Europe
Sustainable Forest Management Criteria and
we comply with the European Union Timber
Regulation (EUTR).
The Group Director of Corporate Affairs has
overall responsibility for ensuring biomass
meets the Government’s sustainability
criteria. Cases requiring special attention
are escalated to the Ethics and Business
Conduct Committee (EBCC) or the
Executive Committee.
An example of this in 2017 was when new
information came to light on one of our
suppliers through an SBP audit report.
Background information collected during
preparation for SBP assessment highlighted
that our supplier had not provided us with
the most accurate information regarding
harvesting locations. Without this, we
cannot carry out the regional risk-based
assessment required under the legislation.
Although the volume in question was low,
we halted deliveries until our supplier could
properly identify the material and we could
carry out the appropriate due diligence.
In 2017, Drax Group started a review
and update of our policy with various
stakeholders to ensure that it is still relevant
and addresses the key biomass sustainability
issues. We also asked the non-profit TFT
(The Forest Trust, www.tft-earth.org) to visit
our key supply regions to examine local
challenges and identify opportunities
for improved environmental and social
performance. TFT is a UK-registered charity
working with other global companies to
improve the environmental and social
impact of their supply chains.
Maintaining forest carbon stocks
Ensuring that forest carbon stocks are
maintained, or not adversely impacted by
biomass demand, is one of the requirements
of the UK Government’s criteria for
sustainable biomass. Drax only sources
sustainable biomass from working forests.
We regularly monitor forest inventory data,
in addition to our detailed certification and
auditing process, to ensure that biomass
demand is having a positive impact on
regional forest industries.
Recent analysis of historical trends in the
southern US has shown that as demand
for wood products increased over the last
60 years, management practices have also
improved to increase forest growth rates
and more than double the amount of carbon
stored in the working forest from 4 billion m3
to 8.4 billion m3.(2)
Healthy markets for wood products have
led to an increase in forest growth (carbon
sequestration) and stored carbon. The total
growing stock in the forests of the 28 EU
member states increased by 7.4 billion m3
between 1990 and 2015, an increase of
38%(3). Over this same period, total
production of roundwood (harvesting) also
increased by 103 million m3, around 29%(4).
This demonstrates that increasing demand
for wood products and increased harvesting
does not necessarily lead to deforestation or
lower forest carbon stocks.
The continual cycle of sustainable forest
management, production of wood products,
improving management practice and
increased sequestration of atmospheric
carbon leads to substantial GHG benefits.
These benefits are even greater when
compared to the linear emissions associated
with burning coal.
(1) FSC-C119787
(2) www.forest2market.com/hubfs/2016_Website/
Documents/20170726_Forest2Market_Historical_
Perspective_US_South.pdf
(3) www.appsso.eurostat.ec.europa.eu/nui/show.
do?dataset=for_vol&lang=en
(4) www.fao.org/faostat/en/#data
Drax Group plc Annual report and accounts 2017
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In 2017
2.7Mt
of Drax’s sourced biomass came with an
SBP-compliant claim
How we ensure sustainable biomass
sourcing
Drax has developed a rigorous process
to ensure that new and existing biomass
suppliers demonstrate that all sustainability
and legal requirements are being met. Our
eight key stages for ensuring compliance
are: chain of custody; supplier audits; the
EUTR legality assessment; GHG life
cycle assessment and monitoring; the
sustainability data return (SDR) captured
in the contract; the SDR and annual
declaration; regional and country risk
assessments; and supplier relationship
management and monitoring. These stages
are implemented in an ongoing cycle to provide
robust evidence across each element.
Our due diligence process always begins
with a regional risk assessment, which
identifies high-level risks such as
deforestation or illegal logging, corruption
and issues with workers’ rights. This ensures
focus on these high risks and that they are
mitigated. These reports are renewed every
three years, or more frequently if there is
cause for concern, to ensure that we always
stay on top of developing issues.
This is followed by a sustainability data
return (SDR), where we ask each supplier 43
detailed questions about all aspects of their
supply chain and they are required to provide
documentary evidence to support their
answers. This sustainability declaration
subsequently forms part of the contract
between Drax and the supplier.
Our supplier audit process
Each new supplier is subject to an
independent audit before pellets can be
delivered. Existing suppliers are audited at
least once every three to four years. The
audit requires the supplier to pass a series
of detailed environmental and social checks
along the whole length of their supply chain
and pellet manufacturing process. Findings
are categorised into three priorities: high,
medium and low.
(1) Figures for audited plants only
High-priority findings can result in
termination of a supplier agreement.
Medium-priority findings result in the
supplier being given a set timescale within
which to rectify them. Low-priority issues
highlight areas where our independent
auditors believe suppliers have room to
improve their practices. Drax engages with
our suppliers to share best practice and
support and encourage improvements
to procedures.
The Sustainable Biomass Program
Alternatively, suppliers can evidence the
necessary sustainability requirements
through Sustainable Biomass Program (SBP)
certification, as SBP-compliant material has
been benchmarked by Ofgem to fully meet
the UK sustainability requirements. If a
supplier can provide all of their biomass to
Drax with an SBP compliant biomass claim,
Drax does not require an audit to be carried
out and the supplier can progress through
the process much faster. We encourage our
suppliers to move towards SBP certification
and we aim to achieve 90% SBP-compliant
material by the end of 2018.
Drax Power is certified under the SBP Chain
of Custody standard. In 2017, 2.7 million
tonnes of Drax Power’s sourced biomass
came from SBP-certified pellet mills.
Drax Biomass is an SBP-certified
Biomass Producer.
DRAX POWER SUPPLIER AUDIT AND SBP
FIGURES FOR 2017 (1)
Forest management certification
In addition to the Drax internal process and
third party SBP certification, sustainability
can also be demonstrated through Forest
Management (FM) certification. This
confirms that the forest is being managed in
a way that preserves the natural ecosystem
and benefits the lives of local people and
workers, while ensuring it sustains economic
viability. In 2017, Drax Power purchased
1.3 million tonnes of wood fibre from
FM-certified forests, 20% of our total supply
of pellets.
FM certification may be difficult to achieve
for some types of forest owners and, for this
reason, a secondary level of assessment
called Controlled Wood is available. This
ensures that wood fibre is not: illegally
harvested; harvested in violation of
traditional and human rights; harvested in
forests in which high conservation values
are threatened by management activities;
harvested in forests being converted to
plantations or non-forest use; or from
forests in which genetically modified trees
are planted. In 2017, Drax Power purchased
4.9 million tonnes of wood fibre from
Controlled Wood sources.
Chain of Custody
Once certified, Chain of Custody (CoC) can
be used as a mechanism for tracking wood
fibre from the forest to the final product and
destination. Each supplier in the chain must
have a documented system to be able to
identify and trace the wood fibre at each
stage. Drax requires that all of its suppliers
achieve CoC certification before contracts
are signed and pellets can be delivered.
At Drax Power, our key biomass buyers,
logistics, legal and communications
employees are required to complete
Chain of Custody training with the
sustainability team.
Suppliers assessed through
Drax audit process
SBP-certified suppliers
12.8%
87.2%
The number of audits has decreased since
2016 because increasingly more audits are
covered by SBP. In 2017, 69.6% of our
biomass suppliers were in the audit cycle.
34 of the 56 pellet mills we sourced from
were SBP certified and were audited by an
independent third party. In addition, we
carried out five first party audits by Drax
staff and six third party audits by
independent auditors. In 2017, three of the
suppliers that we audited did not meet our
standards and as a result we made the
decision not to contract them.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
BUILDING A SUSTAINABLE BUSINESS CONTINUED
Our feedstock sources in 2017
In 2017, Drax Power sourced 82.78% of
our biomass feedstock from North America,
with the remainder coming from the Baltics
(12.96%), Brazil, Portugal and other countries
within the European Union.
We report our feedstock types according to
the Ofgem guidelines and criteria. In 2017,
40% of our feedstock mix came from
sawmill residues.
Drax is required to report all feedstock
categories to Ofgem in accordance with
their guidelines and criteria. This information
can be found at: www.ofgem.gov.uk.
POWER GENERATION FEEDSTOCK MIX 2017
United States
Canada
Latvia
Estonia
Portugal
Other EU
Brazil
United Kingdom
59%
24%
9%
4%
2%
1%
<1%
<1%
40%
Sawmill residues
Thinnings
18%
Low-grade roundwood 24%
Branches, tops and bark 17%
1%
Agricultural residues
COUNTRIES OF ORIGIN AND FEEDSTOCKS OF OUR BIOMASS PELLETS
The following table shows the types of feedstocks we used in 2017 by weight (tonnes) and country of origin.
Sawmill
residues
Branches,
top and bark
tonnage
Disease
tonnage
End of life
tonnage
Thinnings
tonnage
Low grade
roundwood
tonnes
Product
tonnage
Agri
tonnes
Country
total
tonnes
USA
Canada
Latvia
Estonia
Portugal
Other EU
Brazil
UK
Other non-EU
Grand total
958,930
962,269
–
1,298,077
155,091
37,599
274,684
5,844
1,607
–
–
–
–
–
–
999,793 1,075,059
–
105,536
121,978
196,084
91,663
74,423
–
–
–
–
94,512
12,058
63,907
–
–
1,045
5,880
3,828
48
22,355
91,280
1,932
39
–
–
–
157
–
–
–
–
–
–
–
2,662
4,527
–
–
–
46,935
–
–
2
–
–
–
– 3,996,051
– 1,596,303
–
–
–
–
–
600,197
260,598
137,381
71,294
46,935
45,846
45,846
–
1,045
2,703,213
1,129,123
43,191
48 1,238,451 1,593,844
1,934
45,846 6,755,651
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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THE BETTERCOAL INITIATIVE
Bettercoal is a global, not-for-profit
initiative established by a group of
major utilities to promote the
continuous improvement of corporate
responsibility in the coal supply chain
www.bettercoal.org.
We buy coal only from known sources and
from suppliers that are transparent about
origin mines. Any jurisdictions we source
from are vetted against our policies. In 2017,
31% of the coal we used came from UK deep
and surface mines, with the remainder
coming predominantly from the US,
Colombia and Russia. Where possible, we
use pond fines (the filtered residue of coal
washings) and other advantaged fuels to
reduce the amount of raw coal extracted
and burned.
As we look to the future, coal sourcing will
continue to be governed by our focus on
responsible sourcing. Origins will be
determined by balancing quality and
economics. Where possible, we source
from Bettercoal-engaged mines.
We carry out due diligence to ensure coal is
supplied in line with our CSR policy and carry
out visits to suppliers’ sites. Where our
checks raise any “red flags” we undertake
enhanced due diligence and commission
third party investigations. Results and
concerns are reviewed by Drax’s Ethics and
Business Conduct Committee if necessary.
Partnering with others to raise standards
We work with a range of stakeholders to try
and improve standards in the coal industry.
For example, we engage with coal suppliers
through conferences and through our
membership of industry initiatives such as
Bettercoal. In 2017, we attended conferences
with large suppliers such as Cerrejón, to
understand developments in their
sustainability approach. We also enhanced
our risk assessment process by capturing
key questions on potential risks to revisit
with suppliers.
The Bettercoal initiative works with coal
suppliers to encourage continuous
improvements in social, ethical and
environmental standards. Suppliers
complete a self-assessment process and
are independently audited against the
Bettercoal Code by approved assessors. We
make it clear in supplier contracts that we
prefer to source Bettercoal. Results from
Bettercoal assessments form part of our
supply chain due diligence procedures and
any new information on suppliers is reviewed
by Drax’s procurement and compliance teams.
In 2017, 23% of the coal we sourced was
Bettercoal. As a member of the Technical &
Advisory Committee (TAC), in 2017 we
worked with other members to further
develop rigorous procedures, protocols
and assurance in the Bettercoal system.
ENSURING A COAL-FREE FUTURE
Reducing our reliance on coal
Our business is changing rapidly. Today
we have cut our coal consumption by 72%,
from 9.8 million tonnes in 2011 to 2.7 million
tonnes in 2017, with three units upgraded
to run on renewable biomass.
Given the UK Government’s policy decision
to remove coal from the nation’s energy
system by 2025, we are preparing for a
post-coal future. Our goal is to replace coal
with alternative lower-carbon fuels (subject
to alternative generation being available).
In June 2017 we announced plans to consult
on upgrading two of the remaining coal-fired
units at Drax Power Station to become
gas-powered generating plants. This is in
addition to our plans to construct four
fast-response Open Cycle Gas Turbine
(OCGT) generation plants at new sites
across England and Wales.
The upgraded gas-powered units could
provide flexible and reliable electricity for
the UK’s homes and businesses and facilitate
other investments in renewable energy such
as wind and solar power by helping to bridge
intermittent renewable supplies.
In January 2018 the UK government
confirmed support for conversion of a fourth
unit to biomass fuel. The conversion of unit 4
will complete during 2018 allowing us to
optimise generation across three ROC
accredited units.
Sourcing coal responsibly
Transitioning away from coal is challenging
and will take time. In the meantime, we must
continue to secure reliable and responsible
sources of coal. Our coal sourcing approach
is strictly governed by our compliance,
sustainability and risk teams. Drax’s
corporate social responsibility (CSR)
statement sets out the legal, ethical,
environmental and social standards we
expect of our suppliers. Requirements are
also set out in our contracts, including our
preference for Bettercoal.
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Drax Group plc Annual report and accounts 2017
CASE STUDY
American Tree Farm
The majority of forestlands in the southern US are privately owned
(86%) and two-thirds of these forests are owned by families and
individuals. The American Tree Farm System (ATFS), administered by
the American Forest Foundation, was established over 75 years ago
to provide support and recognition to these non-corporate landowners
who play such a key role in forest sustainability. Today, the 74,000 tree
farmers across the US manage approximately 20.5 million acres of
forestland. The programme has evolved into an internationally
recognised, third party verified certification standard sanctioned by
the Programme for the Endorsement of Forest Certification (PEFC)
standards. The ATFS now provides a means by which family tree
farmers can be recognised and rewarded in the marketplace for
meeting rigorous sustainability standards analogous to large
corporate owners certified to Sustainable Forestry Initiative (SFI)
or Forest Stewardship Council (FSC) standard.
REDUCE OUR ENVIRONMENTAL IMPACT
We are committed to managing, monitoring
and reducing our environmental impact and
the Group environment policy outlines our
approach. Our Environmental Management
System (EMS) covering Drax Power Station
and its associated ash disposal site is
certified to IS0 14001. We are committed to
complying with all relevant environmental
legislation and there were no major or minor
breaches to our environmental permits at
Drax Power in 2017.
In addition to carbon, we manage our other
emissions to air including sulphur dioxide
(SO2), nitrogen oxides (NOX) and particulates.
Managing the use of water and other natural
resources, along with disposal of waste, is
also important across our business. We aim
to protect biodiversity both at our own sites
and through our biomass sourcing.
POSITIVE SOCIAL IMPACT
We strive to have a positive social impact in
the communities and countries in which we
operate, through the jobs we provide, our
wider economic contribution, the tax we pay
and the education and charity projects we
support. Communicating effectively with
people is a vital aspect of being a successful
business and we aim to be transparent and
open. We are in constant dialogue with our
local communities and the diverse group of
stakeholders affected by our business
(see page 42, Stakeholder Engagement).
In 2017, we commissioned Oxford Economics
to analyse Drax’s economic footprint across
the UK. The researchers found that Drax
contributed an estimated £1.67 billion to the
UK economy in 2016, through the 18,500
people we directly employ, the supply chain
we support and the goods and services we
purchase.
Local recruitment is important to us. Opus
Energy works with a network of education
providers in Northampton to recruit local
talent for apprenticeships in business
administration and its graduate programme
in the areas of risk management and IT. In
the United States, our business activities
have helped to revitalise communities which
have lost jobs in traditional industries, such
as pulp and paper, and our Pellet Production
business provides a steady income for
landowners who supply us with low-grade
wood.
We also make a positive contribution by
investing in skills and education projects,
particularly in STEM (science, technology,
engineering and maths) subjects which are
aligned to our future business needs. In 2017
we supported education projects to develop
STEM skills in schools and through
apprenticeships to nurture the STEM skills
and talents of young people.
Our businesses support local projects
through fundraising, partnerships and
volunteering. Each business has strong links
to its local communities and we focus our
charitable support on the areas where we
operate. During 2017, the Group donated a
total of £185,888 to a range of charities
and £53,465 to non-charitable causes.
We take a responsible approach to managing
our tax affairs and we will always comply
with applicable tax laws and regulations in
the countries in which we operate. In 2017
we paid taxes of more than £150 million.
These included taxes on our profits, taxes on
our workforce, taxes levied for burning fossil
fuels as well as environmental taxes. This
figure excludes VAT.
BUILDING A SUSTAINABLE BUSINESS CONTINUED
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CASE STUDY
Restoring Brickmakers’
Wood
The Eden-Rose Coppice Trust is a woodland network that
transforms urban environmental disasters into beautiful, natural
high-biodiversity woodland settings for people living with a terminal
illness. Haven Power has been supporting the Trust’s ambitious
Brickmakers’ Wood project in Ipswich since April 2016.
Brickmakers’ Wood is a three-and-a-half-acre site that is
being transformed into a peaceful space for cancer patients,
disadvantaged children and people with mental or physical health
problems and learning difficulties. Throughout 2017, up to 12 Haven
Power employees spent time volunteering at the project each
month. Volunteers contributed to the restoration of the site and
relished getting their hands dirty, clearing rubbish and dense
overgrowth, building new structures, creating an allotment
and planting wild flowers.
Without Haven Power’s contribution, the charity founders would
have had to undertake most of the work at Brickmakers’ Wood
themselves. In their words: “The continual volunteering has
transformed the project, so we are now two to three years
ahead of where we would have been otherwise.”
The site is being transformed into a town centre oasis and has
already been put to good use. The charity has run skills workshops
for 12–16 year-olds who have been excluded from school,
encouraging them to learn about woodcraft and how to run
a business.
13,200
VISITORS TO DRAX POWER STATION
5,200
PEOPLE REACHED BY
OUR OUTREACH PROGRAMME
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Employment contracts
Full time
Part time
92%
8%
Employment gender
OUR EMPLOYEES ARE AT THE
HEART OF OUR SUCCESS AND
ARE KEY ENABLERS OF OUR
BUSINESS STRATEGY
PEOPLE AND CULTURE
Drax Group maintains high standards in its
employment practices and all our employees
benefit from a range of policies to support
them in the workplace. These include
policies designed to enable different work
and lifestyle preferences, processes whereby
employees can raise grievances or concerns
about safety, along with supporting a diverse
and inclusive workplace.
As at 31 September 2017, Drax Group
employed a total number of 2,558 people
and almost all our employees were on
permanent contracts.
Of the total, 1,714 were male and 844 were
female. There were eight Board directors
(one female) and three members of the
Executive Committee who were not
directors (one female).
Diversity and inclusion
Drax Group is fully committed to the
elimination of unlawful and unfair
discrimination and values the differences
that a diverse workforce brings to the
organisation. Our goal is to create and
maintain a working environment that is
supportive of all our people and where every
employee has the opportunity to realise his
or her potential. We believe that a
commitment to diversity is critical to
achieving our strategic goals. We are
determined to be a place where employees,
customers and suppliers alike feel respected,
comfortable and supported in all their diversity.
Employee representation
and engagement
Overall, 22% of the workforce across the
Group is covered by collective bargaining.
We have representative employee
consultation and information arrangements
in place for those employees who have
individual employment contracts.
We communicate with employees through
a range of channels, including our internal
intranet, quarterly newsletter and Open
Forum meetings. We track employee
engagement through our opinion surveys.
The 2016 survey of all UK and US employees
(prior to Opus Energy joining the Group) was
completed by 79% of employees. Key issues
raised included the need for clearer learning
and development programmes and more
effective communication. The results were
used to inform the development of our new
people strategy. The next employee
engagement survey will take place in 2018.
Male
Female
67%
33%
Employees per country
United Kingdom
United States
2,300
258
Employees per business unit
Corporate
Pellet Production
Power Generation
B2B Energy Supply
185
258
804
1,311
BUILDING A SUSTAINABLE BUSINESS CONTINUED
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Our people strategy
In 2017, we launched our new Group-wide
people strategy, One Drax. The strategy
focuses on valuing our people, driving business
performance and developing talent to deliver
our strategic and operational objectives.
LABOUR AND HUMAN RIGHTS
Our commitment to the protection of human
rights includes not tolerating the use of
underage workers or forced labour. This is
captured in our ethics guide, “Doing the
Right Thing”, in our Corporate Crime policy
and our corporate social responsibility
(CSR) statement.
Our CSR statement outlines the standard
of ethical business conduct we expect from
suppliers. Businesses in our supply chain
should offer a safe workplace for their
employees that is free from harm, intimidation,
harassment and fear. We have incorporated
further provisions into our statement
template to manage and reduce these risks
within our procurement contracts.
We encourage suppliers and contractors
working on our behalf to challenge unethical
behaviour and promote a “speak up” culture.
MODERN SLAVERY
In 2017 we published our first statement to
comply with the UK Modern Slavery Act. This
describes the steps we are taking to reduce
the risk of modern slavery in our supply
chain. We have added modern slavery
awareness to our programme of regular
training for contract managers, provided
classroom-based training to higher-risk
teams and reviewed our counterparty due
diligence processes. Our most recent
statement is available on our website.
HEALTH, SAFETY AND WELLBEING
The Drax Group approach is outlined in our
Group Health and Safety policy.
www.drax.com/about-us/health-and-safety/
Each business unit and corporate team
has local arrangements in place, appropriate
to the operating environment and hazards
inherent in the workplace, to ensure that
high standards are set and maintained.
We have well-established Safety
Management Systems (SMS) in place to
ensure safe workplaces for all our people. At
Drax Power, the SMS is certified to OHSAS
18001 and subject to regular compliance
reviews, the last of which took place in 2017.
At Drax Biomass, the SMS meets the
requirements of OHSAS 18001 and the
United States certification ANSI Z10.
AT DRAX POWER, WE
HAVE A PROUD HISTORY
OF APPRENTICESHIPS,
WITH THE MAJORITY
REMAINING TO WORK AT
DRAX AND PROGRESSING
THROUGH THE COMPANY.
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The results for 2017 were in line with targets,
but the number of incidents increased from
previous years, partly reflecting the
increased headcount of the Group.
While the Group’s TRIR remained on target
in 2017, the incident at our biomass rail
unloading facilities in December did cause
a fire. It highlighted once again that the
risks of generating using biomass must be
mitigated through robust safety procedures
and a risk-based plant investment and
maintenance programme.
Safety performance is reported and
reviewed regularly by local management
teams, the Executive Committee and the
Board. Each incident is comprehensively
analysed and reviewed, lessons learnt are
shared with employees and actions are
taken to mitigate the risk of future failures.
At Drax Power, a weekly safety update is
uploaded to our intranet and at Drax
Biomass, information is made available
to employees through a health and safety
online portal.
The Board receives monthly reports which
include Lost Time Injury Rates (LTIR), Total
Recordable Injury Rates (TRIR) and numbers
of Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations
(RIDDORs) (or US equivalent) for the Group.
TRIR is included in the Group scorecard.
HEALTH & SAFETY PERFORMANCE
Lost Time Injury Rates
(LTIR)(1)
Total Recordable Injury Rates
(TRIR)(2)
Reporting of Injuries,
Diseases and Dangerous
Occurrences Regulations
(RIDDOR)
2017 Actual
2017 Target
2016
2015
0.13
0.27
0.10
0.30
0.02
0.22
0.05
0.31
7
6
4
2
(1) LTIR is the total fatalities and lost time injuries per 100,000 hours worked
(2) TRIR is the total fatalities, lost time injuries and medical treatment injuries per 100,000 hours worked
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STAKEHOLDER ENGAGEMENT
“THE MOVE TO CLEANER
ECONOMIC GROWTH IS
ONE OF THE GREATEST
INDUSTRIAL OPPORTUNITIES
OF OUR TIME”
GREG CLARK
SECRETARY OF STATE FOR BUSINESS,
ENERGY AND INDUSTRIAL STRATEGY,
CLEAN GROWTH STRATEGY
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We engage with a range of people who
are directly or indirectly involved in our
business and affected by what we do.
IDENTIFYING STAKEHOLDERS
Like many businesses we have a diverse
group of stakeholders who are affected by
our activities across the United Kingdom,
Europe and the US. These include our
shareholders, employees, customers,
suppliers, communities, government
regulators and policymakers, academia,
non-governmental organisations, opinion
formers and the media.
We communicate with different audiences
regularly and keep track of stakeholder
relationships. We use stakeholder feedback
to inform the planning and delivery of our
business activities.
We conduct an ongoing mapping exercise
to assess how the stakeholder landscape is
developing and to ensure we are recognising
the expectations of a broad range of
stakeholders and that across our businesses
we do the right thing every day.
Investor engagement is discussed
on page 69
PUBLIC AFFAIRS
It is vital to our business that we develop
and maintain good relationships with
governments, regulators and individuals
in public life.
No party political donations were made in
the UK or elsewhere in 2017 or 2016 and
our interactions with those engaged in the
political arena were aimed solely at the
promotion of the Group’s business interests.
What counts as political expenditure
within the EU encompasses a wide range
of activities, many of which would not be
considered as political in the normal
sense. For that reason, in order to avoid
inadvertently breaching EU legislation, Drax
presents a resolution at its Annual General
Meeting to seek shareholders’ approval for
expenditure of up to £100,000 by the
Company and its subsidiaries.
2017 HIGHLIGHTS
16,604
Number of visitors to
electricinsights.co.uk
16,604 people visited
Electric Insights, a
Drax collaboration with
researchers at Imperial
College London, to learn
more about our national
electricity network
18
Community sessions
We listened to people
near to our gas-fired
power station projects
at 18 drop-in sessions
this year
+28%
Group website visits
170,724 people visited
our Group website
in 2017, an increase
of 28% on 2016
£1.67bn
Contribution to GDP
Drax’s 2017 Economic Impact
report by Oxford Economics
estimates that Drax’s direct,
indirect and induced contribution
to GDP was £1.67bn in 2016 and
the Group supported 18,500 jobs
10.6m
Twitter feeds
In 2017 our Tweets
appeared in 10.6m
Twitter users’ feeds
£185,888
Charitable donations
In the course of 2017 Drax Group donated
£185,888 to charitable causes and £53,465
to non-charitable causes
+83%
New social media
followers in 2017
Followers on Twitter,
Facebook, Instagram
and LinkedIn increased
by 83%, from 10,215 to
18,644
13,200
Visitor numbers
We welcomed 13,200
visitors to Drax Visitor
Centre this year
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STAKEHOLDER ENGAGEMENT CONTINUED
COMMUNICATING WITH STAKEHOLDERS
Communicating effectively is a vital aspect
of being a successful business. Honesty is
one of the Drax core behaviours and we aim
to be transparent and open.
Drax has a long history of engaging with
people, businesses and local authorities.
We engage with stakeholders and partner
with many other organisations to make
progress on sustainability topics throughout
the year. We use the most appropriate
communication channels to listen to our
stakeholders and ensure they can access
the information they need about our policies,
practices and strategic direction.
The table below summarises our key
stakeholder engagement activities in 2017
and the topics raised.
STAKEHOLDER COMMUNICATION
Stakeholder group
Key engagement activities in 2017
Communities and
local authorities
Customers
Employees
We have been in extensive dialogue with a number of communities around the UK
throughout 2017 as our expanding Business to Business offer widened our
geographic footprint and we progressed our various gas-fired power station projects
through the planning process.
Our employees also strengthen our links to local communities by volunteering
to support local organisations.
Drax provides a Board member and is a keen supporter of the Northern Powerhouse
Partnership.
We generate and sell power to business customers. Haven Power and Opus Energy
engage with their customers daily, including through our dedicated, UK-based
customer service advisers at Haven Power and an online portal at Opus Energy.
We communicate with our employees through various channels, such as the intranet,
Open Forums and newsletters, and keep them informed of any important
developments in the Group’s operations.
We began the roll out of our new “One Drax” people strategy which has been
designed to address the key issues that were raised by our employees, such as the
need for clearer learning and development programmes and more effective internal
communications.
Drax Group companies also run graduate programmes focused on two areas of
the business: commercial analysts and IT. Our apprenticeship programme offers
opportunities in a number of different disciplines, including: electrical engineering,
mechanical engineering, electrical control, an instrumentation engineering and
corporate support function at Drax Power or administrative, customer service and
facilitates management roles at Haven Power and Opus Energy.
We work closely with employee representatives for the third of our workforce
covered by collective bargaining. Business-led employee Forums, along with
employee-led feedback groups are in place for employees on individual contracts.
Think tanks
and academia
We frequently meet with a number of think tanks and academic institutions in the UK,
Europe and US to inform our thinking around various policy issues and co-operate on
issues of shared interest.
Schools
We are collaborating with universities across the UK as part of our research
and innovation work, including: Imperial College London, the University of
Nottingham, the University of Leeds and the University of York. We are sponsoring
three PhD projects at the University of Sheffield to understand developing
technologies to enable Drax to support the UK’s energy system in the future.
We have a long tradition of supporting education and helping children to develop
their STEM (science, technology, engineering and maths) skills. Our activities
included the launch of Project Reinvent – a challenge for secondary school students
to develop an idea to improve their community using STEM skills.
Our Skylark Centre and Barlow Nature Reserve is open to the public and regularly
offers experiences for schoolchildren to learn about nature and ecology.
Overview of topics raised
– Management of
environmental impacts
– Transport management
– Community initiatives
and sponsorships
– The Northern
Powerhouse
– Customer service support
– Sales and product details
– Energy efficiency
– The One Drax strategy
– Learning and
development
– The purpose and future
direction of the Company
– Career progression
– Carbon pricing
– Developing technologies
for future energy needs
– Sustainable wood
sourcing
– Battery technology
and storage
– STEM skills
– Biodiversity and ecology
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STAKEHOLDER COMMUNICATION continued
Stakeholder group
Key engagement activities in 2017
Government
and regulators
We regularly engage with regulators and policymakers to ensure our business
understands and contributes to the evolving regulatory agenda.
We engage with the UK Government, particularly the Department for Business,
Energy, Innovation and Skills and Her Majesty’s Treasury, on a range of topics
including: the importance of biomass sustainability; carbon price support; the future
of coal; the decarbonisation, decentralisation and digitisation of the energy sector;
and innovation, training and skills.
We engaged with representatives from the European Commission, European
Parliament and Council of Ministers to inform the development of pan-European
sustainability criteria for biomass as part of the Renewable Energy Directive II. The
Directive is expected to be finalised in early 2018.
Non-governmental
organisations (NGOs)
NGOs play an important part in challenging our thinking and we engage with
representatives from a number of leading UK and international NGOs active on
climate and energy issues.
In November, we invited a number of NGOs and other stakeholders to two
roundtables in London and Brussels to discuss our approach to biomass
sustainability. The roundtables were facilitated by leading environmentalist
Tony Juniper, who presented on his recent fact-finding visit to Drax’s Biomass
operations in the United States.
Drax Biomass conducted a stakeholder consultation on risks associated with wood
fibre procurement, as part of its efforts to meet the standards set out by the
Sustainable Biomass Program (SBP) and the Forest Stewardship Council (FSC).
Overview of topics raised
– European Union’s
biomass sustainability
policy
– Ofgem’s Targeted
Charging Review
– Closure of unabated coal
power stations
– Controlling the costs
of biomass under the
Renewable Obligation
– Emissions to air, including
particulates
– Closure of coal
generation
– Carbon Price Support
Regulator and network
businesses
We have engaged with Ofgem and National Grid on the need to deliver a secure and
reliable network at least cost to the consumer, in addition to promoting efficient
investment decisions and market behaviours via the system operator incentive
scheme and industry licence, code and charging arrangements.
– Delivery of a secure
and reliable network
Shareholders
and investors
Suppliers and
Contractors
Sharing timely and accurate communication with shareholders is central to our
relationship with investors. We shared results, prospects and our latest thinking with
investors through a wide range of channels. These included our Capital Markets Day,
Annual General Meeting, our Preliminary and Interim results announcements, our
annual report and accounts and trading updates. Relevant documents can all be
found online at www.drax.com.
The remuneration policy for 2017-2019 and the Annual Report on Remuneration for
2016 were approved by the majority of investors in 2017 but we are conscious that a
significant minority of shareholders voted against the policy and particularly the
report. This feedback has been considered and noted.
We engage proactively with our key fuel suppliers. We have developed a biomass
supplier engagement programme and our approach includes regular site visits to
improve overall performance. For coal sourcing, we carry out visits to suppliers’ sites.
Drax Biomass requires and monitors biomass suppliers’ professional logger training
as part of our certification requirements and commitment to our stakeholders.
– Results and prospects
– Operations
– Business strategy
– Remuneration policy
– Expected standards
of conduct
– Prompt Payment Code
– Guidance on statutory
obligations, such as
modern slavery
Trade and industry
associations
We work closely with a number of trade and industry associations, particularly those
active in the energy, renewable energy, timber and forestry sectors.
– Ofgem’s Targeted
Charging Review
We continued to play an active role in Energy UK, the trade body for the UK’s
electricity industry, with our Group Chief Executive on its Board. We are a founding
member of Biomass UK (the Renewable Energy Association’s biomass power sector
group). Drax also serves on the Policy Board of the Renewable Energy Association.
We are co-founders and an active member of the Sustainable Biomass Program (SBP).
– The Renewable Energy
Directive
– Health and safety
in operations
SBP’s vision is an economically, environmentally and socially sustainable woody
biomass supply chain that contributes to a low carbon economy.
In Europe we are represented on the Board of the European Biomass Association
(AEBIOM) and are members of Eurelectric.
The US Industrial Pellet Association, of which Drax Biomass is a member, has regular
meetings at which members share best practice for managing health and safety, a
critical part of our industry.
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GROUP FINANCIAL REVIEW
“THE GROUP HAS GONE
THROUGH A PERIOD OF
SIGNIFICANT CHANGE, WHILST
DELIVERING MATERIAL
IMPROVEMENTS TO EBITDA”
WILL GARDINER
CHIEF EXECUTIVE, DRAX GROUP
2017 HIGHLIGHTS
1 Revenue increased to £3,685 million
2 Gross margin increased
to £545 million
3 Profit before tax impacted by non-
cash losses on derivative contracts
4 Significant increase to
EBITDA, at £229 million
5 Successful £550 million
bond placing
6 Investment in growth: acquisition of
Opus Energy and LaSalle Bioenergy
(1) EBITDA is defined as earnings before interest, tax,
depreciation, amortisation and material one-off items
that do not reflect the underlying trading performance
of the business
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INTRODUCTION
The Group’s performance for 2017 was
significantly improved from 2016, with
EBITDA(1) of £229 million (2016: £140 million).
This principally reflects contributions
from recently acquired Opus Energy and
the operation of a biomass unit in Power
Generation under a CfD. This was delivered
alongside a well-supported refinancing,
a positive result for the Pellet Production
business and good operational performance.
Profit before tax was adversely impacted
by higher depreciation (£13 million), which
included the previously announced
accelerated depreciation of coal-specific
assets, one off costs associated with the
Opus Energy acquisition (£8 million) and
the refinancing (£24 million), as well as
amortisation of newly acquired intangible
assets in Opus Energy (£37 million).
Non-cash unrealised losses on derivative
contracts in the period of £156 million
(2016: profit £197 million), principally a
result of foreign exchange rate movements,
materially affected the result and led to a
loss before tax of £183 million for the period.
The underlying profit performance, which
excludes the volatility of open derivative
contract valuations and associated
tax charges and one off transaction
costs, resulted in underlying earnings of
£2.7 million, as shown in note 2.7 to the
consolidated financial statements.
The financial structure of the business
has changed over the year and the Group
benefits from increasingly visible and
growing earnings from a broader base, with
reducing exposure to commodity prices, and
strong cash generation potential. We expect
the CfD will provide high quality earnings
through the life of the contract (to March
2027), supported by growing contributions
from expanding Pellet Production
operations and B2B Energy Supply.
On 10 February 2017 we completed the
acquisition of Opus Energy Group Limited
for total consideration of £367 million.
The acquisition was funded from the
Group’s own resources and £200 million
from an acquisition facility and resulted in
£159 million of goodwill and £224 million
of intangible assets (see note 5.1 to the
consolidated financial statements).
The Group is supported by a strong balance
sheet, strengthened in the period by
the refinancing and restructuring of the
Group’s debt and a continued focus on
working capital and cash optimisation.
Net debt was £367 million at 31 December,
increased from £93 million in 2016, largely
driven by debt funding drawn to finance
the acquisition of Opus Energy. However,
continued focus on working capital and
cash optimisation resulted in net debt
at 1.6x EBITDA at the end of the year.
The results for 2017 demonstrate clear
progress with the Group’s strategy. Positive
contributions were made from across the
Group, the balance sheet was restructured
and investment targeted in areas with
the potential to deliver strong returns.
This provides an excellent platform from
which to increase shareholder value.
INCOME STATEMENT
REVENUE
Consolidated revenue for 2017 of £3,685
million was £735 million greater than 2016,
driven by higher Power Generation sales
and the acquisition of Opus Energy.
Electrical output from Power Generation
of 20.0TWh was in line with our plan, 65%
from biomass units and 35% from coal units.
This included the impact of maintenance
outages for two biomass units and the
impact of low load factors on coal units
during the summer. 2017 saw the first
full year of generation under the CfD,
contributing £248 million of revenue.
Revenues from system support services
and the business’ ability to respond flexibly
to grid demands grew during the year,
contributing £88 million. The revenues
available from flexibility recognises the
value of the Drax plant in an increasingly
volatile and intermittent generation market.
Renewable Obligation Certificate (ROC)
revenues, recognised when we sell ROCs to
third parties, of £368 million were recorded
during the year (2016: £362 million).
B2B Energy Supply revenues increased
from £1,326 million in 2016 to £1,999
million in 2017. This included contributions
from Opus Energy (from 10 February) and
included sales of gas, a key contributor
to revenues over the winter period.
Revenues of our US-based Pellet Production
business continued to rise, as we increased
production from 607,000 tonnes in 2016
to 822,000 tonnes in the year. Revenues
are based on sales of pellets from the US to
our Power Generation business, based on
an arms-length contract. Volumes included
18,000 tonnes of commissioning production
from our new plant at LaSalle Bioenergy.
GROSS MARGIN
Consolidated gross margin for 2017
of £545 million (2016: £376 million)
was primarily derived from our
generation and supply activities.
Power Generation delivered £398 million of
gross margin from biomass units operating
under a CfD and the ROC regime and coal
units providing system support. ROCs
continue to form a key component of
financial performance and the expected
benefit of ROCs earned is recognised
as a reduction in our biomass fuel costs
at the point of generation. Each ROC is
subsequently recognised as revenue
when that ROC is sold to a third party. We
earned ROCs, reducing costs, with a total
value of £481 million in 2017 (2016: £536
million) as CfD replaced ROC generation.
B2B Energy supply gross margin improved
from £24 million in 2016 to £117 million
in 2017, with positive contributions from
Haven Power and Opus Energy. Electricity
sales were supplemented, for the first
time, with gas sales by Opus Energy.
Pellet Production gross margin relies
on pellet sales and close control over
production and operating costs.
Increasing volumes and stable costs
allowed margins to improve to £39 million
during the year and deliver a positive
EBITDA contribution for the first time.
Further segmental financial
performance data is provided in the
notes to our consolidated financial
statements on page 127.
OPERATING COSTS
Operating costs of £316 million increased
from the previous year (2016: £236 million).
This increase largely reflected the addition of
Opus Energy to the Group and the expansion
of the Pellet Production business. Operating
costs in Power Generation included a major
planned outage on one of the biomass units.
Central costs for 2017 were £34 million,
compared with £21 million in 2016.
The increase reflected investment in
strategy, innovation and development
activities, the majority of which is
not expected to be recurring.
We incurred transaction costs of £8
million during the year (2016: £nil),
supporting the delivery of strategic
options, including the acquisition of
Opus Energy. Transaction costs were
also incurred as part of the disposal of
Billington Bioenergy to Aggregated Micro
Power Holdings plc on 31 October. These
costs were all one off in nature, related
to asset acquisitions and disposals, and
were therefore excluded from EBITDA.
EBITDA
As a result of the financial performance
described above, consolidated
EBITDA for 2017 was £229 million,
compared to £140 million in 2016.
DEPRECIATION AND AMORTISATION
Depreciation of £123 million in the year
was £13 million higher than 2016, largely
driven by the acceleration of charges
following the shortening of useful economic
lives for certain coal-specific assets and
including write off of obsolete assets. We
assume that assets which are only able
to support coal-fired generation will not
operate beyond 2025, in line with the
Government’s declared intention to cease
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GROUP FINANCIAL REVIEW CONTINUED
unabated coal generation, resulting in
accelerated depreciation charges between
1 January 2017 and 31 December 2025.
Amortisation charges of £44 million included
£37.5 million relating to intangible assets
arising from the Opus Energy acquisition.
These assets totalled £224 million and were
comprised of customer contracts, brand
value and software, as shown in note 5.3.
Charges in the year also include the impact
of reclassifying software assets in use across
the Group as intangible assets, following
investment in new systems capability.
UNREALISED LOSSES ON DERIVATIVE
CONTRACTS
A key component of the Group’s risk
management strategy is the use of forward
contracts to secure and de-risk the
future cash flows of the business. Whilst
these contracts are all entered into for
risk management purposes, a proportion
of our portfolio is not designated into a
hedge accounting relationship under
IFRS. Where this is the case, the unrealised
gains and losses arising from the change
in fair market value of these contracts is
recognised in our income statement.
In 2017, we recognised unrealised losses
of £156 million (2016: gain £177 million)
within the income statement in respect of
outstanding contracts for future delivery.
This was recorded below EBITDA and
excluded from underlying earnings. In our
balance sheet a similar loss of £209 million
was recognised (2016: gain £330 million)
in the hedge reserve (2016: gain £327
million). The losses, which do not impact
cash, principally relate to forward foreign
currency purchase contracts designed to
fix the Sterling cost of future purchases of
biomass. The majority of our fuel purchases
are denominated in US Dollars, with the
remainder in Canadian Dollars and Euros.
The losses reflect the change in value of
our hedge as Sterling has strengthened
against the US Dollar during the year. The
strengthening in Sterling during 2017
partially reversed the significant mark
to market gains posted during 2016 as
its value fell following the Brexit vote.
In addition to hedging foreign currency
commitments we also forward purchase,
as required, coal, oil, gas and carbon.
An increase to oil prices during 2017
drove an unrealised gain from forward
contracts for these commodities, which
partially offset the unrealised losses on
forward foreign exchange purchases.
Despite the loss in the year the Group
continues to benefit from the hedging
programme, securing medium-term
fuel costs and other liabilities.
The term of our hedges is limited by available
credit lines and market liquidity. We have
hedges in place to cover anticipated
exposures until 2022, beyond which there
is a risk that the cost of our fuel purchases
will materially increase. We remain very
focused on reducing the long- term cost
of biomass fuel to preserve gross margins
beyond the current currency hedge period.
The accounting treatment of derivative
contracts is set out in note 7.2 to the
consolidated financial statements.
EBIT
Loss before interest and tax (Operating loss)
fell from £204 million in 2016 to a loss
of £117 million in 2017, influenced by
the items described above, a loss on
disposal of Billington Bioenergy (£4 million),
but principally reflecting the volatility
in the unrealised gains and losses on
derivative contracts. The impact of these
movements is excluded in the calculation
of underlying earnings (see below).
NET INTEREST CHARGES
Net interest charges of £66 million
include costs incurred as a result of
the Group’s refinancing. This includes
acceleration of deferred financing costs,
the one-off cost of early repayment
charges for loans outstanding at the
refinancing date (£24 million) and interest
costs driven by a higher quantum of debt
than the previous year. A full breakdown
of interest payable is shown in note 2.5.
PROFIT/LOSS BEFORE AND AFTER TAX
The Group’s loss before tax, calculated
in accordance with IFRS, was £183
million for 2017, compared to a profit
of £197 million for the previous year.
The reduction predominantly reflects
improvements to EBITDA, offset by
higher depreciation and amortisation
and unrealised losses on forward
foreign currency purchase contracts.
The net tax credit of £32 million compares
to £3 million in 2016. It includes two
one-off items arising in the year.
Firstly, a tax credit of £13 million arising
from a patent relating to biomass was
granted to the Group in late 2016. Under
the UK Patent Box tax regime, this enables
the Group to pay corporate taxes at a
lower rate on profits which arise from
the use of innovation. We have agreed
the claim with HMRC for prior years 2013
to 2016 (£10 million) and have included
our best estimate of the benefit arising
under the tax regime for 2017 (£3 million).
However, for accounting purposes our best
estimate is made of the benefit arising
under the tax regime from 2013 to 2017.
Offsetting this credit is a non-cash
deferred tax charge of £16 million arising
from the reduction in US Federal tax
rates to 21% from 1 January 2018.
Applying the tax credit results in a loss
after tax of £151 million (2016: £194
million) and a basic loss per share of
37.2 pence (2016: 47.7 pence).
UNDERLYING EARNINGS
Underlying profit (also referred to as
underlying earnings) is used to assess the
performance of the Group without the P&L
volatility caused by derivative contracts
and any other material, one-off items.
The reconciliation of IFRS earnings to
underlying earnings is shown in note 2.7.
Underlying profit before tax for 2017 of
£5 million reduced from £21 million in 2016,
reflecting higher EBITDA offset by higher
depreciation, amortisation and interest
charges.
The underlying tax charge for the year of
£2 million (2016: £nil) excludes the tax
effect of non-underlying translations.
Underlying profit after tax for the year was
£3 million (2016: £21 million), resulting in
underlying EPS of 0.7 pence per share
(2016: 5.0 pence per share).
FINANCIAL POSITION
CAPITAL EXPENDITURE
The Group has a disciplined approach to
capital expenditure, with all projects subject
to review by investment committees and
large projects requiring Board approval.
Investment is prioritised to address safety
and regulatory requirements, ensure plant is
fully maintained and fit for purpose, and only
released to enhancement projects where
incremental returns have been identified.
Capital expenditure in the year was £181
million, increased from £97 million during
2016. This included the purchase, at auction,
of the pellet-production assets at LaSalle
Bioenergy and investment to recommission
the plant and achieve throughput of
450k tonnes of wood pellets per annum.
In total the LaSalle investment was
£48 million. Details are shown in note 3.1.
At Drax Power Station investment
reflected routine asset replacement
and upgrades (£62 million), including
the purchase of strategic spares, and
payments to secure development
options for four OCGT power plants.
In B2B Energy Supply the development of a
new information technology platform and
preparations for Smart meters adoption
added £9 million and an office facility
was purchased in Northampton (£17
million), which will be used to consolidate
existing Opus Energy operations
from four offices into a single facility,
enhancing operational effectiveness.
CASH GENERATED FROM OPERATIONS
Cash generated from operations was
£315 million in 2017, an increase of
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£125 million from the previous year.
Key drivers were the improvement in
EBITDA and cash inflows generated
from working capital management.
Working capital management included
use of a committed facility to manage
receivables in our B2B Energy Supply
business, providing cash in advance
of normal payment terms. More
details can be found in note 4.4 to the
consolidated financial statements.
A cash inflow was also generated from ROC
sales. Cash from ROCs is typically realised
several months after the ROC is earned
however, we have optimised our trading
activities to enable us to accelerate the
cash flows over a proportion of these assets.
This provided a £142 million cash benefit
during 2017. In 2016, three uncommitted
ROC facilities were used to accelerate
ROC receivables, these were unused at
31 December 2017 (2016: £111 million).
The net cash outflow for the year was
£6 million (2016: £95 million inflow), after
cash payments for capital expenditure
of £159 million (2016: £93 million) and
dividend payments of £22 million (2016:
£11 million). Cash taxes paid during the
year were £14 million (2016: £2 million).
NET DEBT AND FUNDING
The cash position of the Group during the
year was significantly impacted by a full
Group refinancing, which was executed
on 5 May 2017. The Group successfully
raised £550 million of publicly traded bonds,
supported by a revised revolving credit
facility and indexed loan notes totalling
£350 million. The newly raised funds
were used to repay the £200 million Opus
Energy acquisition facility. The remaining
funds will provide support for the Group’s
investment and strategic programmes.
The use of the receivables facility and ROC
sales mentioned above accelerated cash
flows to a value of £110 million (2016: £74
million) with a corresponding reduction
to net debt. We expect to continue to use
the receivables facility throughout 2018. In
addition we expect to maintain the flexibility
to accelerate ROC cash flows through
optimising our trading activities or through
uncommitted ROC receivable facilities.
The Group also has access to secured
trading lines, available with certain
counterparties, providing support
to the trading programme.
Net debt at 31 December 2017 was £367
million, an increase of £273 million from
31 December 2016 (£94 million).
We remain committed to a strong balance
sheet and maintaining an appropriate credit
rating. Cash optimisation contributed to
achieving a ratio of net debt to EBITDA
of 1.6x at 31 December and we remain
focused on further reductions, supported
by improved cash generation.
