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Driven by
our purpose
Drax Group plc Annual report and accounts 2020
Welcome to Drax Group
Our purpose
To enable a zero carbon,
lower cost energy future
Our ambition
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 direct business
operations globally – creating a carbon
negative company
Philip Cox
CBE, Chair
Read more about
how we plan to
achieve our
ambition from our
Chair and CEO on
pages 8 and 10
Will Gardiner,
CEO
Our strategic aims
To build a long-term future
for sustainable biomass
By expanding our sustainable bioenergy supply chain and
reducing costs we are developing options for long-term
biomass operations – renewable generation, negative
carbon emissions, system support services and third party
supply of biomass to international markets.
To be the leading provider
of power system stability
Through a portfolio of flexible and renewable generation,
and large industrial and commercial customer supply business,
we will provide system support services to allow the power
system to utilise intermittent renewable energy accelerating
the UK’s decarbonisation en route to 2050.
To give our customers
control of their energy
We provide our customers with renewable energy, and the
opportunity to control and optimise energy use and cost,
helping us support the energy system.
Read more on
page 16
Read more on
page 36
Read more on
page 38
See more online at
www.drax.com
Front cover: Foresters in Weyerhaeuser working
forest, Mississippi, USA, where more carbon is stored
and more wood inventory is grown each year than is
extracted for wood products such as biomass pellets.
2020 highlights
Adjusted revenue(1)
Adjusted gross profit(1)
Adjusted EBITDA from
continuing and discontinued
operations(1)
Percentage of total UK
renewable electricity
generated
£4,235m
£800m
£412m
(2019 re-presented: £4,457m)
(2019 re-presented: £798m)
(2019: £410m)
11%
(2019: 12%)
Total revenue
Total gross profit
Total operating (loss)/profit
Net debt(2)
£4,245m
£726m
£(156)m
£776m
(2019 re-presented: £4,468m)
(2019 re-presented: £677m)
(2019 re-presented: £48m)
(2019: £841m)
Total recordable incident rate
Dividend per share
Customer meter points
Wood pellets produced
0.29
(2019: 0.22)
17.1p
(2019: 15.9p)
425k
(2019: 419k)
1.5Mt
(2019: 1.4Mt)
Contents
Strategic report
01 2020 highlights
02 Market context
04 Business model
06 ESG highlights
08 Chair’s statement
10 CEO’s review
16 Biomass cost reduction
18 Key performance
indicators
20 Financial review
30 Covid-19 impact on
executive remuneration
32 TCFD disclosures
34 Our Covid-19 response
36 System stability
38 Giving customers control
of their energy
40 Engaging our stakeholders
48 Sustainable business
64 Viability statement
66 Principal risks and
uncertainties
Governance
80 Letter from the Chair
84 Board of Directors
86 Executive Committee
87 Corporate governance
report
94 Nomination Committee
report
Financial statements
142 Financial statements
contents
143 Independent auditor’s
report to the members
of Drax Group plc
151 Financial statements
154 Consolidated financial
98 Audit Committee report
108 Remuneration Committee
statements
– Consolidated income
report
134 Directors’ report
138 Directors’ responsibilities
statement
statement
– Consolidated statement
of comprehensive
income
139 Verification statements
– Consolidated balance
sheet
– Consolidated statement
of changes in equity
– Consolidated cash flow
statement
159 Financial performance
173 Operating assets and
working capital
184 Financing and capital
structure
190 Other assets and liabilities
197 Our people
206 Risk management
226 Reference information
228 Company financial
statements
– Company balance sheet
– Company statement
of changes in equity
230 Notes to the Company
financial statements
Shareholder information
235 Shareholder information
238 Company information
239 Glossary
(1)
(2)
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 items we consider to be exceptional, to provide additional information about the Group’s performance. Adjusted financial
performance measures are described more fully on page 153, with a reconciliation to their statutory equivalents in note 2.7 to the consolidated financial statements
on page 170. 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). On 15 December 2020, the Group announced the sale of its portfolio
of CCGT assets to VPI Holdings in a deal worth up to £193 million (see page 21), which subsequently completed on 31 January 2021. As a result of this transaction,
the results of the CCGT portfolio for 2019 and 2020 have been classified as discontinued operations in the consolidated financial statements. References to
financial performance measures throughout this annual report refer to continuing operations, unless otherwise stated. Further details, and a full reconciliation
of continuing, discontinued and total financial performance measures is included in note 5.5 to the consolidated financial statements.
We define net debt as borrowings less cash and cash equivalents. A reconciliation of net debt is provided on page 184. Borrowings is defined as per the Group’s
balance sheet on page 156 and does not include lease liabilities, pension obligations or other financial liabilities.
Drax Group plc Annual report and accounts 2020
1
Strategic reportGovernanceFinancial statementsShareholder information
Market context
Why is Drax
important in
the market?
Supporting the nation’s
energy needs, tackling climate
change and promoting the
UK’s socio-economic growth
and global leadership ambition
through negative emissions
Decarbonisation, electrification,
the role of negative carbon
emissions and a green recovery
from Covid-19
2020 was widely expected to be a
transformative year: the UK would leave
– and seek a new relationship with –
the European Union; the re-elected UK
Government under Boris Johnson would
implement a new vision and manifesto,
including the levelling up agenda and
COP26; and US elections in November
would offer two very different domestic
and international visions. But very few
predicted why 2020 would become
such a watershed year. The worldwide
pandemic (Covid-19) fundamentally
changed the world, with short- and
long-term socio-economic consequences
and global impact on health.
One issue didn’t change, however.
Climate change, and the focus on a
green economy and renewable power.
Rather than the global crisis pushing
the green agenda into the long grass,
the general public reconnected with
the environment during lockdowns,
and governments saw the economic
benefits of pushing a green recovery
with more affordable green technology.
Net zero
UK and Globally
The UK continued to position itself
as a world leader in decarbonisation.
The Prime Minister’s 10-point plan and
Energy White Paper included low-
carbon technologies such as offshore
wind and carbon capture and storage.
Despite COP26 being postponed
by a year, several major economies
announced, reaffirmed or accelerated
their net zero commitments. The EU
set a new 2030 target for emission
reduction to complement its target
of carbon neutrality by 2050. South
Africa, Japan and South Korea
announced net zero emissions by 2050.
China announced a carbon emission
peak before 2030, with carbon
neutrality by 2060. Joe Biden pledged
to re-join the Paris Climate Agreement,
proposing to make US electricity
production carbon-free by 2035 and
meet net zero by 2050.
Bioenergy carbon capture
and storage (BECCS)
The UK’s Climate Change Committee
highlighted in December 2020 that 53
MtCO2 of BECCS would be needed to
meet net zero. National Grid set out in
its 2020 Future Energy Scenarios (FES)
report that BECCS was needed in the
power industry in every scenario to
achieve net zero in 2050 and could
help the UK achieve a carbon negative
power system as early as 2030.
The UK Government reaffirmed its
commitment to Carbon Capture Usage
and Storage, safeguarding and building
on its £800 million budget commitment
in a minimum of two clusters. In that
context, it announced a call for evidence
on the role of Greenhouse Gas Removal
technologies (GGRs) including BECCS.
This will inform key strategic decisions
around the development, deliverability
and cost of different GGRs, as well as
the Government’s role in addressing
market barriers, supporting policies
and frameworks.
Flexibility and Stability
Intermittent renewable technologies
such as solar and wind grew in 2020,
helping decarbonise the power sector.
However, this growth increased
challenges for the stability of the UK’s
electricity grid, caused by generation
outages and low wind levels. National
Grid twice issued an “Electricity Margin
Notice” – a warning that the margin
between electricity supply and demand
on the system had tightened to critical
levels – for the first time since 2016. This
underscored the need to increase flexible
2 Drax Group plc Annual report and accounts 2020
Net zero
See more online at www.drax.com
and more details about trends in
the electricity sector at
www.electricinsights.co.uk
Covid-19 and the Green Bounce Back
Energy
Covid-19’s global economic impact also
affected the UK power market. In 2020
alone, the average wholesale power
price fell 44%, with average electricity
demand down by 13%. The costs of
balancing the system rose 51% to
£293 million whilst the share of
renewables increased from 28% to
38.4%, with biomass increasing 8.4%
and fossil fuel decreasing by 17.4%.
Green Economic Recovery
It has become increasingly clear that a
Covid-19 socio-economic recovery in the
UK will focus on green technologies and
industries, using private finance to fund
immediate and future priorities such as
green infrastructure. This could create
tens of thousands of jobs around the
country, such as offshore wind, carbon
capture and storage, and hydrogen.
Drax Impact
Drax can be at the heart of the green
economic recovery in the North. Scaling
up BECCS at Drax could support
thousands of jobs during construction
at its peak and contribute significantly to
the local economy, according to a report
from Vivid Economics, commissioned by
Drax. Delivering the Zero Carbon Humber
project could create and support tens of
thousands of jobs locally and throughout
the supply chain, according to the report.
Many businesses will be remembered
for their actions during the Covid-19
pandemic. At Drax, we generated good
returns for shareholders, with a
sustainable and growing dividend and
increased share price, whilst “keeping
the lights on”, avoiding furloughing
employees and supporting our
employees, customers and communities.
Global situation
COP26
COP26 in Glasgow was postponed to
2021 but offers potential to be a major
success for the UK both domestically
and internationally. The UK Government
will want to showcase innovative
decarbonisation technologies ahead
of COP26. This will be an opportunity
for Drax to continue to explain how it
can be part of a diverse green energy
mix to meet net zero with innovative
advancements technologically
(through BECCS, CCS and hydrogen)
and financially through new green
finance models.
Biomass Acceptability
In the US, EU and in the UK, policy
makers have continued to regulate
biomass in the context of global and
domestic efforts to meet net zero.
In the EU, the European Commission’s
Green New Deal proposed a new
biodiversity strategy and re-opening
key legislation such as the REDII and
EU ETS. In the UK, the Government
announced it would begin work on
a new bioenergy strategy – to be
published in 2022. In the US, the
EPA has been actively considering
the carbon credentials of biomass.
The UK Government’s BEIS attitudes
survey shows that public support for
biomass continues to rise.
EU Carbon Targets
With the EU’s increased net zero ambition
and timetable, biomass is likely to play
a key role in helping the EU to meet its
ambitious targets. This increased
ambition will have implications for carbon
pricing and could result in higher carbon
prices in the UK even after Brexit. The
UK announced a UK Emissions Trading
Scheme (ETS) to replace the EU-ETS from
1 January 2021. The EU is also examining
the potential to introduce a carbon border
adjustment where non-EU countries will
be required to account for an implied
carbon price to import goods into the EU.
Drax Impact
Despite Covid-19 challenges, Drax’s global
supply chain for pellets has remained
resilient. As in 2020, Drax will continue to
engage with UK, EU and US policymakers
on the role of biomass, through the BEIS
biomass strategy, revision of REDII and
new US administration.
In 2021, Drax is positioning itself as one
of the business leaders for COP26 and
will look to support the UK Government
in its efforts to make this a success.
Drax Group plc Annual report and accounts 2020
3
generation and technologies, such as
Drax’s pumped storage and biomass,
to keep the system stable and balanced.
Electrification
According to National Grid’s FES report,
electricity demand could double
between now and 2050. One of the key
components of net zero will be the
substantial increase in the electrification
of various sectors of the economy, such
as heat and transportation. With wind
and solar technologies likely to supply
the bulk of this generation, flexible
technologies will play a role in managing
their integration and constraints. The
FES report estimates that up to 20 GW
of hydrogen power and up to 40 GW
of storage (such as that provided by
pumped storage hydro) could be required
to balance the grid in 2050.
Drax Impact
Drax already plays an active role in
decarbonising the energy system and
providing stability and flexibility. Our
strategic focus for a net zero future
remains increasing pumped storage
and sustainable biomass self-supply,
whilst progressing BECCS to be carbon
negative by 2030. We are also continuing
to focus on giving our customers control
of their energy.
Strategic reportGovernanceFinancial statementsShareholder information
Business model
Climate change is the biggest challenge of our time. Drax’s purpose –
to enable a zero carbon, lower cost energy future – puts us at the
heart of addressing this global challenge.
Our business model and
strategy address key trends
in global energy
1. The need for, and increasing
pace of, decarbonisation,
including negative emissions
2. The continued importance of
renewable energy and absolute
increase in electricity demand
to electrify heat and transport
3. The need for flexibility in
generation and consumption
of energy to reflect increased
reliance on intermittent
renewables and increased
customer control of their energy
Our strategic aims
• To build a long-term future
for sustainable biomass
• To be the leading provider
of power system stability
• To give our customers control
of their energy
*
The definition and calculation of Alternative
Performance Measures (those that are defined
by Drax and not IFRS) is set out on page 153
Our integrated flexible and renewable value chain…
Pellet Production
Our pellets provide a sustainable, low carbon fuel source that can
be safely and efficiently delivered through our global supply chain.
Drax’s Generation business uses these pellets to make flexible,
renewable electricity for the UK.
Based in North America, this part of our business aims to increase
capacity from 1.6Mt to 5Mt and reduce production costs by 2027,
to support a long-term future for sustainable biomass.
Adjusted EBITDA*
£52m
(2019: £32m)
Pellets produced
Production cost
1.5Mt
(2019: 1.4Mt)
$153/t
(2019: $161/t)
Generation
Our multi-site, multi-technology portfolio of flexible, low-carbon and
renewable UK power assets (including biomass and hydro generation)
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.
Drax is the UK’s largest single source of renewable electricity by
output and is developing an option for carbon negative electricity
using bioenergy carbon capture and storage (BECCS).
The Group also has options for system support gas assets and
a long-term option for the potential expansion of pumped storage.
Adjusted EBITDA (including
discontinued operations)*
% renewable
£446m
(2019: £408m)
77%
(2019: 79%)
System support
and optimisation
£118m
(2019: £120m)
Customers
Our Customers business is principally focused on renewable electricity
sales to industrial and corporate customers. The business also offers
non-generation system support and energy management services,
in addition to providing a route to market for many smaller embedded
renewable generators.
Adjusted EBITDA*
£(39)m
(2019: £17m)
(reflecting the negative impact
of Covid-19 with a £60m impact.)
4 Drax Group plc Annual report and accounts 2020
…giving us compelling
competitive advantages
• A leading producer of
sustainable biomass
• End-to-end production,
generation and supply
of renewable energy
• The UK’s largest producer
of renewable electricity
by output
• A leading provider of system
support services for the
UK electricity system, offering
the flexibility that other
renewables can’t
• Developing large-scale
negative emissions
technology, which positions
Drax as a world-leading
carbon negative company
• Leading supplier of
renewable electricity and
energy solutions to business
Our business model and
strategy address key trends
in global energy
1. The need for, and increasing
pace of, decarbonisation,
including negative emissions
2. The continued importance of
renewable energy and absolute
increase in electricity demand
to electrify heat and transport
3. The need for flexibility in
generation and consumption
of energy to reflect increased
reliance on intermittent
renewables and increased
customer control of their energy
Our strategic aims
• To build a long-term future
for sustainable biomass
• To be the leading provider
of power system stability
• To give our customers control
of their energy
*
The definition and calculation of Alternative
Performance Measures (those that are defined
by Drax and not IFRS) is set out on page 153
Our integrated flexible and renewable value chain…
Pellet Production
Our pellets provide a sustainable, low carbon fuel source that can
be safely and efficiently delivered through our global supply chain.
Drax’s Generation business uses these pellets to make flexible,
renewable electricity for the UK.
Based in North America, this part of our business aims to increase
capacity from 1.6Mt to 5Mt and reduce production costs by 2027,
to support a long-term future for sustainable biomass.
Pellets produced
Production cost
1.5Mt
(2019: 1.4Mt)
$153/t
(2019: $161/t)
Adjusted EBITDA*
£52m
(2019: £32m)
Generation
Our multi-site, multi-technology portfolio of flexible, low-carbon and
renewable UK power assets (including biomass and hydro generation)
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.
Drax is the UK’s largest single source of renewable electricity by
output and is developing an option for carbon negative electricity
using bioenergy carbon capture and storage (BECCS).
The Group also has options for system support gas assets and
a long-term option for the potential expansion of pumped storage.
Adjusted EBITDA (including
% renewable
discontinued operations)*
77%
(2019: 79%)
System support
and optimisation
£118m
(2019: £120m)
£446m
(2019: £408m)
Customers
Our Customers business is principally focused on renewable electricity
sales to industrial and corporate customers. The business also offers
non-generation system support and energy management services,
in addition to providing a route to market for many smaller embedded
renewable generators.
Adjusted EBITDA*
£(39)m
(2019: £17m)
(reflecting the negative impact
of Covid-19 with a £60m impact.)
…giving us compelling
competitive advantages
Value creation for our stakeholders
• A leading producer of
sustainable biomass
• End-to-end production,
generation and supply
of renewable energy
• The UK’s largest producer
of renewable electricity
by output
• A leading provider of system
support services for the
UK electricity system, offering
the flexibility that other
renewables can’t
• Developing large-scale
negative emissions
technology, which positions
Drax as a world-leading
carbon negative company
• Leading supplier of
renewable electricity and
energy solutions to business
Investors
• High quality earnings
• Sustainable and growing dividend
• Strong balance sheet
• Investment for growth
Environment
• Absolute carbon emissions of
our generation reduced by over
85% between 2012 and 2020
• Ambition to be a carbon negative
company by 2030
Intellectual
• Progressing options for large-scale
negative emission technologies
• Development of alternative fuel
sources for sustainable biomass
Customers
• Largest source of renewable
electricity in UK
• An important source of energy flexibility
• Giving customers control of their energy
• Support for customers experiencing
financial hardship due to Covid-19
Workforce
• Covid-19 safety
and flexible
working patterns
established
Employee
engagement score
82%
(2019: 76%)
Government and regulators
• No furloughing of employees
due to Covid-19
• Thousands of potential jobs
via BECCS option
• Major contribution towards
UK climate targets
• An important source of system support
Communities
• Community
partnerships,
fundraising and
charitable giving
Total social
contribution
£1m*
*
Includes cash donations, management cost,
in-kind and employee time contributions
Drax Group plc Annual report and accounts 2020
5
Strategic reportGovernanceFinancial statementsShareholder information
ESG highlights
At Drax, we believe that achieving a positive economic, social and
environmental impact is key to delivering long-term value creation.
Environment
Since 2012, Drax has reduced its absolute scope 1 and 2 carbon emissions by more than 85%. Our ambition is to
become a carbon negative company by 2030.
Renewable generation (%)
UK’s largest source of renewable electricity
Power generation mix in 2020
(% total output)
Electricity supplied to customers from
renewable sources (%)
UK’s largest supplier to business
2020
2019
2018
Biomass
Hydro
75
2
77
2
75 0
Biomass
Coal
Gas
Hydro
75%
8%
15%
2%
2020
2019
2018
100
95
69
Group carbon intensity
(tCO2e/GWh)
Group carbon emissions, scope 1 & 2
(ktCO2e)
Group carbon emissions, scope 3
(ktCO2e)
164*
137
2020
2019
2018
245
3,080*
2,371
3,135* ktCO2e
2020
4,484
2020
2019
2018
Social
Creating a safe, fair and inclusive place to work, and making a positive contribution in the communities where
we operate.
Total Recordable Incident Rate
(TRIR)
Gender diversity, total workforce
(%)
Total social contribution (£)
Cash donations, management cost,
in-kind and employee time contributions
2020
2019
2018
Governance
0.29*
2020
31.5*
0.22
0.22
2019
2018
32
34
Female
Male
68.5*
68
66
£1m
(2020)
Clarity of purpose, a positive culture and strong governance enable us to deliver for our stakeholders.
Remuneration is based on long-term performance and linked to Environmental, Social and Governance (ESG)
metrics, including our performance in the CDP.
Board composition
Executive Directors/Non-executive
Directors (%)
Gender diversity (%)
2020
2019
2018
4
4
1
3
2
6
1
2
1
2020
2019
2018
2
2
2
5
6
7
NED
Execs
Chair
Female
Male
*
Limited external assurance using the assurance standard ISAE 3000 for 2020 data as indicated.
For assurance statement and basis of reporting see www.drax.com/sustainability
6 Drax Group plc Annual report and accounts 2020
See Taskforce on Climate-related
Financial Disclosures, page 32
Biomass Sourcing
Sustainably sourced biomass is CO2 neutral under scientific principles established by the UN Intergovernmental
Panel on Climate Change.
Carbon dioxide
(CO2)
Sustainably
managed forest
Biomass Carbon Cycle
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 53
BECCS is bioenergy with carbon capture and storage, enabling the capture of CO2 resulting from generation, which is stored in an aquifer under the North Sea
100% sustainably sourced
• Wood pellets sourced from sustainably
managed working forests and residues
from forest industries
• Sustainability Policy and Responsible
Sourcing Policy outline our requirements
and commitments
• Supplier compliance evidenced by
Sustainable Biomass Program (SBP)
certification or third party audits
Drax Power Station average biomass
supply chain GHG emissions (kgCO2e/MWh)
99%
2020
2019
2018
1091
124
131
(1)
Limited external assurance by Bureau Veritas using
the assurance standard ISAE 3000. For assurance
statement see www.drax.com/sustainability
Woody biomass sourced by Drax
in 2020 that was SBP compliant
Read more
on page 53
UN Sustainable
Development Goals
(SDGs)
We believe we can
have the most impact
in these areas:
ESG rating performance
Climate
A-
Forests
B
Constituent
26.1
AA*
57/100
*www.drax.com/sustainability
Drax Group plc Annual report and accounts 2020
7
Strategic reportGovernanceFinancial statementsShareholder information
Chair’s statement
Managing Covid-19 impact
Keeping colleagues safe remained
paramount throughout the
pandemic:
• Focused on the health, safety and
wellbeing of colleagues and those
we work with
• Continued to pay our sustainable
and growing dividend
• Supported customers, including
help with debt and the freezing
of payments
• Supported our communities
• No Covid-19 financial support
from the Government, and no
furloughing of employees
Find out more
on page 34
Through these activities, we expect to
play a major role in delivering the UK’s
legally binding objective to achieve
net zero carbon emissions by 2050
and support global efforts to reduce
carbon emissions.
Operations, Covid-19 and
supporting stakeholders
2020 witnessed the outbreak of
Covid-19 with unprecedented global
impact. For Drax, the safety and
wellbeing of colleagues remained
paramount. The Board held additional
meetings, overseeing the Group’s
response, understanding the impact
on colleagues, customers, communities
and other stakeholders.
As a strategic part of the UK’s critical
national infrastructure, we recognise
our responsibility to support the
country’s response to Covid-19 and our
stakeholders. We maintained high levels
of power generation throughout 2020,
and we did not seek any Covid-19 financial
support from the UK Government, nor did
we furlough any employees.
We provided extra support to our
customers, particularly the small and
medium-size enterprises (SMEs) that
were adversely affected. We froze
energy payments from care homes in
communities local to Drax and offered
debt support to customers. We supported
our communities in the UK and US with
charitable donations and provided over
850 free laptops to enable home learning
for students in our communities.
How are we planning to become
carbon negative by 2030?
With the right negative emissions framework from
the UK Government, we aim to become a carbon
negative company by 2030. We believe BECCS technology
could have global application in the delivery of negative
carbon emissions
Introduction
Drax Group’s purpose is to enable a
zero carbon, lower cost energy future.
This informs our strategy of building a
long-term future for sustainable biomass,
becoming the leading provider of
electricity system stability in the UK, and
giving customers control of their energy.
Since 2012, we have reduced Drax’s
carbon emissions by over 85%, principally
reflecting our long-term investment in
sustainable biomass. During the year we
made further progress, announcing in
February 2020 an end to commercial coal
generation effective in March 2021. In
January 2021, we completed the sale of
our gas generation portfolio, further
reducing our carbon emissions. More
recently, on 8 February 2021, we
announced the proposed acquisition of
Pinnacle Renewable Energy Inc., which is
expected to position Drax as the world’s
leading biomass generation and supply
business, alongside the continued
development of Drax’s ambition to
become carbon negative by 2030.
The proposed acquisition is subject to
shareholder approval and certain court
and regulatory approvals.
There remains more we can do to reduce
carbon emissions. With the right negative
emissions framework from the UK
Government, we aim to achieve our
ambition to become a carbon negative
company by 2030 using BECCS
technology. We believe this technology
could have global application in the
delivery of negative carbon emissions.
8 Drax Group plc Annual report and accounts 2020
Throughout the pandemic, we have
continued to engage with shareholders
to explain our expectations of the impact
of Covid-19 on the Group and the Board
has considered their feedback.
Operationally, our generation portfolio
performed well. In 2020, the Group
was the largest source of renewable
electricity by output in the UK, providing
11% of the total from its biomass and
hydro generation assets. We also
provided the system support services
and operational flexibility required to
help maintain grid stability during the
Covid-19 induced changes to power
demand. Additionally, we completed two
major outages on our gas and biomass
assets, with the latter including a turbine
upgrade which will help contribute to our
strategy to reduce the cost of biomass.
Sustainable biomass has a long-term
role to play in the UK and global energy
markets, both as a flexible and
sustainable source of renewable energy,
and as a means of delivering negative
carbon emissions. Key to securing this
long-term role is reducing the cost of
biomass and growing our supply chain.
We believe these actions will deliver
attractive returns to shareholders and
enable a long-term future for sustainable
biomass, which could include negative
carbon emissions via BECCS.
Our Customers business, which supplies
electricity and gas to businesses in the
UK, experienced significant challenges
associated with the impact of Covid-19.
The SME market suffered most from this
impact, with lower energy demand and,
in some cases, an increase in business
failures. Throughout the year, our
teams have focused on supporting
customers as well as working to deliver
improvements. We continue to monitor
the situation and assess the options
for this part of the business.
Results and dividend
Adjusted EBITDA in 2020, including both
continuing and discontinued operations,
was £412 million (see page 22 for further
detail and a reconciliation to relevant
IFRS measures). This was a small increase
on 2019 (£410 million), despite the impact
of Covid-19, which was principally
associated with the performance of our
Customers business. We believe this was
a strong performance within the context
of a challenging environment.
At the 2020 half year results, we
confirmed an interim dividend of £27
million (6.8 pence per share). The Board
proposes to pay a final dividend in
respect of 2020 of £41 million, equivalent
to 10.3 pence per share, making the full
year 2020 dividend £68 million (17.1 pence
per share) (2019: £63 million, 15.9 pence
per share). This represents a 7.5% increase
on 2019 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.
In determining the continued
appropriateness of the dividend, the
Board considered a range of factors.
These included trading performance,
current liquidity, the outlook for the
year in the context of Covid-19, as well
as the steps being taken to support all
stakeholders. The Board believes
payment of the final dividend remains
consistent with the Group’s commitment
to all stakeholders.
The Group has a clear capital allocation
policy which it applied throughout 2020.
In determining the rate of growth in
dividends from one year to the next, the
Board will take account of cash flows,
the less predictable cash flows from
the Group’s commodity-linked revenue
streams and future investment
opportunities. The latter includes our
stated intent to invest to expand the
Group’s biomass supply chain and reduce
the cost of biomass. If there is a build-up
of capital, the Board will consider the
most appropriate mechanism to return
this to shareholders.
