Enabling a zero carbon,
lower cost energy future
Drax Group plc Annual report and accounts 2019
Welcome to Drax Group
Our purpose is to
enable a zero carbon,
lower cost energy future.
Our ambition is to become carbon negative by 2030. Being carbon
negative means that we will be removing more carbon dioxide from
the atmosphere than we produce throughout our operations –
creating a negative carbon footprint for the company
Our strategic aims are:
To build a long-term
future for biomass
Building on our world class expertise,
we believe biomass can deliver carbon
negative dispatchable renewable energy.
To be the leading
provider of power
system stability
Through a portfolio of dispatchable
flexible assets and new technologies –
ours and our customers’ – we will support
the system and decarbonise through the
growth of intermittent renewable energy.
To give our customers
control of their energy
Through the provision of insight and
digitisation we provide control over
energy and access to markets to
optimise energy use and lower costs.
Front cover
Sapling at a tree nursery run by Drax
Biomass supplier, Weyerhaeuser,
Mississippi, USA, where tens of millions
of saplings are grown each year to be
planted in forests in the southern US.
See more online at
www.drax.com
Strategic report
Governance
Financial statements
Shareholder information
2019 Highlights
Adjusted revenue (1)
Adjusted gross profit (1)
£4,703m
(2018: £4,237m)
£867m
(2018: £601m)
Adjusted EBITDA(1)
Total revenue
£410m
(2018: £250m)
£4,713m
(2018: £4,229m)
Total gross profit
Total operating profit
£734m
(2018: £639m)
Net debt
£841m
(2018: £319m)
£62m
(2018: £60m)
Percentage of total UK renewable
electricity generated
12%
(2018: 12% )
Total recordable incident rate
Dividend per share
0.22
(2018: 0.22)
15.9p
(2018: 14.1p)
Customer meter points
Wood pellets produced
419k
(2018: 396k)
1,407kt
(2018: 1,351kt)
(1) We calculate Adjusted financial performance measures, which are specific to Drax and exclude income statement
volatility arising from derivative financial instruments and the impact of exceptional items, to provide additional
information about the Group’s performance. Adjusted financial performance measures are described more fully
on page 131, with a reconciliation to their statutory equivalents in note 2.7 to the consolidated financial statements
on page 149. Throughout this document we distinguish between Adjusted financial performance measures and
Total financial performance measures, which are calculated in accordance with International Financial Reporting
Standards (IFRS).
Contents
Strategic Report
01 2019 Highlights
02 Core activities at a glance
04 Business model
06 Chair’s statement
08 Group CEO’s review
14 Group financial review
20 Remuneration at a glance
22 Market context
24 Working with our stakeholders
30 Biomass cost reduction
32 System stability
33 Customers
34 Biomass sustainability
36 Building a sustainable business
52 Viability statement
54 Principal risks and uncertainties
Governance
62 Letter from the Chair
64 Board of Directors
66 Executive Committee
67 Corporate governance report
73 Nomination Committee report
78 Audit Committee report
86 Remuneration Committee report
115 Directors’ report
119 Directors’ responsibilities statement
120 Verification statement
Financial Statements
121 Independent auditor’s report to
the members of Drax Group plc
129 Financial statements
132 Financial statements contents
133 Consolidated financial statements
Consolidated income statement
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated statement of changes
in equity
Consolidated cash flow statement
138 Financial performance
152 Operating assets and working capital
163 Financing and capital structure
169 Other assets and liabilities
175 Our People
185 Risk management
203 Reference information
209 Company financial statements
Company balance sheet
Company statement of changes
in equity
210 Notes to the Company financial
statements
Shareholder Information
216 Shareholder information
219 Company information
220 Glossary
Drax Group plc Annual report and accounts 2019
1
Pellet Production
A leading producer of wood
pellets from sustainable low-value
commercial forestry residues
Our pellets provide a sustainable, low carbon fuel
source. This can be safely and efficiently delivered
through our global supply chain and used by Drax’s
Generation business to make flexible, renewable
electricity for the UK. Our manufacturing operations
also promote forest health by incentivising local
landowners to actively manage and reinvest in
their forests.
Our assets:
• 2 x 525 kt pellet plants
• 1 x 450 kt pellet plant
• 350 kt planned expansion of existing facilities, under
construction
• 2.4 Mt export facility at Baton Rouge port
Pellets produced
1,407kt
Sales of pellets
£229m
Core activities at a glance
We operate an integrated value chain
across three principal areas of activity:
sustainable wood pellet production;
flexible, low carbon and renewable
energy generation; and energy sales
and services to business customers.
Where we operate:
Pellet production sites
Customers
Drax Power Station
Options for Open-Cycle Gas Turbine (OCGT) projects
Options for Closed-Cycle Gas Turbine (CCGT) projects
Hydro and gas generation assets acquired in 2018
UK
US
2
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Find out more at
www.drax.com/about-us/
Generation
Customers
A portfolio of flexible,
low carbon and renewable
UK power generation
Our multi-site, multi-technology generation portfolio
provides power and system support services to the
electricity grid. This portfolio provides long-term
earnings stability and opportunities to optimise
returns from the transition to a low carbon economy.
Our assets:
• Renewable biomass – 2.6GW
• Hydro – 0.6GW
• Thermal:
– Gas – 2.0GW
– Coal – 1.3GW
A leading supplier of renewable
energy solutions to industrial
and business customers
Our B2B Energy Supply business – comprised
of Opus Energy and Haven Power – is the third
largest B2B power supplier in the UK and the largest
supplier of renewable energy to British businesses.
We are giving our customers control of their
energy, which in turn supports the stability
of the energy system.
Our assets:
• Opus Energy
• Haven Power
Generation
17.3TWh
Renewables
79%
Customer meters
Electricity and gas sales
419k
18.9TWh
Drax Group plc Annual report and accounts 2019
3
Business model
Our resources
Our purpose and aims
Financial
• Multi-site, multi-technology portfolio
of assets
• Growing proportion of non commodity-
related earnings
• Long-term debt, foreign exchange and
trading facilities
Manufactured
• Flexible, low carbon and renewable
power generation
• Pellet production capabilities
Human
• Diverse range of expertise, skills
and knowledge
• Strong health and safety culture
Intellectual
• World leaders in sustainable biomass
generation and logistics
• Innovation in Bioenergy Carbon Capture
and Storage (BECCS)
Natural
• Low-value, sustainable forestry residues
sourced from sustainably managed forests,
supporting forest health and growth
• Our hydro and pumped storage assets use
natural resources to produce electricity
Social
• Active community engagement
• Visitor centres at plant sites
• Employee volunteering
• Corporate charitable giving
Enabling a
zero carbon,
lower cost
energy future
1
To build a long-term future
for sustainable biomass
Building on our world class expertise, we believe
biomass can deliver carbon negative dispatchable
renewable energy
2
To be the leading provider of
power system stability in the UK
Through a portfolio of dispatchable flexible assets
and new technologies – ours and our customers’ –
we can support the system and decarbonise through
the growth of intermittent renewable energy
3
To give our customers
control of their energy
Through our insight and digitisation we provide
control over energy and access to markets to
optimise energy use and lower costs
Our essential enablers
Innovation
People
4
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Principal risks page 54
Working with our stakeholders
page 24
Outputs
Value creation
Group adjusted EBITDA
Average net debt
£410m
(2018: £250m)
£950m
(2018: N/A)
Financial
• High quality earnings
• Sustainable and growing dividend
• Strong balance sheet
Total recordable
incident rate
0.22
(2018: 0.22)
Fines (a measure of
wood pellet quality)
7.9%
(2018: 8.0%)
Value from flexibility
£129m
(2018: £79m)
Cost of
production
$9.08/GJ
(2018: $9.37/GJ)
Commercial
availability
88%
(2018: 89%)
Gross margin
(minus bad debt) for
Customers business
£116m
(2018: £112m)
Cost to serve customers
£208/MPAN
(2018: £206/MPAN)
Group Scorecard
outcomes page 105
Drax is a constituent of the
FTSE4Good Index Series
In 2019, Drax received a rating of
AA (on a scale of AAA-CCC) in the
MSCI ESG Ratings assessment*
Drax received a score of B in the
CDP Forests Programme and C in the
CDP Climate Change Programme
*www.drax.com/sustainability
Manufactured
• We generate 12% of the UK’s renewable power
• Drax is the fourth largest energy generator in the UK
• Drax is a leading hydroelectricity generator
Human
• Our Future Creators programme develops 22 high-
potential individuals to grow our leadership pipeline
Intellectual
• We are making progress in developing carbon capture
and storage technology which could make Drax the
world’s first carbon negative power station
Natural
• The carbon intensity of our electricity
generation reduced by over 85% from 2012 to 2019
• We announced our ambition to be carbon negative
by 2030
Social
• We contributed £290k in 2019 through community
partnerships, employee match funding, payroll giving,
our community fund and national fundraising days
• We monitor ethical matters and business conduct
risks of third parties with whom we do business
• We are a signatory to the Social Mobility Pledge
Reputation
Safety
Sustainability
Drax Group plc Annual report and accounts 2019
5
Chair’s statement
We continue to
advance our
purpose of enabling
a zero carbon, lower
cost energy future.”
Philip Cox CBE
Chair
Investment case
• Critical to decarbonisation
of the UK’s energy system
and a major source of
flexible, low carbon and
renewable power from
a nationwide portfolio of
generation technologies
• Underlying growth in
the core business and
attractive investment
opportunities
• Increasing earnings
visibility, reducing
commodity exposure
• Strong financial position
and clear capital
allocation plan
Introduction
Drax Group’s purpose is to enable a
zero carbon, lower cost energy future.
Since 2012 Drax has reduced its reported
carbon emissions by over 85%. In
December, we took a step further and
announced an ambition to become
carbon negative by 2030. With the
right support and negative emissions
framework from the UK Government,
we believe we can realise this ambition.
Through these activities we expect to
play a major role in delivering the UK’s
legally binding objective to become
carbon neutral by 2050.
The Group’s purpose informs our strategy
through which we aim to build a long-
term future for sustainable biomass,
become the leading provider of system
stability in the UK and give customers
control of their energy.
In 2019 we continued to make good
progress in delivering this strategy. In
doing so we are delivering higher quality
earnings, reducing commodity exposure
and creating opportunities for growth
aligned with the UK’s carbon neutral
agenda.
Biomass has a long-term role to play in
the UK and global energy markets as a
flexible and sustainable source of
renewable energy, as well as a means
to deliver negative emissions. Key to
securing this long-term role is reducing
the cost of biomass. We aim to increase
biomass self-supply to five million tonnes
by 2027, which we believe will drive
significant cost reduction and attractive
returns to shareholders. We have made
good progress in 2019 and will continue to
implement measures to reduce costs and
develop expansion opportunities in 2020.
The Group is working with a range of
partner organisations to outline a plan for
the decarbonisation of the Humber area.
This is an industrial area in the northeast
of England with one of the highest levels
of CO2 emissions, making it a natural
and cost-effective location for the
deployment of carbon capture and
storage, using Bioenergy with Carbon
Capture and Storage (BECCS) at Drax
Power Station. Through these initiatives
we hope to deliver long-term benefits to
a wide range of stakeholders and support
the UK’s transition to net zero.
This is one example of how our
engagement with stakeholders is an
enabler to the delivery of our strategy.
On pages 24 to 29 of the Annual Report,
we provide further detail on our
stakeholders and how members of the
Board, including Non-Executive Directors,
have participated in discussions and
sought to understand views in order
to inform decision making.
Drax Power Station is the UK’s largest
single source of renewable electricity,
providing 11% of the total. During 2019
the Generation business managed a
programme of major planned outages.
The business also optimised biomass
operations to reflect weather-related
6
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Corporate governance
page 62
biomass supply chain constraints. Over
the same period coal generation has
reduced, reflecting challenging market
conditions. Following a comprehensive
review of operations and discussions
with National Grid, Ofgem and the UK
Government, the Board of Drax has
determined to end commercial coal
generation at Drax Power Station. Drax
will shortly commence a consultation
process with employees and trade unions
with a view to ending coal operations in
September 2022. Under these proposals,
commercial generation from coal will end
in March 2021 but the two coal units will
remain available to meet Capacity Market
obligations until September 2022.
In December 2018 we completed the
acquisition of a portfolio of hydro and gas
generation assets from ScottishPower,
making Drax the fourth largest electricity
generator in the UK and a leading provider
of system support services. During 2019
we successfully integrated these assets
into our generation portfolio. The assets
have performed strongly, with returns
significantly ahead of the Group’s cost
of capital.
Following weather-restricted production
in the first quarter of 2019, our US Pellet
Production business produced at full
capacity. Our focus remains on the
production of good quality and low-cost
biomass. Although pellet quality improved
in 2019, it was below the level we expect
and we are focused on delivering further
improvements during 2020.
In our Customers business, which
supplies electricity and gas to business
customers, we made progress reducing
cost, increased the margin per MWh and
installed more smart meters year-on-year.
However, in a challenging market
financial performance was below the
level we expect and we have more work
to do to realise the opportunities we
continue to see in this area. During 2019
we consolidated the management team
at Haven Power and Opus Energy into a
single integrated team. We expect this
new structure to improve operational
efficiency.
Results and dividend
Adjusted EBITDA in 2019 of £410 million
grew by 64% compared to 2018 (£250
million). This reflects high levels of
renewable power generation from
sustainable biomass, a strong
performance from the hydro and gas
generation businesses, as well as
continued growth in our Pellet
Production business.
Andy is highly experienced, having
previously served as CFO at Fidessa
Group plc.
At the 2019 half year results we
confirmed an interim dividend of
£25 million (6.4 pence per share). The
Board proposes to pay a final dividend in
respect of 2019 of £38 million, equivalent
to 9.5 pence per share, making the full
year 2019 dividend £63 million (15.9 pence
per share) (2018: £56 million, 14.1 pence
per share). This represents a 13% increase
on 2018 and is consistent with our policy
to pay a dividend which is sustainable and
expected to grow as the strategy delivers
stable earnings, strong cash flows and
opportunities for growth.
The Group has a clear capital allocation
policy which it has applied throughout
2019. In determining the rate of growth
in dividends from one year to the next 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.
Governance and values
Sustainability is at the heart of the Group
and its culture. It covers the sustainable
sourcing of biomass, which is a core
principle of the Group, and also long-term
sustainability. This means achieving
a positive economic, social and
environmental impact and considering
long, medium and short-term factors
in our stewardship of the business.
We are committed to promoting the UN
Global Compact principles on respect
for human rights, labour rights, the
environment and anti-corruption.
We greatly value the contribution made by
our Non-Executive Directors and during a
time of growth their role remains especially
important. David Lindsell, Tony Thorne
and Tim Cobbold each stepped down, and
I would like to thank all three for their very
significant contributions to the Board
and the stewardship of the business.
John Baxter joined the Board in April 2019
and brings a wealth of industry,
engineering and safety management
expertise.
Our people
Our people – employees and contractors
– remain a key asset of the business and
we are focused on creating a diverse and
inclusive working environment that is
both safe and supportive.
We recognise the importance of listening
to employees to understand their concerns
and act on them. To that end, in 2019,
we established an enhanced programme
of workforce engagement to improve
communication and feedback between
the Board, senior management and our
workforce. Together with Will Gardiner,
our CEO, I participated in meetings with
the chairs of our newly established
engagement forums. More information
on this can be found on page 28.
Safety is a long-held and central
commitment of our operational
philosophy. While the number of incidents
is low, we need to remain vigilant and
work to reduce them. We are committed
to the highest standards and have
continued our efforts to strengthen our
approach to health, safety and wellbeing
governance across the Group.
Our aim is to maintain an open and
collaborative culture across the Group.
Setting the right standards helps to
protect the business and the interests of
our stakeholders. We remain committed
to the highest standards of corporate
governance, and the Board and its
committees play an active role in guiding
the Company and leading its strategy.
To conclude, in 2019 we delivered strong
financial performance and made good
progress with our strategic objectives. I
look forward to building on these in 2020.
Through this strategy we will deliver
sustainable long-term value, support the
communities in which we operate and
realise our purpose of enabling a zero
carbon, lower cost energy future.
In 2019 we saw several changes to the
Board, including the appointment of Andy
Skelton as Chief Financial Officer (CFO).
Philip Cox CBE
Chair
Drax Group plc Annual report and accounts 2019
7
Group CEO’s review
2019 highlights
• Strong growth in
Adjusted EBITDA
• Delivered ahead of
target net debt to
Adjusted EBITDA ratio,
after adjusting for
deferred cash receipt
of Capacity Market
payments
• Reduction in CO2
• Reduction in biomass
self-supply cost
• Strong system support
performance
• Completion of private
placement and ESG debt
facilities
• Development of
Bioenergy Carbon Capture
and Storage project
2019 was an important year for Drax
Group. Following the acquisition of the
hydro and gas generation assets from
ScottishPower in December 2018, we
are now the UK’s fourth largest generator,
meeting 5% of its power requirements,
and generating 12% of the country’s
renewable power.
In 2019, we continued to advance our
purpose of enabling a zero carbon, lower
cost energy future. In December 2019,
we announced a world first ambition
to become a carbon negative company
by 2030, removing more CO2 from the
atmosphere than we put into it. We have
made significant progress towards that
goal, as the carbon emissions from the
Group have reduced by over 85% since
2012. We now expect to take this a step
further with the end of commercial coal
generation in 2021 and the formal closure
of the coal units in 2022. For more
information on this please see page 118.
The safety and wellbeing of our
workforce is paramount to the Group.
We continue to invest in the systems,
governance and training to keep our
workforce and assets safe.
Total Recordable Incident Rate (TRIR),
a key scorecard measure of safety, was
0.22. This was the same as in 2018
although behind the challenging
scorecard target for 2019. Safety remains
our priority and as always there is more
we can do in our pursuit of zero incidents.
Alongside a good operational
performance, we delivered Adjusted
EBITDA of £410 million, an increase of
64% on 2018. We propose to pay a
dividend in respect of 2019 of £63 million,
an increase of 13% on 2018. By the end of
2019, net debt was £841 million, 1.9x net
debt to EBITDA, ahead of target of 2.0x,
after adjusting for deferred cash receipt
of Capacity Market payments of
£72 million, received in January 2020.
Purpose and Strategy
Drax’s purpose, to enable a zero carbon,
lower cost energy future, sits at the heart
of everything we do. We see growing
opportunities to create value for
shareholders as well as significant
benefits for all stakeholders as we
deliver that purpose.
2019 saw increasing global recognition
of the need for urgent action to tackle
climate change by reducing greenhouse
gas emissions. The UK Government has
taken a lead by putting in place legally
binding targets to deliver net zero carbon
emissions across the UK economy by
2050. This is an ambitious target which
can only be delivered with action and
investment now.
We are playing a key role in this
transformation. The CO2 emissions at Drax
Power Station were less than one million
tonnes for the first time, a 97% reduction
since 2012, and it is now the UK’s largest
source of renewable power generation.
8
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Our ambition is to
become a carbon
negative company
by 2030.”
Will Gardiner
Group CEO
This was achieved through our continued
focus on renewable biomass combined
with operational excellence and innovative
engineering.
While others target net zero, in December
2019, Drax became the first company
in the world to announce an ambition
to become carbon negative by 2030 –
removing CO2 from the atmosphere
using Bioenergy with Carbon Capture
and Storage (BECCS) to safely capture
and store CO2 at scale.
In May 2019 the UK Committee on
Climate Change published its pathway
for how the UK can deliver net zero
carbon emissions by 2050. It highlighted
the need for BECCS. Drax is in a leading
position to deliver BECCS at scale in
the UK and provide as much as a third
of the negative emissions the UK will
require. We believe we can deliver the
engineering solution, but our ambition
also requires the right regulatory
framework and policy support to
underpin an investment decision.
To support that process, in May 2019
we joined with National Grid and Equinor
to advocate for a framework to support
the development of a carbon cluster in
the Humber region, one of the most
carbon intensive areas of the UK. This
programme is called Zero Carbon Humber.
Group Financial Review
page 14
business by 2027, with the option to
service wood pellet demand in Europe,
North America and Asia.
Summary of 2019
Overall performance of the Group and
its business units is measured as part
of our Group Scorecard which covers a
combination of financial, environmental,
social and governance issues. The
Group’s score in 2019 was 0.9, with a
score of 1.0 being on target.
Adjusted EBITDA, a key financial KPI, of
£410 million represents a 64% increase on
2018. This includes £78 million of Capacity
Market income in respect of the whole of
2019 and the last two months of 2018.
Despite challenging weather conditions
in early 2019, Pellet Production increased
output across the full year from 1.35 million
tonnes to 1.40 million tonnes. At the same
time, the cost of producing and delivering
wood pellets to our port facility at Baton
Rouge reduced from $166/tonne in 2018
to $161/tonne in 2019, although challenges
remain in terms of pellet quality.
In Generation, the integration and
performance of the acquired assets
was a success. At Drax Power Station
we managed lower levels of biomass
availability, which restricted generation
in early 2019. By optimising biomass
generation under the Renewables
Obligation (RO) scheme we were able
to partially offset the constraint by
producing higher levels of biomass
generation later in the year, particularly
December, in which we reported record
monthly renewable generation. The
business also completed a programme
of major planned outages across the
portfolio.
In our Customers business, which
supplies electricity and gas to business
customers, we have made progress
reducing cost, however performance
elsewhere has been below our
expectation. This in part reflects a
challenging market and we have more
work to do to deliver the opportunities
we continue to see in this area.
The Group’s purpose informs the three
pillars of our strategy (i) to build a
long-term future for biomass, (ii) to be the
leading provider of power system stability
and (iii) to give our customers control of
their energy.
In 2019 we continued to make good
progress delivering our purpose and
strategy. Through addressing UK energy
needs, and those of our customers, our
strategy is designed to deliver excellent
long-term financial performance across
the Group. In doing so we are reducing
our historic exposure to commodity
markets and delivering higher quality
earnings, strong cash generation,
increased dividends to shareholders
and further opportunities for growth.
A good example of this is the successful
integration of a generation portfolio of
flexible, low-carbon and renewable hydro
and gas generation assets acquired in
December 2018. Our expanded asset base
has improved the risk profile of the Group
and provided more opportunities to deliver
system support services to the UK energy
market. Our expected EBITDA from these
assets was £90-£110 million and they
have delivered £114 million of high-quality
earnings, with financial returns
significantly ahead of the Group’s cost
of capital.
As part of our strategy to deliver a
long-term future for sustainable biomass,
in November 2019, we announced plans
to expand our supply chain to self-supply
five million tonnes of biomass to our
generation business by 2027. In 2019
we self-supplied 1.4 million tonnes. We
expect this expansion to be delivered
through existing sites, new developments
and a wider fuel envelope of sustainable
biomass. Through these initiatives we
expect to reduce the cost of biomass
from around £75/MWh to £50/MWh by
2027, assuming an exchange rate of
$1.45/£. This is a level at which we believe
renewable electricity from biomass can
be economic without the current support
mechanisms.
These activities, alongside the
development of a biomass trading
capability, could enable Drax to develop
an unsubsidised biomass generation
Drax Group plc Annual report and accounts 2019
9
Group CEO’s review continued
During the year we completed the
refinancing of the funding used to
acquire the hydro and gas generation
assets. These new facilities extend the
Group’s debt maturity profile to 2029,
incorporating a £125 million
Environmental, Social and Governance
(ESG) facility with a mechanism that
adjusts the interest margin based on
Drax’s carbon emissions against an
annual benchmark. We believe we are
one of the first companies to implement
such a feature within its debt,
demonstrating our commitment to
embedding ESG in financial performance.
The Group’s cost of debt is now below
4% and below 3% on the new facilities,
reflecting a reduced business risk.
Operational review
In the US, our Pellet Production
operations reported Adjusted EBITDA
of £32 million up 52% (2018: £21 million).
High levels of rainfall in the US Gulf in
early 2019 restricted the level of
commercial forest extraction and the
availability of low-cost fibre for wood
pellet production. This in turn had an
impact on the shipment of pellets from
the port of Baton Rouge. Since then
commercial forestry processes, wood
pellet production and shipments to the
UK have increased. As a result, wood
pellet volumes for 2019 were 1.40 million
tonnes, up 4% (2018: 1.35 million tonnes).
Pellet quality, as measured by the amount
of fines (larger particle-sized dust) in each
cargo, is a KPI for the Group. Lower levels
of fines result in fuel that is easier and
safer to handle at ports and at Drax
Power Station. The quality of the pellets
we produced was below our target level
in 2019 and we are taking steps to
address this issue in 2020.
We have remained focused on
opportunities across the supply chain
to deliver improved operational
performance and cost savings as part
of our programme to reduce the cost of
biomass to £50/MWh by 2027. We have
made good progress with increased
volumes, operational improvements and
greater utilisation of low-cost fibre which
have contributed to lower cost wood
pellet production.
A co-location agreement with Hunt
Forest Products (a sawmill operator) led
to the development of a sawmill next to
our LaSalle site. The sawmill commenced
production in February 2019 providing
greater access to low-cost sawmill
residues, lower transportation costs
and a reduction in the number of stages
in the production process.
A new rail spur linking LaSalle to the
regional rail network and our port facility
at Baton Rouge was commissioned in
May 2019. This will increase
transportation efficiency, provide
economies of scale and reduce both
cost and carbon footprint.
We have remained
focused on
opportunities to
reduce the cost
of biomass to
£50/MWh by 2027.”
Will Gardiner
Group CEO
We expect to benefit from further
economies of scale in rail associated
with the commissioning of an enlarged
chambering yard at the port of Baton
Rouge in 2020, allowing 80-car train
sets to operate from our LaSalle and
Morehouse sites.
sustainable without subsidy. We expect
to do this by using a greater proportion of
lower cost wood residues, expanding our
self-supply capacity to five million tonnes
and exploring ways to expand our fuel
envelope to include a wider range of
sustainable low-cost biomass residues.
These initiatives and others have
contributed to a year-on-year reduction in
cost per tonne of 3%, which represents a
saving of $5 per tonne compared to 2018.
We expect to deliver further savings
by expanding our existing sites (LaSalle,
Morehouse and Amite) by 350,000
tonnes over the next two years – an
investment of £50 million. This will
expand total capacity to 1.85Mt, provide
economies of scale and allow greater
utilisation of low-cost residues. We
believe these projects offer returns
significantly ahead of the Group’s cost of
capital, with payback in advance of 2027.
These larger projects are accompanied
by small operational improvements such
as greater efficiency in the loading of
road haulage, saving 50 cents per tonne.
Over time these improvements, when
applied across the supply chain, can
deliver significant incremental savings.
Taking the savings in 2019 together with
the other initiatives we have described,
we believe there are opportunities to
reduce the cost of biomass by $35 per
tonne (£13/MWh) on our existing portfolio
by 2022. This represents good progress,
but more work and investment will be
required to deliver our goal of making
biomass power generation economically
In Generation, Adjusted EBITDA of
£408 million was up 76% (2018: £232
million). This includes £114 million from
the hydro and gas generation assets
acquired in December 2018. These assets
have performed strongly, exceeding
our financial expectation in the first year
of ownership.
Commercial availability, which measures
the time we are available to operate in our
markets, was 88% (2018: 89%). This was
below our target and principally reflects
restricted biomass generation in the first
quarter of 2019 and gas unit outages.
The engineering challenges associated
with such an outage are significant and
the completion of the work and
recommissioning, which allowed a strong
operational performance, is testament to
the skill and commitment of our people.
In 2019, we completed two major planned
biomass outages, including the first in
a series of three high-pressure turbine
upgrades which we expect to increase
thermal efficiency and reduce the cost
of biomass generation.
Notwithstanding these planned outages
our biomass units produced 11% of the
UK’s renewable electricity – enough to
power four million homes. This level of
renewable generation, combined with
the flexibility of our expanding portfolio,
10
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
allows the Group to support the
continued deployment of intermittent
renewables and the UK’s plans for
decarbonisation.
Over the last five years the operational
experience with biomass generation has
been positive and we are now exploring
a wider range of sustainable biomass
materials. In time we believe that
utilisation of this expanded fuel mix
will support a reduction in the cost of
biomass generation.