Further information on funding
arrangements is included in note 4.3 to
the consolidated financial statements,
on page 144.
PENSIONS
The Group operates a defined contribution
pension scheme in each of its operating
companies and, in addition, the Power
Generation business operates a defined
benefit scheme within the Electricity
Supply Pension Scheme framework. The
triannual valuation for this scheme (dated
31 March 2016) completed during the
year, resulting in an agreement with the
Trustees for the Company to make deficit
repair contributions, totalling £52 million,
from 1 January 2017 to 31 December 2025.
The agreement also establishes a legally
binding journey plan, involving the deficit
contributions, improved investment returns
and liability reductions, targeting financial
self-sufficiency for the scheme by 2025.
OTHER INFORMATION
ACQUISITION OF OPUS ENERGY
GROUP LIMITED
On 6 December 2016 we announced the
proposed acquisition of Opus Energy
Group Limited, a well-established and
proven B2B energy supply business serving
the SME market, for consideration of
£340 million cash, plus locked box interest.
The acquisition was partly financed by a
short-term debt facility of up to £375 million,
of which £200 million was initially drawn
down and then repaid during the year.
The proposed acquisition was approved
by shareholders at a general meeting
on 8 February 2017 and concluded on
10 February 2017, with Drax obtaining
control of Opus Energy at that date. Opus
Energy is expected to deliver enhanced
margins to Drax’s retail business and
drive our growth in the SME market. The
business made a positive contribution
to performance during 2017.
Financial information on the assets and
liabilities acquired, plus an assessment
of the impact of the acquisition on our
financial statements, is provided in
note 5.1 to the consolidated financial
statements on page 148.
IMPACT OF BREXIT
We have continued to monitor the progress
of the UK’s Brexit negotiations and the
potential impact on the Group. Whilst
we continue to expect limited impact on
our operations, any associated Sterling
weakness may influence the future cost
of fuel used by the Power Generation
business. To manage this risk a number
of financial instruments, including FX
options, were added to the foreign
exchange hedging programme during
the year, effectively capping future FX
liabilities on an additional proportion of the
future foreign currency fuel exposures.
DISTRIBUTIONS
On 15 June we announced a new dividend
policy, consistent with maintaining the
Group’s credit rating and investing in its
business. As part of this announcement the
Board expected to recommend a dividend of
£50 million with regard to the 2017 financial
year, with growth expected in future years.
The Board is confident that this level of
dividend is sustainable and expects it to
grow from this level as the implementation
of the strategy generates an increasing
proportion of stable earnings and cash
flows. In determining the rate of growth
in dividends the Board will take account
of future investment opportunities and
the less predictable cash flows from the
Group’s commodity based businesses.
If there is a build-up of capital in excess
of the Group’s investment needs the
Board will consider the most appropriate
mechanism to return this to shareholders.
At the Annual General Meeting on
13 April 2017, shareholders approved
payment of a final dividend for the year
ended 31 December 2016 of 0.4 pence
per share (£1.6 million). The final dividend
was subsequently paid on 12 May 2017.
On 18 July 2017, the Board resolved to pay
an interim dividend for the six months
ended 30 June 2017 of 4.9 pence per share
(£20 million), representing 40% of the
expected full year dividend. The interim
dividend was paid on 6 October 2017.
At the forthcoming Annual General Meeting,
on 25 April 2018, the Board will recommend
to shareholders that a resolution is
passed to approve payment of a final
dividend for the year ended 31 December
2017 of 7.4 pence per share (£30 million),
payable on or before 11 May 2018.
Shares will be marked ex-dividend on
19 April 2018. In addition, in line with our
capital allocation policy, the Board has
agreed to undertake a £50 million share buy
back programme during 2018 to return cash
to our shareholders.
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VIABILITY STATEMENT
IN ACCORDANCE WITH THE UK CORPORATE GOVERNANCE
CODE, THE DIRECTORS HAVE ASSESSED THE PROSPECTS OF
THE GROUP OVER A PERIOD SIGNIFICANTLY LONGER THAN THE
12 MONTHS REQUIRED BY THE GOING CONCERN PROVISION.
The assessment of viability was led by
the Group Chief Executive and Interim
Chief Financial Officer in conjunction with
divisional and functional management teams
and presented to the Board. In reviewing this
assessment the Board has considered the
principal risks faced by the Group, relevant
financial forecasts and sensitivities, the
availability of adequate funding and the
strength of the Group’s control environment.
ASSESSMENT PERIOD
The Board conducted this assessment
over a period of three years, which was
selected for the following reasons:
– The Group’s Business Plan, which is
reviewed and assessed on a quarterly
basis and is used for strategic decision
making, includes a range of financial
forecasts and associated sensitivity
analysis. This Plan covers a three-year
period in detail.
– Within the three-year period liquid
commodity market curves and established
contract positions are used in the
forecasts. Liquid curves typically cover a
one to two-year window and contracts
cover periods between one and ten years.
In particular, we benefit from the stable
and material earnings stream available
from the CfD until 2027. Selecting a
three-year period balances short-term
market liquidity against our longer term
contractual positions.
– Within a three-year horizon there is limited
certainty around markets and regulatory
regimes. However, in selecting this period
the Board has assumed no material
changes to the Group’s mid-term
regulatory environment and associated
support regimes.
REVIEW OF PRINCIPAL RISKS
The Group’s principal risks and uncertainties,
set out in detail on pages 51 to 57, have
been considered over the period.
The principal risks with the potential to
exert significant influence on viability are:
commodity price changes, political and
regulatory changes, biomass acceptability
changes and plant operating failures.
A significant adverse change to the status
of each risk has the potential to place
material financial stress on the Group.
The risks were evaluated, where possible,
to assess the potential impact of each
on the viability of the Group, should that
risk arise in its unmitigated form. The
potential inputs were included, where
appropriate, as sensitivities to the Plan
and considered by the Board as part of
the approval process required before
the Plan was adopted by the Group.
In this regard, the Group has a proven
track record of adapting to changes
to its environment and deploying
innovative solutions to protect financial
performance. Recent developments
suggest that this will continue in the
future as the Group invests in new plant,
equipment and systems and broadens
the business in line with the strategy.
REVIEW OF FINANCIAL FORECASTS
The Plan considers the Group’s financial
position, performance, cash flows, covenant
compliance and other key financial ratios
and was most recently updated to reflect
current market and external environment
conditions in December 2017. It is built
by business and segment, and includes
growth assumptions appropriate to
the markets each business serves.
The Plan includes certain assumptions,
the most material of which relate to
commodity market price curves and levels
of subsidy support available to the Group
through the generation of biomass-fuelled
renewable power. It is underpinned by
the stable revenues available through the
generation of CfD-backed electricity and
sales to B2B Energy Supply customers.
The Plan is subject to stress testing, which
involves the construction of reasonably
foreseeable scenarios, including those
aligned to the principal risks, which test the
robustness of the Plan when key variables
are flexed both individually and in unison.
Where such a scenario suggests a risk
to viability, the availability and quantum
of mitigating actions is considered.
The Board considers the most significant
of these scenarios in the assessment
period to be a significant deterioration
of commodity market prices, leading
to a fall in the available price for power
and thus a fall in the margins available
to the Group from power generation
and supply activities. This impact would
however be partially mitigated through
the earnings stability provided by the CfD
and a reducing reliance on commodity
price-dependant earnings. Based on its
review the Board is satisfied that in such a
scenario sufficient actions could be taken
to preserve the viability of the Group.
AVAILABILITY OF ADEQUATE FUNDING
The sources of funding available to
the Group are set out in note 4.3 to the
consolidated financial statements (see
page 144). The Board expects these
sources, along with cash flows generated
by the Group from its normal operations,
to provide adequate levels of funding to
support the execution of the Group’s Plan.
Refinancing of the Group’s debt facilities
during the year, and in particular the
placement of a new bond facility, has
provided the Group with enhanced
facilities and the ability to access debt
markets, should that need arise during
the viability assessment period.
EXPECTATIONS
The directors have considered all the factors
in their assessment of viability over the
next three years, including the latest Plan,
scenario analysis, levels of funding, control
environment and the principal risks and
uncertainties facing the Group. The directors
have also considered the availability of
actions within their control in the event of
plausible negative scenarios occurring. They
have a reasonable expectation that the
Group will be able to continue in operation
and meet its liabilities as they fall due over
the three-year period of their assessment.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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PRINCIPAL RISKS AND UNCERTAINTIES
WE MANAGE THE COMMERCIAL
AND OPERATIONAL RISKS FACED
BY THE GROUP IN ACCORDANCE WITH
POLICIES APPROVED BY THE BOARD.
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We manage the commercial and
operational risks faced by the Group in
accordance with policies approved by the
Board. We have reviewed the principal
risks and consider they are broadly
unchanged from the previous year.
The Board is responsible for defining risk
appetite and ensuring the effectiveness
of risk management and internal controls
across the Group. The Group has a
comprehensive system of governance
controls to manage key risks.
GROUP APPROACH TO RISK
MANAGEMENT
The effective identification and
management of risk across the Group is
integral to the delivery of our strategy.
The Group has a Risk Management Policy,
approved by the Board, which defines the
Group’s approach to risk management. The
key elements of the policy are as follows:
– identify principal risks that threaten the
achievement of our strategic objectives
then assess their significance to the
business;
– put in place appropriate mitigating
controls to manage identified risks to an
acceptable level;
– escalate and report principal risk and
control information to support
management decision making;
– assign responsibility and define
accountabilities for risk management and
put these into practice across the Group;
– continuously monitor the changing risk
environment, the Group’s principal risks,
the effectiveness of mitigation strategies
and the application of the risk framework.
The approach manages rather than
eliminates the risk of failure to achieve
business objectives, and provides
reasonable, not absolute, assurance
against material misstatement or loss.
RISK MANAGEMENT COMMITTEES
The risk management governance
structure includes seven business risk
management committees (RMCs).
Each RMC:
– reports to the executive management
of that area, assisting in the management
of their risks. In turn, each executive is
responsible for their risks to the Group
Executive Committee with responsibility
for ensuring that all risks associated with
their specific area of the business are
identified, analysed and managed
systematically and appropriately. This
includes new and emerging risks and
changes to existing risks. New risks are
also identified during development of the
Business Plan;
– has terms of reference that require local
level risk policies and control systems 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.
The Group Executive Committee and the
Board review reporting on risks from each
RMC and from Group Risk. In addition, the
Audit Committee reviews the suitability and
effectiveness of risk management processes
and controls on behalf of the Board.
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PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
DRAX GROUP PLC BOARD
AUDIT COMMITTEE
ASSURANCE
GROUP RISK
ACCOUNTABILITY
GROUP EXECUTIVE
COMMITTEE
BUSINESS RISK MANAGEMENT
COMMITTEES
INTERNAL CONTROL
The Group has a comprehensive and well-
defined internal control system with clear
structures, delegated authority levels and
accountability. The Board has adopted a
schedule of matters which are required to
be brought to it for decision. The internal
control system is designed to ensure that
the directors maintain full and effective
control over all significant strategic,
financial and organisational issues.
Through the Audit Committee, the Board
has implemented a programme of internal
audits of different aspects of the Group’s
activities. The programme is developed
based on an assessment of the key risks
of the Group, the existing assurance and
controls in place to manage the risks and
the core financial control framework.
The results of each internal audit are
documented in a report for internal
distribution and action. A full copy of
the report is distributed to the Group
Executive Committee and the Chair of
the Audit Committee, with an executive
summary going to the other members of
the Audit Committee. Each report includes
management responses to Internal Audit’s
findings and recommendations and an
agreement of the actions that management
will take to improve the risk management
and the internal control framework. In
addition to the results of work undertaken
by Internal Audit, the Audit Committee
also satisfies itself that an action plan is
in place and management are addressing
issues raised by the external auditor
in their yearly management letter.
Based on the reporting from the RMCs
and from the Audit Committee in 2017, the
Board determined that it was not aware
of any significant deficiency or material
weakness in the system of internal control.
CHANGE IN RISK PROFILE
Risks are reported to the Board and
disclosed in the annual report and accounts
under eight principal risk headings.
These are unchanged from 2016.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
53
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Risk
Mitigations
Movement
Changes in factors
impacting risk in 2017
1. Strategic risks
Context
The Group has a strategy designed to
strengthen the long-term future of
the Group. The strategy includes:
– Higher quality, diversified earnings and
management of commodity market
exposure by increasing contractual
and non-commodity related earnings
and;
– Continue work on reducing
projects’ costs to increase
competitiveness in the capacity
market auction; a disciplined
approach to the auction means
such projects will only go forward
upon obtaining a 15-year capacity
market contract (“CM” contract)
which meets our hurdle rate.
– Targeted long-term growth
– Continued work on cost reductions
from biomass supply and
generation efficiency to support
post-2027 operations.
– We continue to actively pursue
potential acquisitions of pellet plant
facilities and evaluate the case for
expansion of existing facilities.
– We continually analyse the
changing dynamics of the markets
in which we operate. A programme
of product incubation to bring new
energy services to market and
research/development into new
technologies is in place.
opportunities with priority on post
2027 earnings and creating new
opportunities in all the markets in
which we operate.
Risk and impact
– Development of the four OCGT plants
acquired in 2016 and re-powering of
coal units to gas with battery storage
option is dependent on winning
contracts with acceptable returns
in capacity market auctions which is
uncertain.
– Post 2027 biomass generation
dependent upon cost of generation
relative to market prices.
– Biomass self-supply requires
acquisition and/or expansion in
order to achieve the 30% self-supply
target. Acquisition opportunities
are dependent on willing vendors or
distressed plants coming to market.
– The energy markets in which we
operate are evolving at a rapid
pace with new entrants competing
with existing players in both Power
Generation and B2B Energy Supply.
– Acquisition of Opus Energy and
integration into the Group provides
support to diversification of
earnings.
– Acquisition and start of
commissioning of LaSalle pellet
facility supports self-supply target.
– Announcement of a cap to
standard variable tariffs (SVTs) for
residential customers increases
regulatory risk to the sector.
– Announcement of a de-rating
mechanism for battery storage will
result in a fairer competition for
CM contracts.
Key
Up/increasing
Down/reducing
No change
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PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
Risk
Mitigations
Movement
Changes in factors
impacting risk in 2017
2. Political and regulatory risks
Context
We remain vulnerable to changes
in government policy at UK and EU
level. The energy sector is subject to
detailed legislation and regulation
that is frequently changing as
the economy decarbonises and
decentralises and is ever more
stringent. Regulation and compliance
generally applicable to businesses is
also increasing with a trend towards
transparency and accountability.
Risk and impact
– Changes to UK policy and regulations
may reduce our ability to deliver our
forecast earnings from our base
business and our growth strategy
putting pressure on our financial
results and cash flows.
– More complex and challenging
regulations increase the potential for
non-compliant outcomes, regulatory
investigation and sanctions.
– Engagement with politicians
across the political spectrum and
Government officials to influence
thinking.
– Communication of our socio-
economic value to the UK.
– Working with think tanks and
specialist consultants to establish
Drax as a thought leader on priority
policy and regulatory issues.
– Engagement with regulators to
influence strategic direction of, and
ensure compliance with, regulatory
requirements.
– Working with Energy UK to identify
market improvements, enhance
competition and develop voluntary
codes of practice.
– Regulatory and compliance
programmes in place proportionate
to the risk of non-compliance. Key
programmes include compliance
with the Criminal Finances Act 2017
and the General Data Protection
Regulation (GDPR) and associated
data protection laws.
– The Government has confirmed
the Carbon Price Floor will remain
in place and at its current level until
the end of coal generation in the
power sector (by 2025).
– The Government has unveiled
a successor to the Levy Control
Framework to monitor the cost of
subsidies and confirmed no new
funding commitments until 2025.
– Brexit continues to create
uncertainty over UK participation
in, and influence over, discussions
on new EU legislation.
– The Government has published
a Bill to introduce a price cap
for domestic power retailers; we
remain vigilant to the risk this could
be extended to some SMEs.
– The smart meter roll out continues
and the obligation to install a
smart meter for every customer
(where reasonable steps have been
exhausted) remains.
– Many ancillary services require
policy, regulatory and market
change to ensure generators are
suitably compensated for these
services.
– Ofgem is reviewing the way in
which network businesses are
remunerated, which will impact
network charging and access rights
for generators and demand users.
– New Data Protection Bill
announced due to Brexit to ensure
the UK is regarded as an “approved
country” to continue to process EU
citizen personal data.
– The introduction of the Markets in
Financial Instruments Directive 2
(MiFID2) increases the regulatory
requirements placed on businesses
participating in non-physical
commodity markets.
Key
Up/increasing
Down/reducing
No change
Drax Group plc Annual report and accounts 2017
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Risk
Mitigations
Movement
Changes in factors
impacting risk in 2017
3. Biomass acceptability risks
Context
The biomass market is still relatively
new, sustainability legislation at
both an EU and UK level and public
understanding of the benefits of
the technology are evolving.
Risk and impact
– EU or UK sustainability policy changes
could be excessively onerous and
make it difficult for us to comply with
policy requirements and claim subsidy
in support of economic biomass
generation.
– Detractors and some eNGOs try and
influence policymakers against wider
biomass use and future biomass
conversions, which could make it
difficult to gain support for further
conversions.
4. Plant operating risks
Context
The reliability of our operating
plant is central to our ability to
create value for the Group.
Risk and impact
– Single point failures of plant and
incidents arising from the handling
and combustion of biomass could
result in forced outages in our
generation or pellet production plants.
– Successful generation using biomass
requires stringent quality throughout
the supply chain, which continues to
evolve and mature. Poor quality could
result in unplanned loss of generation.
– Increased engagement across all
European Institutions (Commission,
Parliament, Council), and relevant
UK Government departments.
– Strong coalition with other utilities
and those engaged in forest
industries including using EU
and US forestry expertise to brief
Brussels.
– Increased transparency in how we
evidence sustainability.
– Working with academics, think
tanks and specialist consultants
to improve understanding and
analysis of the benefits of biomass.
– Engagement with key NGOs to
discuss issues of contention.
– Media, including social media,
presence to respond in the public
domain to eNGOs.
– Forging closer relationships
with suppliers on sustainability
through the supplier relationship
programme.
– Strong processes to ensure
compliance with regulation.
– Robust management systems
designed to mitigate risk.
– Comprehensive risk-based plant
investment and maintenance
programme.
– Stringent safety procedures in
place for handling biomass and
dust management.
– Plant designed to prevent and
control major hazards.
– Significant research and
development on the production of
wood pellets as well as the handling
and burning of biomass.
– Adequate insurance in place to
cover losses from plant failure
where possible.
– Full testing of all biomass supplies
prior to acceptance and the use of
contractual rights to reject out of
specification cargoes.
– Sampling and analysis through
the supply chain to increase
understanding of causes of fuel
quality issues.
– EU consultation on the next
version of the Renewables
Energy Directive, including the
sustainability requirements for
biomass.
– Acquisition and start of
commissioning of LaSalle
Bioenergy plant.
Key
Up/increasing
Down/reducing
No change
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
Risk
Mitigations
Movement
Changes in factors
impacting risk in 2017
5. Trading and commodity risks
Context
The margins of our Power Generation
and B2B Energy Supply businesses
are influenced by commodity market
movements, which are inherently volatile.
Risk and impact
– Fluctuations in commodity prices,
particularly gas and power, could result
in lower margins and a reduction in
cash flow in our generation business.
– Drax Power may fail to secure future
grid system services contracts which
are a source of revenue diversity for
the Group.
– The value of ROCs generated may be
lower than forecast if the recycle value
outturns below BEIS’ projections due
to higher than anticipated renewable
generation.
– High levels of forward power
sales for 2018 and a CfD for one
generation biomass unit.
– Hedging energy supply commodity
price exposures when fixed price
sales are executed with third
parties.
– Wood pellets purchased under
long-term contracts with fixed
pricing.
– Significant forward foreign
exchange hedging in place.
– Hedging fluctuations in ROC
generation from wind farms
through weather derivatives.
6. Information systems and security risks
– Sterling exchange rates against
the Euro and Dollar remain weak.
– Power prices remain low with
increased volatility in short-term
prices.
– Prices for wood pellets increased
as oversupply reduced.
– Opus Energy’ supply to smaller
customers, including gas, increases
commodity exposure relating
to weather impacts on demand
patterns.
Context
The availability, integrity and
security of our IT systems and
Company data are essential to
support operations of the Group.
Risk and impact
– Non-availability of IT systems, or a
breach in their security, could result in
the inability to operate systems or our
information could be compromised.
– If our IT architecture does not meet
the increasingly demanding and
complex requirements of the Group,
we may not deliver our growth plans
effectively.
7. People risks
Context
We need to ensure we have the right
people in place with the leadership
and specialist skills to help the Group
to compete, innovate and grow.
Risk and impact
– Our performance and the delivery
of our strategy is dependent upon
having strong, high-quality leaders
and engaged and talented people
at all levels of the organisation.
– Business continuity, disaster
recovery and crisis management
plans in place across the Group.
– Cyber security measures, including
a defence, detect, remedy strategy,
in place.
– IT transformation programme
in place to deliver upgraded
architecture.
– Significant investment in our
critical IT systems has improved
the general resilience of the core
systems.
– Implementation of the IT
transformation programme.
– Consistent Group-wide
performance management,
potential assessment and career
development frameworks.
– Regular staff surveys to monitor
engagement levels and alignment
of people with Group values.
– Investment in leadership
development.
– Regular staff communications.
– Reward packages to aid retention.
– Development and launch of a new
people strategy centred around
valuing people, driving business
performance and focusing on
talent. This is placing greater onus
on performance, learning, equitable
treatment and consistency in
approach across the Drax Group.
Key
Up/increasing
Down/reducing
No change
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Risk
Mitigations
Movement
Changes in factors
impacting risk in 2017
– World-class personal safety
performance for the year with
improved TRIR continuing well
above the industry benchmark.
– Changes under the Industrial
Emissions Directive set demanding
emissions limits that come fully into
force in the next four years.
8. Environment, health and safety risks
Context
The health and safety of all our
employees, contractors and visitors is of
paramount importance to us. We believe
that a safe, compliant and sustainable
business model is critical to the delivery
of our strategy and crucial for sustained
long-term performance. Safety is at
the heart of our operational philosophy
and we continue to work across the
Group to maintain high standards and
a culture of safe working. Compliance
with environmental legislation and
our environmental permits and
consents is essential to ensure the
long-term future of the business.
Risk and impact
– Our operations involve managing a
range of hazards to personnel and
the environment that arise from
the processes we operate.
– Training staff to a high level of
competence to appreciate and
manage risk.
– Robust management systems
designed to mitigate risk.
– Continuous reporting of events
and prompt implementation of
corrective actions.
– Continuous monitoring of
processes to identify trends
in performance.
– Rigorous auditing of compliance
against standards, policy and
procedures.
– Engagement with regulators
and stakeholders to identify
improvements to our systems and
operations.
– Investigating underlying reasons
for events and implementing
any necessary changes in the
management system and culture.
– Timely identification of future
legislation and appropriate
investment in order to optimise
performance into the future.
Key
Up/increasing
Down/reducing
No change
STRATEGIC REPORT
The Strategic report is set out on pages 1–57 of this document and was approved by the Board of directors on 26 February 2018.
WILL GARDINER
CHIEF EXECUTIVE OFFICER, DRAX GROUP
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
BOARD OF DIRECTORS
THE BOARD PROVIDES CONSTRUCTIVE CHALLENGE AND STRONG LEADERSHIP
TO THE GROUP. IT STRIVES TO LEAD BY EXAMPLE THROUGH FIRST-CLASS
MANAGEMENT AND BEST PRACTICE GOVERNANCE.
EXECUTIVE DIRECTORS
NON-EXECUTIVE DIRECTORS
WILL GARDINER
Group Chief Executive Officer
ANDY KOSS
Chief Executive, Drax Power
PHILIP COX CBE
Chairman
TIM COBBOLD
Independent non-executive director
RESPONSIBILITIES AND SKILLS
Will is responsible for all aspects of
stewardship of Drax Group and its
business, including developing an
appropriate business strategy for Board
approval and securing its timely and
effective implementation. He is also
responsible for shareholder engagement.
He 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
November 2015.
COMMITTEE MEMBERSHIP
Executive Committee.
CURRENT EXTERNAL APPOINTMENTS
Qardio plc – Non-executive director.
Groton School, Groton MA – Member of
the Board and Treasurer.
Institute for War & Peace Reporting
– Member of the UK Board.
Energy UK – Board member.
PREVIOUS ROLES
Will was previously CFO at CSR plc,
divisional FD at BSkyB, CFO at Easynet
Group plc and he held a number of senior
roles at JP Morgan in the investment
banking division.
QUALIFICATIONS
BA Harvard College in Russian and
Soviet Studies.
MA John Hopkins School of Advanced
International Studies in International
Relations.
RESPONSIBILITIES AND SKILLS
Andy is responsible for the operation
of the power plant and equipment.
This includes all aspects of safety
management, plant integrity, plant
operations, engineering support,
maintenance and plant design. He leads
the Power Generation business unit
which maximises shareholder value by
driving efficiency and profitability.
RESPONSIBILITIES AND SKILLS
Philip’s responsibilities include Board
composition and succession and Board
governance. He has significant Board
experience in both executive and
non-executive capacities, and extensive
experience in the power sector.
RESPONSIBILITIES AND SKILLS
Tim’s blend of financial and engineering
experience means that he is well placed
to contribute significantly to the Board
and its committees. His role as a serving
Chief Executive in a different sector
provides an added dimension to his
contribution.
APPOINTMENT TO THE BOARD
January 2015.
APPOINTMENT TO THE BOARD
September 2010.
COMMITTEE MEMBERSHIP
Audit, Nomination and Remuneration
Committees.
CURRENT EXTERNAL APPOINTMENTS
UBM plc – Chief Executive.
PREVIOUS ROLES
Tim was previously Chief Executive
of De La Rue plc, Chief Executive of
Chloride Group plc, and following
Emerson Electric’s takeover of Chloride,
he held a senior position in Emerson.
Prior to that he held a number of senior
positions in Smith Group plc.
QUALIFICATIONS
BSc (Hons) in Mechanical Engineering.
Fellow of the Institute of Chartered
Accountants in England and Wales
(FCA).
APPOINTMENT TO THE BOARD
January 2016, having joined the Group in
June 2005.
APPOINTMENT AS CHAIRMAN
April 2015.
COMMITTEE MEMBERSHIP
Executive Committee and Drax Power
Management Board (Chairman).
COMMITTEE MEMBERSHIP
Nomination (Chair) and Remuneration
Committees.
CURRENT EXTERNAL APPOINTMENTS
Northern Powerhouse Partnership
– Board member.
CURRENT EXTERNAL APPOINTMENTS
Kier Group plc – Chairman.
PREVIOUS ROLES
Andy held a number of senior roles at
Drax including Director of Strategy, Head
of Investor Relations, Group Treasurer
and Head of Risk. He was Deputy Group
Treasurer at Provident Financial plc and
held various investment banking roles at
UBS, Dresdner Kleinwort Benson,
Lehman Brothers and was a chartered
accountant at Coopers & Lybrand.
QUALIFICATIONS
BSc (Hons) in Maths, Operational
Research, Statistics and Economics.
Fellow of the Institute of Chartered
Accountants in England and Wales
(FCA).
Member of the Association of Corporate
Treasurers (MCT).
PREVIOUS ROLES
During his executive career, Philip
was the CFO and then CEO of
International Power plc. Prior to this
he held a senior operational position at
Invensys plc and was CFO at Siebe plc,
having qualified as a chartered
accountant.
As a non-executive he was previously
the Senior Independent Director at Wm
Morrison Supermarkets plc, Chairman of
Global Power Generation and a member
of the boards of Talen Energy
Corporation, PPL, Meggitt plc and
Wincanton plc.
QUALIFICATIONS
MA in Geography.
Fellow of the Institute of Chartered
Accountants in England and Wales
(FCA).
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
59
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Gender diversity
As at 31 December 2017
Composition
As at 31 December 2017
Age profile in years
As at 31 December 2017
Tenure in years
As at 31 December 2017
Male
Female
88%
12%
Non-executive 50%
Executive
Chairman
38%
12%
45–49
50–54
55–59
65–70
12%
12%
38%
38%
0–3
4–6
7–9
10–12
38%
12%
38%
12%
Note:
Dorothy Thompson is included in the above analysis as she was a director throughout 2017, stepping down on 31 December 2017.
Nicola Hodson is not included in the above analysis as she was appointed as a director on 12 January 2018.
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NICOLA HODSON
Independent non-executive director
(appointed 12 January 2018)
DAVID LINDSELL
Senior Independent
non-executive director
DAVID NUSSBAUM
Independent non-executive director
TONY THORNE
Independent non-executive director
RESPONSIBILITIES AND SKILLS
Nicola has extensive sales and IT
experience gained in senior roles at
organisations including Ofgem,
Microsoft, Siemens, CSC, Ernst & Young
and British Nuclear Fuels.
RESPONSIBILITIES AND SKILLS
David’s recent and relevant experience
in the areas of finance and audit are a
significant asset to the Board in his role
as Chairman of the Audit Committee.
APPOINTMENT TO THE BOARD
12 January 2018.
COMMITTEE MEMBERSHIP
Audit, Remuneration and Nomination
Committees.
APPOINTMENT TO THE BOARD
December 2008.
COMMITTEE MEMBERSHIP
Audit (Chairman), Nomination and
Remuneration Committees.
CURRENT EXTERNAL APPOINTMENTS
Microsoft – Vice-President, Global Sales
and Marketing, Field Transformation.
TechUK – Board member.
CURRENT EXTERNAL APPOINTMENTS
Cancer Research UK – Trustee and
Chairman of the Audit Committee.
University of the Arts, London – Deputy
Chairman of Governors.
PREVIOUS ROLES
In an executive capacity, Nicola was
Chief Operating Officer, General
Manager Public Sector at Microsoft and
at Siemens she was General Manager FS,
PS, Manufacturing, Sales and Marketing
Director.
Nicola was previously a non-executive
director at Ofgem, a Board member at
the UK Council for Child Internet Safety
and at the Child Exploitation and Online
Protection group.
QUALIFICATIONS
MBA in Business Administration,
Management and Operations.
PhD in Materials Engineering.
BSc in Chemistry and Materials Science.
PREVIOUS ROLES
During his executive career, David was
a Partner at Ernst & Young LLP and was
Deputy Chair of the Financial Reporting
Review Panel.
He was a non-executive director
and Chairman of the Audit and Risk
Committee at Premier Oil plc and
a non-executive director of
HellermannTyton Group PLC.
QUALIFICATIONS
MA in History.
Fellow of the Institute of Chartered
Accountants in England and Wales
(FCA).
RESPONSIBILITIES AND SKILLS
David’s experience in international
development and environmental
matters, as well as his financial and
governance background, is a valuable
addition to the Board and its committees,
and helps the successful delivery of the
Group’s sustainability agenda.
RESPONSIBILITIES AND SKILLS
Tony’s experience of operating in
different geographical territories is of
great value to the Board as the Group’s
operations develop.
APPOINTMENT TO THE BOARD
June 2010.
COMMITTEE MEMBERSHIP
Audit, Nomination and Remuneration
(Chairman) Committees.
CURRENT EXTERNAL APPOINTMENTS
None.
PREVIOUS ROLES
During his executive career, Tony was
Chief Executive of DS Smith plc and
President of SCA Packaging Limited.
He worked throughout the world in
senior management roles for
Shell International.
He was the non-executive Chairman of
South East Coast Ambulance Service.
QUALIFICATIONS
BSc (Hons) in Agricultural Economics.
APPOINTMENT TO THE BOARD
August 2017.
COMMITTEE MEMBERSHIP
Audit, Nomination and Remuneration
Committees.
CURRENT EXTERNAL APPOINTMENTS
The Elders – Chief Executive.
International Integrated Reporting
Council – Deputy Chair.
PREVIOUS ROLES
During his executive career, David was
the Chief Executive of World Wide Fund
for Nature UK, Chief Executive of
Transparency International UK, Finance
Director and Deputy Chief Executive of
Oxfam and Finance Director of Field
Group plc. In a non-executive capacity,
David was Vice-Chairman of Shared
Interest Society, Chairman of Traidcraft
plc and a non-executive director of Low
Carbon Accelerator Limited.
QUALIFICATIONS
MA in Theology.
MTh in Theology.
MSc in Finance.
Member of the Institute of Chartered
Accountants of Scotland (CA).
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Drax Group plc Annual report and accounts 2017
BOARD OF DIRECTORS CONTINUED
EXECUTIVE COMMITTEE MEMBERS
Gender diversity
As at 31 December 2017
Composition
As at 31 December 2017
Female
Male
33%
67%
Business Unit
operations
50%
Group
operations
Chair
33%
17%
Note:
Dorothy Thompson is included in the above analysis as she was a member of the Executive Committee
throughout 2017, stepping down on 31 December 2017
WILL GARDINER
Group Chief Executive Officer
PETE MADDEN
Chief Executive, Drax Biomass
JONATHAN KINI
Chief Executive, Drax Retail
CLARE HARBORD
Director of Corporate Affairs
Will was appointed to the Executive
Committee on joining the Group in
November 2015.
His biography appears on page 58.
ANDY KOSS
Chief Executive, Drax Power
Andy was appointed to the current
Executive Committee in March 2015,
having joined the Group in June 2005.
His biography appears on page 58.
RESPONSIBILITIES AND SKILLS
Pete guides the business strategy and
oversees day-to-day operations at three
pellet plants and a port facility in the
South Eastern United States, ensuring
that they are environmentally sound,
safe and professionally managed.
APPOINTMENT TO THE EXECUTIVE
COMMITTEE
January 2016, having joined the Group
in March 2015.
COMMITTEE MEMBERSHIP
Executive Committee and Drax Biomass
Inc.
CURRENT EXTERNAL APPOINTMENTS
University of Georgia Center for Forest
Business – Advisory Board Member.
US Industrial Pellet Association – Board
member.
Forest History Society – Board member.
PREVIOUS ROLES
Pete held a number of senior roles
at Plum Creek (USA) including: Vice
President, Renewable Energy and Supply
Chain; Vice President, Operations
Support; and Director, Regional
Marketing, Operations, Resource
Management, Materials Management
and Corporation Planning.
RESPONSIBILITIES AND SKILLS
Jonathan oversees business operations
and champions Drax’s retail strategy
across Haven Power and Opus Energy.
He is responsible for pursuing increased
business growth through small to
medium-sized enterprise (SME) sectors,
and for sustaining and growing Drax
Retail’s industrial and commercial (I&C)
customer base.
APPOINTMENT TO THE EXECUTIVE
COMMITTEE
September 2016, having joined the
Group in January 2016.
COMMITTEE MEMBERSHIP
Executive Committee, Haven Power
and Opus Energy management boards
(Chairman).
CURRENT EXTERNAL APPOINTMENTS
None.
PREVIOUS ROLES
Jonathan was Director of SME at
Vodafone and held various commercial
roles at Virgin Media.
QUALIFICATIONS
Bsc (Hons) in Mathematics.
MBA.
ACMA (CIMA qualified).
RESPONSIBILITIES AND SKILLS
Clare leads the Group’s internal and
external communications, brand, public
affairs and corporate social responsibility
strategies. She also has responsibility for
sustainability, regulation, policy and
compliance.
APPOINTMENT TO THE EXECUTIVE
COMMITTEE
May 2017, having joined the Group at the
same time.
COMMITTEE MEMBERSHIP
Executive Committee.
CURRENT EXTERNAL APPOINTMENTS
None.
PREVIOUS ROLES
Clare was Director of Corporate Affairs
at Heathrow Airport, Director of
Communications at the Ministry of
Justice and Head of UK Communications
at E.ON.
QUALIFICATIONS
BA (Hons) in Archaeology.
QUALIFICATIONS
BA Marlboro College.
MS (Forestry).
MBA.
DOROTHY THOMPSON
(Former) Group Chief Executive Officer
Dorothy was Chairman of the Executive
Committee before stepping down as a
director on 31 December 2017.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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THE EXECUTIVE COMMITTEE
ROLE OF THE EXECUTIVE COMMITTEE
The Executive Committee focuses on the Group’s strategy,
financial structure, planning and performance, succession
planning, organisational development and Group wide policies.
HOW THE EXECUTIVE COMMITTEE FUNCTIONS
The Executive Committee receives regular reports on performance
against the Business Plan and periodic business reports from each
of the business units. Papers are distributed in advance of meetings,
to brief members on matters to be discussed. Members also receive
presentations on various business issues by senior managers within
the business units.
COMPOSITION
With the exception of Clare Harbord, Director of Corporate Affairs
(who was appointed a member in May 2017), all of those listed below
served on the Executive Committee throughout the year and all
continued to be members at the date of this report except for
Dorothy Thompson, who ceased to be a member on 31 December
2017. Biographical details of the Executive Committee members
appear on page 58 (executive directors) and page 60 (senior
management). Matthew Rivers, who was Director of Corporate
Affairs, ceased to be a member of the Executive Committee in
May 2017.
HIGHLIGHTS OF 2017 ACTIVITIES
HEALTH & SAFETY
Regular updates to ensure
attention and commitment
across the Group
CAPITAL RESTRUCTURE
AND NEW DIVIDEND
POLICY
To ensure financial
resources provide
significant strategic
flexibility
EXECUTIVE COMMITTEE COMPOSITION AS AT
31 DECEMBER 2017
Executive Committee members
Will Gardiner
Clare Harbord
Jonathan Kini
Andy Koss
Pete Madden
Dorothy Thompson
The Group Company Secretary is Secretary to the
Executive Committee.
ON-BOARDING OF OPUS
ENERGY
Regular updates on the
continued integration
process and progression of
smart metering roll out
BIOMASS
SUPPLY CHAIN
Consideration of how to
increase supply, particularly
self-supply
GENERATION
Development of four
standalone OCGT plants
and coal to gas repowering
NEW PEOPLE
STRATEGY
Development of our people
to ensure full optimisation
of the diversity of skills of
the workforce
GROUP INFORMATION
SERVICES STRATEGY
Including cyber security,
data protection and GDPR
readiness, and better use
of technology
GROUP
COMMUNICATIONS
STRATEGY
Effective internal
communication and
improved external
stakeholder engagement
EXECUTIVE COMMITTEE DIVERSITY AT
31 DECEMBER 2017
Executive Committee diversity
During 2017 there were four male members and two female
members of the Executive Committee.
Number of meetings
The Executive Committee has 11 scheduled meetings each calendar
year and arranges additional meetings if needed.
EXECUTIVE COMMITTEE ATTENDANCE 2017
The table below shows the number of meetings and attendance at
them by members of the Executive Committee during 2017.
Date appointed as
a member of the
current Executive
Committee
Maximum
possible
meetings(1)
Number of
meeting
attended
% of
meetings
attended
Dorothy Thompson
CBE(2)
1 March
2015
Will Gardiner
Clare Harbord(3)
Jonathan Kini
Andy Koss
Pete Madden
Matthew Rivers(3)
16 November
2015
9 May
2017
1 September
2016
1 March
2015
1 January
2016
1 March
2015
11
11
7
11
11
11
5
8
73%
11
100%
7
100%
11
100%
11
100%
11
100%
5
100%
Notes:
(1) The maximum number of meetings that each individual was entitled to, and had the opportunity
to attend
(2) Dorothy Thompson ceased to be Group Chief Executive Officer and a member of the Executive
Committee on 31 December 2017 and as part of the transition process for the new Chairman of
the Executive Committee she stepped away from meetings in the run up to that date
(3) Matthew Rivers ceased to be a member of the Committee and Clare Harbord was appointed to
the Committee in May 2017
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
LETTER FROM THE CHAIRMAN
“THE MANAGEMENT
OF OUR BUSINESS AND
CONTROL OF OUR ACTIVITIES
IS FOUNDED ON GOOD
GOVERNANCE”
PHILIP COX CBE
CHAIRMAN
OUR HEAT VALUES
HONEST
We say what we mean and do what
we say, we’re genuine and true to
our word
ENERGISED
We’re passionate about our daily
activities and have the drive to
turn ideas into action
ACHIEVING
We’re focused on our goals and
determined to succeed. We work
hard to deliver innovative solutions
to help us do things better, for the
benefit of the Group
TOGETHER
We work collaboratively with
our colleagues, customers and
stakeholders with a friendly approach
and recognise the value each of us
brings to achieving our Group vision
Drax Group plc Annual report and accounts 201763Drax Group plc Annual report and accounts 201763Dear shareholdersDrax places considerable emphasis on governance and in this section of the Annual Report, we describe governance at Drax, the principal activities of the Board and its committees and how we have complied with the principles of the UK Corporate Governance Code (the Code).MY ROLE AS CHAIRMANThe division of responsibilities between the roles of Chairman and Group Chief Executive Officer (CEO) is well established, as shown below. As Chairman I am responsible for leading the Board and ensuring it operates effectively. The Group CEO is responsible for running the business and the implementation of the strategy and policies adopted by the Board.Chairman’s responsibilities –Chairing and managing the business of the Board. –Together with the Group CEO, ensuring the Board carries out a full and robust review of the strategy of the business and ensuring effective implementation of the strategy by the executive management team. –Engagement with shareholders and other key stakeholders. –In conjunction with the Nomination Committee, taking responsibility for the composition of the Board. –Overseeing the annual Board evaluation and acting on its results. –Ensuring effective contribution and constructive challenge from non-executive directors and a productive relationship between executive and non-executive directors. –Ensuring Board agendas cover all material aspects of the business. –Overseeing a thorough process for succession management, both for the Board and for the executive management. –Ensuring Group policies, including policies for health and safety, trading, environment, diversity, ethical, social and sustainability standards are fit for purpose and appropriately implemented. –Oversight of risk management and internal control systems.Group CEO’s responsibilities –Communicating the culture, vision and values of the Group. –The development and implementation of the Group’s strategy. –The day-to-day management of the Group. –Leading the Executive Committee. –Managing relationships with key stakeholders. –With the Group Chief Financial Officer, communicating the Group’s financial performance to shareholders.KEY AREAS OF FOCUSIn 2017 significant progress was made with the strategy. The on-boarding of Opus Energy following its acquisition in February continues to go well and the acquisition of LaSalle Bioenergy in the US Gulf region significantly increased our biomass pellet capacity. In developing longer-term options for growth we continue to explore the option of coal-to-gas repowering at Drax Power Station and construction of new OCGT plants, in order to provide new sources of flexible generation backed up by long-term contracts. The health and safety of all employees and contractors is of paramount importance and safety remains at the centre of our operational philosophy. We have performed well in this regard and we continue to work to improve our performance across the Group.SUCCESSION PLANNING AND DIVERSITYWe recognise that in order to maintain an effective Board it is essential to plan for the future and to ensure the right individuals are appointed to the Board from a diverse pool of talent. We are strong advocates of diversity and we consider the Board to be diverse in terms of the background, skills and experience each individual brings to the Board.All appointments will continue to be based on merit. More detail on the work of the Nomination Committee can be found in the Nomination Committee Report on pages 71–75.We recognise the importance of diversity within the Group and we have reported on Board and Executive Committee composition and diversity earlier on pages 59 and 60. Currently around 25% of Drax’s senior management are women and we recently appointed a new female non-executive director, Nicola Hodson. Drax’s business and demographics are changing and we are committed to improving gender diversity across the Group. BOARD DIRECTORATE CHANGESExecutive directorate changesIn September 2017, we announced that Will Gardiner would succeed Dorothy Thompson as Group CEO in January 2018. Will was previously the Group Chief Financial Officer (CFO) and his appointment is a natural progression after two years working alongside Dorothy.A process to appoint a permanent Group CFO is underway and in the meantime Den Jones has been appointed as Interim Group CFO. Non-executive directorate changesThe Board membership has been refreshed and diversified with the appointments of David Nussbaum and Nicola Hodson as non-executive directors in August 2017 and January 2018 respectively. David’s knowledge of sustainability will support our good work in this area and Nicola’s experience in technology, sales and marketing, business transformation and energy will provide real value as Drax delivers on its strategy.BOARD AND COMMITTEE EVALUATIONDuring 2017 we conducted an internal evaluation of the Board and its committees. The evaluation process involved the completion of questionnaires and interviews by the Chairman. More information on the process and the key action areas can be found on page 72 in the report of the Nomination Committee. During 2018 and beyond I am confident that we have the right team in place to meet the challenges and opportunities of the future. PHILIP COX CBECHAIRMANStrategic reportGovernanceFinancial statementsShareholder information 64
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
CORPORATE GOVERNANCE REPORT
OUR LEADERSHIP ENSURES CLEAR DECISION
MAKING WITHIN THE SAFEGUARDS OF A SOUND
GOVERNANCE FRAMEWORK
DRAX GROUP PLC BOARD
Responsible for overseeing the Group’s strategy and risk appetite,
monitoring performance and ensuring that the necessary controls and resources
are in place to deliver the Group’s plans
AUDIT COMMITTEE
NOMINATION COMMITTEE
REMUNERATION COMMITTEE
Overseas financial reporting, internal
controls and risk management
systems, whistleblowing and fraud,
internal and external audit
effectiveness
Page 76
Makes recommendations on the
structure, size and composition of
the Board and succession planning for
the directors and senior executives
Oversees the Group’s approach
to remuneration and sets key
performance measures
Page 71
Page 81
EXECUTIVE COMMITTEE
Focuses on the Group’s strategy, financial structure, planning and performance,
succession planning and organisational development
All Board committees are authorised to obtain legal or other
professional advice as necessary, to secure the attendance of
external advisers at their meetings and to seek information required
from any employee of the Group in order to perform their duties.
ROLE OF THE BOARD
The Board determines: the Group’s strategy; the Group’s appetite
for risk; the risk management policies; the annual plan and key
performance indicators; acquisitions and disposals and other
transactions outside delegated limits; material changes to
accounting policies or practices; significant financial decisions;
capital structure and dividend policy; shareholder communications;
prosecution, defence or settlement of material litigation; Group
remuneration policy; the terms of reference of Board committees;
and the Board structure, composition and succession.
TERMS OF REFERENCE
The Board has a schedule of matters reserved for its decisions and
formal terms of reference for its committees. These are reviewed
annually and are available to view on the Group’s website at
www.drax.com.
HOW THE BOARD FUNCTIONS
At each meeting the Board receives a report from the Group Chief
Executive Officer in relation to key business and operational matters
and from the Group Chief Financial Officer updating the Board on
the financial performance of the Group. It also receives regular
reports on performance against the Business Plan, safety,
operational, financial and periodic business reports from senior
management across the Group. Of equal importance, the Board also
receives industry, regulatory and topical updates from external
experts and advisers, as well as internal specialists, from time to time.
Papers are distributed in advance of Board and committee meetings,
to brief directors.
The core activities of the Board and its committees are documented
and planned on an annual basis and a list of matters arising from
each meeting is maintained and followed up at subsequent
meetings.
Directors may, in the furtherance of their duties, seek independent
professional advice at the Company’s expense. During 2017, no
director sought independent professional advice.
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 Executive Committee or
otherwise delegated in accordance with a schedule of delegated
authorities approved by the Board.
The Company Secretary advises the Board on all governance
matters, ensuring good information flows within the Board, its
committees, the Executive Committee and senior management.
He ensures that Board processes are complied with and is also
responsible for compliance with the Listing, Prospectus,
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
65
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Disclosure Guidance and Transparency Rules and the Companies
Act. There is collaboration with other parties to ensure wider
corporate compliance.
The Company’s Articles of Association (the Articles), give the
directors power to authorise conflicts of interest. The Board has
an effective procedure to identify potential conflicts of interest,
consider them for authorisation and record them. The Articles
also allow the Board to exercise voting rights in Group companies
without restriction (for example to appoint a director to a Group
company).
The Group Company Secretary is the Secretary to the Board.
Notes:
(1) Will Gardiner was the Group Chief Financial Officer until 31 December 2017. On 1 January 2018
he was appointed as Group Chief Executive Officer.
(2) David Nussbaum was appointed as a director on 1 August 2017.
(3) Dorothy Thompson ceased to be a director on 31 December 2017.
BOARD ROLES
At 31 December 2017, the Board comprised of the Chairman, three
executive directors and four independent non-executive directors.
The key responsibilities of members of the Board are as follows:
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Role
Responsible for leading and managing
the Board, its effectiveness, and
governance. Ensures Board members
are aware of and understand the views
and objectives of major shareholders
and other key stakeholders. Helps set
the tone from the top in terms of the
purpose, goal, vision and values for the
whole organisation.
Responsible for the day-to-day
management of the business, developing
the Group’s strategic direction for
consideration and approval by the Board
and implementing the agreed strategy.
Supports the Chief Executive in
developing and implementing strategy,
and in relation to the financial and
operational performance of the Group.
Responsible for leading and developing
the operation of the Power Generation
business.