People and values
The Board is committed to building a
supportive, diverse and inclusive working
environment where all colleagues feel
they belong. To underpin this, in
September we launched a new Diversity
and Inclusion Policy and approach.
Listening to employees and ensuring
a two-way dialogue is vital to
understanding where we are doing
well and where we can improve. In 2020,
we asked employees for feedback on our
values and their experience of working
at Drax – which informed the evolution
of our values – an important part of
engagement as Drax continues to
develop and change. Will Gardiner, our
CEO, and I met regularly with the chairs
of our workforce engagement forums.
These meetings provided valuable
ongoing insights and feedback for the
Board in a period of significant change.
This helped us to support the business
in managing the transition to remote
working and ensuring the safety and
wellbeing of our workforce. On behalf
of the Board, I would like to thank Will
Corporate governance report
page 80
During 2020 we supported
stakeholders in response to
Covid-19, and maintained high
levels of power generation
throughout the year”
and the executive team for their
leadership during this extraordinary
year and all of our employees who have
responded so well to the challenges
presented in 2020.
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 across the Group.
Sustainability is at the heart of what
we do and we believe that achieving
a positive economic, social and
environmental impact helps us create
long-term value. We remain committed
to promoting the UN Global Compact
principles on respect for human rights,
labour rights, the environment and
anti-corruption.
Board changes
In April 2020, Andy Koss stepped down
from the Board after four years as an
Executive Director and 15 years with
the Group. I would like to thank Andy
for his valuable contribution to the
Group in this period.
Conclusion
In 2020 we delivered a strong financial
and operational performance in the
context of the very challenging
environment caused by Covid-19,
supported our stakeholders and
continued to pay a sustainable and
growing dividend in line with our policy.
At the same time, we continued to make
progress with our strategic objectives.
Our biomass strategy is clear; we believe
it can deliver sustainable long-term
value to our stakeholders as we realise
our purpose of enabling a zero carbon,
lower cost energy future and we remain
focused on this objective.
Philip Cox CBE
Chair
Drax Group plc Annual report and accounts 2020 9
Strategic reportGovernanceFinancial statementsShareholder information
CEO’s review
How has Drax
performed in
2020?
We have delivered a robust
performance, supporting
our employees, communities
and customers and made
good progress in delivering
on our strategy
2020 highlights
• Adjusted EBITDA of £412 million
from continuing and
discontinued operations (1)
• Strong balance sheet and
liquidity
• Sustainable and growing
dividend
• Increase in biomass self-supply
and reduction in cost
• Strong system support
performance
• Sale of gas generation portfolio
completed in January 2021 and
expected end of commercial
coal generation in March 2021
• Proposed acquisition of
Pinnacle Renewable Energy Inc.
(1)
See page 22 for further detail and a
reconciliation to relevant IFRS measures.
Drax Group’s purpose is to enable a zero
carbon, lower cost energy future. To
deliver that purpose, our strategy is 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.
Our purpose also drives our commitment
to the battle against climate change. Since
2012 we have reduced the Group’s carbon
emissions by over 85%, we are the UK’s
largest renewable energy generator by
output and have an ambition to become
a carbon negative company by 2030.
Operationally, 2020 was a successful
year, as we delivered increases in pellet
production and increased availability
across our generation fleet, in spite of the
challenges we faced due to the Covid-19
pandemic. Our colleagues have responded
tremendously to those challenges, with
operational staff on site at power stations
and pellet plants working in a safe
manner, while the rest of our colleagues
have had to work from home. As a result,
we have had a limited number of Covid-19
cases although, sadly, one colleague in
the US died with the virus.
Strategically, 2020 was a pivotal year
for the Group. In February 2020 we
announced an end to commercial coal
generation, effective in March 2021. In
January 2021 we completed the sale of
our gas generation portfolio, which was
announced in December 2020. Following
these actions we believe our carbon
emissions will be amongst the lowest
of any European energy company.
As we work towards our purpose we
continue to develop our options for
BECCS, which we believe can become
a world leading, UK-led and exportable
solution for large-scale carbon negative
power generation. Subject to the right
negative emissions framework from the
UK Government, we expect to be in a
position to make further investment in
the development of this option in 2021
and to advance our ambition to become
a carbon negative company by 2030.
In February 2021, we were pleased to
announce the proposed acquisition
of Pinnacle Renewable Energy Inc.
(Pinnacle) which we believe will position
Drax as the world’s leading biomass
generation and supply business,
delivering against our strategy to
increase our self-supply capability, reduce
our biomass production cost and create
a long-term future for sustainable
biomass. Completion of the proposed
acquisition is subject to shareholder
consents and the satisfaction of certain
conditions precedent.
As we advance our strategy, we expect
to deliver higher quality earnings, reduce
commodity exposure and create
opportunities for growth aligned with
10 Drax Group plc Annual report and accounts 2020
Financial review
page 20
the UK’s legally binding objective to
become carbon neutral by 2050. This
underpins our continued commitment
to a sustainable and growing dividend.
Summary of 2020
Adjusted EBITDA, a key financial KPI,
of £412 million from continuing and
discontinued operations represents
a small increase on 2019 (£410 million),
inclusive of an estimated £60 million
impact associated with Covid-19,
principally on our Customers business.
We believe that this was a strong
underlying performance which reflects
increased pellet production, biomass
cost reduction and renewable power
generation, offsetting the impact of
Covid-19 on the Customers business.
The Total Operating loss for the year
was £156 million, predominantly
reflecting asset obsolescence charges
and provisions for other costs following
the announcement of the closure of
coal generation at Drax Power Station.
Our balance sheet is strong with cash
and total committed facilities of £682
million at 31 December 2020 and net debt
of £776 million giving a ratio of 1.9x net
debt to Adjusted EBITDA from continuing
and discontinued operations for the full
year, in line with our long-term target.
During the year we completed a series
of financing activities that extend the
maturity of our debt to 2030 and reduce
the cost of our debt whilst retaining the
link between carbon emissions and the
level of interest paid via a new ESG-linked
revolving credit facility (RCF).
In further recognition of the progress
we have made on ESG performance, in
December 2020 the CDP awarded Drax
an A- rating for our CDP climate response
(2019: C). Separately, we are now a TCFD
Supporter and we reflect that framework
in this report.
Safety remains a primary focus. Since
March 2020 our operational colleagues,
working at power stations or pellet
plants, have had to work in new ways to
protect against outbreaks of Covid-19 on
site, while maintaining our contribution
to the integrity of the UK power system.
I am very pleased with everyone’s efforts
in this area and that we did not have any
outbreaks of Covid-19 at our sites in 2020.
In this context, the Total Recordable
Incident Rate (TRIR), a key scorecard
measure of safety, was 0.29 (2019: 0.22).
This was not the level we expect.
Although there were no major incidents,
the number of minor reportable injuries
did increase. We take any increase in the
number of reportable incidents seriously
and have implemented processes to
improve risk assessment, alongside a
campaign to raise awareness of good
practice, ensuring the correct personal
protective equipment is used.
Operational performance
In the US southeast, our Pellet
Production operations reported Adjusted
EBITDA of £52 million up 63% (2019: £32
million). This was a strong performance,
reflecting increased levels of production,
improved pellet quality and a continued
focus on cost reduction.
Pellet production was 1.5 million tonnes
(Mt), an increase of 7% (2019: 1.4Mt),
which reflects a strong operational
performance and good fibre availability
compared to 2019 when heavy rainfall
restricted commercial forestry activity.
Pellet quality, as measured by the level
of fines (larger particle-sized dust) in
each cargo improved in 2020. Lower
levels of fines result in biomass that is
easier and safer to handle throughout
the supply chain. As such there are safety,
operational and cost benefits in reducing
the level of fines and we continue to work
hard to deliver these improvements.
We remain focused on opportunities to
deliver savings, across the supply chain,
as part of our target to reduce the cost
of biomass to £50/MWh on 5Mt by 2027.
As a part of this long-term goal we
previously identified an intermediate
programme of supply chain
improvements, efficiencies and
investments. We believe this will reduce
the cost of biomass by $35/tonne (£13/
MWh) on our existing portfolio by 2022
compared to 2018 (programme
commenced in 2019). In 2020 this
programme, alongside increased output
and other incremental operational
improvements, resulted in an average
production cost of $153/tonne (2019:
$161/tonne), a 5% saving year-on-year.
We expect to deliver further savings, as
a part of this programme, by expanding
our existing sites (LaSalle, Morehouse
and Amite) by 0.4Mt. At the end of 2020
we completed the first phase of these –
0.1Mt at Morehouse – with the remaining
capacity of 0.3Mt expected to come on
stream by 2022. Realising these
programmes will expand total capacity
to 1.9Mt, providing economies of scale
and allowing greater utilisation of
low-cost residues.
In January 2020 we
announced an end to
commercial coal generation
in March 2021 and in January
2021 we completed the sale
of our gas generation portfolio.
This will further reduce the
Group’s carbon emissions
and we will use the proceeds
to continue developing our
biomass supply chain strategy”
In February 2020 we announced plans to
further expand our existing infrastructure
with the development of three new
40,000 tonne satellite plants. These sites
will use lower cost sawmill residues and
leverage our existing infrastructure in
the US southeast to produce biomass
at around 20% below the current cost
of production. We believe this model
could provide 0.5Mt per annum of
additional lower-cost biomass and that
these projects advance the Group’s
plans to create a long-term future for
sustainable biomass, offer returns
significantly ahead of the Group’s cost
of capital and attractive payback periods.
In Generation, the portfolio has
performed strongly, with Adjusted
EBITDA of £446 million from continuing
and discontinued operations, an increase
of 9% compared to 2019 (£408 million).
The portfolio produced 6% of the UK’s
electricity between October 2019 and
September 2020 (the most recent period
for which data is available) and 11% of the
UK’s renewable electricity, making Drax
the largest renewable generator by
output in 2020.
This level of renewable generation is
only possible thanks to a combination
of portfolio availability and a resilient
supply chain.
Portfolio availability (calculated based
on the availability of each generation
asset weighted by EBITDA contribution)
was 91% (2019: 88%). Underlying this
performance is a robust maintenance
regime. During the year we completed
major planned outages at Damhead
Creek and Drax Power Station. The latter
included the second in a series of
high-pressure turbine upgrades across
three biomass units which will deliver
incremental thermal efficiency
improvements and lower maintenance
Drax Group plc Annual report and accounts 2020 11
Strategic reportGovernanceFinancial statementsShareholder information
CEO’s review continued
We believe our carbon
emissions will be amongst
the lowest of any European
energy company”
Will Gardiner
CEO
costs, reducing the cost of our biomass
power generation. The final outage on
the unit which operates under the
contracts for difference (CfD) scheme
is scheduled to take place in 2021.
The logistical challenges of these major
works, in a Covid-19 operating
environment, are significant. We
delivered the outages with minimum
delay thanks to the diligence, skill and
hard work of our teams and contractors.
Our biomass supply chain performed well
and to date there has been no material
impact from Covid-19 or Brexit on our
supply chain or those of our key suppliers.
Our Scottish hydro operations –
Cruachan Pumped Storage Power
Station (Cruachan), and the Lanark
and Galloway hydro schemes – have
performed well. These assets provide
renewable electricity, system support
services, peak power generation and
Capacity Market income. Taken together
with the Daldowie energy from waste
plant, Adjusted EBITDA was £73 million
(2019: £71 million).
System support services (Balancing
Market, ancillary services and portfolio
optimisation) are an important part of
the Group’s strategy. They are also critical
to the safe and reliable operation of the
power system. Historically, baseload
thermal power plants provided both
electricity and a full range of system
support services. As the UK power
system decarbonises, intermittent
renewable generation has progressively
displaced these assets, creating new
challenges in balancing the system.
Throughout 2020 our portfolio supported
the system operator in managing the
impact of Covid-19 on power demand.
In the first half of 2020, a reduction in
demand for electricity required flexible
generators, like Drax, to turn-down and
stabilise the system. In the second half
of 2020, a combination of cold weather,
lower wind speed and asset availability
issues led to periods of increased
demand. At these times, our flexible
assets were able to increase output to
help balance the system.
System Support Services and
Optimisation – our measure of
performance in the provision of these
services was gross profit of £118 million,
a small reduction on 2019 (£120 million),
which included income from specific
constraint contracts which were not
expected to recur in 2020.
Cruachan, an important source of system
support, was successful in a tender
process to procure specific non-
generation services – inertia and reactive
power. The contract, which commenced
in July 2020, is worth up to £5 million per
year and is over a six-year period. This was
the first tender of its kind and we expect
the system operator to conduct further
tenders over the coming years.
Merchant power prices remain an
important part of the Group’s earnings,
but by focusing on flexible and renewable
generation, the importance of merchant
power prices has reduced. We have a
strong forward power sales position in
place until 2022. Beyond this date, whilst
an exposure exists, it is largely associated
with the three biomass units which
operate under the Renewable Obligation
Certificate (ROC) scheme.
In January 2021, following the UK’s
exit from the European Union, the UK
introduced a new carbon emissions
trading scheme to replace the existing
European scheme to which the UK no
longer has access. We believe that
robust carbon pricing is essential for
decarbonisation and an important
component of long-term power prices.
With a growing level of interconnection
between the UK and continental Europe
as well as growing ambition in terms of
EU energy policy we believe that in the
long-term UK carbon and power prices
could trend towards European prices.
We also believe that with greater demand
for system support services, near-term
power prices could become more volatile
– driven by system support service
requirements rather than commodity
market fundamentals.
The end of commercial coal operations
in March 2021, and final closure of the
generating units in September 2022, is
expected to result in annual cost savings
of £30-35 million once complete. We
believe that this will help to support the
financial model for long-term biomass
generation at Drax Power Station when
the current renewable subsidy schemes
end in March 2027. An employee
consultation process was completed
in 2020. Implementing the changes will
result in the reduction of 206 roles and
one-off costs of £34 million.
Our Customers business reported a loss
at the Adjusted EBITDA level of £39
million (2019: £17 million profit). This
reflects the significant reduction in
demand caused by Covid-19, the cost
associated with exiting hedged positions
as market prices have fallen and the
increased risk of business failure and bad
12 Drax Group plc Annual report and accounts 2020
debt – principally in the SME market,
around 30% of monthly billing. Looking
beyond the impact of Covid-19 we will
continue to monitor the wider Customer
portfolio to ensure alignment with the
Group’s strategy.
Performance in Industrial and
Commercial markets was stronger with
the addition to the portfolio of long-dated
power sales contracts to water utilities,
providing revenue visibility over the next
five years. Just as the Generation
business provides system support
services, so too can our Industrial and
Commercial customer portfolio. Over
time, we expect that this part of the
Group, through efficiency and demand-
side response, can contribute
increasingly to the Group’s system
support services alongside generation.
We continue to believe this approach
will support long-term growth.
The Customers business has a
differentiated market position – selling
purely renewable power while helping
over 2,000 independent renewable
generators access the market.
Biomass strategy
Biomass has an important role to play in
global energy markets as a flexible and
sustainable source of renewable energy,
as well as offering the potential to deliver
negative emissions via BECCS. We believe
that the key to securing this long-term
role is to reduce the unit cost of biomass
and develop greater direct control of the
supply chain.
The Group is targeting control of 5Mt
of self-supply capacity by 2027 (currently
1.6Mt, plus 0.4Mt in development) and
reduce the cost of biomass to £50/MWh
by 2027. Through the delivery of these
strategic objectives Drax aims to create a
long-term future for sustainable biomass,
including third-party supply, BECCS and
merchant biomass generation
The proposed acquisition of Pinnacle
accelerates the Group’s strategic
objectives by adding 2.9Mt of biomass
production capacity from 2022, being a
combination of capacity available to Drax
for self-supply and long-term third-party
supply contacts to counterparties in Asia
and Europe. In 2019, Pinnacle’s
production costs were around 20% lower
than our own.
We intend to deliver further savings
through the optimisation of existing
biomass operations, greater utilisation of
forestry residues, such as sawmill
residues and the use of other lower cost
renewable feedstocks.
The UK’s Climate Change Committee
(CCC) has set out what is required for
the country to achieve its legally binding
objective of being net zero by 2050.
This includes an important role for BECCS
to remove carbon from the atmosphere,
creating negative emissions. BECCS is
the only large-scale solution for negative
emissions with renewable electricity
and system support capabilities.
Through combining BECCS with its
existing biomass generation units at
Drax Power Station, we believe we could
remove millions of tonnes of carbon each
year from 2027. In doing so Drax aims
to become a carbon negative company
by 2030.
The technology to deliver post-
combustion BECCS exists and is proven
at scale. In September 2020, Drax
commenced a trial of one such
technology provided by Mitsubishi Heavy
Industries. In addition, we are developing
innovative technology options, including
C-Capture, a partnership with Leeds
University, IP Group and BP, which has
developed an organic solvent which
could be used for BECCS.
Drax Power Station is in the Humber
region, an area with the highest absolute
level of carbon emissions in the UK,
owing to the industry and manufacturing
located there. This makes the region
a natural site for large-scale carbon
capture and storage for energy and
industry. We continue to work in
partnership with Equinor, National Grid
and others as part of the Zero Carbon
Humber campaign, which we believe
can bring new investment, new jobs and
world-leading and exportable negative
emissions technologies to the UK.
We expect further clarity on the
regulation and support for BECCS and
the Humber cluster over the next two
years and stand ready to develop this
technology which is necessary in
allowing the UK to deliver its target
of a net zero economy by 2050.
We expect global demand for wood
pellets to increase in the current
decade, as other countries develop
decarbonisation programmes that
recognise the benefits of sustainable
biomass for generation, opening up new
sustainable markets. Whilst there is an
abundance of unprocessed sustainable
biomass material globally, there remains
limited capacity to convert these
materials into energy dense pellets, which
have a low-carbon footprint and lower
cost associated with transportation.
The proposed acquisition of Pinnacle
supports our biomass self-supply strategy
which can be used as part of our options
for merchant generator or BECCS,
but equally it provides an immediate
capability to serve the global market
for biomass, underpinned by long-term
off-take agreements.
Biomass sustainability
When sustainably sourced, biomass is
renewable – and sustainably sourced
biomass is an important part of UK and
European renewable energy policy.
The legal framework and science which
underpins this assessment is clear. Carbon
emitted in the generation of renewable
electricity is absorbed by and accounted
for in the growth of forest stock. This is
based on well-established principles set
out by the Intergovernmental Panel on
Climate Change, a UN body, which
reconfirmed its long-standing position on
sustainably sourced biomass in 2019. This
interpretation is reflected in the European
Union’s second Renewable Energy
Directive (RED II) and Taxonomy rules,
which mirror RED II.
The Group provides full disclosure of
the carbon emissions associated with
our generation activities as part of our
annual reporting. We also report the
carbon emissions associated with our
biomass supply chain, providing a greater
level of disclosure than other forms of
electricity generation that also have
carbon emissions associated with their
supply chains.
The Group’s biomass life cycle carbon
emissions in 2020 were 109kgCO2e/MWh
of electricity (2019: 124 kgCO2e/MWh),
almost half the UK Government’s
200kgCO2e/MWh of electricity limit
for biomass.
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 standards as well as
those of the EU. We use 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 carbon
emissions from using sustainably
sourced biomass to produce electricity
are balanced by the absorption
of carbon from growing forests.
Drax Group plc Annual report and accounts 2020 13
Strategic reportGovernanceFinancial statementsShareholder information
CEO’s review continued
In the US southeast, the source for most
of our biomass, increased demand for
wood fibre has directly contributed to
increased growth and protection of
forests. Inventories have increased by
over 90% since 1950 as more carbon is
stored year after year, despite harvests
also increasing.
Our forestry commitments are based on
the latest available science from Forest
Research, the UK’s principal organisation
for forest science. Our Responsible
Sourcing Policy for Woody Biomass aims
to ensure we only source biomass that
makes a net positive contribution to
climate change, protects and enhances
biodiversity and has a positive social
impact on local communities.
Our Policy goes beyond compliance, and
our Independent Advisory Board on
Sustainable Biomass (IAB), chaired by
Sir John Beddington, provides guidance
and independent oversight on the
sourcing choices we make. The advice
and scrutiny from the IAB means
stakeholders can be assured that Drax
will keep our policies under review and
that the biomass we use follows the latest
scientific research and best practice.
Other developments
In our Hydro business we are continuing
to develop a long-term option for the
expansion of Cruachan. Its location,
ability to generate and absorb power from
the grid, and full range of system support
services makes it strategically important
to the management of the UK power
system and aligned with its future needs.
We are continuing to develop options
for new gas generation, including four
small open cycle gas turbine units at
sites in Wales and eastern England.
These flexible assets are intended to
help meet peak demand and provide
non-generation system support services.
Any development remains subject to
the Group’s decarbonisation plans
and the right price in a future Capacity
Market auction.
We have taken the decision not to pursue
the option to develop a new combined
cycle gas power station at Drax Power
Station, and continue to assess options
for the site.
People and values
Sustainability is at the heart of the Group
and its culture. We believe that achieving
a positive economic, social and
environmental impact is key to delivering
long-term value creation. Drax is a
signatory to the UN Global Compact
(UNGC) and we are committed to
promoting the UNGC principles on
respect for human rights, labour rights,
the environment and anti-corruption.
The Board is committed to building a
supportive, diverse and inclusive working
environment where all colleagues feel
they belong. This is underpinned by a new
14 Drax Group plc Annual report and accounts 2020
Diversity and Inclusion Policy and
approach. We value the views of our
employees and have incorporated
their feedback in the development
of our values. 2020 saw a significant
improvement in the level of engagement
which we measure as a KPI on the
Group’s corporate scorecard – used
for our 2020 cash bonus plan and
determination of vesting under our
2018 LTIP due to vest in 2021.
The strong performance and positive
response to Covid-19 across the Group
is testament to the hard work, diligence
and spirit of our employees. I am proud
to have them as colleagues and I thank
them for their efforts in this most
challenging of years.
Outlook
Looking forward, our focus is 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.
Our principal focus remains the
expansion of our biomass supply chain
and the reduction of cost to provide a
long-term future for sustainable biomass.
This includes our ambition to become
a carbon negative company by 2030
underpinned by the development of
BECCS, using technology already proven
at scale to deliver negative carbon
emissions. Through our expertise in
biomass we are leading the way in
developing this world class technology
and response to climate change.
We are making good progress with the
delivery of our strategy and will build on
this as we 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
CEO
Biomass Sustainability
There is widespread recognition
among leading science-based
organisations, such as the UN’s
Intergovernmental Panel on
Climate Change (IPCC) that
sustainable biomass has an
important role to play in meeting
international climate targets
Sustainable biomass has three
big benefits: it generates
renewable electricity, supports
forest growth and provides a
route to negative emissions.
Biomass Sustainability
Sustainably sourced biomass for use in
the generation of renewable electricity
is an important and well-established part
of UK and European renewable energy
policy. In 2019 bioenergy was the leading
form of renewable energy in Europe,
providing twice the amount of energy
of wind and solar combined. The status
of biomass as a renewable material when
sustainably sourced is based on well-
established scientific principles reflected
in the European Union’s second
renewable energy directive and
Taxonomy rules.
Sustainable biomass sourcing practices
are at the heart of Drax’s activities and
have underpinned our transformation
from the UK’s largest coal-fired power
station, to its fourth largest power
generator operating a portfolio of flexible,
renewable and low-carbon assets, with an
ambition to become carbon negative by
2030. In addition, based on its utilisation
of sustainably sourced biomass, Drax
Power Station is also the UK’s largest
source of renewable electricity by output.
We believe that sustainable practices are
important to the activities of the Group
in the UK and North America, are integral
to good corporate governance and
critical to the long-term sustainability
of our business model.
Drax sources biomass from established,
responsibly managed working forests
primarily in the US, Canada and Europe.
Commercial forests are generally
managed for sawlogs, which are sold
into the construction and manufacturing
markets. Sawlogs command a financial
premium which make them uneconomic
for use in making renewable electricity
from sustainably sourced biomass.
However, the associated material and
residues, such as sawmill residues and
forest thinnings are of use in other lower
cost markets such as biomass and fibre
board. This process is fully compliant
with UK and European legislation.
Drax is leading standards on biomass
sustainability and we are committed
to continuing to raise those standards,
so that our sourcing policies evolve as
the science develops. Our Responsible
Sourcing Policy for Woody Biomass is
in line with the recommended sourcing
practices set out by Forest Research – the
UK’s principal organisation for forestry
and tree-related science. We have also set
up an Independent Advisory Board (IAB)
led by the UK government’s former Chief
Scientific Adviser Sir John Beddington.
The IAB provides independent advice to
Drax in all areas of its biomass sourcing.
In 2020 the IAB reviewed our Responsible
Sourcing Policy and confirmed that it
reflects the recommendations made
by Forest Research. We apply these
standards to our own activities and
those of our third-party suppliers.
We are committed to full transparency
and provide an overview of our sourcing
practices and publish reports for each
area we source biomass material from.
At the same time, we are taking action to
reduce emissions across our supply chain,
for example through investment in rail
infrastructure and by partnering with
organisations like the Smart Green
Shipping Alliance.
Carbon accounting
Carbon accounting and reporting of
sustainable biomass is an important
area of disclosure. Sustainably sourced
biomass is considered carbon neutral
under UK and European legislation,
underpinned by well-established
principles set out by the
Intergovernmental Panel on Climate
Change, as carbon emitted in the
generation of renewable electricity
is consumed and accounted for in
the growth of new forest stock.
Drax provides full disclosure of the
biogenic carbon emissions associated
with its generation activities. We also
report the carbon emissions associated
with our supply chain, providing a greater
level of disclosure than any other form
of electricity generation – wind, solar, gas,
nuclear, which also have carbon emissions
associated with their supply chains.
Forest growth
We are seeing the positive effects that
sustainable sourcing practices are having
on the carbon stored. For example, in the
US southeast, where we source most of
our biomass, increased demand for wood
fibre has directly led to increased growth
and protection of forests. Inventories have
increased by over 90% since 1950 as more
carbon is stored in these forests year after
year, despite harvests also increasing.
Negative emissions
Our confidence in the contribution that
sustainably sourced biomass can play in
the UK’s transition to net zero is echoed
by the UK’s Climate Change Committee
(CCC). The CCC sees a critical role for
BECCs in enabling the delivery of the
UK’s net zero carbon by 2050.
Drax Group plc Annual report and accounts 2020 15
Strategic reportGovernanceFinancial statementsShareholder information
Biomass cost reduction
Building a long-term
future for sustainable
biomass is a key strategic
objective for Drax
The Group has identified three
models through which it
believes it can deliver a long-
term future for sustainable
biomass, all of which are
underpinned by the delivery
of its supply chain expansion
and cost reduction plans.