Our hydro assets, which include the
Cruachan pumped storage power station
as well as Lanark and Galloway hydro
schemes, have performed strongly,
providing flexible, renewable and low
carbon electricity. Cruachan Power
Station – the largest of these assets
(440MW) – plays an important role in
the provision of system support services
to the UK energy market. Over 80% of
Cruachan’s earnings are from non-
commodity sources, including Balancing
Market activities, Ancillary Services and
the Capacity Market.
We operate 2.0GW of Combined Cycle
Gas Turbines (CCGT) – Damhead Creek,
Shoreham, Rye House and Blackburn.
These units produced 2.9TWh,
representing around 17% of our total
generation. The location of three of the
four units in southeast England makes
them well placed to provide system
support services to the UK energy market.
During the year we completed two
planned outages, including turbine
repairs and interim inspection work at
Shoreham Power Station, providing the
option for a future turbine upgrade to
take place.
Since the start of 2019 seasonal
electricity prices have weakened,
reflecting a mild winter and high levels
of European gas storage. The market for
coal generation has remained challenging
and our two coal units continue to focus
on short-term power market
opportunities during higher demand
periods. Coal generation of 0.6TWh
represents 4% of the Group’s output.
Where we sold forward volumes on a
limited basis, weaker power prices
allowed us to buy back some of those
volumes at a lower price, adding margin.
The flexibility and dispatchable nature of
our generation portfolio is an important
source of value and was a key factor in
our acquisition of the hydro and gas
generation assets. Given the shift
towards wind generation, which will
provide the majority of the UK’s future
electricity requirements, we anticipate
a growing need for system support
services. In 2019 Value from Flexibility
(a scorecard measure of the value from
flexible power generation, system
support services and attractively priced
coal fuels) was £129 million (2018:
£79 million), which was ahead of plan,
reflecting a 63% increase on 2018.
We believe there is a need for flexible,
large-scale dispatchable generation, but
this must support the UK’s target of net
zero carbon emissions by 2050. To that
end we continue to develop options for
four 299MW Open Cycle Gas Turbines
(OCGTs) and 5.4GW of CCGTs between
Damhead Creek and Drax Power Station.
We expect the CCGTs to be among the
most efficient assets in their class and
hence sit high in the UK merit order, in
addition to being available for system
support services. The OCGTs will perform
a system support role and meet peak
power demand at short notice.
An appropriate clearing price in a future
Capacity Market will be required to
underpin investment in new-build gas.
We will remain disciplined through this
process and at the most recent auction
in January 2020 Drax did not accept a
Capacity Market agreement for these
projects. We remain committed to
developing the most cost-effective capital
programmes for all of our gas projects,
which we believe can make them
competitive in future capacity auctions.
Planning approval for the CCGT at Drax
Power Station is subject to a judicial
review and we will not participate in
future Capacity Market auctions until
the outcome is known.
Our Customers business, which focuses
on B2B supply, has faced a challenging
market environment. Taken together with
integration costs, Adjusted EBITDA of
£17 million is lower than prior year (2018:
£28 million). This includes £8 million of
investment in restructuring to integrate
the Haven Power and Opus Energy brands
under a single operating structure. The
creation of a single management team
is now complete and will help drive
alignment of decision making, effective
market segmentation and operational
efficiencies.
During the year significant focus was
given to cash collection to address
historic challenges associated with bad
debt at Opus Energy. As a result we have
seen further improvements in the
management of bad debts during the
period, reflected in a reduced charge
to the income statement of £18 million
(2018: £31 million), whilst maintaining
a prudent level of provision.
We have a differentiated market position
– selling purely renewable power, helping
over 2,000 independent renewable
generators access the market and
developing products which will meet
our customers’ needs. We continue to
believe this approach will support
long-term growth.
Over time, we expect this business,
through efficiency and demand-side
response, to contribute increasingly
to balancing the power system and we
are excited about our opportunity to
make a difference in this area.
Biomass sustainability
Under well-established UK and European
legislation, sustainably sourced biomass
is a renewable source of electricity. The
rules and the science which underpins
this treatment are clear.
We source low-cost sawmill residues and
forest residues, which are a by-product
of commercial forestry processes, and
thinnings from growing forests, which
help improve forest stocks and forest
health. The CO2 emissions are absorbed
by new forest growth. We use feedstocks
that have been shown to have no carbon
debt associated with them.
Drax Group plc Annual report and accounts 2019
11
Group CEO’s review continued
We maintain a
rigorous and robust
approach to biomass
sustainability.”
Will Gardiner
Group CEO
We maintain a rigorous and robust
approach to biomass sustainability,
ensuring the wood fibre used and pellets
produced are fully compliant with the
UK’s mandatory sustainability standards
as well as those of the European Union.
Since the introduction of the Renewable
Obligation Certificate (ROC) scheme in
2002 Drax has maintained full compliance
with UK and European legislation.
However, there are carbon emissions
associated with the biomass supply
chain. Under UK legislation biomass is
the only source of electricity generation
required to report its supply chain
emissions. The Group’s biomass life cycle
carbon emissions are 124 kgCO2-eq/MWh
of electricity (2018: 131 kgCO2-eq/MWh),
less than half the UK Government’s 285
kgCO2-eq/MWh of electricity limit for
biomass. This equates to an 87% carbon
emission saving against coal, inclusive
of biomass supply chain emissions, but
excluding those of coal, which means the
actual saving from biomass is even greater.
Reflecting this and a lower level of coal
generation, reported carbon emissions
under the European Union Emissions
Trading Scheme fell by 50% to 113tCO2/
GWh (2018: 226tCO2/GWh).
Strengthening our leadership on biomass
sustainability, we introduced a new
Responsible Sourcing Policy for Biomass
and established an Independent Advisory
Board, chaired by Sir John Beddington,
the UK’s former Chief Scientific Adviser.
We responded to the Climate Disclosure
Programme’s (CDP) Climate Change and
Forests questionnaires.
Environmental, social and
governance
The health, safety and wellbeing of our
employees and contractors is vital to
the success of the Group and remains
our priority. We believe that a safe and
sustainable business model is critical to
our strategy and long-term performance.
In 2019 we implemented a new Group-
wide approach to health, safety and
wellbeing, as well as the establishment
of a new Group-wide workforce
engagement forum.
In March 2019 we published our second
gender pay report. While the data showed
that our businesses were in line with the
energy sector overall, it highlighted that
we still have work to do.
In June 2019, we published our third
statement on the prevention of slavery
and human trafficking in compliance with
the UK Modern Slavery Act (2015) and we
are a signatory to the UN Global Compact
(UNGC). We are committed to promoting
the UNGC principles on respect for
human rights, labour rights, the
environment and anti-corruption.
Brexit
Brexit remains a key issue for the UK.
To date, the impact on the Group has
been limited, with the principal risk being
weaker Sterling affecting the cost of
biomass, which is generally denominated
in US dollars. Through our use of medium-
term foreign exchange hedges the Group
has protected its position out to 2024 at
rates close to those that we saw before
the Brexit referendum vote.
Outlook
Our focus remains on progressing our
strategy: to build a long-term future for
sustainable biomass; to be the leading
provider of system stability in the UK and
to give customers control of their energy.
Through achieving these strategic
objectives we expect to deliver tangible
financial benefits – long-term earnings
growth, strong cash generation and
attractive returns for our shareholders.
These activities continue to be
underpinned by safety, sustainability
and operational excellence.
In Pellet Production we remain focused
on the production of good quality pellets
at the lowest cost, cross-supply chain
optimisation and an expanded self-supply
capacity to five million tonnes by 2027.
Our Generation proposition is strong:
flexible, renewable and low carbon
electricity and system support services.
We will continue to provide high levels
of renewable electricity to the UK and
support increased deployment of
intermittent renewables necessary
to support the UK’s transition to a
net zero carbon economy.
Flexible dispatchable gas has an
important long-term role to play in
supporting the transition to a net zero
carbon economy. We will optimise our
portfolio to meet this demand and
develop carbon capture and storage
ready projects – options which could
include hydrogen fuelling – subject to the
right price in future capacity auctions.
Our ambition to become a carbon
negative company is underpinned by
the development of BECCS. Working in
partnership, and with the right support
from the UK Government, we could
develop BECCS at scale before 2030. By
reducing our biomass supply chain cost
we will support this objective and deliver
further attractive returns to shareholders.
In our Customers business we will remain
focused on operational excellence,
reducing our cost to serve customers,
growing gross profit per MWh and
managing bad debt. We will offer
attractive propositions and develop our
presence in the market for system support
through flexible demand management
and other value-added services.
We are making good progress with the
delivery of our strategy and will build on
this as we achieve our targets. We will
also continue to play an important role
in our markets as well as realising our
purpose of enabling a zero carbon, lower
cost energy future for the UK.
Will Gardiner
Group CEO
12
Drax Group plc Annual report and accounts 2019
Governance
Financial statements
Shareholder information
Climate change is the
biggest challenge of
our time and we have a
crucial role in tackling it.
Q How is Drax helping the
UK reach its climate goal
to be net zero by 2050?
Q What impact has the
move to biomass had
on Drax’s carbon emissions?
We’re committed to a zero carbon, lower
cost energy future and are stepping up
our efforts to help the UK become net
zero by 2050. We have already
successfully converted two thirds of
Drax Power Station to run on sustainable
biomass instead of coal in what was the
largest decarbonisation project in Europe.
This means we’re generating 12% of the
UK’s renewable electricity and we’ve
reduced our carbon emissions by more
than 85% since 2012.
We now want to become a carbon
negative company by 2030, which we
can do by applying carbon capture and
storage technology to our biomass units.
This is known as BECCS and, through our
BECCS pilot project at Drax Power
Station, we have the capability to capture
one tonne of carbon a day. With the right
investment framework and support
mechanisms in place, we believe we could
capture 16 million tonnes of CO2 a year.
Q What are negative
they important?
emissions and why are
Negative emissions mean Drax will be
removing more carbon dioxide from the
atmosphere than it produces from its
operations. The UK needs negative
emissions to help offset emissions from
sectors that are harder to decarbonise
than transport and power, for example
aviation and shipping.
Both the UN’s Intergovernmental Panel
on Climate Change and the UK’s
Committee on Climate Change have
said negative emissions with BECCS
technology will be critical to limiting
global temperature rise to 1.5 degrees.
Biomass has been a critical element in
the UK’s decarbonisation journey, helping
the country get off coal much faster than
anyone thought possible.
Since 2012, at Drax Power Station we
have reduced our carbon emissions
by 97%, becoming the largest
decarbonisation project in Europe.
And we want to do more.
We’ve also expanded our generation
operations to include hydro and gas
generation, and we’ve continued to bring
coal off the system.
Q What happens to the
forests where Drax
sources its biomass?
Sustainable biomass from managed
forests is helping to promote healthy
forest growth and biodiversity as well as
decarbonising the UK’s energy system.
The biomass we use comes from
sustainably managed forests that supply
industries like construction and furniture.
We use residues from forestry and
sawmills, like sawdust, that other
industries don’t use.
The biomass that we use is renewable
because the forests are growing and
continue to capture more carbon than
we emit from the power station.
You can read more about
our approach to biomass
sustainability on page 34.
CEO Will Gardiner answers
questions on climate change
Q Why did you decide to
work at Drax?
I took this job because Drax had already
made a contribution to the energy
transition in the UK. Climate change is
the most important challenge we face
and I passionately believe Drax has a
crucial role in tackling it.
I want to use all of our capabilities to fight
climate change. I also want to make sure
that we listen to what everyone else has
to say to ensure that we continue to do
the right thing. Our people are very
engaged on issues relating to climate
change and I’m proud of the passion and
innovation I see around the business.
Q Does building gas power
stations mean the UK
will be tied into fossil fuels
for decades to come?
Our energy system is changing rapidly,
as we increase our use of wind and solar
energy, but the wind doesn’t always blow
and the sun doesn’t always shine, so we
need technologies that can operate when
needed to fill in those gaps.
We’re looking at a range of options to
generate power and support the
electricity system as it decarbonises.
These include BECCS, hydrogen and gas,
which can help enable more renewables
to connect to the system.
As I said already, gas is one option we’re
looking at but it won’t happen without
the right investment conditions. If we do
decide to build new natural gas plants, we
will make sure that it is ready for carbon
capture and storage. We will also look at
converting the plants to run on hydrogen.
See more online at
www.drax.com
Drax Group plc Annual report and accounts 2019
13
Strategic report Group financial review
2019 Highlights
• 64% Adjusted EBITDA growth to £410 million
• Delivered net debt to Adjusted EBITDA
ratio ahead of target of 2x, after adjusting
for deferred cash receipt of Capacity
Market payments of £72 million, received
in January 2020
• Strong performance of acquired
generation assets with Adjusted EBITDA
of £114 million
• Significant increase in Adjusted profit
after tax to £118 million resulting in improved
Adjusted earnings per share of 30 pence
• Total operating profit of £62 million,
increased from £60 million
• Net cash flow from operating activities
of £413 million, compared to £311 million
in 2018
• 13% increase in dividend to £63 million
or 15.9 pence per share
14
Drax Group plc Annual report and accounts 2019
We’ve delivered 64%
growth in Adjusted
EBITDA and a Net
Debt to Adjusted
EBITDA ratio ahead
of our target of 2x.”
Andy Skelton
Chief Financial Officer
Introduction
The Group has delivered significant
growth during 2019, with Adjusted
EBITDA increasing by 64% from
£250 million in 2018, to £410 million.
Total operating profit, which includes
the effect of remeasurement losses of
£133 million (2018: remeasurement gains
of £38 million) on derivative contracts,
also increased from £60 million in 2018
to £62 million.
Our new portfolio of pumped storage,
hydro and gas generation assets
(hereafter referred to as the “new
generation assets”), acquired on
31 December 2018, delivered Adjusted
EBITDA of £114 million. Growth was
further supported by an increased
contribution from renewable power
generation from sustainable biomass
at Drax Power Station and our Pellet
Production business.
This performance is particularly pleasing
when considering the challenges we
faced in the first half of the year where
both our pellet production operations
and biomass generation were impacted
by lower levels of biomass supply as a
result of historically bad weather
conditions in the US Gulf.
Following the reinstatement of the
UK Capacity Market in October 2019, the
results for the year include £78 million
of capacity market income, including
£7 million for the period in 2018 after
its suspension. The associated cash was
Strategic report
Governance
Financial statements
Shareholder information
Financial Performance Summary
Adjusted revenue
Adjusted EBITDA
Adjusted profit after tax
£4,703m
(2018: £4,237m)
Total revenue
£4,713m
(2018: £4,229m)
£410m
(2018: £250m)
Total operating profit
£62m
(2018: £60m)
£118m
(2018: £42m)
Total profit after tax
£1m
(2018: £20m)
Net debt
Cash from operating activities
Dividend per share
£841m
(2018: £319m)
£413m
(2018: £311m)
15.9p
(2018: 14.1p)
subsequently received after the year end
and does not form part of our reported
net debt at 31 December 2019.
The Group improved its access to
capital during 2019. We refinanced
the acquisition bridge facility, used to
part-fund the acquisition in December
2018 of the new generation assets
from ScottishPower, in three stages.
In May, we issued an additional
US$200 million of the existing 2025
6.625% loan notes. In July, we entered
into two new senior debt facility
agreements, a £375 million private
placement and a £125 million
environmental, social and governance
(ESG) facility. The average rate of the two
new facilities is below 3%, reducing the
Group’s overall cost of debt to below 4%,
reflecting a reduced business risk profile.
Adjusted EBITDA/Total Operating Profit
(£m)
500
400
300
200
100
0
Adjusted
EBITDA
Total operating
profit
2019
2018
Driven by strong cash generation in the
period, supported by active management
of working capital, net debt at 31 December
2019 was £841 million (2018: £319 million),
delivering a net debt to Adjusted EBITDA
ratio of 1.9x, ahead of our target of 2.0x
for the year end after adjusting for the
deferred receipt of £72 million cash in
respect of Capacity Market payments
received in January 2020.
We remain committed to a sustainable
and growing dividend. The Board will
recommend at the forthcoming Annual
General Meeting a final dividend that
takes total dividends for the financial
year to £63 million, or 15.9 pence per
share, an increase of £7 million or 1.8
pence per share when compared to 2018.
Financial Performance
Adjusted EBITDA
Group consolidated Adjusted EBITDA
of £410 million includes a contribution
of £114 million from our new generation
assets, acquired at the end of 2018.
This is an excellent result and exceeds
our forecast range of £90-£110 million,
reflecting strong operational
performance across the portfolio, better
than expected performance in ancillary
and balancing services and excellent
progress with the integration of the
assets into our existing generation
business, which is now complete.
In total, the Generation business
contributed Adjusted EBITDA of
£408 million (2018: £232 million), an
increase of £176 million or 76%. This
performance comes despite industry-
wide challenges with wood pellet
production and associated supply
constraints in the first half of the year,
and includes the contribution of
£114 million from our new generation
assets, described above.
Following the reinstatement of the
Capacity Market in October 2019, we
have recognised related income totalling
£78 million across the Generation
portfolio. Our financial results for 2018
excluded £7 million of capacity market
income following its suspension in
October 2018, and this amount has
now been recognised in 2019.
Total output at Drax Power Station
reduced, as we continue our transition
away from coal; however, our biomass
units delivered output broadly in line
with 2018, of 13.4TWh (2018: 13.7 TWh).
The small reduction in part reflected an
outage over the summer period on Unit 1,
which is supported by the Contract for
Difference (CfD) regime.
Despite lower CfD generation, overall
renewable support under the CfD and
ROC regimes remained broadly in line
with the prior period, due to higher
ROC generation and indexation of
support payments.
Overall captured spreads improved
following efficiency gains as a result
of our programme of investment in the
performance of generating units at
Drax Power Station and benefits from
our trading position and portfolio.
Drax Group plc Annual report and accounts 2019 15
Group financial review continued
We continue to derive value from
flexibility (balancing mechanism, ancillary
services and advantaged fuels), which
improved from £79 million in the prior
year to £129 million in 2019, an increase of
63%. Our new hydro and pumped storage
assets performed particularly strongly
in this area, a demonstration of the
contribution of the acquisition to our
strategy to become the leading provider
of system stability in the UK.
The Generation business acquires
biomass pellets predominantly in US
dollars, which we actively hedge over a
rolling five-year period, to manage our
foreign currency exposure to a weaker
pound. The renewable support (CfD and
ROCs) received in respect of biomass
generation are subject to UK inflation
indices. This exposure is managed as
part of our active long-term financial
derivatives hedging programme.
We hold a large portfolio of forward and
option contracts for various commodities
and financial products, the nature, value
and purpose of which is described in
note 7.2 to the consolidated financial
statements. These contracts are held
to de-risk the business, by protecting
the sterling value of future cash flows in
relation to the sale of power or purchase
of key commodities. We manage our
exposures in accordance with our trading
and risk management policies.
From time to time, for example where
market conditions or our trading
expectations change, action may be
needed in accordance with these policies
to rebalance our portfolio. This year such
activity included restructuring in-the-
money foreign currency exchange
contracts, to balance short and long
periods across the duration of the hedge.
During 2019 we also realised value from
closing out positions as expectations for
coal generation reduced, the benefit of
which is included in value from flexibility,
above. The financial impact of these
activities – which is driven by market
prices at the point of execution – is
recognised in the cost of sales of our
Generation business and therefore is
reflected in our Adjusted Gross profit
and Adjusted EBITDA.
Our Customers business contributed
Adjusted EBITDA of £17 million in 2019,
an £11 million reduction when compared
to 2018.
The 2019 result for Customers includes
£8 million of investment cost in the
restructuring of the business, to more
closely integrate our two brands and
bring them under one management team
(In 2018, £3 million of restructuring and
integration costs were treated as
exceptional and excluded from Adjusted
results in the first year post-acquisition
of Opus Energy), and a further £7 million
for the development of next-generation
IT systems (2018: £6 million).
We delivered the new ERP system at
Opus Energy during the second half
of 2019 but have stopped the
implementation of a new billing system
and are in ongoing discussions with the
supplier. We have incurred approximately
£19 million of costs to date, held on the
balance sheet, which we believe have
value and will be recovered.
Overall volumes sold were down by
9% compared to 2018, which largely
reflects a mild 2018/19 winter that led
to a challenging first half of the year.
As a result, overall gross profit fell from
£143 million in 2018 to £134 million
in 2019.
During the year, significant attention
was focused on improving cash
collections, where we have seen a
positive performance. As a result of
this, in addition to a £6 million benefit
in respect of resolution of legacy credit
balances, bad debt charges reduced
from £31 million in 2018 to £18 million
in 2019. The higher charge in the prior
year reflected an increased level of
provisioning required due to reduced
collection performance, plus a £3 million
one-off expense in respect of SME
business. The closing provision at
31 December 2019 of £41 million is
slightly lower than the prior year (2018:
£44 million), reflecting the improved
performance during the year.
Pellet Production Adjusted EBITDA of
£32 million increased 52% from £21 million
in 2018.
Production in the year increased slightly
to 1,406kt (2018: 1,351kt), reflecting a full
year of operations at the LaSalle pellet
plant. This would have been higher but
for challenging weather conditions in the
first quarter, resulting from unseasonably
high rainfall and associated high river
levels, which materially restricted output
at all three of our pellet plants and caused
difficulties in loading ships at the port.
We have made good progress with
biomass cost reduction projects in the
year, with the average cost per gigajoule
of our self-supplied pellets falling to
US$161/tonne in 2019 compared to
US$166/tonne in the prior year.
Key contributions to this saving came
from the benefit of a full year of lower
operational costs as a result of the
headquarters relocation from Atlanta
to Monroe during 2018 and the rail
spur project at our LaSalle plant,
commissioned in early May 2019, saving
transport costs across the rest of 2019
with a positive impact on supply chain
emissions. Furthermore, the sawmill
co-location project at the same plant
has delivered further savings.
The total savings from these projects
delivered in 2019 was £14 million, which
more than offset the weather impact
described above.
Central and other costs of £46 million
have increased by £18 million in 2019.
This increase includes incremental
research and innovation costs associated
with key strategic initiatives – including
those relating to Bio-Energy Carbon
Capture and Storage (BECCs).
As we described at the half year, and in
connection with the integration of the
acquired generation assets; we incurred
one-off costs implementing a new
organisational structure that we believe
will enable us to execute our strategy
more effectively. Costs associated with
delivering working capital initiatives have
also increased.
16
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Total Operating Profit
Total operating profit of £62 million has
increased 3% from £60 million in 2018.
This includes the effect of acquisition
and restructuring costs and
remeasurement gains and losses on
derivative contracts that are excluded
from Adjusted results. Our policy and
approach to calculating Adjusted results
is set out on page 131.
Acquisition and restructuring related
costs of £9 million (2018: £28 million)
reflect the first-year costs of integrating
the new generation assets into our
existing Generation business, following
transaction costs associated with the
acquisition last year. The integration is
now complete, and in line with our policy
no further acquisition and restructuring
costs in relation to the acquired assets
will be excluded from Adjusted EBITDA
in 2020.
Net fair value remeasurement losses on
derivative contracts included in operating
profit were £131 million (2018: gains of
£38 million) reflecting movements in the
mark-to-market position on our portfolio
of commodity and financial derivative
contracts, to the extent they do not
qualify for hedge accounting.
The losses in 2019 are predominantly
the result of the strengthening of sterling
in the period and the resulting impact
on the value of our extensive portfolio
of foreign currency exchange contracts,
which provide a rolling five-year hedge
against changes in exchange rates for
fuel purchases denominated in foreign
currencies.
Profit After Tax and Earnings per Share
Adjusted profit after tax of £118 million
compares to £42 million for the prior year,
resulting in Adjusted earnings per share
(EPS) of 30 pence (2018: 10 pence) which
represents a 200% increase.
Improvements in Adjusted profit after
tax and EPS largely reflect the growth
in Adjusted EBITDA described above,
although this has been partially offset
by higher depreciation charges resulting
from the new generation assets, and
an increase in interest charges as a
result of the new debt issued to part-fund
the acquisition, as described in further
detail below.
development expenditure. Total patent
box credits included in the overall tax
credit for 2019 are £8 million (2018:
£8 million).
Cash taxes paid during the year were
£9 million (2018: £1 million).
Capital Expenditure
We maintain a disciplined approach
to capital expenditure, with all significant
projects subject to appraisal and
prioritisation by a Capital Committee prior
to approval, overall ensuring adherence
to our capital allocation policy and
maintenance of an appropriate net
leverage profile.
Total profit after tax of £1 million is lower
than £20 million for last year, with a
corresponding reduction in Total EPS
from 5 pence in 2018 to nil pence in 2019.
Total capital expenditure of £172 million
in 2019 was higher than £114 million in
the prior year.
Total profit after tax reflects exceptional
items and certain remeasurements,
including the derivative remeasurements
and acquisition and restructuring costs
described above. In addition, it includes
a further £5 million of interest charges
relating to the acquisition bridge facility.
These costs have been treated as
exceptional given the direct link to the
acquisition and their one-off nature
(2018: £7 million).
The total tax credit of £3 million (2018:
£6 million) reflects an effective tax rate
that is lower than the standard rate of
tax in the UK. This principally reflects
the benefit of patent box tax credits
in respect of biomass research and
The increase principally reflects
additional expenditure in respect of the
new generation assets, strategic projects
and investments to progress our
objective of increasing self-supply of
pellets to 5 million tonnes and reduce
the cost of pellets.
We have made an initial investment in
biomass expansion projects in the Pellet
Production business, ahead of full delivery
in 2020, in line with our strategy to expand
self-supply. We have also continued
investment in our gas development
projects – our four OCGT sites, a new
CCGT at Drax Power Station and the
expansion option at Damhead Creek.
Earnings per Share (pence)
Capital Expenditure
35
30
25
20
15
10
5
0
Total EPS
Adjusted
EPS
2019
2018
Maintaining operational performance
New generation assets
Enhancements
Strategic
Other
£59m
£15m
£24m
£67m
£7m
Drax Group plc Annual report and accounts 2019 17
Group financial review continued
Cash and Net Debt
At 31 December 2019, total borrowings
were £1,245 million (2018: £608 million)
and net debt was £841 million (2018:
£319 million).
Following the reinstatement of the
Capacity Market in October, we accrued
the £78 million of associated income in
full; however, the cash payments were
not received until after the year end.
After adjusting for the receipt of £72
million of cash in January 2020 in respect
of Capacity Market payments, covering
the standstill period, this reflects a net
debt to EBITDA ratio for 2019 of 1.9x
(2018: 1.3x), within our target of less than
2x. Without adjusting year end net debt
for this payment our closing net debt to
EBITDA ratio was 2.1x.
The increase in borrowings and net debt
in 2019 reflects the additional debt drawn
to part-fund the acquisition of the new
generation assets, for which the cash
consideration was settled in January 2019.
Taking this into account, and allowing
for a full year of EBITDA from the new
generation assets in 2018, this represents
a significant deleveraging on a like-for-
like basis from a net debt to EBITDA
ratio of 3.1x.
On 2 January 2019, the Group drew down
£550 million from the £725 million
acquisition bridge facility to partially fund
the acquisition, with the remainder of the
consideration funded from the Group’s
cash resources. At inception, the
acquisition bridge facility was due to
mature in the second half of 2020.
During 2019, we refinanced the acquisition
bridge facility in three stages, including
two new long-term debt facilities.
generation assets and a disciplined
approach to working capital, partially
offset by increased interest payments
on the expanded debt portfolio.
On 16 May 2019, we issued an additional
US $200 million of the existing 2025
6.625% US dollar loan notes. The
proceeds from the issuance were used
to repay £150 million of the drawn down
acquisition bridge facility. Reflecting the
strong investor appetite, the notes were
issued at 101.5% of their face value which,
when swapped back into sterling,
achieved an interest rate of 4.74%.
On 24 July 2019, we entered into two
new senior debt facilities agreements,
a £375 million private placement with
infrastructure lenders with maturities
between 2024 and 2029, and a
£125 million ESG facility agreement that
matures in 2022. The ESG facility includes
a mechanism that adjusts the margin
based on carbon emissions against an
annual benchmark.
Together these new facilities extend
the Group’s debt maturity profile beyond
2027 and reduce the Group’s overall cost
of debt to below 4%.