Responsible for bringing sound
judgement and objectivity to the Board’s
deliberations and decision-making
process. Constructively challenge and
support the executive directors. Monitor
the delivery of the strategy within the risk
and control framework set by the Board.
Acts as a sounding board for the
Chairman and a trusted intermediary for
other directors. Available to discuss any
concerns with shareholders that cannot
be resolved through the normal channels
of communication with the Chairman
or the executive directors.
The Company has appropriate insurance cover in place in respect of
legal action against directors of the Company and its subsidiaries.
The Nomination Committee report contains details of the selection,
appointment, review and re-election of directors, as well as the
Board performance review and directors’ development. The Articles
are available on the Group’s website at www.drax.com.
Position
Chairman
Group Chief Executive
Officer
Group Chief Financial
Officer
Chief Executive,
Drax Power
Independent
Non-executive directors
Senior Independent
Director
SCHEDULE OF MATTERS RESERVED FOR THE BOARD
At least once a year the Board reviews the nature and scale of
matters reserved for its decision and these include:
– Dividend policy.
– Company strategy, business objectives and annual budgets.
– Succession planning for the Board and senior management.
– Approval of significant funding decisions.
– Review and approval of corporate transactions.
Other day-to-day operational decisions are delegated by the Board
to the Executive Committee, subject to formal delegated authority
limits.
GOVERNANCE OVERVIEW
The Board recognises that there is always scope for improvement to
make us better able to achieve our aspirations and deal with the
challenges we face. To address this, we continually work to ensure
that our governance structures and processes are aligned with the
requirements of the business and that good governance is
embedded by management throughout the Group. At Drax we
believe that governance is not only about following the rules, but
also about doing things in the right way. We believe that it is
important for the Board to establish and lead a strong moral and
ethical culture within the organisation. The values of the Group are
expressed as; honest, energised, achieving and together, or “HEAT”
as it is known within the business. These values have been
established for several years, and are embedded throughout the
organisation in the way our people go about their everyday business.
THE BOARD IN 2017
The composition of the Board in 2017 was as follows: the Chairman,
three executive directors and four independent non-executive
directors.
Position
Role
Philip Cox CBE
Chairman
Tim Cobbold
Will Gardiner
Andy Koss
David Lindsell
Independent non-executive director
Group Chief Financial Officer(1)
Chief Executive, Drax Power
Senior Independent non-executive
director
David Nussbaum(2)
Independent non-executive director
Dorothy Thompson CBE(3) Group Chief Executive Officer
Tony Thorne
Independent non-executive director
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Drax Group plc Annual report and accounts 2017
CORPORATE GOVERNANCE REPORT CONTINUED
2017 CALENDAR OF BOARD ACTIVITIES – HIGHLIGHTS
JANUARY 2017
– Approval of changes to management and
operational structure.
– Review of the challenges presented by the
EU sustainability regulations comprised in
the Renewable Energy Directive.
– Top ten risk analysis and in particular the
completion of actions necessary
to satisfactorily address the two Health &
Safety Executive Improvement Notices
relating to levels of dust detected in areas
of the generation plant and the Principal
Risks for the Annual report and accounts
– Budgets for 2017 approved.
– Investment plan for the B2B Energy
Supply business approved.
JULY 2017
– 2017 interim report and accounts
approved.
– 2017 interim dividend approved.
AUGUST 2017
– Appointment of David Nussbaum as
a new non-executive director.
SEPTEMBER 2017
– Update on data protection in readiness
for the implementation of the GDPR.
– Review of the B2B Energy Supply
business’ strategy.
– Succession to the role of Group CEO.
OCTOBER 2017
– Sale of Billington Bioenergy approved
as company no longer in line with
Group strategy.
– Group strategy review and approval of
gas repowering project.
– New people strategy approved.
DECEMBER 2017
– Update on OCGT projects.
– Outage contract approved.
JAN
2017
FEB
2017
MAR
2017
APR
2017
MAY
2017
JUN
2017
JUL
2017
AUG
2017
SEP
2017
OCT
2017
NOV
2017
DEC
2017
FEBRUARY 2017
– Approval of the completion of the Opus
Energy acquisition.
– Statement on prevention of slavery and
human trafficking in Drax Group plc was
presented to the meeting and discussed.
– Preliminary results approved.
– 2016 Annual report and accounts
approved.
– 2016 final dividend approved.
– 2016 Corporate Scorecard approved by
the Remuneration Committee.
MARCH 2017
– Group refinancing approved.
APRIL 2017
– Business plan and budgets for Opus
Energy approved.
– Performance and Deferred Share Plans
approved.
MAY 2017
– New dividend policy approved.
JUNE 2017
– Review of the operations of the Power
Generation business, including
consideration of OCGT projects.
– Discussed an update on Group risks.
NOVEMBER 2017
– Announcement of the appointment of
Nicola Hodson as a new non-executive
director in January 2018.
– Review of draft Business Plan for 2018.
Drax Group plc Annual report and accounts 2017
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DIRECTORS’ INTERESTS, INDEMNITY ARRANGEMENTS
AND OTHER SIGNIFICANT AGREEMENTS
Other than 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
significant contract with the Company or any of its subsidiary
undertakings.
There are no agreements between the Group and its directors
providing for compensation for loss of office or employment because
of a takeover bid.
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The Board has reviewed the independence of each non-executive
director. None of the non-executive directors who 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 recognises
that in view of the characteristics of independence set out in the UK
Corporate Governance Code, length of service is an important factor
when considering the independence of non-executive directors and
that directors having served for longer than nine years may not be
considered independent. In November, David Lindsell was re-
appointed for a fourth time until the 2019 AGM. The Board considers
that David Lindsell’s experienced oversight in ensuring careful
financial stewardship as Chairman of the Audit Committee is crucial
during a period of change in the implementation of the new strategy
and the development of the new Group CEO into that role, and the
establishment of a new Group CFO. The established Chairman of the
Audit Committee continuing in post during this period of transition
and assisting in the recruitment and induction of a new Audit
Committee Chairman in 2018 will be an integral part of ongoing good
financial governance. The Board is satisfied that David Lindsell’s
judgement has remained wholly independent and that he has
consistently displayed all of the behaviours expected of
our independent non-executive directors. The Board therefore
considers all of the non-executive directors to be independent.
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BOARD DIVERSITY
In 2017, there were seven male directors and one female director on
the Board.
NUMBER OF MEETINGS HELD
The Board and its committees have regular scheduled meetings and
hold additional meetings as required. Directors are expected, where
possible, to attend all Board meetings, relevant committee meetings,
the Annual General Meeting (AGM) and any General Meetings.
– The Board has eight scheduled meetings each year.
– In 2017, an additional three meetings were held by telephone to
address matters requiring formal decisions and a Shareholder
General Meeting was held to approve the Opus Energy acquisition.
– In addition, the Board meets at least annually to consider strategy.
TIME COMMITMENT
Under the terms of his letter of appointment, the Chairman is
expected to commit between 50 and 70 full days a year to this role.
Under the non-executive directors’ letters of appointment, each is
expected to commit 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 the
Audit, Nomination and Remuneration Committees is an additional
three to four full days a year in each case. However, in practice
considerably more time is devoted, particularly by the Chairmen of
the Board committees. Non-executive directors also spend time with
management, to maintain their knowledge of the developing
business and to understand the operational challenges being faced.
COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE
It is the Board’s view that throughout the period commencing on
1 January 2017, the Company has complied in full with the principles
of the Code issued in April 2016. The Code can be found on the
Financial Reporting Council website at www.frc.org.uk.
With the exception of David Nussbaum who was appointed as a
director on 1 August 2017, and Nicola Hodson who was appointed
as a director on 12 January 2018, all of the directors listed on pages
58–59 served throughout the year. Each of those listed, except for
Dorothy Thompson, remained directors as at the date of the approval
of this report. Biographical details of the directors appear on pages
58–59.
BOARD ATTENDANCE 2017
The table below shows the number of meetings held and the directors’ attendance during 2017.
Director
Tim Cobbold
Philip Cox
Will Gardiner
Andy Koss
David Lindsell
David Nussbaum
Dorothy Thompson(2)
Tony Thorne
Notes:
(1) The maximum number of meetings that each individual was entitled to, and had the opportunity to attend
(2) Dorothy Thompson ceased to be a director on 31 December 2017
Date appointed as a director
and member of the Board
27 September 2010
1 January 2015
16 November 2015
1 January 2016
1 December 2008
1 August 2017
20 October 2005
29 June 2010
Maximum
possible
meetings(1)
No. of
meetings
attended
% of
meetings
attended
8
8
8
8
8
3
8
8
7
8
8
8
8
3
8
8
88%
100%
100%
100%
100%
100%
100%
100%
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Drax Group plc Annual report and accounts 2017
CORPORATE GOVERNANCE REPORT CONTINUED
STRATEGY IN PROGRESS
Succession planning,
development and induction
In September 2017 we announced that
after 12 successful years as Group Chief
Executive Officer, Dorothy Thompson would
be leaving the Group at the end of the year
and that Will Gardiner would be appointed
as Group Chief Executive Officer with effect
from 1 January 2018.
The Nomination Committee has a well-
established and robust succession planning
process in place and it regularly identifies
and monitors potential suitable internal
candidates for senior roles. The Chairman of
the Nomination Committee led the process
to appoint a new Group Chief Executive
Officer and had a number of discussions
with the Nomination Committee to scope
out the best approach to take and the
requirements for the role. The Committee
enlisted the help of a professional external
executive recruitment agency, Russell
Reynolds Associates. Aside from assisting
with the recruitment, Russell Reynolds has
no connection with the Group.
A timetable was adopted for the process
and regular Committee discussions and
updates were held throughout. From a
detailed understanding of our requirements
and specification of the role, a list was
compiled of potential external candidates
and an assessment of both the external and
internal candidates was carried out using
the same criteria to ensure consistency.
A shortlist was then drawn up and the
shortlisted candidates met the Committee.
The Nomination Committee unanimously
agreed that Will Gardiner had the blend of
skills and experience to be our next Group
Chief Executive Officer. Will joined Drax as
Group Chief Financial Officer and a member
of the Group Board in November 2015. He
has been a key architect of our new strategy
and is a focused, innovative and engaging
leader.
DIRECTORS’ DEVELOPMENT
The Board is committed to the development of all employees
and directors and has reviewed, and will continue to review,
each director’s development requirements and make appropriate
arrangements to address them. For example, as part of his ongoing
development, Will Gardiner worked with an executive coach during
2017. In addition to regular coaching sessions, where his coach
reviewed priorities and challenges with him, his coach also prepared
360 degree feedback to support more in-depth coaching.
The non-executive directors visit operational sites both in the UK
and the US. In 2017 a delegation of the Board visited operational and
administrative sites in the US, and over a three-day period carried out
visits to Drax Biomass operations and reviewed the wider
sustainability programme and activities. Periodically, the non-
executive directors also meet with senior management to be
briefed on the Group’s business and specific Board training
is arranged covering key relevant topics. For example, in
September the Board held its meeting at one of the Opus Energy
offices in Northampton where the Board received presentations
on the operation of the retail business by members of the senior
management team. The directors were then taken through
various customer scenarios to illustrate the customer experience.
These programmes are reviewed regularly during the year.
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SHAREHOLDER ENGAGEMENT IS A PRIORITY
FOR THE GROUP TO ENSURE GOOD UNDERSTANDING
OF OUR INVESTMENT CASE
SHAREHOLDER ENGAGEMENT
Drax believes engagement with shareholders is very important.
The Group has a comprehensive investor relations programme,
maintaining regular dialogue with shareholders and investors.
Throughout the year, meetings are held for the Group Chief
Executive Officer, Group Chief Financial Officer and Head of
Investor Relations to meet with institutional shareholders and
sell-side analysts. These meetings allow us to discuss the Company’s
business model, strategy and marketplace, as well as update on
performance. Meetings are arranged proactively and on request
and often include site visits, which provide shareholders with
valuable insight into the Group’s operations.
Digital communication is increasingly used as a means of keeping in
touch with shareholders. During 2017 we introduced a new Investor
Relations section to the Drax Group website. In addition to providing
information on RNS announcements, Company publications and a
calendar of events, the website provides content relating to
the markets in which the Group operates.
The Board receives reports of meetings with institutional
shareholders together with regular market updates which give the
directors a clear understanding of shareholders’ views and concerns.
The Chairman is also available to meet with shareholders,
independently of the executive directors, as required.
The Annual report and accounts is sent to all shareholders who wish
to receive a copy. It is also available in the investor section of the
Company’s website www.drax.com.
Communication with all our stakeholders is an essential part of
our business. Details of communications with stakeholders are
contained in the Stakeholder engagement section of this report
beginning on page 42, with further details of our communications
with investors set out below.
THE DRAX INVESTOR RELATIONS PROGRAMME INCLUDES THE FOLLOWING ACTIVITIES
1. SHAREHOLDER MEETINGS
Through the year the
management team are available
to meet shareholders and, in
addition, following the full and
half year results, a structured
programme of meetings is
arranged to allow management
to meet with shareholders and
prospective investors.
Why it is important
The Group considers that it is
important that the owners of
the business have access to
management in order to
understand the business,
its operation and strategy.
2. THE ANNUAL
GENERAL MEETING
The AGM is attended by the full
Board of directors. Details of the
resolutions to be proposed at
the AGM on 25 April 2018 can be
found in the Notice of AGM
which is available at www.drax.
com, and will be dispatched to
shareholders who have
requested a hard copy of the
documentation from the
Company. All shareholders
are invited to vote on the
resolutions and the results
are made available after the
meeting and published on
our website.
Frequency
Ongoing.
Why it is important
The AGM provides all
shareholders with a forum to
put questions to the Board of
Directors, and to vote on
important issues.
Frequency
Once a year.
4. CAPITAL MARKETS
DAY EVENTS
A Capital Markets Day was
held in June and included
management presentations.
The executive directors were
present, as well as members of
the senior management team.
Why it is important
Capital Markets Days allow the
Group to provide the capital
markets with insight on strategy
as well as the different aspects
of the business and expand on
its plans to create shareholder
value.
Frequency
Periodically.
3. SELL-SIDE ANALYST
ENGAGEMENT
The executive directors and
members of the senior
management team engage with
sell-side analysts formally at the
full and half year results
presentations. In addition, the
Group CFO and Head of Investor
Relations are in regular dialogue
with analysts as they publish
research on the Company.
Why it is important
Sell-side analysts write research
on the Company, which is sent
to their clients, existing and
prospective investors. It is
therefore important that
analysts have up-to-date and
accurate information on the
business and its strategy in order
to present an informed view to
the equity market.
Frequency
Periodically.
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Drax Group plc Annual report and accounts 2017
CORPORATE GOVERNANCE REPORT CONTINUED
Communications with shareholders are given a high priority and the
Chairman is keen to ensure that he maintains an open relationship
with the Company’s major shareholders and communicates directly
with them and offers them the opportunity to meet any other
directors. This enables the Board to understand their views on the
Group and its governance. The Company has implemented the
provisions of the Companies Act 2006 regarding electronic
communication with its shareholders, in order to give shareholders
more choice and flexibility in how they receive information from the
Company. The Group’s website www.drax.com contains a wide
range of information on the Group, including a dedicated Investors
section and all information reported to the market via a regulatory
information service also appears as soon as practicable on
the website.
Financial results are communicated to the market twice a year and
at the preliminary and interim results, a presentation is given to
sell-side analysts, which is made available to the public through a
webcast on the Group’s website www.drax.com. The Board also
reviews and discusses the investor feedback from post-results
investor meetings conducted by the Group Chief Executive and the
Chief Financial Officer. The Group engages Makinson Cowell, part of
the KPMG Group, to advise and assist with communications with
shareholders and regularly discusses matters with its brokers,
JP Morgan.
The Company’s private registered shareholders hold, in aggregate,
approximately 0.65% of the issued share capital. The Board is as
interested in their views as it is in the views 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 a verbal 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.
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 allows them to vote for or against, or to abstain,
on each resolution. Particulars of aggregate proxies lodged are
announced to the London Stock Exchange and appear on the
Group’s website as soon as practicable after the conclusion of
the AGM.
OTHER STAKEHOLDER ENGAGEMENT
We communicate with our employees through various channels
such as open forums and the employee newsletter. We seek
employee feedback through our All Ideas Matter (AIM) initiative and
we regularly carry out a full employee engagement survey with
Towers Watson.
This year the Chair of the Remuneration Committee, Tony Thorne,
also consulted with shareholders on the proposed changes to the
current remuneration policy.
2017 Calendar of investor events
February
General Meeting (Opus Energy acquisition)
March
April
June
July
2016 year-end results released
UK investor roadshows
Dialogue with shareholders on AGM remuneration
resolutions and on 2016 Directors’ Remuneration
report
Annual General Meeting
Capital markets event for investors and analysts
2017 interim results released
UK investor roadshows
December
Trading update
Communication with shareholders and
shareholder representative bodies on proposed
changes to the Company’s remuneration policy
We strive to have a positive impact on local communities and work
hard to ensure we understand the potential impacts of our business
now, and in the future. We regularly meet with local people, as well as
with community and local authority representatives, to make sure
that people’s voices are heard. We work closely with a number of
trade and industry associations, particularly those active in energy,
renewable energy, timber and forestry sectors, and our Corporate
Affairs team engages with regulators and policy makers to ensure
our business understands and contributes to the evolving
regulatory agenda. Sustainability remains at the heart of our
business and as we grow this will be a continued focus to enable us
to achieve a positive economic, social and environmental impact.
The feedback from all of these activities is available to the Board
through the Executive Committee, ensuring that the interests of
all stakeholders are considered, when relevant, in decision making.
This is supportive of the Board’s duty to promote the success of
the Company as set out in Section 172 of the Companies Act 2006.
(For further detail and information on stakeholder engagement
and communication please refer to pages 42–45.)
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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NOMINATION COMMITTEE
ACTIVITIES IN 2017
– Appointment of David Nussbaum
as a non-executive director
– Appointment of the Group
Chief Executive Officer
– Appointment of an Interim
Group Chief Financial Officer
– Appointment of Nicola Hodson
as a non-executive director
– Considered the effectiveness
and performance of the
Board and its committees
– Review of management
development and
succession planning
ROLE OF THE COMMITTEE
The Committee’s principal responsibilities
are to:
– keep under review the Board’s structure,
size and composition (including requisite
skills, diversity, knowledge and experience
it requires);
– conduct the search and selection process
for new directors, taking advice from
independent search consultants as
appropriate; and
– ensure a rigorous succession
planning process for the directors and
other senior managers, including the
identification of candidates from both
within and outside the Group.
TERMS OF REFERENCE
The Committee’s terms of reference 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.
NOMINATION COMMITTEE REPORT
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“THE COMMITTEE’S ROLE IS TO
ENSURE THE RIGHT LEADERSHIP IS
IN PLACE TO STEER THE COMPANY”
PHILIP COX CBE
CHAIRMAN
COMMITTEE MEMBERS
Tim Cobbold
David Lindsell
David Nussbaum
Tony Thorne
Nicola Hodson
(appointed 12 January 2018)
ATTENDING BY INVITATION
Group Chief Executive Officer
Head of Corporate HR
NUMBER OF MEETINGS
HELD IN 2017
4
The Group Company Secretary is
Secretary to the Committee.
ATTENDANCE IN 2017
Committee
member
Tim Cobbold
Philip Cox
David Lindsell
David Nussbaum
Tony Thorne
Date
appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
27 September 2010
22 April 2015
1 December 2008
1 August 2017
29 June 2010
4
4
4
1
4
4
4
4
1
4
100%
100%
100%
100%
100%
BOARD AND COMMITTEE EVALUATION
The Board continually strives to improve its effectiveness and
recognises that the performance evaluation process represents an
annual opportunity to enhance overall Board effectiveness. In 2016
the Board conducted an externally facilitated Board evaluation
which resulted in some important recommendations for improving
the Board’s effectiveness which have subsequently been
implemented, including inviting advisers and external experts to
selectively attend Board meetings to share their perspective on the
business and the markets in which we operate. In 2017 the Board
received presentations from external consultants on: energy,
marketing and branding, and from the Company’s brokers.
In addition, presentations from Group senior management were
received on a wide range of issues such as safety, operational
integrity, risk analysis, IT and cyber security, people development,
innovation and development. There has also been some
restructuring of how the Board conducts its meetings in order to
increase the effectiveness of meetings, by the introduction of
pre-meetings for the Chairman and non-executive directors before
the Board meeting.
This year, in view of the externally facilitated evaluation carried out
in 2016, it was agreed that an internal Board performance evaluation
would be most beneficial to the Company. The Chairman and the
Company Secretary discussed how best to facilitate this and it was
decided that the Company Secretary should prepare a questionnaire
for this purpose.
The questionnaire was approved by the Chairman and was
subsequently completed by all directors to evaluate the
performance of the Board, each of its committees and individual
Board members. Following completion of the questionnaires, the
Chairman held a series of one-to-one meetings with each of the
directors in order to discuss the outcomes of the evaluation.
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Drax Group plc Annual report and accounts 2017
NOMINATION COMMITTEE REPORT CONTINUED
The Chairman of the Committee reports on the Committee’s
proceedings to the following Board meeting.
The Committee has had a busy year as following Dorothy
Thompson’s decision to stand down as Group Chief Executive Officer
(CEO). it led the process of the search for a replacement. Will
Gardiner, formerly Group Chief Financial Officer (CFO) was appointed
as the new Group CEO, effective 1 January 2018 with Den Jones
appointed as Interim Group CFO until the process for appointing
a permanent Group CFO has been completed.
During the year an additional non-executive director, David
Nussbaum, was appointed and the announcement of another
non-executive director, Nicola Hodson, to be appointed in January
2018, was made.
DIRECTORATE CHANGES
The past year has been a significant year for the Board with the
announcement in September 2017 that Will Gardiner, Group CFO was
to succeed Dorothy Thompson as Group CEO with effect from
1 January 2018 following Dorothy Thompson’s decision to step down
after 12 years as Group CEO.
Will’s appointment is a natural progression after two years
working alongside Dorothy developing the new strategy. The
Board is progressing the process to appoint a permanent Group
CFO as soon as practicable, but in the meantime Den Jones was
appointed on 1 November 2017 as Interim Group CFO. Den is highly
experienced, having previously been the CFO at Johnson Matthey
and BG Group.
On behalf of the Board I would like to thank Dorothy for her
enormous contribution to Drax. She has led the transformation of
the business during her tenure and leaves the Group in a strong
position with a clear strategy that lays the foundations for further
success in a changing energy sector.
I am pleased to welcome two new non-executive directors to the
Board, David Nussbaum and Nicola Hodson. David, who was
appointed on 1 August 2017, has a strong background in
sustainability, environmental, ethical and social responsibility, and
Nicola, who was appointed on 12 January 2018, has significant
experience in the technology, business transformation, IT, sales and
marketing and energy sectors. I am confident that with their breadth
of experience and expertise, they will be valuable additions to the
Board.
NON-EXECUTIVE DIRECTORS
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. The Board will not normally 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 subject to rigorous review. All directors are subject to annual
re-election at our Annual General Meeting.
Drax Group plc Annual report and accounts 2017
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SKILLS AND KNOWLEDGE OF THE BOARD
A key responsibility of the Committee is to ensure that the Board
maintains a balance of skills, knowledge and experience appropriate
to the operation of the business and required to deliver the strategy.
As in past years, the Nomination Committee has reviewed the
composition of the Board and as part of this review the Committee
considered whether the:
– Board contains the right mix of skills, experience and diversity;
– Board has an appropriate balance of executive directors and
non-executive directors; and
– non-executive directors are able to commit sufficient time to the
Company in order to discharge their responsibilities effectively.
Following the review, the Committee was satisfied that the Board
continues to have an appropriate mix of skills and experience to
operate effectively. All the directors have many years of experience,
all gained from a broad range of businesses and they collectively
bring a range of expertise and knowledge of different business
sectors to Board deliberations, which encourage constructive,
challenging and innovative discussions.
In addition to the specific focus for 2017, there is an annual
programme of work which is designed to fulfil its principal duties.
This programme reviews:
– Re-election and appointment of directors
The Committee met on 15 February 2018, following the
completion of the 2017 Board evaluation and performance review
process, (described above) 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 Board evaluation and performance review
concluded that the directors offering themselves for re-election
continue to demonstrate commitment to their particular role and
to perform effectively.
– Size, structure and composition of the Board
At its meeting in February 2017, the Chairman provided the
Committee with an update in the search for and recruitment of
two additional non-executive director roles. The Committee
concluded that the Board, constituted with three executive
directors, five independent non-executive directors and a
Chairman who was independent on appointment, was appropriate
for the Company .
– Membership of Board committees
It is the Board’s policy to invite all independent non-executive
directors to join the Audit, Nomination and Remuneration
committees. The Committee reviewed this policy, and also the
composition of the Board committees. It was noted that the
committees remained compliant with the provisions of the Code
and thus no changes to membership of the committees were
recommended.
The main points arising from the 2017 performance evaluation
include the following:
Key strengths
– Board meetings are conducted in a way that ensures open and
meaningful participation. Non-executive directors are given
full transparency and are actively included on all matters. The
Board also has regular engagement with management levels
below the executive, through presentations and visits to all
business units.
– The Board is very aware of the risk of political and regulatory
changes. There is strong engagement with policy makers. The
executives keep the non-executives well informed of political
and regulatory developments, and key milestones.
– The Board has an appropriate variety of skills and experience
which is aligned to the strategy.
– The Board is very effective in managing change within the
business. The organisation has managed a significant scale
change over the last few years which has gone well.
– The duties and responsibilities of the Board and its committees
have been clearly defined and are carried out well.
– The ethics and corporate responsibility processes are highly
effective.
Principal areas of focus for 2018
– Improving diversity, as it was recognised that additional focus is
needed to further widen the composition of the Board.
– The Board has developed a clear and coherent strategy. The
focus is now on the successful implementation of this strategy.
– Risk – increased discussion on risk and the Board’s appetite
for risk.
– More focus on assessing the non-financial, qualitative and
quantitative measures when assessing company performance.
– Further examination of new technologies in the energy sector,
and continued focus on cyber security risk.
– Implementation of the new employee performance and
appraisal process to drive forward talent development.
SUCCESSION PLANNING AND DIVERSITY
Maintaining and improving the effectiveness of the Group’s
succession planning process is key to the success of the business
in the future. Selecting and supporting the right individuals are
essential in leading the delivery of the new strategy. We will be
assisted in this by the implementation of the new people strategy
which will help to create opportunities for talented individuals to
develop and to lead the Group in the future.
Diversity is one aspect of the succession planning process and
includes: gender, age, race, religion, background and experience.
The Board is committed to expanding the diversity of the workforce
across the Group, including its top management. This ongoing
commitment is reflected in the recent appointments of David
Nussbaum and Nicola Hodson to the Board.
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Drax Group plc Annual report and accounts 2017
– Succession planning
– Board diversity
The Committee reviews the succession plan at least annually.
The Group has a well-established and robust succession planning
process, which covers all Executive Committee members and their
direct reports, as well as other individuals within the Group who
have been identified as having longer-term potential for senior
roles. In the Committee’s opinion, the plan is well prepared and
appropriate for the size of the Group’s business and management
structure, and there is a range of strong candidates for most
senior roles. Any potential gaps are the subject of both internal
development plans and/or selected external recruitment.
– Appointment of new Group CEO
The Committee led the process for the search of a new Group CEO
to replace Dorothy Thompson. The Committee engaged an
external recruitment agency, Russell Reynolds, to assist in the
search. Russell Reynolds does not have any other connection with
the Company. A suitable list of external candidates was drawn up
and an assessment of both the external and internal candidates
was carried out. A shortlist of candidates then met the Committee
and it was decided to appoint Will Gardiner.
– Appointment of two new non-executive directors
The Committee continued its search to broaden non-executive
strength and diversify the Board’s skills and experience base,
leading to the appointments of David Nussbaum in August 2017
and Nicola Hodson in January 2018. External recruitment
agencies, Acre and Heidrick & Struggles, were used to assist in the
recruitment process for David Nussbaum and Nicola Hodson
respectively. Aside from assisting with recruitment, Acre and
Heidrick & Struggles have no other connection with the Company.
In addition to the regular programme of work and the evaluation
mentioned below, the Committee recognises the diversity
challenge and considers the question of Board diversity in its
widest sense, and gender diversity in particular. The Committee
identified a number of additional capabilities in its non-executive
director search specification which were used in the successful
recruitment of David Nussbaum, who has a background in the
charity and sustainability sectors, and Nicola Hodson who has
extensive experience in technology, business transformation, IT
sales and marketing, and energy. The Committee recognises the
strength that can be achieved through diversity in the Group’s
management and this is an important consideration in the
recruitment, promotion and training of the senior management
team. The Company participated in the Hampton Alexander
review into increasing the number of women in senior positions in
FTSE 350 companies. The Board fully supports the findings of this
review. Looking forward we have further opportunities to address
our diversity agenda. We have already started in 2018 the search
to recruit a non-executive director who will shadow David Lindsell
as Chair of the Audit Committee, and in 2019 the scheduled
retirements of Tim Cobbold and Tony Thorne from the Board will
provide further planned opportunities. To assist in this process the
Board plans to only use executive search agencies which have
signed up to the Hampton Alexander voluntary code of conduct
on gender diversity. Further details of our commitment to diversity
can be found on page 40.
Drax Group plc Annual report and accounts 201775Drax Group plc Annual report and accounts 201775STRATEGY IN PROGRESSInduction of David NussbaumAll new directors receive a comprehensive and tailored induction programme including wider background briefings on the Group’s activities, meetings with key managers and visits to the Group’s operational sites. In August 2017 David Nussbaum joined the Board as an independent non-executive director, bringing with him valuable experience and expertise particularly in the charity and sustainability sectors. David’s induction programme included a visit to our US operations, and the Drax Power Station site in Selby which included a site tour and meetings with some of thesenior management team as well as the Group Company Secretary who provided an overview of the Board procedures and governance framework. David was provided with a comprehensive induction pack which contained a wide range of material including: Board papers and minutes of previous meetings; schedule of matters reserved for the Board; schedule of dates for Board and committee meetings; terms of reference for all Board committees; Group company structure chart and senior management structure chart.RENEWAL AND RE-ELECTIONThe Company’s Articles provide that, unless otherwise determined by the Company, the Board must consist of at least two, and no more than 15 directors. The shareholders and the Board have the power to appoint any person who is willing to act as a director. If the Board appoints a director, that director must retire at the first AGM following their appointment. That director may, if they so wish, put themselves forward for re-election. Nicola Hodson and David Nussbaum were appointed by the Board subsequent to the 2017 AGM and therefore they will retire and offer themselves for re-election by shareholders at the forthcoming AGM. The Articles provide that, one-third of directors shall retire by rotation each year and are eligible for re-election by shareholders at the AGM. In accordance with the Code, the Company will continue its practice to propose all directors for annual re-election. Accordingly, each of Tim Cobbold, Philip Cox, Will Gardiner, Andy Koss, David Lindsell and Tony Thorne will retire at the forthcoming AGM and, being eligible, offer themselves up for re-election.Following the evaluation and review of the Board described above, I concluded that the directors offering themselves for re-election continue to demonstrate commitment, management and industry expertise in their particular role and continue to 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 103.The Company may however, remove a director by ordinary resolution before the expiration of the director’s period of office (without prejudice to any claim the director may have for breach of any service contract) and may appoint another person who is willing to act to be a director in their place. The replacement director is regarded as a director from the outgoing director’s date of last appointment/re-appointment.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 of the AGM, prior to the meeting, details of which are contained in the Notice of Meeting.During the year, the Chairman held meetings with the non-executive directors in the absence of the executive directors, and, separately, 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 Code.This report was reviewed and approved by the Nomination Committee on 26 February 2018.PHILIP COX CBECHAIRMAN OF THE NOMINATION COMMITTEEStrategic reportGovernanceFinancial statementsShareholder information 76
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Drax Group plc Annual report and accounts 2017
AUDIT COMMITTEE REPORT
AUDIT COMMITTEE ACTIVITIES
IN 2017
The Audit Committee follows a
programme of work designed to
ensure that the Group has sound
risk management processes, a
robust system of internal control
and delivers fair and balanced
performance reporting.
The acquisition of Opus Energy, its
risk management and internal control
systems and its integration into the
Group was a particular focus in 2017.
ROLE OF THE COMMITTEE
The Committee assists the Board to fulfil
its oversight responsibilities. Its primary
functions are to:
– monitor the integrity of the financial
statements and other information
provided to shareholders;
– review significant financial reporting
issues and judgements contained in
the financial statements;
– advise the Board on whether the
Committee believes the annual report
and accounts are fair, balanced and
understandable;
– maintain an appropriate relationship with
the Group’s external auditor and review
the effectiveness and objectivity of the
external audit process;
– review the systems of internal control
and risk management;
– monitor and review the effectiveness of
the internal audit function; and
– make recommendations to the Board
(to put to shareholders for approval)
regarding that appointment of the
external auditor.
TERMS OF REFERENCE
The Committee’s terms of reference 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.
“WITH THE INCREASED RANGE OF THE
GROUP’S ACTIVITIES, THE COMMITTEE
HAS FOCUSED ON THE EFFECTIVENESS
OF THE EXTENDED RISK MANAGEMENT
AND INTERNAL CONTROL SYSTEMS”
DAVID LINDSELL
CHAIRMAN
COMMITTEE MEMBERS
Tim Cobbold
David Nussbaum
Tony Thorne
Nicola Hodson
(appointed 12 January 2018)
The Board is satisfied that the
Committee’s membership has
the recent and relevant financial
experience required by the Code.
ATTENDING BY INVITATION
Chairman of the Board, Group Chief
Executive, Chief Financial Officer,
Group Financial Controller, Group
Finance Manager, Head of Group Risk
and Internal Audit, External auditor
(Deloitte).
NUMBER OF MEETINGS HELD
IN 2017
5 The Group Company
Secretary acts as Secretary
to the Committee.
Date
appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
ATTENDANCE IN 2017
Committee
member
Tim Cobbold
27 September 2010
David Nussbaum(1)
1 August 2017
David Lindsell
Tony Thorne
1 December 2008
29 June 2010
5
1
5
5
5
1
5
5
100%
100%
100%
100%
Note:
(1) David Nussbaum was appointed as a non-executive director with effect from 1 August 2017 and joined the Committee
from this date
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The Chairman of the Committee reports the Committee’s deliberations to the following Board meeting. The minutes of each Committee
meeting are circulated to all members of the Board.
In undertaking its duties, the Committee has access to the services of the Chief Financial Officer and the Group 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 annual work plan, which is agreed in November for the following
calendar year. A rolling 12-month plan is reviewed at each meeting. The main areas of work undertaken by the Committee at each of its
routinely scheduled meetings during 2017 are set out in the table below.
In addition, the Committee met in January 2017 to review the contents of the shareholder circular in relation to the acquisition of Opus
Energy and recommend that the Board approve the circular.
Meeting
February
April
July
November
Item under review
– Year-end review of
– Review of Senior
– Review of accounting
– Review of accounting
accounting issues and
judgements (2016)
– Consideration of the
2016 annual report,
financial statements
and preliminary results
announcement
– Review of the
effectiveness of
internal controls and
consideration of fraud
– Review of 2017 internal
audit strategy and risk
mapping
– Review of final report
from Deloitte on their
audit findings
– Assessment of the
effectiveness of the
external audit process
– Review of the Audit
Committee’s
effectiveness
– Noted the satisfactory
outcome of the meeting
with the Financial
Reporting Council (FRC)
regarding its letter
relating to the Group’s
2015 Annual report and
accounts and reviewed
the reference to the FRC
letter in the 2016 Audit
Committee Report
Accounting Officer
reporting to HMRC
– Review of management
update on year-end
accounting issues and
judgements
– Review of the auditor
independence policy
– Review of the operation
of the whistleblowing
policy including incidents
reported and
investigation outcomes
– Review of the activity of
and matters addressed
by the Ethics and
Business Conduct
Steering Committee
– Review of the external
auditor’s management
letter for the 2016 audit
– Reviewed proposed audit
fees for 2017
– Review of principal IT
risks and controls,
including cyber security,
infrastructure
vulnerability and
preparedness for the EU
General Data Protection
Regulation
– Review of key risks and
controls in Haven Power
and Opus Energy
issues and judgements
affecting the 2017
interim financial
statements
– Review of the accounting
treatment of the
acquisition of Opus
Energy and related
disclosures in the interim
financial statements
– Consideration of the
half-yearly financial
report
– Review of a report
from Deloitte on their
interim review findings
issues and judgements and
key regulatory focus areas
affecting the 2017
financial statements
– Review of the internal
audit plan for 2017–18
– Review of Deloitte
planning report on the
2017 audit and proposed
audit fees
– Review and approval of
the external auditor’s
terms of engagement
– Review of the composition
and qualifications of the
Group’s finance teams
– Review of an
– Review of the
independent assurance
report on the
sustainability of the
biomass burned in
2016/17 and the
implementation of
recommended process
improvements
– Review of the Audit
Committee’s terms
of reference
– Review of the Auditor
Independence Policy
effectiveness of the
Group’s internal controls
and risk management
systems and the
effectiveness of its
procedures for detecting
fraud and preventing
bribery
– Review of the key risks and
controls in Drax Power and
Drax Biomass
– Review of Drax Group tax
strategy document for
publication as required by
the Finance Act 2016
In addition, there are a number of routine items which are put to each meeting as follows:
– a review of the minutes and actions from previous meetings;
– reports from the internal audit function on its progress with the programme for the year and new internal audit reports, further details of
which can be seen on page 80. No significant weaknesses were identified in any of the internal audit reports prepared during the year,
although improvements in processes and procedures were made as a result of reviews;
– quarterly internal controls updates; and
– the Committee’s rolling annual plan.
During 2017, the Committee also received updates on financial risks and controls from each of the Group’s primary business units.
Drax Power, Haven Power, Opus Energy and Drax Biomass all attended Committee meetings to present their updates. The integration
of Opus Energy and maintaining appropriate financial controls was a key focus area through the year. The Committee met key management
and reviewed progress as Opus Energy controls and methodologies were updated to match those of the existing Retail business.
During the year the Committee received reports of a fraud affecting Haven Power perpetrated by a third party intermediary. The Committee
was satisfied that additional controls have been introduced to reduce the risk of recurrence. The amount involved was not material in the
context of the Group.
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Drax Group plc Annual report and accounts 2017
AUDIT COMMITTEE REPORT CONTINUED
The Committee met twice in the absence of management with each of the external auditor (February and July) and Head of Group Risk
and Internal Audit (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
giving them material concern, they will immediately draw it to the Committee’s attention via the Chairman of the Committee.
REVIEWING THE 2017 ANNUAL REPORT AND ACCOUNTS
Between the year-end date and the date of the approval of the annual report and accounts, the Committee met in February 2018 principally
to review the draft 2017 Annual report and accounts and the external auditor’s findings. The Committee reviewed papers prepared by
management on accounting issues and judgements affecting the accounts and a report from Deloitte LLP setting out their audit findings.
The Committee also reviewed the underlying process, internal controls, forecasts and relevant assumptions made in preparing the Viability
Statement, disclosed on page 50. Having challenged the assumptions made in this process and considered the appropriateness of the
three-year period of assessment, the Committee concluded that the process supporting the Viability Statement was robust.
Explanations of the critical accounting judgements, estimates and assumptions are set out in detail throughout the notes to the
consolidated financial statements, with a summary on pages 119 and 120 which also includes an explanation of the two non-IFRS measures
of performance used by the Group. The Committee reviewed these aspects of the financial statements, paying particular attention to those
issues that involve the most subjective and complex judgements, namely impairment of fixed assets, valuation of derivative financial
instruments and business combinations, which are discussed below. In previous years, ROC valuations were among such aspects. However,
following several years in which the net realised value of ROCs, including value recovered through the ROC recycling fund, has not differed
significantly from the expected realisable value at which they were stated in the balance sheet, the Committee no longer considers the
valuation of ROCs to be subject to such a high level of subjectivity and complexity.
The existence and valuation of fuel inventories was also regarded as an area of significant risk in previous years, principally due to the need to
derive year-end volumes of biomass on-site at Drax Power Station from data on the weight of inventory movements and thermal efficiency
calculations, since it is not practicable to physically count the stocks at the year end. During 2017, management reviewed the IT systems
which sit behind the weighing process, the data flows between them, and the accuracy of the calculations, all of which has provided greater
assurance regarding the accuracy of the biomass inventory valuation. The Committee noted also that an internal audit review was carried
out during the year of the processes and controls to manage biomass stocks held off-site and managed by third-party service providers, and
that the review had concluded that the controls in place to measure and report biomass volumes were appropriate in design and effective in
operation. Accordingly, the Committee does not regard biomass inventories as a significant issue in relation to the 2017 financial statements.
The significant issues in relation to the financial statements were as follows:
Matter
Issue and key judgements
Factors considered and conclusions reached
Carrying value of
Power Generation
fixed assets
In 2017 the market capitalisation of the Group remained
materially below the carrying value of the Group’s net
assets. In addition, the value of Sterling against both
the Euro and US Dollar indicated a potentially material
increase in the long-term costs of fuel for our generation
business, which are predominantly priced in these
currencies.
As a result, in accordance with the requirements of IFRS,
management conducted an impairment review in respect
of the Drax Power cash-generating unit (CGU). They did
so by comparing the present value of the future cash
flows of the CGU with the carrying value of its tangible
and intangible assets.
The assumptions that underpin such calculations
are, by their nature, dependent upon the application
of judgement and are thus subject to uncertainty. In
particular this is because observable market information
is only available for a limited proportion of the remaining
lives of the Group’s power generation assets.
Management presented an overview of the methodology
and most critical assumptions to the Committee meeting
in November 2017.
The Committee reviewed an updated report at its
meeting in February 2018 that considered refinements in
assumptions and key judgements up to the present time,
as described in note 2.4.
It was noted that the cash flows that underpin the
value in use calculation for the Drax Power CGU were
derived from the Group’s five-year business plan, which
was subject to review by the Board in January 2018.
This review included challenge of the key assumptions,
including commodity and currency forward curves, the
expected useful life of the coal generating units (see note
3.1) and revenue sources after the expiry of the current
Renewables Obligation certificate scheme in 2027.
After challenging management regarding these longer-
term assumptions, the Committee concluded that a
reasonable, supportable and consistent approach had
been taken in preparing the review and that there was no
current indication of impairment.
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Matter
Issue and key judgements
Factors considered and conclusions reached
Valuation of
derivative financial
instruments
Business
combinations
The Group makes extensive use of derivative financial
instruments in order to manage key risks facing the
business and its balance sheet includes significant
assets and liabilities arising from derivatives which are
stated at their fair value. In particular, the asset values of
forward foreign currency purchase contracts reduced
substantially in the period following the recovery
of Sterling against US Dollar.
Changes in the fair value of such instruments are
recognised in the income statement or when the specific
criteria for hedge accounting are met, in the hedge
reserve.
The fair values for derivative financial instruments are
determined using forward price curves and, where an
instrument incorporates an element of optionality, an
option pricing model.
The inputs to these calculations include assumptions
regarding future transactions and market movements,
as well as credit risk, and are therefore subjective.
During the year, the Group acquired Opus Energy Group
Limited, a well-established energy retail business serving
customers in the SME market. To account for the
business combination the identifiable assets acquired
and liabilities assumed are required to be measured
at their acquisition-date fair values. This process can
require estimation of the effects of uncertain events on
those assets and liabilities. In the case of Opus Energy,
as stated page 148, the fair value measurement of the
existing customer contracts depends on a number of
assumptions, and in particular requires estimates to be
made of likely margins on current customer contracts,
future contract renewal rates and future margins on
renewed contracts.
The Committee reviewed the Group’s derivative position
in February, July and November 2017 having regard in
particular to the critical judgemental areas described in
note 7.2 and considered the position as at 31 December
2017 at its meeting in February 2018.
At each meeting, management explained the trends
in market prices that underpinned changes in the fair
value of the derivative portfolio and highlighted any
new types of derivative instrument for the Committee’s
consideration.
The Committee concluded that the fair value calculations
had been performed in a reasonable and consistent
manner based on quoted market prices as explained
in note 7.2 and that the system of controls in place was
fit for purpose. Accordingly, it was concluded that the
amounts included in the financial statements were
appropriate.
The Committee reviewed management reports detailing
the valuations and key judgements and estimates, noting
that management had been assisted by independent
valuation specialists in measuring the fair value of
existing customer contracts. The Committee concluded
that the assumptions used to value the contracts were
appropriately supported and reasonable.
Unbilled B2B Energy
Supply revenue
The acquisition of Opus Energy resulted in a significant
increase in the amount of revenue from electricity and
gas supplied to customers between the date of the last
meter reading and the financial year end. The amount
of this revenue is based on estimates in relation to the
volume of energy consumed and the valuation of that
consumption.
The Committee reviewed the process for and
assumptions applied in determining the calculation
of unbilled receivables, noting that historically, final
settlements had been closely in line with the unbilled
receivables recognised in the financial statements. The
Committee concluded that the process and assumptions
applied were appropriate and reasonable.
FAIR, BALANCED AND UNDERSTANDABLE
As a result of its review of the Annual report and accounts, underpinned by its discussions with operating and finance management
regarding the strategic report, and with the Group finance team regarding the financial statements, the Audit Committee advised the
Board that, in the Committee’s view, the Annual report and accounts, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the company’s position and performance, business model and strategy.
REVIEW OF AUDIT COMMITTEE EFFECTIVENESS BY MEMBERS
In line with the FRC’s Guidance on Audit Committees, the Committee reviewed 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.
The Board performance evaluation questionnaire referred to on page 72 included questions on the effectiveness of the Audit Committee, in
particular its effectiveness in monitoring the integrity of the Group’s financial statements, the Group’s internal controls and risk management
systems, its arrangements and processes to ensure compliance with its ethical standards, and the effectiveness of the internal audit
activities and the external audit process. The questionnaire also asked whether the Committee has sufficient expertise, time and access to
key staff and information to enable it to discharge its monitoring and oversight role effectively. Based on responses to the questionnaire, the
Committee, the members of which between them have extensive experience and expertise in business management, financial management,
financial reporting and auditing, discharged its responsibilities effectively in 2017.
Drax Group plc Annual report and accounts 201780Drax Group plc Annual report and accounts 201780AUDIT COMMITTEE REPORT CONTINUEDEXTERNAL AUDITOR EFFECTIVENESSThe Committee reviewed the effectiveness of the external auditor, Deloitte LLP, who have performed the role continuously since the Company’s listing in 2005 and were reappointed in 2017 following a tender process. The review of effectiveness incorporated feedback from management and key individuals across the Group, as well as the Committee’s own experience. The assessment considered the independence and objectivity of Deloitte, 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 experience and expertise of the audit team and the quality of service provided.INDEPENDENCE OF THE EXTERNAL AUDITThe Group has an Auditor Independence Policy, the provisions of which include: –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; –a requirement to rotate the lead audit partner every five years. The current lead audit partner, James Leigh, has completed four years of his term; –a policy governing the engagement of the auditor to conduct non-audit work, under which: • 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; • there is a clear approval process for engaging the auditor to conduct other categories of non-audit work, subject to financial limits. Permitted non-audit services for which the fee exceeds £50,000 is required to be approved in advance by the Audit Committee;• all engagements of the auditor to conduct non-audit work are reported to the next meeting of the Committee; and • the balance between the fees paid to the external auditor for audit and non-audit work is monitored by the Committee. The Policy can be found on the Company’s website at www.drax.com.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 2.3 to the consolidated financial statements on page 131.No contractual obligations exist that restrict the Group’s choice of external auditor.AUDITOR REAPPOINTMENTThe Group has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.The Group conducted a tender to appoint the external auditor during 2016 and the Board agreed to reappoint Deloitte LLP. Deloitte have now been the Group’s auditor for the past 12 years.Having considered the effectiveness and independence of the external auditor as described above, the Audit Committee agreed to recommend to the Board that the a resolution to reappoint Deloitte LLP as the company’s external auditor should be put to shareholders at the AGM in April 2018.INTERNAL AUDITThe Group operates a co-sourced model for its internal audit function.Under this model, the internal team conducts core financial control reviews. Reviews of specialist technical areas are outsourced to firms with appropriate experience and qualifications.The Committee receives reports at each meeting regarding the internal audit programme and reviews undertaken. Recommendations are made to management for control improvements as appropriate. Topics dealt with by internal audit reports reviewed by the Committee during 2017 included: –ROC controls and verification –Fixed asset capitalisation –Financial risk management processes –Controls around the power trading strategy –Foreign currency risk management –Cyber security –Derivatives accounting –Off-site biomass stocks –Opus Energy commodity hedgingIn addition, at the April and November meetings the Committee received reports detailing progress with implementing recommendations previously raised by internal audit. Following the most recent of these updates, in November 2017, the Committee was satisfied that management is taking appropriate steps to deal with the recommendations raised.The Chairman of the Committee, independent of management, maintains regular and direct contact with both the internal and external auditor, allowing open dialogue and feedback. At it’s annual review, the Committee concluded that the internal audit function remains effective.This report was reviewed and approved by the Audit Committee on 15 February 2018.DAVID LINDSELLCHAIRMAN OF THE AUDIT COMMITTEE Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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REMUNERATION COMMITTEE REPORT
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“OUR KEY FOCUS IS TO MAKE SURE THAT
EXECUTIVE REMUNERATION IS ALIGNED
WITH PERFORMANCE AND THE SUCCESSFUL
DELIVERY OF THE GROUP STRATEGY”
TONY THORNE
CHAIRMAN
COMMITTEE MEMBERS
Tim Cobbold
Philip Cox
David Lindsell
David Nussbaum
Nicola Hodson
(appointed on 12 January 2018)
ATTENDING BY INVITATION
Group CEO
Head of Corporate HR
External remuneration advisers
NUMBER OF MEETINGS HELD
IN 2017
6 The Group Company
Secretary is Secretary to
the Committee.