Drax aims to expand its supply chain to
5Mt of self-supply capacity by 2027 (from
1.6Mt today, plus 0.4Mt in development)
and reduce the cost of biomass to
£50/MWh (from around £75/MWh in
2019). We expect to deliver these savings
through the optimisation of existing
biomass operations, greater utilisation
of low-cost wood residues and an
expansion of the types of sustainable
low-cost biomass sourced across the
Group’s expanded supply chain.
Drax believes that the additional capital
and operating cost investment required
to deliver this supply chain expansion is
in the region of £600 million, which the
Group expects to invest ahead of 2027.
This expansion and cost reduction plan
gives rise to the three options (see page
17) which are not mutually exclusive. The
delivery of one or more of these models
by 2027 is expected to enable Drax to
continue its biomass activities when
the current UK renewable schemes
for biomass generation end in 2027.
How do we plan to expand and reduce the cost
of our biomass supply chain?
Expansion and optimisation
of existing capacity
Drax currently uses around 7Mt of
biomass for generation at Drax Power
Station, 1.5Mt of which is self-supplied by
our existing pellet production operations
in the US Gulf.
We have also identified plans to expand
our three existing production sites –
LaSalle, Morehouse and Amite – by 0.4Mt
over the next two years – an investment
of £50 million, the first 0.1Mt of which
has now been completed. This will expand
total capacity to around 1.9Mt, provide
economies of scale and allow even
greater utilisation of lower cost residues,
such as wood chips and sawmill residues.
Other projects include the co-location of
a third-party sawmill at the LaSalle Plant
to provide access to sawmill residues,
lower transport costs and improved
efficiency; a new rail spur connecting
LaSalle to the local rail network,
improving economies of scale in transport
and fewer road miles; and a new
chambering yard at the Port of Baton
Rouge allowing greater rail throughput.
These larger projects are accompanied
by small projects to improve operational
efficiency such as greater efficiency
in the loading of road haulage.
In 2020, these initiatives and others
contributed to a 5% year-on-year
reduction in cost per tonne. The delivery
of these projects, amongst other
incremental improvements is expected
to deliver $35 per tonne of savings on
1.9Mt by 2022.
In addition to improvements in the US,
we have also invested to improve
thermal efficiency at Drax Power Station.
In 2020 we completed the second of
three turbine upgrades which has
improved thermal efficiency and
alongside other improvements results
in a reduction in fuel cost in the region
of £1/MWh. The third outage is scheduled
to take place in 2021.
Further expansion of self-supply
capacity
In 2020 Drax approved the construction
of three new 40,000 tonne satellite
plants sited alongside existing sawmills in
the US southeast at a cost of $40 million.
These small sites are designed to utilise
low-cost sawmill residues and leverage
the Group’s existing infrastructure in the
region. Drax believes that this approach
could represent up to 0.5Mt of capacity
and expects these plants to significantly
reduce the cost of pellet production
versus the 2018 benchmark and will be
operational by 2022.
We will continue to assess opportunities
to build or buy capacity to support this
ambition – both in North America and
other regions where we can demonstrate
the right combination of sustainability,
fibre availability, cost and infrastructure.
Exploring alternative fuels
Biomass residues from commercial
forestry processes represent the majority
of biomass used by Drax for generation.
Over the last decade, as part of our work
on biomass, we have screened hundreds
16 Drax Group plc Annual report and accounts 2020
of different types of materials, and we are
now using this knowledge of chemistries
and operational characteristics to inform
the exploration of alternative fuels.
Drax believes that in time such materials
could represent a significant volume
of sustainable biomass material.
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 non-proprietary
trading, through which we aim to
optimise internal and external supply and
develop opportunities in other markets.
Drax biomass supply chain – opportunities for efficiency, improvement and optimisation
Pellet Production
Generation
Forest
Harvesting
Transport to
pellet plant
Processing
Transport to
port
Port storage
and handling
Ocean
freight
Port storage
and handling
Transport to
power station
Generation
40% delivered fibre
40% processed pellets to port
20% transport to Drax
Drax has identified three opportunities for the long-term use of sustainable biomass
Merchant biomass generation
at Drax Power Station
Bioenergy carbon capture and
storage (BECCS)
Third party biomass supply
Biomass has an important role to
play in the UK as a flexible and
reliable source of renewable energy,
complementing increased utilisation
of intermittent and inflexible
generation across the UK power grid.
In March 2027, when the current
renewable schemes end, Drax believes
that through a combination of peak
power generation, system support
services, Capacity Market income
and a low-cost operating model
for Drax Power Station (including
low-cost biomass), this site can
continue to operate as a merchant
renewable power station.
Drax expects global demand for
sustainable wood pellets to increase in
the current decade, as other countries
develop decarbonisation programmes
which incorporate the benefits of
sustainable biomass for generation.
Whilst there is an abundance of
unprocessed sustainable biomass
material globally, there remains limited
capacity to convert these fibres to
energy dense pellets, which have a
low-carbon footprint and lower cost
associated with transportation. As a
result, Drax expects the global market
for biomass to remain under supplied.
Drax is therefore exploring options
to service biomass demand in other
markets – such as Europe, North
America and Asia alongside the UK.
Establishing a presence in these
markets could offer the potential
for long-term offtake agreements,
providing diversified revenues
from other biomass markets.
The CCC has set out what is required
for the country to achieve its legally
binding objective of being net zero
by 2050. This includes a significant
role for BECCS to remove carbon from
the atmosphere, creating negative
emissions. BECCS is the only large-
scale solution for negative emissions
that also generates renewable
electricity and can provide system
support services. Through combining
BECCS with our existing biomass
generation units at Drax Power
Station, we believe we could remove
millions of tonnes of carbon each year
from 2027. In doing so Drax aims to
become a carbon negative company
by 2030.
The technology to deliver post-
combustion BECCS exists and is
proven at scale. In September 2020,
Drax commenced a trial of one such
technology provided by Mitsubishi
Heavy Industries. In addition, Drax
is developing innovative technology
options, including C-Capture, a
partnership between Leeds University,
Drax, IP Group and BP, which has
developed an organic solvent which
could be used for BECCS.
Drax Group plc Annual report and accounts 2020 17
Strategic reportGovernanceFinancial statementsShareholder information
Key performance indicators
Finance
Group adjusted EBITDA from continuing
and discontinued operations(1) (£m)*
Why we measure this
This is our principal financial performance metric,
combining the underlying earnings performance
of each business to give a Group outcome
Average net debt(1) (£m)*
Why we measure this
This is a key measure of our liquidity (borrowings
less cash) and our ability to manage our current
obligations. Our long-term target is net debt to
EBITDA of around 2x
250
2020
2019
2018
2020
2019
2018 N/A
000
Adjusted Earnings Per Share(2) (EPS)*
Why we measure this
This is an important measure of our profitability –
showing our adjusted earnings (adjusted net profit
from continuing and discontinued operations after
tax) on a per-share basis
Dividend
Why we measure this
This is a primary measure of our value creation
for shareholders. We aim to pay a sustainable
and growing dividend
2020
2019
2018
2020
2019
2018
10.4
412
410
849
950
29.6
29.9
17.1
15.9
14.1
*The definition and calculation of Alternative Performance Measures (those that are defined by Drax and not IFRS) is set out on page 153
Sustainability
Group carbon emissions, scope 1 & 2
(ktCO2e)
Why we measure this
We are focused on reducing carbon emissions –
as measured by scope 1 and 2 – which enables
us to track progress towards our carbon
negative ambition
2020
2019
2018
Power generation mix (% total output)
Why we measure this
This is a measure of the different generation
sources we use, allowing us to track our progress
as we seek to enable a zero carbon energy future
2020
8
15
2019
4
17
2018
25
3,080
2,371
4,484
75
77
2
2
75
Coal
Gas
Biomass
Hydro
CDP Climate score(1)
Why we measure this
This is an internationally recognised disclosure
system and a benchmark for our environmental
performance
2020
2019
A-
C
In 2020 we have improved
our performance in the
CDP and scored “A-”.
In 2019, we scored “C”.
£412m
£849m
29.6p
17.1p
3,080
ktCO2e
(1)
(2)
These measures are contained in the Group Scorecard. and form the basis for the calculation of outcomes for annual bonus and 50% of PSP awards. For more
information see pages 125 and 126.
EPS forms the basis for the calculation of outcomes for 50% of LTIP awards. For more information see page 115.
18 Drax Group plc Annual report and accounts 2020
Safety
Total Recordable Incident Rate(1) (TRIR)
Why we measure this
Good safety management is a core principle
and is critical to safe and efficient operations.
TRIR is an industry standard measure of the
number of incident over hours worked
Pellet Production
Pellets produced (Mt)
Why we measure this
This measures a key part of our strategy –
to increase our pellet production capacity
and output
Cost of production(1) (GJ)
Why we measure this
This measures a key part of our strategy –
to reduce the cost of biomass produced
Power generation
Value from system support (£m)
Why we measure this
This measures our generation performance in
the provision of non-generation system support
services – balancing mechanism, ancillary
services and portfolio optimisation
Commercial availability (%)
Why we measure this
This is an important measure of the amount
of time our assets are available to operate,
either to generate electricity or provide
system support services
Customers
Gross margin(1) (£m)
Why we measure this
This is a key measure of the financial performance
of our Customers business – average margin earned
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
0.29
0.22
0.22
0.29
1.5
1.4
1.35
8.61
9.08
9.37
1.5Mt
$8.61/GJ
118
120
79
91
88
89
£118m
91%
84
134
143
£84m
Drax Group plc Annual report and accounts 2020 19
Strategic reportGovernanceFinancial statementsShareholder information
Financial review
How did Drax’s financial performance
respond to the challenges of 2020?
Performance has been robust throughout the year,
and despite the challenges of Covid-19, Adjusted EBITDA from
continuing and discontinued operations was £412 million
2020 highlights
• Robust financial performance –
delivering Adjusted EBITDA
from continuing and discontinued
operations of £412 million, ahead
of 2019 despite impact of Covid-19
• Sale of CCGT assets concluded
on 31 January 2021 for total
consideration, before customary
adjustments, of up to £193 million
• Ratio of Net debt to Adjusted
EBITDA from continuing and
discontinued operations of 1.9x
at 31 December 2020
• Asset obsolescence charges of
£239 million includes coal closure
(£226 million) and decision not
to proceed with Drax CCGT
(£13 million)
• Provision for one-off coal closure
costs of £34 million
• Total operating loss of
£156 million includes asset
obsolescence charges, one-off
coal closure costs plus net
derivative remeasurements
• Cash generated from operations
of £413 million, compared to
£471 million in 2019
• Strong liquidity – with total cash
and committed facilities of £682
million at 31 December 2020
• 7.5% increase in dividend to
£68 million or 17.1 pence
per share
Introduction
The Group’s financial performance
in 2020 has been robust, delivering
Adjusted EBITDA from continuing and
discontinued operations of £412 million,
which represents a small increase
compared to the previous year despite
an estimated impact of approximately
£60 million as a result of the Covid-19
pandemic, most notably affecting our
Customers business (2019 Adjusted
EBITDA from continuing and
discontinued operations: £410 million).
Strong availability and output from our
biomass generation units at Drax Power
Station underpinned this result. In
addition, we saw value from system
support services captured across our
flexible generation portfolio and the
continuing delivery of our cost reduction
targets for biomass pellet production.
We estimate the total financial impact of
Covid-19 to be approximately £60 million.
In our Customers business, we witnessed
a reduction in demand and an increased
risk of business failure affecting our
customers. This is reflected in costs
incurred to exit our previously hedged
positions and an increase in the provision
for bad debt. In the Generation business,
we saw a reduction in ROC recycle values
and incurred increased outage costs, but
largely offset this by delivering improved
returns from flexible generation. We
were also able to capture benefits from
our substantial derivatives portfolio
during a volatile period in markets.
The sale of Drax Generation Enterprise Ltd (which contained the Group’s CCGT portfolio) to VPI Generation Limited was announced on 15 December 2020 and completed
on 31 January 2021 (see page 27 for further details). The income, expenditure and cash flows of the disposed operations for both the current and previous year have been
presented as discontinued operations, and the assets and liabilities of the disposed operations as at 31 December 2020 have been presented as held for sale in the
Group’s consolidated financial statements. Amounts presented in this financial review are for continuing operations unless otherwise stated. Reconciliations between
continuing, discontinued and total amounts for each period are shown in note 5.5 to the consolidated financial statements on page 195. Comparatives for 2019 have been
re-presented to reflect the income and expenditure for the disposed operations as discontinued. Tables in this financial review may not add down/across due to rounding.
20 Drax Group plc Annual report and accounts 2020
£(156)m
(2019 re-presented:
£48m)
Cash Generated from
Operations
£413m
(2019: £471m)
Dividend per Share
Adjusted EBITDA
(Continuing Ops)(1)
£366m
(2019: £371m)
Adjusted EBITDA
(Discontinued Ops)(1)
£46m
(2019: £39m)
£412m
(2019: £410m)
Adjusted EBITDA
(Continuing and discontinued Ops)(1)
Total Operating
(Loss)/Profit
Adjusted Revenue(1)
Adjusted Profit After Tax(1)
Net debt(1)
£4,235m
(2019 re-presented: £4,457m)
£96m
(2019 re-presented: £99m)
£776m
(2019: £841m)
Total revenue
Total Loss After Tax
Net Debt to Adjusted EBITDA
from continuing and
discontinued operations(1)
£4,245m
(2019 re-presented: £4,468m)
£(195)m
(2019 re-presented: £(10)m)
1.9x
(2019: 2.1x)
17.1p
(2019: 15.9p)
(1) Alternative performance measures (income statement values described as “Adjusted”, plus net debt and net debt to Adjusted EBITDA calculations) are used
throughout this financial review. All alternative performance measures are described in full on page 153 and reconciled to corresponding IFRS values on page 170.
Following the Board’s decision to close
our remaining coal-fired generation
operations, which was announced in
February 2020, we recognised asset
obsolescence charges in respect of the
associated fixed assets of £226 million
during the year. In addition, following
an employee consultation process, we
have booked provisions in respect of
redundancy, pension costs, and other
closure costs totalling £34 million. Other
closure costs include a provision for work
to ensure the safety of the site following
the closure of the coal units and a small
inventory write down for coal we no longer
expect to burn prior to closure. All costs
associated with the closure of the coal
units have been treated as exceptional
items in the income statement.
The Total operating loss for the year –
which includes depreciation, amortisation
and the effect of exceptional items and
certain derivative remeasurements – was
£156 million (2019 re-presented: profit of
£48 million). The year-on-year reduction
principally reflects £239 million of asset
obsolescence charges plus the £34
million of coal closure costs described
above, The asset obsolescence charges
are comprised of £226 million related to
the coal units and a further £13 million in
respect of the option to develop a new
combined cycle gas turbine at Drax
Power Station, which is no longer
expected to proceed. These one-off
costs, the majority of which are non-cash,
have been partially offset by a reduction
in losses arising on the remeasurement
of derivative contracts, from £121 million
in 2019 to £70 million in 2020, as a result
of sterling strengthening during the year.
On 15 December 2020, we announced
the sale of our CCGT portfolio to VPI
Generation Limited for a cash
consideration of up to £193 million,
subject to customary working capital
adjustments. This included £29 million
of contingent consideration associated
with the option to develop a new CCGT
at Damhead Creek. The transaction
subsequently completed on 31 January
2021. The CCGTs have performed well
since being acquired in December 2018,
delivering £46 million of Adjusted EBITDA
in 2020 (2019: £39 million). However,
they do not form part of the Group’s
core flexible and renewable generation
strategy. The results of the CCGTs have
been classified as discontinued operations
in the consolidated financial statements.
We continued to strengthen our balance
sheet and capital structure during 2020.
In August we agreed a new infrastructure
term loan facility agreement with
committed funds in both sterling (£45
million) and euro (€126.5 million), with
an option to increase by up to a further
£75 million. In November €31.5 million was
drawn under this agreement and a
further £53 million was committed under
the option which was subsequently
drawn in December. These commitments
have competitive effective interest rates
inside the Group’s current average cost
of debt. Also in November we issued a
new €250 million euro-denominated
bond at 2.625% which achieved a rate
of 3.24% when swapped back to sterling,
a record low cost for a Drax public market
issuance. At the same time, we redeemed
the existing £350 million sterling bond
and the £125 million ESG facility, resulting
in an improved maturity profile and lower
all-in cost of our debt portfolio. We also
refinanced our Revolving Credit Facility,
extending its final maturity date from
2022 out to 2025 and converted it into a
£300 million facility with ESG credentials.
This delivers further enhancements to
liquidity. Overall, net cash payments
in respect of debt reduced our
borrowings by £176 million (2019:
increased borrowings by £636 million,
linked to acquisitions).
We continue to generate strong net
operating cash inflows. Net cash from
operating activities was £306 million in
2020 (2019: £413 million). The reduction
when compared to the prior year
principally reflects a net cash outflow
from rebased derivative contracts of £27
million, as the benefit of cash accelerated
from such activity unwound over the
course of the year (2019: net cash inflow
of £104 million). In addition, 2020 saw
the introduction of the new tax payment
regime for large companies, accelerating
tax payments in the year of transition.
Cash capital expenditure in the year
was £174 million (2019: £171 million).
Drax Group plc Annual report and accounts 2020 21
Strategic reportGovernanceFinancial statementsShareholder information
Financial review continued
The Group’s liquidity position remains
strong and provides a solid platform
from which we can continue to execute
our strategy. At 31 December 2020,
we held cash of £290 million (2019:
£404 million) and total cash and total
committed facilities of £682 million
(2019: £615 million).
We remain fully committed to payment of
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 £68 million, or 17.1 pence per share,
an increase of £5 million or 1.2 pence per
share when compared to 2019.
Financial Performance
Adjusted EBITDA
Group Adjusted EBITDA from
continuing and discontinued operations
of £412 million was slightly ahead of the
prior year (2019: £410 million) despite
the impact of Covid-19. This represents
a robust performance in what has
been a challenging year. Excluding
the contribution from the CCGT
portfolio classified as discontinued
in the consolidated financial statements,
Adjusted EBITDA from continuing
operations was £366 million (2019:
£371 million).
Our Generation business contributed
Adjusted EBITDA from continuing and
discontinued operations of £446 million
(2019: £408 million), an increase of 9%
or £38 million compared to the previous
year. This result was underpinned by a
5% increase in total output from biomass
in 2020, to 14.1TWh compared to 13.4TWh
in 2019. This was supported by availability
of 91% (2019: 88%). Our strong generation
hedge book also provided protection
against volatility in commodity markets
resulting from Covid-19.
Despite this performance, Generation
has been affected by the pandemic. ROC
recycle values fell during 2020 and the
cost of performing outage work at our
sites increased as a result of
implementing social distancing measures
to enable this work to be carried out
safely. These factors were offset by
strong performance in the short-term
and balancing markets plus some value
captured from within the derivatives
portfolio attributable to market volatility
during the Covid-19 pandemic.
Our pumped storage and hydro assets
in Scotland continued to perform well.
Cruachan pumped storage power station
Reconciliation of Adjusted EBITDA to Total Operating Loss
Adjusted EBITDA from continuing and
discontinued operations
Remove EBITDA contribution from CCGT portfolio sold
on 31 January 2021
Adjusted EBITDA from continuing operations
Depreciation, amortisation and losses on disposal of
fixed assets
Adjusted Operating profit
Asset obsolescence charges due to coal closure
Asset obsolescence charges due to decision not to
develop CCGT at Drax Power Station
Provision for coal closure costs
Acquisition and restructuring costs
Derivative remeasurements
Total Operating Loss
£m
412
(46)
366
(177)
189
(226)
(13)
(34)
(1)
(70)
(156)
contributed significantly to overall gross
margin from system support activity of
£118 million. This reduced slightly from
£120 million in 2019, due to specific
constraint contract income and benefits
associated with closing out positions as
our coal generation forecasts reduced,
neither of which were expected to recur
in 2020. This reflects the benefit of
generating plant that is flexible and
can turn up and down at short notice
to meet demand.
The CCGT portfolio performed strongly,
particularly in the final quarter of the
year as cold weather and low wind led
to opportunities in the balancing market.
Total output from the CCGTs was
2.8TWh (2019: 2.9TWh) with an EBITDA
contribution of £46 million (2019: £39
million). On 15 December 2020, we
announced the sale of the CCGT portfolio
to VPI Generation Limited for total cash
consideration of up to £193 million,
including £29 million of consideration
contingent on the development of a new
CCGT at the Damhead Creek site. The sale
subsequently completed on 31 January
2021. Initial cash consideration received
on 1 February was £188 million, including
£24 million in respect of adjustments for
working capital.
Coal contributed approximately 8%, or
1.6TWh, of our total generation volume
in 2020 (2019: 3%) and a small loss, as
the economics as the economics remain
very challenging. Following the decision
to close the remaining coal units, made
in February 2020, total closure costs
of £34 million have been provided for
and treated as exceptional items and
excluded from Adjusted EBITDA – a
reconciliation of these amounts is
provided in note 5.1 to the financial
statements. The trading performance
of the coal units continues to form
part of our Adjusted results, and will
do so until closure. The units will cease
commercial generation in March 2021
and close entirely following the
completion of Capacity Market
obligations in September 2022, at which
point we expect to see cost savings
in excess of £30 million per annum.
Some of this benefit will begin to
materialise during 2021.
The Generation business acquires
biomass pellets predominantly in US
dollars, Canadian dollars and euros, 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
is subject to UK inflation indices, while
some of our biomass pellet contracts
are subject to US 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. During 2020,
this included restructuring in-the-money
foreign currency exchange and inflation
22 Drax Group plc Annual report and accounts 2020
contracts, to balance short and long
positions across the duration of the
hedge. The value of such activity
increased in 2020, due to market volatility
during the Covid-19 pandemic. The
financial impact of these activities –
which is driven by market prices at the
point of execution – is included within
the cost of sales of our Generation
business and therefore is reflected in
our Adjusted Gross profit and Adjusted
EBITDA. This reflects the fact that the
principal purpose of holding these
contracts is to manage and de-risk
the cost of purchasing fuel.
Performance in our Pellet Production
business has been strong, in terms of
both quality and quantity of pellets.
Adjusted EBITDA of £52 million (2019:
£32 million) increased by 63% and reflects
a record year for output with 1,5Mt of
pellets produced (2019: 1,4Mt) and 1.5Mt
shipped (2019: 1.3Mt). In addition to
increasing output and lowering the
overall cost per tonne, we improved pellet
quality during the year, with a reduction
in fines (larger particle-sized dust) when
measured at disport from 7.9% in 2019 to
5.0% in 2020, a 37% reduction in the year.
This performance comes against a
backdrop of Covid-19 and Hurricane Laura,
the latter of which significantly affected
the areas where we operate in August
2020. Our teams successfully operated
our plants throughout these challenges
to deliver a strong performance, with total
pellets produced 6% ahead of the previous
year – a testament to their hard work,
focus and shared commitment to the
business and one another.
We continued to make good progress
with our biomass cost savings initiatives,
with the overall cost per tonne of pellets
produced in the year standing at $153
per tonne (2019: $161 per tonne), a
reduction of approximately 5%. In
addition to the increase in tonnage
year-on-year contributing to the lower
cost per tonne, we commissioned a dry
shavings facility at the La Salle plant,
enabling us to process less expensive
residual fibre products.
As set out in the biomass cost reduction
section on pages 16 and 17, there are
three potential business models for
post-2027 operations. We believe that
the strategy to expand self-supply and
reduce biomass costs supports all three
of these models.
Our Customers business made an
Adjusted EBITDA loss of £39 million in
2020 (2019: Adjusted EBITDA profit of
£17 million). We believe the reduction of
£56 million can be primarily attributed
to the impact of the Covid-19 pandemic.
Excluding this impact, the result for the
year would have been more in line with
that in 2019.
The majority of this impact was taken
in the first half of the year and, despite
a further national lockdown during
November 2020, the second half of the
year has out-turned broadly in line with
the expectations we set out at our
interim results in July.
We have experienced reduced demand
in the Customers business as a
consequence of lockdown and social
distancing measures in the UK, although
this effect saw some recovery in the
second half of the year. Combined
electricity and gas volumes sold in 2020
of 17.5TWh were approximately 7% lower
than prior year (2019: 18.9TWh). As a
result, revenues have reduced, and we
incurred costs to exit previously hedged
positions as demand estimates reduced
and market prices fell. Overall, gross profit
in the Customers business reduced by
£50 million, from £134 million in 2019 to
£84 million in 2020. This reduction was
primarily attributable to the effects of
the pandemic. This impact was partially
mitigated by delivering operating cost
savings across the Group during the year
with consolidated Adjusted operating and
administrative expenses from continuing
and discontinued operations £16 million
lower in 2020 than the prior year.
Covid-19 has also increased our
expectation of business failures and bad
debt charges, particularly in the SME
segment and among customers in
higher-risk industries. This is reflected in
the charge for impairment losses on
trade receivables for the year of £43
million, which has increased by £25
million compared to the prior year (2019:
£18 million). The bad debt charge for the
year represents 2% of total Customers
revenue, including revenues derived from
lower-risk segments and larger Industrial
and Commercial customers, up from less
than 1% in 2019.
The overall provision for trade receivables
at the end of 2020 of £60 million (2019:
£47 million) is based on a consistent
methodology with that used at the end
of prior periods, updated to reflect our
experience of cash collections and
potential customer business failures
in the period since the first lockdown
came into effect in March 2020, and
using that experience to inform our
assumptions about future performance.
In addition, we have credit insurance
We continued
to strengthen our
balance sheet and
capital structure
during 2020, and
delivered a net debt
to Adjusted EBITDA
ratio of 1.9x”
Andy Skelton
CFO
coverage to help further mitigate some
of this risk.
We will continue to monitor the wider
Customers portfolio to ensure alignment
with the Group’s strategy. Whilst we
remain cautious about the trajectory
for Covid-19 recovery in our forecasts,
we anticipate a return to profitability
at EBITDA level for this business.
Central and other costs, which reflect
our core services functions, including
our innovation teams, were £50 million
in 2020 (2019: £46 million). The increase
from the previous year reflects additional
investment of £8 million in innovation
activities in support of our strategy,
including the development of BECCS and
the zero-carbon Humber project, and an
increase in insurance costs. Other central
operating costs reduced – in 2019 we
incurred one-off costs associated with
implementing a new operating structure
and a higher level of costs associated
with working capital management
initiatives which have not recurred in
2020. In 2021 we expect the overall trend
of investment in innovation to continue.
Total Operating (Loss)/Profit
The Total operating loss for 2020 of
£156 million (2019: re-presented profit
of £48 million) includes the effect of
exceptional items 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 153.
In February 2020, we announced the
decision to cease commercial coal
generation at Drax Power Station by
March 2021, with the units closing
fully once existing Capacity Market
obligations are concluded in September
2022. Following this decision, we
Drax Group plc Annual report and accounts 2020 23
Strategic reportGovernanceFinancial statementsShareholder information
Financial review continued
recognised asset obsolescence charges
in respect of associated fixed assets of
£226 million. We have also provided for
total closure costs of £34 million in
respect of employee termination benefits
and necessary site reorganisation costs,
within the £25-35 million range previously
estimated. A breakdown of these costs,
and the location of the provisions in our
consolidated balance sheet, is provided
in note 5.1 to the consolidated financial
statements. All costs associated with
the closure of coal have been treated
as exceptional items and excluded from
Adjusted results. See notes 2.7 and 5.1
to the consolidated financial statements
for more information.