A full reconciliation of the Group’s
borrowings in the period is provided in
note 4.3 to the consolidated financial
statements.
The Group continued to generate strong
cash from operating activities in 2019,
with a total inflow of £413 million in 2019
(2018: £311 million). The increase
principally reflects improved profitability,
the contribution from newly acquired
In addition to the improvements in
operating performance described above,
the Group has a strong focus on cash
flow discipline. We also use various
methods to manage liquidity through
the business’ cash generation cycle.
The Group has access to a £315 million
revolving credit facility, which can be
used to manage low points in the cash
cycle, which expires in 2021. No cash was
drawn under this facility at 31 December
2019 (2018: £nil). We actively optimise
our working capital position by managing
payables, receivables and inventories
to ensure that the working capital
committed is closely aligned with
operational requirements.
The key working capital benefits in 2019,
in terms of cash flow, arise from making
sales and purchases of ROC assets and
rebasing foreign currency exchange
contracts.
Historically, cash from ROCs has typically
been realised several months after the
ROC was earned at the end of the ROC
compliance period; however, the Group is
able to limit the overall impact of ROCs on
working capital by making separate sales
and purchases in the compliance period.
For 2019, such transactions generated
a net cash inflow of £131 million and
supported an overall working capital
inflow from ROCs of £54 million. The
Group also has access to facilities
enabling it to sell ROC trade receivables
Net Debt Development (£m)
692
1,011
410
48
10
62
51
841
72
769
171
150
1200
1000
800
600
400
200
0
319
2018
net debt
Acquisition 2018 net
debt (inc.
acquisition)
Adjusted
EBITDA
Capital
expenditure
Debt
service
Tax
Dividends
& share
buyback
Working
Capital/
other
2019
net debt
Capacity
market (CM)
payments
2019
net debt
(inc. CM
payments)
18
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
arising on a non-recourse basis. These
facilities were not utilised at 31 December
2019 (2018: £nil).
net proceeds from new borrowings of
£653 million (2018: net repayment of
£5 million) and payments in respect of
acquisitions of £692 million (2018: £nil).
During 2019 the Group rebased several
foreign currency contracts, which
resulted in a working capital benefit.
The total cash released from related
trades still outstanding at the end of the
year was £84 million (2018: £3 million)
reflected in cash generated from
operations. By undertaking a similar
exercise on cross-currency swaps,
we released a further cash benefit
of £23 million (2018: £nil). This has no
impact on Adjusted EBITDA, the gains
are held on the Group’s balance sheet,
until the rebased trades expire.
In addition, the Group has access to a
£200 million receivables monetisation
facility (extended from £150 million in
2018), which accelerates associated cash
flows and mitigates exposure to credit
risk, and a number of payment facilities
to leverage scale and efficiencies in
transaction processing. We also facilitate
a supply chain financing scheme, which
enables certain suppliers to access
payment earlier than contractually
agreed payment terms and supports
the wider working capital efficiency
of the Group. The balances outstanding
at 31 December 2019 and change in
utilisation in respect of each of these
facilities is set out in note 4.4 to the
consolidated financial statements.
The overall net cash inflow for the year
was £122 million (2018: £66 million), after
cash payments for capital expenditure of
£171 million (2018: £104 million), dividend
payments of £59 million (2018: £53 million),
Total Dividends (£m)
70
60
50
40
30
20
10
0
2019
2018
2017
2016
2015
Distributions
We have a long-standing capital
allocation policy – a commitment to
robust financial metrics that underpins
our strong credit rating, invest in our core
business, pay a sustainable and growing
dividend and return surplus capital to
shareholders as appropriate.
At the Annual General Meeting on 17 April
2019, shareholders approved payment
of a final dividend for the year ended
31 December 2018 of 8.5 pence per share
(£34 million). The final dividend was paid
on 10 May 2019.
On 23 July 2019, the Board resolved to
pay an interim dividend for the six months
ended 30 June 2019 of 6.4 pence per
share (£25 million), representing 40%
of the expected full year dividend.
The interim dividend was paid on
11 October 2019.
At the forthcoming Annual General
Meeting, on 22 April 2020, the Board
will recommend to shareholders that a
resolution is passed to approve payment
of a final dividend for the year ended
31 December 2019 of 9.5 pence per share
(£38 million), payable on or before 10 May
2020. Shares will be marked ex-dividend
on 23 April 2020. This brings the total
dividend payable for 2019 to £63 million
and delivers 13% growth on 2018.
The Group’s £50 million share buy-back
scheme, which commenced in April 2018,
concluded in January 2019. In total,
13.8 million shares were repurchased and
are now held in treasury.
Other Information
New Accounting Standards
The impact of adopting IFRS 16 during
the financial year – the new accounting
standard for leases – is set out in note 8.3
to the consolidated financial statements.
On transition, the Group elected to use
the practical expedient available, allowing
the standard to only be applied to those
contracts identified as leases under the
previous standards. As a result, adoption
of IFRS 16 has not resulted in any
retrospective changes to amounts
recognised in the Group’s annual
consolidated financial statements for
the year ended 31 December 2018.
Adoption of IFRS 16 has resulted in a
reduction of operating costs in 2019
of £7.4 million, with the costs of leases
now reflected as depreciation and
interest charges.
Had the standard been applied in 2018,
the equivalent reduction in operating
costs for the year ended 31 December
2018 would have been £6.3 million.
Restatement of Comparative Financial
Information
The Group consolidated financial
statements (see page 133), include
comparative information for the year
ending 31 December 2018.
The 2018 comparatives have been
restated, from those originally published,
in respect of the following items:
• Finalisation of the opening values
of assets and liabilities acquired in
respect of the acquisition of the new
generation assets on 31 December
2018. During 2019, we concluded a
completion statement process and
identified adjustments to fixed asset
values totalling £4 million. The net
effect of these changes was a
£5 million increase in consideration
payable and a £3 million reduction in
goodwill. See note 5.1 to the financial
statements.
• Correction of an historical error
identified in respect of translation of
fixed assets in our US-based business
into the consolidated group financial
statements. Application of the correct
foreign exchange rates resulted in an
increase in fixed asset carrying values
at 1 January and 31 December 2018 of
£34 million and £56 million respectively,
with an equivalent amount recognised
in the translation reserve. The
correction has no impact on previously
reported profit or cash amounts.
Andy Skelton
Chief Financial Officer
Drax Group plc Annual report and accounts 2019 19
Remuneration at a glance
A new Remuneration Policy which aligns with our
purpose of enabling a zero carbon, lower cost energy
future and rewards sustainable long-term performance
Drax has continued to evolve since
the last full review of the Directors’
Remuneration Policy (the policy).
The Group has a broader position in
the energy market following the biomass
conversion programme and the
acquisitions in the Customers business
and, more recently, in Generation with
the successful integration of the hydro,
pumped storage and gas assets.
To ensure that our approach to
remuneration supports the strategy, the
Remuneration Committee has undertaken
a full review of the policy, taking into
account the Group’s strategy, shareholder
feedback and the new provisions in the
Corporate Governance Code.
Our principal aims are to ensure that
executive pay is closely linked to Group
performance, underpins our purpose of
enabling a zero-carbon, lower cost energy
future; better aligns reward with
delivering the strategy; incorporates
targets that reflect the Group’s progress,
and are relevant and transparent for the
wider workforce and our shareholders.
The proposed new policy is designed
to support delivery of our core business
against a smaller number of stretching
annual financial, operational and
strategic targets, rewarding the delivery
of growth, innovation and sustainability
over the long term.
The proposed new remuneration
structure is simplified, with annual bonus
payments linked to these goals – a
decision informed by engagement with
shareholders.
In the long-term incentive, Total
Shareholder Return (TSR) will be retained
but the Group scorecard will be replaced
with cumulative adjusted EPS. We feel
this change will help to drive further
shareholder value over the medium to
longer term.
Attracting and retaining the right talent
capable of delivering high quality
business performance and growth
is critical in achieving our strategy.
We believe the new long-term incentive,
focused on rewarding stretching
performance, and with extended
holding requirements will enable this.
I have met a number of our major
shareholders and have incorporated their
feedback. I welcome further feedback
on the proposed policy.
You can read more about our
new policy in our Directors’
remuneration report on page 91.
The Committee has
undertaken a full
review of the policy,
taking into account
shareholder
feedback.”
Nicola Hodson
Remuneration Committee Chair
20
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
The full Policy appears on
page 91
Our purpose: enabling a zero carbon, lower cost energy future
Our purpose is embedded in the core principles of our new remuneration policy
Making sure
that executive
remuneration is
closely linked to the
performance of the
Company
Simplifying
the design and
application of
our executive
remuneration
programmes
Incentives earned
for the delivery of
stretching corporate,
financial, strategic
and operational
targets
Attracting and
retaining the right
talent through
market-aligned
incentive opportunity
Aligning executive
reward with
shareholder value,
over the longer term,
through the new
Long-Term Incentive
Plan (LTIP)
Our new remuneration policy is aligned with the provisions of the 2018 Corporate Governance Code
Clarity
Simplicity
Risk
• Alignment between the delivery of
strategic goals and remuneration
outcomes
• Remuneration which rewards
shareholder value over the medium
to longer term
• Performance related elements, relevant
for the Group as a whole, creating
alignment across the wider workforce
in delivering financial, operational and
strategic imperatives
• Annual Bonus: Simplifying the bonus
by focusing on a smaller number of
financial and strategic measures, which
provide greater clarity and simplicity
• Greater proportion of remuneration
linked to the longer term, ensuring
stronger alignment with the shareholder
experience
• Revised long-term incentive plan (LTIP).
Replacing the scorecard element of the
LTIP with cumulative adjusted EPS,
which reflects the capability to deliver
more stable earnings and the
implementation of a metric aligned to
shareholder interests in delivering
growth
• Increased shareholding requirement
for Executive Directors during and post
employment
• Malus and clawback provisions mitigate
behavioural risks by enabling payments
to be reduced or reclaimed in specific
circumstances.
Predictability
Proportionality
Alignment to culture
• Transparent performance measures and
targets make clear the possible range
of remuneration outcomes and these
potential outcomes are illustrated in
the Directors’ Remuneration Policy
• The Committee will continue to have
discretion to override formulaic
outcomes to ensure that remuneration
appropriately reflects overall
performance
• Performance measures are linked to
the Company’s strategy and aligned
with long-term creation of value for
shareholders
• Stretching targets ensure that
payments are only made for strong
corporate performance
• Bonus measures for all employees,
including Executive Directors, are the
same so that all employees are focused
collectively on, and rewarded for, the
delivery of strategic goals
• The annual bonus contains measures
related to health and safety, people
and reputation which underpin the
Company’s value and business strategy
Drax Group plc Annual report and accounts 2019 21
Market context
Decarbonisation,
electrification and flexibility
Globally the energy market in 2019 was marked by
geopolitical tension, commodity prices which varied
within a relatively stable range and, most importantly,
rising awareness of climate change and its
implications. The UK energy market is increasingly
shaped by three major trends: the pace of
decarbonisation of the sector is increasing; the need
for electrification and more electricity is growing as
the heat and transport sectors decarbonise; and the
need for flexible sources of power is greater than ever.
Decarbonisation – In July 2019 the UK Government
passed legislation requiring the UK economy to be
net zero carbon by 2050. Tackling climate change
is high in the public consciousness and widespread
engagement and activism suggests that the UK public
increasingly expects the Government and industry to
work together to provide solutions. To date the power
sector has led the way in the UK’s efforts to
decarbonise, and we believe it will have an even
greater role in helping to realise net zero. In fact, to hit
net zero by 2050, including the hard to decarbonise
sectors such as aviation and agriculture, we envisage
that the power sector will have to contribute
negative emissions to the overall carbon balance.
Electrification – Decarbonisation on the scale
outlined above is likely to require an absolute increase
in the amount of electricity produced and consumed
due to the electrification of heating and transport.
The UK Government has signalled a commitment to
end diesel and petrol car sales by the middle of the
next decade, which is expected to increase the
number of electric vehicles on the road and further
add to the demand for electrification. Furthermore,
a report from the Energy Transitions Commission
(November 2018) estimated that electricity’s
contribution to global energy supply must rise from
20% to 60% by 2060.
Flexibility – Renewable power generation, driven by
wind and solar, is increasing and is expected to
provide over 80% of power by 2050. Delivered by
smaller, more widely distributed, sources of
generation this will mean the UK power grid will need
to manage more volatility, and energy customers
will increasingly need more control over the way they
use or generate their own energy. The need for more
flexible generation was thrown into sharp relief by
the power supply issues on 9 August 2019 which
saw over one million people go without power when
1.9GW of power failed in a short period of time.
On the next page we explore three aspects of
Drax’s response to changes in the energy market
in more detail.
22 Drax Group plc Annual report and accounts 2019
Governance
Financial statements
Shareholder information
Towards a net
zero carbon future
1 Meeting the net zero
by 2050 target
2 Evolving mix of
generation
Hitting net zero and limiting average
temperature rises to less than 1.5 degrees
Celsius will require huge investment.
The precise path to achieve this goal
is not yet certain for all sectors but it is
becoming increasingly clear that carbon
removal technologies and negative
emissions will have a significant role
to play. Organisations such as the
International Panel on Climate Change
and the UK’s Committee on Climate
Change agree that carbon capture
technologies, in particular those which
could lead to the removal of carbon
from the atmosphere, will be important.
Our response
In 2019 Drax produced 13.7 TWh of
renewable power and we have reduced
our carbon footprint by over 85% since
2012. Coal accounted for only 4% of
Drax’s generation in 2019. In December
2019 we announced an ambition to
become a carbon negative company by
2030. This means by 2030 Drax would
be removing more carbon dioxide from
the atmosphere than we are emitting.
The use of intermittent renewables, such
as wind and solar, continues to increase.
Flexible, thermal generation, such as coal
and older gas plant generation continues
to decline. This places additional pressure
to balance the energy system. 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. There is an
increasing need for flexible sources of
power which can provide services such
as response, reserve, reactive power,
black start and inertia.
Our response
Drax’s portfolio of flexible generation
assets (biomass, hydro and gas) provide
these increasingly important balancing
services. Drax now has generation
assets with a capacity of 6.5GW
distributed across Scotland, northern
and south east England, and options
to develop generation assets in Wales
and the East of England.
Drax saw a 63% increase in the value
derived from flexibility in 2019 compared
to 2018.
3 Changing customer
behaviours and
expectations
The business-to-business energy market
is highly competitive and customers
demand access to both low cost and
renewable power. Customers want more
control of their energy in order to manage
both cost and their environmental
impact. Energy suppliers therefore need
to provide the services which customers
need. Our business customers
increasingly seek to create value from
their portfolios through the installation
of their own generation capabilities,
the provision of demand side response
and energy trading.
Our response
Drax is now the third largest supplier of
energy to businesses and supplies more
of its customers with 100% renewable
power than any of its competitors.
Our investment in digital technologies
is providing new opportunities, a reduced
cost to serve and an enhanced customer
experience.
In 2019 Drax launched a partnership
with SES Water to provide an end-to-end
electric vehicle offer, and a new
partnership with Eaton allowed Drax
to install batteries as an energy service
on our customers’ property. Services
like this mean Drax can open up power
and flexibility markets to more of our
customers and ultimately generate value
for both us and our customers through
our trading expertise.
See more online at www.drax.com and
more details about trends in the electricity
sector at www.eletricinsights.co.uk
Drax Group plc Annual report and accounts 2019 23
Strategic report Working with our stakeholders
Engaging with our stakeholders is fundamental to our success.
We recognise that we need to listen to, and work with, a diverse
range of interested parties to achieve our purpose: to enable a
zero carbon, lower cost energy future. In this section, we explain
how we have identified our stakeholders and engaged with them
to inform the way we operated our business in 2019.
Stakeholder relations
High quality engagement with the full
breadth of our stakeholders is key to
well-informed decision-making that pays
appropriate regard to stakeholder views.
Drax has a wide range of stakeholders
and takes care to ensure that the Group,
and the Board, has an effective strategy
to identify and engage with those
stakeholders.
We have a comprehensive stakeholder
engagement strategy. This is detailed in
the Communications Strategy, which is
presented to the Board at least annually
and sets out our stakeholders and
provides oversight of how the Group
intends to engage with them.
Engagement with stakeholders informs
both our day-to-day decision making,
that ensures the smooth running of the
business, and the strategic decisions
which help set our direction for the years
and decades to come.
Drax employs dedicated teams to
engage both proactively and reactively
with particular stakeholder groups.
This includes a stakeholder relations
team, an investor relations team, an
internal relations team, a sustainable
business team, a business ethics team,
a media relations team and a digital
engagement team.
Methods of engagement with
stakeholders vary according to the issue
at hand and the stakeholder concerned.
The table on page 25 sets out the broad
stakeholder groups that we identified
and engaged with during 2019. It also
highlights why we engaged, how we
engaged and the areas of focus.
Companies Act, Section 172 Statement
Meaningful engagement with all our stakeholder groups supports our
obligations under Section 172 of the Companies Act 2006.
On pages 24 to 29 we set out how the Board, and the Group more widely,
has had regard to stakeholder interests when discharging its duty to promote
the success of the Company.
On pages 49 and 50 we explain how we seek to maintain our high standards
of business conduct.
24
Drax Group plc Annual report and accounts 2019
Communities and local authoritiesWorkforceTrade and industry associationsThink tanks and academicsSuppliers and contractorsShareholders and investorsSchools and collegesRegulator and network businessesNon-governmental organisationsGovernment and political bodiesCustomers
Strategic report
Governance
Financial statements
Shareholder information
Understanding the needs of our
various stakeholders is essential
to our long-term success
Engagement takes place at many levels
of the business and a judgement about
whether Board engagement, Executive
Committee engagement, senior
management or working level
engagement is required is made on a case
by case basis. The Group Head of Public
Affairs maintains a detailed map of key
stakeholders, the concerns they have
raised and the date of the last meeting.
Management keeps under review the
relevant stakeholders who may be
affected by major decisions.
To ensure clear feedback to the Board,
the CEO regularly reports to the Board on
key stakeholder relations activity, current
issues and the relevant feedback received
from interaction with stakeholders. This
is supported by the Group Director of
Corporate Affairs, the Corporate Affairs
team and the relevant owners of direct
stakeholder engagement.
Supporting the Board’s duty to promote
the success of the Company, as set out
in Section 172 of the Companies Act
2006, Board and Executive Committee
discussions include information on
stakeholders likely to be affected by
items under discussion and the potential
impact. This ensures that the interests
of all relevant stakeholders are considered
in decision-making.
The Group Director of Corporate Affairs
and the Group External Affairs Director
presented a detailed report on
stakeholder engagement in July 2019,
to both the Board and the Executive
Committee. This included the Board’s
response to the 42% vote against the
political donations resolution at the 2019
AGM and the development of a new
policy for political expenditure. You can
read more about this on page 27.
In 2019, we developed a new
Remuneration Policy. Nicola Hodson,
the Remuneration Committee Chair, led
the engagement with our shareholders,
to gain their feedback on the proposed
Policy. You can read more about the new
Policy in the Directors’ Remuneration
Report on page 86.
As part of his induction, John Baxter
visited 12 Drax sites in 2019, meeting
with local management to discuss the
business, in particular health and safety
and plant management.
On appointment as Senior Independent
Director in April 2019, David Nussbaum
wrote to our largest shareholders to
confirm his availability to meet with them.
David also attended the Group’s Capital
Markets Day in November 2019 and met
with a variety of investors.
Stakeholder
Why
How
Areas of focus
Communities and
local authorities
Drax is an active participant in the
communities in which it operates.
Good community relationships
strengthen our licence to operate
in those areas
Jobs and employment, local
environmental impact, community
initiatives and sponsorship
We engage regularly with the
communities around our businesses
through supporting local initiatives,
holding quarterly meetings and
formal drop in sessions. For
example, we invested £100,000
to support local initiatives via
the Galloway Glens Landscape
Partnership
Customers
Engagement allows us to better
understand our customers’ needs
and how we can deliver continuous
improvement in customer service
Our Customers business engages
with our customers through
channels including social media,
our website, by phone and through
our complaints procedure
Energy costs, customer service
support, Third Party Intermediary
relationships, sales and product
details, energy efficiency, carbon
footprint
Government and
political bodies
Constructive engagement with
Government is key to Drax’s
purpose to enable a zero carbon
lower cost energy future
We regularly engage with regulators
in the UK, EU and US on a broad
range of topics including the
need for decarbonisation, the role
of biomass and carbon capture
and storage policy. For example,
engagement with political
stakeholders at Party Conferences
through All-Party groups
Energy costs, Decarbonisation and
Carbon Price Support, nationalisation
risks, Impact of Brexit, Capacity Market,
decarbonisation, climate change
mitigation, biomass sustainability,
Station ROC cap, development of
policy to support BECCS, delivery of UN
Climate Change Conference (COP26),
unabated coal closure
Drax Group plc Annual report and accounts 2019 25
Working with our stakeholders continued
Stakeholder
Why
How
Areas of focus
Non-governmental
organisations
(NGOs)
Engagement with NGOs helps
us to challenge and enhance our
practices on behalf of the wider
society
Regulators &
network operators
Engagement with Ofgem and
National Grid allows us to help
deliver a secure, reliable network
with the least cost
Schools and
colleges
Engagement with schools and
colleges allows us to promote
interest in science, engineering and
the energy sector, with a particular
focus on under-represented
sections of society
Shareholders and
investors
Engagement allows us to
understand their concerns and
priorities and take these into
account in our decision-making
We engage directly with NGOs
on a wide range of topics from
biomass sustainability through to
carbon pricing. For example, our
new Biomass Sustainability Policy
addresses stakeholder issues
Biomass sustainability, coal phase
out, potential gas phase out, climate
change, Carbon price support
We engage directly with the
relevant teams at Ofgem and
National Grid. For example, we
engage with National Grid and
Ofgem over the growing need for
financial mechanisms to support
the provision of system services to
the grid
Targeted Charging Review, Smart
meter installation, energy trading
compliance, environmental
compliance, health & safety
compliance, compliance with biomass
sustainability policy, ROC compliance,
and business ethics compliance,
including data protection
Jobs and employment, local
environmental impact, community
initiatives and sponsorship
Drax strategy, capital allocation
and dividend policy, reinstatement
of the Capacity Market, share
price performance, operational
performance, remuneration policy,
political engagement policy
We engage directly with schools and
colleges and offer free access to
our site tours for all students in term
time. For example, Drax’s Women
of the Future event in November
2019 formed part of the Company’s
continuing efforts to encourage
girls to study STEM subjects
We engage through a wide range
of channels including our website,
AGM, full-year and half-year results,
a Capital Markets Day, an ongoing
programme of investor relations
meetings, engagement by the Chair
of the Remuneration Committee on
the proposed new Remuneration
Policy, engagement on the new
Political Engagement Policy and an
investor audit
Suppliers and
contractors
Strong relationships with suppliers
and contractors allow us to
mitigate health and safety risk,
promote high standards and
ensure realistic expectations
on project delivery
Drax’s procurement, business ethics
and sustainability functions engage
directly with suppliers around key
issues to ensure our values and
our policies are upheld throughout
our supply chain
Expected standards of conduct and
satisfactory responses to our due
diligence requests, Prompt Payment
Code, provision of guidance regarding
statutory obligations, such as Modern
Slavery Act
Think tanks and
academics
Engagement allows us to keep
abreast of the latest thinking and
likely policy developments across
a range of areas
Trade and industry
associations
Active membership of a wide range
of trade and industry associations
allows us to keep track of best
practice in our sector
Workforce
To create an engaging environment
where our employees can thrive and
people want to work
We engage with think tanks
and academics through direct
participation in events and round
tables. We directly sponsor several
PhDs at British universities.
Established an Independent Advisory
Board on sustainable biomass
We engage directly with trade
bodies focusing on energy and
sustainable forestry. For example,
Drax is an active member of Energy
UK, Biomass UK and the CBI
We maintain regular dialogue with
our workforce through our MyVoice
Forums, briefings, weekly updates
and Q&A from our CEO and our
annual survey
Carbon pricing, CCS policy, biomass
sustainability, future energy policy
Energy policy, reputation of energy
sector, reputation of biomass sector,
Ofgem’s targeted charging review,
Health & Safety best practice
One Drax awards, benefits
review, Beyond Coal, impact of
transformation and restructure,
future strategy, trade union
relations, learning and development,
career progression and wellbeing
26
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Engagement over political
donations policy
While Drax makes no political donations in
the generally accepted definition of the term,
it is important that we engage with politicians,
political parties, policy makers and other
stakeholders. The engagement includes,
for example, sponsorship of events at party
conferences and facilitating visits to the areas
in which we operate where such activity is
closely tied to our business objectives. While
this type of expenditure is typically classified
as “commercial spend”, Drax is mindful of the
potential for these activities to be considered
political, or to be included on the Electoral
Commission Register.
At Drax’s 2019 AGM, a majority of shareholders
voted in favour of an increase in the authority
which would allow for inadvertent political
spending. However, 42% of shareholders
voted against the proposed increase. This
represented a significant fall in support
compared to previous years so we
implemented a systematic programme to
engage with shareholders to understand
how our approach could better align with
our investors’ expectations and address the
concerns expressed at the 2019 AGM.
We reviewed initial feedback received from
shareholders at the time of the AGM; analysed
spend from political engagement activities;
engaged a third party to conduct an external
benchmarking exercise on political donations
authorities; developed a new Political
Engagement Policy (Policy), which included
an aggregate expenditure cap of £125,000
reflecting initial shareholder feedback;
developed a strategy for engagement with
shareholders which was approved by the
Board in July 2019, along with the new Policy;
engaged with major shareholders both in
writing and in person; considered further
feedback received; published an update on our
website in October 2019, within six months of
the AGM, and published the new Policy on our
website: drax.com/about-us/drax-political-
engagement-policy/
Drax Group plc Annual report and accounts 2019
27
Working with our stakeholders continued
Workforce engagement
Workforce engagement forums –
MyVoice – were implemented in 2019.
In determining the most appropriate
engagement method to adopt, the
Board considered that the workforce
forums already in place in parts of the
business provided a strong basis on
which to develop and grow a Group-
wide structure. It was therefore agreed
to expand the existing infrastructure,
create a more formal governance
framework and provide appropriate
resourcing to support the forums.
training course to develop the skills
needed to be confident in fulfilling
their role. Penny Small, Chief
Transformation officer, is the
Executive Committee sponsor.
The chairs of each of the forums
come together quarterly to discuss
workforce issues across the business.
The chairs then meet with the Group
Chair and CEO to discuss the key
issues raised, with feedback from
these meetings then shared with
all forum members.
The forums are aligned to our
operating model, representing the
Pellet Production, Generation and
Customers businesses, and Core
Services. Each forum comprises up to
12 colleague representatives, including
the chair, and meets as regularly as
each forum feels is appropriate for
local needs.
Each forum is made up of members
drawn from nominated colleagues
from across the relevant business
unit, and each forum chair has been
selected by membership vote.
MyVoice forum members attended
an independently facilitated two-day
Matters discussed during 2019 include
how effectively communication filters
down from senior leadership to the
wider business: wellbeing, including
a greater focus on mental health;
and living our values. In response to
MyVoice feedback, the Safety, Health,
Environment and Welfare Leadership
Executive Committee, a sub-
committee of the Executive
Committee, has developed plans to
address wellbeing across Drax Group,
including mental wellbeing, which
have been shared with the MyVoice
forums to seek their input before
rolling out in 2020.
28 Drax Group plc Annual report and accounts 2019
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Ask the CEO
Each week employees are able to
ask, anonymously, questions of
the CEO on any subject. The CEO
then sends a weekly email to all
colleagues with his thoughts and
highlights of the week followed
by his responses to the latest
questions.
In 2019 employees asked nearly
2,000 questions in “Ask Will”.
Subjects ranged from questions
about strategy – with employees
enquiring and challenging to gain
deeper understanding of what we
do and plan to do; climate change
– including what Drax is doing to
help to tackle climate change, what
employees can do as individuals
and Will’s own views; areas of
concern around the business;
mental health and wellbeing; pay
and benefits around the Group and
new or innovative ideas.