This Directors’ Remuneration Report
has been prepared in accordance
with Schedule 8 to the Large and
Medium-sized Companies and
Groups (Accounts and Reports)
Regulations 2008, as amended
(the Regulations) and the provisions
of the Code.
ATTENDANCE IN 2017
Committee
member
Tim Cobbold
Philip Cox
David Lindsell
David Nussbaum
Tony Thorne
Date
appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
27 September 2010
22 April 2015
1 December 2008
1 August 2017
29 June 2010
6
6
6
1
6
4
6
6
1
6
67%
100%
100%
100%
100%
REMUNERATION COMMITTEE
ACTIVITIES IN 2017
Considered and approved the:
– Remuneration policy
– New Long-Term Incentive Plan (LTIP)
– Annual Report of the Committee
on remuneration for 2016
– Remuneration of executive
directors and senior staff
– Remuneration terms for the
outgoing Group CEO
– Remuneration for the
incoming Group CEO
– New performance appraisal
process for Group employees
ROLE OF THE COMMITTEE
The Committee’s principal responsibilities
are to:
– recommend to the Board the
remuneration strategy and framework for
the executive directors and members of
the Executive Committee;
– determine, within that framework, the
individual remuneration packages for the
executive directors and members of the
Executive Committee;
– approve the design of annual and
long-term incentive arrangements for
executive directors and members of the
Executive Committee, including agreeing
the annual targets and payments under
such arrangements;
– determine and agree 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;
– determine the policy for, and scope of,
executive pension arrangements; and
– oversee any major changes in employee
benefit structures throughout the Group
and review remuneration trends across
the Group.
TERMS OF REFERENCE
The Committee’s terms of reference are
reviewed regularly by the Committee and
then by the Board. The terms of reference
are available on the Group’s website at
www.drax.com.
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REMUNERATION COMMITTEE REPORT CONTINUED
The proposed changes substantially toughen the operation of bonus
arrangements. The Committee recognises that they will most likely
lead to lower bonuses but believes it right that the bonus outcome
should be on demonstrable performance and that there is a
consistent approach across all employees. I would add that the
changes have the full support of the executive directors.
Full details on the changes and the policy are set out later in the report.
REVIEW OF 2017
2017 was the first year following the announcement of our new
strategy. It was a year of change and challenge for the Group as we
set about implementing this strategy. Management delivered a
substantial uplifting of financial performance, with EBITDA of £229
million (2016: £140 million). This was principally due to high levels of
renewable generation, but also from the growth of our B2B Energy
Supply business. A new capital structure and dividend policy were
concluded, which will see the Group pay a sustainable and growing
dividend to shareholders.
In support of the strategy, the Group acquired Opus Energy (the
leading challenger brand in the UK SME energy market). In-sourcing
of this business has progressed well. The Group also acquired a third
biomass pellet plant (LaSalle Bioenergy). This has been upgraded and
at the end of the year was commissioning. In Power Generation, plans
for a fourth biomass unit were progressed. Having received the
necessary Government support the conversion will go ahead in 2018.
The development of the options for rapid response gas generation at
four sites around the UK was continued, with two sites ready for
construction, subject to securing a capacity market agreement. The
repowering project, being two combined cycle gas turbine plants
plus battery storage, to be built on the Drax site, was scoped and
taken into the planning process.
Operationally, performance was mixed. The ramp up of pellet output
at Drax Biomass was down on plan but this reflected a slower start to
the year, followed by a strong finish which augurs well for 2018.
Power Generation continued to meet a significant amount of the
UK’s renewable electricity and provided good support to the
electricity system’s stability. However, plant availability was below
plan, including the December unplanned outage which impacted
the end of 2017 with the disruption continuing into 2018. The energy
supply businesses performed well. Opus Energy met the planned
EBITDA and had a high customer retention while Haven Power
exceeded planned EBITDA and was well up on the prior year.
Management continued to make the case for biomass with the result
that the Government, in early 2018, provided the necessary support
to allow the conversion of a fourth unit. There was continued high
attention to biomass sustainability. Feedback to the Board from
various site visits and the results of third party audits gives
confidence that sustainability is well embedded.
ANNUAL STATEMENT TO SHAREHOLDERS
Dear shareholders
This report reviews the key matters considered by the Remuneration
Committee in the past year and the future matters we expect to
consider. Before reviewing the past year I want to highlight two
proposed changes in the current remuneration policy that require
your consideration.
We believe the changes to be incremental to the approved policy
but we are required to submit the revised policy to a shareholder
vote at the 2018 AGM. We hope that the revised policy will receive
your support.
Technically the revised policy, if approved, would be valid for three
years, until the AGM in 2021. However, we intend to keep to the
timetable for the original policy. Therefore, we will make a full review
of the revised policy in 2019, incorporating the results of this review
into a new policy for shareholder consideration at the 2020 AGM.
CHANGES TO THE REMUNERATION POLICY
At the 2017 AGM, shareholders approved a new remuneration policy
for the executive directors. A component of this policy, namely the
operation of the annual bonus, applies both to executive directors
and employees. As part of a wider project to align processes and raise
efficiency, a decision has been taken as to how the bonus formula will
apply to employees from the financial year ending 31 December 2018
onwards. The changes we are proposing comprise two amendments
to the approved Remuneration Policy, which are designed to ensure
a consistent approach to our bonus arrangements for executive
directors and employees. These changes are set out in detail in the
report but in summary they are:
(i) removal of the personal performance component of the bonus
formula. In future, bonuses will be earned for the delivery of
stretching corporate and divisional related financial, strategic
and operational targets, as measured through the Corporate
Scorecard; and
(ii) an increase in the level of Corporate Scorecard performance
which must be attained for maximum bonus payout, thereby
strengthening the link between corporate performance and
incentive payouts.
The rigour in setting and scoring the Corporate Scorecard will not
be changed. The Committee will retain the discretion to adjust the
bonus if the Corporate Scorecard outcome is not reflective of
corporate or an individual executive’s performance.
The proposed changes simplify the remuneration arrangements
for the executive directors as well as aligning the approach to bonus
for all employees. As set out further in the report, I believe that the
removal of the personal performance component also addresses the
concern raised by shareholders in feedback on our current policy
about the continuing use of such a component in the determination
of bonus.
We are not proposing changes to the 2017 Performance Share Plan.
Therefore our incentive arrangements will be linked only to
performance under the Corporate Scorecard and Total Shareholder
Return from 2018.
Drax Group plc Annual report and accounts 2017
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The Group is committed to paying an externally competitive salary
consistent with an employee’s role. In order to provide the basis
for a consistent approach to setting salary across the Group,
management carried out a Group-wide job grading and salary
benchmarking exercise. The results will now be worked through. This
exercise was in addition to the review of performance management
that led to the changes in the bonus formula discussed above. In line
with the Gender Pay Gap reporting requirements, details for the
individual subsidiary companies in the UK will be submitted by the
required deadline.
LONG-TERM ASSESSMENT OF PERFORMANCE
BMP awards made in 2015 were tested at the end of 2017 by
reference to relative Total Shareholder Return (TSR) performance
(50%) and on the three-year average of the Corporate Scorecard
(50%). The Company’s TSR over the period was below the median of
the comparator group, and the Committee therefore confirmed that
none of the TSR element of the award would vest. The average
Corporate Scorecard outcome over the same period was 0.97 out of
1.5, and as the vesting threshold is 1.0 there will be a nil vesting of the
executive directors’ 2015 BMP performance awards.
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I hope you find the above statement helpful background to the
following section on the Committee’s assessment of executive
performance.
ANNUAL ASSESSMENT OF PERFORMANCE IN 2017
Please note that the assessment of performance for 2017 is made
under the current policy. The proposed changes to the policy, as
described above and in greater detail on page 87, would not come
into effect until immediately after the 2018 AGM.
The Committee determines the remuneration of the executive
directors and members of the Executive Committee against the
strategic objectives and priorities of the company. Executive
performance is therefore closely aligned to business performance
with a high proportion of total remuneration delivered through
variable pay designed to reward achievement of short and long-term
strategic targets.
There is a detailed review of performance against our balanced
scorecard measures on page 99. Components within the scorecard
can be scored between 0 and 2.0. A score of 1 represents an
on-target performance. For 2017 the Board assessed the overall
performance at 0.84. The Committee, having reviewed the
performance of the Group over the year, believes this outturn of the
Corporate Scorecard is reflective of overall performance.
The score is applied both to the annual bonus and the Bonus
Matching Plan (BMP). For the purposes of the annual bonus the
overall score in any year is capped at 1.5. There is no cap on the annual
score when applied to the BMP scorecard, but there is a cap of 1.5 on
the average for the three years.
The Committee assessed the personal performance of each
executive in driving the 2017 performance and delivering on the
strategy. This assessment was both as regards their individual
contribution and as a member of the executive team.
Based on performance, a corporate score of 0.84 out of 2 and
personal score of 1.25 out of 1.5 was agreed by the Committee,
resulting in annual bonuses of approximately 53% of maximum.
The Committee believes that this bonus outcome fairly reflects
executive directors’ performance.
The Committee decided not to exercise its discretion in determining
the outcome for the possible vesting of performance awards.
SHAREHOLDER ENGAGEMENT
The current remuneration policy and the Annual Report on
Remuneration for 2016 were approved by the majority of investors
in 2017, but we are conscious that a significant minority of shares
were voted against the policy and, particularly, the annual report. The
Committee has discussed the shareholder feedback and noted areas
of concern for future consideration. As outlined above, a concern
we propose to address short term is the use of personal measures
in the calculation of the executives’ annual bonuses. Our proposal
to remove the personal element simplifies the remuneration
arrangements and aligns the approach to the executives’ bonuses
with that of our other employees.
We continue to monitor developments in executive remuneration.
Notably this year, we have considered the likely revisions to
the Corporate Governance Code. We are supportive of the changes.
We recognise that these will widen the Remuneration Committee’s
responsibility, both in overseeing pay arrangements across the
Company and being seen to take into account the different
stakeholder views when setting executive director remuneration.
APPLICATION OF POLICY
During the year we applied the executive remuneration policy
that was approved by shareholders in 2017. We have listened to
shareholders and taken account of emerging “best practice” and
this is reflected in the outcomes to the following areas addressed
in the year:
(i) proposed an amendment to the policy for 2018 onwards to
remove the personal element of the annual bonus, which will
simplify the bonus arrangements, align pay and performance
and ensure bonus arrangements for executive directors are
consistent with those for the wider workforce;
(ii) used judgement as regards the treatment of the outgoing Group
CEO, Dorothy Thompson, taking into account the remuneration
policy, plan rules and her service agreement;
(iii) applied judgement on the remuneration package for the
incoming Group CEO, balancing the need to remunerate
competitively a high quality individual with the objective to stop
the ratcheting up of remuneration; and
(iv) used judgement in determining the pay outcomes for the year in
the context of performance achieved.
In addition to the above, the Committee reviewed and approved the
proposed changes resulting from the extensive project in employee
job grading and pay benchmarking carried out across the Group.
BASE SALARIES
The salaries of Dorothy Thompson, Will Gardiner and Andy Koss were
reviewed and increased by 2.5% with effect from 1 April 2017. This was
in line with the average increase for the wider workforce.
SUMMARY
I, and the other members of the Committee, are satisfied that the
2017 remuneration outcomes fairly reflect corporate and personal
performance. We are confident that the changes to our policy to
remove the personal element of the bonus formula and to increase
the level of performance required for maximum bonus, provide a fair
and consistent approach to remuneration across the Group and are
in the shareholders’ interests.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
CHANGES TO THE BOARD
We announced in September 2017 that Dorothy Thompson, Chief
Executive Officer, had given notice of her intention to stand down as
Group CEO. It was agreed that she would leave prior to the
completion of her 12 month notice period on 31 December 2017.
The Committee undertook a detailed review of the treatment of
Dorothy’s remuneration, taking into account the circumstances of
her leaving Drax and her performance up to the date of retirement
which has continued to be strong. Further detail is provided on the
individual elements of remuneration within the Annual Report on
Remuneration but in summary:
– Dorothy was treated as a good leaver for the purpose of the
outstanding share awards, with pro-rating from the date the
award was granted to the date of leaving i.e. 31 December 2017;
– pro-rated performance related share awards will vest at the
normal vesting date subject to performance conditions being met;
– pro-rated deferred share awards granted under the legacy BMP
vested shortly after retirement in accordance with the provisions
of the previous remuneration policy and the BMP scheme rules;
and
– Dorothy is entitled to salary, pension and other benefits for the
unworked period of notice from 1 January 2018 to 20 September
2018 and is also contractually eligible to be considered for a bonus
for the unworked period of notice during which she was unable to
earn a bonus, with the bonus amount to be determined in the
usual way for all executives, early in 2019.
The Committee is confident that the decisions made in relation to
Dorothy’s remuneration are fair to her and to the Company, taking
into account her outstanding performance, the agreed termination
date, the provisions of the remuneration policy applying to executive
directors and her employment contract. We are conscious that the
payment of bonus for the unworked notice period as provided for in
Dorothy’s contract and our remuneration policy, is less common in
the market and, as discussed with our major shareholders, we have
committed not to include this for any newly appointed directors in
future service contracts, including that of the new Group CEO.
Dorothy is succeeded by Will Gardiner, who has been our Group CFO
since his appointment in November 2015. Will’s base salary was
increased to £530,000 on his promotion. His other elements of pay
will be in line with those for Dorothy. Will has been a member of the
Board over the last two years and is a key architect of the Company
strategy. We look forward to working with him in his new role over the
coming years.
A process to appoint a new permanent Group CFO is underway and in
the meantime Den Jones has been appointed as Interim Group CFO.
Den is highly experienced, having previously been CFO at Johnson
Matthey and BG Group.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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Corporate score result
0.84
REMUNERATION AT A GLANCE
Below is a top line summary of the 2017 remuneration earned by each of
our executive directors during 2017. This shows the alignment between
our remuneration framework, the Company’s performance and how the
payments to directors in 2017 link to this.
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The Remuneration Report is
colour-coded as follows:
DOROTHY THOMPSON (GROUP CEO) £000s
Base salary
Pension
Annual bonus
LTIP
Other benefits
2017
2016
585
117
574
115
463
71
Total
£1,236,000
756
74
76
Total
£1,595,000
WILL GARDINER (GROUP CFO) £000s
2017
2016
397
79
390
78
294
20
Total
£790,000
479
24
Total
£971,000
ANDY KOSS (CHIEF EXECUTIVE, DRAX POWER) £000s
2017
2016
316
63
310
62
234
19
Total
£632,000
381
19
21
Total
£793,000
– Bonus is the total value of the annual bonus payable in respect of performance in the relevant year,
including the cash bonus and the value of bonus deferred which is paid in shares after three years
subject only to continued service.
– The performance conditions for the BMP Matching Awards awarded in March 2015 and due to vest
in March 2018 were not met and therefore there was a nil vesting of BMP Matching Awards in 2018.
BONUS EARNED FOR 2017
The resulting bonus outcomes as a percentage of base salary were:
BONUS EARNED FOR GROUP CEO
BONUS EARNED FOR OTHER EXECUTIVE DIRECTORS
TARGET
BONUS
75%
X
CORPORATE
SCORE
0.84
X
PERSONAL
SCORE
1.25
TARGET
BONUS
70%
X
CORPORATE
SCORE
0.84
X
PERSONAL
SCORE
1.25
Group CEO 79% of salary out of a maximum of
150% salary
Executive directors 74% of salary out of
a maximum of 140% salary
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
BONUS EARNED FOR 2017
The table below sets out the bonuses earned and the split between cash and deferred elements
Executive Director
Dorothy Thompson, Group CEO
Will Gardiner, Group CFO
Andy Koss, CEO, Drax Power
2017 bonus
(as % base salary)
79%
74%
74%
Bonus
earned
£000
463
294
234
Of which paid in
cash
(65% of bonus)
£000
Of which deferred
into shares
(35% of bonus)
£000
301
191
152
162
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ANNUAL BONUS INCENTIVE OUTCOMES FOR 2017
Area
Weighting
Score/Outcome
Financial
(Group/Business Units)
Operations
Strategy
(Development/Implementation)
45%
40%
15%
1.0
0.4
– Overall “corporate score” (CS) (maximum 2)
– Executive directors’ “personal score” (PS)
(maximum 1.5)
– Bonus outcome as % of maximum
(=CS x PS x 50%)
1.6
– Range of bonus outcomes as % of salary
0.84
1.25
53%
74–79%
LONG-TERM INCENTIVE PLAN (LTIP)
For BMP awards granted in March 2015, vesting was conditional upon two performance measures with up to 50% of shares vesting
subject to TSR performance and up to 50% of shares vesting subject to Company Scorecard performance as below:
Total shareholder return TSR (50%)
Company Scorecard (50%)
TSR performance over three years relative
to FTSE 51–150 as follows:
– Below median = 0% vesting
– At median = 15% vesting (threshold)
– Upper quartile = 100% vesting
The outturn for the vesting of awards in 2018 is:
BMP
2015 corporate score
2016 corporate score
2017 corporate score
Average corporate score (maximum 1.5)
Relative TSR performance
BMP outcome as a % of maximum
Company Scorecard performance averaged over the three-year
performance period as follows (capped at 1.5):
– Score <1 = 0% vesting
– Score 1 = 15% vesting (threshold score)
– Score 1.5 = 100% vesting
Weighting
Score/Outcome
16.6%
16.6%
16.6%
50%
50%
0%
0.76
1.30
0.84
0.97
0%
0%
The Committee considered the circumstances surrounding the outturn for 2018 and following discussion chose not to exercise its
discretion and thus there will be a nil vesting of the BMP performance awards made in 2015.
Page 101
PAY RATIOS
We have considered the likely revisions to the Corporate Governance Code.
The ratio of the average pensionable pay of an executive director to the
average for all UK employees is shown here.
2017
12.8 : 1
2016
9.6 : 1
The structure of the workforce changed in 2017 due primarily to the
acquisition of Opus Energy.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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DIRECTORS’ REMUNERATION POLICY
As set out in the Chairman of the Committee’s Annual Statement to Shareholders, we are proposing changes to the current remuneration
policy which, in order to be effected, require shareholders’ approval.
This revised remuneration policy, subject to shareholder approval at the 2018 AGM, will be effective from immediately after the AGM on
25 April 2018. Normally it would be binding on the Group for three years but, as outlined earlier, the Committee intends to review the policy in
2019 and incorporate the results of this review in a policy to be presented to shareholders at the 2020 AGM. Therefore the results of the
2018 vote on the revised policy will be binding for two years, until the close of the 2020 AGM.
The core principles of the remuneration policy are set out below:
– making sure that executive remuneration is linked strongly to performance and the achievement of strategic objectives;
– ensuring transparency in executive pay reporting through simplification in design and appropriate reporting;
– securing and retaining top talent and incentivising strong performance; and
– maintaining flexibility, to recognise the uncertain business environment, whilst ensuring that remuneration outcomes are aligned to
shareholder interests.
CHANGES TO THE POLICY
As described in the Chairman’s Statement, the proposed changes to the current remuneration policy ensure a consistent approach to our
bonus arrangements for executive directors and employees. These changes are:
– removal of the personal performance component of the bonus formula such that the formula moves from target bonus x corporate
score x personal score to target bonus x corporate score. In future, bonuses will be earned solely for the delivery of stretching corporate
and divisional related financial, strategic and operational targets, as measured through the Corporate Scorecard; and
– raising the level of Corporate Scorecard performance which must be attained for maximum bonus pay out (from maximum bonus pay out
being possible at a score of 1.5 to a score of 2.0) thereby strengthening the link between corporate performance and incentive pay outs.
The rigour in setting and scoring the Corporate Scorecard will not be changed. The proposed changes toughen the operation of bonus
arrangements as the executives’ personal score in recent years has had the effect of increasing the bonus outcome from what would have
been earned through the Corporate Scorecard alone. The Committee will retain the overall discretion to adjust the bonus if the Corporate
Scorecard outcome is not reflective of corporate or individual performance in the year. We are not proposing any other change to the
Directors’ Remuneration Policy approved at the 2017 AGM, except for minor changes to the wording to clarify the operation of the policy.
The following is an overview of our remuneration framework under the revised policy.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
KEY COMPONENTS OF REMUNERATION
The remuneration policy for executive directors has been designed to support the delivery of strong business performance and the creation
of shareholder value. We set out in the table below the policy relating to the key components of the remuneration policy for executive
directors, and in the notes following the table we comment on differences between this policy and that for the remuneration of employees
generally.
BASE SALARY
Base salary helps to attract, reward and retain the right calibre of executive to deliver the leadership and management needed to execute
the Group’s vision and Business Plan.
PRACTICAL OPERATION
Base salary reflects the role, the executive’s skills and experience,
and market level. It is paid in 12 monthly instalments.
To determine the market level, the Committee reviews
remuneration data on executive positions at companies which
the Committee considers to be appropriate comparators.
The comparator companies are selected, with advice from the
Committee’s remuneration advisers, taking into account 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 be increased over time to align with the market
level, subject to performance.
Base salaries of all executive directors are generally reviewed
once each year, with increases applying from April. Reviews cover
individual performance, experience, development in the role and
market comparisons.
MAXIMUM POTENTIAL VALUE
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 Group
employees in the Group.
Exceptions to this, subject to performance and development, are
where:
(i) An executive director has been appointed at below market level to
reflect experience. Under this scenario, increases will be capped
at 5% above the average annual percentage increase in salaries of
all other Group employees.
(ii) An executive director has been promoted internally and their
salary is below market level. Under this scenario, increases will not
be capped and the Committee can increase base salary to the
market level within an appropriate timeframe.
PERFORMANCE MEASURES
No performance measures apply.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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ANNUAL BONUS
The award of annual bonuses is linked directly to personal performance and to achieving the annual Business Plan targets.
The aim of the deferred portion of annual bonus is to further align executives to shareholders’ interests, by linking share-based reward to
long-term sustainable performance.
MAXIMUM POTENTIAL VALUE
Role
Chief Executive, Drax Group
Other executive directors
Maximum bonus potential
(% of base salary)
150%
140%
There is no payment for below threshold performance.
PERFORMANCE MEASURES
Corporate score is based on performance, against the Corporate
Scorecard, of strategic and Business Plan targets set, each year, by
the Committee, in conjunction with the Board. Performance measures
include financial, operational and strategic objectives. Typically,
across the Group and Business Units, around 40% of the Scorecard
is based on financial objectives, 30–40% on strategic goals with the
balance on operational issues. The Committee has the discretion to
vary the weightings from year to year.
The corporate scorecard is amended each year, in line with business
strategy and objectives.
In exceptional circumstances such that the Committee believes
the original measures and/or targets are no longer appropriate, the
Committee has discretion to amend performance measures and
targets during the year.
PRACTICAL OPERATION
65% of annual bonus earned is paid in cash, normally three months
after the end of the financial year to which it relates.
35% of annual bonus earned is deferred in nil cost awards over
shares under the Deferred Share Plan (DSP), which vest after
three years subject to continued employment or “good leaver”
termination provisions.
The DSP was introduced in 2017, as a vehicle for deferring the
relevant proportion of annual bonus in shares.
Annual bonus earned (subject to the maximum opportunity) is:
Target bonus x corporate score.
Target bonus is 50% of maximum.
Corporate score ranges from zero to 2.0.
Each measure in the corporate scorecard is assigned a weighting
and three performance levels (low, target and stretch). The score is
zero if performance is below the low target, one if performance is
at target and two for stretch performance.
Dividends in respect of the deferred shares are reinvested in
additional shares, which vest when the deferred shares vest.
In certain circumstances, the Committee can apply clawback to
any annual bonus awards, as set out in the notes to the policy table.
Summary corporate scorecard and performance results are
published in the Annual report on remuneration.
The Committee will review the formulaic outcome of the Annual
bonus and has the discretion to amend the final outcome to make
sure that bonus payments reflect overall performance. The use of
such discretion will be explained fully in the relevant Annual report
on remuneration.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
DRAX 2017 PERFORMANCE SHARE PLAN (PSP)
The PSP is the Company’s new long-term incentive plan. It replaces the legacy BMP and links long-term share-based incentives to TSR
and to the achievement of Business Plan strategic targets.
PRACTICAL OPERATION
The PSP was approved by shareholders at the 2017 AGM.
MAXIMUM POTENTIAL VALUE
The maximum annual grant is 175% of base salary.
Under the PSP, executive directors receive an annual grant of nil
cost conditional awards over shares.
Shares vest on the third anniversary of the grant, subject to
continued service or “good leaver” termination provisions, and the
achievement of performance conditions over a three-year period
determined by the Committee. Vested awards are subject to a
further holding period of two years.
Dividends or dividend equivalents (which may assume notional
reinvestment) are paid on PSP awards.
The Committee will include an override provision in each grant
under the PSP. This will give the Committee discretion to determine
that no vesting shall occur, or that vesting shall be reduced, if there
are circumstances (relating to the Company’s overall performance
or otherwise) which make vesting when calculated by reference to
the performance conditions alone inappropriate.
PERFORMANCE MEASURES
There are two performance measures which apply to PSP awards, as
follows:
(i) TSR performance over three years relative to FTSE 350
comparator group (50% of award), vesting as follows:
Below Median = 0%
At Median = 25%
Upper Quartile = 100%
(ii) Average corporate scorecard (as described in the annual bonus)
over three financial years (50% of award), vesting as follows:
Average Score 0.75 = 0%
Average Score 1 = 50%
Average Score 1.5 = 100%
While each annual corporate score can range from zero to 2.0, the
three-year average corporate score is capped at 1.5. For illustration:
In certain circumstances, the Committee can apply malus or
clawback to unvested/vested awards, as set out in the notes to the
policy table.
Year 1 Score 1.8
Year 2 Score 0.9
Year 3 Score 1.2
Average corporate score = 1.3
Straight line vesting occurs between performance levels for both
conditions.
The Committee reserves discretion to:
(i) amend the performance conditions/targets attached to
outstanding awards granted under this policy, in the event
of a major corporate event or significant change in economic
circumstances, or a change in accounting standards having
a material impact on outcomes; and
(ii) adjust the vesting of PSP awards and/or the number of shares
underlying unvested PSP awards, on the occurrence of a
corporate event or other reorganisation.
In the event of a change of control, the treatment of long-term
incentives will be determined in accordance with the relevant
plan rules.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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PENSION
Pension provision is one of the components to attract, reward and retain the right calibre of executive, to ensure delivery of the leadership
and management needed to execute the Group’s vision and Business Plan.
PRACTICAL OPERATION
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, cash in lieu of pension (subject to normal statutory
deductions); or a combination of pension contributions and cash in
lieu of pension.
MAXIMUM POTENTIAL VALUE
Maximum is 20% of base salary.
PERFORMANCE MEASURES
No performance measures apply.
BENEFITS
Benefits are provided to be market competitive as an integral part of directors’ total remuneration.
PRACTICAL OPERATION
Executive directors receive a car allowance, life assurance (four
times 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.
Additional benefits may be provided if the Committee considers
them appropriate.
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.
MAXIMUM POTENTIAL VALUE
Benefits are set at a level appropriate to the individual’s role and
circumstances.
The maximum opportunity will depend on the type of benefit and cost
of its provision, which will vary according to the market and individual
circumstances.
PERFORMANCE MEASURES
No performance measures apply.
SHARE OWNERSHIP GUIDELINE
The Group’s share ownership guidelines align the interests of executives with shareholders.
PRACTICAL OPERATION
The share ownership guideline is that all executive directors should
retain shares to the value of 200% of base salary, to be
accumulated over five years. Until this level is reached, directors
who receive shares by virtue of any share plan award 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.
MAXIMUM POTENTIAL VALUE
N/A
PERFORMANCE MEASURES
N/A
ELEMENTS OF PREVIOUS POLICY THAT WILL CONTINUE – BMP AWARDS MADE IN 2015, 2016 AND 2017
Remuneration component and link to strategy
Practical operation
Performance measures
Bonus Matching Plan – deferred awards made in
2015, 2016 and 2017 and conditional awards made
in 2015 and 2016.
Vesting is subject to the achievement of
performance conditions (conditional awards) and
continued service or “good leaver” termination
provisions (deferred and conditional awards).
Vesting of conditional awards is subject to relative
TSR and average Corporate Scorecard outcome
over three years.
Links long-term share-based incentives to
TSR and to the achievement of Business Plan
strategic targets.
Further details of the terms of the awards were
included in the Annual remuneration reports for
the respective years.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
PERFORMANCE MEASURES AND APPROACH TO SETTING TARGETS
The measures for elements of variable pay are:
– Corporate Scorecard, consisting of strategic and Business Plan targets set by the Committee each year in conjunction with the Board.
The Corporate Scorecard aligns incentives of executive directors with achievement of key business goals.
– Relative TSR, which aligns executive director remuneration with creation of long-term shareholder value.
– The Committee sets targets for the performance measures each year, taking into account market conditions, the Business Plan and other
circumstances as appropriate. A summary of the Corporate Scorecard targets that apply for the following year are disclosed in the Annual
Report on Remuneration.
CIRCUMSTANCES IN WHICH MALUS OR CLAWBACK MAY APPLY
Malus and/or clawback may be applied to incentive awards under the following circumstances:
– Clawback for the annual bonus – the Committee may require a director to repay any amount of annual bonus payment it considers
appropriate, in circumstances of financial misstatement, or 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.
– Malus and clawback for the BMP – if a repayment of bonus is required (see “annual bonus” above) the Committee shall reduce the number
of shares that may vest under the BMP by an appropriate amount (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.
– Malus and clawback for the PSP and DSP – the Committee may also reduce the number of shares under a PSP and/or DSP 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.
COMMITTEE’S JUDGEMENT AND DISCRETION
In addition to assessing and making judgements on the meeting of performance targets and the appropriate incentives payable, the
Committee has certain operational discretions it can exercise in relation to executive directors’ remuneration. These include, but are not
limited to:
– reviewing the formulaic outcome of the annual bonus and applying discretion to amend the final outcome, to ensure that bonus payments
reflect overall performance or an individual executive’s performance;
– deciding whether to apply malus or clawback to an award; and
– determining whether a leaver is a “good leaver”.
Where such discretion is exercised, it will be explained in the relevant directors’ remuneration report.
REMUNERATION SCENARIOS
The composition and value of the executive directors’ remuneration packages at low, target and stretch performance scenarios under the
Drax Group remuneration policy are set out in the charts below. The assumptions used in the charts are provided in the following table:
BASE SALARY, PENSION AND BENEFITS
Description
Scenario
Annual bonus
Salary is the rate payable to each director from
1 January 2017
Low
None
The value of benefits is taken from the single figure
for the year ended 31 December 2017
Target
50% of the maximum bonus
PSP
None
TSR: 62.5% vesting
(midpoint between threshold and maximum)
Scorecard: 50% vesting
Pension is the value of the pension payable on the
salary rate used
Stretch
Maximum bonus (150% of salary
for Group Chief Executive, 140% of
salary for other executive directors)
Maximum PSP opportunity (175% of salary) with no
allowance for share price appreciation or dividend
equivalents
WILL GARDINER
(GROUP CHIEF EXECUTIVE OFFICER)
£,000
ANDY KOSS
(CHIEF EXECUTIVE, DRAX POWER)
£,000
3,000
2,500
2,000
1,500
1,000
500
0
£630
100%
Low
£2,353
39%
34%
27%
£1,549
34%
26%
41%
Target
Stretch
1,600
1,400
1,200
1,000
800
600
400
200
0
£1,401
40%
32%
28%
£936
33%
24%
43%
Target
Stretch
£400
100%
Low
Fixed elements
Annual variable
Multi-period variable
Fixed elements
Annual variable
Multi-period variable
Fixed elements
Annual variable
Multi-period variable
Drax Group plc Annual report and accounts 2017
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APPROACH TO RECRUITMENT REMUNERATION
The Committee will apply the core principles on page 87 and the components set out in the table on pages 88 to 92 to 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.
The incentive provision for a new executive director will include annual bonus up to 150% of salary and a PSP award of up to 175% of salary.
In relation to directors appointed from outside the Group, where the Committee considers it to be necessary to secure the appointment of
the director, the Committee may:
– pay 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 Company’s right to claw back any amount
which is subsequently paid to the executive by the former employer, and to claw back an appropriate proportion of the payment if the
executive leaves soon after appointment); and
– make appropriate payments in circumstances where a director is relocated from outside the UK.
SERVICE AGREEMENTS AND COMPENSATION ON LOSS OF OFFICE
Executive directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’ notice.
Element
Details
Notice periods
Executive directors may be required to work during the notice period or may be provided with pay in lieu of notice if not required to
work the full notice period.
Compensation
for loss of office
Treatment of annual
bonus on termination
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.
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 apply retrospectively 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. The Group may pay reasonable fees for
a departing director to obtain independent legal advice in relation to their termination arrangements and nominal consideration
for agreement to any contractual terms protecting the Company’s rights following termination. 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;
cooperation with succession; any breach of goodwill, and adherence to contractual obligations/restrictions. If the termination is by
the Company on less than the notice specified in the director’s service agreement and, if required, in order to adhere to contractual
obligations, 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. As outlined
earlier in the report the latest Chief Executive service contract for Will Gardiner as Group CEO, does not allow for the payment of
bonus after termination. 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:
– redundancy;
– retirement;
– ill-health or disability, proved to the satisfaction of the Company; and
– death.
If the termination is for any other reason, a bonus payment will be at the Committee’s discretion and 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 92, 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 payment will be made unless the director is employed on the date of bonus payment, except for “good leavers” as defined above.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
Element
Details
Treatment of unvested
long-term incentive and
deferred share awards
on termination
The Committee will consider the extent to which deferred and conditional share awards held by the director under the BMP, DSP
and PSP should lapse or vest. Any determination by the Committee will be in accordance with the rules of the BMP, DSP and PSP
(as approved by shareholders).
In summary, the rules of the BMP and PSP provide that awards will vest (pro-rated to the date of employment termination)
if employment ends for any of the following reasons (“long-term good leaver reasons”):
– redundancy;
– retirement;
– ill-health or disability proved to the satisfaction of the Company;
– change of ownership; and
– death.
If employment ends for any other reason, the rules of the BMP and PSP require the Committee to exercise its discretion. In doing so, it
will take account of all relevant circumstances, in particular, the Company’s performance; the director’s performance and behaviour
towards the Company during the performance cycle of the relevant awards; and 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 and conditional 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 rules of the DSP provide that deferred bonus awards will vest (in full) if employment ends for any of the “long-term good leaver
reasons” detailed above. If employment ends for any other reason, the rules of the DSP require the Committee to exercise its
discretion. In doing so it will take account of all relevant circumstances, in particular, the Company’s performance; the director’s
performance and behaviour towards the Company during the performance cycle of the relevant awards; and a range of other relevant
factors, including the proximity of the award to its maturity date.
The rules of the DSP and PSP also provide that in circumstances where awards vest, they do so at the normal vesting date, unless
the Committee exercises discretion to vest awards earlier. Awards which vest subject to satisfaction of the relevant performance
conditions will be (time) pro-rated.
Outside appointments
Executive directors may accept external Board appointments, subject to the Chairman’s approval. Normally only one appointment to
a listed company would be approved. Fees may be retained by the director.
CONSIDERATION OF CIRCUMSTANCES FOR LEAVERS
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 PSP awards include:
– the director’s continued good performance up to and following the giving of notice; and
– 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:
– poor performance; or
– the director does not continue to perform effectively following notice.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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REMUNERATION OF NON-EXECUTIVE DIRECTORS AND CHAIRMAN
Remuneration component and link to strategy
Practical operation
Maximum potential value
Overall aggregate fees paid to all non-
executive directors will remain within the
limit as stated in the Company’s Articles
(currently £1,000,000).
Fees
To attract a Chairman and independent
non-executive directors who, together
with the executive directors, form a
Board with a broad range of skills and
experience.
The Chairman’s remuneration 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:
– fees of chairmen and non-executive directors of other listed
companies selected for comparator purposes, on the same basis as
for executive directors;
– the responsibilities and time commitment; and
– the need to attract and retain individuals with the necessary skills
and experience.
Non-executive directors’ fees are reviewed periodically against market
comparators. They were last reviewed in 2017. Current fee levels are
shown in the annual report on remuneration.
The Chairman receives an annual fee.
Non-executive directors receive an annual base fee.
Additional annual fees are paid:
– to the Senior Independent Director (which includes the fee for
chairing a Board Committee other than the Audit Committee);
– to the Chair of the Audit Committee;
– to the Chair of the Remuneration Committee; and
– to the Chair of any other committee (this is not paid to the Chairman
of the Nomination Committee if he or she is also the Chairman of the
Board).
Non-executive directors are not entitled to participate in any
performance related remuneration arrangements.
Expenses
Reasonable travel and accommodation expenses are reimbursed
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
Group’s 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.
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
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:
– executive directors and a number of senior employees are eligible for PSP awards, although there are differences in terms of levels
of grant;
– annual bonus levels vary across the workforce, but the requirement to defer a portion of annual bonus applies only to executive directors;
– 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; and
– hourly paid employees qualify for overtime payments.
CONTEXT
Wider employee population
In determining executive remuneration, the Committee also takes into account the level of general pay increases within the Group.
The Committee’s policy is 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 or if an executive director has been appointed at a salary below market level reflecting experience in the role.
The Committee has considered a number of comparison metrics when determining its approach to executive remuneration, including the
ratio of Group Chief Executive to median employee pay.
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.
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 also able to consider
these issues in determining whether to exercise its discretion to adjust the overall score, and in considering the performance conditions
override under the PSP, as described on page 92.
Shareholder engagement
The Company holds regular meetings with its largest shareholders, and the Committee takes into account all shareholder views or
representations relating to executive remuneration. We held discussions with a number of shareholders leading up to and around the time of
the 2017 AGM and the Committee has considered this feedback. The proposal to remove the personal element from the annual bonus within
the current policy takes on board that feedback. We wrote to a number of shareholders in late 2017 to explain the proposed changes to the
remuneration policy for executive directors. The Committee takes shareholder feedback very seriously and will continue to engage.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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ANNUAL REPORT ON REMUNERATION
The relevant sections of this report have been audited as required by the Regulations and, in accordance with the Regulations, this part of
the report will be subject to an advisory vote at the AGM to be held on 25 April 2018.
SINGLE TOTAL FIGURE OF REMUNERATION FOR EACH DIRECTOR (AUDITED INFORMATION)
The table below sets out the single figure of remuneration and the breakdown for each executive director for 2017, together with
comparative figures for 2016:
Salary/Fees
(£000)
Pension
(£000)
Bonus(1)
(£000)
Long Term Incentives(2)
(£000)
Other benefits (4)
(£000)
Total
(£000)
Name
Dorothy Thompson
Will Gardiner
Andy Koss
2017
585
397
316
2016
574
390
310
2017
117
79
63
2016
115
78
62
2017
463
294
234
2016
756
479
381
2017
2016 (3)
2017
2016
2017
2016
0
–
0
74
–
19
71
20
19
76
24
21
1,236
1,595
790
632
971
793
Notes:
(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) There is a nil vesting of BMP awards that would vest in 2018, due to the performance conditions in respect of the 2015 BMP awards not being satisfied
(3) The BMP figure for 2016 is the value of the BMP Matching Awards granted in March 2014 which vested in March 2017, together with the dividend shares in relation to those vested shares. The value has
been re-stated to reflect the share price of £3.415 at the vesting date of 13 March 2017
(4) Other benefits include car allowance, private medical insurance, life assurance, permanent health insurance, dependent’s pension, and prior to her ceasing to be a director on 31 December 2017, in the
case of Dorothy Thompson, a second base allowance
BASE SALARIES
The base salaries of the executive directors as at 31 December 2017, together with comparative figures as at 31 December 2016, are shown in
the following table:
Andy Koss
Will Gardiner
Dorothy Thompson
318
400
588
310
390
574
Base salary as at
31 December 2017
£000
Base salary as at
31 December 2016
£000
Percentage
increase
2.5%
2.5%
2.5%
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Base salaries were reviewed with effect from 1 April 2017. In line with policy, the salaries of Dorothy Thompson, Will Gardiner and Andy Koss
were reviewed and increased by 2.5%. This was in line with the average increase for the wider workforce of 2.5%. Will Gardiner’s salary was
increased to £530,000 as at 1 January 2018 on his promotion to Group CEO.
ANNUAL FEES
Will Gardiner’s salary increased to £530,000 as at 1 January 2018 on his promotion to Group CEO.
Chairman
Non-Executive Director base fee
Senior Independent Director
Audit Committee Chair
Remuneration Committee Chair
Nomination Committee Chair (1)
Note:
(1) This is not paid if the Chairman of the Nomination Committee is also the Chairman of the Board
Fees at
31 December 2017
£000
Fees at
31 December 2016
£000
Percentage
increase
250
250
55
10
10
10
7.5
55
10
10
10
7.5
0%
0%
0%
0%
0%
0%
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Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
The table below sets out the single figure of remuneration and breakdown for each non-executive director for 2017 together with
comparative figures for 2016:
Philip Cox
(Chairman of the Board and Chairman of Nomination Committee)
Tim Cobbold
David Lindsell
(Senior Independent Director and Chairman of Audit Committee)
David Nussbaum(1)
Tony Thorne
(Chairman of Remuneration Committee)
Note:
(1) David Nussbaum was appointed as a director of the Board on 1 August 2017
Base fee
£000
250
250
55
55
55
55
23
–
55
55
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Additional
fee for Senior
Independent
Director
£000
Additional fee
for chairing a
committee
£000
–
–
–
–
10
10
–
–
10
10
Total
£000
250
250
55
55
75
75
23
–
65
65
–
–
–
–
10
10
–
–
–
–
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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DETAILS OF PERFORMANCE AGAINST METRICS FOR VARIABLE PAY AWARDS
Annual bonus plan outcome
A summary of the Committee’s assessment in respect of the 2017 Corporate Scorecard is set out in the following table:
Target
weighting
Low target
Target
Stretch
target
Outturn
Score
Group – Corporate
Safety
Total recordable injury rate
Finance
Group underlying earnings per share (pence)
Group underlying EBITDA (£m)
Group net debt (£m)
Pellet quality
DBI fines at disport (%)
Strategy
5%
10%
10%
10%
5%
0.70
0.30
0.15
0.27
0.0
201
(562)
4.7
231
(532)
10.6
266
(497)
0.7
229
(367)
7.5%
6.5%
4.5%
9.6%
New strategy implementation
15%
Behind plan
On plan Ahead of plan Ahead of plan
Drax Biomass
Variable cost/tonne ($)
Output (K tonnes)
Drax Power
Biomass unit technical availability (%)
Value from flexibility (£m)
Haven Power
Haven Power EBITDA (£m)
Implementation of new ERP
Opus Energy
Opus Energy EBITDA (£m)
Opus Energy sales volumes (TWh)
Renewal rate (%)
Total weighting
5%
2.5%
10%
5%
5%
2.5%
5%
5%
5%
100%
71.05
800
69.90
880
65.95
950
76.72
822
ND
82
(4)
ND
97
0
ND Below target
112
4
88
2
Q1 2018
Q4 2017
Q3 2017
Q2 2018
29
5.9
ND
29
6.3
ND
33
6.7
29.1
5.7
ND Above target
Notes:
The targets were aligned with the Group’s strategy and 2017 Business Plan and reviewed regularly by the Board as part of their ongoing scrutiny of business and executive performance
ND – Not Disclosed. It is considered that the disclosure of detailed performance against these metrics would be commercially sensitive. It would therefore not be appropriate to disclose
these figures. To do so may result in unfair competitive disadvantage to the Group and to consumers. All results were reviewed by the Committee prior to values being removed
1.2
0.1
0.9
2.0
0.0
1.6
0.0
0.3
0.0
0.4
1.6
0.0
1.0
0.0
1.6
0.84
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100 Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
Outlined below is a brief synopsis of the KPIs used and their strategic rationale:
Group
– Safety is the first priority for the business. The Total Recordable Incident Rate (TRIR) is defined as the number of incidents per 100,000
hours worked. A TRIR of 0.30 represents industry upper quartile safety performance.
– Financial performance metrics are based on underlying EBITDA, underlying EPS and Net Debt. The weighting at 30% reflects the priority
given to a strong Group financial performance.
– Pellet quality impacts both Drax Biomass and Drax Power. The Group’s strategic objective is 30% self-supply of high quality pellets, to fuel
its biomass generation units. The “fines” metric is used to drive pellet quality, from own supply.
– New strategy implementation allows the Board to assess progress against a small number of specific strategic objectives. The weighting
demonstrates the Board’s commitment to the further development of the Group.
Drax Biomass
– We remain focused on developing strong in-house pellet supply capability, able to provide up to 30% of the biomass fuel required by Drax
Power. Aside from “fines” whch are a Group issue, the focus is pellet output, particularly relevant as plants are commissioned and rise up
their development curve, and pellet production costs, which have a direct impact on gross margins available from generation.
Drax Power
– The value available to the Group from biomass-fuelled generation is a key driver of gross margins. Biomass unit technical availability
reflects the value that can be derived from maximising biomass unit output.
– The value from operational flexibility acknowledges the changing nature of the UK’s electricity sector and the value available to
generators able to fully support the grid. This system support has emerged as a key revenue driver as coal-fuelled generation has declined.
Haven Power
– During 2017 our Haven Power retail business has focused on improving profitability and making a positive financial contribution to the
Group. The EBITDA reflects this ambition.
– To drive the future performance of the business it will need to engage with customers through suitable digital platforms and the
implementation of new IT systems forms part of this development.
Opus Energy
Opus Energy was acquired in February 2017 and, in the year, there has been a strong attention to its successful integration, with emphasis on
maintaining its growth and profitability. The targets within the three metrics are consistent with the acquisition case.
Further details of how these individual metrics support the business strategy and drive both shareholder value and performance can be
found on pages 1–57.
The Committee made an in-depth review of the score for each of the performance measures, to make sure these were individually
supportable, and then reviewed the overall outcome, to determine whether to exercise its discretion and adjust the final score.
The majority of the measures are quantitative but for reasons of commercial sensitivity some of the targets are not disclosed in the
Annual report. The Committee aims for maximum transparency so the decision not to disclose a target is closely reviewed.
PERSONAL PERFORMANCE
The members of the Executive Committee, including the executive directors were assessed both relative to their individual contribution in
driving 2017 performance, and as a team. Key to the assessment was each individual’s contribution to delivering the Group’s strategy and
2017 Business Plan plus the promotion of the Drax values.
Individual and executive team performance were both considered to be strong. This included good cooperation across the team, which was
key to progressing the strategy and to the successful integration of Opus Energy.
With respect to the executive directors, areas of particular note included the:
– Group CEO’s strong and effective leadership of the Group, the work on sustainability and the development, promotion and implementation
of the new strategy, which included two significant acquisitions. She also gave strong support to the new HR strategy;
– Group CFO’s success in leading on the acquisition of Opus Energy, which was well integrated, the acquisition of LaSalle Bioenergy, which
increased our pellet capacity by 50% and is now successfully commissioning, the successful completion of the Group refinancing in May
and a new dividend policy which was announced in June. He has also been instrumental in the overhaul of IT across the Group;
– Chief Executive of Drax Power’s strong leadership of the Drax generating plant, including good interaction with Government leading to the
support for the fourth biomass unit, the acquisition of four permitted UK sites to develop as gas “peaking plants“ and the development of
longer-term options for growth through coal-to-gas repowering on the Drax site.
The Committee determined that the three executive directors had performed strongly and that it was appropriate to give the same personal
performance score to each. A score of 1.25 out of 1.5 was awarded.
Drax Group plc Annual report and accounts 2017
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BONUS EARNED FOR 2017
The resulting bonus outcomes as a percentage of base salary were:
BONUS EARNED FOR CHIEF EXECUTIVE
BONUS EARNED FOR OTHER EXECUTIVE DIRECTORS
TARGET
BONUS
75%
X
CORPORATE
SCORE
0.84
X
PERSONAL
SCORE
1.25
TARGET
BONUS
70%
X
CORPORATE
SCORE
0.84
X
PERSONAL
SCORE
1.25
The table below sets out the bonuses earned and the split between cash and deferred elements.