Net fair value remeasurement losses
on derivative contracts included in
operating profit were £70 million (2019
re-presented: losses of £121 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. A
further £22 million of net fair value
remeasurement gains on power, gas
and carbon trades related to the CCGT
portfolio (2019: £12 million loss)
is included in the result arising on
discontinued operations.
The net losses in 2020 are predominantly
the result of the strengthening of sterling
in the period, which drives the unwind
of previously built-up gains resulting
from the value of our extensive portfolio
of foreign currency exchange contracts.
These exchange contracts provide
protection against changes in exchange
rates for fuel purchases denominated in
foreign currencies over a five-year period.
Depreciation and amortisation in the
year, including losses on disposal of
assets, totalled £177 million (2019
re-presented: £194 million) a decrease of
£17 million compared to the previous year.
Following the decision taken in February
2020 to close coal generation, associated
assets were fully written down and no
longer attract any depreciation charges.
A further £19 million (2019: £16 million) of
depreciation relates to the CCGT portfolio
and is presented in the result from
discontinued operations.
Profit After Tax and Earnings
per Share
Adjusted profit after tax from continuing
and discontinued operations of £118
million (2019: £118 million) results in
Adjusted earnings per share (EPS) of
29.6 pence (2019: 29.9 pence).
Net Debt Development
(£m)
2019 net debt
Adjusted EBITDA
Capital expenditure
Debt service
Tax
Dividends
Working
Capital/other
2020 net debt
841
412
174
59
000
00
48
00
00
65
1
776
Adjusted profit after tax and EPS from
continuing and discontinued operations
have remained broadly consistent
year-on-year, largely reflecting a
combination of the factors described
above, offset by an £8 million increase
in Adjusted net interest charges and
a £4 million increase in the Adjusted
tax charge.
corporation tax rates in the first half of
the year. The total impact of this change
was £18 million, with £4 million relating
to deferred tax balances associated with
the written down coal assets treated
as an exceptional item. The remaining
£14 million charge, which reduces
Adjusted EPS by 3.5 pence, is included
in Adjusted Results.
The Group continued to benefit from
Research and Development Expenditure
Credits (RDEC) in 2020, with claims
totalling £6 million recognised as a
reduction in cost of sales and operating
expenses (2019: £3 million).
The Total tax credit for continuing and
discontinued operations of £32 million
includes the tax attributable to
exceptional items and derivative
remeasurements. A full reconciliation
of the Group’s tax credit for the year is
provided in note 2.6 to the consolidated
financial statements.
Cash taxes paid during the year were
£48 million (2019: £10 million). In 2020,
the Group fell into the new arrangements
in respect of corporation tax payments
for very large companies in the UK for the
first time. As a result, the Group must now
make tax payments earlier than under
the previous regime and the increase
compared to the prior year is a one-off
impact on transition.
The Total loss after tax from continuing
and discontinued operations of £158
million is significantly reduced from the
equivalent profit of £1 million for the prior
year, with a corresponding reduction in
Total EPS from nil pence in 2019 to a loss
per share of 39.8 pence in 2020. Total
loss after tax reflects exceptional items
and certain remeasurements, including
the derivative remeasurements, coal
asset obsolescence charges and coal
closure costs described above. In
addition, it includes £8 million
of charges related to refinancing activity
(2019: included £5 million of costs
associated with the acquisition bridge
facility) described in further detail below.
The Adjusted tax charge for continuing
and discontinued operations of £28
million (2019: £24 million) reflects an
effective tax rate of 19%, in line with the
standard rate of corporation tax in the
UK. This reflects the benefit of patent box
tax credits in respect of the biomass unit
conversions. Total patent box credits
included for 2020 are £8 million (2019:
£8 million). This was offset by the
negative impact of revaluing deferred tax
liabilities following the UK Government’s
decision to reverse the previously
announced reduction in future
24 Drax Group plc Annual report and accounts 2020
Earnings per Share
(pence)
2020
2020
(39.8)
2019
2019
29.6
29.9
0.1
Adjusted EPS*
Total EPS
*
EPS based on profit/(loss) for the year including
continuing and discontinued operations
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. This committee ensures
overall adherence to our capital
allocation policy and maintenance
of an appropriate net leverage profile.
In 2020, total capital expenditure of
£200 million, excluding additions to
decommissioning assets of £29 million
(see note 5.4), compares with £172 million
in the previous year. This was lower than
previous expectations as a result of the
deferral of some projects due to Covid-19.
This includes non-essential works at Drax
Power Station, and delayed timing of
some investments in our biomass
supply chain.
The increase compared to 2019
principally reflects execution of our
strategy, with significant investments
made in the expansion of our US pellet
production facilities, alongside smaller
projects within our generation portfolio
to enhance efficiency. Notably the
expansion at our pellet production
facility in Morehouse commissioned
in November 2020. The extensions at
La Salle and Amite are expected to
come online by 2022.
Capital investment in our Customers
business has been limited to £7 million
(2019: £20 million). The past capitalised
spend associated with a new billing
system of £19 million was stopped in
2019 and the Group is engaged in active
discussion with the supplier reflecting the
supplier’s failure to perform under this
contract. No amounts have been provided
against this value as the Group believes
that the carrying amount will be recovered
in full, supported by legal advice.
Cash and Net Debt
We remain focussed on cash flow
discipline and maintaining a robust
balance sheet. This is underpinned by
prudent risk management which provides
protection in times of economic
uncertainty and a strong platform from
which to execute our strategy.
The Group continued to generate strong
cash from operations in 2020, with a total
inflow of £413 million (2019: £471 million)
before interest and tax payments. This
reflects our focus on cash flow discipline
and continued management of working
capital. Cash received in respect of 2019
Capacity Market income in January 2020
(£72 million) and a net cash inflow
resulting from increased generation
and a corresponding reduction in coal
inventories was offset by a net outflow
from rebasing of derivative contracts
and an increase in net purchases of
ROC assets.
Net cash generated from operating
activities in the year was £306 million
(2019: £413 million). In 2020, the Group
experienced the impact of the new
arrangements in respect of corporation
tax payments for very large companies
in the UK, as described above, which
increased cash tax payments by
£38 million compared to the prior year.
Our liquidity position remains strong,
reflected by all three of our ratings
agencies evaluating our liquidity
assessment as Strong. At 31 December
2020 we held cash of £290 million (31
December 2019: £404 million), total
borrowings were £1,066 million
(31 December 2019: £1,245 million) and
as a result net debt was £776 million
(31 December 2019: £841 million). During
the first half of 2020, the Group was
assigned its first equivalent to
investment grade from DBRS. This
affirmed the strength of our balance
sheet, strong near-term contracted
earnings, plus the depth and breadth
of our available sources of liquidity.
Our net debt to Adjusted EBITDA ratio,
based on Adjusted EBITDA for continuing
and discontinued operations, was 1.9x at
31 December 2020 (2019: 2.1x). After
adjusting for timing differences related to
Capacity Market income and cash across
the current and previous period, the net
debt to EBITDA ratio was 1.9x at both
31 December 2020 and 31 December
2019. On a proforma basis, taking into
account the initial proceeds on sale of
the CCGT portfolio (£188 million – see
below) and removing the associated
EBITDA contribution (£46 million), net
debt to Adjusted EBITDA at 31 December
2020 was 1.6x.
During the year, the Group continued
to enhance its access to capital and
strengthen the balance sheet. In August,
we announced the agreement of a new
Infrastructure term loan agreement
with committed funds in both sterling
(£45 million) and euro (€126.5 million),
with a range of maturities between 2024
and 2030. €31.5 million was drawn under
the agreement at 31 December 2020.
The agreement also included an option to
increase the facility by up to a further £75
million of which £53 million was agreed
in November and drawn in December.
The remaining commitments were
subsequently drawn on 18 February 2021.
In November 2020, the Group issued
€250 million of euro-denominated senior
secured notes which mature in 2025. The
2.625% issuance achieved Drax’s lowest
ever priced public offering which, once
swapped back to sterling, reflected an
interest rate of 3.24% per annum. The
proceeds of this issuance were, along
with existing cash flows, used to redeem
the Group’s £350 million 2022 sterling
bond and the £125 million ESG term loan
facility. Total costs in respect of the
redeemed facilities, including the
non-cash impact of deferred finance
costs, of £8 million have been treated
as an exceptional item in the income
statement, in line with previous practice.
A significant proportion, almost 90%,
of the Group’s debt now falls due in 2025
or later.
Following the issue of the euro-
denominated notes in 2020, £610 million
or 57% of the Group’s closing borrowings
balance is denominated in foreign
currencies (2019: £374 million, 30%). The
carrying amount of our foreign currency
borrowings and, consequently, the value
of reported net debt is subject to FX
volatility as a result of translating
balances at rates prevailing at the
balance sheet date under IFRS.
We use derivatives, including cross-
currency swaps to hedge the sterling
cost of the interest payments and future
principal repayments in respect of these
facilities. In note 4.1 to the consolidated
financial statements, in addition to
net debt per the IFRS balance sheet
(as defined on page 153). we set out
a reconciliation of net debt that
incorporates the impact of relevant
financial derivatives to fix the value
of sterling principal repayments. At
31 December 2020, this resulted in net
debt adjusted for hedging of £819 million.
Drax Group plc Annual report and accounts 2020 25
Strategic reportGovernanceFinancial statementsShareholder information
Financial review continued
Adjusted Results from Continuing and Discontinued Operations 2020
£m
Revenue
Cost of Sales
Adjusted Gross Profit
Operating Expenses
Impairment losses on Trade Receivables
Adjusted EBITDA
Depreciation & Amortisation
Net finance charges
Adjusted Profit before tax
Taxation
Adjusted Profit after Tax
Impact of exceptional items and certain
remeasurements (see note 2.7)
Total (Loss)/Profit after Tax
Continuing
Operations
Discontinued
Operations
Cumulative
4,235
(3,435)
800
(391)
(43)
366
(178)
(69)
119
(23)
96
(291)
(195)
206
(127)
79
(33)
-
46
(19)
(1)
26
(5)
21
16
37
4,441
(3,562)
879
(424)
(43)
412
(197)
(70)
145
(28)
118
(275)
(158)
In November 2020, we also concluded
the refinancing of the revolving credit
facility (RCF). The new RCF matures in
2025, with an option to extend by one
year, and replaces the previous facility.
This £300 million facility provides
increased liquidity, enabling the full
facility to be drawn as cash (previously
restricted to £165 million). The RCF has
a customary margin grid referenced over
LIBOR and represents a small reduction
in cost compared to the previous facility.
It includes an embedded ESG component
that adjusts the margin based on the
Group’s carbon intensity measured
against an annual benchmark.
The RCF is available to manage low points
in the cash cycle and was undrawn at
31 December 2020. Committed facilities
of £45 million and €95 million under our
new Infrastructure term loan agreement
also remained undrawn at 31 December
2020. Available cash on hand and
committed, undrawn facilities provide
substantial headroom over our short-term
liquidity requirements.
Net cash released from working capital
in 2020 was £37 million (2019: cash
absorbed by working capital of £51
million). We actively optimise our working
capital position by managing payables,
receivables and inventories to make sure
the working capital committed is closely
aligned with operational requirements.
As in previous periods, we have
maintained our strong cash flow focus
and continued to deliver working capital
benefits from making sales and
purchases of ROC assets and utilisation
of payment facilities, however the overall
utilisation of these facilities has
decreased compared to 2019.
Historically, cash from ROCs has typically
been realised several months after the
ROC was earned, usually 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. During 2020, such
transactions generated a net cash outflow
of £74.0 million due to more purchases
than sales in the period. The overall
working capital inflow from ROCs of £23.1
million reflects an overall reduction in ROC
assets held on the balance sheet due to
decreased generation in the year. The
Group also has access to facilities enabling
it to sell ROC trade receivables on a
non-recourse basis. Utilisation of these
facilities at 31 December 2020 was £nil
(31 December 2019: £nil).
In the first half of 2020, the Group rebased
several foreign currency contracts, which
resulted in a working capital benefit, with
total cash released from rebased trades
still outstanding at 31 December 2020
of £24 million (in the prior year, total cash
released from rebased trades still
outstanding at 31 December 2019 was
£84 million). A similar exercise for cross-
currency swaps resulted in cash released
from outstanding trades at 31 December
2020 of £56 million (31 December 2019:
£23 million). The overall net outflow
associated with rebasing activity in 2020
was therefore £27 million (2019: a net
inflow of £104 million).
The Group holds a large portfolio of
forward and option contracts for various
commodities and financial products.
These contracts are held to de-risk the
business, by protecting the sterling value
of future cash flows in relation to the sale
or purchase of key commodities. We
26 Drax Group plc Annual report and accounts 2020
manage our exposures in accordance
with our trading and risk management
policies. These policies provide flexibility
to optimise our trading position, working
capital and liquidity when market
conditions allow, whilst ensuring
downside protection and prudent risk
management are maintained.
In addition, the Group has access to a
£200 million receivables monetisation
facility, which accelerates associated
cash flows and mitigates exposure to
credit risk. The Group also has access
to a number of payment facilities to
leverage scale and efficiencies in
transaction processing and also
facilitates a supply chain financing
scheme, which enables certain suppliers
to accelerate their payment and which
supports the wider working capital
efficiency of the Group. There are no
changes to the Group’s payment terms
under this arrangement, nor would there
be if the arrangement were to fall away.
The balances outstanding at 31
December 2020 and the 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 outflow for the
period was £114 million (2019: net inflow
of £122 million), after cash payments for
capital expenditure of £174 million (2019:
£171 million), dividend payments of £65
million (2019: £59 million), net
repayments of borrowings of £176 million
(2019: net proceeds from new borrowings
of £636 million) and payments in respect
of acquisitions of £nil (2019: £692 million).
Total Dividends
(£m)
2020
2019
2018
2017
2016
11
68
63
56
50
Distributions
We have a long-standing capital
allocation policy. This policy sets out our
commitments to robust financial metrics
that underpin our strong credit rating,
to invest in our core business, to pay
a sustainable and growing dividend
and finally to return surplus capital
to shareholders as appropriate.
At the Annual General Meeting on
22 April 2020, shareholders approved
payment of a final dividend for the year
ended 31 December 2019 of 9.5 pence
per share (£38 million). The final dividend
was paid on 15 May 2020. On 28 July
2020, the Board resolved to pay an
interim dividend for the six months ended
30 June 2020 of 6.8 pence per share
(£27 million), representing 40% of the
expected full year dividend. The interim
dividend was paid on 2 October 2020.
At the forthcoming Annual General
Meeting, on 21 April 2021, the Board
will recommend to shareholders that
a resolution is passed to approve
payment of a final dividend for the year
ended 31 December 2020 of 10.3 pence
per share (£41 million), payable on or
before 14 May 2021. Shares will be
marked ex-dividend on 22 April 2021.
This brings the total dividend payable
for 2020 to £68 million and delivers
7.5% growth on 2019.
Other Information
Covid-19, Brexit and Going Concern
We continue to monitor and assess
developments and the potential future
impact of the Covid-19 pandemic on our
operations and financial performance.
As described above, our financial
performance in 2020 was robust despite
an estimated £60 million impact on
Adjusted EBITDA, and we have maintained
a strong balance sheet with a net debt
to Adjusted EBITDA from continuing and
discontinued operations ratio of 1.9x at
31 December 2020.
Looking forward, our business plan for
2021 and beyond reflects our central
assumptions regarding the likely duration
of the pandemic, and the nature of the
associated restrictions such as social
distancing. These factors, alongside
wider macroeconomic considerations,
can affect the demand for, and price of,
power. We continue to expect a
detrimental impact, when compared to
pre-Covid expectations, in our Customers
business due to the reduction in demand
and increase in bad debt risk described
above. Our forecasts for 2021 assume a
gradual easing of lockdown in the UK
will commence as the roll-out of Covid-19
vaccinations progresses.
We are monitoring developments
following the end of the Brexit transition
period. Our consideration of risk impacts
in respect on Brexit is set out on page 68.
In addition to the routine scenario
planning incorporated into our business
plan process, we have modelled a series
of scenarios based on our principal risks,
a reasonable worst case and more extreme
scenarios. These scenarios have helped
us to test the Group’s financial resilience
over both the next 12 months and a
longer period for the purpose of viability
reporting (see page 64). In particular, we
have considered the impact of extended
generation outages across our portfolio,
taking into account risks associated with
plant operations and supply chain, as well
as commodity price exposure. To date,
such modelling has indicated that, while
there would be a financial impact, none of
the scenarios modelled would result in an
impact to the Group’s liquidity, solvency or
covenants that could not be remediated
by taking mitigating action. In reaching
this conclusion, no additional financing
was contemplated beyond existing
committed facilities.
Consequently, the Directors have a
reasonable expectation that the Group
will continue to meet its obligations as
they fall due for at least the next twelve
months, while operating within the
means of its current capital structure.
Accordingly, the Directors have adopted
the going concern basis when preparing
the consolidated financial statements.
Sale of CCGT Portfolio
On 15 December 2020, the Group
announced it had reached agreement
for the sale of Drax Generation Enterprise
Limited, which held the Group’s portfolio
of CCGT power stations, to VPI Generation
Limited for cash consideration of up to
£193 million, subject to customary
adjustments. This included £29 million
of contingent consideration associated
with the option to develop a new CCGT
at Damhead Creek.
The sale completed on 31 January
2021. The Group received the initial
consideration of £188 million on
1 February 2021 which included
£24 million in respect of working capital
adjustments. The final consideration is
subject to a completion accounts process
which is expected to conclude in the
first half of 2021. The Group anticipates
recording a small premium on sale in its
2021 consolidated financial statements.
The sale price represents a return over
the Group’s period of ownership
significantly ahead of the Group’s
weighted average cost of capital.
In the consolidated financial statements
for the year ended 31 December 2020,
the results of the CCGT portfolio
(revenue of £181 million, Adjusted EBITDA
of £46 million and profit after tax of
£37 million) have been presented as
discontinued operations in the
consolidated income statement, and
the assets and liabilities shown as held
for sale in the consolidated balance sheet.
Transaction costs of £4 million have
been expensed to the income statement
as incurred and recognised as an
exceptional item within discontinued
operations in line with our policy. The
consolidated income statement for the
year ended 31 December 2019 has been
re-presented to show the results for the
CCGT portfolio on a consistent basis as
discontinued operations. See note 5.5
for further details.
Proposed Acquisition of Pinnacle
Renewable Energy
On 8 February 2021, the Group
announced the proposed acquisition
of 100% of the issued share capital
of Pinnacle Renewable Energy Inc.
(Pinnacle) at a price of C$11.30 per share.
This values the fully diluted equity of
Pinnacle at C$385 million, with an
implied enterprise value of C$741 million
including C$356 million of net debt. The
acquisition price will be paid in Canadian
dollars and we expect to manage that
exposure within our existing foreign
exchange risk processes.
The acquisition remains subject to
Drax and Pinnacle shareholder approval,
court approval, regulatory approvals
and the satisfaction of certain other
customary conditions. Completion is
expected to occur in the second or
third quarter of 2021. The acquisition
will be funded from cash and existing
arrangements and is expected to be cash
generative with 2022 EBITDA consensus
of C$99 million(1). Net debt to Adjusted
EBITDA in 2021 is expected to be above
Drax’s long-term target of around 2x
immediately following completion of the
acquisition but it is expected to return
to around this level by the end of 2022.
Andy Skelton
Chief Financial Officer
(1) The figure above was a collation of forecasts,
estimates and opinions made by a number of
independent research analysts compiled by
Bloomberg and appearing on Bloomberg’s website
at the time of the announcement of the Pinnacle
transaction. The inclusion of this figure may be
interpreted as a profit forecast in relation to
Pinnacle for the purposes of the Listing Rules.
The Directors consider that this figure is no
longer valid because:
(i) this figure was representative of Pinnacle
as a standalone entity and does not represent
Drax’s or the Directors’ views of the expected
financial performance of Pinnacle under
Drax’s ownership; and
(ii) the acquisition of Pinnacle will result in a
number of changes impacting Pinnacle’s
EBITDA, including the impact of purchase price
allocation and intra-group trading adjustments.
Drax Group plc Annual report and accounts 2020 27
Strategic reportGovernanceFinancial statementsShareholder information
Helping the
UK meet
its net zero
target
BECCS (bioenergy with
carbon capture and storage)
is a key project both for Drax
and in helping the UK meet
its net zero target. Working
together with our technology
and engineering partners,
we continued to develop the
project during 2020, and it
is currently approaching the
end of the initial engineering
design process. Covid-19 has
presented some challenges
with our partners spread
across the globe, but the
project team have managed
to keep everything on track
through hard work,
determination, and the
desire to deliver this ground-
breaking project and help
Drax to deliver its purpose.
2021 will continue to be a
busy year as we complete
our pilot testing, and the
project moves into the next
stages of development –
both technically and via
the planning process.”
Carl Clayton,
Head of BECCS, Innovation
Cooling towers at Drax
Power Station, Yorkshire
28 Drax Group plc Annual report and accounts 2020
Keeping our
people and
plants safe
Safety is a primary focus at
Drax, and at Cruachan we are
hugely proud to have had no
serious incidents in 2020 and
achieved 16 years since our
last Lost Time Incident on site.
For me, the biggest challenge
in 2020 was introducing
changes to how we work
to ensure we protected
colleagues and contractors
from Covid-19, whilst
continuing to keep our
plants running safely and
maintaining our focus on
potential hazards and our
primary safety procedures,
to prevent incidents and keep
everyone safe. Thankfully,
we’ve achieved good safety
performance this year at
Cruachan, whilst delivering
our outages and project work.“
Roddy Davies,
HS&E Adviser, Cruachan Power
Station
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Covid-19 impact on executive remuneration
How has Drax
taken Covid-19
into consideration
when determining
executive
remuneration
outcomes?
A key focus for Drax has been
on taking care of the health
and wellbeing of employees
during these difficult times.
The remuneration decisions
taken appropriately reflect the
performance of the business
in 2020, and they are fair and
consistent to all employees.
Whilst 2020 was a very challenging
year, it was also a year of
achievement of which we are
rightly proud. Colleagues and
management worked hard to
deliver our purpose, keep each
other safe and continue to deliver
our essential services to the
country. This culminated in strong
financial performance and further
advancement of our strategic
priorities, which are reflected in
the remuneration of the Executive
Directors, senior management
and the wider workforce.
All Drax employees had to adapt to new
ways of working in 2020. The health,
safety, and wellbeing of employees
and contractors has always been of
paramount importance, but particularly
so in these unprecedented times.
During the year the Committee spent
a considerable amount of time reviewing
the remuneration and the working
practice arrangements of the whole
workforce within the context of the
challenges of Covid-19. Our priority has
been to provide pay stability and security
for our workforce, many of whom are
classified as key workers. This included
ensuring continuity of pay for those
who were unable to work due to illness
or caring responsibilities as well as our
commitment not to furlough or make
redundancies as a result of the impact
of Covid-19.
You can find further information on
how Drax has supported employees
through Covid-19 on page 34.
In addition to supporting our colleagues,
we have also actively supported our
customers and communities during this
time. For example, we provided free gas
and electricity for two months to 162
independent care homes, allowing
these vital organisations to divert funds
to other priorities. We also provided
over 850 laptops with three months
of pre-paid internet access to over 50
schools. This has helped to enable
students at our partner schools to
access lessons from home.
In addition to not utilising any
Government support, as explained on
page 88, the Board received regular
updates on the Group’s liquidity position,
our available cash and other resources
which directly informed the decision
to maintain both the final dividend in
respect of the 2019 financial year which
was approved by shareholders at the
2020 Annual General Meeting and paid
on 15 May 2020 and the interim dividend
which the Board approved in July 2020
and paid on 2 October 2020.
The following table provides a summary
of the decisions made by the Committee
in 2020 with respect to key components
of remuneration. In coming to these
conclusions, the Committee considered
several factors. These included external
advice, the performance of the Company
and the contribution of employees at all
levels in delivering the 2020 Group plan
and the longer-term strategic priorities.
The Committee also considered the
extent to which Covid-19 had an impact
on financial performance and on our
range of stakeholders – whether
positively or adversely.
Nicola Hodson
Chair of the Remuneration Committee
30 Drax Group plc Annual report and accounts 2020
We have provided further information on decisions made
by the Committee with respect to Covid-19 in the Annual
Statement to Shareholders on pages 109 to 110.
Committee decision
2021 base salary increases
• To increase the level of base salaries for
all Directors in line with the average
increase made to all employees.
• The Company is supportive of an increase to the salaries of all eligible employees in
2021 which reflects our ability to pay and wider market benchmarking. The increase
applied also takes into account our commitment to not furlough or make redundant
colleagues due to Covid-19.
2020 annual bonus outcome
• To pay the bonus awards in the normal
manner, and in line with the Policy, with
no adjustment.
• The bonus award is reflective of the Company’s solid performance in a challenging year.
• The Company bonus criteria for Executive Directors are consistent with those for
other employees. All eligible employees will receive their bonus.
• Drax maintained its dividend for 2019, paid an interim dividend for 2020 and is
proposing a final 2020 dividend for approval at the 2021 AGM, the proposed bonus
payments are consistent with the shareholder dividend experience and our capital
allocation policy.
• The Company’s balance sheet liquidity and finances are strong.
• We recognise that Covid-19 has brought into sharper focus the responsibilities which
we all have to safeguarding our people, our communities and our environment. Within
the 2020 scorecard we included targets associated with a combination of safety and
engagement with our employees, reputation, as well as ESG measures that included
targeting improvement in our CDP rating. Our employee engagement survey achieved
82% score for effective engagement and the Group’s CDP Climate response rating
improved from C in 2019 to A- in 2020. More information on the 2020 scorecard can be
found on pages 124 and 125. More information on the Group’s wider initiatives on the
environment and climate change can be found on page 48.
2021 annual bonus
• Continue to use performance metrics and
weightings which are consistent with
what is stated in the Policy.
• The Company is committed to the operation of a bonus plan for all eligible employees
for 2021 and the bonus criteria are consistent for all employees.
• On 8 February 2021, we announced our intention to acquire Pinnacle Renewable
2018 PSP Vesting
• To allow the 2018 PSP award to vest
without adjustment in March 2021.
Energy Inc., which is subject to Drax and Pinnacle shareholder approval, and court and
regulatory approvals. As this transaction would materially impact all metrics in the
2021 Scorecard, it is not possible to set targets at this time for each metric which has
been selected for the 2021 Scorecard. The targets will be set as soon as is practicable
once there is confirmation of whether the acquisition will or will not proceed. The
table on page 132 sets out the metrics which will be included in the 2021 Scorecard.