Examples of action taken as a
result of “Ask Will” questions include
the development of a car-sharing
programme, enhancements to the
cycle-to-work scheme and the
development of a Group-wide
charitable giving programme.
Capital Markets Day
In November 2019 we hosted a
Capital Markets Day to update
investors on our strategy. Around
80 participants joined the Capital
Markets Day presentation,
reflecting a combination of existing
shareholders, investors and lenders.
A key theme of the event was the
business case behind our plans to
increase our self-supply of pellets.
The event included a presentation
by Dr Rebecca Heaton, our Group
Head of Climate Change, on the
ways in which we ensure our
biomass supply is sustainable
(for more on this see page 34).
There was an opportunity for
attendees to ask questions and,
once the main presentations were
over, meet with members of senior
management, including the CEO,
CFO, CEO Generation and Senior
Independent Director. Questions
focused on the long-term cost of
biomass, biomass sustainability
and the growing focus on
Environmental, Social and
Governance (ESG) matters.
Following the Capital Markets Day
we hosted an ESG site visit at Drax
Power Station to discuss biomass
sustainability, the future of gas and
the Just Transition.
All materials from the Capital
Markets Day, together with a video
of the presentations and the Q&A
session, have been made available
on the website at www.drax.com/
investors/capital-markets-day
In 2019 around
In 2019 employees asked nearly
80
participants joined the Capital
Markets Day presentation
2,000
questions in “Ask Will”
Zero Carbon Humber
In 2019 Drax Group, Equinor and
National Grid Ventures launched
the Zero Carbon Humber campaign
which commits them to work
together to explore how a large-
scale carbon capture use and
storage (CCUS) and hydrogen
production facility could be
constructed in the Humber in
the mid-2020s.
This initiative was the first
significant response from industry
following the UK Committee on
Climate Change’s Net Zero report
which found that CCUS and
hydrogen technology developed in
regional industrial structures is
essential if the UK is going to
achieve a net zero carbon economy
by 2050.
The programme means we will work
with partners including the Humber
Local Enterprise Partnership, local
Councils, trade unions, politicians,
and businesses across the region
to deliver what could be the world’s
first net zero carbon region.
In September 2019, the partnership
launched Capture for Growth, a
roadmap to guide the delivery of
the net zero industrial cluster on
Humberside by 2040. The cluster
could secure 55,000 jobs and
capture 15% of the UK’s current
annual CO2 emissions – the biggest
contribution to the UK’s climate
commitments of any region.
At the UN Climate Change
Conference in Madrid in December
2019 we announced our ambition
to become a carbon negative
company by 2030.
Drax Group plc Annual report and accounts 2019 29
Biomass cost reduction
Building a
long-term
future for
sustainable
biomass
is a key
strategic
objective
for Drax.
The key to delivering this objective
is reducing the cost of wood pellets
to a level where biomass generation
is economic without subsidy.
Current biomass generation at Drax
Power Station is supported under two
separate schemes. Three biomass units
receive support under the Renewable
Obligation scheme and one unit receives
support under the Contract for
Difference scheme. The support under
both these mechanisms ends on
31 March 2027. Today, without these
schemes, it is uneconomic to produce
renewable electricity from biomass.
The Group’s objective is to reduce the
cost of biomass by about 30% by 2027
– from around £75/MWh in 2019 to
around £50/MWh. We believe that
delivering this reduction will establish
an economic model for unsubsidised
biomass generation beyond 2027.
How will we do this?
Optimise existing capacity and
generation
Drax currently uses around seven million
tonnes of biomass, 1.4 million tonnes of
which are self-supplied by our operations
in the US Gulf.
As Drax’s pellet production business is
relatively immature – its first assets were
commissioned in 2015 – there are
significant opportunities to optimise,
improve processes and drive greater
efficiencies.
Current initiatives:
A co-location agreement with sawmill
operator Hunt Forest Products next to
the LaSalle pellet plant began production
in February 2019 and provides:
• Low-cost sawmill residues
• Reduced transportation costs
• Reduced processing. As sawmill
residues are a semi-processed material,
we can reduce the number of steps in
the production process, eliminating
chipping, drying and debarking
A rail spur linking LaSalle to the regional
rail network and our port facility at Baton
Rouge was commissioned in May 2019.
This increases transportation efficiency,
economies of scale, reduces cost and
carbon footprint.
Development of an enlarged chambering
yard at the port of Baton Rouge, by the
regional rail operator.
• Economies of scale in rail allowing
80-car train sets to operate from
our LaSalle and Morehouse sites
(previously 45-car train sets)
These initiatives and others have
contributed to a 3% year-on-year
reduction in cost per tonne, which
represents a saving of $5 per tonne
compared to 2018.
The larger projects will be accompanied
by small projects to improve operational
efficiency such as greater efficiency in
the loading of road haulage, which saves
50 cents per tonne. Over time these
improvements, when applied across the
supply chain, have the potential to deliver
significant incremental savings.
30 Drax Group plc Annual report and accounts 2019
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We have also identified plans to
expand our existing three sites, LaSalle,
Morehouse and Amite, by 350,000
tonnes over the next two years – an
investment of £50 million. This will
expand total capacity to around 1.85Mt,
provide economies of scale and allow
even greater utilisation of low-cost
residues. These projects support lower
cost wood pellets, while delivering an
attractive return on capital, with payback
before 2027.
Further expansion of self-supply capacity
Ownership of the supply chain provides
the opportunity to reduce cost and
create significant value, both pre- and
post-2027. This is why Drax aims to
increase self-supply capacity to five
million tonnes by 2027.
We are considering the development of
low-cost satellite plants in the US Gulf
which would be able to use our existing
infrastructure and sawmill residues to
produce low-cost wood pellets. We
believe this could add up to 0.5 million
tonnes of new capacity.
We will continue to assess opportunities
to build or buy new capacity to support
this ambition – both in the US Gulf and
elsewhere.
Expansion of the fuel envelope
When we converted Drax Power Station
units from coal to biomass we took a
conservative approach to boiler
chemistry and decided to use sustainable
biomass, such as US pine, because we
knew it would mitigate the risk of boiler
fouling issues.
To date, the operational experience has
been positive and this has allowed us to
now expand the fuel envelope and
chemistries we will consider for
renewable residues. This opens up the
opportunity to consider a broader range
of products and geographies which could
have attractive cost characteristics while
meeting our strict sustainability criteria.
Over the last decade, as part of our work
on biomass, we have screened hundreds
of different types of materials, and we’re
now using this knowledge of chemistries
and operational characteristics to inform
the expansion of the fuel envelope.
Examples of these materials include
sugar cane residues (bagasse), nuts
and agricultural residues.
Trading and optimisation
An integral part of our strategy is to
develop a biomass trading capability. This
is an optimisation and risk management
activity to support our aim to deliver
lower-cost pellets, and not proprietary
trading, through which we aim to:
• manage internal supply, or short-term
supply imbalances
• optimise internal and external supply
as we build our self-supply capacity
• manage the different levels of demand
we might see after 2027
• take advantage of opportunities in
other markets as the global biomass
market develops
Beyond 2027
Biomass cost reduction is a significant
value opportunity, with attractive returns
delivered pre-2027. With a lower cost
base, we believe that biomass can be
economic without subsidy. We also
believe that reducing costs supports the
development of bioenergy with carbon
capture and storage (BECCS). The UK
requires more renewables and BECCS
if it is to achieve its target of net zero
by 2050. These factors inform our
expectations.
However, if biomass generation is
uneconomic post-2027, we retain the
option to sell to other international
markets which we expect to grow in
the coming decade. Being the largest
low-cost producer in the world would
give us strategic optionality and a
competitive advantage in this regard.
Drax Group plc Annual report and accounts 2019
31
System stability
How can we
be the leading
provider of
system stability?
What’s the issue?
Keeping the lights on requires not just
electricity generation, but also a range
of non-generation activities which help
provide stability, flexibility and reliability.
These system support services include:
Inertia – The stored energy in
synchronous generators which slow down
the rate of changes in system frequency,
Voltage control/Reactive Power
(MVars) – Reactive power is used to
manage power flows around the
transmission system and helps to support
voltage in the event of a system fault.
Reserve – The system operator must
be able to ensure a balance between
demand and generation at all times
to prevent power cuts at times of peak
demand. This increased and decreased
generation is sometimes referred to as
headroom and footroom respectively.
Managing demand can also be used
to the same effect.
Response – The automatic change in
generation output, or in demand, to
maintain a system frequency of 50Hz.
This frequency response is required
every second of the day.
Historically, large coal- and gas-fired
power stations were able to deliver these
services as a by-product of producing
reliable baseload electricity.
centre of the UK. The power station is
well-situated to provide system support
services to central and northern England
and Scotland.
Now, these older coal and gas plants are
being shuttered in the UK and being
replaced by intermittent renewable
energy sources, principally wind. This
reduces carbon emissions but makes the
provision of these system support services
more challenging. Wind, by its nature, is
intermittent and, for the most part, unable
to provide system support services.
So as demand for system support services
increases, there are fewer assets, such
as large power stations, able to provide
them. This is increasing the cost of
operating the system and is a growing
source of value for generators like Drax
who can provide these services.
How can we do this?
Our focus as a generator is to provide
the flexible, renewable and low carbon
generation millions of households rely on.
Drax operates a portfolio of sustainable
biomass, hydro and gas assets which are
well positioned, both geographically and
operationally, to provide these services
to the UK electricity market.
Pumped Storage Hydro – Cruachan
Power Station in western Scotland has
440MW of fully flexible electricity
generation that can be brought online
in two minutes from rest. Cruachan has
large-scale energy storage as well as a
full suite of system support capabilities.
The power station, which is capable
of 15 hours of full-load generation
and storage, is well located to support
regional nuclear and offshore Scottish
wind farms.
Gas – CCGT – Drax has 2GW of flexible
generation at Damhead Creek, Shoreham
and Rye House power stations in
southeast England. These are well
located in a key demand centre.
Demand-side response – System support
is principally delivered through
generation, but we also have a growing
opportunity to provide some of these
services through our Customers business.
We provide electricity to large and
industrial customers, in addition to SMEs.
Working with these larger customers
we expect to provide demand-side
response services to the electricity
market – reducing demand at times
of lower supply and vice versa.
Black Start – The ability of a generation
unit to start up without external
electricity supplies following a total
or partial loss of power from the
transmission system.
These assets include:
Sustainable biomass – Drax Power
Station in north Yorkshire has 2.6GW of
flexible renewable generation in the
32 Drax Group plc Annual report and accounts 2019
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Giving customers control of their energy
We provide all customers
with the ability to control
and optimise energy use,
cost and source.
Through the provision of insight,
digitisation, and services, we provide all
customers with the opportunity to control
and optimise energy use, cost and source.
Demand-side Response
Haven Power is the leading challenger
brand provider of renewable energy and
services to Industrial and Commercial
customers. Haven’s large portfolio of
industrial and commercial customers
provides opportunities to provide system
support services to the energy market
and create value for customers.
In November 2019, United Utilities became
the first customer to sign up to Haven
Power’s Asset Flex project. Known as
Demand Side Response (DSR), customers
are provided with financial incentives to
turn down, or off, non-essential equipment
at times of peak demand depending on
the customer’s needs.
isn’t running at full blast for the whole
time. It’s simple for the customer: Drax
has the opportunity to create value
from the asset in the provision of system
support services and in exchange,
customers get a cheaper tariff.
By reducing demand, typically at times
of peak demand, which are also periods
of higher carbon intensity, Drax Group
is supporting the energy system and
delivering the Group’s purpose of enabling
a zero carbon, lower cost energy future.
Electric Vehicles (EVs)
Drax is developing an end-to-end bundle
aimed at making it easier for companies
to switch to EVs. SES Water was the
first partner to trial this bespoke package,
which includes charging infrastructure,
operating software, EV leasing, and
the renewable electricity needed to
power them.
Haven installs its technology to turn
down or off customers’ energy demand
in peak times to reduce costs, and is
designed to always work within the
constraints set by the customer. For
example, turning down an industrial fridge
or freezer where the ambient temperature
can remain within certain limits even if it
The aim is to deliver EV charging and
battery optimisation, which ties into
our customer control strategy. By
understanding all aspects of EVs from
telematics to charge-point hardware
and software we are identifying
opportunities to create value for
customers and the Group.
Battery power
Energy storage through batteries is also
being tested with customers who already
generate renewable energy onsite.
Energy storage is the key to helping
customers maximise the benefit of the
energy they generate from their own
small-scale renewables, providing greater
flexibility to the grid and smoothing
volatility in the system.
Drax has partnered with energy storage
company Eaton, which offers new and
second-life batteries, such as used EV
batteries, for installations on customer
sites. Eaton can quickly scale-up the
deployment of small commercial energy
storage systems to larger, industrial-scale
units, helping to support more customers.
Customers are asking us about
technologies to make their sites more
efficient and sustainable, so we’re
reacting to that. Lots of our customers
want to improve the resilience of their
sites. This area will continue to grow.
Drax Group plc Annual report and accounts 2019 33
Biomass sustainability
with Dr Rebecca Heaton, Group
Head of Climate Change at Drax
There’s widespread recognition among
leading science-based organisations,
such as the UN’s Intergovernmental Panel
on Climate Change, that sustainable
biomass has a vital role to play in meeting
climate targets. Sustainable biomass has
three big benefits: it generates renewable
electricity, supports forest growth and is
a route to negative emissions using
BECCS. At Drax, replacing coal with
biomass to generate power has already
delivered carbon savings of more than
80% since 2012.
Generation of electricity using biomass
functions as a closed loop carbon system.
When trees grow, they absorb carbon
dioxide. Emissions from using biomass to
generate electricity are balanced by the
absorption of CO2 from the forests that
are growing. This differs from burning
coal where the emissions remain in the
atmosphere.
It’s important to remember that the
carbon benefits are only realised if the
biomass is sustainable. There are many
criteria for sustainable biomass, including
taking wood from managed forests –
those that are replanted after harvesting,
not causing deforestation, or cutting
old-growth forests or harvesting wood
from protected areas.
We’re committed to sustainable biomass
which is why our Responsible Sourcing
Policy for Biomass goes beyond existing
regulations, and commits us to only take
feedstocks that the science says delivers
climate benefits. Sustainable biomass
helps to provide a market for the low-
value residues from a working forest.
This creates an incentive for landowners
to have more forests under management,
contributing to greater forest growth and
more CO2 captured. Sustainably managed
forests are typically healthy, support
biodiversity and can absorb more carbon
than unmanaged forests.
We can see evidence of this in the US,
where we source almost two thirds of our
pellets. According to US Forest Service
data (Forestry Inventory Analysis database,
November 2019) there is an average
annual surplus of nearly 200 million m3
of new growth compared to harvesting.
In Canada, in 2017, the surplus of growth
compared to harvesting was 63 million m3
(National Forestry Database, 2017).
Carbon dioxide
(CO2)
Why
sustainable
biomass is
good for
forests and
the climate
Biomass Carbon Cycle
Sustainably
managed forest
Biomass power
station
CO2
CO2 captured,
transported and
stored by BECCS**
Logs
Forestry residues*
Wood pellets
Construction/
Manufacturing
Sawmill
Wood pellet plant
Sawmill
residues
*
Forestry residues includes branch tops and bark, thinnings and low-grade roundwood. For more information, see Sourcing Sustainable Biomass on page 41
** BECCS is a bioenergy, carbon capture and storage system, with CO2 resulting from power generation captured and stored in an aquifer under the North Sea
34
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Forests are managed for multiple
objectives, including biodiversity, water
management and timber production. The
main timber product from a forest is saw
logs. These large, high-value logs produce
wood products for construction or
furniture, ending up as long-term carbon
storage. Around half of a saw log going
into a sawmill comes out as sawdust.
In some parts of the world, that is simply
burned or ends up in a landfill.
Almost 40% of our wood pellet feedstock
is, in fact, those sawmill residues. Of the
rest, around 30% is thinnings, branches,
tops and bark and 30% low-grade
roundwood.
Around a fifth of the material we use to
make pellets is thinnings, where trees are
taken out at various intervals to allow the
remaining trees to grow bigger. Thinning
also stops pests, diseases and fire from
ripping through the forests and supports
biodiversity. Providing a market for these
thinnings helps these forests thrive.
How do you know that
the wood Drax uses is
sustainable?
Everything we do is independently
audited and we abide by all the current
requirements for sustainable biomass.
The UK and EU have robust regulatory
frameworks for sustainable biomass.
Drax’s requirements on biomass
sustainability exceed these rules. We
also use external certification through
the Sustainable Biomass Program (SBP),
which sets a standard that is audited
by independent third-party auditors.
It’s also about choosing the right
feedstocks in the first place – something
we’re committed to ensuring.
We’re committed to
sustainable biomass
which is why our
biomass sourcing
policy goes beyond
existing regulations.”
See more online at
www.vimeo.com/244685668
Why do you ship wood
from the US and Canada
to the UK?
How will the
Independent Advisory
Board (IAB) work?
The six-member IAB is chaired by the
UK government’s former chief scientific
adviser Professor Sir John Beddington.
The IAB will help to keep our sourcing
guidelines under regular review so they
can evolve as the science develops. You
can read more about the IAB on page 41.
We expect the IAB to challenge us every
step of the way, and believe it’s right that
companies using biomass go beyond
existing regulations to ensure that it
makes a positive contribution to our
climate and the environment.
What are the
next steps?
A big part of our work in 2020 is to
increase transparency on our biomass
sourcing and its impacts. We will provide
that evidence by using big data and
satellite images to evaluate the impact on
forest cover, forest carbon and biodiversity
in areas that supply Drax’s pellet mills (see
Healthy Forest Landscapes on page 44).
We are working with non-profit groups
and NGOs, including Earthworm
Foundation and biodiversity-focused
group NatureServe, to understand the
social and economic impacts and benefits
in the areas where we source our biomass.
In 2020, we will broaden our work with
Earthworm on our healthy forest
landscapes programme. We will also
expand the pilot that evaluates the
impact on forest cover and biodiversity
to more sites and publish findings from
our initial work.
Ensuring the sustainability of the biomass
we use is vital if we’re to move to the
next stage and deliver negative emissions
using bioenergy carbon capture and
storage while continuing to supply
flexible, renewable power to the UK grid.
Dr Rebecca Heaton
Group Head of Climate Change
Biomass is best sourced from vast forests
with established forest industries which
generate a lot of low-value residue. North
America, with its well-established and
sustainable commercial forest industry,
meets those conditions. That’s why we
bring a lot from the US. We transport
the pellets mostly by train and ship, with
a small proportion of the journey using
fuel-efficient trucks. We track and
manage all the journeys to ensure the
supply chain is as low carbon as possible,
and report the final number for our
biomass supply chain on page 43, which
is independently audited.
We’re also involved in various
transportation initiatives such as
the Smart Green Shipping Alliance.
Tell us about the new
Responsible Sourcing
Policy for Biomass
As a significant user of sustainable
biomass for energy we wanted our policy
to go beyond existing legislation and
requirements.
The policy we published in 2019 (available
here www.drax.com/sustainability) draws
on recommendations made by Forest
Research, the research agency of the
Forestry Commission, in a report
commissioned by the European Climate
Foundation. Alongside the new policy, we
also launched an Independent Advisory
Board of scientists, who will keep us at the
forefront of the latest scientific thinking
and best practice on biomass sourcing.
Our policy has four parts to it. First, we
commit to only use feedstocks which the
science says delivers climate benefits.
This means we won’t use biomass that
drives harvesting decisions that would
adversely affect the long-term potential
of forests to store carbon. Second, we will
protect the natural environment – for
example, by not causing deforestation.
Third, we will support people and
communities. Finally, we committed
to carry out research, outreach and
intervention, which includes active
engagement with the communities
where we operate and NGOs.
Drax Group plc Annual report and accounts 2019 35
Building a sustainable business
Achieving a positive long-term
economic, social and environmental
impact together.
36
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
At Drax, being a sustainable business means achieving a positive long-term
economic, social and environmental impact as part of the Company strategy.
Additional information on our approach
to sustainability is available at
www.drax.com/sustainability
Our Priorities
We have identified non-
financial priorities that are
material to our business and
important to our stakeholders.
Our 2019 progress and
performance are reported
under each priority area
as follows:
Environment
Carbon Emissions page 38
Environmental
Impact page 40
Sourcing Sustainable
Biomass page 41
Healthy Forest
Landscapes page 44
Our Impact on the Sustainable Development Goals
The 17 United Nations’ Sustainable Development Goals (SDGs) are
a blueprint to achieve a better and more sustainable future for everyone.
We have identified six SDGs and associated targets where we can make
the greatest positive impact. Drax is a participant of the United Nations
Global Compact (UNGC) and sits on the UNGC UK Advisory Group.
Affordable and
Clean Energy
We contribute to the share
of renewable energy in the
global energy mix.
Climate Action
We contribute to SDG 13
to take action to combat
climate change and
its impacts across
our business.
Life on Land
We promote the
implementation of
sustainable forest
management in all
working forests that
we source from.
Social
People and Culture page 45
Health, Safety and
Wellbeing page 46
Positive Social Impact
page 48
Industry, Innovation
and Infrastructure
We contribute to
investment in
infrastructure and
innovation in the energy
sector, progressing the
technological capabilities
of our sector and
contributing to research
and development spending.
Sustainable Cities
and Communities
We contribute to SDG 11
to make cities and human
settlements inclusive, safe,
resilient and sustainable.
Partnerships for the Goals
We proactively collaborate
and engage with
stakeholders and seek
partners to achieve our
purpose of enabling a zero
carbon, lower cost energy
future. This directly
enhances the global
partnership for sustainable
development to support the
achievement of the Goals.
Our activities are underpinned by ethics and integrity. We are committed to conducting
business responsibly, in accordance with our values and all relevant laws and regulations.
We believe in doing the right thing in all our business activities, wherever we operate.
Ethics and Integrity
Ethics and Integrity page 49
Drax Group plc Annual report and accounts 2019 37
Building a sustainable business continued
Environment
Carbon Emissions
Drax has a significant role to play in
the transition to a low-carbon economy
and this informs our purpose to enable
a zero carbon, lower cost energy future.
We are committed to supporting the
UK government to achieve net zero
carbon emissions by 2050.
Managing Climate Change Risks
and Opportunities
We are committed to the identification,
management and disclosure of our
climate change risks and opportunities
in line with the recommendations of the
Task Force on Climate-related Financial
Disclosures (TCFD).
In 2019, we responded to the CDP Climate
questionnaire and received a score of C.
We introduced climate change as a new
principal risk category (see Principal Risks
and Uncertainties on page 54).
Our Negative Emissions Ambition
At the UN Climate Change Conference
COP 25 in December 2019, Drax
announced our ambition to become
carbon negative by 2030. We have signed
up to the Science Based Targets initiative
to further assure that our target is aligned
with climate science.
Using technologies such as Bioenergy
with Carbon Capture and Storage
(BECCS), Drax aims to remove more
carbon dioxide from the atmosphere
than it produces, creating a negative
carbon footprint for the Group. Our
leading ambition is only achievable
with an effective negative emissions
policy and investment framework for
technologies such as BECCS.
Innovating to Decarbonise our Business
Carbon capture and utilisation is part
of our business strategy and we made
progress on this work in 2019.
Drax has set up a Bioenergy Carbon
Capture and Storage (BECCS)
demonstration pilot at Drax Power
Station with C-Capture, a start-up from
the University of Leeds. We also secured
funding from the UK Government to
explore the feasibility of building a
second carbon capture pilot at Drax
Drax’s ambition is to be carbon negative
by 2030. Having pioneered the use of
sustainable biomass, Drax now produces
12% of the UK’s renewable electricity.
With the right negative emissions policy,
we can do much more, removing millions
of tonnes of emissions from the
atmosphere each year.”
Generation Technology Mix
From 2018 to 2019, the mix of
technologies in the Generation
business diversified as we expanded
our portfolio of dispatchable, flexible
assets to support the energy
system’s growing use of intermittent
renewable energy.
Share of Actual Generation Output
by Technology Type (%)
100
80
60
40
20
0
Hydro
Gas
Biomass
Coal
2018
2019
Will Gardiner
Group CEO
Power Station, using molten carbonate
fuel cells as a technology for capturing
carbon dioxide.
In September 2019, together with Equinor
and National Grid Ventures, we launched
the Zero Carbon Humber Campaign
(www.zerocarbonhumber.co.uk) to
develop the first zero carbon industrial
cluster in the UK by 2040.
Carbon Emissions Performance
Group total carbon emissions (Scope 1
and 2) fell 47% between 2018 and 2019.
This reflects a reduction in coal
generation and an increased share of
generation from biomass, gas, hydro and
pumped storage. The reduction in carbon
emissions at Drax Power Station had the
most significant impact. With four of the
six generating units now converted to
biomass from coal, emissions from Drax
Power Station have fallen from 22.7
million tCO2 in 2012 to below 1 million
tCO2 in 2019.
Significant emissions reduction
activities undertaken in 2019 included
the installation of a new high-pressure
turbine on Unit 2 at Drax Power Station,
at a cost of £12.5 million, to improve its
efficiency. We have also improved the
energy efficiency at some of our
Customers business facilities, with
measures such as installing solar panels,
LED lighting and battery storage.
38
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Carbon Emissions
Generation Carbon Emissions1
Group Total Scope 12
Group Total Scope 23
Group Total Scope 1 and 2
Proportion of Group emissions within the UK
Biologically Sequestered Carbon Emissions
(Biomass Combustion)
Biologically sequestered carbon4
Total Energy Consumption
Group total energy consumption
Group total energy consumption within the UK
Unit
2019
2018
2017
ktCO2
ktCO2e
ktCO2e
ktCO2e
%
1,958 *
2,049 *
322 *
2,371 *
93.2
4,139 §
4,233 §
252 §
4,484 §
96.5
6,215 §
6,296 §
209 §
6,505 §
98.5
ktCO2e
12,795
13,019
12,212
kWh 46,025,306,198
50,269,781,751
kWh 43,852,816,521 48,075,425,472
–
–
Notes
Greenhouse gas emissions (GHGs) are reported against a criterion of operational control. This means emissions from all sites that are wholly owned by Drax or where Drax has
operational control of the emission pathway through the opportunity to select and manage its own suppliers. GHGs are reported in units of carbon dioxide equivalent (CO2e).
Conversions from non-CO2 GHGs use the most up-to-date published IPCC global warming potentials for a 100-year period without climate carbon feedbacks. A materiality threshold
of 75 tCO2e/year has been applied.
(1) Generation emissions covers all direct emissions from our own business operations that fall under the scope of the European Union Emissions Trading System (EU ETS)
(2) Scope 1 covers all direct emissions from our own business operations, across all sites
(3) Scope 2 covers all indirect emissions associated with our electricity and heat consumption, across all sites
(4) The biogenic CO2 emissions resulting from generation are counted as zero in official reporting to both UK authorities and under the European Union Emissions Trading System
(EU ETS) as the use of sustainable biomass is considered to be CO2 neutral at the point of combustion. This methodology originates from the United Nations Framework
Convention on Climate Change
§ 2017 and 2018 data has been recalculated to reflect an update to the materiality threshold applied
*
Limited external assurance using the assurance standard ISAE 3000 for 2019 data as indicated. For assurance statement and basis of reporting see www.drax.com/sustainability
Carbon Intensity Performance
The expansion and diversification of our generation portfolio to include hydro, pumped storage and gas, alongside reduced coal
generation and increased biomass generation, has reduced the carbon intensity of our total generation by 50% in 2019 compared
to 2018.
Carbon Intensity
Generation5
Generation emissions per GWh of electricity generation
Group emissions per GWh of electricity generation
Unit
GWh
tCO2/GWh
tCO2e/GWh
2019
17.3
113
137
2018
18.3
226
245
2017
20.0
311
325
(5) Excluding Cruachan Power Station which utilises electricity import for pumping to balance the grid
Generation6 Emissions Intensity (tCO2/GWh)
1000
800
600
400
200
0
2012
2013
2014
2015
2016
2017
2018
2019
Notes:
(6) Generation emissions covers all direct emissions from our own business operations that fall under the scope of the
European Union Emissions Trading System (EU ETS)
Zero Carbon Energy Supply
Our Customers business is committed
to sourcing the renewable power that
our customers want. We provided over
150,000 UK businesses with 100%
renewable electricity, making our
Customers business the largest
renewable electricity supplier to
UK business in the Ofgem compliance
period ending in 2019.