Executive director
Dorothy Thompson, Chief Executive, Drax Group
Will Gardiner, Chief Financial Officer
Andy Koss, Chief Executive, Drax Power
2017 bonus
(as % base salary)
Bonus earned
£000
Of which
paid in cash
(65% of bonus)
£000
Of which deferred
into shares
(35% of bonus)
£000
79%
74%
74%
463
294
234
301
191
152
162
103
82
No discretion was exercised by the Committee in determining the bonus outcome.
Details of deferred bonus share awards (audited information)
The following deferred bonus shares, which were awarded in 2014 in respect of the 2013 annual bonus, vested in 2017.
Executive director
Number of
shares vesting
Additional dividend
shares earned
Total number of
shares vesting
Value of vesting
(£000)
Dorothy Thompson, Chief Executive, Drax Group
21,904
1,512
23,416
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Paul Taylor ceased to be a director on 31 December 2015 but remained an employee. His deferred bonus shares awarded in 2014 in respect of
the 2013 annual bonus vested in 2017. The total number of shares which vested from those awards (including dividend shares) was 10,170 and
the value of the vesting was £34,425 which was based on the share price (338.50 pence) at which the shares were subject to income tax and
national insurance contributions on the vesting date.
DETAIL OF BMP INCENTIVE OUTCOMES (AUDITED INFORMATION)
The vesting outcome for matching awards granted in 2015 under the BMP, which were subject to performance conditions and due to the
performance conditions not being achieved, will not vest in 2018, are provided in the tables below.
Performance measure
Relative TSR vs FTSE 51–150 constituents
Proportion
of award
Performance for
threshold vesting
(15%)
50%
Median
Performance for
maximum vesting
Actual
performance
Upper
quartile
Below
median
Performance measure
Proportion
of award
Performance for
threshold vesting
(15%)
Performance for
maximum vesting
Actual
performance
Average Corporate Score for 2015, 2016
and 2017
50%
Average
score of 1
Average
score of 1.5
Scores of 0.76, 1.30 and
0.84 = Average of 0.97
No discretion was exercised by the Committee in determining the BMP outcome.
PSP AWARDS GRANTED DURING 2017
The table below shows the conditional awards granted under the PSP to executive directors on 15 May 2017.
Executive director
Dorothy Thompson
Will Gardiner
Andy Koss
Award as %
of salary
Number of
shares granted(1)
175%
175%
175%
313,956
213,326
169,567
Vesting
0%
Vesting
0%
Face value of
awards
£000
1,030
700
556
Note:
(1) The number of shares awarded was based on the average share price in the three day period prior to grant, which was 327.93 pence. In accordance with the PSP rules, dividend shares are awarded at the
time and in the event that awards actually vest. No dividend shares are awarded where the initial awards lapse
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REMUNERATION COMMITTEE REPORT CONTINUED
The performance conditions that apply to the PSP awards granted in 2017 are set out below.
Performance measure
Relative TSR vs FTSE 350 constituents
Average Corporate Score
Proportion
of award
Performance for
threshold vesting
50%
Median
50%
Average
score of 0.75
Vesting at
threshold
performance
Performance
for 50% vesting
(Corporate
Scorecard only)
Performance for
maximum vesting
25%
0%
–
Upper
quartile
Average
score of 1
Average
score of 1.5
Straight line vesting occurs between performance levels for both conditions. Performance for both conditions is measured over three
financial years to 31 December 2019.
BMP DEFERRED AWARDS GRANTED DURING 2017
The table below shows the deferred share awards granted under the BMP to executive directors on 28 March 2017 in respect of bonus
earned for performance in 2016. Awards will vest after three years subject to continued service only.
Executive director
Dorothy Thompson
Will Gardiner
Andy Koss
Value of
deferred bonus
(£000)
Number of
shares granted(1)
79,611
50,486
40,130
265
168
133
Note:
(1) The number of shares awarded was based on the average share price in the five day period prior to grant, which was 332.15 pence. In accordance with the BMP rules, dividends in respect of the deferred
shares are reinvested in additional shares, which vest when the deferred shares vest
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 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 pension scheme.
PAYMENTS TO FORMER DIRECTORS
No other payments were made to past directors during 2017.
PAYMENTS FOR LOSS OF OFFICE
Dorothy Thompson ceased to be a director on 31 December 2017 and her service agreement terminated on that date. For the purpose of
outstanding incentive awards under the BMP and PSP, the Committee determined that Dorothy should be treated as a good leaver. Upon
leaving the Company she received the following payments which were in line with the provisions of her service agreement and the
Company’s Remuneration Policy which was approved by shareholders at the 2017 Annual General Meeting:
– In accordance with the relevant provisions of her service agreement, payment in lieu of the residual part of the period of 12 months’ notice
commencing on 1 January 2018 and terminating on 20 September 2018, in respect of salary, pension payments and contractual benefits
(the “PILON payment”). In accordance with the terms of the service agreement, the PILON payment will be made in instalments, with an
initial payment of 50% of the PILON payment paid within 30 days of the termination date, a second instalment of 25% to be paid within six
months of the termination date and a third instalment of 25% to be paid within nine months of the termination date;
– Annual bonus in respect of 2017 was determined in accordance with the Remuneration Policy. It is payable in early 2018 and totals
£463,300. 35% of this bonus awarded for 2017 will be deferred as an award under the Deferred Share Plan (DSP) and will vest in
accordance with the rules of the DSP;
– Annual bonus in respect of the unworked period of notice (1 January 2018 to 20 September 2018) will, in accordance with the service
agreement and the Remuneration Policy, be determined (and will be payable in early 2019). 35% of any such bonus will be deferred as an
award under the DSP and will vest in accordance with the rules of the DSP;
– Deferred bonus awards granted in 2015, 2016 and 2017 will vest in accordance with the leaver provisions of the BMP, pro-rated to the date
on which employment ceased. A total of 110,667 shares will vest, as soon as practicable, with a sufficient number being sold to meet
income tax and National Insurance Contributions. The value of these shares based on a share price of £2.706 as at 29 December 2017 is
£299,465;
– Pro-rata vesting of performance related BMP and PSP Awards made in 2016 and 2017 to the extent that any such awards vest, subject to
fulfilling performance conditions, in accordance with the rules of the BMP and PSP. These awards will vest at the normal vesting date. The
PSP awards are subject to a two year post-vesting holding period in accordance with the remuneration policy and the PSP rules . A total of
216,340 shares including dividend shares were outstanding as at 31 December 2017. An estimated maximum value of these based on the
closing share price on 29 December 2017 of £2.706 is 585,416; and
– Long term incentive awards will remain subject to malus and clawback provisions.
Drax Group plc Annual report and accounts 2017
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103
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STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS (AUDITED INFORMATION)
The shareholding guidelines require 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 is equal to at least
200% of salary. Only shares that have actually vested count towards the threshold.
As at 31 December 2017, the shareholding guidelines had not been met, as detailed in the table below, which also shows the executive
directors’ shareholdings and share interests as at that date.
Beneficial
ownership
of director or
connected persons
Deferred awards not subject to
performance
Awards subject to
performance
Name
Year ending 31 December 2017
Shares(2)
Share Awards(3)
BMP
Sharesave
Options
BMP & PSP
Share Awards
Total
Will Gardiner
Number
57,392
55,549
14,778
566,830
694,549
Value at year end(1)
£155,303
£150,316
£39,989
£1,533,842 £1,879,450
Shareholding as a percentage of salary
Andy Koss
Number
39%
52,113
–
–
–
–
40,130
5,633
280,726
378,602
Value at year end(1)
£141,018
£108,592
£15,243
£759,645 £1,024,497
Shareholding as a percentage of salary
44%
–
–
–
–
Dorothy Thompson
Number
353,337
191,643
2,816
794,097
1,341,893
Value at year end(1)
£956,130
£518,586
£7,620
£2,148,826 £3,631,162
Shareholding as a percentage of salary
163%
–
–
–
–
Notes:
(1) Share price at 29 December 2017 was 270.6 pence per share
(2)
(3) The deferred share awards not subject to performance are the annual bonus deferred shares
(4) For the purposes of the table above, the reference salary used for Will Gardiner was his 2017 salary as Group CFO
Includes, where applicable, shares held by the Trustee of the Drax Group plc Share Incentive Plan
There is no shareholding requirement for non-executive directors. The table below shows the shareholdings of the non-executive directors
and their connected persons and the value as at 29 December 2017, when the share price was 270.6 pence per share.
Tim Cobbold
Philip Cox
David Lindsell
David Nussbaum
Tony Thorne
As at the date hereof there have been no changes to the shareholdings or share interests since 31 December 2017.
Number
of shares
1,000
Value at
year end
£2,706
60,000
£162,360
7,500
7,500
7,500
£20,295
£20,295
£20,295
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SERVICE AGREEMENTS
The following table shows, for each director of the Company at 26 February 2018, or those who served as a director of the Company at any
time during the year ended 31 December 2017, the start date and term of the service agreement or contract for services, and details of the
notice periods.
Director
Tim Cobbold
Philip Cox
Will Gardiner
Nicola Hodson
Andy Koss
David Lindsell
David Nussbaum
Dorothy Thompson(1)
Tony Thorne
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)
27 September 2016
3 years
1 year and 7 months
1 January 2018
3 years
2 years and 10 months
16 November 2015
Indefinite term
Not applicable
12 January 2018
3 years
2 years and 10 months
1 January 2016
Indefinite term
Not applicable
1 December 2017
17 months
13 months
1 August 2017
3 years
2 years and 6 months
3 September 2013
Indefinite term
Not applicable
29 June 2016
3 years
1 year and 4 months
1
6
12
1
12
1
1
12
1
1
6
12
1
12
1
1
12
1
Note:
(1) Dorothy Thompson ceased to be a director on 31 December 2017
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Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
DRAX NINE-YEAR TSR DATA TO 31 DECEMBER 2017
The following graph shows how the value of £100 invested in both the Company and the FTSE 350 Index on 31 December 2008 has
changed. This index has been chosen as a suitable broad comparator against which the Company’s shareholders may judge their relative
returns given that, in recent years, the Company has been a member of the FTSE 350 Index. The graph reflects the TSR (determined
according to usual market practice) for the Company and the index referred to on a cumulative basis over the period from 31 December 2008
to 31 December 2017.
£
300
250
200
150
100
50
0
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
31 Dec
2015
31 Dec
2016
31 Dec
2017
Drax
FTSE 350
GROUP CHIEF EXECUTIVE OFFICER’S PAY IN LAST NINE FINANCIAL YEARS
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
Dorothy Thompson’s total single figure
(£000)
Bonus % of maximum awarded
BMP Matching Award % of maximum
vesting
903
77%
1,155
100%
1,196
100%
1,406
100%
3,360
100%
1,854
73%
1,248
46%
1,595
88%
1,236
53%
–
–
–
–
40.52%
21.66%
15.43%
0%
PERCENTAGE CHANGE IN THE GROUP CHIEF EXECUTIVE OFFICER’S REMUNERATION COMPARED WITH THE WIDER
EMPLOYEE POPULATION
The table below shows how the percentage change in the Group CEO’s salary, benefits and bonus between 2016 and 2017 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.
Bonus
Dorothy Thompson
Salary
Taxable benefits
£000
Percentage
increase
Percentage
increase
0%
2.7%
2016
755.7
2017
% increase
463.3
–38.7%
Average for UK employees
2.7%
0.7%
6.6
4.3
%
RELATIVE IMPORTANCE OF SPEND ON PAY
The table below illustrates the relative importance of spend on pay compared to other disbursements from profit, namely 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.
Remuneration – 2017
Remuneration – 2016(1)
Capital expenditure – 2017
Capital expenditure – 2016(2)
£137.1m
£99.9m
£96.4m
£180.6m
Dividends – 2017
£50.0m
Dividends – 2016(3)
£11.0m
0
£50,000.000
£100,000,000
£150,000,000
£200,000,000
Notes:
(1) Remuneration 2016 see note 6.1
Notes:
(2) Capital expenditure 2016 see note 3.1
(1) Remuneration 2017 see note 6.1
(3) Dividends 2017 see note 2.9
(2) Capital expenditure 2017 see note 3.1
(3) Dividends 2017 see note 2.9
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
105
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STATEMENT OF IMPLEMENTATION OF THE REMUNERATION POLICY IN 2018
The remuneration policy will be implemented following its approval by shareholders at the AGM in April 2018 as follows:
The Committee will review salaries 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.
CORPORATE SCORECARD
The Corporate Scorecard measures and targets for 2018 have been established for the Group and for each Group business. Details of
performance against the measures will be disclosed in the 2018 Annual Report on Remuneration so far as possible, whilst maintaining
commercial confidentiality.
The following table sets out the categories and a description of the measures.
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Target
Group
Safety
TRIR
Finance & strategy
Group EBITDA
Reasons for use
The same target as previous years, focused on reducing the number of safety-related incidents,
measured using the Total Recordable Incident Rate
EBITDA is our principle financial metric, measuring the underlying performance of each business
and the Group
Group Net Debt
We use net debt as a key indicator of cash generation and effective capital allocation
Progress on delivering strategy
This target focuses on project delivery, including 30% self-supply of pellets, development of new
generation capacity and implementation of digital capabilities
Sustainability
People, reputation & responsibility
DRAX BIOMASS
Fines at disport
Cost of production
DRAX POWER
By combining several KPIs into a single target we will seek to improve sustainability across all of our
activities and businesses
The same target as previous years, our focus remains on improving the quality of biomass pellets
measured as the percentage of fines in each shipment
Reducing the cost of production will make a positive contribution to the Group’s financial
performance, in 2018 and beyond
Biomass unit technical availability
Revenues from biomass units are key drivers of profitability; by maximising availability we maximise
profit opportunities
Value from flexibility
B2B Energy Supply
Cost to serve customers
Quality of business
Growth in market share
This targets the financial value we expect from providing flexible support services to the UK
electricity grid
By reducing cost to serve we will increase the efficiency and effectiveness of our energy supply
operations
This target will focus on the gross margin derived from each unit of power we sell to customers
By growing market share, whilst controlling costs and improving margins, we expect to increase
profit from the Energy Supply business
PERFORMANCE MEASURES FOR PERFORMANCE SHARE PLAN
The performance measures to be used in 2018 PSP awards are as described on page 90 in the remuneration policy report.
NON-EXECUTIVE DIRECTORS’ FEES
Non-executive directors’ fees will be reviewed by the Chairman and executive directors in July 2018.
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Drax Group plc Annual report and accounts 2017
REMUNERATION COMMITTEE REPORT CONTINUED
SHAREHOLDER VOTING
The table below shows the voting outcome for the remuneration policy and the Annual Report on Remuneration at the AGM on 13 April 2017.
Name
Approval of the directors’
remuneration policy
Approval of the annual report
on remuneration
For
Shares
Against
Total
Votes withheld
%
Shares
%
Shares
%
Shares
275,998,273
77.03
82,299,718
22.97
358,297,991
100
1,496,815
234,597,094
66.35
118,991,937
33.65
353,589,031
100
6,205,774
The remuneration policy and the 2016 Directors’ Remuneration Report were approved by the majority of shareholders but there was a
significant minority of shares voted against, particularly against the Remuneration Report. We had consulted on the new policy with the
major holders of the issued share capital, representing a significant majority of the shares. Most of these investors were supportive, but not
all. Feedback from investors, particularly those who did not support either or both the report and the policy, has been considered by the
Remuneration Committee. Further discussion will take place with investors as part of an ongoing programme.
COMMITTEE ACTIVITY AND KEY DECISIONS IN 2017
Matters considered and decisions reached by the Committee in 2017 are shown in the table below:
January
Considered the report of shareholder consultation in respect of the 2017 Remuneration Policy.
Approved the remuneration package for the new Director of Corporate Affairs.
February
Considered the 2016 balanced Corporate Scorecard and decided not to exercise its discretion to adjust the score.
Adopted the 2016 balanced Corporate Scorecard for the purpose of determining relevant aspects of 2016
remuneration.
Approved executive director and senior staff personal scores and annual bonus awards for 2016.
Approved the Group Chief Executive’s personal score and annual bonus award for 2016.
Approved the vesting of the 2014 BMP awards, which was reported in the 2017 Annual Report on Remuneration.
Considered and approved the 2016 Annual Report on Remuneration.
Approved the operation of the all-employee Sharesave Share Plan in 2017.
Approved the Deferred Share Plan and Performance Share Plan.
March
Approved the Long Term Incentive awards for 2017 for senior management below Board.
June
September
November
Noted the bonus awards to senior management below Executive Committee member level
Approved a proposal for members of the Executive Committee and senior staff salary review.
Agreed revised remuneration for Jonathan Kini.
Approved the remuneration terms for the outgoing Group CEO.
Approved the remuneration package for the incoming Group CEO.
Noted the performance status of outstanding share plans and approved in principle the operation of share plans in
2017.
Considered and approved the implementation of the new HR strategy.
Reviewed the fees paid to PricewaterhouseCoopers LLP (PwC) as, the Committee’s remuneration adviser, together
with fees paid by the Group to PwC for other matters, and reviewed PwC’s independence.
In 2017, the members of the Remuneration Committee were Tony Thorne, Chairman of the Committee; Tim Cobbold; Philip Cox; David
Lindsell; and David Nussbaum (from 1 August 2017), all of whom are independent non-executive directors. The Group Company Secretary
was Secretary to the Committee.
The Group CEO was invited to attend meetings of the Committee, except when her own remuneration was discussed.
The Committee met on six occasions during the year and its members’ attendance record is set out on page 81, along with details of
other attendees.
Drax Group plc Annual report and accounts 2017107Drax Group plc Annual report and accounts 2017107Strategic reportGovernanceFinancial statementsShareholder informationADVISER TO THE COMMITTEEThe adviser to the Committee for the year was 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 . PwC is a member of the Remuneration Consultants Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as PwC has confirmed there are no conflicts of interest.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 £233,000 during 2017 in respect of advice given to the Committee.The Committee also considers the views of the Group Chief Executive regarding the performance and remuneration of the other executive directors and senior staff.During 2017, the Committee has also been advised by David McCallum, the Group Company Secretary, and Samantha Brook, Head of Corporate HR.OTHER MATTERSWider employee populationThe average pensionable pay of an executive director is 12.8 times the average of pensionable pay for all UK employees within the Group.Past directorsPaul Taylor ceased to be a director on 31 December 2015, but he continued in employment on a part-time basis until 31 December 2017 and received a salary in respect of this role.Remuneration received from external appointmentsRemuneration received by executive directors for service as a non-executive director elsewhere is retained by the director. Detailed below is the remuneration they received.Fees receivedNameExternal organisation20162017Dorothy ThompsonCourt of the Bank of England£15,000£15,000Dorothy ThompsonEaton Corporation plc (appointed 29 July 2016)£58,000£122,873This report was reviewed and approved by the Remuneration Committee on 26 February 2018.TONY THORNECHAIRMAN OF THE REMUNERATION COMMITTEE 108
108 Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
DIRECTORS’ REPORT
This report contains information which the Company is obliged to
disclose and which cannot be found in the strategic, financial,
sustainability or corporate governance reports of this document.
SHARE CAPITAL
The Company has only one class of equity shares, which are ordinary
shares of 11 16⁄29 pence each. There are no restrictions on the voting
rights of the ordinary shares.
Drax Group plc has a Premium Listing on the London Stock
Exchange and currently trades as part of the FTSE 250 Index,
under the symbol DRX and with the ISIN number GB00B1VNSX38.
SHARES IN ISSUE
At 1 January 2017
Issued in period through
the Bonus Matching Plan(1)
Issued in period through the Sharesave Plan(2)
At 31 December 2017
Issued between 1 January and 26 February 2018
through the Sharesave Plan
At 26 February 2018
406,700,321
293,057
41,051
407,034,429
467
407,034,896
Notes:
(1) 64 members of the Bonus Matching Plan with performance related awards had shares vest at
the third anniversary following the award and two members of the Bonus Matching Plan had
deferred awards vest early
(2) 15 members of the Sharesave Plan exercised their options early upon retirement or redundancy
No other ordinary shares were issued during the year and the
Company held no treasury shares during 2017. The position remains
the same at the date of this report.
The directors present their annual report on the affairs of the Group,
together with the financial statements and auditor’s report for the
year ended 31 December 2017. The directors’ report required under
the Companies Act 2006 is comprised of this Report, the Corporate
Governance Report and the Audit, Nomination and Remuneration
Committee Reports.
The 2021 T-4 capacity market auction closed in February 2018. This
Post-balance sheet event has not changed the estimates included
in the financial statements. Full details are disclosed in note 5.3 on
page 150. Since the year end, we have also announced the closure
of our Atlanta office. Details are disclosed in note 5.4 on page 152.
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 1–57.
Information about the use of financial instruments by the Company
and its subsidiaries is given in note 7.2 to the consolidated financial
statements.
ANNUAL GENERAL MEETING (AGM)
The AGM will be held at 11.30am on Wednesday 25 April 2018 at
The Grand Hotel and Spa, Station Rise, York, YO1 6GD. A separate
document contains the notice convening the AGM and includes
an explanation of the business to be conducted at the meeting.
DIVIDENDS
An interim dividend of 4.9 pence per share was paid on 6 October
2017, to shareholders on the register on 22 September 2017.
The directors propose a final dividend of 7.4 pence per share, which
will, subject to approval by shareholders at the AGM, be paid on
11 May 2018, to shareholders on the register on 20 April 2018.
Details of past dividends can be found on the Company’s website at
www.drax.com/investors/financial-history/#dividend-history.
No shareholder has waived or agreed to waive dividends payable in
the year or in future years.
Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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INTERESTS IN VOTING RIGHTS
Information provided to the Company in accordance with the Financial Conduct Authority’s Disclosure and Transparency Rules (DTR) is
published in a timely manner on the London Stock Exchange’s Regulatory News Service – a Regulatory Information Service and also on the
Company’s website.
As at 26 February 2018, the following information had been received in accordance with DTR5 from holders of notifiable interests in the
voting rights of the Company. The information provided below was correct at the date of notification. However, investors are only obliged to
notify the Company when a notifiable threshold is crossed and therefore it should be noted that the holdings below may have changed but
without crossing a threshold.
Date last
notification made
Number of voting
rights directly held
Invesco plc
Schroders plc(2)
Woodford Investment Management LLP
Old Mutual
Artemis Investment Management LLP
Orbis Holdings Limited
Investec Asset Management Limited
16.02.2017
14.02.2018
19.08.2014
27.09.2017
21.06.2017
01.12.2016
19.12.2016
–
–
–
–
–
–
–
Number of
voting rights
indirectly held
84,800,663
61,010,745
21,703,125
20,310,972
20,329,815
20,241,875
20,204,001
Number of
voting rights in
qualifying financial
instruments
–
–
–
–
–
–
–
Total number of
voting rights held
84,800,663
61,010,745
21,703,125
20,310,972
20,329,815
20,241,875
20,204,001
% of the issued
share capital
held(1)
20.85%
14.99%
5.36%
4.99%
4.99%
4.98%
4.97%
Notes:
Ordinary shares of 11 16/29 pence each
(1) As at the date of the last notification made to the Company by the investor, in compliance with DTR
(2) As at 31 December 2017, Schroders plc had voting rights over 65,092,112 shares. All other shareholdings were as stated in this table as at 31 December 2017
AUTHORITY TO PURCHASE OWN SHARES
At the AGM held on 13 April 2017, shareholders authorised 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.
The Company did not purchase any of its own shares during 2017, nor has it done so from 31 December 2017 up to the date of this report.
RIGHTS AND OBLIGATIONS ATTACHING TO SHARES
There are various rights and obligations attaching to the ordinary shares which are set out in the Articles. A copy of the Articles can
be accessed on the Company’s website at www.drax.com/about-us/compliance-and-policies.
Attention should be given to the following sections within the Articles, covering the rights and obligations attaching to shares:
Variation of rights – which covers the rights attached to any class of shares that 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.
Transfer of shares – provides detail of how transfers of shares in certified and uncertified form may be undertaken. It also sets out the
directors’ rights of refusal to effect a transfer and the action that directors must take following such refusal. It should be noted that a
shareholder does not need to obtain the approval of the Company, or of other holders of shares in the Company, for a transfer of shares to
take place.
Voting and deadlines for exercising voting rights – these sections of the Articles deal with voting on a show of hands and on a poll. They also
cover the appointment of a proxy or corporate representative. In respect of voting deadlines, the Articles provide for the submission of proxy
forms not less than 48 hours before the time appointed for the holding of the meeting. It has been the Company’s practice since
incorporation to hold a poll on every resolution at Annual General Meetings and Extraordinary General Meetings.
A trustee holds shares 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 a General Meeting and the trustee may
only cast its vote in respect of shares over which it has received a valid direction from employees.
Changes to the Articles – the Articles may only be changed by shareholders by special resolution.
Drax Group plc Annual report and accounts 2017110Drax Group plc Annual report and accounts 2017110OTHER SIGNIFICANT AGREEMENTSThe Group has two main financing agreements: –A £350 million facilities agreement dated 20 December 2012 (as amended and restated on 10 December 2015 and 21 April 2017 and further amended by way of a supplemental amendment agreement dated 4 May 2017) between, amongst others, Drax Corporate Limited and Barclays Bank PLC (as facility agent) (the Facilities Agreement). –An indenture dated 5 May 2017 between, amongst others, Drax Finco plc and BNY Mellon Corporate Trustee Services Limited (as Trustee) (the Indenture) governing (i) £350,000,000 4 ½% senior secured notes due 2022 (the Fixed Rate Notes) and £200,000,000 senior secured floating rate notes due 2022 (the Floating Rate Notes). Under the Facilities Agreement, a change of control occurs if any person or group of persons acting in concert gains control of Drax Group plc or if Drax Group plc no longer holds directly or indirectly 100% of the issued share capital of Drax Group Holdings Limited or else if a party other than Drax Group plc becomes the beneficial owner of more than 50% of the voting rights of Drax Group plc’s direct subsidiary, Drax Group Holdings Limited. Following a change of control, if any lender requires, it may by giving notice to the relevant Group entity within 30 days of receiving notice from such Group entity that a change of control has occurred, cancel its commitments and require the repayment of its share of any outstanding amounts within three business days of such cancellation notice being given.Under the Indenture, a change of control occurs if a party other than Drax Group plc becomes the beneficial owner of more than 50% of the voting rights of Drax Group plc’s direct subsidiary, Drax Group Holdings Limited, or else if all or substantially all of the assets of Drax Group Holdings Limited are disposed outside of the Drax corporate group. No later than 60 days after any change of control, Drax Group Holdings must offer to purchase any outstanding Fixed Rate Notes and Floating Rate Notes at 101% of the principal amount of such notes plus accrued interest and other unpaid amounts. 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.STRATEGIC REPORTThe Strategic report on pages 1–57 contains disclosures in relation to employee participation, Greenhouse Gas emissions and third party indemnity provisions for which the Company is responsible.DISABLED EMPLOYEESApplications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned.In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues, and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, so far as possible, be identical to that of other employees.AUDITORS AND THE DISCLOSURE OF INFORMATION TO THE AUDITORSo far as each person serving as 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.Resolutions will be proposed at the AGM for (i) the reappointment of Deloitte LLP as the auditor of the Group; and (ii) authorising the directors to determine the auditor’s remuneration. As explained, the Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and its 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 76–80.The directors’ report was approved by the Board on 26 February 2018 and is signed on its behalf by:DAVID MCCALLUMGROUP COMPANY SECRETARYRegistered office:Drax Power StationSelbyNorth YorkshireYO8 8PHDIRECTORS’ REPORT CONTINUED Drax Group plc Annual report and accounts 2017
Drax Group plc Annual report and accounts 2017
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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), set out in FRS 101 “Reduced
Disclosure Framework”. 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:
– select suitable accounting policies and then apply them consistently;
– make judgements and accounting estimates that are reasonable and prudent;
– state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained
in the financial statements; and
– prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that directors:
– properly select and apply accounting policies;
– present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
– provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
– make an assessment of the 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:
– 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;
– 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
– 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.
This responsibility statement was approved by the Board of directors on 26 February 2018 and is signed on its behalf by:
WILL GARDINER
CHIEF EXECUTIVE, DRAX GROUP
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Drax Group plc Annual report and accounts 2017
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DRAX GROUP PLC
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Opinion
In our opinion:
– 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 2017
and of the group’s loss for the year then ended;
– the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
– the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and
– 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.
We have audited the financial statements of Drax Group plc (the "parent company") and its subsidiaries ("the group") which comprise:
– the consolidated income statement;
– the consolidated statement of comprehensive income;
– the consolidated and parent company balance sheets;
– the consolidated and parent company statements of changes in equity;
– the consolidated cash flow statement;
– the basis of preparation and statement of accounting policies;
– the related group notes 2.1 to 8.3; and
– the related parent company notes 1 to 9
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 has been applied in the preparation of the parent company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United
Kingdom Generally Accepted Accounting Practice).
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
SUMMARY OF OUR AUDIT APPROACH
Key audit matters
The key audit matters that we identified in the current year were:
– Asset impairment of Drax Power
– Valuation of commodity and foreign exchange contracts
– Estimation of retail unbilled revenue
Materiality
Scoping
Within this report, any new key audit matters are identified with
same as the prior year identified with
and any key audit matters which are the
The materiality that we used for the group financial statements was £6.8m (2016: £4.2m). This was
determined on a blended basis taking into consideration a number of available metrics, with particular focus
on Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) and excluding unrealised gains
or losses on derivative contracts and material one-off items, as this measure is of direct relevance to readers
of the financial statements. Our selected materiality represents approximately 3% of EBITDA for the year.
We focused our group audit scope primarily on the audit work at four locations, being Drax Power, Haven
Power, Opus Energy and Drax Biomass. All of these were subject to a full scope audit. These four locations
represent the principal business units and account for virtually all of the group’s net assets, revenue and
profit before tax.
Significant changes
in our approach
We have completed the audit of Opus Energy for the first time, following its acquisition by the Group in
February 2017. Other aspects of our audit approach remain broadly consistent to the prior year but we have
continued to refine our key audit matters as detailed below.
Drax Group plc Annual report and accounts 2017
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CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENT
Going concern
We have reviewed the directors’ statement on page 119 to the financial statements about whether they
considered it appropriate to adopt the going concern basis of accounting in preparing them and their
identification of any material uncertainties to the group’s and company’s ability to continue to do so over a
period of at least 12 months from the date of approval of the financial statements.
We confirm that we have
nothing material to report, add
or draw attention to in respect
of these matters.
We are required to state whether we have anything material to add or draw attention to in relation to that
statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our
knowledge obtained in the audit.
Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of
the directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are
required to state whether we have anything material to add or draw attention to in relation to:
– the disclosures on pages 51–57 that describe the principal risks and explain how they are being
managed or mitigated;
– the directors' confirmation on page 111 that they have carried out a robust assessment of the principal
risks facing the group, including those that would threaten its business model, future performance,
solvency or liquidity; or
– the directors’ explanation on page 50 as to how they have assessed the prospects of the group, over
what period they have done so and why they consider that period to be appropriate, and their statement
as to whether they have a reasonable expectation that the group will be able to continue in operation
and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the group
required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
We confirm that we have
nothing material to report, add
or draw attention to in respect
of these matters.
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KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements for
the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and
directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
We previously identified onsite biomass stocks as a key audit matter reflecting the judgement inherent in calculating the volume of biomass
stocks owned by the Group. Following the reduction in biomass stock as a result of an onsite fire during December 2017, we no longer
consider this to be a key audit matter.
The appropriateness of asset useful economic life assumptions is no longer considered to be a key audit matter following the reduction in
the accounting lives of the coal specific assets from 1 January 2017.
The valuation and recoverability of Renewable Obligation Certificates (ROCs) is no longer considered to be a key audit matter. The ROC
valuation process has historically been free from material error and it is well established.
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DRAX GROUP PLC CONTINUED
ASSET IMPAIRMENT OF DRAX POWER
Key audit matter description Property, plant and equipment of £1.7bn (2016: £1.6bn) is held on the balance sheet at the year end, the
majority of which relates to the power generation plant. Net assets at the year end were £1.7bn (2016: £2bn)
and the market capitalisation was £1.1bn (2016:£1.5bn).
Management considered indicators of impairment in respect of each Cash Generating Unit (CGU). Despite
improvements in achieved spreads within key commodity markets and a period of relative stability with
respect to relevant government policy, the market capitalisation of the Group continues to be below the
net asset value. This is considered to be an indicator of the risk of impairment and accordingly management
performed an impairment review for the Drax Power CGU in the current year, as this is the CGU which
contains the majority of the Group’s assets.
As noted in the Group’s critical accounting judgements, estimates and assumptions in note 2.4 and the Audit
Committee report on page 76, asset impairment has been considered a key risk by the Audit Committee. Fixed
assets are disclosed in note 3.1.
The impairment testing is subject to the application of management judgement in identifying relevant
CGUs and various assumptions underlying the calculation of the value in use for each CGU identified. These
assumptions include the achievability of the long-term business plan. Management’s assessment also
considers changes in the business which may give rise to additional CGUs, for example the acquisition of
Opus Energy in February 2017.
Due to the level of management judgement involved in assessing impairment, we have identified this as a
fraud risk.
The significant judgements made by management have been disclosed in note 2.4 and include:
– The expected operating lives of the six generating units;
– Future commodity prices beyond the horizon of existing contracted purchases, particular long-term power
prices at both baseload and peak times, and future biomass prices, particularly given that biomass is not a
standardised commodity traded openly on exchanges;
– The continuance of existing biomass support regimes until 2027 and the existence of a favourable
economic environment for biomass generation thereafter; and
– The discount rate applied to forecast future cashflows.
We evaluated the design and implementation of key controls related to asset impairment testing.
We have challenged management’s identification of CGUs, taking into consideration the independence of
cash flows across key components of the business and across the power generating units.
We identified the key judgements made by management and utilised our internal valuation specialists to
benchmark key market related assumptions including future commodity prices, current and future capacity
and other support mechanisms and discount rates against external data where available. For example, we
have compared the commodity price assumptions to the latest available Department for Business, Energy
and Industrial Strategy (DBEIS) and National Grid forecasts.
We have considered the liquidity of the biomass market and the impact that Drax could have on that market
as a result of the volumes of biomass it requires and its potential impact on price.
We have also challenged the underlying assumptions and significant judgements used in management’s
impairment model by:
– Running a range of sensitivities to assess whether an impairment would be required if a range of more
conservative assumptions were adopted;
– Assessing the historical accuracy of management’s budgets and forecasts by comparing them to actual
performance;
– Verifying the mathematical accuracy of the cash flow models; and
– Assessing whether the disclosures in note 2.4 of the financial statements appropriately disclose the key
judgements taken so that the reader of the accounts is aware of the impact in the financial statements of
changes to key assumptions that may lead to impairment.
How the scope of our audit
responded to the key audit
matter
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ASSET IMPAIRMENT OF DRAX POWER CONTINUED
Key observations
We are satisfied that the discount rate is determined based on acceptable valuation methodologies. While it
is lower than the ranges determined by our internal valuation specialists, increasing the discount rate to be
within our range would not lead to an impairment.
Although we note that assumptions relating to long term revenues and costs are inherently difficult
to assess, we believe that the assumptions used by management were reasonable, and based on the
sensitivities that we performed on these assumptions, we are satisfied that no impairment is required.
VALUATION OF COMMODITY AND FOREIGN EXCHANGE CONTRACTS
Key audit matter description Unrealised losses on derivative contracts recognised in the income statement in the year are £156m (2016:
unrealised gains of £177m), with related derivative assets of £366m and liabilities of £204m recognised on the
balance sheet as at 31 December 2017.
The valuation of derivative contracts is complex and requires judgement in areas including the selection
of appropriate valuation methodologies, and assumptions in respect of future market prices and credit risk
factors.
Due to the large amount of data involved in the contract valuations, and the requirement for certain manual
adjustments, we have identified a fraud risk relating to management or employees of the company valuing
trades inappropriately.
Further detail of the key judgements are disclosed in the Group’s critical accounting judgements, estimates
and assumptions set out on pages 119 and 120 and the Audit Committee report on pages 76 to 80. Section 7
sets out the financial risk management notes.
We evaluated the design and implementation and tested the operating effectiveness of key controls related
to the valuation of commodity and foreign exchange contracts.
We used our internal financial instrument specialists to test management’s key judgements and calculations,
including testing a sample of trades undertaken to trade tickets, confirming key contractual terms such as
volumes and contracted prices.
We have assessed the valuation models used by management, including any manual adjustments to
determine the fair value of the derivative instruments and performed independent valuations across a
sample of both commodity and foreign exchange contracts.
We have analysed the appropriateness of management’s forward price curve assumptions by benchmarking
these to third party sources and reviewed the consistency of the assumptions used across other areas of the
financial statements, such as asset impairment.
We have challenged management’s approach and assumptions involved in assessing fair value adjustments
such as credit risk, time value of money and spread adjustments.
From our testing, we are satisfied that the valuation of commodity and foreign exchange contracts is
appropriate. We consider the valuation models used by management to be appropriate and the forward curve
assumptions adopted are within an acceptable range.
How the scope of our audit
responded to the key audit
matter
Key observations
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Drax Group plc Annual report and accounts 2017
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DRAX GROUP PLC CONTINUED
ESTIMATION OF RETAIL UNBILLED REVENUE
Key audit matter description The recognition of retail revenue requires an estimation of customer usage between the date of the last
meter reading and year end, which is known as unbilled revenue.
Across the retail division, unbilled revenue at the balance sheet date amounted to £195 million
(2016: £119 million).
The method of estimating unbilled revenues is complex and judgemental and requires assumptions for both
the volumes of energy consumed by customers and the related value.
We identified a fraud risk in relation to revenue recognition in the retail business, in particular to the estimates
underpinning unbilled revenue as these judgement areas could be manipulated by management to mis-report
revenue.
Further detail of the key judgements are disclosed in the Group’s critical accounting judgements, estimates
and assumptions set out on pages 119 and 120 and the Audit Committee report on pages 76 to 80. Accrued
income is disclosed in note 3.5.
How the scope of our audit
responded to the key audit
matter
We evaluated the design and implementation and tested the operating effectiveness of key controls related
to the estimation of unbilled revenue. This included controls over the reconciliation of meter readings
provided by the energy markets, and which are used by management to estimate the power supplied. We also
tested the controls over the price per unit applied in the valuation of unbilled revenue.
When external market information was not available at the balance sheet date we also obtained and
considered management’s reconciliation of the volume of power purchased to their calculations of
revenue supplied and completed sample tests to check that the December unbilled revenue amount was
subsequently billed.
We also reviewed the aggregate unbilled revenue balance from previous periods to test that the amounts
recognised were subsequently billed in line with the values accrued.
Key observations
Our retrospective reviews of estimated revenues found that management have historically achieved a high
level of accuracy. We considered the estimates for revenue made in the year to be appropriate.
OUR APPLICATION OF MATERIALITY
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
Basis for determining
materiality
Rationale for the
benchmark applied
Group financial statements
£6.8m (2016: £4.2m)
Parent company financial statements
£4.1m (2016: £3.8m)
We have determined materiality by considering
a range of possible benchmarks and the figures
derived from those, with a particular focus on
selecting a materiality within the range that we
considered appropriate. This included EBITDA
(excluding unrealised gains or losses on derivative
contracts and material one-off items), profit before
and after interest and tax as well as the scale of the
balance sheet and the overall size of the business.
The increase in materiality from prior year is
primarily due to the acquisition of Opus Energy.
Our selected materiality represents approximately
3% of EBITDA for the year.
When determining materiality, we have considered
the size and scale of the business and the nature
of its operations. We have also considered which
benchmarks would be of relevance to the users of
the financial statements.
We have capped materiality at 60% of the materiality
identified for the Group. This is a judgement and
reflects the significant value of investments held on
the balance sheet at the year end (£713m).
When determining materiality, we considered the net
assets of the company as its principal activity is as an
investment holding company for the Group.
Drax Group plc Annual report and accounts 2017
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We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.3m (2016: £0.2m) for the
parent company and group, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing
the risks of material misstatement at the group level. Based on that assessment, we focused our group audit scope primarily on the audit
work at four locations (2016: three locations which excludes Opus Energy which was acquired in February 2017), being Drax Power, Haven
Power, Opus Energy and Drax Biomass. All of these locations were subject to a full scope audit and they represent the principal business
units and account for virtually all of the group’s net assets, revenue and profit before tax, in line with 2016. They were also selected to provide
an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work at four
locations was executed at levels of materiality applicable to each individual entity which were lower than group materiality and ranged from
£3.5 million to £5.2 million (2015: £2.1 million to £3.8 million).
At the parent company level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to
audit or audit of specified account balances.
During 2017 the Senior Statutory Auditor visited two of the four key locations being Drax Power and Drax Biomass, and other senior team
members visited the remaining two.
OTHER INFORMATION
Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
We have nothing to report in
respect of these matters
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required
to determine whether there is a material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there
is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:
– Fair, balanced and understandable – the statement given by the directors that they consider the annual
report and financial statements taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the group’s position and performance, business model
and strategy, is materially inconsistent with our knowledge obtained in the audit; or
– Audit committee reporting – the section describing the work of the audit committee does not
appropriately address matters communicated by us to the audit committee; or
– Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the
directors’ statement required under the Listing Rules relating to the company’s compliance with the UK
Corporate Governance Code containing provisions specified for review by the auditor in accordance
with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK
Corporate Governance Code.
RESPONSIBILITIES OF DIRECTORS
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, and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as
a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
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Drax Group plc Annual report and accounts 2017
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DRAX GROUP PLC CONTINUED
USE OF OUR REPORT
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.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006.
In our opinion, based on the work undertaken in the course of the audit:
– 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; and
– the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and of the parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
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:
– we have not received all the information and explanations we require for our audit; or
– adequate accounting records have not been kept by the parent company, or returns adequate for our
audit have not been received from branches not visited by us; or
– the parent company financial statements 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 directors’ remuneration report to be
audited is not in agreement with the accounting records and returns.
We have nothing to report in
respect of these matters
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were appointed at the Annual General
Meeting on 13 April 2017 to audit the financial statements for the year ending 31 December 2017 and
subsequent financial periods. The period of total uninterrupted engagement including previous renewals
and reappointments of the firm is 13 years, covering the years ending 2005 to 2017, inclusive.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to
provide in accordance with ISAs (UK).
James Leigh FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
26 February 2018
Drax Group plc Annual report and accounts 2017
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FINANCIAL STATEMENTS
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INTRODUCTION
The consolidated financial statements provide detailed information
about the financial performance (Consolidated income statement),
financial position (Consolidated balance sheet), and cash flows
(Consolidated cash flow statement) of Drax Group plc (the Company)
together with all of the entities controlled by the Company
(collectively, the Group).
The notes to the financial statements provide additional information
on the items in the Consolidated income statement, Consolidated
balance sheet and Consolidated cash flow statement. The notes
include explanations of the information presented. In general, the
additional information in the notes to the financial statements is
required by law, International Financial Reporting Standards (IFRS)
or other regulations to facilitate increased understanding of the
primary statements set out on pages 122–126.
BASIS OF PREPARATION
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 Regulation and the Companies Act 2006.
The financial statements have been prepared on the historical cost
basis, except for certain financial assets and liabilities (principally
derivative financial instruments) that have been measured at fair
value.
Foreign currency transactions
Transactions in foreign currencies are translated into Sterling at the
exchange rate ruling at the date of the transaction. At each balance
sheet date, monetary assets and liabilities that are denominated in
foreign currencies are retranslated at the rates prevailing at that
date. Non-monetary items are not retranslated.
Foreign exchange gains and losses arising on such revaluations are
recognised in the income statement within finance costs.
Foreign operations
The assets and liabilities of foreign operations with a functional
currency other than Sterling are translated into Sterling using
published exchange rates at the reporting date. The income and
expenditure of such operations are translated into Sterling using the
exchange rate prevailing at the date of the transaction. Foreign
exchange gains and losses resulting from the retranslation of the
operation’s net assets and its results for the year are recognised in
the Consolidated statement of comprehensive income.
Going concern
The Group’s business activities, along with future developments
that may affect its financial performance, position and cash flows,
are discussed within the Strategic report on pages 1–57 of this
Annual Report.
In the viability statement on page 50 the directors state that they
have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over the
next three years.
Consequently, the directors also have a reasonable expectation that
the Group will continue in existence for the next 12 months and,
therefore, have adopted the going concern basis in preparing these
financial statements.
Basis of consolidation
These consolidated financial statements incorporate the financial
results of the Company and of all entities controlled by the Company,
(its subsidiaries) made up to 31 December each year. The Company
owns 100% of the equity of all subsidiaries.
The Group acquired and gained control of Opus Energy on
10 February 2017 (see note 5.1). Opus Energy's financial results from
this date are included in the Group's Consolidated income statement.
The Group sold its holding in Billington Bioenergy on 31 October 2017.
Billington Bioenergy's financial results, until this date, are included
within the Consolidated income statement.
ACCOUNTING POLICIES
The significant accounting policies for the measurement of an
individual item in the financial statements are described in the note
to the financial statements relating to the item concerned (see
contents on page 121).
No changes have been made to accounting policies in the year.
A full listing of new standards, interpretations and pronouncements
under IFRS applicable to these financial statements is presented in
note 8.2. The application of these new requirements has not had a
material effect on the financial statements. Note 8.2 also includes
the anticipated impact of IFRS 9, 15 and 16 which will affect the
financial statements in future periods.
JUDGEMENTS AND ESTIMATES
The preparation of financial statements requires judgement to be
applied in forming the Group’s accounting policies. It also requires
the use of estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expenses. Actual results
may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing
basis, with revisions recognised in the period in which the estimates
are revised and in any future periods affected.
The judgements involving a higher degree of estimation or
complexity are set out below and in more detail, including sensitivity
analysis where appropriate, in the related notes.
Critical accounting judgements
The following are the critical judgements, apart from those involving
estimation (which are dealt with separately below), made in the
process of applying the Group's accounting policies during the year
that have the most significant effect on the amounts recognised in
the financial statements:
Accounting treatment applied to acquisition of LaSalle pellet
production assets – the Group acquired the assets at the LaSalle
pellet production plant on 13 April 2017. Having assessed the
circumstances, notably that the plant was acquired without
employees, input or output contracts and required significant
investment prior to commissioning, it was concluded that the
transaction represented an asset purchase and not the acquisition
of a business. Accordingly, the assets have been recognised as
additions to property, plant and equipment in the year.
See note 3.1 on page 138
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Drax Group plc Annual report and accounts 2017
FINANCIAL STATEMENTS CONTINUED
Sources of estimation uncertainty
The following are the sources of estimation uncertainty that carry
the most significant risk of a material effect on next year's accounts
– that is, the items where actual outcomes in the next 12 months
could vary significantly from the estimates made in determining the
reported amount of an asset or liability.
Renewable Obligation Certificates (ROCs) – ROC assets generated
by the Group's Power Generation business and held in the Group’s
balance sheet are stated at the lower of their deemed cost at the
point of generation and expected realisable value. The calculation of
this value depends upon estimates of likely future sales prices.
See note 3.3 on page 140
Property, plant and equipment – property, plant and equipment is
depreciated on a straight-line basis over its useful economic life.
Useful economic lives are estimated and based on past experience,
future replacement cycles and other available evidence. Useful
economic lives are reviewed annually. We reduced the useful lives of
coal-specific generation assets in our Power Generation business
from 1 January 2017.
See note 3.1 on page 138
Intangible assets – intangible assets acquired through the purchase
of Opus Energy have been recognised at their fair value. The fair
value measurement of the existing customer contracts depends on a
number of assumptions, and in particular requires estimates to be
made about likely margins on current customer contracts, future
contract renewal rates and future margins on renewed contracts.
The assets are amortised over their useful economic lives, which in
the case of the customer-related assets, have also been assessed
based on the future contract renewal rates. The amortisation rate
will change if the assumed renewal rates differ from actual
experience.
See note 5.3 on page 150
Impairment – an impairment review is conducted annually of
goodwill and of other assets and cash-generating units where an
indicator of possible impairment exists. In 2017, an impairment
assessment has been completed for three of the Group's CGUs. The
assessment of future cash flows that underpins such a review is
based on management’s best estimate of future commodity prices,
supply volumes and economic conditions. The calculations are
particularly sensitive to changes in the assumptions applied given
the long time period covered by the assessment.
See note 2.4 on page 131 and note 5.2 on page 149
Derivatives – derivative financial instruments are recorded in the
Group's balance sheet at fair value. The assessment of fair value is
derived from assuming a market price for the instrument in question.
The Group bases its assessment of market prices upon forward
curves that are largely derived from readily obtainable quotations
and third party sources. However, any forward curve is based at least
in part upon assumptions about future transactions and market
movements. Where such instruments extend beyond the liquid
portion of the forward curve, the level of estimation increases as the
number of observable transactions decreases.