• The Committee is comfortable that the vesting result is appropriate in the context
of performance over the three year performance period.
• Drax share price at 31 December 2020 was 39% higher than the start of the
performance period (given the averaging periods over which TSR has been calculated
this equates to a return of 15% based on the six month averaging period prior to the
start and end of the performance period). These returns represent a strong result
for our shareholders, particularly in the current environment. Performance is assessed
against a broader FTSE 350 comparator group, where the majority of shareholder
returns have been negative over the performance period.
• Although Drax’s share price was initially impacted by Covid-19 in early 2020 (as was
the case for many companies), it recovered strongly, with a shareholder return
of 28% from 1 January 2020 to the end of the year.
• Drax has not benefited from unexpected windfall financial performance as a result
of Covid-19, and the Committee is confident that this return represents genuine strong
performance and delivery of our strategy in an extremely challenging climate.
2020 LTIP grant
• The grant was made on the normal
• The LTIP performance is measured over a three-year period and therefore the targets
timetable and with the performance
conditions and targets agreed with
shareholders.
• The normal practice of using the
three-day average share price
immediately prior to the date of grant to
determine the number of shares awarded
was followed.
remain appropriate.
• The Committee will assess the value of the 2020 LTIP award at vesting and will ensure
that the final outturn reflects all relevant factors, including consideration of any
windfall gains. In making their assessment the Committee will take into account
appropriate advice (e.g. the Company’s auditors, the Committee’s advisers and the
Audit Committee), also giving due consideration to the shareholder experience and to
what extent the outcome incorporates any windfall gain, which warrants adjustment.
Drax Group plc Annual report and accounts 2020 31
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Taskforce on Climate-related Financial Disclosures
Tackling climate change
is at the heart of our
purpose and Drax is
committed to helping
the UK and the wider
world to achieve its
climate targets.
The recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) provide a framework for consistent disclosure of
climate-related information. Drax became a TCFD Supporter in December
2020. Our approach, progress and the next steps of our journey towards
meeting the TCFD recommendations in full are summarised below.
In 2020, we responded to the CDP Climate questionnaire, which is aligned
to the TCFD recommendations. Drax was awarded a score of A-.
We will continue responding to the CDP Climate questionnaire each year.
Governance
Strong governance that embeds climate change in decision-making at all levels of the business
Our approach
Responding to climate change is a core
component of our Group governance
framework. The CEO reports quarterly
to the Board on Environment, Social and
Governance (ESG) performance, including
climate-related matters. Climate change
factors are considered in decisions taken
by the Board, reflecting the Board’s duty
to consider all stakeholders. Examples
in 2020 include the decision to cease
coal generation by March 2021 and the
refinancing of the Group’s debt facilities,
which link Drax’s carbon emissions to the
amount of interest paid on the Group’s
debt (see page 26).
Our Climate Policy, approved by the Board,
outlines our approach to integrate
effective management of climate-related
risks and opportunities into everyday
decision-making and delivery of our
business strategy (available at: www.drax.
com/about-us/compliance-and-policies).
Our progress in 2020
In October, the Board reviewed our
strategic aims and progress, and re-
emphasised Drax’s commitment to our
purpose, to enable a zero carbon, lower
cost energy future. The Board considered
how our strategy aligns with good practice
for purpose-driven organisations and
committed to explore how this can be
further strengthened through 2021.
In 2020, engagement with the Executive
Committee and the Board focused on
furthering understanding and embedding
climate-related matters. Engagement in
2020 included:
• Climate Policy considered and approved
by the Executive Committee and the
Board.
• 2020 CDP Climate submission signed off
by the CEO and CFO.
• At the Group’s interim and full year, the
Executive Committee and the Board
examined the Climate Change principal
risk, considering key evolving challenges
and potential mitigations.
• The Executive Committee and the Board
considered management’s response and
future plans for addressing the TCFD
requirements, approved initiatives to
meet these proposals, and approved
Drax becoming a TCFD Supporter.
Remuneration
Our 2020 Group scorecard included
a target to improve our CDP Climate score,
linking remuneration to our performance
and quality of disclosure on climate
change.
Our actions for 2021
• Continue schedule of engagement with
Executive Committee and the Board on
climate-related matters.
See Corporate Governance Report
page 80
See Remuneration Report
page 108
Strategy
A purpose, strategy, and ambition that places climate change at the heart of what we do
Our approach and progress in 2020
Our purpose – to enable a zero carbon,
lower cost energy future – is aligned
with the UK Government target to achieve
net zero carbon emissions by 2050.
Our purpose informs the three pillars
of our strategy, outlined below. Our
energy market model uses a range of
‘net zero carbon by 2050’ scenarios and
the resulting set of planning assumptions
enable us to identify actions and the
associated capital allocation that we
will take across our strategic horizons.
1. To build a long-term future for
sustainable biomass: By expanding our
sustainable bioenergy supply chain and
reducing costs we are developing options
for long-term biomass operations –
renewable generation, negative carbon
emissions, system support services and
third party supply of biomass to
international markets.
We are investing in the expansion of our
pellet production facilities as part of our
biomass strategy, targeting to achieve 5
million tonnes of self-supply by 2027 and
to reduce production costs. We believe
this will give rise to a long-term future
for sustainable biomass, which includes
the potential for BECCS and negative
emissions. This is supported by a robust
supply chain that is subject to externally-
set regulations and regular audits, to
ensure the required standards are met.
We are progressing the BECCS business
case and technology selection so that
we can effectively implement and scale a
cost-effective carbon removal technology.
2. To be the leading provider of power
system stability: Through a portfolio of
flexible and renewable generation, and
large industrial and commercial customer
supply business, we will provide system
support services to allow the power
system to utilise intermittent renewable
energy accelerating the UK’s
decarbonisation en route to 2050.
We believe that as the UK power system
decarbonises, demand will increasingly
be met by low marginal cost intermittent
wind generation.
Historically, the operation of reliable
baseload thermal power plants provided
32 Drax Group plc Annual report and accounts 2020
Strategy continued
A purpose, strategy, and ambition that places climate change at the heart of what we do continued
both electricity and a full range of
non-generation system support services.
These services are important to the safe
and reliable operation of the system. Given
its inherent intermittency, wind power
has limited capability to provide these
other services, making the system more
challenging to manage. Throughout 2020,
we provided these services to the power
system via our flexible asset portfolio.
ESG finance
In 2020, we completed a £300 million
Revolving Credit Facility. This includes an
embedded ESG mechanism that adjusts
the margin of interest paid based on Drax’s
carbon emissions per GWh of electricity
generated, measured against an annual
benchmark. This is consistent with our
continued strategic focus on reducing
our carbon emissions.
The EA projections considered data
from the UK Climate Projections 2009
(UKCP09), which categorise the range
of possibilities from lower impact to upper
impact. In compliance with planning
requests, the assessment considered the
impacts of the central climate projection
through to the upper impact projection
over a medium time phase, covering the
expected life of the asset.
3. To give our customers control of their
energy: We provide our customers with
renewable energy, and the opportunity to
control and optimise energy use and cost,
helping us support the energy system.
To support the zero carbon and
sustainability ambitions of our customers,
we are considering and developing the
services they need. Our Drax Electric
Vehicles (EV) service enables customers to
transition to EVs or optimise their existing
EV solution. We also provide an Electric
Assets service, that helps our customers
to optimise the energy usage of their
assets and reduce costs.
Risk management
Scenario analysis
We have considered the potential impact
of climate scenarios on our business,
including robust modelling as part of
our capital projects work. Comprehensive
modelling was undertaken to assess
the current flood risk and the potential
future flood risk associated with the
redevelopment of Drax Power Station.
The assessment considered potential
changes in sea level, changes in rainfall
and peak river flows based on guidance
issued by the Environment Agency (EA).
The project identified a risk of flooding
in the community and, as a result, a
flood relief channel has been included
in the plans.
Our actions for 2021
• Undertake scenario analysis exercise.
See Principal Risks and
Uncertainties page 66
Integration of climate-related risks into our Group-wide risk management approach
Our approach
The assessment and management of
climate-related risks is integrated into our
Group-wide approach to risk management,
as defined by the Group Risk Management
Policy. Climate change is a principal risk
category assessed within this approach.
The climate change principal risk is owned
by a member of the Executive Committee
and subject to a deep-dive review by the
Executive Committee each year. An
analysis of all principal risk categories,
including climate change, is made and
presented to the Executive Committee
and Board twice a year.
Our progress in 2020
In 2020, we focused on the development
of our climate change principal risk
assessment process. We strengthened
the assessment of business division
specific risks, expanded the detail of our
assessment, and identified risk areas for
targeted analysis in 2021. A summary
of the physical and transition risks
identified is provided in Principal Risks
and Uncertainties.
In 2020, the Executive Committee
examined the climate change risks,
challenging the assumptions, mitigations
and controls which had been identified.
Metrics and targets
Our ambition is to become carbon negative by 2030
Our approach
Our ambition is to become carbon negative
by 2030. This applies across our direct
business operations globally (scope 1 and 2
emissions).
We are committed to the Science Based
Targets initiative, publicly stating our
intent to externally validate that our
target is aligned with climate science.
Our progress in 2020
We disclose our scope 1, 2 and 3
greenhouse gas emissions, alongside
other key environmental metrics, in
the sustainable business section
(see page 48).
In 2020, we undertook work to better
understand the detail of our scope 3
emissions. We are developing a scope 3
target that enables us to align to the
Science Based Targets initiative.
Our actions for 2021
• Undertake targeted analysis of the risk
areas identified for further exploration in
2021.
See Principal Risks and
Uncertainties page 66
Our actions for 2021
• Set and publish a scope 3 target.
See Carbon Emissions
page 49
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Our Covid-19 response
How has Drax managed
the impact of Covid-19?
Keeping our people safe,
whilst providing energy
and critical services.
Throughout the pandemic we have
successfully maintained effective
day-to-day activities, and supported
our people, communities and
customers. We continue to maintain
our sustainability standards and
meet the needs of stakeholders
as we progress our long-term
objectives and invest for growth.
Organising our response
When Covid-19 was declared a pandemic
in March 2020, we had already
implemented our crisis management
structure to manage information and
our response, and to better understand
emerging risks. Management and leaders
from the business units met regularly
to define and communicate the Drax
response. Our leadership’s priority was,
and will remain, the health and safety
of our colleagues.
Delivering our purpose
As a strategic part of the UK’s critical
national infrastructure, we continued to
supply flexible and renewable electricity,
delivering strong strategic, operational
and financial performance for our
shareholders and various stakeholders.
This allowed us to continue to invest for
growth, whilst paying a sustainable and
growing dividend. Throughout the
pandemic, no employees have been
furloughed and we have not sought any
financial help from the Government.
Supporting our people
We quickly deployed home
working for the majority of our
non-operational colleagues.
Following school closures in the UK,
we introduced two weeks’ emergency
paid leave for childcare support. As
information on the virus and
Government advice developed, we
continued to adjust our response
accordingly. We introduced a Covid-19
absence policy, extending our
emergency arrangements, entitling
colleagues that are unable to work due
to Covid-19 to full pay.
Health and safety as our
top priority
We undertook Covid-19 risk
assessments at each of our sites, to
identify mitigations to reduce the risks
of workplace transmission of the virus.
Throughout the year, our operational
workforce was able to continue to
deliver our business priorities, without
a significant impact or transmission
of the virus in the workplace. Our
Generation business, which has
continued to operate as normal, safely
delivered several major outages, with
large numbers of contractors on our
production sites during the summer.
We deployed home working
assessments and provided colleagues
with suitable equipment to make sure
they could work from home safely.
We continue to focus on maintaining
social distancing, hand hygiene and
reduced occupancy of our workplaces.
As further waves of virus transmission
occur across the country, we are
planning to ensure continued provision
of adequate support for the health and
wellbeing of all our colleagues.
Wellbeing
We surveyed colleagues to understand
how they were coping and to identify
areas for focus. This was to make sure
colleagues continued to feel connected
and supported through the challenges
presented by Covid-19. To further support
our colleagues’ physical and mental
wellbeing, we expanded our virtual
wellbeing tools and resources offering.
Read more on Wellbeing in our
Sustainable Business section,
page 58.
Charitable and community
engagement
We continued to provide colleagues
with ways to engage in community and
charity activities. We held national
fundraising days, promoted Give As
You Earn and shared virtual volunteering
opportunities to support local charities
and communities facing the impact
of the pandemic.
Our employees’ health and
wellbeing are vital, and we
work hard to ensure we are
supporting them with both
their physical and mental
health, whether working at
home or at one of our sites.”
Will Gardiner
CEO
34 Drax Group plc Annual report and accounts 2020
Read more about effective
management and the role
of the Board during Covid-19
on page 88 corporate
governance report and
the impact on principal risks
and our response on pages
66 to 77.
Care homes
We provided free gas and electricity for
two months to 162 independent care
homes local to Drax’s operations across
the UK. This payment freeze allowed
these vital organisations to divert funds
to other priorities, such as PPE, food and
carers’ accommodation.
Not having to pay our energy
bills for two months means
we can redistribute our funds
to buy essential items, like PPE,
to ensure our employees are
supported to give our residents
the level of care they deserve.”
Mike Smith
Chief Operating Officer of Shaw
Healthcare
Supporting our communities
Supporting our customers
We have sought to help our
communities during the
Covid-19 pandemic.
Laptops for Learners
Our Laptops for Learners initiative
provided 853 laptops, each with three
months of pre-paid internet access,
to over 50 schools and colleges local
to our sites across the UK. The
initiative has enabled students at our
partner schools in England and
Scotland to continue to access
lessons from home.
Online educational resources
We launched an online offering to
make sure students were able to
continue learning. This included
creating virtual tours of our assets
and educational content, delivering
webinars to university students,
and providing a virtual experience
of work in partnership with Oak
National Academy.
This donation of laptops
from Drax is going to make
a huge difference to the lives
of pupils currently without
access to online educational
resources – as well as our
whole school community
after the Coronavirus
lockdown is over.”
Ian Clennan
Head Teacher of Selby Community
Primary School
Throughout the year, we
continued the vital supply
of power to around 300,000
UK businesses, including
organisations most affected
by the pandemic, such as care
homes, hospitals, schools,
and retailers.
Debt support
We focused on providing extra help
for our customers facing financial
hardship due to Covid-19. We retrained
call centre colleagues to equip them
with the skills needed to help prevent
debt and to connect businesses with
the support they might need, including
access to Government-backed loans
and expert financial help.
We created options for smaller
businesses and organisations
struggling at this time. For those
unable to keep their accounts in
balance or pay in full, we created
deferred payment plans. We also
extended current energy prices for
three months to 4,000 customers
coming to the end of their contracts,
giving those businesses an
opportunity to focus on more pressing
concerns related to Covid-19.
We donated £150,000 to the specialist
debt charity Business Debtline. The
funds are being used to set up and run
a dedicated webpage and phoneline
for our SME referrals over the next two
years. This will help businesses recover
from the crisis and aims to support
their long-term security.
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System stability
Why is there a growing
importance for system
support services?
Keeping the lights on requires
not just electricity generation,
but also a range of non-
generation activities which
help provide stability, flexibility
and reliability, to ensure that
electricity supply meets
demand, second-by-second.
Electricity must be transported the
length of the country, and levels of
generation must be managed so they
are exactly equal to levels being used
(i.e. balanced), and properties like voltage
and frequency must be minutely
regulated across the whole network.
Ensuring all this happens smoothly relies
on the system operator – National Grid –
working with power generators like Drax
to provide services in addition to power
generation that keep the power system
in operation, stable and balanced. We
call these system support services.
Table 1
Generation type
Power generation
Frequency response
Reactive power
Voltage management
Inertia
Black start
Reserve power
Biomass
Pumped
storage
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Gas
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Examples of system support services:
Historically, coal and gas-fired power
stations were able to deliver these
services as an inherent by-product of
producing reliable baseload electricity.
Now, coal and older gas plants are
being closed down 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. Whilst solar
generation may be more predictable
than wind, it does not provide any
system support services. As demand
for system support services increases,
there are fewer assets, such as large
power stations, able to provide them
(see Table 1 below). This is increasing
the cost of operating the system
and is a growing source of value
for generators like Drax which can
provide these services.
Frequency response – The
automatic change in generation
output, or in demand, to maintain a
system frequency of 50Hz. Frequency
response is required every second of
the day.
Hydro Nuclear
Solar
Wind
connector Batteries
Inter
Yes
Yes
Yes
Yes
Yes
Partial
Partial
Yes
No
No
Partial
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
No
No
Partial
Partial
Partial
No
No
Partial
Yes
Partial
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.
Inertia – The stored energy in
synchronous generators (i.e. large
spinning mass such as a biomass or
pumped storage turbine) which slow
down the rate of changes in system
frequency.
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.
Reserve – The system operator must be
able to ensure a balance between demand
and generation at all times to prevent
power cuts. This increased and decreased
generation is sometimes referred to as
headroom and footroom. Managing
demand can also be used to the same
effect. As we become more dependent
on intermittent renewables, we believe
that the system operator will require
more dispatchable plant like biomass and
pumped storage, which can turn up when
wind speed drops and, crucially, turn down
when wind speeds are high.
Pumped storage is particularly useful as,
in addition to providing a full range of
generation and non-generation services
to the system operator, it allows large-
scale wind generation to be stored as
hydro-electricity at times of excess
electricity production (by using energy
from excess wind generation to pump the
water to storage), before releasing it back
into the electricity grid when required. By
way of comparison Cruachan Power
Station is four times as big as the world’s
largest battery and can run at full load for
fifteen hours.
36 Drax Group plc Annual report and accounts 2020
System support services and Drax:
Drax operates a portfolio of flexible,
renewable and low-carbon generation,
which is able to provide all of these
services. As demand for these services
increases, Drax is able to contract with
the system operator National Grid to
provide a range of non-generation
services, such as a six-year contract
worth up to £5 million per year
awarded to Cruachan for the
provision of inertia in western
Scotland. The contract does not
require Cruachan to produce
electricity, but to be synchronised
with the electricity system.
Drax also makes its assets available in
the short-term balancing mechanism
to help National Grid balance the
system on a minute -by-minute and
hour-by-hour basis.
We are remunerated for system
support services via the balancing
mechanism, specific bilateral
contracts for ancillary services with
the system operator. We monitor our
performance by measuring the gross
profit earned from these activities
which we describe as System
Support Optimisation.
System support services are 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
to manage their usage throughout
the day, we expect to provide demand-
side response services to the electricity
market – for example, by reducing
demand at times of lower supply and
vice versa.
The chart below shows the value derived
from system support services and
optimisation:
Gross profit (£m)
2020
2019
2018
118
120
79
Drax Group plc Annual report and accounts 2020 37
Strategic reportGovernanceFinancial statementsShareholder information
Giving customers control
of their energy
How are we supporting
our customers?
Demand-side response
In addition to providing
our customers with renewable
energy, we provide them with
the opportunity to control
and optimise their energy
use, cost and source, and
this helps us in supporting
the energy system.
Haven uses technology to turn down
or turn off customers’ energy demand
in peak times to reduce their costs, and
is designed to always work within the
constraints set by the customer. For
example, we could turn off a water
pump within certain limits or time shift
a production line. It is 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 unit rate.
Reducing demand, typically at peak times
(which are also periods of higher carbon
intensity) is another way in which the
Group is providing system support
services to the UK power system.
Drax is a leading provider of renewable
energy and services to industrial and
commercial customers. Haven Power’s
large portfolio of industrial and
commercial customers offers
opportunities to provide system
support services to the energy market
and create value for our 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 turn off, non-essential equipment
at times of peak demand depending
on the customer’s needs.
The latest customer to sign up for this
service is Sundown Products, a large
industrial site with a range of heavy
machinery, providing another new type
of asset to control as Haven look to
broaden their portfolio and knowledge
base across different technologies.
38 Drax Group plc Annual report and accounts 2020
Electric vehicles (EVs)
Battery power
Drax has developed a solution aimed
at making it easier for companies,
especially those with fleets, to
transition to EVs. SES Water was
the first partner to take this bespoke
package, which includes vehicle
suitability assessment, charging
infrastructure, operating software,
vehicle telematics, maintenance
services, and the renewable electricity
needed to power the vehicles.
Our energy expertise enables us
to approach the challenge of
electrification from a different angle,
considering on-site energy
requirements and deploying smart
charging technology that delivers cost
and environmental benefits without
negatively affecting business-as-usual.
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.
You can read more about this on our
electrification for business website
www.energy.drax.com
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 with
energy management solutions.
Drax Group plc Annual report and accounts 2020 39
Strategic reportGovernanceFinancial statementsShareholder information
Engaging our stakeholders
Why is engaging with our
stakeholders 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
The quality of the Group’s
decision making is richer when
we actively consider the views
of stakeholders.
From our shareholders to our
colleagues and from environmental
NGOs (eNGOs) to regulators, we
recognise that our decisions have
an impact far beyond our business.
We proactively seek to understand
the needs of our stakeholders and
act upon them to better deliver our
purpose: to enable a zero carbon,
lower cost energy future.
Stakeholder relations
The world around us is evolving rapidly,
and the expectations on the business
are changing too. More than ever before,
our role in supporting our stakeholders
is central to our strategy. From tackling
climate change, to responding to Covid-19
to levelling up the economy, our aim is to
be a force for positive change in the
communities where we operate and in
addressing some of the major global
challenges affecting us all.
We recognise that delivering long-term
value for our shareholders and customers
is closely linked to delivering good
outcomes for our climate, environment
and communities. These factors continue
to drive changes in regulation, policy and
public attitudes. Therefore, Drax takes
great care to anticipate and respond
effectively to the changing world. To
that end, the views of all our stakeholders
forms a core part of the decision-making
process of the Board and the Group.
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 them.
The Board receives regular reports
on stakeholder engagement including
from the Corporate Affairs and Investor
Relations functions. This ensures that
the Board takes into account the views
of our stakeholders when making
strategic decisions.
Drax’s Communications Strategy
contains our stakeholder engagement
plan. Presented to the Board at least
annually, this sets out and provides
oversight of how the Group intends to
engage stakeholders. In addition, the
Board engages with key communications
campaigns to better understand the
needs of those stakeholders that our
campaigns are targeting. We employ
dedicated teams to engage both
proactively and reactively with specific
stakeholder groups. Our teams include
stakeholder relations, strategic
communications, investor relations, HR,
internal relations, sustainable business,
business ethics, media relations and
digital engagement.
The methods of engagement we use
vary according to the issue and the
stakeholder concerned. As Drax changes
and grows, we expect the scope and
breadth of our engagement with
different stakeholders to also evolve.
The following pages 40 to 45 set out the
broad stakeholder groups we identified
and engaged with in 2020. It also
highlights their key concerns, why and
how we engaged, and how we responded.
40 Drax Group plc Annual report and accounts 2020
Companies Act,
Section 172 Statement
The directors have a duty to
promote the success of the
Company, having regard to a range
of matters and stakeholders. The
Board recognises that decisions
taken today will shape both the
longer-term performance of the
business and its impact on our
various stakeholders.
The Board is responsible for
engagement with a range of
stakeholders, and believes that
considering the interests of our
stakeholders in key business
decisions is fundamental to the
Group’s ability to deliver sustainable
value creation. This consideration
enables Drax to have a positive
impact on the environment, our
communities and wider society
over the longer term.
The following pages explain how
during 2020 the Board had regard
to those matters set out in Section
172 of the Companies Act 2006:
On pages 40 to 45 we set out
the Board’s, and more widely
the Group’s, comprehensive
engagement with stakeholders.
On pages 61 to 63 we describe
how we seek to maintain our high
standards of business conduct.
On page 88 we describe how the
Board responded to the Covid-19
pandemic, including decisions
taken to support the workforce
and wider community.
On pages 90 and 91 we describe
the Board’s leadership of
stakeholder engagement, including
a focus on Board decision-making
and stakeholder and long-term
considerations.
On page 92 we describe the Board’s
engagement with the workforce.
On pages 32 and 33 we describe
the Board’s oversight of TCFD and
climate-related risks, and in
Sustainable Business on pages 48
to 63 we describe the impact of
the Company’s operations on the
environment and the community.
Understanding the needs of
our stakeholders is essential
to our long-term success
Engagement takes place at many
levels of the business and a judgement
is made on a case-by-case basis on
whether engagement is required by
the Board, Executive Committee, senior
management or at the operational level.
The Group Head of Public Affairs
maintains a detailed map of key
stakeholders, both internal and external,
the concerns they’ve raised and the date
of the last meeting. Management keeps
under review the relevant stakeholders
that may be affected by major decisions.
To ensure clear feedback, the Board
receives regular reports from the CEO
on key stakeholder relations activity,
current issues and the relevant feedback
received from stakeholder interaction.
These reports are supported by the
Group Director of Corporate Affairs,
the Corporate Affairs team and the
relevant owners of direct stakeholder
engagement.
The Board has a duty to promote the
success of the Company, as set out in
Section 172 of the Companies Act 2006.
Supporting this, Board and Executive
Committee discussions – and
accompanying papers – include
information on the stakeholders likely to
be affected by items under discussion
and the likely impact. This ensures that
the interests of all relevant stakeholders,
and the need to act fairly between
members of the Company, are considered
in decision-making.
The most recent detailed review of
stakeholder activities was presented to
the Executive Committee and the Board
in October 2020.
Our stakeholders
Workforce
Key concerns
Beyond Coal strategy, diversity and
inclusion, response to Covid-19, wellbeing,
culture and values, future strategy,
trade union relations, learning and
development, career progression,
Health & Safety, reward and recognition.
Why we engage
To enable employees to be better
informed and able to contribute to the
delivery of our purpose and strategy,
whilst creating a safe and engaging
culture and environment where our
employees feel valued, respected and
listened to. We want all employees to
feel they can grow, develop and make a
meaningful contribution to our strategy,
purpose and communities, whilst building
resilience to cope with the context in
which we are operating.
How we engage
We maintain regular dialogue with our
workforce through our engagement
(MyVoice) forums, colleague briefings,
weekly updates and Q&A from our CEO
and our pulse and annual engagement
surveys.
Launched in 2019, the MyVoice forums
align to our operating model and forums
representing each of the business areas.
Each forum comprises sufficient colleague
representatives relative to the size of the
business, and meet formally each quarter
and informally as regularly as each forum
feels is appropriate for local needs.
Representatives are drawn from across
the relevant business unit, and each forum
chair has been selected by membership
vote. The chairs of each forum come
together quarterly to discuss workforce
issues across the business, and discuss
topics where workforce feedback has been
sought by the Board. The chairs then meet
with the Chair of the Board of Directors
and CEO to discuss the key issues raised,
with feedback from these meetings then
shared with all forum members.
Matters discussed during 2020 included
diversity and inclusion, how effectively
our Covid-19 response was communicated,
colleague wellbeing in lockdown, and how
colleagues would prefer to work in future.
Employees are also able, anonymously,
to ask questions of the CEO (“Ask Will”)
on any subject. The CEO responds to the
latest questions in his weekly email to
all colleagues, where he also shares his
thoughts and highlights of the week.