Our Customers business fuel mix
disclosures are available at
www.drax.com/opus-sources
www.drax.com/haven-sources
Drax Group plc Annual report and accounts 2019 39
Building a sustainable business continued
Thermal Generation Emissions to Air by Fuel Type
Biomass Generation1
Nitrogen Oxides
Sulphur Dioxide
Particulates
Coal Generation2
Nitrogen Oxides
Sulphur Dioxide
Particulates
Gas Generation3
Nitrogen Oxides
Carbon Monoxide
Unit
2019
t
t
t
t
t
t
t
t
7,104
986
415
746
601
35
625
71
(1) Biomass Generation covers units 1,2,3 and 4 at Drax Power Station
(2) Coal Generation covers units 5 and 6 at Drax Power Station
(3) Gas Generation covers Blackburn, Damhead Creek, Rye House and Shoreham Power Stations
UK Biomass Production4 Emissions to Air
Nitrogen Oxides
Sulphur Dioxide
Carbon Monoxide
Particulates
(4) UK Biomass Production covers Daldowie Fuel Plant
Thermal Generation5 Water Use
Total water abstracted
Total water discharged
Unit
2019
t
t
t
t
Unit
m3
m3
4.76
1.68
1.76
0.04
2019
177,215,811*
167,953,231*
(5) Thermal Generation covers Blackburn, Damhead Creek, Drax, Rye House and Shoreham Power Stations
Hydro Generation6 Water Use
Total water abstracted
(6) Hydro Generation covers Galloway and Lanark Hydro Scheme
Pumped Storage7,8 Water Use
Total water abstracted from reservoir
Total water abstracted from Loch Awe
(7) Pumped Storage covers Cruachan Power Station
(8) Excluding volume of water collected via the aqueduct system
Unit
2019
m3 3,370,272,574*
Unit
m3
m3
2019
263,015,328*
207,277,224*
Notes:
‘Total water abstracted’ covers water data reported to the Environment Agency and Scottish Environment Protection
Agency as abstraction.
*
Limited external assurance using the assurance standard ISAE 3000 for 2019 data as indicated. For assurance
statement and basis of reporting see www.drax.com/sustainability
Environmental Impact
We are committed to managing,
monitoring and reducing the
environmental impact of our operations
and the Group environment policy
outlines our approach.
The Environmental Management Systems
(EMS) at our Generation sites in the UK
are certified to ISO 14001. The EMS at
our Pellet Production sites in the US
are based on the principles of, but not
certified to, ISO 14001.
We self-reported one environmental
permit breach at Drax Power Station
in 2019. The regulator categorised it
as having no impact on human health,
quality of life or the environment.
Emissions to Air
Our work in 2019 focused on future
compliance with the requirements of the
EU Best Available Techniques reference
documents (BREFs), which will further
reduce emission limits, entering into
force in 2021.
At Drax Power Station, emissions of
nitrogen oxides, sulphur dioxide and
particulates continued to trend
downward. This can be partially attributed
to a reduction in total generation, as well
as the first full year of operation of Unit 4
since its conversion to biomass from coal.
Our UK gas generation and biomass
production sites are also permitted for
releases to air by the Environment Agency
and Scottish Environment Protection
Agency respectively. 2019 emissions to
air were in line with expectations for the
generation and production levels achieved.
Water Use
Water is utilised at our thermal generation
sites for operational and cooling
processes, and losses occur through
steam and ancillary processes. Procedures
are in place to manage water system
efficiency and usage and to ensure that
all discharge consent limits are met.
The Galloway and Lanark Hydro Scheme
utilises abstracted water that is returned
to the environment immediately.
At Cruachan Power Station, water
abstracted from the upper reservoir is
used for generation and water abstracted
from Loch Awe is used for pumping.
40
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
The Responsible Sourcing policy outlines
our forest biomass sustainability
commitments:
1. We will reduce carbon dioxide
emissions
We are committed to ensuring the
biomass we use makes a positive
contribution to tackling the climate
change crisis and fulfilling the UK’s
Paris Agreement targets.
2. We will protect the natural environment
We recognise our duty to keep forests
thriving and to respect the many benefits
they bring, including carbon storage,
protection of soil and water quality,
supporting biodiversity and provision
of habitat.
3. We will support people and
communities
From state-owned forests to
smallholdings, and from the US Southeast
to the Baltic states, forest owners, forest
workers and communities in our sourcing
areas are bound by their common reliance
on forests for employment, wellbeing and
quality of life.
4. We will invest in research,
outreach and intervention
The strength of our collaboration
with others will improve the sourcing
choices we make. We are committed
to working with governments, non-
governmental organisations, academia
and other stakeholders to continually
improve biomass sourcing and develop
best practice.
Sourcing Sustainable Biomass
At Drax we use wood pellets sourced
from sustainably managed working
forests and residues from forest
industries to generate low-carbon,
renewable electricity. We ensure our
biomass is sustainable and compliant
with appropriate legislation through a
combination of proactive supplier
engagement, third-party certification
schemes and our own audits and checks.
The Group Sustainability policy outlines
our requirements and it is evidenced and
included in biomass supplier contracts.
Details of our due diligence process are
available at www.drax.com/sustainability.
Responsible Sourcing Policy for Biomass
In 2019, we published Responsible
Sourcing: A policy for biomass from
sustainable forests, available at www.
drax.com/sustainability/responsible-
sourcing/. This Responsible Sourcing
policy for biomass strengthens our
approach in line with recommendations
made by a report commissioned by the
European Climate Foundation. This is
to provide further assurance that the
sustainable biomass we source makes
a net positive contribution to climate
change, protects and enhances
biodiversity and has a positive social
impact on local communities.
Independent Advisory Board
During the year, we established an
Independent Advisory Board (IAB)
of scientists and leaders in the field
of sustainability to provide impartial
advice and guidance. The IAB will
advise on feedstock options, forest
science and how Drax can optimise
carbon benefits. It will also give
advice on the role of sustainable
biomass in Drax’s climate change
mitigation activities and in
supporting the transition to a
net zero energy system.
The advice from the IAB means our
stakeholders can be assured that
Drax will keep our Sustainability and
Responsible Sourcing policies under
review and that the biomass we use
follows the latest scientific research
and best practice.
The independent group is chaired
by Professor Sir John Beddington,
former UK government Chief
Scientific Adviser. It will meet twice
a year and will provide feedback and
make recommendations on Drax’s
sustainable biomass approach and
performance, which will be published
on our website.
As the science
evolves, we
will make
recommendations
to ensure that
the biomass
used at Drax
makes a positive
contribution to
our climate and
the environment.”
Sir John Beddington,
IAB Chair
Drax Group plc Annual report and accounts 2019 41
Building a sustainable business continued
Our Sustainable Biomass Sourcing
Requirements
At Drax, all our biomass suppliers must
demonstrate that all necessary
sustainability and legal requirements are
met. Supplier compliance is evidenced
either by our own checks and third-party
audits or by Sustainable Biomass Program
(SBP) certification. Drax was instrumental
in the creation of SBP, which is a
certification system for woody biomass.
We encourage our suppliers to progress
from our own checks and third-party
audits commissioned by Drax towards SBP
certification. In 2019 93% of the woody
biomass we sourced was SBP certified,
an increase compared to 86% in 2018
and exceeding our target of 92% for 2019.
No concerns regarding biomass supplier
sustainability compliance were raised
or escalated to the Group Ethics and
Business Conduct Committee or the
Executive Committee in 2019.
Average % SBP-certified material
100
80
60
40
20
0
Drax audit
process
material
SBP-certified
material
2017
2018
2019
Maintaining Forest Carbon Stocks
We are committed to sourcing
sustainable biomass that
contributes to the long-term
maintenance of growing stock
and productivity and that helps to
improve the health and quality of
forests at a local and regional level.
We monitor forest inventory
data and local industry trends,
in addition to certification and
our auditing process, to determine
whether biomass demand is having
an impact on regional forest
industries. This allows us to make
informed sourcing decisions.
Drax has recently completed the
first phase of our planned
Catchment Area Analysis reports
at the Drax Biomass Amite and
Morehouse Bioenergy Plants in the
US South and also for our suppliers
in Estonia. These reports are
available on the Drax website. The
aim of this analysis is to evaluate
the trends occurring in the forestry
sector around the plant and to
determine what impact the pellet
mill may have had in influencing
those trends, positively or
negatively. This includes the impact
on harvesting levels, carbon stock,
growth rate, wood prices and the
production of all wood products.
The “total growing stock” is the
amount of wood stored in the
forest. Between 2006 and 2018
the total growing stock surrounding
the Drax Biomass Morehouse
Bioenergy Plant increased by
68 million metric tonnes.
Biomass Sources in 2019
In 2019 our biomass was sourced from established, responsibly managed working forests in the US South, Europe, Canada,
South America and Russia. To enhance our biomass supply chain transparency, we provide detailed supply chain information
at Drax ForestScope http://forestscope.info.
Drax Power Station Biomass Pellet Feedstock Sources in 2019
Country
USA
Canada
Latvia
Portugal
Estonia
Russia
Brazil
Belarus
UK
Lithuania
Other
Sawmill
Residues (t)
1,345,906
956,170
273,081
19,144
55,267
45,715
–
71,387
–
17,524
Branches, Tops
and Bark (t)
710,231
127,996
106
5,465
4,280
7
–
<1
–
<1
End of Life
Timber (t)
231
–
–
3,450
–
–
–
–
–
–
Thinnings
(t)
1,393,377
–
3,535
44,600
61,261
–
–
–
–
954
Low Grade
Roundwood (t)
1,126,435
31,034
343,592
91,500
14,210
–
115,700
5,047
–
–
Short Rotation
Forestry (t)
–
–
–
2,524
–
–
–
–
–
–
Agricultural
Residues (t)
32,625
–
–
–
–
88,776
–
–
30,920
–
Total
(t)
4,608,805
1,115,199
620,315
166,684
135,018
134,498
115,700
76,434
30,920
18,478
European
Total
5,902
2,790,096
<1
848,087
–
3,681
–
1,503,728
–
1,727,518
–
2,524
22,761
175,082
28,665
7,050,717
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Drax Group plc Annual report and accounts 2019
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Governance
Financial statements
Shareholder information
Biomass Supply Chain Emissions
We monitor each step in the supply chain
to ensure our requirements are met and
greenhouse gas (GHG) emissions
associated with producing our biomass
are calculated according to regulatory
requirements.
The UK Government has set a limit on
biomass supply chain GHG emissions
which must be met by generators to be
eligible for support under the Renewables
Obligation and Contract for Difference
schemes. The current limit is 285
kgCO2-eq/MWh of electricity, reducing to
200 kgCO2-eq/MWh of electricity in 2020.
In 2019, our average biomass supply chain
GHG emissions amounted to 124 kgCO2-
eq/MWh* of electricity. This is lower than
our 2018 average biomass supply chain
GHG emissions and 56% less than the
UK Government limit.
* Limited external assurance using the assurance
standard ISAE 3000 for 2019 data as indicated.
For assurance statement and basis of reporting
see www.drax.com/sustainability
Additional information on our
biomass sourcing is available at
www.drax.com/sustainability
Drax Power Station Average Biomass Supply Chain GHG Emissions
Average Biomass Supply Chain
GHG Emissions
Unit of
Measure
kgCO2-
eq/MWh
2019
2018
2017
2016
124 *
131
130
122
2015
114
Drax Power Station Average Biomass Supply Chain GHG Emissions in 2019 (%)
50%
<1%
2%
1%
8%
4%
20%
12%
3%
Cultivation
Harvesting
Chipping
in forest
Transport to
pellet plant
Drying
Pelletising
Transport
to port
Shipping
Rail to Drax
Drax Group plc Annual report and accounts 2019 43
Building a sustainable business continued
Healthy Forest Landscapes
Our Partnership with Earthworm
Drax has partnered with Earthworm
Foundation (formerly The Forest Trust)
to support our approach to responsible
biomass sourcing. Earthworm are
not-for -profit, responsible sourcing
experts, experienced in working with
corporate entities developing landscape
scale approaches in similar commodity
supply chains.
The core programme we are jointly
pioneering has been called Healthy
Forest Landscapes.
Healthy Forest Landscapes Programme
At Drax, our approach to sourcing
biomass responsibly is governed by
environmental regulation, our
Sustainability and Responsible Sourcing
policies, our own checks and third-party
audits or Sustainable Biomass Program
(SBP) certification.
We recognise such traditional
approaches and certification audits
are detailed and, although we publish
summaries of the output, are not readily
digestible by a wide, interested audience.
The Healthy Forest Landscapes
programme aims to provide further
objective and quantified transparency
and assurance on our ecological, social
and economic impacts in our supply
catchment areas. The programme is
piloting an approach to capturing
remotely sensed data, and other credible
origin publicly available information,
and sharing the arising metrics that
consider the entire source catchment
area we are operating in – albeit that
the Drax demand is only one small part
of a larger, dynamic market for wood
in each catchment.
Alongside this, we are looking for
opportunities to proactively intervene,
as appropriate and feasible, in those
instances where changes in our sourcing
landscapes have been identified.
Developing our Programme Approach
During the year, we undertook a
stakeholder engagement process with
Earthworm in the source catchment
area around one of our pellet mills and
with other stakeholders. We identified
and confirmed four key forest biomass
source catchment metrics to be used
as common indicators across all our
sourcing geographies. These are: forest
cover, biodiversity, carbon stock and
socio-economic wellbeing.
Looking Ahead
During 2020, we will continue piloting
technology options in other geographies
with third party providers. We aim to
be in a position to share more widely
the selected technology, programme
challenges and more detailed output
during 2020. We expect to socialise
the approach with other purchasers
of wood products derived from the
same geographies to test the appetite
for broader collaborative adoption.
Over the next four years, we aim to
roll out the Healthy Forest Landscapes
programme for all our wood source
catchment areas. Ultimately Drax will
be able to track and report these key
metrics for our specific and aggregate
impact on key dimensions of forest
landscape health in a very timely
and accessible way.
Piloting Technology Options
In 2019, we began to pilot technology
options to establish how best to gather
the data needed to provide credible
and replicable measures for our
identified metrics.
We piloted the use of big data
and remote sensing in the source
catchment area of our Amite
BioEnergy Plant in Mississippi, USA.
Big data and automated interpretation
of satellite imagery was applied to
develop a time series from before our
plant started operation of forest cover,
biodiversity and carbon stock metrics.
Forest Cover Maps
The forest cover analysis is arguably
the simplest, of the metrics.
The mapping captures the changes
in forest cover across the Amite source
catchment area from 2010, before
the Amite BioEnergy Plant was
commissioned in 2015, until 2018.
Analysis then shows forest cover,
in aggregate, modestly increasing
over the time series – supporting
our commitment and other publicly
available data that there has been
no deforestation in the catchment.
Detailed analysis shows a working
landscape where forests are harvested
and replanted, as we’d expect, in
a continuous cycle. Satellite data
supports on the ground analysis
(Forest Inventory and Analysis data)
that also indicates an increase in
forest cover of 1% (4,000 ha) since
the plant opened.
Land Cover
Classification for
the Amite BioEnergy
fibre catchment 2018
Land cover
Coniferous
Deciduous
Low
Open
Hydrology
Watercourse
Waterbody
Data Sources:
a) Land cover classification is
based on Sentinel-2 imagery
using random forest
classification, Hatfield, 2019.
b) Background Topographic
Map, Esri Online Service.
44 Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Social
Employment contracts*
Full time
Part time
92%
8%
Employees per country*
UK
USA
91%
9%
Employees per business unit*
Customers 45%
Generation 37%
Pellet
Production
Corporate
9%
9%
Male
Female
68%
32%
Employment gender*
*
Limited external assurance using the assurance
standard ISAE 3000 for 2019 data as indicated.
For assurance statement and basis of reporting
see www.drax.com/sustainability
Further information on gender
diversity is available in the
Corporate Governance Report
on page 69
People and Culture
We work to maintain consistently high
standards in our employment practices
and all our colleagues benefit from
policies to support them in the workplace.
These include policies designed to enable
different work and lifestyle preferences,
processes for employees to raise
grievances or concerns about safety,
along with supporting a diverse and
inclusive workplace. Our people strategy
focuses on valuing our people, driving
business performance and developing
talent to deliver our strategic and
operational objectives.
During 2019, we focused on the
integration of our new Generation
colleagues following the acquisition
of hydro and gas generation assets in
December 2018. We reorganised our
structure to align with our business
strategy. We are centralising Finance,
Procurement, HR and Internal
Communications in order to deliver core
services consistently across the Group.
Investing in the development of our
people is essential to the delivery of
our business strategy. Our Potential
and Succession processes enable senior
leaders to identify individuals with the
skills and capability needed for critical
roles. Individuals identified can be
nominated for our Future Creators
programme. Launched in 2019, the
programme is designed to develop and
retain 22 high-potential individuals
and grow our leadership pipeline. Each
individual has a personal development
plan and an Executive Committee mentor
with whom they meet regularly
throughout the year. A One Drax award
may also be awarded for those identified
as having potential to add significant
value to Drax.
Diversity and Inclusion
Drax Group is fully committed to the
elimination of unlawful and unfair
discrimination and we value the benefits
that a diverse workforce brings to the
organisation. Our goal is to create and
maintain a working environment that is
both safe and supportive of all our people
and where every employee has the
opportunity to realise their potential.
Our Diversity and Inclusion Steering
Group meets monthly to consider and
recommend plans to increase diversity
and inclusion. The Steering Group is
co-sponsored by the Chief
Transformation Officer and Director
of Corporate Affairs, both of whom are
members of the Executive Committee.
Our 2019 progress included the roll out
of eLearning training to all managers, to
understand and promote appreciation to
correct unconscious bias. We introduced
a voluntary keep in touch days process
for colleagues on parental leave and
reviewed internal data on gender pay.
We also focused on recruitment and
added a diversity and equality statement
to our careers webpages. We hosted
around 100 female students from our
partner schools at Drax Power Station
in November to meet female colleagues
and understand the diverse career
opportunities in our sector.
Going forward we will set diversity and
inclusion objectives for all managers and
include diversity training in our leadership
and management development
programmes. In our recruitment
practices, we will provide gender ratio
guidance for interview lists and more
broadly seek to improve the gender and
diversity balance for our apprentice and
graduate recruitment. Through our My
Voice Forums we will also seek colleague
views on establishing diversity networks.
In our 2019 annual survey, we included
questions on diversity and inclusion and
we will continue to track our performance
in this area.
Drax Group plc Annual report and accounts 2019 45
Building a sustainable business continued
Women of the
Future Event Inspires
Next Generation
In November 2019 we hosted our first
Women of the Future event at Drax
Power Station. Around 100 girls from
local schools and colleges, aged
between 14 and 18, attended the
event, as part of our ongoing efforts
to encourage young women to study
science, technology, engineering and
maths (STEM) subjects, increase
diversity in our workforce and support
the communities where we operate.
Female colleagues ran group activities,
games and mini workshops to illustrate
the skills they use in their daily jobs
and explained their own career stories.
Employee Representation
and Engagement
We have two main sets of arrangements
to engage colleagues and provide them
with representation across the Group.
We engage with colleagues who are
represented by trade unions (22% of
our workforce is covered by collective
bargaining) and we have employee
representative consultation and
information arrangements in place
for employees with individual
employment contracts.
Health, Safety and Wellbeing
As explained by our CEO Will Gardiner
(see page 12), the health, safety and
wellbeing of our employees and
contractors is vital to the success
of the Group and remains our priority.
In 2019, we established our vision for
health and safety with One Safe Drax:
everyone, every day, safe and well.
The building blocks to this are Safe
People, Safe Systems & Process, and
Safety Assurance.
We communicate with our workforce
through channels including our intranet,
quarterly newsletter and Open Forum
meetings. Colleagues can ask our Group
CEO questions through a weekly online
question and answer portal, with the
CEO’s responses shared across the Group.
During the year, we established My Voice
Forums, one for each business unit
and each with up to 12 colleague
representatives. The Forum Chairs meet
quarterly with our Group CEO and Group
Chair to provide feedback on topics raised
by colleagues. For more information
on our workforce engagement, please
see the case study on page 28.
We track employee engagement through
our annual survey and in 2019 this was
completed by 67% of employees. Key
themes highlighted included colleague
careers, manager development and the
wellbeing of our colleagues. Responding
to themes raised in our 2018 survey,
we introduced employee volunteering
days and established the My Voice
Forums as an additional colleague
feedback mechanism.
Safe People
Suitably trained, qualified and
experienced people who know
what’s expected of them and choose
to do the right thing.
Safe Systems and Process
Fit for purpose plant, operations and
maintenance activities. Robust
management systems.
Safety Assurance
The checks and balances put in place
to ensure things are working as
intended and to provide continual
improvement.
46
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Read more on ethics and integrity
and our social impact at
www.drax.com/sustainability
Health and Safety Performance
In 2019, our Group TRIR was 0.22 per 100,000 hours worked (2019 target: 0.18) (2018: 0.22 per 100,000 hours worked). Our LTIR in
2019 was 0.08 per 100,000 hours worked (2018: 0.09 per 100,000 hours worked). This represents an improvement compared with
the previous year.
Drax Group Health and Safety
LTIR1
TRIR2
RIDDOR
2019 Actual
2018
2017
0.08
0.22*
5
0.09
0.22
9
0.13
0.27
7
(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
*
Limited external assurance using the assurance standard ISAE 3000 for 2019 data as indicated. For assurance statement and basis of reporting see www.drax.com/sustainability
We have Safety Management Systems
(SMS) in place to ensure safe workplaces
for all our people. At Drax Power Station,
the SMS is certified to OHSAS 18001 and
subject to regular audits. Our hydro and
gas generation assets have an integrated
management system covering Safety,
Environment & Quality and the safety
component will transition to ISO 45001
in 2020. Our Pellet Production sites in
the US meet the requirements of OSHA
1910 and the SMS is aligned with, but
not certified to, OHSAS 18001. At our
Customers and Core Services sites in the
UK, we began implementing a Health and
Safety Management System in 2019, to
create a health and safety culture which
prevents accidents and promotes both
physical and mental wellbeing.
Safety performance is reported and
reviewed regularly by each local
management team. Incidents and
findings are shared across the Company
via safety bulletins, enabling preventative
action to be taken to mitigate the risk
of future occurrences. Each business
unit reports monthly on Key Performance
Indicators (KPIs), including Total
Recordable Incident rate (TRIR), Lost
Time Incident Rate (LTIR). Business units
also report Reporting of Injuries, Diseases
and Dangerous Occurrences Regulations
(RIDDORs) to regulators in the UK. The
Board receives monthly reports.
In 2019, we established the Safety,
Health, Environment and Wellbeing
Leadership Executive Committee
(SHEWLEC). The Committee is chaired by
the CEO Generation and meets quarterly
to receive reports regarding significant
safety, health, environmental and
wellbeing aspects that are prominent
within the business. The Committee also
establishes standards for relevant health,
safety, environmental and wellbeing
issues. It oversees the implementation
of relevant policies and principles across
the business, reflecting Group philosophy,
best practice and regulatory and
statutory requirements. It also oversees
governance arrangements across the
business. Key risks and mitigation
associated with health, safety,
environment and welfare are routinely
reported to the SHEWLEC. The
Committee also receives a summary
of results of internal and external audits
where the scope falls within the remit
of the Committee. In addition, the
Committee receives and considers
potential implications for the Group of
information regarding any significant
changes in regulation or legislation
and oversees how business units amend
their arrangements accordingly.
Key issues raised in 2019 include:
management of dust at relevant locations,
tracking of findings from third-party
audits, development and implementation
of a Group-wide Wellbeing policy and
framework and standardisation of a set
of group-wide minimum standards for
safety Golden Rules.
In 2019, Drax introduced Intelex as our
Group reporting tool for Safety, Health,
Environment and Production incidents.
The system went live at our Pellet
Production sites in July and at Drax
Power Station, our Customer sites and
our Head Office in November. We are
considering plans to align all Drax sites
to a common integrated incident
management system.
Process safety is a key focus for the
operational business units. Drax
implemented lessons learned from the
fire at Drax Power Station pellet handling
system in 2017 to make the plant more
robust to potential ignition events by
installing additional fire detection and
suppression equipment. Work on the
installation will complete in 2020.
Incoming fuel quality and metallic
contamination in fuel are key
performance measures, since these
factors can influence levels of dust,
potential for fuel line blockages or
ignition events. In 2019, there was greater
collaboration with the supply chain and
our UK port operators. Drax held a
conference in April to share best practice.
Following a major safety incident in
December 2018 at our Pellet Production
site LaSalle in the US, we identified 42
action items. In 2019, we implemented
and closed these corrective action items
and focused on supervisor training and
improving safety culture.
In 2019, multiple assurance audits were
completed across the Group. Drax Power
Station was externally audited to OHSAS
18001 with no major findings and the
Health and Safety Executive completed
a scheduled control of major accident
hazards (COMAH) audit with no major
findings.
Drax Group plc Annual report and accounts 2019 47
Building a sustainable business continued
g a
G r eat Place to
W
o
r
k
Creatin
Healthy
Body
Healthy
Mind
Healthy
Workplace
C
r
e
a
ti
n
g a Great P l a c
k
e t o W or
Wellbeing at Drax
The Drax-wide Wellbeing programme
encompasses three areas and focuses
on building resilience.
• Healthy Body – A healthy body
means looking after yourself first –
finding ways to incorporate a
healthy diet, an active lifestyle and
healthy habits into the routines of
work and home.
• Healthy Mind – A healthy mind is
about colleagues being able to focus
on what’s important at work.
• Healthy Workplace – We believe
that a healthy workplace at Drax
supports and encourages healthy
behaviours in our colleagues,
making healthy choices easy.
Internal Audit commissioned Turner &
Townsend to complete a Group-wide
audit of health and safety which
confirmed that the control framework
is generally designed and operating
effectively, and effective health and
safety management systems were in
place. The audit made recommendations
to help advance the management of
health and safety across the Group
as it evolves and an action plan to
implement the recommendations
has been put in place.
Wellbeing
We recognise the importance of
promoting the physical and mental
wellbeing of all our colleagues. In 2019,
we began implementing a holistic
Wellbeing programme across Drax,
covering the three areas of Healthy Body,
Healthy Mind and Healthy Workplace.
To oversee the programme and measure
progress, we set up a Wellbeing Steering
Committee. The Committee represents
all business units across Drax and meets
monthly to ensure effective
implementation.
In 2019, we introduced a single private
medical insurance and reward
programme to our UK colleagues. We aim
to achieve complete coverage for UK
colleagues in 2020, after the roll out to
our hydro and gas generation sites. In
addition, all colleagues have access to an
Employee Assistance Programme.
Our Customers business continued to
expand their workplace wellbeing
education programmes in 2019. We have
trained nearly 200 Customers colleagues
over 2018 and 2019 on the topics of
mental health and emotional resilience.
Positive Social Impact
We provide jobs, support economic
growth, pay tax responsibly and deliver
charitable and employee volunteering
initiatives in the communities where
we operate.
Our social strategy focuses on improving
opportunity and social mobility by
promoting education, science,
technology, engineering and maths
(STEM) skills and employability. We signed
the UK cross-party Social Mobility Pledge,
demonstrating our commitment to
accessing and progressing talent from
all backgrounds. In 2019, we recruited
18 apprentices and 6 graduates. This
included expanding our apprenticeship
scheme to Drax’s Scottish sites where
we recruited 5 new apprentices. Our
partnership with Teach First enabled the
recruitment, placement and training of
eight STEM teachers in 2019, improving
the STEM education of 1,000 students.
We pledged £100,000 support over
four years to support the Galloway Glens
Landscape Partnership where our
Galloway Hydro Scheme operates.
The funding will be used to promote
the region’s heritage, boost the local
economy and support sustainability
initiatives in local communities.
Community and Charitable Giving
During the year, we launched our
new Community and Charity policy,
strengthening our charitable giving
across the business and enabling
colleagues to volunteer one working
day annually. In 2019, Drax colleagues
volunteered over 2,000 hours and
we contributed £290,000 through
community partnerships, employee match
funding, payroll giving, our community
fund and national fundraising days.