See note 7.2 on page 164
Revenue recognition – the nature of some of the Group’s activities,
particularly within the B2B Energy Supply segment, results in
revenue being based on the estimated volumes of power supplied to
customers at an estimated average price per unit. Assumptions that
underpin these estimates are applied consistently and comparison
of past estimates to final settlements suggests a high degree of
accuracy. However, actual outcomes may vary from initial estimates.
See note 2.2 on page 129
Pensions – the Group records a liability in its balance sheet for its
obligation to provide benefits under an approved defined benefit
pension scheme, less the fair value of assets held by the pension
scheme. The actuarial valuation of the scheme assets and liabilities
is performed annually and depends on assumptions regarding
interest rates, inflation, future salary and pension increases,
mortality and other factors, any of which are subject to future
change.
See note 6.3 on page 156
Taxation – in accounting for both current and deferred tax the Group
makes assumptions regarding the likely treatment of items of
income and expenditure for tax purposes. These assumptions are
based on interpretation of relevant legislation and, where required,
consultation with external advisers.
See note 2.6 on page 134
ALTERNATIVE PERFORMANCE MEASURES (APMs)
We present two APMs (measures without formal definition in IFRS)
on the face of our income statement, EBITDA and underlying
earnings, to assist users of the accounts in evaluating the
comparability of the Group’s financial performance and the
performance against strategic objectives.
EBITDA is defined as earnings before interest, tax, depreciation,
amortisation and material one-off items that do not reflect the
underlying trading performance of the business. Interest, tax,
depreciation and amortisation are calculated in accordance
with IFRS.
EBITDA is the primary measure used by the Board and market
analysts to assess our financial performance.
The purpose of EBITDA is to provide a consistent, comparable
measure of the trading performance of the Group’s businesses
year on year.
Underlying earnings is defined as profit after tax, as calculated in
accordance with IFRS, adjusted to exclude unrealised gains and
losses on derivative contracts, which introduce volatility to IFRS
measures of net profitability, and material one-off items that do not
reflect the underlying performance of the business.
The purpose of underlying earnings is to provide a consistent,
comparable measure of the overall financial performance of the
Group’s businesses year-on-year, including costs of servicing the
existing debt, allocations of the cost of non-current assets and tax.
Judgement is applied in determining transactions which are not
considered to reflect the underlying trading performance of the
business.
EBITDA is reconciled to both gross profit and operating profit on
the face of the income statement. A reconciliation of underlying
earnings to profit after tax attributable to shareholders is provided
in note 2.7.
FINANCIAL STATEMENTS CONTENTS
Drax Group plc Annual report and accounts 2017
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SECTION 5
Other assets and liabilities
5.1 Acquisitions
5.2 Goodwill
5.3 Intangible assets
5.4 Provisions
SECTION 6
Our people
6.1 Employees and directors
6.2 Share-based payments
6.3 Retirement benefit obligations
SECTION 7
Risk management
7.1 Financial risk management
7.2 Derivative financial instruments
7.3 Other financial instruments
7.4 Hedge reserve
7.5 Contingent liabilities
7.6 Commitments
SECTION 8
Reference information
8.1 General information
8.2 Basis of preparation
8.3 Related party transactions
DRAX GROUP PLC
Company financial statements
Notes to the Company financial statements
148
149
150
152
153
153
156
161
164
166
167
168
168
169
169
171
172
174
SECTION 1
Consolidated financial
statements
Consolidated income statement
Consolidated statement of comprehensive
income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
SECTION 2
Financial performance
2.1 Segmental reporting
2.2 Revenue
2.3 Operating expenses and EBITDA
2.4 Review of fixed assets for impairment
2.5 Net finance costs
2.6 Current and deferred taxation
2.7 Underlying earnings
2.8 Earnings per share and underlying
earnings per share
2.9 Dividends
2.10 Retained profits
122
123
124
125
126
127
129
131
131
133
134
136
136
137
137
SECTION 3
Operating assets and working
capital
3.1 Property, plant and equipment
3.2 Other fixed asset investments
3.3 ROC assets
3.4 Inventories
3.5 Trade and other receivables
3.6 Trade and other payables
138
140
140
141
142
143
SECTION 4
Financing and capital structure
4.1 Reconciliation of net debt
4.2 Cash and cash equivalents
4.3 Borrowings
4.4 Cash generated from operations
4.5 Equity and reserves
144
144
144
146
147
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Drax Group plc Annual report and accounts 2017
SECTION 1
Consolidated financial statements
CONSOLIDATED INCOME STATEMENT
Revenue
Fuel costs in respect of power generation
Cost of energy purchases
Grid charges
Other energy supply costs
Total cost of sales
Gross profit
Operating and administrative expenses
EBITDA(1)
Depreciation
Amortisation
Loss on disposal(2)
Years ended 31 December
Notes
2.2
2.3
2.3
3.1
5.3
2017
£m
2016
£m
3,685.2
2,949.8
(1,356.8)
(1,154.2)
(974.6)
(907.8)
(498.7)
(310.1)
(379.7)
(131.8)
(3,140.2)
(2,573.5)
545.0
376.3
(316.1)
(236.3)
228.9
140.0
(122.7)
(109.5)
(43.6)
(15.4)
–
(3.8)
Unrealised (losses)/gains on derivative contracts
7.2
(156.1)
176.8
Other losses
Acquisition-related costs(3)
Operating (loss)/profit
Foreign exchange gains and losses
Cost of debt restructure(4)
Interest payable and similar charges
Interest receivable
(Loss)/profit before tax
Tax:
– Before effect of changes in rate of tax
– Effect of changes in rate of tax
Total tax credit/(charge)
(Loss)/profit for the year attributable to equity holders
Underlying profit after tax(5)
(Loss)/earnings per share
– Basic
– Diluted
All results relate to continuing operations.
2.7
2.5
2.5
2.5
2.5
2.6
2.6
2.7
2.8
(0.4)
(7.8)
(117.1)
(10.6)
(24.2)
(31.5)
0.2
(183.2)
47.8
(15.7)
32.1
–
–
203.5
22.0
–
(29.0)
0.6
197.1
(13.0)
9.8
(3.2)
(151.1)
193.9
2.7
pence
(37)
(37)
20.5
pence
48
47
Notes:
(1) EBITDA is defined as: earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business
(2) Loss on disposal includes a £3.6 million loss on disposal of Billington Bioenergy and losses on disposal of assets in the ordinary course of business of £11.8 million
(3) Acquisition-related costs reflect costs associated with the acquisition and on-boarding of Opus Energy Group Limited into the Group
(4) Cost of debt restructure are one-off costs associated with the refinancing of the Group’s debt
(5) Underlying profit is defined as: profit after tax, as calculated in accordance with IFRS, adjusted to exclude unrealised gains and losses on derivative contracts and material one-off items that do not reflect
the underlying performance of the business. See page 136
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Loss)/profit for the year
Items that will not be subsequently reclassified to profit or loss:
Actuarial gains /(losses) on defined benefit pension scheme
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations
Fair value (losses)/gains on cash flow hedges
Deferred tax on cash flow hedges before tax rate changes
Impact of tax rate changes on deferred tax on cash flow hedges
Other comprehensive (expense)/income
Total comprehensive (expense)/income for the year attributable to equity holders
Drax Group plc Annual report and accounts 2017
123
Years ended 31 December
Notes
6.3
2.6
7.2
2.6
2.6
2017
£m
2016
£m
(151.1)
193.9
21.4
(4.1)
(8.4)
1.6
3.4
(219.2)
39.9
–
(158.6)
(309.7)
(9.1)
330.1
(62.6)
3.0
254.6
448.5
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Drax Group plc Annual report and accounts 2017
SECTION 1: CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
Assets
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Other fixed asset investments
Deferred tax assets
Derivative financial instruments
Current assets
Inventories
ROC assets
Trade and other receivables
Derivative financial instruments
Current tax assets
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
Translation reserve
Retained profits
Total shareholders’ equity
As at 31 December
Notes
2017
£m
2016
£m
5.2
5.3
3.1
3.2
2.6
7.2
3.4
3.3
3.5
7.2
2.6
4.2
3.6
2.6
4.3
7.2
4.3
7.2
5.4
2.6
6.3
4.5
4.5
4.5
4.5
7.4
4.5
169.9
232.0
14.5
21.7
1,661.9
1,641.5
1.3
22.7
–
33.5
190.7
486.3
2,278.5
2,197.5
272.1
145.5
417.5
175.5
6.2
287.5
257.6
292.9
405.0
–
222.3
228.4
1,239.1
1,471.4
736.5
591.9
–
18.6
109.6
864.7
374.4
571.1
94.2
36.3
230.0
1.2
932.8
6.1
35.9
251.0
884.9
586.5
286.0
112.5
35.0
275.2
30.1
738.8
1,720.1
2,045.2
47.0
1.5
424.3
710.8
126.1
47.0
1.5
424.2
710.8
305.4
(6.8)
(10.2)
2.10
417.2
566.5
1,720.1
2,045.2
The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for issue by the Board
of directors on 26 February 2018.
Signed on behalf of the Board of directors:
Will Gardiner
Chief Executive
Drax Group plc Annual report and accounts 2017
125
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
At 1 January 2016
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income
for the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.5)
Movement in equity associated with
share-based payments (note 6.2)
At 31 December 2016
Loss for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense)
for the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.5)
Movement in equity associated with
share-based payments (note 6.2)
–
–
–
–
0.1
–
47.0
–
–
–
–
–
–
Issued
equity
£m
46.9
Capital
redemption
reserve
£m
1.5
Share
premium
£m
424.2
Merger
reserve
£m
710.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Hedge
reserve
£m
34.9
–
270.5
270.5
–
–
–
Translation
reserve
£m
(1.1)
–
(9.1)
(9.1)
–
–
–
Retained
profits
£m
385.2
193.9
(6.8)
187.1
(11.0)
–
5.2
Total
£m
1,602.4
193.9
254.6
448.5
(11.0)
0.1
5.2
1.5
424.2
710.8
305.4
(10.2)
566.5
2,045.2
–
–
–
–
–
–
–
–
–
–
0.1
–
–
–
–
–
–
–
–
(179.3)
–
3.4
(151.1)
(151.1)
17.3
(158.6)
(179.3)
3.4
(133.8)
(309.7)
–
–
–
–
–
–
(21.6)
(21.6)
–
6.1
0.1
6.1
At 31 December 2017
47.0
1.5
424.3
710.8
126.1
(6.8)
417.2
1,720.1
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126
Drax Group plc Annual report and accounts 2017
SECTION 1: CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED CASH FLOW STATEMENT
Cash generated from operations
Income taxes paid
Other (losses)/gains
Interest paid
Interest received
Net cash from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of software assets
Acquisition of subsidiaries
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 drawn down
Other financing costs paid
Net cash generated from/(absorbed by) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of changes in foreign exchange rates
Cash and cash equivalents at 31 December
Years ended 31 December
Notes
4.4
2.9
2017
£m
375.7
(14.0)
(0.1)
(46.6)
0.2
315.2
2016
£m
213.1
(1.7)
0.7
(21.7)
0.4
190.8
(159.0)
(93.2)
(15.7)
(379.8)
(554.5)
(21.6)
0.1
(493.8)
768.5
(17.9)
235.3
(4.0)
228.4
(2.1)
–
–
(93.2)
(11.0)
0.1
–
–
–
(10.9)
86.7
133.8
7.9
4.2
222.3
228.4
The Group received shares with a value of £1.6 million as part-consideration for the disposal of Billington Bioenergy during 2017. The net cash
disposed of in the transaction was negligible. There were no other non-cash transactions in either the current or previous year.
SECTION 2
Financial performance
Drax Group plc Annual report and accounts 2017
127
The financial performance section gives further information about the items in the Consolidated income statement. It includes a summary of
financial performance by each of our businesses (2.1), analysis of certain income statement items (2.2–2.6) and information regarding
underlying earnings, distributable profits and dividends (2.7–2.10). Further commentary on our trading and operational performance during
the year, which is predominantly reflected in EBITDA, can be found in the Strategic report on pages 1–57, with particular reference to key
transactions and market conditions that have affected our results.
2.1 SEGMENTAL REPORTING
The Group is organised into three businesses, with a dedicated management team for each and a central corporate office providing certain
specialist and shared functions. Our businesses are:
– Power Generation: power generation activities in the UK, including at Drax Power Station and the development of OCGT projects;
– Pellet Production: production of sustainable compressed wood pellets at our processing facilities in the US; and
– B2B Energy Supply: the supply of electricity and gas to business customers in the UK.
The operating segments have been renamed to align more closely with the strategy, but are consistent with the prior year, except for
changes due to business combinations as noted below. Each business is an operating segment for the purpose of segmental reporting.
Information reported to the Board for the purposes of assessing performance and making investment decisions is based on these three
operating segments. The measure of profit or loss for each reportable segment presented to the Board on a regular basis is EBITDA (as
defined on page 120).
Operating costs are allocated to segments to the extent they are directly attributable to the activities of that segment. Corporate office
costs are included within central costs.
During the year, the Group acquired 100% of the share capital of Opus Energy Group Limited (see note 5.1), an energy supply business
providing electricity and gas to business customers. Opus Energy’s activities are closely-related to those of the existing B2B Energy Supply
business and the B2B Energy Supply management structure has been reorganised to integrate Opus Energy into the existing structure.
Financial results are reported to the Board for the larger combined business. Accordingly, this new acquisition forms part of the B2B Energy
Supply segment in the year ended 31 December 2017. Note 5.1 details the additional revenue and profit attributable to the Group from the
new acquisition.
As noted on page 16, the Group sold its interest in Billington Bioenergy in the year. The B2B Energy Supply segment includes £6.3 million of
revenue and £0.2 million EBITDA losses in respect of this business for the 10-month period to the date of disposal.
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Segment revenues and results
The following is an analysis of the Group’s performance by reporting segment for the year ended 31 December 2017:
Year ended 31 December 2017
Power
Generation
£m
B2B Energy
Supply
£m
Pellet
Production
£m
Adjustments(1)
£m
Consolidated
£m
Revenue
External sales
Inter-segment sales
Total revenue
Segment gross profit
Segment EBITDA
Central costs
Consolidated EBITDA
Acquisition-related costs
Depreciation and amortisation
Other losses
Loss on disposal
Unrealised losses on derivative contracts
Operating loss
Net finance costs
Loss before tax
Note:
(1) Adjustments represent the elimination of intra-group transactions
1,686.2
1,999.0
1,033.4
–
2,719.6
1,999.0
398.4
237.5
117.4
29.4
–
135.7
135.7
39.0
5.5
–
3,685.2
(1,169.1)
–
(1,169.1)
3,685.2
(9.8)
(9.8)
545.0
262.6
(33.7)
228.9
(7.8)
(166.3)
(0.4)
(15.4)
(156.1)
(117.1)
(66.1)
(183.2)
128
Drax Group plc Annual report and accounts 2017
SECTION 2: FINANCIAL PERFORMANCE
2.1 SEGMENTAL REPORTING CONTINUED
The following is an analysis of the Group’s performance by reporting segment for the year ended 31 December 2016:
Year ended 31 December 2016
Power
Generation
£m
B2B Energy
Supply
£m
Pellet
Production
£m
Adjustments(1)
£m
Consolidated
£m
Revenue
External sales
Inter-segment sales
Total revenue
Segment gross profit
Segment EBITDA
Central costs
Consolidated EBITDA
Depreciation and amortisation
Loss on disposal
Unrealised gains on derivative contracts
Operating profit
Net finance costs
Profit before tax
Note:
(1) Adjustments represent the elimination of intra-group transactions
1,622.7
1,326.4
868.2
–
2,490.9
1,326.4
337.0
173.8
23.5
(4.3)
0.7
72.9
73.6
18.1
(6.3)
–
2,949.8
(941.1)
–
(941.1)
2,949.8
(2.3)
(2.3)
376.3
160.9
(20.9)
140.0
(109.5)
(3.8)
176.8
203.5
(6.4)
197.1
The accounting policies applied for the purpose of measuring the segments’ profits or losses, assets and liabilities are the same as those
used in measuring the corresponding amounts in the Group’s financial statements. The external revenues and results of all the reporting
segments are subject to seasonality, with higher dispatch and prices in the winter months compared to summer months.
Capital expenditure by segment
Assets and working capital are monitored on a consolidated basis; however, spend on capital projects is monitored by operating segment.
B2B Energy Supply
Power Generation
Pellet Production
Corporate unallocated
Total
Capital
additions to
intangible
assets
2017
£m
Capital
additions
to property,
plant and
equipment
2017
£m
Capital
additions to
intangible
assets
2016
£m
Capital
additions
to property,
plant and
equipment
2016
£m
12.6
2.4
0.4
0.6
17.6
77.0
66.2
3.8
16.0
164.6
–
0.7
–
–
0.7
4.4
85.7
6.7
–
96.8
Total cash outflows in relation to capital expenditure during the year were £175.2 million (2016: £93.2 million). The increase in capital
expenditure compared to the previous year principally reflects the acquisition of the LaSalle pellet plant and subsequent investment to bring
the site into operation in the Pellet Production segment, and investment in office space for Opus Energy in the B2B Energy Supply segment.
Intra-group trading
Intra-group transactions are carried out on arm’s-length, commercial terms that, where possible, equate to market prices at the time of
the transaction. During 2017, the Pellet Production segment sold wood pellets with a total value of £135.7 million (2016: £72.9 million) to
the Power Generation segment and the Power Generation segment sold electricity, gas and ROCs with a total value of £1,033.4 million
(2016: £868.2 million) to the B2B Energy Supply segment.
The impact of all intra-group transactions, including any unrealised profit arising (£9.8 million at 31 December 2017), is eliminated on
consolidation. Following the increase in output from Pellet Production during the year and reduced generation in Power Generation
at the end of the year, intra-group stocks were higher at the end of 2017 than previously, resulting in an increase in this provision.
Major customers
Total revenue for the year ended 31 December 2017 does not include any amounts from individual customers (2016: amounts of £541.5
million and £399.3 million derived from two customers) that represent 10% or more of total revenue for the year. The Group's largest two
customers contributed 9% and 8% of total consolidated revenue respectively. These revenues arose in the Power Generation segment.
Drax Group plc Annual report and accounts 2017
129
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2.2 REVENUE
Accounting policy
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 between Group companies.
Revenues from the sale of electricity from our Power Generation business are measured based upon metered output delivered at rates
specified under contract terms or prevailing market rates as applicable.
Two of our biomass-fuelled generating units earn Renewable Obligation Certificates (ROCs) under the UK Government’s Renewables
Obligation (RO) regime. The financial benefit of a ROC is recognised in the income statement at the point the relevant renewable biomass
fuel is burnt and power dispatched as a reduction in the cost of the biomass fuel. A corresponding asset is recognised on the balance sheet
(see note 3.3 on page 140). Revenue from sale of ROCs is recognised when the ROC is transferred to a third party.
The Group recognises the income or costs arising from the CfD (see below) in the income statement, as a component of revenue, at the point
the flow of economic benefit becomes probable. This is considered to be the point at which the relevant generation is delivered and the
payment becomes contractually due.
Revenue from the sale of electricity and gas directly to business customers through our B2B Energy Supply businesses, Haven Power and
Opus Energy, is recognised on the supply of electricity or gas 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 is measured based
upon metered consumption and contractual rates; however, where a supply has taken place but is not yet measured or billed, the revenue is
estimated based on consumption statistics and selling price estimates and is included as accrued income on the balance sheet.
Other revenues derived from the provision of services (for example, the supply of system support services, such as black start and frequency
response) to National Grid are recognised by reference to the stage of completion of the contract. Most such contracts are for the delivery of
a service either continually or on an ad-hoc basis over a period of time and thus stage of completion is calculated with reference to the
amount of the contract term that has elapsed. Depending on the contract terms this approach may require judgement in estimating
probable future outcomes.
Other revenues derived from the sale of goods (for example, by-products from electricity generation such as ash and gypsum) are recognised
at the point the risks and rewards of ownership pass to the customer, typically at the point of delivery to the customer’s premises.
CfD payments
The Group is party to a Contract for Difference (CfD) with the Low Carbon Contracts Company (LCCC), a Government-owned entity
responsible for delivering elements of the Government’s Electricity Market Reform Programme. Under the contract, the Group makes or
receives payments in respect of electricity dispatched from a specific biomass-fuelled generating unit. The payment is calculated with
reference to a strike price of £100 per MWh. The base year for the strike price was 2012 and it increases each year in line with the UK
Consumer Price Index and changes in system balancing costs. The strike price at 31 December 2017 was £106 per MWh.
When market prices at the point of generation are above/below the strike price, the Group makes/receives an additional payment to/from
LCCC equivalent to the difference between the market power price at the point of dispatch and the strike price. Such payments are in
addition to amounts received from the sale of the power in the wholesale market and either increase or limit the total income from the power
dispatched from the relevant generating unit to the strike price in the CfD contract.
The year ended 31 December 2017 is the first full year of generation under the CfD contract, which commenced on 21 December 2016.
ROC sales
The generation and sale of ROCs is a key driver of the Group’s financial performance. The RO scheme started in April 2002 and places an
obligation on electricity suppliers to source an increasing proportion of their electricity from renewable sources. Under the RO, ROCs are
certificates issued to generators of renewable electricity which are then sold to suppliers to demonstrate that they have fulfilled their
obligations under the RO. ROCs are managed in compliance periods (CPs), running from April to March annually, CP1 commenced in April
2002. At 31 December 2017 we are in CP16.
To meet its obligations a supplier can either submit ROCs or pay the “buy-out” price at the end of the CP. The buy-out price was set at £30 per
ROC in CP1 and rises with inflation. The buy-out price in CP16 is £45.58. ROCs are typically procured in arm’s-length transactions with
renewable generators at a market price typically slightly lower than the buy-out price for that CP. At the end of the CP, the amounts collected
from suppliers paying the buy-out price form the “recycle fund”, which is distributed on a pro-rata basis to ROC generators.
The financial benefit of a ROC recognised in the income statement at the point of generation is thus comprised of two parts: the expected
value to be obtained in a sale transaction with a third party supplier and the expected recycle fund benefit to be received at the end of the
CP. See note 3.3 on page 140 for further details of ROCs generated and sold by our Power Generation business and those utilised by our B2B
Energy Supply business in the year.
130
Drax Group plc Annual report and accounts 2017
SECTION 2: FINANCIAL PERFORMANCE
2.2 REVENUE CONTINUED
Further analysis of our revenue for the year ending 31 December 2017 is provided in the table below:
Power Generation
Electricity sales
ROC and LEC sales
CfD income
Ancillary services
Other income
B2B Energy Supply
Electricity and gas sales
Pellet sales
Other income
Pellet Production
Pellet sales
Elimination of intra-group sales
Total consolidated revenue
Year ended 31 December 2017
External
£m
Intra-group
£m
Total
£m
1,030.9
774.5
1,805.4
367.8
248.2
30.7
8.6
1,933.9
6.3
58.8
258.9
–
–
–
–
–
–
626.7
248.2
30.7
8.6
1,933.9
6.3
58.8
–
–
135.7
135.7
(1,169.1)
(1,169.1)
3,685.2
–
3,685.2
The B2B Energy Supply segment includes £6.3 million of revenue representing 10 months of sales of wood pellets into the domestic UK heat
market via Billington Bioenergy (2016: £6.7 million). This business was sold on 31 October 2017.
The following is an analysis of the Group’s revenues in the year ended 31 December 2016:
Power Generation
Electricity sales
ROC and LEC sales
CfD income
Ancillary services
Other income
B2B Energy Supply
Electricity and gas sales
Pellet sales
Other income
Biomass Supply
Pellet sales
Other income
Elimination of intra-group sales
Total consolidated revenue
Year ended 31 December 2016
External
£m
Intra-group
£m
Total
£m
1,193.4
366.7
10.3
47.3
5.0
1,319.6
6.7
0.1
–
0.7
–
686.5
1,879.9
181.7
548.4
–
–
–
–
–
–
72.9
–
10.3
47.3
5.0
1,319.6
6.7
0.1
72.9
0.7
(941.1)
(941.1)
2,949.8
–
2,949.8
Drax Group plc Annual report and accounts 2017
131
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2.3 OPERATING EXPENSES AND EBITDA
This note sets out the material components of “Operating and administrative expenses” in our Consolidated income statement, page 122,
and a detailed breakdown of the fees paid to our auditor, Deloitte LLP, in respect of services they provided to the Group during the year.
Gross profit
The following expenditure has been charged in arriving at operating profit/EBITDA:
Staff costs (note 6.1)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total operating and administrative expenses
EBITDA
EBITDA is defined on page 120.
Years ended 31 December
2017
£m
2016
£m
545.0
376.3
137.1
50.7
128.3
316.1
228.9
99.9
68.9
67.5
236.3
140.0
Operating lease costs of £2.3 million in respect of land and buildings and £5.7 million in respect of other operating leases (2016: £2.4 million
and £1.3 million) are included in other operating expenses.
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
Other fees:
Review of the Group’s half-year condensed consolidated financial statements
Other services
Total audit-related fees
Other assurance services
Total non-audit fees
Total auditor’s remuneration
Years ended 31 December
2017
£000
653
31
684
89
2
775
125
125
2016
£000
448
27
475
71
2
548
610
610
900
1,158
Other assurance services provided by Deloitte LLP in 2017 consist of assurance and agreed-upon procedures performed in relation to the
bond finance raised in May 2017 (2016: reporting accountant services associated with the shareholder circular in relation to the Opus Energy
transaction).
Non-audit services are approved by the Audit Committee in accordance with the policy set out on page 80.
2.4 REVIEW OF FIXED ASSETS FOR IMPAIRMENT
Accounting policy
The Group reviews its fixed assets (or, where appropriate, groups of assets known as cash-generating units (CGUs)) whenever there is an
indication that an impairment loss may have been suffered. The Group assesses the existence of indicators of impairment annually. The
Group considers the smallest collections of assets that generate independent cash flows to be its operating entities (Drax Power, Haven
Power, Opus Energy and Drax Biomass) and accordingly considers the Group to be comprised of four CGUs.
If an indication of potential impairment exists, the recoverable amount of the asset or CGU in question is assessed with reference to the
present value of the future cash flows expected to be derived from the continuing use of the asset or CGU (value in use) or the expected
price that would be received to sell the asset to another market participant (fair value less costs to sell). The initial assessment of recoverable
amount is normally based on value in use.
Where value in use is calculated, the assessment of future cash flows is based on the most recent approved business plan and includes all of
the necessary costs expected to be incurred to generate the cash inflows from the CGU’s assets in their current state and condition,
including an allocation of centrally managed costs. Central costs are only allocated where they are necessary for and directly attributable to
the CGU’s activities. Future cash flows include, where relevant, contracted cash flows arising from our cash flow hedging activities and as a
result the carrying amount of each CGU includes the mark-to-market value of those cash flow hedges.
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SECTION 2: FINANCIAL PERFORMANCE
2.4 REVIEW OF FIXED ASSETS FOR IMPAIRMENT CONTINUED
The additional value that could be obtained from enhancing or converting the Group’s assets is not reflected, nor the potential benefit of any
future restructuring or reorganisation. In determining value in use, the estimate of future cash flows is discounted to present value using a
pre-tax rate reflecting the specific risks attributable to the CGU in question.
If the recoverable amount is less than the current carrying amount in the financial statements, a provision is made to reduce the carrying
amount of the asset or CGU to the estimated recoverable amount. Impairment losses are recognised immediately in the income statement.
Goodwill balances are assessed for impairment annually (see note 5.2).
Assessment of indicators of impairment
The Group's market capitalisation has remained below the carrying value of its net assets this year. As part of the most recent annual review,
the Group considered this and concluded that a potential indicator of impairment existed in respect of the Drax Power CGU. This assessment
was based upon continued weakness in commodity markets, volatility in foreign exchange rates, perceived levels of regulatory uncertainty
and the sensitivity of the recoverable amount of Drax Power's assets to changes in these factors.
Accordingly, an impairment review of the Drax Power CGU was undertaken at the balance sheet date. A review of other CGUs suggested no
indicators of impairment.
Significant estimation uncertainty
The assessment of the present value of future cash flows on which such a review is based is dependent upon a number of assumptions. In
particular, expected future cash flows are based upon management’s estimates of future prices, output, costs, economic support for
renewable energy generation and access to contracts for electricity generation and supply. Where relevant and to the fullest extent possible,
the key assumptions are based on observable market information. However, observable market information is only available for a limited
proportion of the remaining useful lives of the assets under review.
Impairment review
The carrying amount of the Drax Power CGU at 31 December 2017 was £1,430 million. The value in use of the Drax Power CGU was tested
using the Group’s established planning model.
The analysis assumed that Drax Power’s three biomass-fuelled generating units will continue in operation until the end of their estimated
useful lives, currently considered to be 2039. In line with our assumption that coal-fired generation will cease by 2025, applied in light of the
Government's announced intention to close coal-fired generation following recent consultations, the three remaining coal-fired units were
assumed to cease coal-fired generation by this date but will then be available for conversion to alternative fuels. No account has been taken
of any cash inflows that could result from such a conversion (which could take place earlier than 2025) in measuring the value in use of the
Drax Power CGU. This includes potential cash flows arising from the fourth unit conversion to biomass and possible repowering of the fifth
and sixth units to gas.
The analysis depends on a broad range of assumptions, including the expected life of the six power generating units and the regulatory
regime under which they might operate. The key assumptions (i.e. those most sensitive to a change, possibly resulting in a different outcome
for impairment) are considered to be:
– the expected operating lives of the six generating units, as described above;
– future commodity prices beyond the horizon of our existing contracted purchase and sale commitments – notably power prices and
biomass prices;
– future foreign exchange rates beyond the horizon of our existing contracted purchase commitments; and
– the continuance of existing biomass support regimes – CfD and RO – until 2027 and the existence of a favourable economic environment
for biomass generation thereafter. This includes future capacity market and system support revenues.
These assumptions are all dependent on external market movements. The historic volatility in these assumptions is reflected in the financial
performance of the Group but past performance is not necessarily a reliable indicator of future values.
Where available, estimates of future prices are based on signed contracts for purchases and sales with third parties. Intra-group purchases
of biomass are included at contract prices which are based on our view of future market prices. Transactions beyond contracted positions
are valued using market data and forward price curves, based where possible on data points provided by a reputable third party source,
independent to the Group. In particular, longer-term power prices are based on assumptions from Aurora Energy Research. The contracted
period for biomass purchases is substantially longer, with the longest-dated contracts expiring in 2027. Beyond this point, estimated biomass
prices are largely based on our internal models which reflect our assessment of future market prices.
Future foreign exchange rates are based on contracted foreign currency purchases to the extent possible. Beyond our contracted position,
exchange rate estimates are based on market forward curves.
Current Government plans for existing renewable support mechanisms, namely the CfD and RO, assume these cease in 2027. The
impairment analysis made no assumptions regarding the direct replacement of these support mechanisms beyond this date. The biomass-
fuelled units that are assumed to continue to generate power do so supported by the prevailing wholesale power price, delivery of ancillary
services to the UK grid and an expectation that capacity market revenues will be available to these units. Our power price forecasts reflect
increased volatility between peak and baseload prices. Assumed revenues from ancillary services and the capacity market are based on
projections derived from current contracts and capacity market outcomes and how we expect the market to evolve. These assumptions
Drax Group plc Annual report and accounts 2017
133
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2.4 REVIEW OF FIXED ASSETS FOR IMPAIRMENT CONTINUED
reflect our expectation that Drax will be required to provide generation to support intermittent renewable power and be an essential part of
the UK’s energy mix throughout the life of the units.
The expected future cash flows were discounted using a pre-tax nominal rate of 7.3%. The discount rate is supported by observable market
reports and independent analysis commissioned by, and specific to the circumstances of, the Group and the Power Generation business. This
indicated that the recoverable amount of the Drax Power CGU exceeded its carrying value and therefore that no provisions for impairment
were required.
Sensitivity analysis indicated that, when compared to our base case assumptions, a reduction of approximately 21% in market power prices,
an increase in biomass prices of approximately 31%, or a depreciation of Sterling against the US Dollar of approximately 24% throughout the
22-year term of the valuation would result in a recoverable amount for the Drax Power CGU that is lower than its carrying amount.
Furthermore, the valuation includes cash flows for the period from 2027–2039 in line with the assumed useful economic lives of the assets.
If the value from this period was removed in its entirety, it would not result in an impairment charge. The analysis does not consider the
interaction effect of potential changes in several or all of the assumptions simultaneously, and the sensitivities do not take account of any
mitigating actions that could be taken should the changes referred to materialise. In addition, in relation to central costs, no reasonable
change in the method of allocation would result in an impairment charge.
2.5 NET FINANCE COSTS
Finance costs reflect expenses incurred in managing our debt structure (such as interest payable on our bonds) as well as foreign exchange
gains and losses, the unwinding of discounting on provisions for reinstatement of our sites at the end of their useful lives (see note 5.4) and
net interest charged on the Group’s defined benefit pension scheme obligation (see note 6.3). 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.
On 5 May 2017, the Group refinanced its external debt. The resulting cost of £24.2 million (2016: £nil) reflects the costs incurred to extinguish
the existing debt together with the release of the related deferred borrowing costs. As described in note 2.7, these costs have been excluded
from the calculation of underlying earnings. Further information about the new finance structure can be found in note 4.3.
Interest payable and similar charges:
Interest payable on borrowings
Unwinding of discount on provisions (note 5.4)
Amortisation of deferred finance costs
Net finance cost in respect of defined benefit scheme (note 6.3)
Other financing charges
Total interest payable and similar charges
Interest receivable:
Interest income on bank deposits
Total interest receivable
Foreign exchange (losses)/gains
Total recurring net interest charge
One-off costs of debt restructure:
Fees to exit existing facilities
Acceleration of deferred costs in relation to previous facilities
Total one-off net interest charge
Total net interest charge
Years ended 31 December
2017
£m
2016
£m
(25.6)
(19.4)
(0.7)
(3.5)
(0.5)
(1.2)
(4.5)
(2.1)
(0.9)
(2.1)
(31.5)
(29.0)
0.2
0.2
0.6
0.6
(10.6)
22.0
(41.9)
(6.4)
(13.8)
(10.4)
(24.2)
–
–
–
(66.1)
(6.4)
Foreign exchange gains and losses recognised in interest arise on the retranslation of non-derivative balances and investments
denominated in foreign currencies to prevailing rates at the balance sheet date. Sterling strengthened against the US Dollar and Euro
during 2017, resulting in losses being recognised on assets the Group holds denominated in these currencies.
134
Drax Group plc Annual report and accounts 2017
SECTION 2: FINANCIAL PERFORMANCE
2.6 CURRENT AND DEFERRED TAXATION
The tax charge includes both current and deferred tax. Current tax is the estimated amount of tax 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 which are not allowable for tax purposes
and therefore on which we are required to pay additional tax) and adjusted for estimates for previous years. 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
(reflected in differences between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used in
the computation of taxable profits). The tax credit reflects the estimated effective tax rate on the loss before tax for the Group for the year
ended 31 December 2017 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the income
statement.
Accounting policy
Current tax, including UK corporation tax and foreign tax, is based on the taxable profit or loss for the year in the relevant jurisdiction. Taxable
profit or loss differs from profit/loss before tax as reported in the income statement because it excludes items of income or expenditure that
are either taxable or deductible in other years or never taxable/deductible. The Group’s liability (or asset) for 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 expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits
will be available against which deductible temporary differences can be utilised.
Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive
income or directly in equity, in which case the current and deferred tax are recognised in other comprehensive income or directly in equity
respectively.
Significant estimation uncertainty
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. Where such assets relate to losses incurred by a
business unit, particularly one with a history of losses, the Group seeks evidence other than its own internal forecasts to support recognition
of the related deferred tax asset.
Tax (credit)/charge comprises:
Current tax
– Current year
– Adjustments in respect of prior periods
Deferred tax
– Before impact of tax rate changes
– Impact of tax rate changes
Tax (credit)/charge
Tax charged/(credited) on items recognised in other comprehensive income:
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme (note 6.3)
Deferred tax on cash flow hedges (note 7.4)
Years ended 31 December
2017
£m
2016
£m
20.3
(10.6)
(57.5)
15.7
(32.1)
14.7
(6.2)
4.5
(9.8)
3.2
Years ended 31 December
2017
£m
2016
£m
4.1
(39.9)
(35.8)
(1.6)
59.6
58.0
UK corporation tax is the main rate of tax for the Group and is calculated at 19.25% (2016: 20%) of the assessable profit or loss for the year.
Tax for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on
jurisdictional tax laws and rates that have been enacted or substantively enacted at the balance sheet date. In December 2017, US Tax
Reforms were legislated and introduced a package of tax measures, including a reduction in the US federal tax rate from 35% to 21% from
January 2018. This rate reduction has been reflected in the US deferred tax balances at 31 December 2017. We do not anticipate any other
impact of the US Tax Reforms on the deferred tax balances.
Drax Group plc Annual report and accounts 2017
135
2.6 CURRENT AND DEFERRED TAXATION CONTINUED
The tax charge for the year can be reconciled to the loss before tax as follows:
(Loss)/profit before tax
(Loss)/profit before tax multiplied by the rate of corporation tax in the UK of 19.25% (2016: 20%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Impact of change to tax rate
Difference in overseas tax rates
Deferred tax on prior year start-up losses and other temporary differences
Other
Total tax (credit)/charge
Years ended 31 December
2017
£m
(183.2)
(35.3)
(11.8)
1.3
15.7
(3.0)
–
1.0
(32.1)
2016
£m
197.1
39.4
(3.6)
1.7
(9.8)
(4.8)
(21.4)
1.7
3.2
The Group’s underlying effective tax rate is sensitive to the mix of operating results between our UK and US businesses and the tax rates
which apply in those jurisdictions. However, as a result of the reduction in the US federal tax rates from 2018 to 21%, and tax relief now arising
to the group from the UK Patent Box regime (see below), in the medium term we anticipate our group underlying effective tax rate to be
marginally lower than the main rate of corporation tax in the UK. The adjustments in respect of prior periods principally relate to a Patent Box
claim. Drax Power was granted a patent to protect certain intellectual property it owns and which attaches to the technology developed to
manage the combustion process in generating electricity from biomass. Under UK tax legislation the Company is now entitled to apply a
lower rate of tax to some of its profits each year which are derived from utilisation of that technology. The Company has agreed a claim with
HMRC for tax relief covering the period from the patent application in 2013 to 2016 amounting to £10.4 million. In line with the policy
intentions of IFRIC 23 “Uncertainty over Income Tax Treatments”, the Group has also recognised an estimated benefit from the tax regime for
the financial year 2017 of £2.6 million (included in the “Other” line in the table above). The movements in deferred tax assets and liabilities
during each year are shown below.
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Financial
instruments
£m
Accelerated
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allowances
£m
Non-trade
losses
£m
Intangible
assets
£m
At 1 January 2016
(7.3)
(162.5)
1.5
(33.9)
(7.1)
(1.5)
(Charged)/credited to the income
statement
Charged to equity in respect of
actuarial gains
Charged to equity in respect of
cash flow hedges
Effect of changes in foreign
exchange rates
At 1 January 2017
Acquisition of Opus Energy
(Charged)/credited to the income
statement
Charged to equity in respect of
actuarial gains
Charged to equity in respect of
cash flow hedges
Effect of changes in foreign
exchange rates
At 31 December 2017
–
(59.6)
–
–
–
(1.3)
(100.8)
(170.9)
–
29.7
–
39.9
–
8.7
–
–
–
1.2
(31.2)
(161.0)
Deferred tax balances (after offset) for
financial reporting purposes:
Net deferred tax asset
Net deferred tax liability
–
(11.1)
(31.2)
(149.9)
Trade
losses
£m
–
35.3
–
–
3.5
38.8
–
–
–
–
–
–
–
(40.7)
7.5
(8.5)
–
–
–
(33.2)
–
–
(3.4)
26.9
Other
liabilities
£m
(30.9)
5.3
–
–
–
(25.6)
–
7.1
–
–
–
(18.5)
Other
assets
£m
7.3
7.2
1.6
Total
£m
(191.9)
5.3
1.6
–
(59.6)
0.7
16.8
–
2.9
(241.7)
(40.7)
(2.7)
41.8
(4.1)
(4.1)
–
39.9
(0.3)
9.7
(2.5)
(207.3)
–
(33.2)
26.9
–
–
(18.5)
6.9
2.8
22.7
(230.0)
–
–
–
–
–
–
–
–
–
–
–
–
136
Drax Group plc Annual report and accounts 2017
SECTION 2: FINANCIAL PERFORMANCE
2.6 CURRENT AND DEFERRED TAXATION CONTINUED
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so, otherwise they are shown separately in
the balance sheet.
Within the above deferred tax balances is a net deferred tax asset of £22.7 million in relation to start-up losses and other temporary
differences in the US-based Pellet Production business. Based on its business plan and reflecting continuing improvement in operational
performance, the Group anticipates generating sufficient profits in future periods against which to utilise this asset.
2.7 UNDERLYING EARNINGS
Following the announcement of the change in the Group's dividend policy on 15 June 2017, there is no longer a link between underlying
earnings and the calculation of distributions. We have continued to present underlying earnings, an alternative performance measure
(see page 120), to provide a consistent, comparable measure of the overall financial performance of the Group year-on-year.
Underlying earnings is defined as profit after tax, as measured in accordance with IFRS, adjusted to exclude unrealised gains and losses on
derivative contracts and material one-off items that do not reflect the underlying performance of the business.
This note analyses the items which are included in our results for the year but are excluded from underlying earnings:
– Unrealised gains and losses on derivative contracts: calculated in accordance with IAS 39 on derivative contracts not designated into
hedge relationships for accounting purposes but held for the purposes of de-risking future cash flows (see note 7.2), excluded due to their
inherent volatility which does not reflect current operational performance.
– Acquisition-related costs: material one-off costs associated with the acquisition and integration of Opus Energy during 2017.
– Cost of debt restructure: material one-off costs incurred as part of the restructuring of the Group's debt in May 2017.
– In 2016, deferred tax on start-up losses and other temporary differences: a material one-off credit arising from the recognition of a
deferred tax asset relating to the Pellet Production business.
Earnings:
Earnings attributable to equity holders of the Company for the purposes of basic and diluted earnings
(151.1)
193.9
Years ended 31 December
2017
£m
2016
£m
Adjusted for:
Unrealised gains on derivative contracts
Acquisition-related costs
Cost of debt restructure
Tax impact of the above items
Deferred tax on start-up losses and other temporary differences
Underlying profit after tax attributable to equity holders of the Company
156.1
7.8
24.2
(34.3)
–
2.7
(176.8)
–
–
33.9
(30.5)
20.5
2.8 EARNINGS PER SHARE AND UNDERLYING EARNINGS PER SHARE
Earnings per share (EPS) represents the amount of our earnings (post-tax profits) that is attributable to each ordinary share we have in issue.
Basic EPS is calculated by dividing our earnings (profit after tax calculated in accordance with IFRS) 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 6.2), 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. Underlying EPS is based upon underlying earnings as defined in note 2.7.
The effect of potentially dilutive options on the weighted average number of shares in issue at the balance sheet date is shown below:
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
2017
2016
406.8
406.6
3.5
2.7
410.3
409.3
(37)
(37)
1
1
48
47
5
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Drax Group plc Annual report and accounts 2017
137
2.9 DIVIDENDS
Amounts recognised as distributions to equity holders in the year
(based on the number of shares in issue at the record date):
Interim dividend for the year ended 31 December 2017 of 4.9 pence per share paid on 4 October 2017
(2016: 2.1 pence per share paid on 7 October 2016)
Final dividend for the year ended 31 December 2016 of 0.4 pence per share paid on 12 May 2017
(2015: 0.6 pence per share paid on 13 May 2016)
Years ended 31 December
2017
£m
2016
£m
20.0
1.6
21.6
8.6
2.4
11.0
As described on page 49, on 15 June 2017 we announced a new dividend policy.
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 2017 of 7.4 pence per share (equivalent to approximately £30 million) payable on or before
11 May 2018. The final dividend has not been included as a liability as at 31 December 2017. This would bring total dividends payable in respect
of the 2017 financial year to £50 million.
In future years, in determining the value of dividends the Board will take account of future investment opportunities and the less predictable
cash flows from the Group’s commodity based businesses. If there is a build-up of capital in excess of the Group’s investment needs the
Board will consider the most appropriate mechanism to return this to shareholders.
2.10 RETAINED PROFITS
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 to our shareholders. The table below sets out the movements in our retained
profits during the year.
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(Loss)/profit for the year
Actuarial gains/(losses) on defined benefit pension scheme (note 6.3)
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme (note 2.6)
Equity dividends paid (note 2.9)
Net movements in equity associated with share-based payments (note 6.2)
At 31 December
Years ended 31 December
2017
£m
566.5
(151.1)
21.4
(4.1)
(21.6)
6.1
2016
£m
385.2
193.9
(8.4)
1.6
(11.0)
5.2
417.2
566.5
Distributable profits
The capacity of the Group to make dividend payments is primarily determined by the availability of retained distributable profits and cash resources.
The immediate cash resources of the Group of £222.3 million are set out in note 4.2 and the recent history of cash generation within note
4.4. The majority of these cash resources are held centrally within the Group by Drax Corporate Limited. The Parent Company financial
statements, set out on pages 172–177 of this report, disclose the Parent Company’s distributable reserves of £229.7 million. Sufficient
reserves are available across the Group as a whole to make future distributions in accordance with the Group’s updated dividend policy for
the foreseeable future.
The majority of the Group’s distributable reserves are held in holding and operating subsidiaries. Management actively monitors the level of
distributable reserves in each company in the Group, ensuring adequate reserves are available for upcoming dividend payments and that the
Parent Company has access to these reserves.
The Group's new financing facilities (see note 4.3) place certain conditions on the value of dividend payments to be made in any given year.
We expect to be able to make dividend payments, in line with our new policy, within these conditions for the foreseeable future.
138
Drax Group plc Annual report and accounts 2017
SECTION 3
Operating assets and working capital
This section gives further information on the operating assets we use to generate revenue and the short-term liquid assets and liabilities,
managed during day-to-day operations, that comprise our working capital balances.
3.1 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 businesses to generate
revenue. The cost of an asset is what we paid to purchase or construct the asset. Depreciation reflects the usage of the asset over time and
is calculated by taking the cost of the asset, 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 its cost less any depreciation (including impairment, if required) charged to date.
On 13 April 2017, the Group acquired the wood pellet manufacturing plant owned by Louisiana Pellets Inc, for consideration of $35 million
(£27.4 million). The assets of the plant were acquired at auction through a bankruptcy court and did not constitute a business in their own
right. At the point of acquisition, the plant was not operational, there was no workforce in place and no raw material contracts for it to
operate as a business. In accordance with the requirements of IFRS 3 – Business combinations, the acquisition has been accounted for as an
asset purchase. Since the date of acquisition, further costs totalling £20.4 million have been capitalised and the plant is expected to begin
commercial operations in 2018.
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.
We construct many of our assets as part of long-term development projects. Assets that are in the course of construction are not
depreciated until they are ready for us to use in the way intended.
Depreciation is provided on a straight-line basis to write down assets to their residual value evenly over the estimated useful lives (UEL) of the
assets from the date of acquisition (where relevant, limited to the expected decommissioning date of the power station – currently expected
to be 2039). The table below shows the range of useful lives at the date of acquisition and the average remaining useful life at the balance
sheet date of the main categories of asset we own in years:
Freehold buildings
Plant and equipment
Electricity generation plant
Biomass-specific assets
Coal-specific assets
Pellet production plant
Other plant, machinery and equipment
Decommissioning asset
Plant spare parts
Average UEL
remaining
20
14
20
6
19
13
22
22
Range of
UELs
8–33
3–33
4–26
3–19
5–20
3–33
35
Up to 35
Freehold land held at cost is considered to have an unlimited useful life and is not depreciated.
Electricity generation plant refers to core electricity generation assets at Drax Power Station which are fuel agnostic. Biomass-specific and
coal-specific assets are those assets that are only necessary to support electricity generation from the specified fuel and include fuel
storage and distribution systems.
Within the plant and equipment categories shorter lives are attributed to components that are overhauled and upgraded as part of rolling
outage cycles. The majority of assets within these categories have a remaining useful life in excess of 15 years.
Plant spare parts are depreciated over the remaining useful life of the power station.
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.
Estimated useful lives and residual values are reviewed annually, taking into account regulatory change and commercial and technological
obsolescence as well as normal wear and tear. Residual values are based on prices prevailing at each balance sheet date. Any changes are
applied prospectively.