How we’ve responded
We’ve listened to and acted on feedback
from both the MyVoice forums and other
colleague interactions more broadly. This
included introducing informal and formal
flexible working policies, and a working from
home policy and guidance, developing our
diversity and inclusion strategy, developing
and delivering plans to further support
colleague wellbeing including: a dedicated
intranet resource; Mental Health Awareness
training for managers; building resilience
e-learning for all colleagues; raising further
awareness of existing wellbeing benefits
available and a step challenge to encourage
physical fitness and (virtual) social
connection, and creating a dedicated
intranet resource to clarify the latest
guidance and information about Covid-19.
In 2020 employees asked over 1,300
questions in “Ask Will”. Subjects ranged from
employees enquiring about the strategy
and challenging the CEO so they could gain
a deeper understanding of what we do and
plan to do, to what Drax is doing to help
tackle climate change, what employees can
do individually and Will’s own views. Other
topics included 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 increasing our
Cyclescheme limit to £2,000, as part of our
voluntary benefits offering; our CEO making
a statement about Black Lives Matter; and
doing more to embed diversity and inclusion
through people stories.
Following the coal closure announcement,
consultation on all key areas was
undertaken with trade unions and
employee representatives. Feedback from
this process was considered, allowing the
Board to assess the process undertaken to
date and consider further measures to be
implemented, for example resulting in
changes and enhancements to the financial
and retraining packages.
We also strengthened our Health and
Safety function, with the recruitment
of a new role of Group HSE Director.
You can read more about our
activities on pages 58 to 61 and 92.
Drax Group plc Annual report and accounts 2020 41
Strategic reportGovernanceFinancial statementsShareholder information
Engaging our stakeholders continued
Engaging with stakeholders
Our stakeholders continued
Shareholders
and investors
Key concerns
Drax strategy, Covid-19 response, capital
allocation and dividend policy, the
Capacity Market, share price, financial
and operational performance, biomass
sustainability, funding, engagement with
policy makers, and remuneration.
Why we engage
Engagement allows us to understand
the concerns and priorities of current
and prospective investors, and lenders.
We can then take these into account
in our decision-making in areas such
as ESG matters; executive pay; dividend
and longer term capital allocation policy;
as well as strategy.
How we engage
We actively engaged with shareholders
to explain the impact of Covid-19 on the
Group. In addition to our full and half-year
results we issued a trading update in April,
early in the pandemic, in which we set out
our expectations for the Group as a result
of Covid-19. Reflecting the constraints on
face-to-face meetings, most meetings
have been calls and video calls with
existing shareholders and new investors.
We engage through a wide range of
channels including our website, AGM,
full-year and half-year results. We also
have an ongoing programme of investor
relations meetings. The Chair and Senior
Independent Director are available to
speak with investors. In 2020 the Chair
of the Remuneration Committee wrote
to a number of shareholders and
institutional bodies regarding executive
pay, outlining how we were formulating
the Directors’ Remuneration Policy in
response to feedback provided from
engagement undertaken during 2019.
How we’ve responded
Reflecting feedback from investors and
an investor perceptions study completed
in 2019, we continued to develop our
programme of ESG reporting and
engagement, which includes developing
our reporting towards the disclosure
requirements for TCFD, which we include
in this year’s annual report. Our Head of
Investor Relations and Head of Climate
Change undertook an ongoing
programme of ESG focused meetings
with shareholders and investors, primarily
focused on biomass sustainability and
carbon accounting.
Engaging stakeholders through
a new approach to negative
emissions
There is scientific consensus that to
get to “net zero” emissions, we need to
address emissions from key sectors that
cannot decarbonise as much or as fast
as others. Examples include aviation,
heavy industry and agriculture. This
means that in addition to our efforts
to reduce emissions, we also need to
invest in technologies that remove
carbon from the atmosphere. Leading
expert bodies such as the Climate
Change Committee, Royal Society,
Royal Academy of Engineering and the
Electricity System Operator recognise
that these technologies will play a
crucial role in getting to net zero.
In 2020 the Group engaged with a
range of stakeholders on the role of
biomass and negative emissions in the
energy transition and a post-Covid-19
green recovery. The stakeholders
included Government, local MPs,
leaders in industry and business, NGOs,
think tanks and academics.
The Group’s CEO, Will Gardiner, played
a key role in leading the debate on
negative emissions, climate change
and the importance of Drax’s role in the
energy transition. He highlighted our
plans to combine sustainable biomass
with BECCS, which the International
Energy Agency recently described as
the most mature of carbon capture
technologies. Reflecting the cross-
sectoral need for negative emissions
technologies, a broad group of
companies and industry bodies
launched the Coalition for Negative
Emissions in October 2020.
The Coalition ranges from farming to
aviation and represents hundreds of
thousands of workers across some of
the UK’s most critical industries. The
Coalition jointly wrote to the UK
Government outlining a shared vision to
build back better from Covid-19 as part
of a sustainable and resilient recovery.
Enabling the fulfilment of this vision is the
development of pioneering projects that
can remove carbon from the atmosphere.
Drax has also been championing the
potential of the Humber region to lead
a green industrial revolution including
by deploying BECCS at Drax. A study
by consultancy Vivid Economics
(November 2020), commissioned by Drax,
revealed that tens of thousands of jobs
could be created and supported in the
Humber region.
To make this happen, cutting edge carbon
capture and hydrogen technologies need
to be deployed to decarbonise industry
and deliver a Zero Carbon Humber. With
the right policy framework, these new
jobs could begin to be realised as soon
as 2024. Developing BECCS at Drax could
support thousands of jobs at its peak,
including in construction, supply chain
and the wider economy. This could
kickstart a new carbon capture and
hydrogen industry in the UK.
The Prime Minister’s ‘Ten Point Plan for
a Green Industrial Revolution’, published
in November 2020, increased support
for carbon capture and storage projects
and accelerated timeframes for delivery.
It also recognised the role of carbon
capture and storage in helping
“decarbonise our most challenging
sectors, provide low carbon power and
a pathway to negative emissions”. In
addition, it acknowledged the creation
of “SuperPlaces” in areas such as the
Humber where these technologies could
be deployed.
42 Drax Group plc Annual report and accounts 2020
Communities and
local authorities
Customers
Government and
political bodies
Key concerns
Future opportunities for employment,
investment, tackling climate change,
our local environmental impact,
community initiatives and sponsorship,
action in response to Covid-19.
Key concerns
Energy costs, response to Covid-19,
customer service support, Third Party
Intermediary relationships, sales and
product details, energy efficiency,
managing their own carbon footprint.
Why we engage
Drax is an active participant in the
communities in which it operates. Strong
community relationships strengthen
our licence to operate in those areas.
Why we engage
Engagement allows us to better
understand our customers’ needs and
how we can deliver continuous
improvement in customer service.
How we engage
We engage regularly with the
communities around our businesses
through supporting local initiatives, and
holding quarterly meetings and formal
drop-in sessions.
How we engage
Our Customers business engages with
our customers through a variety of
channels including social media, our
website, by phone and through our
complaints procedure.
How we’ve responded
We listened to how customers were
being affected by Covid-19 and took
several measures to support them: we
retrained call centre colleagues to equip
them with the skills to help customers in
need, created deferred payment plans
and donated £150,000 to Debtline, a
specialist debt charity.
We provided free gas and electricity for
two months to care homes local to our
operations. You can read more about
these actions on page 35.
We also engaged with Government on
behalf of customers, advocating for
access to Government support for SMEs
and micro-businesses.
How we’ve responded
In February 2020 we donated £25,000 to
support the local community around Drax
Power Station which had been adversely
affected by severe flooding. We donated
$30,000 to help families and businesses
in the parishes around our pellet mills in
Louisiana and Mississippi in the US,
adversely affected by both the Covid-19
crisis and tornadoes in the Monroe area.
In September 2020 we donated $20,000
to help families in north eastern and
central Louisiana who were adversely
affected by Hurricane Laura.
As a board member and funding partner
of the Galloway Glens Landscape
Partnership Scheme, we support its
work to create local opportunities for
a sustainable future. This work includes
the recovery of salmon fish stocks,
which is a big issue locally and across
Scotland, and working together to
support STEM education.
Colleagues have undertaken a range
of volunteering and charitable work.
This has included volunteering, outreach
to partner schools in our communities,
Group-wide fundraising days and
colleagues’ personal fundraising efforts,
for which Drax offers matched funding.
Key concerns
Energy costs, decarbonisation, Carbon
Price Support, Brexit, Capacity Market,
climate change mitigation, biomass
sustainability, Renewable Obligation
Certificate (ROC) cap, development of
policy to support BECCS, delivery of the
UN Climate Change Conference (COP26),
unabated coal closure, Covid-19.
Why we engage
Constructive engagement with
Government and political bodies is key
to Drax’s purpose to enable a zero carbon
lower cost energy future.
How we engage
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, and
the need for system stability and flexible
generation. For example, in the UK we
engage with political stakeholders at
party conferences through all-party
groups. 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. You can read more about
this on page 136.
Our political engagement policy, which
was developed in direct response to
shareholder feedback, remains
unchanged from 2019 and is available
on our website: drax.com/about-us/
drax-political-engagement-policy/
How we’ve responded
Throughout 2020 Will Gardiner
participated in regular industry-wide
forums with the Secretary of State for
Business Energy and Industrial Strategy
and the Minister for Energy on the
response to Covid-19. In response to
requests from several political bodies we
commissioned Vivid Economics to assess
the socio-economic impact of developing
BECCS at Drax Power Station. Will Gardiner
has joined the Scottish Government’s
Green Recovery Taskforce, which was set
up by the First Minister of Scotland to
support Scotland’s recovery from Covid-19.
Drax Group plc Annual report and accounts 2020 43
Strategic reportGovernanceFinancial statementsShareholder information
Engaging our stakeholders continued
Our stakeholders continued
Non-governmental
organisations (NGOs)
Regulators and
network operators
Schools and
colleges
Key concerns
Biomass sustainability, coal and gas,
climate change, Carbon price support.
Why we engage
Engagement with NGOs helps us to
challenge and enhance our practices
on behalf of the wider society. We warmly
welcome engagement with NGOs and
the advice and guidance they bring to
our operations. This year, for example,
we engaged with Greenpeace, WWF,
RSPB and many other eNGOs.
How we engage
We engage directly with NGOs on a
wide range of topics from biomass
sustainability through to carbon pricing.
For example, our new Responsible
Sourcing Policy for woody biomass
addresses stakeholder issues and
was developed following a series of
roundtable discussions.
How we’ve responded
In May 2020 Drax issued a consultation
to key stakeholders – including NGOs –
on a new Biomass Carbon Calculator. It
lasted until June 2020 and in November
2020 we published a summary of
responses, alongside an amended
Calculator that accounted for stakeholder
views. The Calculator is available on our
website: www.drax.com/sustainability/
the-biomass-carbon-calculator/
In 2020 we asked the Independent
Advisory Board to review our sourcing
policy. This came about in light of the new,
scientific understanding of the climate
impacts of woody biomass developed by
the UK’s leading forest science body,
Forest Research. The IAB confirmed that
our sourcing policy was in line with the
Forest Research recommendations.
Key concerns
Targeted Charging Review, smart meter
installation, energy trading compliance,
environmental compliance, Health &
Safety compliance, compliance with
biomass sustainability policy, system
support and ancillary services markets,
ROC compliance, and business ethics
compliance, including data protection.
Why we engage
Engagement with Ofgem and the
Electricity System Operator allows us
to promote and deliver a secure, reliable
network at least cost to the consumer.
We support a level playing field for all
technologies, enabling an efficient and
investable market. In addition,
engagement with Ofgem, environmental
agencies and the ICO enables us to
promote best practice and ensure we
remain compliant with latest guidance.
How we engage
We engage directly with stakeholders
and through industry associations.
For example, we engage with relevant
teams at Ofgem and National Grid on
the growing need for stable markets
and appropriate support mechanism
to provide system support services
to the grid.
How we’ve responded
Following a request from Ofgem on the
role of pumped hydro storage in the
future energy system, we’ve created a
presentation outlining potential support
mechanisms and shared with Ofgem’s
market development team.
We are also in discussion with Ofgem
on potential market solutions to deliver
system support services that enable
greater deployment of intermittent
renewables while also maintaining
safe and stable networks.
Key concerns
Skills to support future employment,
local environmental impact, community
initiatives and sponsorship, “levelling up”
and supporting STEM jobs.
Why we engage
Our aim is to improve skills, education,
employability, and opportunities, with
a particular focus on supporting under-
represented sections of society.
Engagement with schools and colleges
allows us to promote interest in science,
engineering and the energy sector and
to support educational institutions in
developing the workforce of the future.
How we engage
We engage directly with schools and
colleges and offer virtual learning
opportunities, in addition to free access
for all students to our site tours during
term time. Our partnerships with
organisations such as Teach First support
the delivery of our activities with schools.
How we’ve responded
In October 2020 Drax committed
£180,000 in a new five-year partnership
with Selby College. This will enable the
college to deliver community education
programmes and support for retraining.
Such initiatives will help students develop
the skills needed in innovative clean
technologies which will assist in the
delivery of a zero carbon economy in
the future.
Following the temporary closure of our
Visitor Centres and site tours in response
to Covid-19, we expanded our online
educational offering in 2020. To provide
opportunities for continued learning, we
also donated laptops with internet access
(see page 35 for more information) and
delivered virtual tours, university
webinars, and a virtual experience of work
in partnership with Oak National
Academy.
We fund PhD studentships on a range
of different topics, including engineering,
policy and forestry.
You can read about our work supporting
young people and teaching them the skills
for a green economy on page 56.
44 Drax Group plc Annual report and accounts 2020
Suppliers and
contractors
Think tanks
and academics
Trade and industry
associations
Key concerns
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) and the end of the EU
transition period.
Why we engage
We’re committed to conducting business
with honesty and integrity and in
accordance with applicable laws and
regulations. Strong relationships with
suppliers and contractors allow us to work
together to ensure health and safety risks
are identified and properly managed,
promote high standards and ensure
realistic, and shared, expectations on
project delivery.
How we engage
Drax’s procurement, business ethics and
sustainability functions engage directly
with suppliers around key issues to ensure
our values and our policies are effectively
incorporated into and upheld throughout
our supply chain. We also seek the views
of suppliers and contractors to
collaborate on improvements in standards
and meeting our obligations under law,
and regulations which are in keeping with
our values.
How we’ve responded
In preparation for the end of the EU
transition period, we’ve engaged with
several of our largest suppliers. This
engagement has helped inform our
internal Brexit preparation led by the
Chief Transformation Officer. In turn,
we’ve used this information to support
the Government in the development of
new procedures including on decisions
about critical goods. In October 2020, the
Board approved a new Supplier Code of
Conduct which we are rolling out to all
suppliers, to support understanding of
how we can work together to meet high
standards.
Key concerns
Carbon pricing, carbon capture and
storage (CCS) policy, biomass
sustainability, future energy policy.
Key concerns
Energy policy, reputation of energy sector,
reputation of biomass sector, Health &
Safety best practice.
Why we engage
Active membership of a wide range of
trade and industry associations allows
us to keep track of best practice in our
sector and other industries.
How we engage
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.
How we’ve responded
Drax’s Director of Corporate Affairs sits
on the Board of Energy UK. Last year,
Energy UK’s Board took a role in
strategically advising the Brexit working
group on areas of focus ahead of the end
of the EU transition period. This included
enhanced engagement between the
industry and ministers.
We actively engage at a working level on
shared interests in the energy sector such
as carbon pricing, education and skills. We
also work with businesses from all sectors
on shared national and regional priorities.
This includes being members of Scotland’s
Economic and Social Forum and the
Northern Powerhouse Partnership.
Andy Skelton, CFO, represents Drax on
the board of the Northern Powerhouse
Partnership, and Executive Committee
member Mike Maudsley is a member of
the CBI Yorkshire.
Why we engage
Engagement allows us to keep abreast
of the latest thinking, consider likely
policy developments across a range of
areas and consider new opportunities
for innovation and collaboration.
How we engage
We engage with think tanks and
academics through direct participation
in events and round tables. We directly
sponsor several PhDs at British
universities. We established an
Independent Advisory Board (IAB) on
sustainable biomass, which advises
Drax on feedstock options, forest science
and the role of sustainable biomass in
our climate change mitigation activities.
This allows us to follow the latest
scientific research and best practice.
How we’ve responded
In response to concerns raised by think
tanks and academics regarding biomass
carbon neutrality, we performed and
published forest catchment area analyses
which were discussed by the IAB.
The IAB meets four times per year and
regularly provides feedback and
recommendations to Drax. Meeting
agendas, and a high-level summary of
the minutes and recommendations, are
published on our website www.drax.com/
sustainability/independent-advisory-
board-on-sustainable-biomass/. You can
read more about the IAB on page 55.
We also sit on steering groups of several
multi university research projects and
provide industry input, for example the
SuperGen Bioenergy consortia in the UK,
and International Energy Agency –
Bioenergy work programmes.
Drax Group plc Annual report and accounts 2020 45
Strategic reportGovernanceFinancial statementsShareholder information
Working
hard to
support our
customers
We’ve been working hard
since March 2020 to help
our customers who have
been affected by Covid-19.
For example, I worked with
a hairdressing business to
understand their situation
and needs and we set up a
mutually agreeable payment
plan and put the customer in
touch with Business Debtline
(BDL). BDL is a charity we’ve
worked with throughout the
pandemic, including with a
donation of £150,000. They
provide free debt advice and
dedicated support to business
owners and helped our
customer with budgeting,
prioritisation and contacting
creditors. We’re still working
with the customer to help
them get back on track.
They’re feeling more
confident about overcoming
their challenges and building
a more resilient business.”
Taylor Moon,
Customer Collections Advisor,
Customers
Clatteringshaws Loch and Dam,
part of the Galloway Hydro Scheme
46 Drax Group plc Annual report and accounts 2020
Working in
partnership
with our
communities
Working in partnership with
our communities is a core
part of how we do business.
We support the Galloway
Glens Landscape Partnership
(GGLP) which aims to promote
the area’s heritage, boost the
local economy and support
sustainable projects. We
joined the GGLP and Dumfries
& Galloway Council at a
Climate Emergency public
meeting, to provide an insight
into how our Galloway Hydro
scheme will play its part in
helping the region achieve
its net zero carbon target by
2025. We’re also supporting
the Galloway Fisheries Trust,
through a £17,000 donation.
to improve water quality and
habitats. I’m proud of the
support Drax provides these
projects and the innovative
and exciting learning
opportunities they present
for young people and local
communities.”
Stuart Ferns,
O&A Manager, Galloway Hydros
Drax Group plc Annual report and accounts 2020 47
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business
What is our approach
to sustainable business?
At Drax, we believe that achieving a positive
economic, social and environmental impact
is key to delivering long-term value creation.
Sustainable business governance
The Board has ultimate responsibility for
the Group’s sustainability performance
and receives quarterly environment,
social and governance updates from the
CEO. The Executive Committee, chaired
by the CEO, oversees performance.
The Group Director of Corporate Affairs
leads Drax’s sustainability programme and
is a member of the Executive Committee.
Drax is a participant of the United
Nations Global Compact (UNGC) and
sits on the UNGC UK Advisory Group.
Our priorities
We have identified non-financial priorities
that are material to our business and
important to our stakeholders. Our 2020
progress is reported under each priority
area as follows:
Carbon negative
Our ambition is to become
carbon negative by 2030
Forest positive
Evidencing that our biomass
sourcing delivers beneficial
climate outcomes, promotes
sustainable management,
protects the environment,
and supports people and
communities
People positive
Our ambition is to improve skills,
education, employability and
opportunity for 1 million people
by 2025
Carbon emissions page 49
Environmental impact page 51
Sourcing sustainable biomass
page 53
Catchment Area Analysis page 55
Healthy Forest Landscapes page 55
Independent Advisory Board page 55
Positive social impact page 56
Safety, health and wellbeing page 57
People, culture and values page 59
Ethics and integrity page 61
48 Drax Group plc Annual report and accounts 2020
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
S
h
a
r
e
h
o
d
e
r
i
l
n
f
o
r
m
a
t
i
o
n
Carbon negative
Our ambition is to become
carbon negative by 2030
Carbon emissions
Tackling climate change is at the heart
of our purpose and we are committed
to helping the UK and the wider world
to achieve its climate change targets.
Our negative emissions ambition
Drax’s ambition is to become carbon
negative by 2030, using technologies
such as bioenergy with carbon capture
and storage (BECCS) to remove more
carbon from the atmosphere than we
produce throughout our direct business
operations. We are committed to the
Science Based Targets initiative
(www.sciencebasedtargets.org), to
further assure that our target is aligned
with climate science.
Innovating to decarbonise our business
Carbon capture, utilisation and storage
is part of our business strategy. In 2020,
we installed our second BECCS pilot
at Drax Power Station, whilst moving
our full-scale design into the next stage
of detailed engineering. Drax is one
of the founding members of the Zero
Carbon Humber Partnership (www.
zerocarbonhumber.co.uk), a consortium
of energy and industrial companies
working to develop the UK’s first zero
carbon industrial cluster by 2040.
Taskforce on Climate-related
Financial Disclosures
We are committed to the 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). Our Climate Policy outlines our
approach (www.drax.com/about-us/
compliance-and-policies). See our TCFD
summary on page 32.
Flexible, renewable and
low-carbon energy
Our Generation business operates a
portfolio of flexible, renewable and
low-carbon assets to support the energy
system’s growing use of intermittent
renewable energy. In 2020, 77% of the
power generated by Drax was renewable.
Our Customers business is the largest
supplier of renewable electricity to
businesses by annual consumption
and provides a route to market for over
2,000 renewable generators. For the first
time, 100% of the electricity procured
and supplied by Haven Power and Opus
Energy during the 2019-2020 Ofgem
reporting year was from renewable
sources. Our Customers business also
sold 2.8TWh of gas to customers in 2020.
Our Customers business fuel mix
disclosures are available at:
www.drax.com/opus-sources
www.drax.com/haven-sources
Power generation mix in 2020(1)
(% total output)
Biomass
Coal
Gas
Hydro
75%
8%
15%
2%
(1) Commercial generation output
Drax Group plc Annual report and accounts 2020 49
Sustainable business continued
Carbon negative continued
Understanding our carbon emissions
Scope 3
Scope 1
Scope 2
Scope 3
Upstream
Direct emissions
• Coal supply chain
• Natural gas supply chain
• Biomass supply chain
• Supply chain for other fuels
• Supply of sludge to
Daldowie
• Biomass transport from
Drax Biomass to Drax
• Utilities as part of lease
contracts
• Emissions from operational
and capital purchases
• Business travel
• Hotel stays
• Employee commuting
• Coal and natural gas power
generation
• Methane and nitrous oxide
emissions from biomass
• Baton Rouge transit port
• US pellet plant operations
• Large plant vehicles
• Flue gas desulphurisation
Indirect emissions
from electricity
• Hydro electricity
consumption
Downstream
• Recycling, processing and
disposal of waste
• Cruachan electricity imports
• Customers electricity
• Reuse and reprocessing
of ash and by-products
consumption
• Transmission and
• Generation electricity
Distribution
consumption
• Emissions from use of sold
• Drax Biomass electricity
electricity
(FGD) system
consumption
• Emissions from use of sold
• Company vehicles
• Fluorinated gases from
heating, ventilation and air
conditioning systems
• Daldowie pellet plant
natural gas
Carbon emissions
Generation CO2 emissions (1)
Group total scope 1 (2)
Group total scope 2 (location-based) (3)
Group total scope 1 and 2
Proportion of Group emissions within the UK
Group total scope 3 (4)
Biologically sequestered carbon (5)
Total energy consumption
Group total energy consumption
Group total energy consumption within the UK
Unit
2020
2019
2018
ktCO2
ktCO2e
ktCO2e
ktCO2e
%
ktCO2e
ktCO2e
2,682
2,762*
318*
3,080*
95.3*
3,135*
13,273
1,958
2,049
322
2,371
93.2
-
12,795
4,139
4,233
252
4,484
96.5
-
13,019
kWh
kWh
48,253,807,865*
47,090,524,296
46,025,306,198
43,852,816,521
50,269,781,751
48,075,425,472
Note: Carbon emissions are reported against a criterion of operational control. Carbon emissions are reported in units of carbon dioxide equivalent (CO2e) and include
all greenhouse gases as required by the GHG Protocol. A materiality threshold of 75tCO2e/year is applied. For the basis of reporting see www.drax.com/sustainability.
Generation emissions covers all direct emissions from our own business operations that fall under the scope of the European Union Emissions Trading System
(1)
(EU ETS)
Group total scope 1 covers all direct emissions from our own business operations, across all sites
Group total scope 2 covers all indirect emissions associated with our electricity and heat consumption, across all sites
(2)
(3)
(4) Group total scope 3 excludes downstream leased assets
(5)
The biogenic carbon 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
Limited external assurance using the assurance standard ISAE 3000 and based on Drax using the Corporate Greenhouse Gas Protocol, for 2020 data as indicated.
For assurance statement and basis of reporting see www.drax.com/sustainability
*
Direct carbon emissions (scope 1 and 2)
In 2020, our absolute carbon emissions
(scope 1 and 2) increased by 30%
compared with 2019. This reflects an
increase in coal generation in 2020, as
remaining coal stocks were used ahead
of the planned closure of commercial
coal generation at Drax Power Station in
March 2021. In addition, Shoreham Power
Station was fully operational in 2020,
following outage work completed in 2019.
Since 2012, our absolute carbon
emissions (scope 1 and 2) have fallen
more than 85%, with four of the six
generating units at Drax Power Station
converted to biomass from coal.
For breakdown of emissions
by greenhouse gas type see
www.drax.com/sustainability
Energy and carbon reduction initiatives
In 2020, we invested in significant
upgrades to our turbines and associated
equipment at Drax Power Station and
Shoreham Power Station, which will result
in lower carbon emissions and improved
energy efficiency. At Cruachan Pumped
Storage Power Station, work to replace
four sulphur hexafluoride (SF6) circuit
breakers with vacuum circuit breakers
was completed in 2020, reducing the
total potential for emissions from this
source by up to 500 tCO2e per year.
50 Drax Group plc Annual report and accounts 2020
Carbon negative continued
Indirect carbon emissions (scope 3)
We recognise the impact our carbon
emissions have across the value chain.
In 2020, we undertook work with a third
party, to better understand our scope 3
emissions in areas such as purchased
goods and services, and capital
expenditure. We are developing a scope 3
target that will enable us to align to the
Science Based Targets initiative.
The primary contribution to our scope 3
emissions comes from our fuel and
energy related activities. This includes
fuel supply chains, such as biomass,
natural gas and coal. The second largest
contribution comes from the use of sold
products. This includes the end use of
gas purchased and sold by our Customers
business. For further breakdown of our
scope 3 emissions see www.drax.com/
sustainability.
Carbon intensity performance
Between 2012 and 2020, our generation
carbon intensity has fallen more than
80%. This reflects the conversion of four
generating units at Drax Power Station
from coal to biomass, and the expansion
and diversification of our generation
portfolio to include hydro.