Drax Power Station welcomed 9,763
visitors in 2019. Our tours are focused on
learning outcomes and tailored for visitors
of all ages. Cruachan Power Station in
Scotland received 36,646 visitors in 2019
and offers free tours to school children
and academic institutions.
48
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Ethics and Integrity
At Drax Group, we are committed to
conducting business ethically and in
compliance with all relevant laws and
regulations. We do not tolerate any form
of bribery, corruption or other unethical
business conduct.
Our compliance framework consists
of principles, policies and guidance.
The principles are set out in our ethics
handbook, Doing the right thing, which
identifies the behaviours expected from
colleagues and contractors on topics
including human rights, ethical business
conduct and integrity. The Doing the
right thing principles form part of our
terms of employment and have been
converted into a series of training videos
used in our new starter induction
programme. The scope of Doing the
right thing will be expanded with the
implementation of a new Group Code
of Conduct in 2020.
Our policies and guidance documents
provide further instruction. These include
our Group Corporate Crime policy and
Gifts and Hospitality, Conflicts of Interest
and Due Diligence guides. In 2019, we
published board-approved updates to our
Group Corporate Crime policy, Fair
Competition policy and associated guides.
In 2019, we established and deployed new
eLearning across the Group, including
Data Protection and Anti-Bribery and
Corruption training for all colleagues.
Targeted training on Supply Chain Human
Rights, the Criminal Finances Act and Fair
Competition was provided for managers
and teams in higher risk areas. Refresher
training was also provided on Market
Abuse Regulation for the Board,
Executive Committee and relevant
management and employees.
Responsibility for Ethics
Governance of our framework is overseen
by the Group Ethics and Business
Conduct Committee (EBCC). The EBCC
comprises of senior leaders, meets
quarterly and is chaired by the Group
CFO. EBCC activities are reported
annually to the Audit Committee.
Management across the Group is
responsible for demonstrating leadership
on ethical matters and supporting teams
to apply our ethical principles, set out
in our Doing the right thing booklet,
and business ethics policies.
Our Group Business Ethics team manages
our various business ethics programmes,
taking steps to understand our risk
profile, developing policy and procedures,
awareness raising and training, as well as
investigating any potential breaches of
policy, and administrating our external
Speak Up (Whistleblowing) service. Our
Internal Audit team provides assurance
on the robustness of our business ethics
programmes and any recommendations
for improvement are duly considered and
as appropriate, implemented.
The Group Business Ethics team conducts
annual risk assessments of each of its
programmes, which relate to areas
including anti-bribery and corruption,
conflicts of interest, data protection,
fair competition, and human rights in
the supply chain. This is to ensure policy
and procedures remain fit for purpose
and to recommend any further mitigation
measures. Our annual review timetable
also includes a review of the Group gifts
and hospitality record and a colleague
business ethics declaration. Results of
annual reviews, details of investigations
conducted, whistleblowing reports, and
audit outcomes are reported quarterly to
both the EBCC and the Audit Committee.
Working with Others
We are a signatory to the UN Global
Compact (UNGC) and maintained our
representation on their Modern Slavery
Working Group in 2019. This enables us to
benchmark our compliance programmes
and exchange experience with peers,
with a particular focus on our response
to modern slavery.
We seek to work with suppliers, partners,
agents, intermediaries, contractors,
consultants and counterparties whose
standards are consistent with our own.
Third parties are subject to our
precontract due diligence checks and
regular monitoring through the lifecycle
of the contract, via our third-party due
diligence system. In cases where a red
flag is raised, we follow an EBCC-
At Drax Group, we
are committed to
conducting business
ethically and in
compliance with
all relevant laws
and regulations.
approved escalation protocol. Depending
on the nature of the flagged issue, we
may decide not to engage with a new
third party, to engage on a conditional
basis, to collaborate on remedial action
or to end an existing business relationship.
In 2019, we enhanced our due diligence
process, which assesses for risks
associated with financial crime, conflicts
of interest, anti-competitive behaviour,
trade sanctions and other improprieties,
such as modern slavery. We centralised
these across the business.
Anti-bribery and Anti-corruption
Our internal processes ensure
consistency with our zero-tolerance
approach to bribery and corruption.
Geographic risk is factored into our
third-party due diligence system.
Conducting business in higher risk
countries must receive prior approval
from the Group Ethics and Business
Conduct Committee.
Following country approval, third parties
are then put forward for our due diligence
process. Suppliers in higher risk countries
receive a higher level of initial due
diligence and ongoing monitoring.
We also screen the affiliates (directors,
shareholders) of these suppliers and
refresh their information on a more
frequent basis, compared to our lower risk
suppliers. Third parties with operations
in, or linked to, higher risk countries are
escalated to the EBCC for review prior
to engagement. Ongoing monitoring is
performed with new information provided
to the Group Ethics and Business
Conduct Committee, as appropriate.
Drax Group plc Annual report and accounts 2019 49
Building a sustainable business continued
With the implementation of a Supplier
Code of Conduct in 2020, we will
emphasise our requirement for our
suppliers and contractors working on our
behalf to challenge unethical behaviour
and promote a “speak up” culture. We
will provide the details of our Speak Up
service for their use.
Data Privacy and Security
We take seriously the privacy and security
of the personal data we control. We are
committed to maintaining effective
privacy and security programmes to
ensure our people, customers and the
third parties we engage with have
confidence in our data handling practices.
The EBCC supports and oversees the
Group privacy programme and reviewed
the first formal programme risk
assessment and risk register in 2019. In
addition, policies, guides, privacy notices,
third party due diligence questionnaires
and contractual terms were updated and
our first eLearning refresher training
(“Overview of Data Protection”) was
developed and deployed across the
Group. Internal Audit completed an
audit of our privacy programme and
no red-rated findings were identified.
We continue to monitor and adapt our
compliance with the requirements of the
General Data Protection Regulation, the
UK Data Protection Act 2018, regulatory
guidance and other associated legislation
such as the e-Privacy & Electronic
Communications Regulation.
Security risk management has continued
to mature through 2019, with a
comprehensive improvement plan
implemented and intended to enable
key IT Security control effectiveness
to achieve best practice. The plan was
initiated in 2019 and work will continue
through 2020. In addition, a security
governance structure was put in place
to assess and communicate the evolving
threat landscape and identify appropriate
responses. An ongoing security
assurance programme is in place.
We maintain risk-based security controls
to protect our employee and customer
data, by detecting and preventing threats
and security breaches. In addition to
traditional security measures, we
undertake advanced threat monitoring
and analytics measurement intended to
detect, identify, respond to and resolve
cyber threats and attacks. We are
conscious that such threats continue
to change. Accordingly, our security
programme seeks to evolve our controls
and response to cyber threats.
Speak Up (Whistleblowing)
As part of our commitment to
transparency and openness, we
encourage those working for or on behalf
of Drax to raise genuine concerns about
practices which could breach laws,
regulations or standards. This is
supported by our Doing the right thing
handbook and Speak Up (Whistleblowing)
policy. Colleagues can either raise
concerns internally, through line
management, a member of the Group
Business Ethics team, the Group
Company Secretary (Whistleblowing
Officer), directly with a member of the
EBCC or externally through our
anonymous third-party Speak Up service.
The Group Business Ethics team manages
the Speak Up (Whistleblowing)
programme. The team maintains relevant
records and investigates ethical-related
matters under the supervision of the
Whistleblowing Officer and governance
of the EBCC and Board. Where required,
relevant senior leadership are consulted,
and a course of action agreed. Drax has a
zero tolerance of retaliation and considers
it a disciplinary matter to victimise or
retaliate in any way against someone
who has raised a genuine concern.
During 2019, communications on
speaking up were rolled out to all
colleagues, temporary colleagues and
certain contractors as part of the 2019
Business Ethics policy deployment and
eLearning programme. In 2019, six
concerns were reported via internal
channels and two via our anonymous
third-party Speak Up service. This is an
increase from zero reports in the previous
year and demonstrates the effectiveness
of our efforts to increase awareness
of our reporting channels and promote
an open, “speak up” culture.
Modern Slavery
Our Modern Slavery Working Group,
chaired by a member of the Business
Ethics team, oversees a three-year
rolling programme and reports
quarterly to the EBCC.
In 2019, we published our third
board-approved modern slavery
statement in accordance with the UK
Modern Slavery Act (www.drax.com/
modern-slavery-act/). It describes the
steps we are taking to reduce the risk
of modern slavery in our supply chain.
We keep our programme and
statement under review to ensure it
reflects our activities, global presence
and wider evolving practice.
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 set out in our Corporate Crime
policy and our Corporate Responsibility
(CR) statement.
Our CR 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 in
our statement template to manage these
risks within our procurement contracts
and further advanced this effort in 2019
with the drafting of a Code of Conduct
and a Supplier Code of Conduct.
50
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Non-Financial Information Statement
We have summarised in this Annual Report and Accounts our policies, standards and disclosures in relation to non-financial
matters in line with the Non-Financial Reporting (NFR) requirements of the Companies Act 2006. This report forms our UN
Global Compact (UNGC) Communication on Progress and we have mapped the NFR requirements to the four issue areas of
the Ten Principles of the UNGC.
UN Global Compact
Environment
Non-Financial Reporting Requirement
Environmental matters
Policies, due diligence processes and outcomes
Environmental policy
Page reference
Labour
Employees
Social matters
Sustainability policy
Responsible Sourcing policy
Carbon Emissions
Environmental Impact
Sourcing Sustainable Biomass
Healthy Forest Landscapes
Health and Safety policy
Doing the right thing handbook
Gender Pay Reporting
People and Culture
Diversity and Inclusion
Health, Safety and Wellbeing
Community and Charity policy
Positive Social Impact
Page 41
Page 41
Page 38
Page 40
Page 41
Page 44
Page 45
Page 45
Page 46
Page 48
Human Rights
Respect for human rights
Corporate Responsibility (CR) statement
Corporate Crime policy
Modern Slavery Act statement
Ethics and Integrity
Page 49
Anti-corruption Anti-corruption and anti-bribery matters Doing the right thing handbook
A description of the company’s
business model
A description of the principal risks
Corporate Crime policy
Ethics and Integrity
Business Model
Principal Risks and Uncertainties
(Climate Change, People, Environment,
Health & Safety risks)
Page 49
Page 04
Page 54
A description of the non-financial
key performance indicators
Remuneration Report (Total Recordable
Incident Rate Group KPI)
Page 86
Drax Group plc Annual report and accounts 2019 51
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 Chief Financial
Officer in conjunction with divisional
and functional management teams and
presented to the Board as part of the
annual planning process. 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, selected for
the following reasons:
• The Group’s Business Plan (Plan) which
is prepared annually, updated twice
during the year and also used for
strategic decision-making, includes
a range of financial forecasts and
associated sensitivity analysis.
This Plan covers a three-year period
in detail, before extending into the
medium term.
• 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, the Group
benefits from the stable and material
earnings stream available from the
CfD until 2027. Selecting a three-year
period balances short-term market
liquidity against longer-term
contractual positions.
• There is limited certainty around
the Group’s markets and regulatory
regimes. However, in selecting a
three-year period the Board has
assumed no material changes to the
medium-term regulatory environment
and associated support regimes
beyond those already announced
at the date of this report.
Review of principal risks
The Group’s principal risks and
uncertainties, set out in detail on pages
54 to 61, 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, 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, in
January 2020, before the Plan was
adopted by the Group.
The Group has a proven track record of
adapting to changes to its environment
and deploying innovative solutions to
protect its financial performance.
Previous adverse events have arisen and
provided challenges which tested the
ability of the Group to deliver on its
targets but, on each occasion, it has been
able to respond positively and manage
the impact. This provides the Board with
confidence that risks can be sufficiently
mitigated, and viability can be maintained,
during the assessment period.
Review of financial forecasts
The Plan considers the Group’s financial
position, performance, cash flows, credit
metrics and other key financial ratios and
was most recently updated to reflect
current market and external environment
conditions in December 2019. 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 contracted
sales from the Customers business.
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 material
scenario 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, the Group’s ability
to trade effectively in volatile power
markets and reductions to discretionary
expenditure.
52
Drax Group plc Annual report and accounts 2019
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Governance
Financial statements
Shareholder information
The Board is confident that the Group
has access to a range of options to
maintain a diverse and well-balanced
capital structure.
Expectations
The Directors have considered a range
of factors in their assessment of viability
over the next three years, including the
latest Plan, scenario analysis, levels of
funding, the 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.
The Directors 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.
Based on its review, the Board is satisfied
the viability of the Group would be
preserved in a range of scenarios, with
various mitigating actions available,
sufficient to manage the risk, including
significant deterioration of commodity
market prices.
Availability of adequate
funding
The sources of funding available to the
Group are set out in note 4.3 to the
consolidated financial statements (page
163). The Board expects these sources,
along with stable 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.
During the year the Group drew down and
subsequently restructured £550 million
of its £725 million acquisition bridge
facility that was used to partially fund
the acquisition of the hydro and gas
generation assets. In May 2019 an
additional $200 million of the existing
2025 6.625% USD loan notes was issued,
the proceeds of which were used to repay
£150 million of the acquisition bridge
facility. In July 2019 the refinancing of the
remaining £400 million was concluded
in the form of two new facilities with
combined proceeds of £500 million, a
£375 million UK infrastructure private
placement and an environmental, social
and governance facility of £125 million.
These arrangements both reduced the
overall cost of debt and extended the
maturity profile to 2029 to further
strengthen the balance sheet.
Drax Group plc Annual report and accounts 2019 53
Principal risks and uncertainties
The effective management of risk supports
the delivery of our strategy
Identifying, assessing and managing risks
across the Group is an integral part of the
delivery of our strategy. We manage the
commercial and operational risks faced
by the Group in accordance with policies
approved by the Board.
The Board is responsible for determining
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 risk appetite determined by the
Board varies depending on the risk, and
guides the principles of the Group’s
culture, behaviour and the intensity of
risk management activities in achieving
our business objectives. We consider a
range of risk categories including
environment, health, safety, strategic,
financial, political, regulatory and
operational. 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 to:
• Identify risks that have the potential to
threaten the achievement of our
strategic objectives. We then assess
the likelihood of the risk occurring and
possible impact to the business in the
event it should arise. This assessment
is based on a risk scoring matrix to
ensure we take a consistent approach.
• Assign responsibility and define
accountabilities for the identification,
assessment and management of risk
and provide resources to enable
appropriate measures to be taken.
• Put in place appropriate mitigating
controls intended to manage identified
risks to an acceptable level.
• Escalate and report information on the
potential risk and the effectiveness of
the mitigations and controls to support
management decision making.
• Regularly monitor changes within and
outside our business, review the
Group’s principal risks against such
changes to ensure our analysis remains
accurate and up-to-date and review
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 governance
The risk management governance
structure includes Executive Committee
level principal risk owners and risk
management committees whose
responsibilities include:
• Ensuring that risks are identified,
assessed and managed effectively
within risk appetites and limits.
• Including new and emerging risks.
• Demonstrating robust governance of
risk management by reviewing and
challenging risk management across
the Group and driving the completion
of actions to manage risks within risk
appetites and limits.
• Driving an appropriate risk
management culture and an
environment that promotes and
creates balanced risk-taking behaviour
and clear accountability.
The risk management committees receive
reports from business units and risk
owners. The Executive Committee
receive reports from the risk management
committees and principal risk owners and
undertake deep dive reviews of the
management of principal risks.
In addition, the Audit Committee review
the suitability and effectiveness of risk
management processes and controls
on behalf of the Board.
Internal control
The Group has a well-defined internal
control system established through
policies and procedures, documented
levels of authority which support decision-
making and accountability for day-to-day
management across the Group.
The Board has adopted a schedule of
matters which are required to be brought
to it for a decision, below which authority
is delegated through the Executive
Committee to a combination of sub-
committees and individuals enabling
them to make decisions on behalf of the
Group and its businesses for its day-to-
day activities. The internal control system
is designed to ensure that the directors
and executive maintain effective
oversight and direction for all material
strategic, operational, financial and
organisational issues.
54
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Under authority delegated by the Board,
the Audit Committee, implements 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
programme is reviewed quarterly and
refreshed to reflect developments within
the Group as well as changes in wider
practices, informed by the experience
of internal and external personnel.
Internal audits are performed either
by the in-house team members of the
internal audit function or by external
parties where their appointment has
first been considered and approved by
the Audit Committee. The findings and
recommendations from each internal
audit are documented in a report for
internal distribution and action. A full
copy of the report is distributed to the
Executive Committee and the Audit
Committee. Each report includes
management responses to the findings
and recommendations and details of
the actions that management propose
to take.
Based on the reporting from the
Executive Committee and the Audit
Committee undertaken during 2019
and considered at the meeting of the
Board held in finalising the annual report
and financial statements, the Board
determined that it was not aware of
any significant deficiency or material
weakness in the system of internal
control. For further information on the
work of the Audit Committee, please see
the Audit Committee report on page 78.
Drax Group plc Board
Audit Committee
Group Executive Committee
1st line of defence
2nd line of defence
3rd line of defence
E
x
t
e
r
n
a
l
a
u
d
i
t
Management
controls
Policies and
procedures
Understanding of
Risk management
Risk management
Internal Audit
Compliance
Oversight by
management
committees
Current Principal Risk
categories
1. Environment, Health and Safety
2. Political and Regulatory
3. Strategic
4. Biomass Acceptability
5. Plant Operations
6. Trading and Commodity
7. Information Systems and Security
8. People
9. Climate Change (new)
Principal risks and
uncertainties
Risks are reported to the Board and
disclosed in the Annual Report and
Accounts under nine principal risk
headings. The Board has assessed
the principal risk categories. These
are broadly unchanged from 2018
with two exceptions: Transaction risks,
which was included in 2018 to reflect
the risks associated with the acquisition
of hydro and gas assets. The risk category
has been removed as these assets have
been integrated successfully into our
operations during 2019. A new category
entitled Climate Change has been
created. This reflects the increasing
focus on such risks, given the nature of
our sector and operations, and our work
to implement the recommendations of
the Task Force on Climate-related
Financial Disclosures (TCFD).
Drax Group plc Annual report and accounts 2019 55
Principal risks and uncertainties continued
Principal Risk Category
Environment, health and safety
Context
The health, safety and wellbeing 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 a range of hazards to personnel
and the environment, that arise from the processes
we perform and the equipment which we use. This
includes heavy plant and machinery at our sites in
the US and UK.
Key Mitigations
Changes in factors impacting risk in 2019
= • Good personal safety
performance for the year with
TRIR and LTIR, continuing in
line with industry benchmarks.
• Hydro and gas asset health and
safety management systems
integrated.
• Introduction of a Group-wide
reporting tool for environment,
health and safety incidents.
• Installation of further fire
suppression devices in our
biomass conveying systems.
• Maintaining robust management
systems designed to mitigate risk.
• Training staff to a high level of
competence, to appreciate and
manage environment, health
and safety risks.
• Continuously reporting events
and prompt implementation
of corrective actions.
• Continuously monitoring
processes to identify trends
in performance.
• Rigorous auditing of compliance
against standards, policy and
procedures.
• Engaging with regulators and
stakeholders to identify
improvements to our systems
and operations.
• The biomass that we use to generate electricity is by
• Investigating the underlying
its nature combustible and the production, preparation
and transportation (whether within our sites or in
transit between sites) requires careful management to
minimise the risk of fire or explosion. For example, in
the US we produce pellets using a combination of high
temperature and high-pressure plant, and in the UK we
operate plant which involves very high temperatures
and pressures for the generation of electricity at
400KV for transmission onto the National Grid.
reasons for events and
implementation of any necessary
changes in the management
system and culture.
• Timely identification of future
legislation and appropriate
investment to optimise
performance.
• Effective governance framework
including an executive level Safety,
Health, Environment and Wellbeing
Leadership Executive Committee,
to oversee governance, review and
challenge the management of
safety, health, environment and
wellbeing risks across the Group.
56
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Movement key
>Up/increasing
Up/increasing
1 year
Derivative financial instrument assets < 1 year
Total derivative financial instrument assets
Derivative financial instrument liabilities > 1 year
Derivative financial instrument liabilities < 1 year
Total derivative financial instrument liabilities
As at 31 December
2019
£m
152.3
193.7
346.0
(72.9)
(216.5)
(289.4)
2018
£m
295.2
215.4
510.6
(62.0)
(89.4)
(151.4)
Total derivative financial instruments
56.6
359.2
The gains and losses recognised in the period relating to derivative financial instruments are detailed below
Unrealised derivative financial instrument (losses)/gains recognised in the income statement
Unrealised derivative financial instrument (losses)/gains recognised in the hedge reserve
Unrealised derivative financial instrument gains/(losses) recognised in the cost of hedge reserve
Total unrealised derivative financial instrument (losses)/gains
Gains/(losses) recognised
2019
£m
(130.8)
(125.1)
60.1
(195.8)
2018
£m
38.4
119.1
39.3
196.8
The unrealised gains/(losses) recognised in the hedge reserve differs from the movements in the hedge reserve in the year by £24.5
million (2018:£27.6 million) due to realised gains/(losses) retained in the hedge reserve relating to hedging instruments where the
hedged item has not impacted the income statement yet, or due to the recycling of gains/(losses) on hedging instruments where
the hedged item has impacted the income statement, but the hedging instrument has not yet been realised.
The total unrealised gains/(losses) recognised on derivative financial instruments differs from the total movement on derivative
financial instruments by £106.8 million due to rebasing. The fair value of the rebased trades is recognised on the lower rebased
rates, resulting in a reduction in the value of derivative financial instruments recognised. However, the gains relating to the cash
received from rebasing are deferred from Adjusted Results until the contracts mature.
188
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.2 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, inflation 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 overseen by the risk
management committees as explained in the principal risks and uncertainties (page 54 to 61) which identify, evaluate and hedge
financial risks in close co-ordination with the Group’s trading and treasury functions under policies approved by the Board of
directors.
7.2.1 Commodity price risk
The Group is exposed to the effect of fluctuations in commodity prices, particularly the price of electricity, gas, the price of coal,
sustainable wood fibre and pellets, 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.
Commodity price sensitivity
The sensitivity analysis below has been determined based on the exposure to commodity prices and the impact on profit after tax
and other components of equity of reasonably possible increases/decreases in commodity prices.
31 December 2019
Power
Carbon
Gas
Oil
Other
31 December 2018
Power
Carbon
Gas
Oil
Other
Impact on profit after tax
Impact on other components
of equity, net of tax
5% decrease
£m
5% increase
£m
5% decrease
£m
5% increase
£m
–
–
(3.0)
(4.5)
0.7
–
–
(2.0)
(4.3)
(0.2)
–
–
3.0
4.5
(0.7)
–
–
2.0
4.3
0.2
8.6
(3.7)
–
–
(0.7)
23.9
(3.2)
–
–
(1.8)
(8.6)
3.7
–
–
0.7
(23.9)
3.2
–
–
1.8
Profit after tax is sensitive to increases/decreases in commodity prices as a result of the impact on the fair value of derivative
financial instruments not designated as hedging instruments under cash flow hedge accounting. The Group designates certain
derivatives as hedging instruments under cash flow hedge accounting. As such other components of equity are sensitive to
increases/decreases in commodity price risk in relation to the impact on the hedge reserve of these movements.
Commodity risk management
The Group has a policy of securing forward power sales, purchases of fuel and CO2 emissions allowances when profitable to do so
and in line with specified limits under approved policies. Forward power sales can be secured up to 100% of forecast availability
two years out. 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 power.
The Group purchases sustainable biomass, coal and other fuels under either fixed or variable priced contracts with different
maturities principally from a number of international sources. The Group considers all such contracts to be economic hedges. The
Group applies the own-use exemption or hedge accounting in accordance with IFRS 9.
Where forward power curves are less liquid, the Group uses financially settled gas sales as a proxy for power to mitigate the risk of
power price fluctuations. The Group also purchases gas under fixed-price contracts to meet the demand of Customers’ customers
and the CCGT assets as a fuel for its gas-fired generation portfolio.
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.
Drax Group plc Annual report and accounts 2019 189
Financial statements Section 7: Risk management continued
7.2 Financial risk management continued
Hedge accounting
The Group’s cash flow hedges relate to commodity contracts (principally commitments to sell power and purchase CO2). 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 at the point when the
underlying power is delivered.
Included in amounts released from equity are gains and losses on financial instruments that matured in a previous period, released
to the income statement in the period the hedged transaction occurs. No ineffectiveness was recognised in the income statement
in the year (2018: £nil). Due to the use of ‘all-in-one’ hedges, this results in the movement in value for the hedged items and hedging
instruments being identical.
The only source of ineffectiveness regarding the “all-in-one” hedges would be if delivery of the commodities be no longer expected
to occur. The main sources of ineffectiveness regarding financial contracts could be as a result of timing differences and credit risk.
Commodity contracts are released from equity to revenue (power contracts) or cost of sales (CO2 contracts) in the income statement.
The reconciliation of the reserves and time period when the hedge will affect the profit or loss are disclosed in note 7.3.
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented in
the table below. Ineffectiveness on sale of power hedging instruments is recognised in revenue. Ineffectiveness on designated
hedging instruments for purchases of CO2 emissions allowances and for financial coal are recognised in cost of sales.
The average forward rates quoted below only reflect the rates applicable to the portion of the Group’s commodity and financial
contracts that qualify for hedge accounting in accordance with IFRS 9. The rates do not reflect the overall average rate of the
Group’s total portfolio of commodity and financial contracts that are used to protect the value of future cash flows.
31 December 2019
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
Fair value
recognised in
balance sheet
(Assets)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Fair value
recognised
in balance
sheet
(Liabilities)
£m
Ineffectiveness
recognised
in the period
£m
Notional
value of
contracts
(Mwh, tonnes)
Average
fixed price
4,596,250
4,341,000
£61.23
€25.46
68.6
(3.3)
151.2
0.9
(79.0)
(4.1)
(68.6)
3.3
396,000
£73.59
(4.0)
–
(4.0)
4.0
–
–
–
Exposure
Commodity contracts
Sale of power
Purchase of CO2 emissions allowances
Financial contracts
Financial coal
Exposure
Commodity
Sale of power
Purchase of CO2 emissions allowances
Financial contracts
Financial coal
Notional
value of
contracts
(Mwh, tonnes)
Average
fixed price
7,931,837
2,898,000
£59.96
€18.83
540,000
£86.40
31 December 2018
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised
in balance
sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised
in the period
£m
(6.1)
15.7
(1.2)
59.5
16.1
(67.6)
(0.5)
6.1
(15.7)
0.5
(0.9
1.2
–
–
–
190
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.2 Financial risk management continued
7.2.2 Foreign currency risk
The Group is exposed to the fluctuations in foreign currency rates resulting from committed and forecast transactions in foreign
currencies, principally in relation to purchases of fuel for use in the Generation business. These purchases are typically denominated
in US dollars (USD), Canadian dollars (CAD) or Euros (EUR).
The Group also has a limited exposure to translation risk in relation to its net investment in its US subsidiary, Drax Biomass Inc.
Foreign currency sensitivity
The analysis below shows the impact on profit after tax and other components of equity of reasonably possible strengthenings/
weakenings of currencies against GBP. The analysis assumes all other variables were held constant.
31 December 2019
USD
EUR
CAD
31 December 2018
USD
EUR
CAD
Impact on profit after tax
Impact on other components
of equity, net of tax
5% strengthening
£m
5% weakening
£m
5% strengthening
£m
5% weakening
£m
164.0
18.8
18.1
105.0
3.3
16.4
(84.3)
(17.0)
(4.8)
(93.9)
(3.0)
(15.4)
119.7
4.0
13.1
156.3
10.2
17.1
(108.5)
(3.6)
(11.9)
(135.9)
(9.2)
(15.5)
Profit after tax is sensitive to the strengthening/weakening of other currencies as a result of the impact on the fair value of currency
derivative financial instruments not designated as hedging instruments under cash flow hedge accounting. The Group designates
certain currency derivatives as hedging instruments under cash flow hedge accounting. As such other components of equity are
sensitive to the strengthening/weakening of other currencies in relation to the impact on the hedge reserve of these movements.