Drax Group plc Annual report and accounts 2017
139
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3.1 PROPERTY, PLANT AND EQUIPMENT CONTINUED
Significant estimation uncertainty
Asset lives are reviewed annually at each balance sheet date. The estimated useful lives of coal-specific assets at Drax Power Station have
been revised with effect from 1 January 2017 as a result of the Government’s announcement that all coal generation will be closed during
2025. Having considered this event, the Group concluded that coal generation will cease during 2025, but that the three existing coal units
will be retained for conversion to alternative fuels in the period to 2039. This results in the useful lives of the coal-specific assets which will
not be required to support generation after this date being shortened to no later than 2025. This change has been applied prospectively,
from 1 January 2017, and has resulted in an increase of approximately £15 million per annum in depreciation charges in 2017 compared to
2016, which will recur in each year until 2025. The useful lives of electricity generation plant currently fuelled by biomass are unaffected by
this change. No further changes to the useful economic lives of assets have been made as a result of the most recent review.
At each balance sheet date, the Group reviews its property, plant and equipment to determine whether there is any indication that these
assets may be impaired. The Group's accounting policy in respect of impairment, along with details of the impairment review conducted
during 2017, are set out in note 2.4.
Cost:
At 1 January 2016
On acquisition
Additions at cost
Disposals
Issues/transfers
Effect of foreign currency exchange differences
At 1 January 2017
Acquisition of Opus Energy (note 5.1)
Additions at cost
Disposals
Issues/transfers
IT software transferred to intangible assets
At 31 December 2017
Accumulated depreciation and impairment:
At 1 January 2016
Depreciation charge for the year
Disposals
Effect of foreign currency exchange differences
At 1 January 2017
Depreciation charge for the year
Acquisition of Opus Energy
Disposals
IT software transferred to intangible assets
At 31 December 2017
Net book amount at 31 December 2016
Net book amount at 31 December 2017
Freehold land
and buildings
£m
Plant and
equipment
£m
Plant
spare parts
£m
Total
£m
318.1
2,111.3
58.5
2,487.9
1.3
0.8
(7.2)
(11.9)
0.7
0.2
84.3
(28.1)
19.0
1.1
–
10.6
–
(4.5)
–
1.5
95.7
(35.3)
2.6
1.8
301.8
2,187.8
64.6
2,554.2
4.9
17.1
(6.4)
0.2
–
4.1
138.5
(29.9)
9.2
(39.4)
–
9.0
–
(6.6)
9.0
164.6
(36.3)
2.8
–
(39.4)
317.6
2,270.3
67.0
2,654.9
54.4
11.2
762.8
96.7
(6.5)
(25.0)
0.2
59.3
11.4
–
(3.4)
–
0.4
834.9
109.9
2.4
(16.6)
(25.0)
16.9
1.6
–
–
18.5
1.4
–
0.2
–
834.1
109.5
(31.5)
0.6
912.7
122.7
2.4
(19.8)
(25.0)
67.3
905.6
20.1
993.0
242.5
250.3
1,352.9
1,364.7
46.1
46.9
1,641.5
1,661.9
Assets in the course of construction amounted to £149.2 million at 31 December 2017 (2016: £120.5 million). Additions to assets in the course
of construction were £139.4 million in 2017 and include LaSalle pellet plant and the new office space for Opus Energy.
Plant and equipment includes assets held under finance lease agreements with a carrying value at 31 December 2017 of £1.1 million
(2016: £1.6 million).
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Drax Group plc Annual report and accounts 2017
SECTION 3: OPERATING ASSETS AND WORKING CAPITAL
3.1 PROPERTY, PLANT AND EQUIPMENT CONTINUED
Reflecting continued investment in the Group's IT software systems and the increasing significance of the value of such assets as a result, IT
software assets have been presented as a component of intangible assets from 2017 (see note 5.3). As a result of this change in presentation,
assets with a net book value of £14.4 million previously presented in property, plant and equipment have been transferred in this period.
Issues and transfers reflect changes in the categorisation of assets during the period, or the issue of spare parts for use in repair and
maintenance projects. When spares are utilised in such projects, the cost of the part is transferred from the property, plant and equipment
balance and recognised as an expense in the income statement within operating costs.
Losses on disposal in the income statement of £15.4 million include £3.6 million relating to the disposal of Billington Bioenergy on 31 October
2017.
3.2 OTHER FIXED ASSET INVESTMENTS
During 2017, the Group acquired 1.6 million shares in Aggregated Micro Power Holdings plc (AMPH) as part-consideration for the disposal of
Billington Bioenergy. AMPH is an AIM-listed energy company specialising in the sale of wood fuels and the development of distributed energy
assets, including biomass boilers and battery storage. Through its shareholding in AMPH, the Group retains an interest in the UK heating
market, whilst gaining exposure to the development of small-scale distributed energy assets.
Accounting policy
Other investments are recognised at fair value, based on quoted market prices, at the date of transfer. The assets are classified at fair value
through profit and loss in accordance with IAS 39. Subsequent movements in the fair value are recognised in the income statement.
At 1 January
Additions
Fair value losses
At 31 December
Years ended 31 December
2017
£m
–
1.6
(0.3)
1.3
2016
£m
–
–
–
–
3.3 ROC ASSETS
We earn Renewable Obligation Certificate (ROC) assets, which are accredited by the Office for Gas and Electricity Markets (Ofgem), as a
result of burning sustainable compressed wood pellets to generate electricity. This note sets out the value of these assets that we have
earned but not yet sold.
Total ROC generation has reduced in 2017, compared to previous periods, following the approval of the CfD contract for one of our biomass-
fuelled units in December 2016, which was previously supported by the ROC regime. Haven Power and Opus Energy provide us with a
credit-efficient and timely route to market for these ROCs.
Accounting policy
ROCs are recognised as current assets in the period they are generated and are initially measured at fair value based on anticipated sales
prices. The value of ROCs earned is recognised in the income statement as a reduction in fuel costs in that period.
Where our B2B Energy Supply electricity sales incur an obligation to deliver ROCs to Ofgem, that obligation is provided for in the period
incurred.
At each reporting date the Group reviews the fair value of ROC assets generated but not sold against updated anticipated sales prices
including, where relevant, agreed forward sale contracts and taking into account likely utilisation of ROCs generated to settle our own
ROC obligations. Any impairments required are recognised in the income statement in the period incurred.
Drax Group plc Annual report and accounts 2017
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3.3 ROC ASSETS CONTINUED
Significant estimation uncertainty
The fair values and net realisable values of ROCs referred to above are calculated with reference to assumptions regarding future sales prices
in the market, taking into account agreed forward sale contracts where appropriate. Historic experience indicates that the assumptions
used in the valuation are reasonable; however, actual sales prices may differ from those assumed.
ROC valuations also include an estimate of the future benefit that may be obtained from the ROC recycle fund at the end of the compliance
period. The recycle fund provides a benefit where supplier buy-out charges (incurred by suppliers who do not procure sufficient ROCs to
satisfy their obligations) are returned to renewable generators on a pro-rata basis. The estimate is based on assumptions about likely levels
of renewable generation and supply over the compliance period and is thus subject to some uncertainty. The Group utilises external sources
of information in addition to its own forecasts in making these estimates. Past experience indicates that the values arrived at are reasonable
but they remain subject to possible variation.
Fair value and carrying amount:
At 1 January 2016
Earned from generation
Utilised by our B2B Energy Supply business/sold to third parties
At 1 January 2017
Earned from generation
Purchased from third parties
Utilised by our B2B Energy Supply business/sold to third parties
At 31 December 2017
ROCs
£m
Total
£m
265.7
535.8
270.1
535.8
(543.9)
(548.3)
257.6
480.9
33.7
257.6
480.9
33.7
(626.7)
(626.7)
145.5
145.5
Recognition of revenue from sales of ROCs is described in further detail on page 129.
3.4 INVENTORIES
We hold stocks of fuels and other consumable items that we use in the process of generating electricity, and raw materials used in the
production of compressed wood pellets. 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, our facilities in the US and those owned by us but stored in off-site locations.
Accounting policy
Our raw materials and fuel stocks are valued at the lower of the weighted average cost to purchase and net realisable value.
The cost of fuel stocks includes all direct costs and overheads incurred in bringing the fuel to its present location and condition, including the
purchase price, import duties and other taxes (including amounts levied on coal under the UK carbon price support mechanism) and
transport/ handling costs.
Both coal and biomass stocks are weighed when entering, moving within or exiting our sites using technology regularly calibrated to industry
standards. Fuel burn in the electricity generation process is calculated using a combination of weights and thermal efficiency calculations to
provide closing stock volumes. Both calibrated weighers and efficiency calculations are subject to a range of tolerable error. All fuel
inventories are subject to regular surveys to ensure accuracy of these measurements.
Coal stocks are verified by an independent stock survey carried out by a suitably trained specialist, and a provision is made where the survey
indicates a lower level of stock than indicated by the methods described above. Despite being an independent process, the survey depends
on estimates and assumptions and as a result actual values may differ.
The characteristics of biomass require specialist handling and storage. On-site biomass at Drax Power Station is stored in sealed domes with
a carefully controlled atmosphere for fire prevention purposes and thus cannot be surveyed using traditional methods. Biomass stock is
surveyed using regularly calibrated state-of-the-art RADAR scanning technology.
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Drax Group plc Annual report and accounts 2017
SECTION 3: OPERATING ASSETS AND WORKING CAPITAL
3.4 INVENTORIES CONTINUED
Coal
Biomass
Other fuels and consumables
As at 31 December
2017
£m
44.5
205.2
22.4
272.1
2016
£m
66.4
197.5
23.6
287.5
Inventories of biomass include £1.5 million of fibre and other raw materials utilised in the production of compressed wood pellets
(2016: £2.3 million) and £0.1 million of work in progress (2016: £2.0 million) in our Pellet Production business.
The cost of inventories recognised as an expense in the year ended 31 December 2017 was £1,285.8 million (2016: £1,173.5 million).
3.5 TRADE AND OTHER RECEIVABLES
Trade receivables represent amounts owed to us by our customers for goods or services we have provided but not yet been paid for. Other
receivables include accrued income, which is income earned in the period but not yet invoiced, largely in respect of power delivered that will
be invoiced the following month, and prepayments, which are amounts paid by the Group for which we are yet to receive the relevant goods
or services in return (e.g. insurance premiums relating to periods after the balance sheet date).
Accounting policy
Trade and other receivables, given their short tenor, are measured at cost. A provision for impairment of trade receivables is established
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
Years ended 31 December
2017
£m
2016
£m
125.7
209.0
82.8
417.5
87.0
100.0
105.9
292.9
Trade receivables and accrued income principally represent sales of energy to counterparties within both our Power Generation and B2B
Energy Supply businesses. At 31 December 2017, the Group had amounts receivable from five (2016: four) significant counterparties
representing 20% (2016: 46%) of total trade receivables and accrued income.
The increase in trade receivables and accrued income is principally the result of Opus Energy joining the Group in 2017.
Of total trade and other receivables at 31 December 2017, £123.9 million (2016: £33.4 million) relates to B2B Energy Supply sales. The risk
profile of B2B Energy Supply debt is different from that of the Power Generation business due to a larger volume of smaller counterparties,
and therefore a lower concentration of credit risk, with different payment terms.
The Group does not consider there to be any requirement for further provisions in excess of the provision for doubtful debts of £28.2 million
(2016: £4.0 million). This provision, which largely relates to B2B Energy Supply receivables, has been determined with reference to past
default experiences in line with our policies. Credit and counterparty risk are both discussed in further detail in note 7.1.
All past-due receivables are assessed against the Group’s credit risk policies for indicators of impairment and provisions made where
appropriate.
The movement in the allowance for doubtful debts is laid out in the following table:
At 1 January
Receivables written off
Acquisition of Opus Energy
Provision for receivables impairment
At 31 December
Years ended 31 December
2017
£m
4.0
(3.8)
19.7
8.3
28.2
2016
£m
4.9
(3.3)
–
2.4
4.0
Drax Group plc Annual report and accounts 2017
143
3.5 TRADE AND OTHER RECEIVABLES CONTINUED
The customer base of Opus Energy is comprised of a large number of smaller enterprises. Accordingly, Opus Energy carries lower
concentrations but higher levels of credit risk compared to the rest of the Group. This is reflected in the increase of the allowance for
doubtful debts acquired when the Group obtained control of Opus Energy.
The value of trade receivables that are past due and not provided against, in accordance with the assessment described above, is
£32.2 million (2016: £3.6 million). An ageing analysis of this amount is provided in the table below:
0–30 days past due
31–60 days past due
61–90 days past due
91+ days past due
Total past due not provided
As at 31 December
2017
£m
14.2
3.9
3.5
10.6
32.2
2016
£m
3.6
–
–
–
3.6
3.6 TRADE AND OTHER PAYABLES
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).
Accounting policy
Trade and other payables, given their short tenor, are measured at cost.
Amounts falling due within one year:
Trade payables
Fuel accruals
Energy supply accruals
Other accruals
Other payables
Amounts payable in respect of acquisitions
As at 31 December
2017
£m
2016
£m
79.5
95.3
291.9
164.2
101.5
4.1
87.4
77.6
216.3
125.4
62.1
23.1
736.5
591.9
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Energy supply accruals includes £225.0 million (2016: £166.0 million) in relation to the Group’s obligation to deliver ROCs arising from B2B
Energy Supply activities. The remaining balance principally comprises third party grid charge accruals of £36.8 million (2016: £26.5 million)
and FiT accruals of £25.9 million (2016: 21.2 million).
The Group recognises a liability in respect of its unsettled obligations to deliver emissions allowances under the EU Emission Trading Scheme
(ETS). Accruals at 31 December 2017 include £30.6 million (2016: £2.8 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.
At 31 December 2017, the amounts payable in respect of acquisitions reflect the contingent consideration payable in relation to the
acquisition of four Open-Cycle Gas Turbine (OCGT) projects in 2016. Initial consideration of £18.6 million was settled in cash on 3 January
2017, with the amount held as a liability in the balance sheet at 31 December 2016. The final purchase price depends upon future clearing
prices in T-4 capacity market auctions from 2016 to 2020. The range of possible outcomes being zero further consideration if the capacity
market clearing price does not exceed £28/KW in these auctions, with a maximum contingent consideration payable of £72 million, based
on a clearing price of £75/KW. The fair value of the contingent consideration at 31 December 2017 was assessed at £4.1 million (2016:
£3.8 million) based on a projection of likely future capacity market clearing prices, discounted to present value at a risk-free rate of 2%.
144
Drax Group plc Annual report and accounts 2017
SECTION 4
Financing and capital structure
This section gives further information regarding the Group’s capital structure (equity and debt financing) and cash generated from
operations during the year.
4.1 RECONCILIATION OF NET DEBT
Net debt is calculated by taking our borrowings (note 4.3) and subtracting cash and cash equivalents (note 4.2). The table below reconciles
net debt in terms of changes in these balances across the year.
Net debt at 1 January
(Decrease)/increase in cash and cash equivalents
Increase in borrowings
Effect of changes in foreign exchange rates
Net debt at 31 December
Years ended 31 December
2017
£m
2016
£m
(93.5)
(186.6)
(4.0)
86.7
(267.8)
(2.1)
(1.5)
7.9
(367.4)
(93.5)
A reconciliation of the increase in borrowings during the year is set out in the table on page 145.
4.2 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash held in current and other deposit accounts that are accessible on demand. It is our policy to invest
available cash on hand in short-term, low-risk bank accounts or money market funds.
Cash and cash equivalents
As at 31 December
2017
£m
2016
£m
222.3
228.4
4.3 BORROWINGS
On 10 February 2017, the Group entered into a £375 million acquisition finance facility, of which £200 million was drawn and utilised in the
purchase of Opus Energy (see note 5.1). This facility, along with the existing term loans at 1 January 2017, was repaid in full on 5 May 2017,
when the Group undertook a refinancing exercise.
The new financing structure consists of £550 million of high-yield, publicly traded bonds listed on the Luxembourg exchange. This includes
£350 million 4.25% fixed rate notes and £200 million floating rate notes of 4.00% above LIBOR, which all mature in April 2022.
On the same day, the Group entered into a £350 million Facility comprised of a revolving credit facility (RCF) with a value of £315 million (2016:
£400 million) and an index-linked term loan of £35 million.
The RCF matures in April 2021, with an option to extend by one year, and has a margin of 150 basis points over LIBOR. At 31 December 2017,
the RCF had been utilised to draw down letters of credit with a total value of £35.7 million (2016: 57.9 million).
The Group also has access to a $25 million revolving 30 day facility in the US business. This facility was fully drawn down at 31 December
2017 and had a Sterling equivalent value of £18.5 million at that date.
The term loan was fully drawn at inception and remains fully drawn at 31 December 2017 (2016: term loans of £325 million fully drawn).
The Group has no other undrawn debt facilities, although it does have access to certain non-recourse trade receivable finance facilities as
described on note 4.4 which are utilised to accelerate working capital cash flows.
Accounting policy
The Group measures all debt instruments (whether financial assets or financial liabilities) initially at fair value, which equates to the principal
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 amortised through the income statement over the life of the instrument.
Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or
all of the facility will be drawn down. Where this is the case, the fee is deferred until the draw-down occurs.
4.3 BORROWINGS CONTINUED
Analysis of borrowings
An analysis of the changes in borrowings during the year is shown in the table below:
Borrowings at 1 January
Draw-down of Opus Energy acquisition facility
Draw-down of US revolving facility
Borrowings repaid on 5 May 2017
Fixed rate loan notes drawn down
Floating rate loan notes drawn down
Indexation of linked loan
Amortisation of deferred finance costs (note 2.5)
Changes in finance lease liabilities
Borrowings at 31 December
Loan notes
Term loans
US revolving facility
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
Term loans
Finance lease liabilities
Total borrowings
Less current portion
Non-current borrowings
Drax Group plc Annual report and accounts 2017
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As at 31 December 2017
Borrowings
before
deferred
finance costs
£m
329.0
200.0
18.5
(493.8)
350.0
200.0
1.8
–
(0.3)
Deferred
finance costs
£m
Net
borrowings
£m
(7.1)
(3.8)
–
10.9
(11.4)
(6.5)
–
2.4
–
321.9
196.2
18.5
(482.9)
338.6
193.5
1.8
2.4
(0.3)
605.2
(15.5)
589.7
As at 31 December 2017
Borrowings
before
deferred
finance costs
£m
Deferred
finance costs
£m
Net
borrowings
£m
550.0
(15.5)
534.5
35.9
18.5
0.8
605.2
(18.6)
586.6
–
–
–
35.9
18.5
0.8
(15.5)
589.7
–
(15.5)
(18.6)
571.1
As at 31 December 2016
Borrowings
before
deferred
finance costs
£m
327.9
1.1
329.0
(37.9)
291.1
Deferred
finance costs
£m
Net
borrowings
£m
(7.1)
320.8
–
(7.1)
2.0
(5.1)
1.1
321.9
(35.9)
286.0
The borrowings from the refinancing exercise in May, including the term loan, the loan notes and the RCF are secured against the assets of a
number of the Group’s subsidiaries, with the exception of the US subsidiary’s land and buildings.
In addition, the Group has a secured commodity trading line, which allows us to transact prescribed volumes of commodity trades without
the requirement to post collateral and FX trading lines with certain banks. Counterparties to these arrangements are entitled to share in the
security as described above. As at 31 December 2017, this value was £3.6 million (2016: £0.9 million).
The US revolving facility is unsecured.
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Drax Group plc Annual report and accounts 2017
SECTION 4: FINANCING AND CAPITAL STRUCTURE
4.4 CASH GENERATED FROM OPERATIONS
Cash generated from operations is the starting point of our cash flow statement on page 126. The table below makes adjustments for any
non-cash accounting items to reconcile our net profit for the year to the amount of cash we have generated from our operations.
(Loss)/profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax (credit)/charge
Depreciation and amortisation
Losses on disposal
Unrealised losses/(gains) on derivative contracts
Other losses
Defined benefit pension scheme current service cost
Non-cash charge for share-based payments
Close out of currency contracts(1)
Operating cash flows before movement in working capital
Changes in working capital:
Decrease/(increase) in inventories
Decrease in receivables
(Decrease)/increase in payables
Decrease in carbon assets
Decrease in ROC assets
Total cash released from working capital
Defined benefit pension scheme contributions
Cash generated from operations
Years ended 31 December
2017
£m
2016
£m
(151.1)
193.9
66.3
(0.2)
(32.1)
167.2
14.5
156.1
0.4
7.3
6.1
(9.8)
224.7
15.4
60.6
(22.4)
0.6
112.1
166.3
(15.3)
375.7
7.0
(0.6)
3.2
109.5
3.8
(176.8)
–
6.0
5.2
14.0
165.2
(63.5)
28.6
73.7
11.1
12.5
62.4
(14.5)
213.1
Note:
(1) During 2016 we closed out a number of in-the-money forward foreign currency purchase contracts with a total value of £14 million. As these contracts were designated into hedge accounting
relationships under IAS 39, the benefit is being recognised in the income statement in the period the hedged transaction occurs. The net loss for 2017 includes £10 million of income in relation to the
unwinding of this position, for which the cash was received in 2016.
The Group has access to a facility that enables it to accelerate the cash flows associated with trade receivables arising from B2B Energy
Supply sales on a non-recourse basis. The net cash benefit derived from this facility during 2017 was £110 million (2016: £74 million) and is
recognised as a reduction in receivables in the table above. We estimate that approximately 30% of this cash would have been received in
the ordinary course of business by 31 December 2017 had the facility not been in place.
The Group also has access to similar non-recourse facilities to accelerate cash flows on ROC receivables. No ROC receivables have been sold
through these facilities in 2017 (2016: net cash benefit of £111 million). The reduction in ROCs in the table above reflects a reduction in the
number of generation units that give rise to ROCs following the approval of the CfD contract for one of our biomass-fuelled units in
December 2016.
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4.5 EQUITY AND RESERVES
Our ordinary share capital reflects the total number of shares in issue, which are publicly traded on the London Stock Exchange.
Accounting policy
Ordinary shares are classified as equity as evidenced by their residual interest in the assets of the Company after deducting 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.
As at 31 December
Authorised:
865,238,823 ordinary shares of 11 16⁄29 pence each
Issued and fully paid:
2017: 407,034,429 ordinary shares of 11 16⁄29 pence each
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
At 31 December
2017
£m
2016
£m
100.0
100.0
47.0
47.0
47.0
47.0
Years ended 31 December
2017
(number)
2016
(number)
406,700,321
406,317,162
334,108
383,159
407,034,429
406,700,321
The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income. No shareholders
have waived their rights to dividends.
Shares issued under employee share schemes
On 21 December 2017, 152,169 shares were issued on early vesting of the Group’s Bonus Matching Plan (BMP) by two individuals who
had retired and discretion was used to vest the shares. On 1 March 2017, 140,888 shares were issued in satisfaction of shares vesting in
accordance with the rules of the Group’s BMP. Throughout January to December 2017, a total of 41,051 shares were issued in satisfaction
of options vesting in accordance with the rules of the Group’s Savings-Related Share Option Plan.
Translation reserve
Exchange differences relating to the translation of the net assets of the Group’s US-based subsidiaries from their functional currency
(US Dollar) into Sterling for presentation in these consolidated accounts recognised in the translation reserve.
At 1 January
Exchange differences on translation of foreign operations
At 31 December
Years ended 31 December
2017
£m
(10.2)
3.4
(6.8)
2016
£m
(1.1)
(9.1)
(10.2)
Other reserves
The share premium account reflects amounts received in respect of issued share capital that exceed the nominal value of the shares issued.
Other equity reserves reflect the impact of certain historical transactions, which are described under the table below.
At 1 January
Issue of share capital
At 31 December
Capital redemption reserve
Share premium
Merger reserve
2017
£m
1.5
–
1.5
2016
£m
1.5
–
1.5
2017
£m
2016
£m
2017
£m
2016
£m
424.2
424.2
710.8
710.8
0.1
–
–
–
424.3
424.2
710.8
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 the
share premium reserve reflects amounts received on the issue of shares under employee share schemes.
Movements in the hedge reserve, which reflect the change in fair value of derivative financial instruments designated into hedge accounting
relationships in accordance with IFRS, are set out in note 7.4.
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Drax Group plc Annual report and accounts 2017
SECTION 5
Other assets and liabilities
This section provides information on the assets and liabilities in the Consolidated balance sheet that are not covered in other sections,
including goodwill, other intangible assets and the provision for reinstatement.
5.1 ACQUISITIONS
Accounting policy
Acquisitions of businesses are recognised at the point the Group obtains control of the target (the acquisition date). The consideration
transferred and the assets and liabilities acquired are measured at their fair value on the acquisition date. The assets and liabilities acquired
are recognised in the Consolidated balance sheet and the profits of the acquired business are recognised in the Consolidated income
statement from the acquisition date. Acquisition-related costs are recognised in the income statement in the period the acquisition occurs
in the transaction costs line. Goodwill is measured as the excess of the fair value of the consideration transferred over the fair value of the
identifiable net assets acquired.
Acquisition of Opus Energy Group Limited (Opus Energy)
The acquisition of Opus Energy was approved by shareholders on 8 February 2017 and subsequently completed on 10 February 2017; the
Group acquired 100% of the issued share capital on this date.
Opus Energy is a well-established B2B energy supply business serving business customers principally in the SME market, providing
diversification of our retail offering and a robust platform for growth in line with our strategy. Opus Energy has contributed positively to
earnings and cash flow immediately following the acquisition.
The purchase consideration was £340 million plus interest calculated on the amount of Opus Energy’s net assets from 31 March 2016 to
the acquisition date. The total consideration of £367 million was funded by a combination of existing cash reserves (£167 million) and partial
drawing of a £375 million acquisition facility (£200 million). This facility was repaid as part of the refinancing described in note 4.3.
Acquisition-related costs amounted to £7.8 million.
Following a detailed exercise to review the assets and liabilities, including intangible assets, the fair values acquired were as follows:
Financial assets
Property, plant and equipment
Financial liabilities
Intangible assets
Customer-related assets
Brand
Software
Total identifiable intangible assets
Deferred tax liability
Total identifiable net assets
Goodwill
Fair value of consideration payable
The revenue and results of Opus Energy from the date of acquisition to the year end were as follows:
Income statement items for the period from 10 February to 31 December 2017
Revenue
EBITDA
Profit
Opus Energy
£m
213.3
6.7
(195.4)
211.0
11.3
1.9
224.2
(40.7)
208.1
159.2
367.3
610.7
28.9
22.5
The figures above have changed from those disclosed in the interim financial statements published on 19 July 2017. The Group has continued
to review and align estimates for the B2B Energy Supply business. This process resulted in a number of remeasurements reducing the fair
value of the net assets acquired by £4.4 million, with a corresponding increase in goodwill. The values shown above are now final.
Following the acquisition, the Group has been able to identify and measure the fair value of existing customer contracts, the Opus Energy
brand and software. The assets will be amortised over their useful economic lives as follows:
– Existing customer contracts 11 years (reducing balance)
– Brand 10 years (straight line)
– Software 3 years (straight line)
Drax Group plc Annual report and accounts 2017
149
5.1 ACQUISITIONS CONTINUED
The fair value measurement of the existing customer contracts requires assumptions to be made, in particular regarding margins on current
customer contracts, future contract renewal rates and future margins on renewed contracts. The goodwill of £159 million recognised on
acquisition is largely reflective of potential customer contracts and growth opportunities together with the assembled workforce. None of
the goodwill is deductible for tax purposes.
The financial assets acquired include £130 million of receivables, the majority of which reflect trade receivables for energy supplied to
customers. By virtue of their short tenor, the fair value of these receivables is considered to be the contractual amounts receivable less any
provision for doubtful debts. The provision for doubtful debts as at the acquisition date was £20 million.
Additional financial information
The consolidated results of the Group, assuming Opus Energy had been acquired at the beginning of the year, would show revenue of
£3,775.7 million (compared to reported revenue of £3,685.2 million), EBITDA of £231.6 million (compared to the reported EBITDA of £228.9
million) and a loss after taxation of £149.0 million (compared to a reported loss after taxation of £151.1 million). This information includes the
revenue and profits made by Opus Energy between 1 January 2017 and 10 February 2017, without accounting policy alignments and/or the
impact of fair value uplifts resulting from acquisition accounting adjustments. This information is not necessarily indicative of the results of
the combined Group that would have occurred had the acquisition actually been made at the beginning of the year, or indicative of the
future results of the combined Group.
5.2 GOODWILL
Goodwill arises on the acquisition of a business when the consideration paid exceeds the fair value of the assets acquired. During 2017,
we recognised additional goodwill on the purchase of Opus Energy (see note 5.1), and wrote off goodwill of £3.8 million in respect of
Billington Bioenergy following the sale of the business.
Accounting policy
Goodwill is initially recognised and measured at the acquisition date. Goodwill is not amortised but reviewed for impairment at least annually.
For the purpose of impairment testing, goodwill is allocated to the CGU to which it relates and the recoverable amount for that CGU
assessed. The table below shows movements and balances:
Cost and carrying amount:
At 1 January 2016, 31 December 2016 and 1 January 2017
Acquisition of Opus Energy
Disposal of Billington Bioenergy
At 31 December 2017
Goodwill
£m
14.5
159.2
(3.8)
169.9
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Goodwill
Total goodwill in the Consolidated balance sheet at 31 December 2017 was £170 million, with £11 million arising on the acquisition of Haven
Power in 2009 attributed to the Haven Power CGU and £159 million arising on the acquisition of Opus Energy in the year (see note 5.1)
attributed to the Opus Energy CGU.
The recoverable amount of the Haven Power and Opus Energy CGUs is measured annually, based on a value-in-use calculation using the
Group's established planning model. The elements reflected in this calculation are the same as those used for the wider asset impairment
review conducted by the Group as at 31 December 2017 and are disclosed in note 2.4. Cash flows beyond the business plan period are
inflated into perpetuity using a growth rate of 1%.
The carrying amount of the Haven Power CGU at 31 December 2017 was £23 million. The expected future cash flows of the CGU were
discounted using a pre-tax discount rate of 8.1% (calculated based on independent analysis commissioned by the Group, adjusted to the
specific circumstances and risk factors affecting the Group's B2B Energy Supply business). We believe that this rate reflects the prospects
for a well-established B2B Energy Supply business. The value in use of the Haven Power CGU, including the goodwill, was significantly in
excess of its carrying amount.
The carrying amount of the Opus Energy CGU at 31 December 2017 was £366 million, including intangible assets with a net book value of
£186 million as described in note 5.3. Following the acquisition in 2017, the appropriate discount rate was assessed as being higher for Opus
Energy than for Haven Power. The expected future cash flows were discounted using a range of discount rates from the Group's central B2B
Energy Supply assumption (8.1%) to the rate used in the valuation of Opus Energy at the acquisition date (10.7% – see note 5.3). The
application of discount rates across this range does not result in a recoverable amount for Opus Energy below its carrying amount.
The Group has conducted a sensitivity analysis of the estimates of future cash flows of each CGU. This analysis indicates that any reasonably
possible change in the key assumptions, which are customer margins and supply volumes, would not cause an impairment loss in respect of
goodwill.
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Drax Group plc Annual report and accounts 2017
SECTION 5: OTHER ASSETS AND LIABILITIES
5.3 INTANGIBLE ASSETS
Intangible assets are not physical in nature but are identifiable and separable from other assets. Intangible assets can be acquired in
business combinations (such as the acquisition of Opus Energy during 2017) or purchased separately. The Group routinely purchases
computer software and carbon emissions allowances, which are considered intangible assets.
Accounting policy
Intangibles acquired in business combinations are measured at fair value on the acquisition date. Other intangible assets are measured at
cost. Cost comprises the purchase price (net of any discount or rebate) and any directly attributable costs to bring the asset into the
condition and location required for use as intended by management.
Intangible assets are amortised over their anticipated useful lives. Useful lives are reviewed at each balance sheet date. No changes to useful
lives were made as at 31 December 2017. Amortisation calculations are specific to each category of assets and are explained in further detail
below.
Carrying amounts are assessed for indicators of impairment at each balance sheet date. The customer-related assets and brand are
attributed to the Opus Energy CGU and details of the impairment test relating to this CGU are included in note 5.2.
Significant estimation uncertainty
The valuation of the intangible assets recognised on the acquisition of Opus Energy is dependent upon a number of assumptions. The most
significant of these assumptions are explained under each of the asset headings below.
Cost and carrying amount:
At 1 January 2016
Utilised in period
Additions at cost
Acquisition of OCGT projects
At 1 January 2017
Transferred from PPE
Utilised in period
Additions at cost
Acquisition of Opus Energy (note 5.1)
At 31 December 2017
Accumulated amortisation
At 1 January 2016
Charge for period
At 1 January 2017
Transferred from PPE
Acquisition of Opus Energy
Charge for period
At 31 December 2017
Net book value
At 31 December 2016
At 31 December 2017
Customer-
related assets
£m
Brand
£m
Computer
software
£m
Development
assets
£m
Carbon
£m
Total
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
211.0
211.0
11.3
11.3
–
–
–
–
–
35.6
35.6
–
175.4
–
–
–
–
–
1.1
1.1
–
10.2
–
–
–
–
–
39.4
–
16.0
2.6
58.0
–
–
–
25.0
0.7
6.9
32.6
–
25.4
–
–
–
21.0
21.0
–
–
–
–
21.0
–
–
–
–
–
–
–
11.8
(11.8)
0.7
–
0.7
–
(0.7)
–
–
–
–
–
–
–
–
–
–
11.8
(11.8)
0.7
21.0
21.7
39.4
(0.7)
16.0
224.9
301.3
–
–
–
25.0
0.7
43.6
69.3
21.0
21.0
0.7
–
21.7
232.0
Drax Group plc Annual report and accounts 2017
151
5.3 INTANGIBLE ASSETS CONTINUED
Customer-related assets
Customer-related assets reflect the value of customer contracts acquired on the acquisition of Opus Energy in February 2017, which
provided the Group with access to a broad customer base with contracted cash flows. The asset valuation of £211 million reflects the
estimated acquisition-date value of the future cash flows associated with this customer base and is dependent upon estimates of both
current and expected future contract margins and assumed customer retention rates. The cash flows have been discounted using a pre-tax
discount rate of 10.7%. The asset has a useful life of 11 years, calculated based on customer churn-rate analysis, and is being amortised on a
reducing balance basis to reflect the diminishing rate of contract renewals over time.
Opus Energy brand
The Opus Energy brand was acquired as part of the acquisition in February 2017 and valued at £11 million on a relief-from-royalty method.
The brand is being amortised on a straight-line basis over its assumed 10 year useful life.
Computer software
In light of continued investment and the increased significance of the carrying amount, the Group’s software assets are presented
separately within intangible assets (2016: included within tangible fixed assets, see note 3.1). Additions in the period include assets acquired
in the Opus Energy acquisition in addition to those in the ordinary course of business, which principally reflect ongoing investment in
business systems to support the B2B Energy Supply segment. Software assets are amortised on a straight-line basis over estimated useful
lives ranging between three and five years.
Computer software assets in the course of construction of £11.1 million at 31 December 2017 (2016: £nil) were capitalised in the year.
Development assets
The development assets arose on the acquisition of four Open Cycle Gas Turbine projects in December 2016 and reflect the value of planning
and consents acquired as part of that transaction. Until operations commence, the assets are considered to have an indefinite life and thus
are not amortised and will be subject to impairment testing at each balance sheet date.
At 31 December 2017, the recoverable amount of the development assets was established using a value-in-use calculation derived from the
Group's established planning model, consistent with the approach described in note 2.4. The assessment incorporated assumptions related
to likely capacity market clearing prices, construction costs, the ongoing revenues to be derived from the projects once constructed and the
direct costs of generating those revenues. The analysis indicated a recoverable amount for the development assets in excess of their
carrying amount.
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Carbon assets
Carbon assets arise on the purchase of CO2 emissions allowances in excess of the amount allocated under the Emissions Trading Scheme
and required for the current financial year, and are measured at cost, net of any impairment. Given their short tenor, carbon assets are not
amortised.
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 to the extent further
purchases are required, the market price at the balance sheet date.
Post balance sheet events
The 2021 T-4 capacity market auction closed in February 2018 at a clearing price of £8.40/KW. The Group secured agreements to provide a
total of 1,217MW of capacity from two existing coal units, worth a total of £10 million for the period October 2021 to September 2022.
Two of the Group’s Open Cycle Gas Turbine (OCGT) projects also participated in the auction but exited above the clearing price. The Group
will continue to develop these options with an expectation that they will go on to participate in the next T-4 auction. This outcome does not
change the Group’s view of the recoverable amount of the existing investments in the OCGT projects (see above) or the fair value of the
contingent consideration that may become payable following future capacity market outcomes (see note 3.6).
152
Drax Group plc Annual report and accounts 2017
SECTION 5: OTHER ASSETS AND LIABILITIES
5.4 PROVISIONS
We make provision for reinstatement to cover the estimated costs of decommissioning and demolishing our generation assets and
remediating the site at the end of the useful economic lives of the assets. The amount represents the present value of the expected costs.
Accounting policy
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the
Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Specifically, 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. In view of the uncertainty of assessing the amount of any proceeds from the disposal of the assets at the decommissioning
date, no reduction in the provision is made for any such proceeds. The discount rate used is a risk-free pre-tax rate of 1.8% (2016: 1.9%),
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. The balance also includes a small provision in respect of dilapidation
provisions for leased offices acquired in the Opus Energy transaction in 2017.
Carrying amount:
At 1 January 2017
Additions
Acquisition of Opus Energy
Adjustment for changes in assumptions
Unwinding of discount
At 31 December 2017
Provisions
£m
35.0
0.3
0.3
0.1
0.6
36.3
The decommissioning provision is based on the assumption that the decommissioning and reinstatement will take place at the end of the
expected useful life of the power station in 2039, and has been estimated using existing technology at current prices based on independent
third-party advice, updated on a triennial basis. The most recent update took place in December 2017.
Post balance sheet events
Subsequent to the year end, on 8 February 2018 the Group announced its intention to close the headquarters of the Pellet Production
business in Atlanta, Georgia and move these functions to a location closer to the operational sites in Monroe, Louisiana. No amounts have
been included in respect of this decision in these financial statements.
SECTION 6
Our people
Drax Group plc Annual report and accounts 2017
153
The notes in this section relate to the remuneration of our directors and employees, including our obligations under retirement benefit
schemes.
6.1 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 based at production sites), B2B Energy Supply services (employees in our B2B Energy Supply segment) and Central and
administrative functions are also provided.
Further information in relation to pay and remuneration of the executive directors can be found in the report of the Remuneration
Committee, starting on page 81.
The number of staff employed by the Group, and the associated costs, increased from the previous year following the purchase of Opus
Energy and the expansion of our US-based Pellet Production business.
Staff costs (including executive directors)
Included in other operating and administrative expenses (note 2.3)
Wages and salaries
Social security costs
Pension costs
Share-based payments (note 6.2)
Average monthly number of people employed (including executive directors)
Power Generation operations
Pellet Production operations
B2B Energy Supply services
Central and administrative functions
Years ended 31 December
2017
£m
103.7
11.9
15.4
6.1
137.1
2016
£m
74.3
8.1
12.3
5.2
99.9
Years ended 31 December
2017
(number)
2016
(number)
667
186
1,349
305
2,507
645
130
399
293
1,467
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6.2 SHARE-BASED PAYMENTS
We operate two share option schemes for our employees – the Performance Share Plan (PSP) for directors and senior executives (which
replaced the Bonus Matching Plan (BMP) from 2017), and the Savings-Related Share Option Plan (SAYE) for all qualifying employees. We
incur a non-cash charge 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.
Accounting policy
All of the Group’s share-based payments are equity settled. Equity-settled share-based payments are measured at the fair value of the equity
instrument at the date of grant and are recognised in the income statement on a straight-line basis over the relevant vesting period, based
on an estimate of the shares that will ultimately vest as a result of the effect of non-market-based vesting conditions, which is revised at each
balance sheet date.
Costs recognised in the income statement in relation to share-based payments during the year were as follows:
PSP (granted from 2017)
DSP (granted from 2017)
BMP (granted in periods prior to 2017)
SAYE
Years ended 31 December
2017
£m
0.5
0.1
1.5
4.0
6.1
2016
£m
–
–
2.6
2.6
5.2
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Drax Group plc Annual report and accounts 2017
SECTION 6: OUR PEOPLE
6.2 SHARE-BASED PAYMENTS CONTINUED
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 shares they bought, in a ratio of one-to-one, with the cost of matching shares borne by the Group.
There have been no awards under the SIP Partnership and Matching Share plan since 2010.
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
2017
(number)
Shares
acquired
during year
(number)
Shares
transferred
during year
(number)
Shares
held at
31 December
2017
(number)
Cost at
31 December
2017
£000
Nominal
value at
31 December
2017
£000
Market
value at
31 December
2017
£000
SIP
153,034
–
(95,435)
57,599
–
7
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2017 Performance Share Plan (PSP) and Deferred Share Plan (DSP)
In 2017, a new share plan was introduced for directors and senior executives, replacing the Bonus Matching Plan. Under the PSP, annual
awards of performance and service-related shares are made for no consideration to executive directors and other senior executives up to a
maximum of 175% of their annual bonus. Vesting of a proportion of shares is conditional upon whether the Group’s Total Shareholder Return
(TSR) matches or outperforms an index (determined in accordance with the scheme rules) over three years and vesting of a proportion of
shares is conditional upon performance against the internal balanced corporate scorecard. The fair value of the 2017 PSP awards of
£2.8 million is being charged to the income statement on a straight-line basis over the three-year vesting period.
The fair value of PSP awards is calculated using a Monte-Carlo valuation model, which takes into account the estimated probability of
different levels of vesting. The key inputs to the valuation model for the 2017 awards are the share price at the grant date (325 pence),
expected volatility (44%), and risk-free interest rate (0.13%).
In addition, the Group operates the DSP, which was introduced in 2017 as a vehicle for deferring 35% of the annual bonus of executive
directors, which are granted at nil cost and vest after three years subject to continued employment or “good leaver” termination provisions.
The share price on the grant date of DSP awards made in 2017 was 325 pence and the fair value of these awards of £0.6 million is being
charged to the income statement on a straight-line basis over the three-year vesting period.
Movements in the number of share options outstanding for the PSP and DSP awards are as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
2017
PSP
(number)
–
2017
DSP
(number)
–
1,582,309
170,227
(292,547)
(59,418)
–
–
–
–
1,289,762
110,809
50% of the PSP options granted in 2017 will vest conditional on Group TSR relative to the TSR of a comparator group of companies, with
the remaining 50% vesting conditional upon the internal balanced corporate scorecard. The share price on the grant date for PSP options
awarded in the year was 325 pence and the weighted average fair value of the PSP options granted during the year was 177 pence.
All of the PSP options outstanding at the end of the period had an exercise price of £nil. The weighted average remaining contractual life was
28 months.
The number of options exercisable at the year end was nil.
Drax Group plc Annual report and accounts 2017
155
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6.2 SHARE-BASED PAYMENTS CONTINUED
Bonus Matching Plan (BMP)
Under the BMP, annual awards of performance and service-related shares were made for no consideration to executive directors and other
senior executives up to a maximum of 150% of their annual bonus up until 2016. The BMP was replaced in 2017 by the PSP. For awards prior
to 2017, a proportion of the shares vesting under the BMP are conditional upon whether the Group’s Total Shareholder Return (TSR) matches
or outperforms an index (determined in accordance with the scheme rules) over three years and a proportion of the shares vesting is
conditional upon performance against the internal balanced corporate scorecard. The fair value of the 2017, 2016 and 2015 BMP awards
of £0.6 million, £2.6 million and £3.3 million respectively, are being charged to the income statement on a straight-line basis over the
corresponding three-year vesting periods.
The fair value of BMP awards is calculated using a Monte-Carlo valuation model, which takes into account the estimated probability of
different levels of vesting. No BMP awards were made in 2017.
Movements in the number of share options outstanding for the BMP awards is as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
2017
BMP
(number)
2016
BMP
(number)
3,193,932
3,411,792
–
1,686,095
(196,402)
(623,597)
(131,952)
(337,146)
(551,423)
(943,212)
2,314,155
3,193,932
For the BMP options exercised during the period, the weighted average share price at the date of exercise was 308 pence (2016: 232 pence).
All of the BMP options outstanding at the end of the period had an exercise price of £nil (2016: £nil). The weighted average remaining
contractual life was nine months (2016: 17 months).
The number of options exercisable at the year end was nil (2016: nil).
Savings-Related Share Option Plan (SAYE)
In April 2017, participation in the SAYE plan was offered again to all qualifying employees. Options were granted for employees to acquire
shares at a price of 280 pence (2016: 203 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 £0.9 million (2016: £3.9 million) is being charged to the income statement over the term 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
2017
2016
SAYE
three-year
(number)
SAYE
five-year
(number)
SAYE
three-year
(number)
SAYE
five-year
(number)
3,286,906
996,709 1,948,209
934,041
752,414
140,974 3,150,023
919,723
(81,269)
(32,324)
(73,907)
–
(34,525)
(6,526)
(8,618)
(8,604)
(301,057)
(91,544) (1,728,801)
(848,451)
3,622,469 1,007,289 3,286,906
996,709
The fair value of SAYE awards is calculated using a Black-Scholes model, which compares exercise price to share price at the date of grant.
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SECTION 6: OUR PEOPLE
6.2 SHARE-BASED PAYMENTS CONTINUED
The fair value of SAYE options granted and the inputs to the option pricing model used in the current and previous year are set out in the
table below:
Grant date
Share price at grant date (pence)
Vesting period
Exercise price (pence)
Dividend yield
Annual risk-free interest rate
Expected volatility
Fair value of options granted (pence)
5 April 2017
5 April 2017
5 April 2016
5 April 2016
328
328
286
286
3 years
5 years
3 years
5 years
280
1.8%
0.73%
41.2%
106
280
2.5%
0.90%
37.3%
103
203
2.9%
0.81%
40.0%
101
203
5.0%
0.95%
37.6%
82
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three and five years
respectively. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-
transferability, exercise restrictions and behavioural considerations.
For the SAYE options exercised during the period, the weighted average share price at the date of exercise was 305 pence (2016: 337 pence).
The weighted average exercise price of SAYE options outstanding at the end of the period was 224 pence (2016: 216 pence). The weighted
average remaining contractual life was 22 months (2016: 31 months).
The number of options exercisable at the year end was nil (2016: nil).
Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration Committee report.
6.3 RETIREMENT BENEFIT OBLIGATIONS
We operate one defined benefit and four defined contribution pension schemes.
The Drax Power Group (DPG) section of the Electricity Supply Pension Scheme (ESPS) 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 an annual pension 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 Group Personal Pension Plan, Haven Power Personal Pension Plan, Opus Energy Group Personal Pension Plan and Drax Biomass
Inc. 401(K) Plan are defined contribution schemes, which provide a retirement benefit that is dependent upon actual contributions made by
the Group and members of the relevant scheme.
Accounting policy
Payments to defined contribution schemes are recognised as an expense when employees have rendered services that entitle them to the
contributions. 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.
For the defined benefit pension scheme, the cost of providing benefits is determined using the projected unit credit method, with actuarial
valuations being carried out at the end of each reporting period. Remeasurement of the obligation, comprising actuarial gains and losses, the
effect of the asset ceiling (if applicable) and the return on scheme assets (excluding interest), is recognised immediately in the balance sheet
with a charge or credit to the statement of comprehensive income in the period in which it occurs. Defined benefit costs, including current
service costs, past service costs and gains and losses on curtailments and settlements are recognised in the income statement as part of
operating and administrative expenses in the period in which they occur. The net interest expense is recognised in finance costs.
Significant estimation uncertainty
Measurement of the defined benefit obligation using the projected unit credit method involves the use of 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 measuring 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.
The assumptions applied in 2017 have been prepared on a consistent basis with those in the previous period and in accordance with
independent actuarial advice received.
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6.3 RETIREMENT BENEFIT OBLIGATIONS CONTINUED
Defined contribution schemes
The Group operates four defined contribution schemes, the Drax Group Personal Pension Plan, Haven Power Personal Pension Plan, Opus
Energy Group Personal Pension Plan and Drax Biomass Inc. 401(K) Plan, for all qualifying employees. Pension costs for the defined
contribution schemes are as follows:
Total included in staff costs (note 6.1)
Years ended 31 December
2017
£m
8.1
2016
£m
5.6
As at 31 December 2017, contributions of £nil (2016: £0.5 million) due in respect of the current reporting period had not been paid over to the
schemes. The Group has no further payment obligations once the contributions have been paid.
Defined benefit scheme
The DPG section of the ESPS was closed to new members as from 1 January 2002 unless they qualify through being existing members of
another part of the ESPS. Members who joined before this date continue to build up pension benefits as part of the scheme.
The DPG ESPS exposes the Group to actuarial and other risks, the most significant of which are considered to be:
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 scheme holds a significant proportion of growth assets
(equities, property and direct lending) 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 scheme’s long-term objectives.
Discount rate risk
A decrease in corporate bond yields will increase the value placed upon the scheme’s liabilities, although this will be
partially offset by an increase in the value of the scheme’s bond holdings.