Carbon intensity
Generation (1)
Generation emissions
per GWh of electricity
generation
Group emissions
per GWh of electricity
generation (2)
Unit
2020
TWh
18.8
tCO2/GWh
143*
tCO2e/GWh
164*
2019
17.3
113
137
2018
18.3
226
245
(1)
(2)
*
Excluding Cruachan Power Station which utilises electricity import for pumping to balance the grid
Group emissions are total scope 1 and 2 emissions as reported
Limited external assurance using the assurance standard ISAE 3000 and based on Drax using the
Corporate Greenhouse Gas Protocol, for 2020 data as indicated. For assurance statement and basis of
reporting see www.drax.com/sustainability
Generation(3) carbon intensity
(tCO2/GWh)
1000
800
600
400
200
0
000
000
000
000
000
000
000
2012
2013
2014
2015
2016
2017
2018
2019
2020
(3)
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)
Environmental impact
As a major electricity producer and
retailer, and producer of sustainable
biomass fuels, we take our responsibilities
to society and the environment seriously.
We are committed to managing and
monitoring our environmental impact.
We seek to reduce the environmental
impacts caused by our business through
continual improvement of our operations,
with particular focus on emissions to air,
discharges to water, disposal of waste
and the use of natural resources.
Each business unit reports monthly on
environmental incidents and near misses,
and the Board receives monthly reports.
We also seek to respond to, and track
actions taken from, any environmental
complaints made in relation to our
operations. We investigate all
environmental events to ensure that root
causes are established, and lessons are
learned and shared across the business.
Environmental Management Systems
In the UK, our Generation assets are
certified through their respective
management systems to ISO 14001:2015
and are subject to regular external audits.
In the US, our Pellet Production sites
operate under an environmental
management system that is aligned,
but not certified, to the principles of
ISO 14001:2015. During 2020, we
established a platform to collate our
environmental monitoring data for our
US sites. This produces regular reports
and provides alerts as environmental
limits are close to being reached.
In 2020, across our UK sites, we had two
confirmed minor permit breaches related
to air emissions at Daldowie Fuel Plant
during emissions testing. At Daldowie, we
delivered sustained improvements to our
odour minimisation strategy to address
neighbourhood odour complaints, as
required by the Scottish Environment
Protection Agency (SEPA), which
substantiated six complaints in 2020. In
September 2020, we commissioned an
additional regenerative thermal oxidiser,
to further treat exhaust air before it is
released to the atmosphere.
We are working to resolve an odour issue
at Drax Golf Course, due to improper
material being brought on site by a third
party. As ultimate landowner, we are
working with the Environment Agency
(EA) and other stakeholders to resolve
the issue.
In 2020, across our US sites, we had
two notices of non-compliance issued
by the authorities. One notice related to
incorrect handling of wet electrostatic
precipitator (WESP) material at our
LaSalle site. The other notice related
to exceeding VOC emissions limits at
our Amite site in 2018. In 2020, the
Mississippi Department of Environmental
Quality (DEQ) and Drax agreed a
$2.5 million settlement for the violation
of VOC emissions limits, dating between
2016 and 2020. During 2020, the Board
was kept informed and tracked progress
in addressing corrective actions.
Drax Group plc Annual report and accounts 2020 51
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
Carbon negative continued
We established an open and direct
partnership with the DEQ in the
US states in which we operate to focus
on settling the emissions to air actions
and agreeing a path forward. We
commissioned a full third-party
environmental audit covering each of our
US sites, with a focus on positive action
plans to improve our environmental
performance, and we track our actions
to closure on a monthly basis.
Emissions to air
At Drax Power Station, we have focused
on the new requirements of Annex V
of the EU Industrial Emissions Directive
and established a transition plan for
compliance. We continue preparations
to deliver improved performance
considering the Industrial Emissions
Directive. These new Best Available
Techniques Reference Document (BREF)
levels will become the reference point
for setting permit conditions and have
included tighter limits for emissions of
nitrous oxides (NOx), sulphur dioxide
(SO2), mercury and particulate matter
(PM). Drax Power Station will operate
within BREF limits from August 2021.
Water use
Our thermal generation sites use water
for operational and cooling processes.
Losses occur through steam and ancillary
processes, and the remainder is
discharged to the environment. In line
with our permit requirements, procedures
are in place to manage water system
efficiency and usage and to ensure
that all discharge consent limits are met.
Between 2019 and 2020, total water
abstracted for thermal generation use
increased. This reflects a new borehole
permit at Blackburn Power Station and
increased generation output at
Shoreham Power Station in 2020.
In 2020, 4,289,825,847 m3 of water
reported as abstracted was used for
hydro generation at the Galloway and
Lanark Hydro Scheme. This volume is
therefore not consumed and is returned
to the natural environment.
At Cruachan Pumped Storage Power
Station, water is abstracted by pumping
from Loch Awe into the upper reservoir,
when grid generation is surplus. Water
is then released back into Loch Awe
when electricity generation is required.
We closely monitor the arrangements
for the cycling of this water and report
as required to SEPA.
7,104
986
415
746
601
35
625
71
2019
4.76
1.68
1.76
0.04
2019
-
-
-
-
Thermal Generation emissions to air by fuel type
Unit
2020
2019
Biomass generation (1)
Nitrogen oxides
Sulphur dioxide
Particulates
Coal generation (2)
Nitrogen oxides
Sulphur dioxide
Particulates
Gas generation (3)
Nitrogen oxides
Carbon monoxide
t
t
t
t
t
t
t
t
6,971
1,806
419
1,949
1,209
147
578
284
(1)
(2)
(3)
Biomass generation covers units 1, 2, 3 and 4 at Drax Power Station
Coal generation covers units 5 and 6 at Drax Power Station
Gas generation covers Blackburn, Damhead Creek, Rye House and Shoreham Power Stations
UK Biomass Production (4) emissions to air
Nitrogen oxides
Sulphur dioxide
Carbon monoxide
Particulates
(4)
UK Biomass Production covers Daldowie Fuel Plant
US Biomass Production emissions to air
Nitrogen oxides
Carbon monoxide
VOCs
Particulates
Thermal Generation (5) water use
Total water abstracted
Total water discharged
Unit
t
t
t
t
Unit
t
t
t
t
Unit
m3
m3
2020
3.31
2.24
2.46
0.31
2020
427
567
2,983
489
2020
2019
242,472,306*
231,039,964*
177,215,811
167,953,231
(5)
Thermal Generation covers Blackburn, Damhead Creek, Drax, Rye House and Shoreham Power Stations
Hydro Generation (6) water use
Total water abstracted
Unit
2020
m3 4,289,825,847*
2019
3,370,272,574
(6)
Hydro Generation covers Galloway and Lanark Hydro Scheme
Pumped Storage (7,8) water use
Total water abstracted from reservoir
Total water abstracted from Loch Awe
Unit
m3
m3
2020
2019
294,022,644*
241,452,288*
263,015,328
207,277,224
(7)
(8)
Pumped Storage covers Cruachan Power Station
Excluding volume of water collected via the aqueduct system
Note: “Total water abstracted” covers water data reported to the Environment Agency (EA) and Scottish
Environment Protection Agency (SEPA) as abstraction.
* Limited external assurance using the assurance standard ISAE 3000 for 2020 data as indicated. For
assurance statement and basis of reporting see www.drax.com/sustainability
52 Drax Group plc Annual report and accounts 2020
Forest positive
Evidencing that our sourcing
delivers beneficial climate
outcomes, promotes
sustainable management,
protects the environment,
and supports people
and communities
At Drax we use wood pellets sourced
from sustainably managed working
forests and residues from forest
industries to generate low-carbon,
renewable electricity. Our forest positive
approach to sourcing sustainable biomass
is made up of the following elements:
• Sourcing sustainable biomass
• Catchment Area Analysis
• Healthy Forest Landscapes
• Independent Advisory Board
Sourcing sustainable biomass
We ensure our biomass is sustainable
and compliant with relevant legislation
through Sustainable Biomass Program
(SBP) certification, alongside proactive
supplier engagement, other third-party
certification schemes and our own audits
and checks.
Our 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.
Our Responsible Sourcing Policy for
Biomass outlines our forest biomass
sustainability commitments. 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.
Our forest biomass
sustainability commitments
1. We will reduce carbon
dioxide emissions
We are committed to ensuring our
use of biomass makes a positive
contribution to tackling climate
change and fulfilling the UK’s net
zero by 2050 target.
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.
Supplier compliance with our policies
and appropriate legislation is evidenced
by Sustainable Biomass Program (SBP)
certification, a certification system for
woody biomass, or by our own checks
and third-party audits. We require
suppliers to progress from our own
checks and third-party audits
commissioned by Drax, towards SBP
certification. In 2020, 99% of the woody
biomass we sourced was SBP compliant.
No concerns regarding biomass supplier
sustainability compliance were raised
or escalated to the Group Ethics and
Business Conduct Committee or the
Executive Committee in 2020.
Biomass supply chain emissions
Biomass can only be considered a low
carbon, renewable energy solution when
it can be evidenced that greenhouse gas
(GHG) emissions savings are delivered on
a lifecycle basis, compared to alternatives
such as fossil fuel generation. We
therefore collect fuel and energy data for
each step in the supply chain, enabling
us to calculate lifecycle GHG emissions
for our biomass and to demonstrate
compliance with our 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 200 kgCO2e/
MWh of electricity. In 2020, our average
biomass supply chain GHG emissions
amounted to 109 kgCO2e/MWh of
electricity.
99%
Woody biomass sourced by Drax in
2020 that was SBP compliant
Responsible Sourcing: A policy
for biomass from sustainable
forests is available at
www.drax.com/sustainability/
responsible-sourcing
109 kgCO2e/MWh
Drax Power Station average biomass
supply chain GHG emissions, 2020
Drax Group plc Annual report and accounts 2020 53
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
Forest positive continued
Drax Power Station average biomass supply chain GHG emissions
Average biomass supply chain GHG emissions
kgCO2e/MWh
Unit
2020
109*
2019
124
2018
131
2017
130
2016
122
*
Limited external assurance by Bureau Veritas using the assurance standard ISAE 3000. For assurance statement see www.drax.com/sustainability.
Drax Power Station average biomass supply chain GHG emissions in 2020 (%)
43%
25%
4%
6%
6%
9%
5%
2%
Processing
at origin
Feedstock
transport
Drying
Pelleting
Transport
to port*
Shipping*
Rail to Drax*
Combustion
CH4 & N20
emissions
In 2020, we launched our Biomass
Carbon Calculator, a GHG lifecycle
emission tool designed to improve
the accuracy and transparency of
reporting emissions for wood pellet
supply chains. The calculator has
been externally verified against UK
and EU regulations. It includes all
material sources of GHG emissions,
including categories absent from
other UK reporting tools, such as
methane and nitrous oxide emissions
arising from fuel combustion.
Drax is committed to taking a
leading role in the lifecycle emissions
reporting of biomass, and we are
providing the calculator for open
use to facilitate improved reporting
standards across the industry. For
more information see www.drax.com/
sustainability/the-biomass-carbon-
calculator
Note: includes the biomass supply chain emissions associated with both Drax’s direct operations (Pellet Production business) and third parties.
*
These categories are aggregated in our Biomass Carbon Calculator and the proportion of emissions assigned to transport to port, shipping and rail to Drax
has been estimated
Biomass sources
Biomass supply chain transparency is a key element of our forest positive approach. In addition to our annual reporting, we
provide detailed supply chain information at Drax ForestScope (www.forestscope.info). We respond annually to the CDP Forests
questionnaire and achieved a rating of B in 2020. In 2020 our biomass was sourced from established, responsibly managed working
forests in the US South, Europe, Canada, Brazil and Russia.
Drax Power Station biomass pellet feedstock sources in 2020
Country
USA
Canada
Latvia
Portugal
Brazil
Belarus
Russia
Estonia
Lithuania
UK
Other European
Total
Sawmill and other
wood industry
residues (t)
1,675,929
1,021,444
206,468
12,830
–
106,734
592
29,997
67,161
–
16,357
3,137,511
Branches
and tops (t)
92,934
99,233
–
4,672
–
–
–
–
–
–
–
196,839
Thinnings (t)
1,117,795
13,163
7,922
31,530
–
–
–
10,203
1,019
–
–
1,181,631
Low grade
roundwood (t)
Arboricultural
residues (t)
1,768,873
95,267
453,621
99,015
141,274
2,223
–
45,200
14,952
–
738
2,621,163
–
–
–
470
–
–
–
–
–
–
–
470
Agricultural
residues (t)
24,871
–
–
–
–
–
85,301
–
–
70,086
56,424
236,682
Country
total (t)
4,680,402
1,229,107
668,011
148,516
141,274
108,957
85,893
85,399
83,132
70,086
73,520
7,374,296
54 Drax Group plc Annual report and accounts 2020
Forest positive continued
Catchment Area Analysis
We are committed to sourcing
sustainable biomass that contributes to
the long-term maintenance of growing
forest carbon stock and productivity
and that helps to improve the health and
quality of forests. In addition to our due
diligence processes, we monitor a range
of data about the forests from which we
source, to determine whether biomass
demand is having an impact on regional
forest industries. This allows us to make
informed sourcing decisions.
We have completed eight Catchment
Area Analyses covering Latvia, Estonia,
part of central British Columbia, the
catchment around three mills in the
Chesapeake region in Virginia, seven
pellet mills in south east Georgia, and
around Drax’s own pellet mills – LaSalle,
Morehouse, and Amite. These catchment
areas provide around two thirds of Drax’s
supplies. The analysis evaluates the
trends occurring in the forestry sector
around the plant to determine what
impact the pellet demand may have had
in influencing those trends, positively or
negatively. This includes the impact on
harvesting levels, carbon stock, growth
rate, wood prices, forest management
practices and the production of all
wood products.
In the geographies examined so far, data
collected through our Catchment Area
Analyses provides robust evidence that
we are meeting our Forest Biomass
Sustainability Commitments. For key
findings and our Catchment Area
Analysis reports, see www.drax.com/
sustainability/catchment-area-analyses.
Our intention is to complete Catchment
Area Analyses for the remaining supply
areas within the next two years.
Healthy Forest Landscapes
Drax is jointly pioneering the Healthy
Forest Landscapes (HFL) approach with
Earthworm Foundation. Earthworm is a
non-profit organisation that focuses on
responsible sourcing and is experienced
in working with companies to develop
landscape-scale approaches in
commodity supply chains.
HFL aims to provide an evidence-based
approach to measure and evaluate the
ecological, social and economic impacts
in our supply catchment areas.
The HFL approach measures changes
in the forest landscape using empirical
evidence such as big data from
government statistics and input from
remote sensing technologies, such as
earth observation from satellites. HFL
also uses an Earthworm-developed
socio-economic evaluation methodology
to assess community wellbeing.
The HFL approach assesses four key
metrics – forest cover, carbon stock,
biodiversity and community wellbeing
– which will be used across all our
sourcing areas.
Healthy Forest
Landscapes metrics
Forest cover
All other forest landscape attributes
depend upon forest cover, so
particular attention is paid to trends
in forest cover change.
Carbon stock
Carbon sequestration and storage in
forests is critical to mitigating climate
change, and therefore crucial to
track. Measurement of forest carbon
stock also provides a useful picture
of forests’ continuing productivity.
Biodiversity
Landscape scale biodiversity is
an important indicator of healthy
forest ecosystem functioning, and
is of concern to both local and
international stakeholders.
Community wellbeing
Forests have many impacts on
people who live and work within the
landscape. This metric addresses
social aspects of forest landscape
health, prioritising respect for the
rights of Indigenous Peoples, and
includes socio-economic and
community health, encompassing
industry workers’ rights.
The HFL approach enables Drax to
actively identify opportunities to make
positive interventions which support
healthy forests, communities, or
biodiversity.
In 2020, we trialled several
methodologies to assess the strengths
and weaknesses of each of the four key
metrics. We completed analysis around
our own plants at Amite and Morehouse
and commenced analysis in the
Chesapeake catchment in Virginia.
Over the next four years, we aim to roll
out the HFL approach across all our wood
source catchment areas. Ultimately, this
will allow Drax to track and report our
specific and aggregate impact on the four
key metrics of forest landscape health
in a timely and transparent manner.
Independent Advisory Board
Our Independent Advisory Board (IAB)
of scientists, academics and forestry
experts is led by Professor Sir John
Beddington, former Chief Scientific
Adviser to the UK Government. The
IAB provides independent advice on
feedstock options, forest science,
optimisation of carbon impacts, and
the role of biomass in supporting the
transition to a net zero energy system.
The advice and scrutiny 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.
In 2020, the IAB had five meetings and
discussed topics including Drax’s carbon
negative ambition, the scalability and
feasibility of BECCS, and our forest
Catchment Area Analyses. The IAB
commissioned two independent pieces
of work to inform them – a literature
review on the impacts of bioenergy on
biodiversity, and a literature review on
global carbon accounting methodologies,
which were discussed during the year.
We publish the IAB’s recommendations
to Drax on our website.
For more information see
www.drax.com/ sustainability/
independent-advisory-board-on-
sustainable-biomass
Drax Group plc Annual report and accounts 2020 55
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
People positive
Our ambition is to improve
skills, education, employability
and opportunity for 1 million
people by 2025
Positive social impact
The UK’s emerging green economy
and businesses like Drax will play an
important role in supporting levelling-up
and closing regional economic and
productivity gaps across the UK.
New skills are required as we look to
develop new technologies, including
BECCS. It is also important we ensure
people local to our operations are
equipped with the skills to take
advantage of these opportunities. At the
heart of this, our Mobilising a Million
initiative aims to improve skills, education,
employability and opportunity for
1 million people by 2025.
Drax is working with trade unions and
businesses in the North to galvanise
support for enhanced jobs and skills for
the region. Analysis by Vivid Economics
estimates tens of thousands of jobs could
be created and supported in the Humber
if BECCS, as well as hydrogen and other
carbon removal technologies, are
deployed to decarbonise industry. With
UK Government backing, these new jobs
could begin to be created as early as 2024.
*
Figure includes cash donations, management
cost, in-kind and employee time contributions.
57
Apprentices started or in continued
development at Drax in 2020
117,000
Students engaged in virtual experience
of work with Drax and Oak National
Academy in 2020
93%
853
Of graduates recruited in 2018 completed
the programme in 2020
Laptops donated to schools and colleges
in 2020, to enable continued learning
during Covid-19
See our Covid-19 community
response, page 34.
Building the skills of the future
To drive forward our aims, in 2020 we
established a five-year partnership with
Selby College. We committed £180,000
to deliver community education
programmes and retraining, to support
people in our communities to develop
new skills needed for jobs in the green
economy. Our continued partnership with
Teach First has enabled the recruitment
and training of nine Science, Technology,
Engineering and Mathematics (STEM)
teachers in 2020, supporting the STEM
education of 1,125 students.
Apprentices and graduates
We are a signatory to the UK cross-party
Social Mobility Pledge, which is
committed to accessing and progressing
talent from all backgrounds. During the
year, we focused on apprenticeships and
use of the Apprenticeship Levy to recruit
new talent and develop our colleagues.
The number of Degree Apprenticeships
undertaken by colleagues has increased,
from five Degree Apprenticeships
commenced in 2019 to 12 commenced in
2020, with a specific focus on MBAs,
Data Science and Finance qualifications.
Of the 15 graduates we recruited in 2018,
retention during the programme was 93%
and all of those completing the
programme in 2020 secured permanent
roles at Drax. In 2020, despite the
challenges of Covid-19, we continued
development programmes for graduates
recruited in 2019, and we took on an
additional three graduates and seven
Year in Industry students.
In 2021, Drax plans to launch a virtual
work experience programme, and to
create further apprenticeships in a
diverse range of career paths, to support
the delivery of our business strategy.
Community and charity
We deliver charitable and employee
volunteering initiatives in the
communities where we operate. In 2020,
Drax’s total social contribution was
£1 million*, including donations through
employee match funding, payroll giving,
our community fund, community
partnerships and fundraising days.
In February 2020, we donated £25,000 to
Snaith Priory to help local recovery
efforts, following flooding in villages
nearby to Drax Power Station. We
donated $30,000 to help families and
businesses in the parishes around our
pellet mills in Louisiana and Mississippi
in the US, impacted by both the
Covid-19 crisis and tornadoes. Following
Hurricane Laura, we also donated
$20,000 to the Food Banks of Northeast
and Central Louisiana.
Prior to Covid-19, our power stations
at Drax in England and Cruachan in
Scotland welcomed students for free
educational tours. During the Covid-19
crisis, we have expanded our online
offering – creating virtual tours and
educational content, delivering webinars
to university students, and provided
a virtual experience of work in
partnership with the Oak National
Academy – to ensure students were
able to continue learning.
56 Drax Group plc Annual report and accounts 2020
People positive
Safety, health and wellbeing
The safety, health and wellbeing of our
employees and contractors is a priority for
Drax and vital to our continued success.
Safety Management Systems
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
will transfer to ISO 45001 in 2021. Our
hydro generation assets, and the gas
generation assets subsequently sold in
2021, have an integrated management
system covering safety, environment
and quality, and the safety component
transitioned to ISO 45001 in 2020.
Our Pellet Production sites in the US
meet the requirements of OSHA 1910
and the SMS is aligned to OHSAS 18001.
We undertook an OSHA-10 and OSHA-30
training programme to strengthen the
safety leadership and skills of our US
colleagues, achieving 98% completion
in 2020. Delivered by registered in-house
trainers, the training covers risk
identification and incident handling, set
in the context of our industry. We have
also upgraded our approach to tracking
compliance and corrective actions
identified from audits or investigations,
using one consolidated online tool.
Our Customers and Corporate sites in the
UK continue to implement an SMS, with a
focus on continuous improvement in our
health and safety culture and promoting
both physical and mental wellbeing.
Health and safety performance
Each business unit reports monthly
on Key Performance Indicators (KPIs),
including Total Recordable Incident Rate
(TRIR) and 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 as part of the CEO
report, which includes information
on any incidents and tracks trends.
We investigate all injury events, with
particular focus on those with high
potential, to ensure that root causes
are established and lessons are learned
and shared across the organisation.
In 2020, our TRIR was 0.29 per 100,000
hours worked (against a target of 0.21)
(2019: 0.22 per 100,000 hours worked).
This reflects an increase in the number of
minor hand injuries, which have a short
period of lost time associated. As a result,
we have implemented a campaign to
improve risk assessment, raise awareness
and ensure the right type of personal
protective equipment is used. Our LTIR in
2020 was 0.08 per 100,000 hours
worked (2019: 0.08 per 100,000 hours
worked).
Drax Group health and safety
LTIR (1)
TRIR (2)
RIDDOR (3)
2020
0.08
0.29*
6
2019
0.08
0.22
5
2018
0.09
0.22
9
(2)
(3)
Note: data include both employees and contractors.
LTIR is the total fatalities and lost time injuries
(1)
per 100,000 hours worked.
TRIR is the total fatalities, lost time injuries
and medical treatment injuries per 100,000
hours worked.
RIDDOR is the number of incidents in the UK
that were reported to the Health and Safety
Executive in compliance with the Reporting of
Injuries, Diseases and Dangerous Occurrences
Regulations 2013.
Limited external assurance using the assurance
standard ISAE 3000 for 2020 data as indicated.
For assurance statement and basis of reporting
see www.drax.com/sustainability
*
The Safety, Health, Environment and
Welfare Leadership Executive Committee
(SHEWLEC) is chaired by the UK Portfolio
Generation Director and meets quarterly
to receive reports regarding significant
safety, health, environmental and welfare
aspects. The Committee establishes
standards for relevant health, safety,
environmental and welfare 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
HSE governance arrangements across
the business. We have identified
developments for our Group HSE
governance for implementation in 2021.
This includes changes to the HSE
Committee structure within the business,
introducing a Group HSE Committee
in place of the SHEWLEC.
Key risks and mitigations associated with
health, safety, environment, and welfare
are routinely reported to the SHEWLEC.
The Committee receives a summary of
results of internal and external audits,
where the scope falls within the remit
of the Committee, and receives and
considers potential implications for
Drax regarding any significant changes
in regulation or legislation.
A combined approach to health, safety,
environment and wellbeing
In 2020, we appointed an HSE Director
with Group responsibility to drive HSE
improvements via a coordinated strategy
across all our businesses. We are
establishing plans for 2021 that align
all the businesses on our key focus
areas to drive improvement in our HSE
performance, whilst building upon the
2019 One Safe Drax vision and aligning
with our Safe People, Safe Systems &
Process, and Safety Assurance approach.
HSE performance is reported monthly to
the Board and reviewed regularly by each
local management team, and the Group
HSE performance is reviewed by the
Executive Committee. Incidents and
findings are shared across the business
via safety bulletins, focusing on
preventative action to be taken to
mitigate the risk of future occurrences.
Key issues raised at the SHEWLEC in
2020 include management of emissions
and dust at relevant locations, tracking
of findings from third-party audits,
actions to address changes in legislation
(particularly of relevance to our power
generation fleet in the UK), and delivery
of a Group-wide approach to safety
Golden Rules.
In 2020, consultants at the specialist
health and safety firm DNV-GL were
engaged to provide a risk-based
approach to HSE audits, focusing on
key processes, organisational risks
and continual improvement. A baseline
for this Group-wide HSE audit, including
benchmarking, will be reported in Q1
2021. Actions arising from the 2019
Internal Audit report undertaken by
Turner & Townsend have been tracked
to ensure implementation of the
recommendations.
Drax Group plc Annual report and accounts 2020 57
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
People positive continued
Process safety
We recognise that ongoing process
safety management is essential for
identifying and managing process risk to
reduce the likelihood of a major accident.
In 2020, we started work to establish the
key principles of process safety across
the Generation fleet and these will be
rolled out Group-wide in 2021. These
principles are in line with industry best
practice and focused on controls of
plant, process and people. A consistent
approach to process safety policy and
procedures across the Generation
business will be delivered in 2021, starting
with the gap analysis conducted in 2020.
Improvements and standardisation
of the management of change process,
including delivery of training and
awareness sessions amongst the
workforce, will be a key deliverable.
Process safety key performance
indicators are reported monthly to
the Executive Committee.
In 2020, all process safety incidents with
high potential were fully investigated to
establish root causes and enable
corrective actions to be focused on
preventing reoccurrence. Lessons
learned are shared across the Group.
Wellbeing
We continue to build on our holistic
wellbeing programme that is overseen
by our Wellbeing Steering Committee,
which reported to the SHEWLEC. In 2021,
we will focus on four key areas: my
physical health, my mental health, my
social health and my financial health.
In 2020 we focused on resilience,
supporting colleagues to adapt in times
of challenge and change. We provided
leaders and colleagues with training
and tools to understand key drivers and
techniques to provide support. We
partnered with Mental Health First Aid
England to provide one-hour live
webinars, eLearning and materials for
managers, to raise awareness on how
to support colleagues with mental health
issues. During the summer, the entire
leadership team joined a series of online
workshop sessions on personal, team
and organisational resilience, facilitated
by external experts. Interactive personal
resilience eLearning was made available
to all colleagues. We will continue
these programmes and track completion
in 2021.