Foreign currency risk management
It is the Group’s policy to hedge material transactional exposures using a variety of derivatives to fix the sterling value of foreign
currency cash flows, except where there is an economic hedge inherent in the transaction. The Group enters into derivative
contracts in line with the currency risk management policy, including forwards and options, to manage the risks associated with its
anticipated foreign currency requirements over a rolling five-year period, covering contracted exposures and a proportion of highly
probable forecast transactions.
In addition, in order to optimise the cost of funding, the Group has issued foreign currency denominated debt in US dollars (see
note 4.3). The Group utilises derivative contracts to manage exchange risk on foreign currency debt.
Hedge accounting
The Group designates certain foreign currency derivatives as hedging instruments. Foreign currency forward contracts that are
designated as hedges are transferred from equity to inventory for hedges of fuel purchases or transferred to intangible assets for
hedges of carbon EUAs.
Gains and losses on the cross-currency interest rate swaps are released to interest payable and similar charges and foreign
exchange gains/(losses). Further details of the cross-currency interest rate swaps are provided in the interest rate risk section.
The main sources of ineffectiveness relating to foreign currency hedges are timing differences and credit risk.
The reconciliation of the reserves and when the amount will affect the income statement or will be removed from equity and
included in the initial cost of the non-financial item are disclosed in notes 7.3 and 7.4.
Drax Group plc Annual report and accounts 2019 191
Financial statements Section 7: Risk management continued
7.2 Financial risk management continued
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented in the
table below. Ineffectiveness on foreign currency hedging instruments is recognised in cost of sales.
The average forward rates quoted below only reflect the rates applicable to the portion of the Group’s forward currency purchase
contracts that qualify for hedge accounting in accordance with IFRS 9. The rates do not reflect the overall average rate of the
Group’s total portfolio of currency derivatives that are used to protect the sterling value of future cash flows.
31 December 2019
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
Average
forward rate
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised
in the period
£m
1.40
1.09
1.82
(101.4)
(5.7)
1.6
117.6
–
13.0
(23.3)
(6.1)
(3.0)
101.4
5.7
(1.6)
–
–
–
31 December 2018
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
Average
forward rate
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised
in the period
£m
1.43
1.12
1.79
155.2
1.4
(6.8)
210.6
2.2
9.9
–
–
(7.1)
(155.2)
(1.4)
6.8
–
–
–
Notional
value of
contracts
million
3,713.4
90.3
527.6
Notional
value of
contracts
million
3,871.8
170.8
575.3
Exposure
Foreign currency contracts
Purchases in foreign currency – USD
Purchases in foreign currency – EUR
Purchases in foreign currency – CAD
Exposure
Foreign currency contracts
Purchases in foreign currency – USD
Purchases in foreign currency – EUR
Purchases in foreign currency – CAD
7.2.3 Interest rate risk
The Group has limited exposure to interest rate risk, principally in relation to cash and cash equivalents and floating rate debt
instruments. The Group has taken out a fixed-to-fixed cross-currency interest rate swap to hedge the future cash flows associated
with USD $500 million 2025 fixed rate loan notes, effectively converting them to sterling fixed rate cash flows. The Group has also
taken out a floating-to-fixed swap to fix the interest payments on the £375 million private placement issued in the year. As the
Group has fixed most of its debt instruments interest rates swaps, at December 2019 the Group only had one floating rate debt
instrument drawn, being the £125 million ESG facility issued in the year.
The return generated on the Group’s cash balance, or on amounts drawn on the revolving credit facility, are also exposed to
movements in short-term interest rates. The Group manages cash balances to protect against adverse changes in rates whilst
retaining liquidity.
Further information about the Group’s instruments that are exposed to interest rate risk and their repayment schedules is provided
in note 4.3.
192
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.2 Financial risk management continued
Interest rate benchmark reform
The only interest rate benchmark to which the Group is exposed to within its hedge accounting relationships and that is subject
to interest rate benchmark reform is GBP LIBOR. This exposure relates to the hedge of the £375 million private placement using
a floating-to-fixed GBP LIBOR swap maturing in 2024.
The Group is closely monitoring the market and the output from the various industry working groups managing the transition to
new benchmark interest rates. This includes announcements made by LIBOR regulators (including the Financial Conduct Authority
(FCA)) regarding the transition away from LIBOR to Sterling Overnight Index Average Rate (SONIA). The FCA has made clear that,
at the end of 2021, it will no longer seek to persuade, or compel, banks to submit to LIBOR.
In response to the announcements, The Group will be engaging the following work streams: risk management, tax, treasury, legal
and accounting. The aim of the programme is to identify any LIBOR exposures that are within the business and prepare and deliver
on an action plan to enable a smooth transition to alternative benchmark rates. This will involve considering appropriate alternative
benchmark rates in line with those proposed by different working groups in the industry and engaging with counterparties to
implement appropriate wording in relevant contracts.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative
instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of the liability
outstanding at the balance sheet date was outstanding for the whole year.
The analysis below shows the impact on profit after tax and other components of equity of a reasonably possible increase/
decrease in interest rates. The analysis assumes all other variables were held constant
31 December 2019
Variable rate debt
Interest rate swaps
Net
31 December 2018
Variable rate debt
Net
Impact on profit after tax
Impact on other components
of equity, net of tax
1% increase
£m
1% decrease
£m
1% increase
£m
1% decrease
£m
(4.2)
3.1
(1.1)
(1.0)
(1.0)
4.2
(3.1)
1.1
1.0
1.0
–
15.8
15.8
–
–
–
(15.8)
(15.8)
–
–
Profit after tax is sensitive to an increase/decrease in interest rates as a result of the impact on the interest payable in the period
on any floating rate debt. The Group has reduced its exposure to interest rate risk on variable rate debt through the use of floating-
to-fixed interest rate swaps and therefore a change in interest rates would not have a significant effect on profit after tax. The
Group designates certain floating-to-fixed interest rate swaps as hedging instruments under cash flow hedge accounting. As such
other components of equity are sensitive to an increase/decrease in interest rates in relation to the impact on the hedge reserve of
these movements.
Interest rate risk management
The Group has a risk management policy in place relating to interest rate risk. The Group policy permits, but does not require,
the use of hedging instruments in order to hedge up to 100% of the Group’s current and forecast interest rate exposure.
Drax Group plc Annual report and accounts 2019 193
Financial statements Section 7: Risk management continued
7.2 Financial risk management continued
Hedge accounting
The Group designates the floating-to-fixed GBP interest rate swap and the cross-currency interest rate swaps as hedging
instruments. The GBP interest rate swap is a hedge of the interest payments relating to the £375 million private placement.
The cross-currency interest swaps are hedges of the interest payments of the $500 million 2025 fixed rate loan notes, and
of the USD denominated principal. As such there is both an interest element and a foreign exchange element relating to the
cross-currency interest rate swaps.
Gains and losses on the floating-to-fixed GBP interest rate swap are released to interest payable and similar charges at the same
time as the interest expense on the hedged borrowings.
Gains and losses on the cross-currency interest rate swaps are released to interest payable and similar charges at the same time
as the interest expense on the hedged borrowings. Also, gains and losses that are effective at hedging the foreign exchange risk on
the USD principal are released to foreign exchange gains/(losses) to offset gains and losses on retranslating the USD denominated
hedged loan notes.
The main sources of ineffectiveness relating to interest rate risk hedges are differences in the critical terms, differences in
repricing dates and credit risk.
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented in
the table below. Ineffectiveness on GBP interest rate hedging instruments is recognised in interest payable and similar charges.
Ineffectiveness on USD cross-currency interest rate hedging instruments is recognised in either interest payable and similar
charges or foreign exchange (losses)/gains.
31 December 2019
Change in fair
value of hedging
instrument during
the reporting
period used for
measuring
ineffectiveness
£m
Notional
value of
contracts
millions
Average
fixed rate
GBP
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised in
the period
£m
375
500
1.05%
4.90%
(4.8)
(8.3)
–
21.8
(4.8)
–
4.8
8.7
–
–
31 December 2018
Change in fair
value of hedging
instrument during
the reporting
period used for
measuring
ineffectiveness
£m
Notional
value of
contracts
millions
Average
fixed rate
GBP
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised in
the period
£m
300
5.01%
27.9
27.9
–
(30.9)
–
Exposure
Financing
Interest rate risk – GBP
Interest rate risk – USD
Exposure
Financing
Interest rate risk – USD
194
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.2 Financial risk management continued
7.2.4 Inflation risk
The Group is exposed to inflation risk on elements of its revenues and cost base. The Group’s ROC revenues are linked to UK RPI
and its Contract for Difference revenue is linked to UK CPI. In addition, a proportion of the Group’s fuel costs are linked to US/CAD
CPI. The Group has entered UK CPI swaps to hedge the future cashflows relating to a proportion of its exposure. The Group also
benefits from a natural hedge arising from its inflation-linked borrowings (see note 4.3).
Inflation risk sensitivity
The sensitivity analysis below has been determined based on the exposure to inflation rates for both derivatives and non-derivative
instruments at the balance sheet date.
The analysis below shows the impact on profit after tax and other components of equity of a reasonably possible increase/
decrease in inflation rates. The analysis assumes all other variables were held constant.
31 December 2019
CPI inflation swaps
Impact on profit after tax
Impact on other components
of equity, net of tax
1% increase
£m
1% decrease
£m
1% increase
£m
1% decrease
£m
–
–
(15.5)
15.5
The Group designates the CPI inflation swaps as hedging instruments under cash flow hedge accounting. As such other
components of equity are sensitive to an increase/a decrease in inflation rates in relation to the impact on the hedge reserve of
these movements.
Inflation risk management
The Group has a risk management policy in place relating to inflation risk. The Group policy permits, but does not require, the use
of hedging instruments in order to hedge up to 100% of the Group’s current and forecast inflation exposure.
Hedge accounting
As the Group has contracts for which the revenue is contractually linked to either RPI or CPI inflation, the Group has been able
to designate this risk component as a hedged item. Inflation swaps are utilised as the hedging instrument for this inflation risk.
Gains and losses on the inflation swaps are held in the hedge reserve and reclassified to the income statement within the revenue
line at the same time the revenue from the inflation linked contracts impacts on the income statement.
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented in
the table below. Ineffectiveness on inflation hedging instruments is recognised in revenue.
31 December 2019
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
Fair value
recognised in
balance sheet
(Assets)
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Ineffectiveness
recognised in
the period
£m
Notional
value of
contracts
£m
Average
fixed rate
250
2.48%
16.4
16.4
–
(16.4)
–
Exposure
Inflation
Inflation linked sales contracts – CPI
Drax Group plc Annual report and accounts 2019 195
Financial statements Section 7: Risk management continued
7.2 Financial risk management continued
7.2.5 Liquidity risk
The Treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board.
Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group
maintains a mixture of cash and cash equivalents, committed facilities and uncommitted facilities in order to ensure sufficient
funding for business requirements.
In managing liquidity risk, the Group has the ability to accelerate the cash flows associated with certain working capital items
(principally those related to ROC sales and Customers power sales). In each case this is undertaken on a non-recourse basis
and accordingly, the ROCs and other items are derecognised from the balance sheet at the point of sale. The Group also utilises
standard purchasing facilities to extend the working capital cycle, whilst still paying suppliers on time. The impact on the Group’s
cash flows is described in note 4.4.
The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include
both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived
from interest rate curves at the balance sheet date.
Term loans, gross value
Loan notes, gross value
Borrowings, contractual maturity
Trade and other payables
Lease liabilities(1)
Within
3 months
£m
7.1
–
7.1
354.7
1.8
363.6
3 months–
1 year
£m
9.2
39.9
49.1
323.8
5.4
378.3
As at 31 December 2019
1–2 years
£m
16.2
39.9
56.1
4.5
6.2
66.8
2–5 years
£m
316.8
430.1
746.9
–
13.0
759.9
>5 years
£m
261.9
398.9
660.8
–
10.6
671.4
Total
£m
611.2
908.8
1,520.0
683.0
37.0
2,240.0
(1) In the prior year, under IAS 17, only finance leases were recognised as financial liabilities. On transition to IFRS 16 all leases are now recognised as financial liabilities. As such the
Lease liabilities row in the table above is not comparable to the Finance Lease liabilities line in the table below as the Lease liabilities above includes leases that would have been
classified as operating leases under IAS 17.
Trade and other payables of £683.0 million (2018: £560.5 million) excludes non-financial liabilities such as the Group’s obligation
to deliver ROCs.
The comparative table below has been restated to split out the maturity of financial liabilities due over one year into more time
buckets than previously disclosed and updated for the additional acquisition consideration payable as a result of finalisation of
the completion accounts process.
Term loans, gross value
Loan notes, gross value
Finance lease liabilities
Borrowings, contractual maturity
Trade and other payables
Acquisition consideration payable
Within
3 months
£m
–
–
–
–
384.1
691.7
1,075.8
3 months–
1 year
£m
1.7
30.5
0.2
32.4
176.4
–
208.8
As at 31 December 2018
1–2 years
£m
1.7
30.5
0.4
32.6
–
–
32.6
2–5 years
£m
39.6
419.2
–
458.8
–
–
458.8
>5 years
£m
–
266.5
–
266.5
–
–
266.5
Restated
Total
£m
43.0
746.7
0.6
790.3
560.5
691.7
2,042.5
The above table has been restated to reflect the finalisation of the measurement period adjustments in relation to the new
generation assets acquired from ScottishPower on 31 December 2018.
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 the Group’s borrowings was 3.99% (2018: 4.56%).
196
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.2 Financial risk management continued
The following tables set out details of the expected contractual maturity of derivative financial instruments which are marked
to market based on the undiscounted cash flows. 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. Where derivatives are expected to be gross settled the gross cash flows have
been presented. Commodity contracts and forward foreign currency contracts are expected to be gross settled. Where derivatives
are expected to be net settled, the net cash flows expected to occur based on the current fair value have been disclosed. Financial
contracts and other foreign exchange contracts (excluding forwards) are expected to be net settled. Interest rate contracts and
inflation rate contracts are presented based on net settlement of the interest rate and inflation rate differentials. Gross settlement
of the principal of cross-currency interest rate swaps is expected and as such this element of the swap is presented gross.
Commodity contracts
Financial contracts
Foreign exchange contracts
Interest rate contracts
Inflation rate contracts
Commodity contracts
Financial contracts
Foreign exchange contracts
Interest rate contracts
Within
1 year
£m
(6.7)
(42.8)
1,581.1
3.9
1.8
1,537.3
Within
1 year
£m
14.5
(33.2)
1,827.9
10.7
1,819.9
As at 31 December 2019
1–2 years
£m
43.3
(37.1)
803.6
2.5
3.2
815.5
>2 years
£m
11.0
(65.0)
2,176.8
(2.3)
11.8
2,132.3
As at 31 December 2018
1–2 years
£m
190.8
(61.8)
905.2
10.7
1,044.9
>2 years
£m
68.6
(37.5)
1,898.8
26.8
1,956.7
Total
£m
47.6
(144.9)
4,561.5
4.1
16.8
4,485.1
Total
£m
273.9
(132.5)
4,631.9
48.2
4,821.5
7.2 Financial risk management continued
7.2.6 Counterparty risk
As the Group relies on third party suppliers and counterparties for the delivery of currency, sustainable biomass and other goods
and services, it is exposed to the risk of non-performance by these third-party suppliers. If a large supplier 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.
Drax Group plc Annual report and accounts 2019 197
Financial statements Section 7: Risk management continued
7.2 Financial risk management continued
7.2.7 Credit risk
The Group’s gross 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
2019
£m
2018
£m
404.1
582.3
3.0
346.0
1,335.4
289.0
413.3
2.4
510.6
1,215.3
Trade and other receivables are stated gross of the provision for doubtful debts of £40.7 million (2018: £44.0 million) and exclude
non-financial receivables such as prepayments.
Of the Group‘s three operating segments, two are exposed to different levels and concentrations of credit risk, largely reflecting
the number, size and nature of their respective customers. The Pellet Production segment only trades intra-group.
The highest risk is in the Customers segment, with a high number of customers of varying sizes operating in a variety of markets.
In particular, Opus Energy carries lower concentrations but higher levels of credit risk owing to a customer base comprised largely
of smaller retail and commercial entities.
In the Customers segment, credit risk is managed by checking a company’s creditworthiness and financial strength both before
commencing trade and during the business relationship. Credit risk is monitored and managed by business sector. In addition,
the Customers segment extended its trade credit insurance programme to increase its mitigation to credit risk.
For the Generation segment, the risk arises from treasury, trading and energy procurement activities, as well as the sale of by-
products from generation activities. Wholesale counterparty credit exposures are monitored by individual counterparty and by
category of credit rating. Counterparty credit exposures are subject to approved limits. The Group uses master netting agreements
to reduce credit risk and net settles payments with counterparties where net settlement provisions exist. In addition, the Group
employs a variety of other methods to mitigate credit risk: margining, various forms of parent company guarantee, deed of charge,
cash collateral, letters of credit and surety bonds. The majority of the Generation business’s credit risk is with counterparties in
related energy industries or with financial institutions. In addition, where deemed appropriate, the Group has historically purchased
credit default swaps.
The investment of surplus cash is undertaken with the objective of ensuring that there is sufficient liquidity at all times, so that
funds are available to meet liabilities as they fall due, whilst securing a return from invested funds and preserving the capital value
of those funds 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; maintain a strong credit rating underpinned by
robust financial metrics; invest in its core business and pay a sustainable and growing dividend 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 and cost of hedging reserves), plus net debt. Net debt is comprised of borrowings and cash and cash
equivalents as disclosed in note 4.3 and 4.2 respectively.
Borrowings
Cash and cash equivalents
Net debt
Total shareholders’ equity, excluding hedge and cost of hedging reserves
As at 31 December
2019
£m
1,245.2
(404.1)
841.1
1,553.3
2018
£m
608.1
(289.0)
319.1
1,580.0
198
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.3 Hedge reserve
The Group designates certain hedging instruments that are used to address commodity price risk, foreign exchange risk,
interest rate risk and inflation rate 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 effective
in offsetting changes in cash flows of the 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.
The cumulative gains and losses unwind and are released as the related contracts mature and the Group take delivery of the
associated commodity or currency.
At 1 January 2018
Gains/(losses) recognised:
– Change in fair value of hedging instrument recognised in OCI
Released from equity:
– Reclassified to cost of inventory
– Reclassified to the income statement – included in cost
of sales
– Reclassified to the income statement – included in revenue
– Reclassified to the income statement – included in interest
payable and similar charges
– Reclassified to the income statement – included in interest
payable and similar charges
Related deferred tax, net (note 2.6)
At 31 December 2018
Gains/(losses) recognised:
– Change in fair value of hedging instrument recognised in OCI
Released from equity:
– Reclassified to cost of inventory
– Reclassified to the income statement – included in cost of sales
– Reclassified to the income statement – included in revenue
– Reclassified to the income statement – included in interest
payable and similar charges
– Reclassified to the income statement – included in interest
payable and similar charges
Related deferred tax, net (note 2.6)
At 31 December 2019
Commodity
price risk
Foreign
exchange risk
Interest
rate risk
Inflation
rate risk
Hedge reserve
£m
125.1
£m
–
£m
–
£m
1.0
8.4
(8.8)
22.4
–
–
(1.3)
6.2
149.8
27.9
(15.5)
(53.5)
(16.4)
–
–
–
–
–
(0.8)
–
(15.4)
189.6
(22.0)
(1.0)
4.1
Total
£m
126.1
186.1
(69.0)
(25.2)
22.4
(0.8)
(22.0)
(17.7)
199.9
–
–
–
–
–
–
–
–
61.3
(105.5)
(13.1)
16.4
(40.9)
0.4
1.6
11.7
–
–
(12.9)
68.3
(77.5)
(3.4)
–
–
–
36.7
39.9
–
–
–
(0.7)
8.2
1.2
(0.3)
–
–
–
–
–
(2.8)
13.6
(77.1)
(1.8)
11.7
(0.7)
8.2
22.2
121.5
Drax Group plc Annual report and accounts 2019 199
Financial statements Section 7: Risk management continued
7.3 Hedge reserve continued
The expected release profile from equity of post-tax hedging gains and losses is as follows:
Commodity contracts
Financial contracts
Foreign exchange contracts
Interest rate contracts
Inflation contracts
Commodity contracts
Financial contracts
Cross currency interest rate swap
Within 1 year
£m
62.1
(3.0)
58.4
3.2
1.5
122.2
Within 1 year
£m
2.7
67.0
–
69.7
As at 31 December 2019
1–2 years
£m
8.0
(0.3)
(4.3)
2.5
2.6
8.5
>2 years
£m
1.5
–
(14.2)
(6.0)
9.5
(9.2)
As at 31 December 2018
1–2 years
£m
3.6
91.2
–
94.8
>2 years
£m
0.5
56.7
(21.8)
35.4
Total
£m
71.6
(3.3)
39.9
(0.3)
13.6
121.5
Total
£m
6.8
214.9
(21.8)
199.9
7.4 Cost of hedging reserve
The Group allocates unrealised gains and losses on the forward rate of foreign currency derivative contracts to a cost of hedging
reserve in accordance with IFRS 9.
A large proportion of the derivative contracts relate to foreign exchange contracts, including forward contracts, options and
swaps. Consistent with prior periods, the Group has continued to designate the change in fair value of the spot rate in the Group’s
cash flow hedge relationships. The Group designates the cost of hedging – being the change in fair value associated with forward
points including currency basis – to equity. All amounts within the cost of hedging reserve relate to commodity price risk.
The cumulative gains and losses unwind and are released as the related contracts mature and we take delivery of the associated
currency.
At 1 January
Gains/(losses) recognised:
– Change in fair value of hedging instrument recognised in OCI
Released from equity:
– Reclassified to cost of inventory
– Reclassified to cost of intangible assets (Carbon)
Related deferred tax, net (note 2.6)
At 31 December
Forward foreign currency exchange contracts are released to cost of sales in the income statement.
Cost of hedging
2019
£m
(8.9)
2018
£m
(40.7)
56.3
24.8
3.1
0.7
(10.4)
40.8
11.3
3.2
(7.5)
(8.9)
200
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
7.4 Cost of hedging reserve continued
The expected release profile from equity of post-tax cost of hedging gains and losses is as follows:
Foreign exchange contracts
Foreign exchange contracts
As at 31 December 2019
Within 1 year
£m
(3.6)
1–2 years
£m
10.5
>2 years
£m
33.9
As at 31 December 2018
Within 1 year
£m
(3.0)
1–2 years
£m
(11.9)
>2 years
£m
6.0
Total
£m
40.8
Total
£m
(8.9)
7.5 Offsetting financial assets and financial liabilities
Financial assets and liabilities are offset and the net amount is reported in the balance sheet where the Group has a legally
enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle
the liability simultaneously. The Group also has financial asset and liabilities with certain counterparties that are subject to master
netting agreements. Financial assets and liabilities do not meet the criteria for offsetting in the balance sheet, but are subject to
an enforceable master netting agreement that in certain circumstances, such as a bankruptcy, would allow for the amounts to be
offset and a single net amount payable. The table below shows the impact if the carrying amounts that are subject to these
agreements were offset.
Financial assets
Derivative financial instruments
Financial liabilities
Derivative financial instruments
As at 31 December 2019
As at 31 December 2018
Gross amounts
of financial
instrument
in the
balance sheet
£m
Related
financial
instruments
that are
not offset
£m
Gross amounts
of financial
instrument
in the
balance sheet
£m
Related
financial
instruments
that are
not offset
£m
Net amount
£m
Net amount
£m
346.0
(209.1)
136.9
510.6
(117.3)
393.3
(289.4)
209.1
(80.3)
(151.4)
117.3
(34.1)
Drax Group plc Annual report and accounts 2019 201
Financial statements Section 7: Risk management continued
7.6 Contingent assets and liabilities
Contingent liabilities are potential future outflows of cash that are dependent on a future event that is outside of the control
of the Group. The amount or timing of any payment is uncertain and cannot be measured reliably.
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 2019,
the Group’s contingent liability in respect of letters of credit issued under the revolving credit facility amounted to £77.0 million
(2018: £31.8 million).
The Group also guarantees obligations in the form of surety bonds with a number of insurers amounting to £96.1 million (2018:
£63.7 million).
7.7 Commitments
The Group has a number of financial commitments (i.e. a contractual requirement to make a cash payment in the future) that are
not recorded in the balance sheet as the contract is not yet due for delivery. Such commitments include contracts for the future
purchase of coal and biomass, 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 ROCs
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 one to five years
After five years
As at 31 December
2019
£m
57.2
19.9
295.0
4,332.9
2018
£m
74.9
6.5
159.7
6,716.6
As at 31 December
2019
£m
840.1
2,997.4
495.4
4,332.9
2018
£m
1,084.2
4,191.0
1,441.4
6,716.6
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 2019–2027 and
the delivery of gas to be used in the Gas-thermal plants. To the extent these contracts relate to the purchase of wood pellets, they
are not reflected elsewhere in the financial statements owing to application of the “own-use” exemption from fair value accounting
to such contracts (see note 7.1).
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Shareholder information
Section 8: Reference information
This section details reference information relevant to the compiling of the financial statements and provides the general
information about the Group (e.g. operations and registered office). The Group 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:
• Power generation;
• Gas and 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 2019. The Group adopted the following from
1 January 2019:
IFRS 9 (amended) – Financial Instruments
IFRS 16 – Leases
IFRIC 23 – Uncertainty over Income Tax Treatments
IAS 19 (amended) – Employee Benefits
IAS 28 (amended) – Investments in Associates and Joint Ventures
Annual Improvements to IFRS Standards 2015–2017 Cycle
IFRS Practice Statement 2
Other than the adoption of IFRS 16, these updates and amendments have not had a material impact on the financial statements
of the Group. The transition disclosures for IFRS 16 have been included in note 8.3.
The Group has elected to early adopt the ‘Amendments to IAS 39 and IFRS 7 Interest Rate Benchmark Reform’ issued in September
2019. In accordance with the transition provisions, the amendments have been adopted retrospectively to hedging relationships
that existed at the start of the reporting period or were designated thereafter, and to the amount accumulated in the cash flow
hedge reserve at that date.
The amendments are relevant to the Group given that it applies hedge accounting to its GBP LIBOR interest rate exposure on the
£375 million private placement that is hedged using the floating-to-fixed GBP interest rate swap.
The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly
affected by interest rate Interbank Offered Rates (IBOR) reform. The reliefs have the effect that IBOR reform should not generally
cause hedge accounting to terminate. However, any hedge ineffectiveness continues to be recorded in the income statement.
Furthermore, the amendments set out triggers for when the reliefs will end, which include the uncertainty arising from interest
rate benchmark reform no longer being present. In summary, the reliefs provided by the amendments that apply to the Group are:
• When considering the ‘highly probable’ requirement, the Group is able to assume that the GBP LIBOR interest rate on which
the hedged future cash flows are based is not altered as a result of IBOR reform;
• In assessing the hedge effectiveness on a prospective basis, the Group is able to assume that the economic relationship
between the hedged item and the hedging instrument is not impacted as a result of IBOR reform; and
• When the Group applies these amendments, the quantitative requirements in paragraph 28(f) of IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors are not required.
Drax Group plc Annual report and accounts 2019 203
Financial statements Section 8: Reference information continued
8.2 Basis of preparation continued
These amendments will cease to apply at the earlier of when the uncertainty regarding the timing and amount of the interest rate
benchmark-based cash flows are no longer present, or the discontinuation of the hedging relationship.
The additional disclosure requirements that apply as a result of applying the ‘Amendments to IAS 39 and IFRS 7 Interest Rate
Benchmark Reform’ have been disclosed in note 7.2.
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 10 (amended) – Consolidated Financial Statements and IAS 28 (amended) – Investments in Associates and Joint Ventures
(2011) – effective date deferred indefinitely.*
IFRS 3 (amended) – Business Combinations – effective from 1 January 2020.*
Conceptual Framework for Financial Reporting (amended) – effective from 1 January 2020.
IAS 1 (amended) – Presentation of Financial Statements and IAS 8 (amended) Accounting Policies, Changes in Accounting
Estimates and Errors – effective from 1 January 2020.