Longevity risk
Inflation risk
The majority of the scheme’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 scheme’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 by or only loosely correlated
with inflation, such that 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 (such as the Government increasing the burden
on pension schemes through new legislation) and other demographic risks (such as making a higher proportion of members with dependants
eligible to receive pensions from the Group). The Trustees insure certain benefits payable on death before retirement.
A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (GMP). See note 7.5 for details.
The most recent funding valuation of the DPG ESPS was carried out by Aon Hewitt, a qualified independent actuary, as at 31 March 2016.
The actuarial review at 31 December 2017 is based on the same membership and other data as this funding valuation. The scheme board
accepted the advice of the actuary and approved the use of these assumptions for the purpose of assessing the scheme cost. Future
valuations are required by law at intervals of no more than three years.
The results of the latest funding valuation at 31 March 2016 have been adjusted to the balance sheet date, taking into account experience
over the period since 31 March 2016, changes in market conditions and differences in financial and demographic assumptions. The present
value of the defined benefit obligation, and the related current service costs were measured using the projected unit credit method. The
principal assumptions used, which reflect the nature and term of the scheme liabilities, are as follows:
Discount rate
Inflation (RPI)
Rate of increase in pensions in payment and deferred pensions
Rate of increase in pensionable salaries
As at 31 December
2017
% p.a.
2.6
3.2
3.0
3.8
2016
% p.a.
2.8
3.2
3.1
3.8
Mortality assumptions are based on recent actual mortality experience of scheme members and allow for expected future improvements
in mortality rates. The assumptions are that a member aged 60 in 2017 will live, on average, for a further 26 years if they are male
(2016: 27 years) and for a further 29 years if they are female (2016: 29 years). Life expectancy at age 60 for male and female non-pensioners
currently aged 45 is assumed to be 27 and 30 years respectively (2016: 28 and 31 years respectively).
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SECTION 6: OUR PEOPLE
6.3 RETIREMENT BENEFIT OBLIGATIONS CONTINUED
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
As at 31 December
2017
£m
306.5
2016
£m
311.4
(305.3)
(281.3)
1.2
30.1
The amounts recognised in the income statement, within other operating and administrative expenses and finance costs, are as follows:
Included in staff costs (note 6.1):
Current service cost
Included in finance costs (note 2.5):
Interest on net defined benefit liability
Total amounts recognised in the income statement
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 gains/(losses) on defined benefit pension scheme recognised in the year
Cumulative losses recognised in the statement of comprehensive income at 31 December
Changes in the present value of the defined benefit obligation are as follows:
Defined benefit obligation at 1 January
Current service cost
Employee contributions
Interest cost
Actuarial (gains)/losses
Benefits paid
Defined benefit obligation at 31 December
Years ended 31 December
2017
£m
7.3
0.5
7.8
2016
£m
6.0
0.9
6.9
Years ended 31 December
2017
£m
(79.2)
21.4
(57.8)
2016
£m
(70.8)
(8.4)
(79.2)
Years ended 31 December
2017
£m
2016
£m
311.4
244.6
7.3
0.1
8.5
(4.8)
(16.0)
306.5
6.0
0.2
9.4
58.8
(7.6)
311.4
The actuarial gains of £4.8 million (2016: £58.8 million losses) reflect losses of £4.5 million arising from changes in financial assumptions
(2016: losses of £71.4 million), offset by £5.5 million gains arising from changes in demographic assumptions and gains arising from scheme
experience of £3.8 million (2016: gains of £1.9 million and £10.7 million respectively).
The losses due to changes in financial assumptions principally reflect the increase in the present value of the scheme liabilities arising as a
result of the change in discount rate assumption to 2.60% (2016: 2.75%) following reductions in corporate bond yields.
Drax Group plc Annual report and accounts 2017
159
6.3 RETIREMENT BENEFIT OBLIGATIONS CONTINUED
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
Employer contributions
Employee contributions
Benefits paid
Fair value of plan assets at 31 December
Employer contributions included payments totalling £7.5 million (2016: £8.3 million) to reduce the actuarial deficit.
The actual return on plan assets in the period was £24.5 million (2016: £58.9 million).
The fair values of the major categories of plan assets were as follows:
Gilts
Equities(1)
Fixed interest bonds(2)
Property
Cash and other assets(3)
Fair value of total plan assets
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Years ended 31 December
2017
£m
281.3
8.0
16.6
15.3
0.1
(16.0)
305.3
2016
£m
215.1
8.5
50.4
14.7
0.2
(7.6)
281.3
As at 31 December
2017
£m
2016
£m
104.1
105.9
76.6
71.6
32.2
20.8
65.2
61.3
29.5
19.4
305.3
281.3
Notes:
(1) At 31 December 2017 the scheme’s long-term asset strategy was: global equity (20%), direct lending (10%), emerging market equity (5%), fixed interest bonds (15%), corporate bonds (6%), liability driven
investing (29%) and long lease property (15%)
(2) Fixed interest bonds include a mixture of corporate, Government and absolute return bonds. Approximately 10% of the bonds have a sub-investment grade credit rating (i.e. BB+ or lower)
(3) Other assets include £19.0 million of investments in direct lending, a type of private equity vehicle, which is not quoted in an active market (2016: £17.9 million)
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 relative to the actual
asset allocation for the scheme.
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 2017 to changes in these assumptions:
Discount rate
– Increase
– Decrease
Inflation rate(1)
– Increase
– Decrease
Life expectancy
– Increase
– Decrease
(Decrease)/
increase in
net liability
£m
(15.6)
16.3
13.7
(13.2)
10.9
(10.9)
%
0.25
0.25
0.25
0.25
1 year
1 year
Note:
(1) The sensitivity of the scheme liabilities to salary and pension increases is closely correlated with inflation
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.
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Drax Group plc Annual report and accounts 2017
SECTION 6: OUR PEOPLE
6.3 RETIREMENT BENEFIT OBLIGATIONS CONTINUED
Defined benefit obligation
Fair value of plan assets
Deficit
Experience adjustments on plan liabilities
Experience adjustments on plan assets
As at 31 December
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
(306.5)
(311.4)
(244.6)
(242.1)
(220.9)
305.3
(1.2)
3.8
16.6
281.3
(30.1)
10.7
50.4
215.1
(29.5)
1.7
(4.6)
207.8
(34.3)
1.6
13.6
179.2
(41.7)
8.7
9.4
The defined benefit obligation includes benefits for current employees of the Group (60%), former employees of the Group who are yet to
retire (5%) and retired pensioners (35%). The weighted-average period over which benefit payments are expected to be made, or the duration
of the scheme liabilities, was assessed at the 31 March 2016 funding valuation to be 21 years.
Future contributions
The Group expects to make regular contributions, in respect of service costs, of £10.8 million to the defined benefit pension plan during the
12 months ended 31 December 2018.
In addition to regular contributions, deficit contributions have been agreed with the Trustees based upon the Technical Provisions as at the
31 March 2016 valuation. The Technical Provisions indicate a deficit of £64 million including an estimate of the impact of future service costs,
which do not meet the definition of a liability at 31 December 2017 for inclusion in the financial statements. This valuation has not changed
materially between the 31 March 2016 valuation date and 31 December 2017.
The Group has agreed to make additional contributions over the period to 31 December 2025 to eliminate the deficit. At this point the
scheme is expected to be self-sufficient, unless material adverse changes in economic conditions arise compared to those assumed in the
valuation. The Group is confident that the additional contributions are manageable within the Group's business plan. The terms of the Trust
Deed allow the Group to recover any surplus once the liabilities of the scheme have been settled, accordingly the deficit contributions will
not give rise to an unrecognised surplus.
SECTION 7
Risk management
Drax Group plc Annual report and accounts 2017
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This section provides disclosures around financial risk management, including the financial instruments we use to mitigate such risks.
7.1 FINANCIAL RISK MANAGEMENT
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 explained in principal risks and uncertainties (page 51) which identify, evaluate and hedge financial risks in close coordination
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
wood fibre and pellets 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, 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:
– loss after tax for the year ended 31 December 2017 would decrease/increase by £1.5 million (2016: profit after tax would increase/decrease
by £3.4 million). This is mainly attributable to the Group’s exposure to oil derivatives; and
– the hedge reserve would increase/decrease by £5.6 million (2016: increase/decrease by £36.3 million) mainly as a result of the changes in
the fair value of financial coal and power derivatives.
Interest rate risk
The Group is exposed to interest rate risk, principally in relation to its net debt to the extent arising from floating rate debt instruments.
Historically, the Group 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 provided 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 the 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 loss after tax and net assets for the year
ended 31 December 2017 would decrease/increase by £2.2 million (2016: profit after tax would decrease/increase by £1.8 million) as a result
of the changes in interest payable during the period.
Foreign currency risk
Forward foreign currency exchange contracts are entered into principally in order to hedge purchases of fuel for use in the Power
Generation business. These purchases are typically denominated in US Dollars, Canadian Dollars or Euros.
Exchange rate exposures are managed within approved policy parameters utilising a variety of foreign currency exchange contracts. The
Group enters into both forward currency purchase and currency option contracts to manage its anticipated foreign currency requirements
over a rolling five-year period for both contracted and forecast transactions.
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SECTION 7: RISK MANAGEMENT
7.1 FINANCIAL RISK MANAGEMENT CONTINUED
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:
– loss after tax for the year ended 31 December 2017 would increase/decrease by £351.1 million/£285.5 million (2016: profit after tax would
decrease/increase by £252.6 million/£277.7 million). This is mainly attributable to the Group’s exposure to foreign currency exchange
contracts entered in relation to fuel purchase contracts; and
– other equity reserves would decrease/increase by £111.1 million/£122.8 million (2016: decrease/increase by £78.7 million/£87 million) as a
result of the changes in the fair value of 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 loan, gross value
Revolving credit facilities, gross value
Loan notes, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
Term loans, gross value
Finance lease liabilities, carrying value
Borrowings, contractual maturity
Trade and other payables
As at 31 December 2017
Within
3 months
£m
3 months–
1 year
£m
–
18.7
2.2
–
20.9
525.2
546.1
1.6
–
21.9
0.1
23.6
204.8
228.4
>1 year
£m
41.7
–
637.2
0.8
679.7
6.5
Total
£m
43.3
18.7
661.3
0.9
724.3
736.5
686.3
1,460.8
As at 31 December 2016
Within
3 months
£m
3 months–
1 year
£m
3.0
0.1
3.1
400.1
403.2
46.7
0.1
46.8
181.7
228.5
>1 year
£m
326.7
1.0
327.7
10.1
337.8
Total
£m
376.4
1.2
377.6
591.9
969.5
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 4.38% (2016: 4.17%).
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.
As at 31 December 2017
Commodity contracts, net
Forward foreign currency exchange contracts, net
Commodity contracts, net
Forward foreign currency exchange contracts, net
Within
1 year
£m
161.9
1–2 years
£m
69.4
>2 years
£m
Total
£m
16.6
247.9
1,104.0
1,173.9
2,331.0
4,608.8
1,265.9
1,243.3
2,347.6
4,856.7
Within
1 year
£m
78.7
903.5
982.2
As at 31 December 2016
1–2 years
£m
(25.1)
870.9
845.8
>2 years
£m
(14.2)
Total
£m
39.4
1,696.5
3,470.9
1,682.3
3,510.3
Drax Group plc Annual report and accounts 2017
163
7.1 FINANCIAL RISK MANAGEMENT CONTINUED
In managing liquidity risk, the Group has access to facilities that enable it to accelerate the cash flows associated with certain of its
receivables (principally those related to ROC sales and retail power sales). Each of these facilities is provided on a non-recourse basis and
accordingly receivables sold under each facility are derecognised from the balance sheet at the point of sale. The impact on the Group’s cash
flows is detailed in note 4.4.
Counterparty risk
As the Group relies on third party suppliers for the delivery of currency, coal, sustainable compressed wood pellets and other goods and
services, it is exposed to the risk of non-performance by these third party suppliers. If a large supplier were to fall into financial difficulty and/
or fail to deliver against its contract with the Group, there would be additional costs associated with securing the lost goods or services from
other suppliers.
The Group enters into contracts for the sale of electricity to a number of counterparties. The failure of one or more of these counterparties
to perform their contractual obligations may cause the Group financial distress or increase the risk profile of the Group.
Credit risk
The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised
below:
Financial assets:
Cash and cash equivalents
Trade and other receivables
Other fixed asset investments
Derivative financial instruments
As at 31 December
2017
£m
2016
£m
222.3
409.2
1.3
366.2
999.0
228.4
296.9
–
891.3
1,416.6
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Trade and other receivables are stated gross of the provision for doubtful debts of £28.2 million (2016: £4.0 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 historically purchased credit default swaps.
The investment of surplus cash is undertaken to maximise the return within Board-approved policies. These policies manage credit risk
exposure by setting out minimum rating requirements, maximum investment with any one counterparty and the maturity profile.
Capital management
The Group manages its capital to ensure it is able to continue as a going concern, and maintain its credit rating while maximising the return
to shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of shareholders’ equity
(excluding the hedge reserve), plus net debt. Net debt is comprised of borrowings disclosed in note 4.3 and cash and cash equivalents in
note 4.2.
Borrowings
Cash and cash equivalents
Net debt
Total shareholders’ equity, excluding hedge reserve
As at 31 December
2017
£m
2016
£m
589.7
321.9
(222.3)
(228.4)
367.4
93.5
1,594.1
1,739.8
164
Drax Group plc Annual report and accounts 2017
SECTION 7: RISK MANAGEMENT
7.2 DERIVATIVE FINANCIAL INSTRUMENTS
We enter into forward contracts for the purchase and sale of physical commodities (principally power, gas, coal, sustainable biomass and CO2
emissions allowances) to secure market level bark and dark green spreads on future electricity sales, and also financial forward and option
contracts (principally currency exchange contracts and financial coal and oil derivatives) to fix Sterling cash flows.
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 7.1).
A successful commercial hedging strategy is critical to our business model. Our policy is to fix 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. As at 31 December 2017, due to the strengthening of Sterling against the
US Dollar, the fair value of our forward derivative contracts, consisting largely of forward contracts for the purchase of foreign currencies
(principally for the purpose of fixing the Sterling cost of sustainable compressed wood pellet purchases), decreased to £160.0 million
(2016: £527.8 million). The strengthening in Sterling during 2017 partially reversed the significant mark to market gains posted during 2016
as its value fell following the Brexit vote.
Accounting policy
At the balance sheet date all contracts (subject to certain exemptions described below) must be measured at fair value, which is in essence
the difference between the price we have secured in the contract, and the price we could achieve in the market at that point in time.
Changes in fair value are recognised either within the income statement or the hedge reserve, dependent upon whether the contract in
question qualifies as an effective hedge under IFRS (see note 7.4).
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, gas, financial oil, financial coal, CO2 emissions allowances and
forward foreign currency exchange contracts – are accounted for as derivatives in accordance with IAS 39 and are recorded in the balance
sheet at fair value, with changes in fair value reflected through the hedge reserve (note 7.4) 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. The Group
enters into forward contracts solely for the purpose of financial risk management and considers all of its contracts to be economic hedges,
regardless of whether the specific criteria for hedge accounting are 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.
The location in the consolidated financial statements of the changes in fair value of derivative contracts in 2017 is summarised in the table
below:
Accounting for derivative contracts
Commodity contracts
Power
Coal from international sources
Coal from domestic sources
Biomass
CO2 emissions allowances
Gas
Financial contracts
Foreign currency exchange contracts
Financial coal
Financial oil and other financial products
Total net losses in hedge reserve
Total net losses in income statement
Gains/(losses)
on contracts
in 2017
£m
Gains/(losses)
on contracts
in 2016
£m
Accounting treatment for gains/
(losses) in the consolidated
financial statements
3.8
(0.8)
n/a
n/a
11.0
0.1
(88.6)
Hedge reserve
5.6
n/a
n/a
(2.7)
Income statement
Own-use exemption
Own-use exemption
Hedge reserve
(76.5)
Income statement
(234.6)
(225.6)
241.9
384.1
Income statement
Hedge reserve
12.9
1.5
66.3
(209.3)
(156.1)
(13.7)
Income statement
Hedge reserve
Income statement
37.3
19.5
330.1
176.8
Drax Group plc Annual report and accounts 2017
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7.2 DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED
Significant estimation uncertainty
The fair values of derivative instruments for commodities and foreign currency exchange contracts 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.
Fair value accounting
Forward contracts for the sale of power, purchase of coal from international sources, purchase of CO2 emissions allowances, financial coal,
financial oil, gas (collectively “Commodity contracts”) and foreign currency exchange contracts are recorded in the balance sheet at fair
value as follows:
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
As at 31 December 2017
As at 31 December 2016
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
60.5
8.4
0.5
115.0
85.5
96.3
(79.3)
(14.4)
(1.1)
(30.3)
(20.0)
(58.7)
366.2
(203.8)
91.1
9.8
1.9
313.9
185.8
288.8
891.3
(8.9)
(181.8)
190.7
175.5
15.5
78.7
(94.2)
(109.6)
(11.7)
(474.6)
486.3
405.0
(164.0)
(51.7)
(7.5)
(87.0)
(26.0)
(27.3)
(363.5)
59.2
53.3
(112.5)
(251.0)
The total reduction in the fair value of these contracts of £365.4 million (2016: £506.9 million gain) is recognised in the income statement or
the hedge reserve, dependent upon whether the hedge accounting requirements of IAS 39 are met, as follows:
Unrealised (losses)/gains on derivative contracts recognised in arriving at operating profit
Unrealised (losses)/gains on derivative contracts recognised in the hedge reserve (note 7.4)
Total unrealised (losses)/gains on derivative contracts
Years ended 31 December
2017
£m
(156.1)
(209.3)
2016
£m
176.8
330.1
(365.4)
506.9
We maintain a substantial foreign currency hedging programme to secure the Sterling cost of future purchases of fuel in foreign currencies.
The vast majority of our fuel purchases, and therefore our currency exchange contracts, are denominated in US Dollars. As noted on
page 164, the unrealised losses reflect the strengthening of Sterling against the US Dollar in the year.
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Drax Group plc Annual report and accounts 2017
SECTION 7: RISK MANAGEMENT
7.2 DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED
A material proportion of these contracts are not designated in hedge accounting relationships under IAS 39 and thus the gains on these
contracts were recognised in the income statement.
Unrealised losses recognised in the hedge reserve principally reflect losses on the portion of our forward currency exchange contracts that
are designated in effective hedge relationships in accordance with IAS 39.
Fair value measurement
– Commodity contracts fair value – The fair value of open commodity contracts that do not qualify for 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.
– 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.
– Other financial contracts fair value – The fair value of other financial contracts that do not qualify for 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 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.
We are required by IFRS to categorise our financial instruments in accordance with the following hierarchy in order to explain the basis on
which their fair values have been determined:
– 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).
Categorisation within this 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.
The fair value of commodity contracts, forward foreign currency exchange contracts and the contingent consideration in the Open Cycle
Gas Turbine sites acquisition (see note 3.6) are 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.
7.3 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.
Accounting policy
Cash and cash equivalents (note 4.2), trade and other receivables (note 3.5), and trade and other payables (note 3.6) generally have a short
time in which to mature. For this reason their carrying values, on the historical cost basis, approximate to their fair value. The Group’s
borrowings are set out in detail in note 4.3.
Drax Group plc Annual report and accounts 2017
167
7.4 HEDGE RESERVE
Changes in the fair value of our derivative commodity, financial and currency contracts are recognised in the hedge reserve, 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.
As described in note 7.2, 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.
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
Gains/(losses) recognised:
– Commodity contracts
– Forward foreign currency exchange contracts
Released from equity:
– Commodity contracts
– Forward foreign currency exchange contracts
Related deferred tax, net (note 2.6)
At 31 December
Years ended 31 December
2017
£m
305.4
2016
£m
34.9
1.5
(18.3)
(161.9)
397.3
14.8
(73.6)
39.9
126.1
(35.7)
(13.2)
(59.6)
305.4
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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 currency contracts, this is when the associated foreign currency transaction is recognised. Further
information about the Group’s accounting for financial instruments is included in note 7.2.
No ineffectiveness was recognised in the income statement in the year (2016: £6.4 million).
The expected release profile from equity of post-tax hedging gains and losses is as follows:
Commodity contracts
Forward foreign currency exchange contracts
Commodity contracts
Forward foreign currency exchange contracts
Within
1 year
£m
2.3
40.0
42.3
Within
1 year
£m
(12.8)
42.8
30.0
As at 31 December 2017
1–2 years
£m
>2 years
£m
(1.7)
39.9
38.2
–
45.6
45.6
As at 31 December 2016
1–2 years
£m
(0.6)
69.0
68.4
>2 years
£m
0.1
206.9
207.0
Total
£m
0.6
125.5
126.1
Total
£m
(13.3)
318.7
305.4
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Drax Group plc Annual report and accounts 2017
SECTION 7: RISK MANAGEMENT
7.5 CONTINGENT LIABILITIES
Contingent liabilities are potential future outflows of cash that are dependent on a future event that is outside of our control. The amount
and timing of any payment is uncertain and cannot be measured reliably.
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 6.3). 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.
Guarantees
In addition to the amount drawn down against the bank loans, certain members of the Group guarantee the obligations of a number of banks
in respect of letters of credit issued by those banks to counterparties of the Group. As at 31 December 2017, the Group’s contingent liability in
respect of letters of credit issued under the revolving credit facility amounted to £35.7 million (2016: £57.9 million).
The Group also guarantees obligations in the form of surety bonds with a number of insurers amounting to £41.3 million (2016: £nil).
7.6 COMMITMENTS
We have a number of financial commitments (i.e. a contractual requirement to make a cash payment in the future) that are not recorded in
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.
Contracts placed for future capital expenditure not provided in the financial statements
Future support contracts not provided in the financial statements
Future commitments to purchase fuel under fixed and variable priced contracts
The contractual maturities of the future commitments to purchase fuel are as follows:
Within one year
Within two to five years
After five years
As at 31 December
2017
£m
11.6
6.5
2016
£m
33.0
5.9
5,803.5
5,194.4
As at 31 December
2017
£m
2016
£m
1,054.2
873.7
2,885.5
2,773.0
1,863.8
1,547.7
5,803.5
5,194.4
Commitments to purchase fuel reflect long-term forward purchase contracts with a variety of international suppliers, primarily for the
delivery of sustainable wood pellets for use in electricity production at Drax Power Station over the period from 2018–2027. To the extent
these contracts relate to the purchase of wood pellets, they are not reflected elsewhere in our financial statements owing to application of
the “own-use” exemption from fair value accounting to such contracts (see note 7.2).
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
The lease commitments principally comprise of a number of leases for office space.
As at 31 December
2017
£m
8.9
25.5
9.1
43.5
2016
£m
3.7
10.8
5.2
19.7
SECTION 8
Reference information
Drax Group plc Annual report and accounts 2017
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This section details reference information relevant to the accounts. Here we describe the general information about the Group
(e.g. operations and registered office). We also set out the basis of preparation of the accounts and general accounting policies that are not
specific to any one note.
8.1 GENERAL INFORMATION
Drax Group plc (the Company) is incorporated in England and Wales under the Companies Act. The Company and its subsidiaries (together,
the Group) have three principal activities:
– electricity generation;
– electricity supply to business customers; and
– manufacturing of sustainable compressed wood pellets for use in electricity production.
The Group’s activities are principally based within the UK, with the wood pellet manufacturing activities situated in the US.
The address of the Company’s registered office and principal establishment is Drax Power Station, Selby, North Yorkshire, YO8 8PH, United
Kingdom. A full list of operating companies of the Group is disclosed in note 5 to the Company’s separate financial statements, which follow
these consolidated financial statements.
8.2 BASIS OF PREPARATION
Adoption of new and revised accounting standards
A number of new and amended standards became effective for the first time in 2017. The Group adopted the following from 1 January 2017:
IAS 12 (amended) – Income Taxes – effective for annual reporting periods beginning on or after 1 January 2017.
IAS 7 (amended) – Statement of Cash Flows – effective for annual periods beginning on or after 1 January 2017.
The adoption of these updates and amendments has not had a material impact on the financial statements of the Group.
At the date of authorisation of these financial statements, the following new or amended 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
– marked by *):
IFRS 2 – Classification and Measurement of Share-based Payment Transactions – effective for annual periods beginning on or after
1 January 2018.
IFRS 9 – Financial Instruments – effective for annual reporting periods beginning on or after 1 January 2018.
IFRS 15 (including clarifications issued on 12 April 2016) – Revenue from Contracts with Customers – effective for annual reporting periods
beginning on or after 1 January 2018.
IAS 40 (amended) – Investment Property – effective for annual reporting periods beginning on or after 1 January 2018.*
IFRIC 22 – Foreign Currency Transactions and Advance Consideration – effective for annual reporting periods beginning on or after
1 January 2018.*
IFRIC 23 – Uncertainty over Income Tax Treatments – effective for annual reports beginning on or after 1 January 2019.*
IFRS 16 (amended) – Leases – effective for annual reporting periods beginning on or after 1 January 2019.
IFRS 10 (amended) – Consolidated Financial Statements and IAS 28 (amended) – Investments in Associates and Joint Ventures (2011) –
effective date deferred indefinitely.*
Adoption of the other standards in future periods is not expected to have a material impact on the financial statements of the Group, other
than the three standards noted below.
IFRS 9 – Financial Instruments
The Group adopted IFRS 9 with effect from 1 January 2018. IFRS 9 addresses the classification, measurement and derecognition of financial
assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets, replacing the
previous requirements of IAS 39.
The Group's current accounting for financial instruments is set out in further detail in note 7.2.
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SECTION 8: REFERENCE INFORMATION
8.2 BASIS OF PREPARATION CONTINUED
The Group does not expect the new requirements to have a significant impact on the classification and measurement of its financial assets
or financial liabilities.
The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk management
practices. The Group's existing hedge relationships will continue to qualify as hedges. No new hedge relationships have been designated as
at 1 January 2018; however, we anticipate opportunities to designate additional contracts into hedge relationships in future, potentially
reducing income statement volatility from fair value movements on such contracts.
IFRS 9 allows a policy choice to designate the fair value movements relating to forward basis points and the time value of money of options
as a "cost of hedging" and recognise these movements as a component of other comprehensive income (OCI). The Group intends to adopt
this policy. Currently these values are recognised in the unrealised gains/losses on derivative contracts line in the income statement. Had
this policy been in place during the year ended 31 December 2017, the impact would have been to reduce the loss before tax by approximately
£32 million and the loss after tax by approximately £26 million, with an identical post-tax expense recognised in other comprehensive
income. There is no impact on the balance sheet valuation of derivative contracts.
As unrealised gains and losses on derivative contracts are currently recognised in the income statement below EBITDA and are excluded
from underlying earnings (see note 2.7), the changes described above will have no impact on EBITDA or underlying earnings.
The new impairment model requires the measurement of impairment provisions to be based on expected credit losses, rather than incurred
credit losses as is the case under IAS 39. We expect this to impact the Group's calculation of impairment provisions in respect of trade
receivable balances. We estimate that such impairment provisions will increase modestly as a result (less than £1 million) with a one-off
corresponding reduction in EBITDA and underlying earnings in 2018.
The new standard also introduces additional disclosure requirements in respect of financial instruments. We anticipate an increase in the
level of financial instrument disclosure, particularly in the year ended 31 December 2018 following the adoption of the new standard.
IFRS 15 – Revenue from Customer Contracts
The Group has completed an impact assessment for the adoption of IFRS 15. The standard has been adopted from 1 January 2018.
IFRS 15 introduces a five-step model for determining the recognition and measurement of revenue, which is more in-depth and provides
additional guidance compared to the previous revenue standard. The Group's main sources of revenue and existing revenue recognition
policies are described in more detail in note 2.2.
Having assessed the Group's material contracts against the new model, a significant change to the quantum and timing of the recognition of
revenue and profits is considered unlikely. The review has included the sources of revenue referred to in note 2.2.
IFRS 15 introduces a number of areas of judgement into the revenue recognition process. In determining that no significant change is
anticipated, the most critical areas of judgement relate to the B2B Energy Supply businesses. Our assessment has considered the
identification of performance obligations within the customer contracts, the assessment of when each performance obligation is satisfied
and the treatment of variable consideration. In all three of these areas, the current policies have been assessed and we have concluded that
they are in line with the new requirements.
In the Group's other businesses, the significant contracts are not complex, being characterised by a single performance obligation that is
satisfied at a point in time with a fixed consideration. Therefore, we have concluded that there will be no impact on transition to IFRS 15.
IFRS 16 – Leases
IFRS 16 introduces a new model for accounting for leases. The principal change compared to the current standard is to bring leases
previously classified as operating leases onto the balance sheet, subject to exemptions and exceptions for short-term and low-value leases.
This will result in an increase in assets, lease liabilities, depreciation and finance charges, and a reduction in operating expenditure, when
compared to previous periods.
At 31 December 2017, the Group has non-cancellable operating lease commitments of £43.5 million (see note 7.6).
The Group intends to undertake a comprehensive review, prior to the effective date, to quantify the above effects. This review will also
consider whether certain contracts currently not classified as leases meet the definition of a lease under IFRS 16.
The Group intends to adopt IFRS 16 in the first period it becomes mandatory, which commences on 1 January 2019.
Drax Group plc Annual report and accounts 2017
171
8.3 RELATED PARTY TRANSACTIONS
A related party is either an individual or entity with control or significant influence over the Group, or a company that is linked to us by
investment (such as an associated company or joint venture). Our primary related parties are our key management personnel.
Remuneration of key management personnel
The remuneration of the directors and Executive Committee members, who are considered to be the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the
remuneration of individual directors, together with the directors’ interests in the share capital of Drax Group plc, is provided in the audited
part of the Remuneration Committee report.
Salaries and short-term benefits
Aggregate amounts receivable under share-based incentive schemes
Company contributions to money purchase pension schemes
Years ended 31 December
2017
£000
4,900
1,221
34
6,155
2016
£000
5,011
1,146
44
6,201
Amounts included in the table above reflect the remuneration of the 12 (2016: 10) members of the Board and Executive Committee as
described on pages 81–107, including those who have resigned during the year.
Amounts receivable under incentive schemes represents the expenses arising from share-based payments included in the consolidated
income statement, determined based on the fair value of the related awards at the date of grant (note 6.2), 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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172
Drax Group plc Annual report and accounts 2017
Company financial statements
COMPANY BALANCE SHEET
Fixed assets
Investment in subsidiaries
Current assets
Other debtors
Amounts due from other Group companies
Cash at bank and in hand
Current liabilities
Amounts due to other Group companies
Net current liabilities
Net assets
Capital and reserves
Called-up share capital
Capital redemption reserve
Share premium account
Profit and loss account
Total equity shareholders’ funds
The Company reported a profit for the financial year ended 31 December 2017 of £16,688k (2016: £12,064k).
These financial statements were approved by the Board of directors on 26 February 2018.
Signed on behalf of the Board of directors:
Will Gardiner
Chief Executive
26 February 2018
As at 31 December
2017
£000
2016
£000
Notes
5
712,955
706,894
18
771
1,565
2,354
–
6,300
668
6,968
(12,729)
(12,586)
(10,375)
(5,618)
702,580
701,276
6
46,989
46,951
1,502
1,502
424,325
424,244
229,764
228,579
702,580
701,276
Drax Group plc Annual report and accounts 2017
173
COMPANY STATEMENT OF CHANGES IN EQUITY
At 1 January 2016
Share capital issued (note 6)
Profit and total comprehensive income for the year
Credited to equity for share-based payments
Equity dividends paid (note 8)
At 1 January 2017
Share capital issued (note 6)
Profit and total comprehensive income for the year
Credited to equity for share-based payments
Equity dividends paid (note 8)
At 31 December 2017
Share capital
£000
Capital
redemption
reserve
£000
Share
premium
£000
Profit and loss
account
£000
Total
£000
46,936
1,502
424,201
222,343
694,982
15
–
–
–
–
–
–
–
43
–
–
–
–
58
12,064
12,064
5,152
5,152
(10,980)
(10,980)
46,951
1,502
424,244
228,579
701,276
38
–
–
–
–
–
–
–
81
–
–
–
–
119
16,688
16,688
6,061
6,061
(21,564)
(21,564)
46,989
1,502
424,325
229,764
702,580
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174
Drax Group plc Annual report and accounts 2017
Notes to the Company financial statements
1. BASIS OF PREPARATION
The separate financial statements of the Company are presented as required by the Companies Act 2006.
The Company meets the definition of a qualifying entity under Financial Reporting Standard 100 (FRS 100) issued by the Financial Reporting
Council (FRC).
The financial statements have been prepared in accordance with FRS 101 (incorporating the amendments to FRS 101 issued by the FRC in
July 2015 and July 2016 and the amendments to company law made by the Companies, Partnerships and Groups (Accounts and Reports)
Regulations 2015).
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to
presentation of a cash flow statement, financial instruments, share-based payments, capital risk management, standards not yet effective
and certain related party transactions. Where required, equivalent disclosures are given in the consolidated financial statements.
The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are
summarised below, and have been consistently applied to both years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Fixed asset investments
Fixed asset investments in subsidiaries are stated at cost less, where relevant, 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 amounts by which the proceeds from issuing shares exceeds the nominal value of
the shares issued 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.
3. CRITICAL ACCOUNTING JUDGEMENTS
(A) Critical judgements in applying the Company’s accounting policies
The critical accounting judgements, to the extent they apply to the Company, are consistent with those of the Group described on page 119.
(B) Impairment of fixed asset investments
Determining whether the Company’s investments in subsidiaries have been impaired requires estimates of the investment’s values in use.
The methodology for calculation of value in use is consistent with that of the Group, as described in note 2.4.
4. 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 27 February 2018. The profit attributable to the Company is
disclosed in the statement of changes in equity.
The Company received dividend income from its subsidiary undertakings totalling £19.9 million in 2017 (2016: £14.7 million).
The Company has no employees other than the directors, whose remuneration was paid by a subsidiary undertaking and a proportion was
recharged to the Company.
The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2017 was £20,500 (2016: £20,000).
5. FIXED ASSET INVESTMENTS
Carrying amount:
At 1 January
Capital contribution
At 31 December
Years ended 31 December
2017
£000
2016
£000
706,894
701,728
6,061
5,166
712,955
706,894
Drax Group plc Annual report and accounts 2017
175
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5. FIXED ASSET INVESTMENTS CONTINUED
Investments in subsidiary undertakings
The capital contribution relates 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 6.2 to the consolidated financial statements.
Full list of subsidiary undertakings
The table below lists the Company’s direct and indirect subsidiary undertakings as at 31 December 2017:
Country of incorporation
and registration
Type of share
Group
effective
shareholding
Name and nature of business
Drax Group plc
Ultimate parent (holding) company
England and Wales
Ordinary
Abergelli Power Limited
Power generation
England and Wales
Ordinary
Abbott Debt Recovery Limited
Debt recovery services
England and Wales
Ordinary
Amite BioEnergy LLC
Baton Rouge transit LLC
DBI O&M Company LLC
Trading company, fuel supply
Trading company, fuel supply
Non-trading company
Delaware, USA
Delaware, USA
Delaware, USA
Common
Common
Common
Donnington Energy Limited
Dormant
England and Wales
Ordinary
Drax Biomass Inc.
Wood pellet manufacturing
Delaware, USA
Common
England and Wales
Ordinary
Delaware, USA
Delaware, USA
Delaware, USA
Common
Common
Common
England and Wales
Ordinary
Drax Biomass Holdings Limited
Drax Biomass Holdings LLC
Dormant
Dormant
Drax Biomass International Holdings LLC
Holding company
Holding company
Holding company
Drax Biomass Transit LLC
Drax CCS Limited
Drax Corporate Limited
(formerly Drax Finance Limited)
Drax Corporate Developments Limited
(formerly Drax Biomass (Immingham)
Limited)
Drax Finco plc
Drax Fuel Supply Limited
Group-wide Corporate Services
England and Wales
Ordinary
100%
Development company
Finance company
Non-trading company
England and Wales
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
Drax GCo Limited
In liquidation
England and Wales
Limited by
Guarantee
Drax Generation Developments Limited
(formerly Drax Group Project Services
Limited)
Development company
England and Wales
Ordinary
Drax Generation (Selby) Limited
Non-trading company
England and Wales
Ordinary
Drax Group Holdings Limited
Holding company
England and Wales
Ordinary
Drax Innovation Limited
Development company
England and Wales
Ordinary
Drax Ouse
Drax Pension Trustees Limited
In liquidation
Dormant
England and Wales
Ordinary
England and Wales
Ordinary
Drax Power Limited
Trading company, power generation
England and Wales
Ordinary
Drax Retail Developments Limited
Development company
England and Wales
Ordinary
Holding company
England and Wales
Ordinary
100%
Drax Research and Innovation Holdco
Limited (formerly Drax Developments
Limited)
Drax Smart Generation Holdco Limited
(formerly Drax Group Services Limited)
Drax Holdings Limited
Drax Smart Sourcing Holdco Limited
(formerly Drax (International) Limited)
Holding company
Dormant
Holding company
Drax Smart Supply Holdco Limited
Holding company
Farmoor Energy Limited
Trading company, power retail
England and Wales
Ordinary
England and Wales
Ordinary
Cayman Islands
Ordinary
England and Wales
Ordinary
England and Wales
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
176
Drax Group plc Annual report and accounts 2017
NOTES TO THE COMPANY FINANCIAL STATEMENTS
5. FIXED ASSET INVESTMENTS CONTINUED
Country of incorporation
and registration
Type of share
Group
effective
shareholding
Name and nature of business
Haven Heat Limited
Haven Power Limited
Non-trading company
England and Wales
Ordinary
Trading company, power retail
England and Wales
Ordinary
Haven Power Nominees Limited
Non-trading company
England and Wales
Ordinary
Hirwaun Power Limited
Jefferson Transit LLC
LaSalle Bioenergy LLC
Millbrook Power Limited
Power generation
Dormant
Trading company, fuel supply
England and Wales
Ordinary
Delaware, USA
Delaware, USA
Common
Common
Power generation
England and Wales
Ordinary
Morehouse BioEnergy LLC
Trading company, fuel supply
Delaware, USA
Common
Progress Power Limited
Opus Energy Limited
Power generation
England and Wales
Ordinary
Trading company, power retail
England and Wales
Ordinary
Opus Energy Group Limited
Holding company, power retail
England and Wales
Ordinary
Opus Energy (Corporate) Limited
Trading company, power retail
England and Wales
Ordinary
Opus Gas Supply Limited
Trading company, power retail
England and Wales
Ordinary
Opus Energy Renewables Limited
Trading company, power retail
England and Wales
Ordinary
Pike Bioenergy LLC
Sunflower Energy Supply Limited
Tyler Bioenergy LLC
Dormant
Dormant
Dormant
Delaware, USA
Common
England and Wales
Ordinary
Delaware, USA
Common
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Drax Group plc directly holds 100% of the equity of Drax Group Holdings Limited. All other investments are held indirectly.
All subsidiary undertakings operate in their country of incorporation. All subsidiary undertakings incorporated in England and Wales have
their registered office at Drax Power Station, Selby, North Yorkshire, YO8 8PH. The registered office for Drax Holdings Limited is c/o
Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. The principal
business address for all subsidiaries incorporated in the USA is 5 Concourse Parkway, Suite 3100, Atlanta, GA 30328.
All subsidiary undertakings have 31 December year ends.
6. CALLED-UP SHARE CAPITAL
Authorised:
865,238,823 ordinary shares of 11 16⁄29 pence each
Issued and fully paid:
2017: 407,034,429 ordinary shares of 11 16⁄29 pence each
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
At 31 December
As at 31 December
2017
£000
2016
£000
99,950
99,950
46,989
46,989
46,951
46,951
Years ended 31 December
2017
(number)
2016
(number)
406,700,321
406,317,162
334,108
383,159
407,034,429
406,700,321
The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income. No shareholders
have waived their rights to dividends.
Issued under employee share schemes
On 21 December 2017, a total of 152,169 shares were issued on early vesting of the Group’s Bonus Matching Plan by two individuals who
had retired and discretion was used to exercise the shares. On 1 March 2017, 140,888 shares were issued in satisfaction of shares vesting in
accordance with the rules of the Group’s Bonus Matching Plan. Throughout January to December 2017 a total of 41,051 shares were issued
in satisfaction of options vesting in accordance with the rules of the Group’s Savings-Related Share Option Plan.
Drax Group plc Annual report and accounts 2017
177
7. DISTRIBUTABLE RESERVES
Note 8 sets out the proposed final dividend of £30 million in respect of 2017.
The Company considers its distributable reserves to be comprised of the profit and loss account with a total value of £229.8 million.
Accordingly, the Company considers itself to have sufficient distributable profits from which to pay the current year final dividend. Based on
a total dividend for 2017 of £50 million, the Company has sufficient distributable reserves to pay four years of dividend at the current level
without generating further distributable profits. In addition to its own reserves, the Company has access to the distributable reserves of its
subsidiary undertakings with which future dividend payments can be funded (see note 2.10 to the consolidated accounts for additional
information).
The Company is dependent upon its subsidiaries for the provision of cash with which to make dividend payments. As shown in note 4.2 to
the consolidated financial statements, the Group has sufficient cash resources with which to meet the proposed dividend.
8. DIVIDENDS
Amounts recognised as distributions to equity holders in the year
(based on the number of shares in issue at the record date):
Interim dividend for the year ended 31 December 2017 of 4.9 pence per share paid on 6 October 2017
(2016: 2.1 pence per share paid on 7 October 2016)
Final dividend for the year ended 31 December 2016 of 0.4 pence per share paid on 12 May 2017
(2016: 0.6 pence per share paid on 13 May 2016)
Years ended 31 December
2017
£m
2016
£m
20.0
1.6
21.6
8.6
2.4
11.0
At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment of
a final dividend for the year ended 31 December 2017 of 7.4 pence per share (equivalent to approximately £30 million) payable on or before
11 May 2018. The final dividend has not been included as a liability as at 31 December 2017.
9. 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 4.3 to the
consolidated financial statements), which is guaranteed and secured directly by each of the subsidiary undertakings of the Company that is
party to the security arrangement. The Company itself is not a guarantor of the Group’s debt.
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178
Drax Group plc Annual report and accounts 2017
SHAREHOLDER INFORMATION
KEY DATES FOR 2018
At the date of publication of this document, the following are the proposed key dates in the 2018 financial calendar:
Annual General Meeting
Ordinary shares marked ex-dividend
Record date for entitlement to the final dividend
Payment of final dividend
Financial half year end
Announcement of half year results
Financial year end
25 April
19 April
20 April
11 May
30 June
24 July
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.drax.com. During London 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 the fluctuations in the Drax Group plc share price during the course of 2017, and the graph provides
an indication of the trend of the share price throughout the year.
Closing price on
31 December 2016
377.9 pence
Low during the year
(6 December 2017)
256.4 pence
High during the year
(3 January 2017)
384.4 pence
Closing price on
31 December 2017
270.6 pence
400
300
200
100
0
1 January
2017
1 February
2017
1 March
2017
1 April
2017
1 May
2017
1 June
2017
1 July
2017
1 August
2017
1 September
2017
1 October
2017
1 November
2017
1 December
2017
31 December
2017
Note:
The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List
MARKET CAPITALISATION
The market capitalisation, based on the number of shares in issue and the closing price at 31 December 2017, was approximately £1,101 million
(2016: £1,536 million).
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 Drax.Enq@drax.com.
Drax Group plc Annual report and accounts 2017
179
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SHAREHOLDER INFORMATION
DRAX SHAREHOLDER QUERIES
The Company’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:
– transfer of shares;
– change of name or address;
– lost share certificates;
– lost or out-of-date dividend cheques;
– payment of dividends direct to a bank or building society account;
and
– death of a registered shareholder.
Equiniti can be contacted as follows:
– Call Equiniti on 0371 384 2030 from within the UK. Lines are open
from 8.30am to 5.30pm, Monday to Friday, excluding Bank
Holidays); or +44 121 415 7047 from outside the UK.
– 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.co.uk.
Once registered with Shareview you are able to:
– elect how Drax communicates with you;
– amend some of your personal details;
– amend the way you receive dividends; and
– 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 our website at www.drax.com/investors/faq.
TAX ON DIVIDENDS
In the 2015 Budget, the Chancellor announced changes in the way
that dividends would be taxed in the future. Below is a brief summary
of the guidance provided by HMRC. If you are in any doubt as to the
impact on your personal circumstances, you are recommended to
seek your own financial advice from a professional adviser
authorised under the Financial Services and Markets Act 2000.
The long-standing system of tax credits attached to dividends was
replaced with a new tax-free Dividend Allowance. This means that
there is no tax to pay on the first £5,000 of dividend income, no
matter what non-dividend income a shareholder may have.
Dividends paid on shares held within pensions and ISAs will be
unaffected, remaining tax-free.
Non-taxpayers and basic rate taxpayers who receive dividend
income between £5,001 and £10,000 will need to make a declaration
(to HMRC) for the first time. Individuals with dividend income of more
than £10,000 are already required to be in HMRC’s Self-Assessment
regime. The impact on Share Incentive Plan participants receiving
cash dividends on their plan shares align with those for Shareholders.
Further information and updates on tax on dividends can be found
on the HMRC website at www.gov.uk/tax-on-dividends/overview.
As the Dividend Tax Credit will no longer be required it is expected
that a dividend confirmation will still need to be sent to shareholders
to replace the old “tax voucher”. The Company is currently
considering whether to move to the practice of issuing just one
dividend confirmation document towards the end of the tax year,
irrespective of the number of cash payments made during the
course of the year, rather than issuing a document each time a
dividend is paid. Shareholders will be advised of the outcome in
due course.
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”).
180
Drax Group plc Annual report and accounts 2017
BEWARE OF SHARE FRAUD
Fraudsters 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:
– 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.
– Do not get into a conversation, note the name of the person and
firm contacting you and then end the call.
– Check the Financial Services Register from www.fca.org.uk to see
if the person and firm contacting you is authorised by the FCA.
– Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
– Use the firm’s contact details listed on the Register if you want to
call it back.
– 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.
– Search the list of unauthorised firms to avoid at
www.fca.org.uk/scams.
– 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.
– Think about getting independent financial and professional advice
before you hand over any money.
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.
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
David McCallum
ENQUIRY E-MAIL ADDRESS
Drax.Enq@drax.com
Drax Group plc Annual report and accounts 2017
181
COMPANY INFORMATION
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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
J.P. Morgan Cazenove
25 Bank Street, Canary Wharf, London E14 5JP
FINANCIAL PR
FTI Consulting LLP
200 Aldersgate, Aldersgate Street, London EC1A 4HD
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
One Bunhill Row, London EC1Y 8YY
182
Drax Group plc Annual report and accounts 2017
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, for example Black Start contracts. They are described in
Connection Condition 8 of the Grid Code.
AVAILABILITY
Average percentage of time the units were available for generation.
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.
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 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).
BARK SPREAD
The difference between the power price and the cost of biomass,
net of renewable support.
IFRSS
International Financial Reporting Standards.
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.
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, including CO2 allowances under the EU Emissions Trading
Scheme and the UK Carbon Price Support (CPS) Mechanism.
DEPARTMENT FOR BUSINESS, ENERGY AND INDUSTRIAL
STRATEGY (BEIS)
The Government department bringing together the responsibilities
for business, industrial strategy, science, innovation, energy and
climate change (formerly DECC).
LECS
Levy Exemption Certificates. Evidence of CCL exempt electricity
supplies generated from qualifying renewable sources.
LEVY CONTROL FRAMEWORK
A control framework for BEIS (formerly DECC) levy-funded spending
intended to make sure that BEIS 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 (LTIR)
The frequency rate is calculated on the following basis: lost time
injuries/hours worked x 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.
EBITDA
Profit before interest, tax, depreciation, amortisation and material
one-off items that do not reflect the underlying trading performance
of the business.
NET SALES
The aggregate of net volumes attributable to bilateral contracts,
power exchange trades and net balancing mechanism.
EU ETS
The EU Emissions Trading System is a mechanism introduced across
the EU to reduce emissions of CO2; the scheme is capable of being
extended to cover all greenhouse gas emissions.
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 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.
GLOSSARY
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 Renewable Obligation Certificate (“ROC”) is a certificate issued
to an accredited generator for electricity generated from eligible
renewable sources. The Renewable Obligation (RO) 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
coordination 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 + worse than first aid injuries)/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 losses on derivative contracts and material
one-off items that do not reflect the underlying performance of
the business.
WINTER
The calendar months October to March.
The DRAX report and accounts are printed on Revive 100 Offset – a Carbon
Balanced paper that has been produced from 100% post-consumer recycled
fibre (FSC® Recycled certified), and awarded the EU Eco label. The carbon
emissions associated with the paper’s production and distribution have been
offset through the World Land Trust’s Carbon Balanced Paper scheme.
WWW.DRAX.COMDrax Group plc Drax Power Station Selby North Yorkshire YO8 8PHT +44 (0)1757 618381