Annual Improvements 2018-2020 Cycle.*
IFRS 17 Insurance contracts – effective from 1 January 2021.*
Adoption of the other standards in future periods is not expected to have a material impact on the financial statements of the Group.
8.3 Adoption of new accounting standards and restatement of previously reported financial statements
IFRS 16 – Leases
IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases and SIC
27 Evaluating the Substance of Transactions involving the legal form of a lease.
The Group has adopted IFRS 16 from 1 January 2019 using the modified retrospective method of adoption. Under this method, the
standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial
application. Consequently, comparative information in these Consolidated Financial Statements for the year ended 31 December
2018 has not been restated.
The new requirements have impacted the Group’s accounting for lease contracts. The Group’s lease portfolio predominantly
relates to properties and the hire of plant and equipment at operating sites. On transition to IFRS 16 on 1 January 2019, assets
controlled under lease contracts were brought onto the balance sheet as right-of-use assets, and the Group has recognised a
corresponding liability for the amounts payable under the lease contracts.
On transition, the Group elected to use the available practical expedient allowing the standard to only be applied to those
contracts identified as leases under the previous standards. Accordingly, the definition of a lease in accordance with IAS 17 and
IFRIC 4 will continue to apply to those leases entered into or modified before 1 January 2019. However, the Group has applied the
new definition of a lease to all contracts entered into or modified on or after 1 January 2019. This change did not have a significant
impact on the assessment of contracts that are in scope of the definition of a lease.
The Group has also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease
term of 12 months or less and lease contracts for which the underlying asset is of low value (less than £3,500).
Under IFRS 16, right-of-use assets are tested for impairment. This has replaced the previous requirement to recognise a provision
for onerous lease contracts.
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Shareholder information
8.3 Adoption of new accounting standards and restatement of previously reported financial statements
continued
Nature of the effect of adoption of IFRS 16
Leases previously classified as finance leases
The Group has not changed the initial carrying amounts of recognised assets and liabilities at the date of initial application for
leases previously classified as finance leases (i.e. the right-of-use assets and lease liabilities equal the lease assets and liabilities
recognised under IAS 17). The requirements of IFRS 16 were applied to these leases from 1 January 2019 and the related amounts
on the balance sheet reclassified from property, plant and equipment to right-of-use assets and borrowings to lease liabilities.
Leases previously accounted for as operating leases
The Group has recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except
for short-term leases and leases of low-value assets. Lease liabilities were recognised based on the present value of the remaining
lease payments, discounted using the incremental borrowing rate at the date of initial application. When calculating the remaining
lease payments, termination options and extension options have been considered in determining the lease term where deemed to
be reasonably probable. The right-of-use assets are recognised based on the amount equal to the lease liabilities, adjusted for any
related prepaid and accrued lease payments previously recognised.
The Group also applied the following practical expedients as permitted by IFRS 16:
• Use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Relied on its assessment of whether leases are onerous immediately before the date of initial application;
• Applied the short-term leases exemptions to leases with a lease term that ends within 12 months at the date of initial application;
• For leases of low value assets, the Group has elected to recognise a lease expense on a straight-line basis;
• Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
• Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
Based on the above, as at 1 January 2019:
• Right-of-use assets of £37.1 million were recognised and presented separately in the balance sheet. This includes the lease assets
recognised previously under finance leases of £0.6 million that were reclassified from property, plant and equipment.
• Additional lease liabilities of £37.6 million were recognised separately on the balance sheet. This includes £0.5 million previously
recognised as finance leases that were reclassified from borrowings.
Prepayments of £0.1 million and trade and other payables of £0.7 million related to previous operating leases were derecognised.
The effect of adopting IFRS 16 as at 1 January 2019 is as follows:
Assets
Right-of-use assets
Property, plant and equipment
Trade and other receivables
Liabilities
Trade and other payables
IFRS 16 lease liabilities
Borrowings
Total adjustment on equity:
Retained profits
Previously
reported
at 31 December
2018
£m
(Note 1)
Transition
adjustments
£m
Adjusted
balance sheet
at 1 January
2019
£m
–
2,292.3
468.8
(938.5)
–
(608.1)
37.1
(0.6)
(0.1)
0.7
(37.6)
0.5
37.1
2,291.7
468.7
(937.8)
(37.6)
(607.6)
442.7
–
442.7
Drax Group plc Annual report and accounts 2019 205
Financial statements Section 8: Reference information continued
8.3 Adoption of new accounting standards and restatement of previously reported financial statements
continued
The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows:
Operating lease commitments as at 31 December 2018
Less:
Effect of discounting
Commitments relating to short-term and low-value leases
Add:
Additional leases identified
Effect of rental changes
Other adjustments
Lease liabilities as at 1 January 2019
£m
30.8
(5.6)
(0.8)
9.7
2.4
1.1
37.6
Key judgements made in response to new reporting requirements
Whilst judgements have been made on initial application of IFRS 16, these are not considered significant to the Consolidated
Financial Statements
Impact of IFRS 16 on comparative information
As the Group has made the election to adopt the modified retrospective approach, no comparative information for the
31 December 2018 has been restated for the effects of transition to the new standard. This has led to a lack of comparability
in certain areas of the financial statement for the two years.
Income statement
Under the previous accounting standards, operating leases were expensed to the income statement on a systematic basis over the
lease term, in the year ended 31 December 2018, £6.3 million was expensed to operating expenses for the operating lease rentals.
Under IFRS 16, operating leases are recognised on the balance sheet as right-of-use assets with a corresponding lease liability.
Interest on the lease liability is expensed to the income statement as the discount on the lease liability unwinds. Depreciation on
the right-of-use assets is charged to the income statement on a straight-line basis over the lease terms. Lease payments are no
longer expensed to the income statement but reduce the lease liability.
The impact of IFRS 16 on the income statement for the year to 31 December 2019 was as follows:
Reduction in operating expense for lease rentals paid
Depreciation charged on right-of-use assets
Unwind of discount on lease liability
Total impact
Please refer to note 4.1 for the impact of IFRS 16 on the net debt calculation.
As at
31 December
2019
£m
7.4
(6.9)
(1.2)
(0.7)
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Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Shareholder information
8.3 Adoption of new accounting standards and restatement of previously reported financial statements
continued
Restatement of previously reported financial statements
The impact of IFRS 16 and the correction of the retranslation of US subsidiary fixed assets (see note 3.1 for further details) on the
balance sheet for the year ended 31 December 2018 was as follows:
Assets
Non-current assets
Goodwill
Intangibles
Property, plant and equipment
Other fixed asset investments
Retirement benefit surplus
Deferred tax assets
Derivative financial instruments
Current assets
Inventories
ROC and LEC assets
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Liabilities
Current liabilities
Trade and other payables
Amounts payable in respect of acquisitions
Current tax liabilities
Borrowings
Derivative financial instruments
Net current (liabilities)
Non-current liabilities
Borrowings
Derivative financial instruments
Provisions
Deferred tax liabilities
Net assets/(liabilities)
Shareholders’ equity
Issued equity
Share premium
Treasury shares
Hedge reserve
Cost of hedging reserve
Other reserves
Retained profits
Total shareholders’ equity
Adjustments
Previously
reported
at 31 December
2018
£m
Measurement
period
adjustments
£m
Retranslations
of US subsidiary
fixed assets
£m
Restated
31 December
2018
£m
244.7
228.8
2,292.3
2.4
22.7
31.8
295.2
3,117.9
222.5
216.7
468.8
215.4
289.0
1,412.4
(938.5)
(686.9)
(7.6)
(0.1)
(89.4)
(1,722.5)
3.5
–
(0.2)
–
(1.1)
–
–
2.2
–
–
5.4
–
–
5.4
(2.1)
(4.8)
(0.8)
–
–
(7.7)
(310.1)
(2.3)
(608.0)
(62.0)
(50.8)
(316.0)
(1,036.8)
1,771.0
47.0
424.7
(47.1)
199.9
(8.9)
712.7
442.7
1,771.0
–
–
–
0.1
0.1
–
–
–
–
–
–
–
–
–
–
–
55.5
–
–
–
–
55.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
55.5
–
–
–
–
–
55.5
–
55.5
248.2
228.8
2,347.6
2.4
21.6
31.8
295.2
3,175.6
222.5
216.7
474.2
215.4
289.0
1,417.8
(940.6)
(691.7)
(8.4)
(0.1)
(89.4)
(1,730.2)
(312.4)
(608.0)
(62.0)
(50.8)
(315.9)
(1,036.7)
1,826.5
47.0
424.7
(47.1)
199.9
(8.9)
768.2
442.7
1,826.5
Drax Group plc Annual report and accounts 2019 207
Financial statements Section 8: Reference information continued
8.4 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 the
Group by investment (such as an associated company or joint venture). The Group’s primary related parties are its 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
2019
£000
4,543
636
43
5,222
2018
£000
4,891
1,004
74
5,969
Amounts included in the table above reflect the remuneration of the 16 (2018: 15) members of the Board and Executive Committee
as described on pages 86 to 114, 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 (see 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.
208
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Strategic report
Governance
Financial statements
Shareholder information
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
Other creditors
Net current liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Treasury shares
Capital redemption reserve
Profit and loss account
Total equity shareholders’ funds
As at 31 December
2019
£000
2018
£000
Notes
5
719,654
717,044
18
2,842
130
2,990
(12,790)
–
(9,800)
709,854
47,417
429,646
(50,440)
1,502
281,729
709,854
57
760
1,666
2,483
(12,481)
(134)
(10,132)
706,912
47,038
424,742
(47,143)
1,502
280,773
706,912
6
The Company reported a profit for the financial year ended 31 December 2019 of £57.3 million (2018: £99.4 million).
These financial statements were approved by the Board of directors on 26 February 2020.
Signed on behalf of the Board of directors:
Andy Skelton
Chief Financial Officer
Drax Group plc Annual report and accounts 2019 209
Company financial statements continued
Company statement of changes in equity
At 1 January 2018
Share capital issued (note 6)
Own shares purchased
Profit and total comprehensive income for the year
Credited to equity for share-based payments
Equity dividends paid (note 8)
At 1 January 2019
Share capital issued (note 6)
Own shares purchased
Profit and total comprehensive income for the year
Credited to equity for share-based payments
Equity dividends paid (note 8)
At 31 December 2019
Share
capital
£000
46,989
49
–
–
–
–
47,038
379
–
–
–
–
47,417
Share
premium
£000
424,325
417
–
–
–
–
424,742
4,904
–
–
–
–
429,646
Treasury
shares
£000
–
–
(47,143)
–
–
–
(47,143)
–
(3,297)
–
–
–
(50,440)
Capital
redemption
reserve
£000
1,502
–
–
–
–
–
1,502
–
–
–
–
–
1,502
Profit and
loss account
£000
229,764
–
–
99,399
4,089
(52,479)
280,773
–
–
57,332
2,489
(58,865)
281,729
Total
£000
702,580
466
(47,143)
99,399
4,089
(52,479)
706,912
5,283
(3,297)
57,332
2,489
(58,865)
709,854
In the previous financial year, the Company announced the commencement of a £50 million share buy-back programme. On
21 January 2019, the buy-back programme concluded. In total, the Group repurchased 13.8 million shares for a total consideration
of £50.4 million, including transaction costs. These shares are held in a separate Treasury Share reserve awaiting reissue or
cancellation and have no voting rights attached to them.
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Governance
Financial statements
Shareholder information
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, ‘Reduced Disclosure Framework’ (FRS 101).
The Company applied certain new and amended standards for the first time in 2019. The full list of standards adopted is set out in
the consolidated financial statements in note 8.2. These updates and amendments have not had a material impact on the financial
statements of the Company.
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
Fixed asset investments
Fixed asset investments in subsidiaries are stated at cost less, where relevant, provision for impairment.
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
Critical judgements in applying the Company’s accounting policies
The critical accounting judgements made in preparation of the Company’s financial statements are set out below:
Impairment of fixed asset investments
Determining whether the Company’s investments in subsidiaries have been impaired requires estimates of the investments’ values
in use. The methodology for calculation of value-in-use is consistent with that of the Group, as detailed in note 2.4 to the
consolidated financial statements.
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 26 February 2020. The net profit attributable
to the Company is £57.3 million.
The Company received dividend income from its subsidiary undertakings totalling £60.5 million in 2019 (2018: £102.6 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 2019 was £22,050
(2018: £21,000).
Drax Group plc Annual report and accounts 2019 211
Notes to the Company financial statements continued
5. Fixed asset investments
Carrying amount:
At 1 January
Capital contribution
At 31 December
Years ended 31 December
2019
£000
2018
£000
717,044
2,610
719,654
712,955
4,089
717,044
Investments in subsidiary undertakings
The capital contribution in 2019 and 2018 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 2019:
Country of incorporation
and registration
England and Wales
England and Wales
Delaware, USA
Delaware, USA
England and Wales
Delaware, USA
England and Wales
England and Wales
Delaware, USA
England and Wales
Delaware, USA
Delaware, USA
Delaware, USA
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Type of share
Ordinary
Ordinary
Common
Common
Ordinary
Common
Ordinary
Ordinary
Common
Ordinary
Common
Common
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Group effective
shareholding
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Holding company
Dormant
Group-wide Corporate Services
Power generation
Debt recovery services
Trading company, fuel supply
Trading company, fuel supply
Dormant
Non-trading company
Dormant
Dormant
Wood pellet manufacturing
Dormant
Dormant
Holding company
Name and nature of business
Abergelli Power Limited***
Abbott Debt Recovery Limited
Amite BioEnergy LLC*
Baton Rouge transit LLC*
Damhead Creek II Limited (formerly
Select Energy Limited)
DBI O&M Company LLC*
Domus Energy Limited
Donnington Energy Limited
Drax Biomass Inc.*
Drax Biomass Holdings Limited
Drax Biomass Holdings LLC*
Drax Biomass International
Holdings LLC*
Drax Biomass Transit LLC*
Drax CCS Limited
Drax Corporate Limited
Drax Corporate Developments Limited Dormant
Drax Finco plc
Drax Fuel Supply Limited***
Drax Generation Developments
Limited***
Drax Generation Enterprise Limited**
(formerly ScottishPower Generation
Limited)
Drax Generation (Selby) Limited
Drax Group Holdings Limited
Drax Holdings Limited +
Drax Innovation Limited***
Drax Pension Trustees Limited
Drax Power Limited
Drax Retail Developments Limited
Drax Research and Innovation
Holdco Limited***
Drax Smart Generation Holdco Limited Holding company
Holding company
Drax Smart Sourcing Holdco Limited
Holding company
Drax Smart Supply Holdco Limited
Trading company, power retail
Farmoor Energy Limited***
Dormant
Haven Heat Limited
Finance company
Non-trading company
Development company
212
Drax Group plc Annual report and accounts 2019
Trading Company, power generation Scotland
England and Wales
Dormant
England and Wales
Holding company
Cayman Islands
Holding company
England and Wales
Development company
England and Wales
Dormant
Trading company, power generation England and Wales
England and Wales
Dormant
England and Wales
Holding company
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ordinary
100%
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Strategic report
Governance
Financial statements
Shareholder information
5. Fixed asset investments continued
Name and nature of business
Haven Power Limited
Haven Power Nominees Limited
Hirwaun Power Limited***
Jefferson Transit LLC *
LaSalle Bioenergy LLC *
Millbrook Power Limited***
Morehouse BioEnergy LLC *
Opus Energy (Corporate) Limited
Opus Energy Limited
Opus Energy Group Limited
Opus Energy Marketing Limited
Opus Energy Renewables Limited
Opus Gas Limited***
Opus Gas Supply Limited
Opus Water Limited
Pike BioEnergy LLC*
Pirranello Energy Supply Limited
Progress Power Limited***
SMW Limited**
Sunflower Energy Supply Limited
Tyler Bioenergy LLC *
Trading company, power retail
Non-trading company
Power generation
Dormant
Trading company, fuel supply
Power generation
Trading company, fuel supply
Trading company, power retail
Trading company, power retail
Holding company, power retail
Dormant
Trading company, power retail
Dormant
Trading company, power retail
Dormant
Trading company, fuel supply
Dormant
Power generation
Trading company, fuel supply
Dormant
Dormant
Country of incorporation
and registration
England and Wales
England and Wales
England and Wales
Delaware, USA
Delaware, USA
England and Wales
Delaware, USA
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Delaware, USA
England and Wales
England and Wales
Scotland
England and Wales
Delaware, USA
Type of share
Group effective
shareholding
Ordinary
Ordinary
Ordinary
Common
Common
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Common
100%
100%
100%
100%
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.
Registered Office
Incorporated in the UK
The registered office of all the companies incorporated in England and Wales is Drax Power Station, Selby, North Yorkshire,
YO8 8PH.
* incorporated in the USA
Principal business address for all subsidiaries incorporated in the USA is 2571 Tower Drive, Suite 7, Monroe, LA 71201.
** incorporated in Scotland
Principal business address for all subsidiaries incorporated in Scotland is 13 Queen’s Road, Aberdeen, Scotland, AB15 4YL.
***Exempt from audit
These subsidiaries have taken advantage of the exemption from audit available under section 479A of the Companies Act 2006
for the 2019 statutory accounts. These companies are all incorporated in England and Wales.
+ registered in Cayman Islands
The address of Drax Holdings Limited is c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town,
Grand Cayman KY1 9005, Cayman Islands.
All subsidiary undertakings have 31 December year ends.
Drax Group plc Annual report and accounts 2019 213
Notes to the Company financial statements continued
6. Called-up share capital
Authorised:
865,238,823 ordinary shares of 11 16⁄29 pence each
Issued and fully paid:
2019: 410,475,731 ordinary shares of 11 16⁄29 pence each
As at 31 December
2019
£000
2018
£000
99,950
99,950
47,417
47,038
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
Years ended 31 December
2019
(number)
407,193,168
3,282,563
410,475,731
2018
(number)
407,034,429
158,739
407,193,168
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
From January to December 2019 a total of 3,282,563 shares (2018: 158,739 shares) were issued in satisfaction of options vesting
in accordance with the rules of the Group’s Savings-Related Share Option Plan.
The total cash received, split between nominal value and share premium, is shown in the statement of changes in equity on
page 210.
Full details of share options outstanding are included in note 6.2 to the consolidated financial statements.
7. Distributable reserves
The Company considers its distributable reserves to be comprised of the profit and loss account, less credits in respect of share
schemes, less treasury shares, with a total value of £188.2 million. Accordingly, the Company considers itself to have sufficient
distributable profits from which to pay the current year final dividend of £38.0 million. Based on a total dividend for 2019 of
£63.0 million, the Company has sufficient distributable reserves to pay three 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 financial
statements for additional information).
The Company is dependent upon its subsidiaries for the provision of cash with which to make dividend payments. The Group has
sufficient cash resources with which to meet the proposed dividend (see note 4.2 to the consolidated financial statement for
additional information).
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Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
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 2019 of 6.4 pence per share paid on 11 October 2019
(2018: 5.5 pence per share paid on 12 October 2018)
Final dividend for the year ended 31 December 2018 of 8.2 pence per share paid on 10 May 2019
(2018: 7.4 pence per share paid on 11 May 2018)
Years ended 31 December
2019
£m
2018
£m
25.4
33.5
58.9
22.4
30.1
52.5
At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve
payment of a final dividend for the year ended 31 December 2019 of 9.5 pence per share (equivalent to approximately £38.0 million)
payable on or before 15 May 2020. The final dividend has not been included as a liability as at 31 December 2019.
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 provided guarantees over the liabilities of its subsidiaries that have taken the advantage of the audit exemption
available in section 479A of the Companies Act 2006. The list of subsidiaries who have taken this exemption can be found in note 5.
The Company has granted a charge over the assets of certain 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.
Drax Group plc Annual report and accounts 2019 215
Shareholder information
Key dates for 2020
At the date of publication of this document, the following are the proposed key dates in the 2020 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
22 April
23 April
24 April
15 May
30 June
29 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 2019, and the
graph provides an indication of the trend of the share price throughout the year.
Closing price on
31 December 2018
358.8 pence
Low during the year
(4 October 2019)
247.8 pence
High during the year
(17 January 2019)
415.0 pence
Closing price on
31 December 2019
314.0 pence
Share price chart
Share price (GBX)
450
400
350
300
250
200
93%
Trade Volume
10m
8m
6m
4m
2m
0m
December
2019
January
2019
February
2019
March
2019
April
2019
May
2019
June
2019
July
2019
August
2019
September
2019
October
2019
November
2019
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 2019, was approximately
£1,289 million (2018: £1,461 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.
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Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
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
The way that dividends are taxed changed in 2017. Below is a brief summary of the guidance provided by HMRC as it relates to the
current tax year. 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.
There is a tax-free Dividend Allowance of £2,000 per annum in the 2019-2020 tax year (2018-2019: £2,000) This means that there
is no tax to pay on the first £2,000 of dividend income, no matter what non-dividend income a shareholder may have. Dividends
paid on shares held within pensions and ISAs are unaffected and remain tax-free.
Non-taxpayers and basic rate taxpayers who receive dividend income of more than £2,001 but less than £10,000 are required to
notify HMRC that they have this source of income
Non-taxpayers and basic rate taxpayers who receive dividend income of more than £10,001 are required to file a self-assessment
return with HMRC.
The above requirements apply to Share Incentive Plan participants receiving cash dividends on their plan shares.
Further information and updates on tax on dividends can be found on the Gov.UK website at www.gov.uk/tax-on-dividends
Drax Group plc Annual report and accounts 2019 217
Shareholder information continued
Beneficial owners and “information rights”
If your shares are registered in the name of a third party (i.e. an ISA provider or other nominee company) you may, if you wish,
receive information rights under Section 146 of the Companies Act 2006. In order for this to happen, you must contact the third
party registered holder, who will then nominate you. All communications by beneficial owners of shares where the shares are held
by third party registered holders must be directed to that registered holder and not to Drax or Equiniti.
ShareGift
ShareGift (registered charity No. 1052686) is an independent charity which provides a free service for shareholders wishing to
dispose charitably of small parcels of shares, which would most likely cost more to sell than they are worth. There are no capital
gains tax implications (i.e. no gain or loss) on gifts of shares to charity and it is possible to obtain income tax relief. Further
information can be obtained directly from the charity at www.sharegift.org.
Share frauds (“boiler room scams”)
In recent years, many companies have become aware that their shareholders have received unsolicited phone calls or
correspondence offering to purchase their shares at apparently inflated prices. It is often the case that the caller, or message in
the correspondence claims that they represent a majority shareholder who is looking to take over the Company. At the time of this
report, the Company was not the subject of a take-over attempt, hostile or otherwise, and approaches such as those outlined are
usually made by unauthorised companies and individuals. Shareholders should be very wary of any unsolicited advice, offers to buy
shares at a premium or offers of free reports into the Company. Below is the advice from the Financial Conduct Authority (the “FCA”).
Beware of share fraud
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.
218
Drax Group plc Annual report and accounts 2019
Strategic report
Governance
Financial statements
Shareholder information
Company information
Drax Group plc
Registered office and trading address
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone +44 (0)1757 618381
www.drax.com
Registration details
Registered in England and Wales
Company Number: 5562053
Company secretary
Brett Gladden
Enquiry e-mail address
Drax.Enq@drax.com
Professional advisers and service providers
Auditor
Deloitte LLP
2 New Street Square, London EC4A 3BZ
Bankers
Barclays Bank PLC
1 Churchill Place, Canary Wharf, London E14 5HP
Brokers
Royal Bank of Canada
2 Swan Lane, London EC4R 3BF
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
Drax Group plc Annual report and accounts 2019 219
Glossary
Adjusted EBITDA
Earnings before interest, tax, depreciation, amortisation,
excluding the impact of exceptional items and certain
remeasurements.
Adjusted Results
Business performance after adjusting for material, one-off
exceptional items, certain remeasurements, acquisition and
restructuring costs, and debt restructuring costs.
BECCS
Bioenergy, carbon capture and storage system, with CO2
resulting from power generation captured and stored.
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.
BEIS
The Government Department for Business, Energy and
Industrial Strategy, bringing together the responsibilities for
business, industrial strategy, science, innovation, energy and
climate change (formerly DECC).
Black start
Procedure used to restore power in the event of a total or partial
shutdown of the national electricity transmission system.
Biomass
Organic material of non-fossil origin, including organic waste,
that can be converted into bioenergy through combustion.
Drax uses woody biomass from low grade wood, sawmill
residues and forest residues, in the form of compressed
wood pellets, to generate electricity at Drax Power.
Capacity market
Part of the Government’s Electricity Market Reform, the
Capacity Market is intended to ensure security of electricity
supply by providing a payment for reliable sources of capacity.
Carbon price support
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.
Combined Cycle Gas Turbines (CCGT)
A form of highly efficient energy generation technology that
combines a gas-fired turbine with a steam turbine.
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.
Forced outage
Any reduction in plant availability, excluding planned outages.
Grid charges
Includes transmission network use of system charges (TNUoS),
balancing services use of system charges (BSUoS) and
distribution use of system charges (DUoS).
Headroom and footroom
Positive “reserve” (see opposite) may be termed headroom
and negative reserve as footroom.
IFRSs
International Financial Reporting Standards.
Inertia
The stored energy in the large rotating mass of a generator,
which assists in maintaining system stability. Wind and solar
power sources have no inertia.
Lost time incident rate (LTIR)
The frequency rate is calculated on the following basis:
(fatalities and 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 cash/(debt)
Comprises cash and cash equivalents, short-term investments
less overdrafts and borrowings net of deferred finance costs.
Open Cycle Gas Turbine (OCGT)
A free-standing gas turbine, using compressed air, to generate
electricity
Planned outage
A period during which scheduled maintenance is executed
according to the plan set at the outset of the year.
Reserve
Generation or demand available to be dispatched by the System
Operator to correct a generation/demand imbalance, normally
at two or more minutes’ notice.
Response
Automatic change in generator output aimed at maintaining
a system frequency of 50Hz. Frequency response is required
in every second of the day.
RIDDORS
Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations.
220
Drax Group plc Annual report and accounts 2019
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 incident rate (TRIR)
The frequency rate is calculated on the following basis:
(fatalities, lost time injuries + worse than first aid injuries)/hours
worked x 100,000.
Value from flexibility
A measure of the value from flexible power generation, support
services provided to the power network and attractively priced
coal fuels.
Voltage control/reactive power
Maintenance of voltage within specified limits in order to “push”
power around the system to maintain safety and stability.
Winter
The calendar months October to March.
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Design and production
Cautionary note regarding forward looking statements
This annual report does not constitute an invitation to underwrite, subscribe for, or
otherwise acquire or dispose of shares or other securities in Drax Group plc.
This Annual Report contains “forward looking statements” in relation to the future
financial and operating performance and outlook of Drax Group plc, as well as future
events and their potential effects on Drax Group plc. Generally the words “will”, “may”,
“should”, “continue”, “believes”, “targets”, “plans”, “expects”, “estimates”, “aims”, “intends”,
“anticipates”, or similar expressions or negatives thereof identify forward looking
statements. Forward looking statements include statements relating to the following:
expected developments in our businesses, expected revenues, expected margins,
expected EBITDA, expected trends, expected growth in our businesses, expected future
cash generation, expected future tax rates, expected future interest rates, availability of
debt, ability to service prevailing debt, expected cost savings, opportunities in our
industry, the acquisition of a portfolio of assets from ScottishPower, utilisation of capital,
the impact of Brexit, the review of the UK Capacity Mechanism, payments under the
Capacity Market, ability to source fuels (including gas, coal, biomass fuels and others),
the impact of government regulation and other expectations and beliefs of management
and the Board of Directors. Actual risks and developments could differ materially from
those expressed or implied by these forward looking statements as a result of numerous
risks and uncertainties. The reader is cautioned not to place undue reliance on these
forward looking statements which speak only as of the date of this Annual Report.
Neither Drax Group plc, nor any other person undertakes any obligation to update or
revise publicly any of the forward looking statements set out herein, whether as a result
of new information, future events or otherwise, except to the extent legally required.
www.drax.com
Drax Group plc
Drax Power Station,
Selby,
North Yorkshire
YO8 8PH
T +44(0)1757 618381