In 2020, we completed coverage for UK
colleagues of a single private medical
insurance and reward programme. In
addition, all colleagues across the Group
have access to an Employee Assistance
Programme.
People, culture and values
At Drax, our values are driven by our
culture, fundamental to which is acting
with integrity – and what we call “doing
the right thing”. These values are driven
by our people and permeate through all
levels of the organisation.
In 2020, we asked our colleagues to
articulate our culture and values, and
what it was that they felt amounted to
the Drax experience. They responded
with five key themes:
1. We care about what matters
2. We are a can-do kind of place
Link to purpose and strategy
We aim to be a sustainable business
with profitable growth that has a
positive economic, social and
environmental impact.
We are committed to enabling a zero
carbon future, starting with our direct
operations and our ambition to
become carbon negative by 2030.
What we did in 2020
The safety and wellbeing of our people
and communities is the backbone
of what we do – and has been
particularly important in our response
to the Covid-19 pandemic. We did not
furlough any employees and we
introduced a new policy to enable
flexible working. We launched a new
online benefits platform and provided
mental health and resilience training,
to support colleagues with their
wellbeing.
We developed our Management
Excellence, apprenticeship and
graduate programmes, reflecting
our ongoing commitment to training,
personal development and supporting
career progression.
The Board approved our new Climate
policy, employee Code of Conduct and
Supplier Code of Conduct (see pages
49 and 61).
Link to purpose and strategy
We have a diverse, inclusive culture
where the continual exchange of ideas
and perspectives leads to great things.
The conversion of our coal-fired power
plant to biomass and the development
of our Electric Vehicles service was
due to the ingenuity of our people.
What we did in 2020
In our response to Covid-19, we made
fundamental changes in working
practices, building new home-working
processes at speed, to support our
customers, colleague welfare and
our communities (see page 34).
Our IT team responded quickly to
the new requirements of working
from home as a result of Covid-19.
This required a new way of supporting
colleagues, dispatching laptops
configured to the appropriate working
requirements, and providing guidance
on potential threats to our cyber
security, as well as colleagues’ own
arrangements for use of online
devices, to reduce risk from phishing
attacks and fake websites.
Our internal Modern Slavery Working
Group brings together colleagues from
diverse business functions to deliver
a rolling programme of activity.
58 Drax Group plc Annual report and accounts 2020
People positive continued
At Drax, our values are
driven by our culture,
fundamental to which
is acting with integrity –
and what we call “doing
the right thing”.
We are proud of our culture at Drax. The Board and
I seek to set a positive tone from the top and monitor
culture across the Group. Our colleagues from across
the business have articulated what they think is the
essence of Drax and what we believe sets us apart.”
Phil Cox
Chair
For more information on Board oversight of culture,
see Corporate Governance Report, page 87.
3. We see things differently
4. We listen carefully
5. We do what we say we’ll do
Link to purpose and strategy
We look at the world and see
possibilities in how we can help to
solve the climate crisis.
We seek new ways of doing things.
We repurpose existing assets (such
as the coal to biomass conversion), use
our expertise and new technologies to
innovate (such as BECCS or alternative
fuels), and embrace opportunities to
learn so we can become even better.
What we did in 2020
We revised our diversity and inclusion
strategy and improved colleagues’
experience and exposure to diversity
and inclusion in the workplace. For
example, we ensured that diversity
and inclusion is woven through all
our development programmes, and
we introduced unconscious bias
training to managers. We set up panel
interviews for key positions, seeking
to make those panels more diverse.
We also increased the number of
questions on diversity and inclusion
in our annual colleague engagement
survey and utilised the MyVoice Forum
representatives to feed into the action
plans arising.
We installed our second BECCS pilot
at Drax Power Station and we are
working with the Zero Carbon Humber
Partnership to enable the
decarbonisation of the region.
Link to purpose and strategy
We listen to our colleagues,
communities, customers and other
stakeholders, working with them to
better understand their needs, and
deliver the best possible outcomes.
Link to purpose and strategy
We are delivering on our purpose to
enable a zero carbon, lower cost
energy future, creating robust plans
and making the investments
necessary to help us achieve our aims.
What we did in 2020
We played a central role in the
Coalition for Negative Emissions and
are at the forefront of bringing both
opportunities and growth to Yorkshire
and the Humber, whilst tackling
climate change and creating the green
jobs of the future.
We are investing £50 million to expand
pellet production capacity at our
existing US sites, by 350,000 tonnes
over the next two years, and the first
100,000 tonnes has now been
commissioned.
What we did in 2020
We responded to the needs of those
stakeholders affected by Covid-19 –
offering support to colleagues, care
homes, customers and local schools.
We continued to run our MyVoice
Forums remotely, enabling exchange
of information and an additional
channel for colleagues to feedback
on our Covid-19 response.
We received improved engagement
scores (vs 2019) in our latest MyVoice
survey results, and changed our
approach to survey action planning
using a “bottom up” approach.
We extended our Speak Up
(whistleblowing) facility to third
parties. It is available in multiple
languages and promoted in our
Supplier Code of Conduct.
Drax Group plc Annual report and accounts 2020 59
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
People positive continued
Employment contracts*
Full time
91.69%
Part time
8.31%
Employees per country*
UK
USA
90.77%
9.23%
Employees per business unit*
Customers
35.21%
Generation
31.63%
Corporate
24.85%
Pellet
Production
8.31%
Male
Female
68.5%
31.5%
Employment gender*
Note: headcount as at 31 December 2020
* Limited external assurance using the assurance
standard ISAE 3000 for 2020 data as indicated.
For assurance statement and basis of reporting see
www.drax.com/sustainability
£285
Average spend per employee on training
and development in 2020
(excluding compliance and safety training,
Apprentice Levy spend and formal supported
academic qualifications)
See Apprentices and Graduates,
page 56
Our people strategy
We work to maintain consistently high
standards in our employment practices
and all colleagues benefit from policies
to support them in the workplace. Our
five-year People Strategy focuses on
three key areas.
1. HR foundations in place that will
enable the organisation to be fit for the
future – through data, simplified and
consistent frameworks and processes,
and enabling people to contribute to
our values.
2. Enabling organisational capability
and empowerment – supporting the
positive evolution of our culture,
alignment of goals throughout the
organisation, and talent pipelines.
3. Continuous improvement and best
in class leadership – a strategic focus,
and a more empowered and agile
workforce.
The last year has been a year of change
for all, and we have seen a significant
growth in the culture, focus and passion
of our organisation. In our response to the
Covid-19 crisis, we demonstrated these
changes through our culture and brand
values, to shape the way we all work.
Development and training
We invest in the development of our
colleagues to help them make the most of
their talents, meet their career aspirations
and enhance business performance. Our
Performance, Potential and Succession
processes enable managers to identify
colleagues’ development needs and those
with the skills and capabilities for
succession into critical roles. In 2020, we
delivered over 16 hours of training per
person, utilising both face-to-face,
instructor-led training and online learning.
Our Future Creators programme is
designed to support the development,
retention and growth of our future
leadership pipeline. In 2019, 22 high-
potential colleagues attended the
programme. In 2020, 41% of these
individuals received at least one upward
career move and 27% moved into more
complex roles, with a 100% retention rate.
A further 12 high-potential colleagues
have been identified for the next intake.
The programme has been deferred to
May 2021 due to Covid-19 and each
colleague is currently receiving remote
personal development planning support.
In September 2020 we launched our
Management Excellence programme.
The programme is designed to support
our line managers with key people skills
and was adapted for online delivery to
enable continued development despite
Covid-19. Since launch we have had over
100 managers on the programme.
Diversity and inclusion
We are committed to a supportive,
diverse and inclusive working
environment, where you can be yourself
and your contribution matters. We aim
to support everyone and to design ways
of working that are inclusive and flexible,
enabling equality of opportunity for all.
Our Diversity and Inclusion Steering
Group meets monthly to consider and
recommend plans to improve diversity
and inclusion across Drax. The Steering
Group is chaired and sponsored by the
Director of Corporate Affairs and
supported by the UK Portfolio Generation
Director, both of whom are members of
the Executive Committee.
In 2020, we launched a new Diversity
and Inclusion policy and plan that will
continue to support our ambitions. Our
Executive Committee participated in
a diversity and inclusion workshop to
understand the role of leadership and
our leadership team participated in
a workshop focused on inclusive
leadership. We published a series of
colleagues’ personal diversity stories
on the intranet, to share the breadth
of diversity across Drax.
Our diversity and inclusion strategy has
been broadened out beyond gender,
focused on building a supportive, diverse
and inclusive working environment,
where every colleague feels that they
belong and can contribute. In 2021, our
diversity and inclusion plan will focus on:
1. Collating data and using insight to
support us in taking meaningful action.
2. Educating and inspiring our colleagues
on diversity and inclusion.
3. Through our actions, making careers
at Drax more attractive to talented
people from all backgrounds and
ensuring a fair and equitable
recruitment process.
Further information on diversity
is available in the Corporate
Governance Report, page 87.
60 Drax Group plc Annual report and accounts 2020
People positive continued
3,022
Total number of Group employees, as at
31 December 2020
82%
Employee engagement score in 2020
11%
Total employee turnover rate in 2020
Colleague representation
and engagement
At Drax, 21% 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.
We communicate with our workforce
through channels including our intranet,
our quarterly magazine, newsletters, and
open forum meetings. During the year,
colleagues asked our CEO over 1,300
questions through our online Q&A portal,
with the CEO and experts’ responses
shared weekly across the Group.
Each business unit has a MyVoice Forum
with up to 12 colleague representatives,
enabling an exchange of information and
views on strategic decisions affecting the
way we work. Forum chairs are supported
by an Executive sponsor and meet
quarterly with our CEO and Chair of the
Board of Directors to provide feedback
on topics raised by colleagues. In 2020,
topics covered included: our annual
results, a remuneration update, data
protection, our Covid-19 response, future
ways of working, wellbeing and
recognition. For more information see
Focus on Workforce Engagement,
Corporate Governance Report, page 92.
We track colleague engagement through
our annual survey. In 2020 this was
completed by 71% of colleagues, a 6%
increase from 2019. Our score for
effective engagement of 82% in 2020 is
4% above the Energy and Utilities sector
benchmark. We have seen an
improvement in nine out of 10 question
areas, with wellbeing growing as the key
driver for effective engagement. The
main theme highlighted for improvement
was colleague careers.
Responding to feedback raised in our
2019 survey, we introduced our
Management Excellence Programme
to equip line managers with key
management skills. We improved our
communications on change in the
business, surveyed colleagues to monitor
wellbeing and connectedness in the
context of Covid-19 and, as a result,
adjusted working arrangements. We also
expanded our wellbeing offering and
community support activity (see page
34).
Ethics and integrity
At Drax, we are committed to conducting
business ethically, with honesty and
integrity, and in compliance with all
relevant laws and regulations. We do not
tolerate any form of bribery, corruption,
human rights abuse, or other unethical
business conduct.
Our business ethics compliance
framework consists of principles, policies,
and guidance. The principles are set out
in our Drax Code, which identifies the
behaviours expected from permanent
and non-permanent workers on a broad
range of topics. The Drax Code principles
form part of our terms of employment
and include a series of training videos
which can be referenced by colleagues.
Our business ethics policies and guidance
documents provide further instruction.
These include our Anti-Bribery and
Corruption (including conflicts of
interest), Human Rights, Fair Competition,
Financial Crime, Privacy and Speak Up
(whistleblowing) policies and our Gifts
and Hospitality, Conflicts of Interest, Due
Diligence, Fair Competition, Privacy and
Speak Up guides. In 2020, a Group policy
project was progressed, to review, update
and harmonise policies across Drax, as
required, to support the Drax Code.
In 2020, we deployed new annual
refresher eLearning across Drax, for data
protection and anti-bribery and
corruption, for all relevant colleagues. A
dedicated business ethics eLearning
module was also provided to and
completed by all members of the Board
and Executive Committee.
Drax Code of Conduct
In September 2020, a new Code of
Conduct (Drax Code) was approved
by the Board. In October, the Drax
Code was deployed as a mandatory
read and completed by all permanent
and relevant non-permanent workers.
We have also built the Code into our
new starter induction processes.
The Drax Code expands on those
topics previously covered in our
“Doing the right thing” handbook, to
include other areas such as Health
and Safety, Environment, Diversity
and Inclusion, Dignity at Work, and
Treating Customers Fairly.
Having a Code helps us to aim for and
maintain consistently high standards
in everything we do. The Code
outlines what we expect from all
those covered by it and supports the
positive development of our culture.
The Code also provides our external
stakeholders with confidence that
we are committed to doing business
ethically and that we only wish to
work with those who do the same.
Responsibility for ethics and business
conduct
Governance of our business ethics
framework is overseen by the Drax
Ethics and Business Conduct Committee
(EBCC), a sub-committee of the Executive
Committee. The EBCC comprises senior
leaders, meets quarterly, and is chaired
by the CFO. A formal report on the work
of the EBCC is provided annually to the
Audit Committee. Management across
Drax is responsible for demonstrating
leadership on ethical matters and
supporting teams to apply our ethical
principles, set out in our Drax Code,
and business ethics policies.
Our Business Ethics team manages
our business ethics programmes, taking
steps to understand our risk profile,
developing and maintaining policies
and procedures, raising awareness
and training, as well as investigating
any potential breaches of policy, and
supporting our internal and external
Speak Up (whistleblowing) channels.
Our Internal Audit function provides
assurance on the robustness of our
Drax Group plc Annual report and accounts 2020 61
Strategic reportGovernanceFinancial statementsShareholder information
Sustainable business continued
People positive continued
business ethics programmes and any
recommendations for improvement
are duly considered and, as appropriate,
implemented.
formed to agree the implementation
plan to deploy the Supplier Code, as
appropriate, to our suppliers in 2021.
The Business Ethics team conducts
annual risk assessments of each of its
programmes, covering anti-bribery and
corruption (including conflicts of
interest), fair competition, financial crime,
privacy, Speak Up (whistleblowing), and
supply chain human rights. This is to
ensure policies and procedures remain
fit for purpose and to recommend any
further mitigation measures. Our annual
review timetable includes a review of
Drax gifts and hospitality records and
a colleague business ethics declaration,
which was completed by 100% of
colleagues in 2021 (covering 2020).
Results of annual reviews, details of
investigations conducted, Speak Up
(whistleblowing) reports, and audit
outcomes are reported regularly to both
the EBCC and the Audit Committee.
The Board now receives an update
on Speak Up (whistleblowing) reports
at each meeting.
Working with others
We are a signatory to the UN Global
Compact (UNGC) and maintained our
representation on their Modern Slavery
Working Group in 2020. This enables us
to benchmark our compliance
programmes and exchange experience
with peers, with a particular focus on our
response to the UK Modern Slavery Act.
We seek to work with third parties whose
standards are consistent with our own.
Relevant third parties are subject to our
precontract due diligence checks and
regular monitoring throughout the term
of the contract, via our third-party due
diligence system. In cases where a red
flag is raised, we follow an EBCC-
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.
Our Supplier Code of Conduct (Supplier
Code) was approved by the Board in
October 2020. The Supplier Code sets
out the commitments and standards
we expect of our third parties and, going
forward, will replace the Corporate
Responsibility statement used in our
contracts. A working group has been
Anti-bribery and 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 process and
system. Conducting business in certain
higher risk countries must receive prior
approval from the EBCC.
Third parties in higher risk countries
receive a higher level of initial due
diligence and ongoing monitoring. We
also screen the affiliates (directors and
shareholders) of third parties identified
as potentially higher risk, and refresh
their information on a more frequent
basis compared to other suppliers.
Ongoing monitoring is performed with
new information provided to the EBCC,
as appropriate.
In 2020, we combined our anti-bribery
and corruption and conflicts of interest
programmes and strengthened our
approach to the reporting of supplier
conflicts of interest. We also separated
the content of our Corporate Crime policy
to form separate Anti-Bribery and
Corruption (including conflicts of
interest), Human Rights and Financial
Crime policies. We developed a Conflicts
of Interest Quick Reference guide and
provided training to US based managers.
Fair competition
We are committed to conducting our
business in accordance with all
applicable fair competition law and we
do not tolerate any anti-competitive
and anti-trust behaviour or activity.
Our dedicated fair competition
compliance programme includes a
Fair Competition policy and guide and
covers both UK competition law and US
anti-trust law. We provide eLearning
for those that need to know more and
targeted learning for our ‘at higher risk’
teams. In 2020, a video on this topic was
included in the new Drax Code, which
sets out the baseline knowledge that
we expect all our people to have with
regard to fair competition. In addition,
we reviewed our policy and guidance
and completed our second annual risk
assessment and risk register, which
was reviewed by the EBCC.
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 that our people,
customers and the third parties with
which we engage have confidence
in our data handling practices.
Our maturing privacy programme is
managed by the Data Protection team
and overseen by the EBCC. It is
implemented through policies, guides,
privacy notices, third party due diligence
questionnaires and contractual terms.
During 2020 we issued eLearning
training to UK colleagues and invested
in privacy designed compliance software
to support our work in areas such as
individual rights requests and personal
data breaches. Internal Audit completed
a positive audit of our privacy programme
in 2020. Our privacy programme
supported our Covid-19 response, with
particular reference to handling
additional health data, temperature
checks and home working guidance.
We benchmarked ourselves against the
new accountability tracker published by
the Information Commissioner’s Office
and have incorporated relevant aspects
into our work plans for 2021.
Our security framework matured
through 2020, embedding security risk
management controls into our business
change activities, improving cyber
technical capabilities and expanding
security controls and architecture into
our operational technology systems
through our NIS Directive compliance
programme. We mobilised quickly in
response to Covid-19 to provide secure
working from home solutions with
minimal impact on our control
environment or risk profile. An
independent maturity review was
undertaken against a security best
practice framework in 2020, which
noted that Drax has a “well-structured
and capable security function that
has matured significantly” since
establishment.
We maintain a risk-based security
controls framework aligned to industry
standards, to protect our business,
colleague and customer data and meet
our regulatory requirements. In addition
to traditional IT security measures,
we use cyber technologies to detect,
62 Drax Group plc Annual report and accounts 2020
People positive continued
Policies are available at
www.drax.com/about-us/
compliance-and-policies
respond to and resolve cyber threats
and attacks. We are conscious that such
threats continue to change and our
security programme seeks to evolve our
controls and response to cyber threats.
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 Human Rights policy,
Drax Code and Supplier Code.
Our Supplier Code outlines the standard
of ethical business conduct we expect
from our suppliers. Businesses in our
supply chain should offer a safe
workplace for their employees that is free
from harm, intimidation, harassment and
fear. The Supplier Code emphasises our
requirement for our suppliers to challenge
unethical behaviour and promote a “speak
up” culture and provides the details of our
available Speak Up channels for their use
in multiple languages.
Supply chain human rights
(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 2020, we published our fourth
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 responded to the
UK Government’s consultation on
Transparency in Supply Chains and
are positioned to meet the new
requirements.
We keep our programme and
statement under review to ensure it
reflects our activities, global presence
and wider evolving practice.
Speak Up (whistleblowing)
As part of our commitment to
transparency, openness and continuous
improvement, we actively encourage
those working for or on behalf of Drax to
raise genuine concerns about practices
which could breach laws, regulations or
our own ethical standards. Drax has a
zero tolerance of retaliation and we have
processes in place to apply appropriate
consequences, should an individual
victimise or retaliate in any way against
someone who has raised a genuine
concern. During 2020, we issued specific
guidance on treating concerns
respectfully.
In 2020, we launched our new Speak Up
(whistleblowing) programme (see
Corporate Governance Report, page 87).
During the year, nine concerns were
reported across both our internal and
external channels. This is an increase
from eight reports in the previous year
and reflects our continued efforts to
promote an open and approachable
culture of “speaking up” across Drax.
Non-financial information statement
We have summarised our policies 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.
Except where indicated as an internal policy, all policies and codes are available on our website using the address at the top of the page.
UN Global Compact
Environment
Non-Financial Reporting requirement
Environmental matters
Labour
Employees
Social matters
Human
rights
Respect for human rights
Anti-corruption Anti-corruption and anti bribery matters
A description of the Company’s business model
A description of the principal risks
A description of the non financial key
performance indicators
Policies, due diligence processes and outcomes
Group Environmental policy statement
Sustainability policy
Responsible Sourcing policy
Carbon emissions
Environmental impact
Sourcing sustainable biomass
Code of Conduct
Supplier Code of Conduct
Group Health and Safety policy statement
Human Rights policy (internal policy)
Gender Pay Reporting
Safety, health and wellbeing
People, culture and values
Community and Charity policy (internal policy)
Positive social impact
Supplier Code of Conduct
Human Rights policy (internal policy)
Modern Slavery Act statement
Ethics and integrity
Code of Conduct
Anti-bribery and Corruption policy (internal policy)
Ethics and integrity
Business model
Principal risks and uncertainties
Key performance indicators
Remuneration committee report
Page reference
Page 53
Page 53
Page 49
Page 51
Page 53
Page 61
Page 62
Page 57
Page 59
Page 56
Page 63
Page 61
Page 61
Page 04
Page 66
Page 18
Page 108
Drax Group plc Annual report and accounts 2020 63
Strategic reportGovernanceFinancial statementsShareholder information
Viability statement
In accordance with the UK Corporate Governance
Code 2018, 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 CEO and CFO 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 (2019: three
years), selected for the following reasons:
• The Group’s Business Plan (the Plan)
which is prepared annually, updated
three times 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.
The business considers longer term
forecasts for other purposes, including
value in use analyses and estimates of
useful economic lives in respect of its
businesses and fixed assets, as set out
in the notes to the financial statements.
Review of principal risks
The Group’s principal risks and
uncertainties, set out in detail on pages
66 to 77, 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 2021,
before the Plan was adopted by the
Group. In addition, reasonable scenarios
that included a combination of
unforeseen plant outages, increases
in commodity prices and reductions
in subsidy income were also considered.
The outcomes of this analysis, which
did not reflect the potential benefit of
available mitigating actions, indicated
that the Group would be able to absorb
the impact of such scenarios without
significant impact upon its ability to
meet liabilities as they fall due.
As part of its review of principal risks
and uncertainties, the Group considered
emerging risks related to Covid-19, the
end of the Brexit transition period and
climate change. This review concluded
that such matters remained low risk to
the Group from a viability perspective. The
Board’s response to Covid-19 during 2020
is described in further detail on page 88.
The Group has a proven track record
of rapidly 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 further
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 2020, including
assumptions related to the ongoing
impact of Covid-19. 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 (described above) 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.
64 Drax Group plc Annual report and accounts 2020
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.
Based on this, 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.
As part of stress-testing the Plan, a
“reasonable worst case” scenario was
also constructed and assessed. Rather
than a single event, the Board considers
the most significant scenario that could
reasonably arise in the assessment
period, and materially impact viability,
to be an aggregation of multiple incidents
either in a short timeframe or repeatedly
during the period. For the purpose of
creating the scenario, the severity of
these incidents (for example, the duration
of an unexpected outage) was based
on experience of actual historical events
or reasonably foreseeable future
downside scenarios.
The reasonable worst case considered
the impact on earnings, cash flow and
net leverage as a result of a series of
incidents including unexpected
generation outages, pellet production
outages, a reasonable reduction in
Customers gross margin, increases in
commodity prices and a loss of ROC
income during the period. Whilst the
outcomes from this scenario were severe,
they indicated that the Group would
continue to operate within the
restrictions of its financing arrangements
and would have sufficient cash to meet
its liabilities as they fall due once likely
mitigating actions were taken into
account. Such mitigating actions
included potentially reducing levels of
capital expenditure and dividend
payments if required. The impact would
also be partially mitigated through the
earnings stability provided by the CfD, the
Group’s proven ability to trade effectively
in volatile markets, use of existing
committed and undrawn facilities and
reductions in other discretionary
expenditure. 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
financial statements (page 184). 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 2020, the Group issued €250
million of loan notes and entered into a
new infrastructure term loan facilities
agreement with committed funds in both
Sterling (£45.0 million) and Euro (€126.5
million), with an option to increase by up
to a further £75.0 million. At the year end,
the loan notes were drawn in full and a
further €31.5 million and £53.0 million
drawn under the infrastructure facilities.
The proceeds of these issuances were,
along with existing cash flows, used to
redeem the Group’s £350 million 2022
sterling bond and the £125 million ESG
term loan facility.
These arrangements both extended the
maturity profile of the Group’s debt and
reduced the overall cost of debt, further
strengthening the balance sheet. No
significant repayments of debt fall due
within the assessment period.
In addition, the Group completed the
refinancing of its revolving credit facility.
The new £300 million facility matures
in 2025 with an option to extend by one
year. This replaces the previous RCF,
which was due to mature in 2021, and
provides increased liquidity with the full
facility now able to be drawn as cash
(the previous facility restricted cash
drawn to support liquidity to £165 million).
At 31 December 2020 the Group had total
cash and committed facilities of £682
million. The Plan demonstrates that the
Group expects to operate within its
current committed facilities for the
duration of the three-year viability period.
The Board is confident that the Group
has access to a range of options to
maintain a diverse and well-balanced
capital structure.
Drax Group plc Annual report and accounts 2020 65
Strategic reportGovernanceFinancial statementsShareholder information
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
and processes 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 all
key risks.
Group approach to
risk management
The risk appetite is the level of risk that
the Group is prepared to tolerate, and
which might arise in the day-to-day
conduct of our business and seeking
to realise our strategic objectives. Risk
appetite can vary depending on the
nature of the risk and expected returns.
Risk appetite also informs the expected
behaviours from our employees,
contractors and business partners,
and the investment required to support
risk management activities. We consider
a range of risk categories including
environment, people, health and safety,
political and regulatory, strategic,
operational, financial, and climate
change. The Board determines the
risk appetite of the Group and seeks to
ensure that emerging and existing risks
are identified and managed to increase
the likelihood that the Group’s business
objectives will be achieved. The Group
has a Risk Management Policy, approved
by the Board, which defines its 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 and assess the
likelihood of the risk occurring using a
risk scoring methodology which ensures
a consistent approach when assessing
all risks.
• Consider the possible impact to the
business in the event of any risks arising
and put in place appropriate mitigating
controls intended to manage identified
risks to an acceptable level.
• Assign responsibility and define
accountabilities for the identification,
assessment and management of risk
and provide resources to enable
appropriate measures to be taken.
• Provide a framework to enable the
escalation and reporting on potential
and emerging risks and the effectiveness
of the mitigations and controls to
support management decision making.
• Regularly monitor changes in the
internal and external environment of
our business, review the Group’s principal
risks against such changes to ensure our
analysis remains accurate and relevant
and review the effectiveness of
mitigation strategies and the application
of the risk framework employed.
The risk management approach
manages, rather than eliminates, the
risk of failure to achieve strategic and
business objectives, and provides
reasonable, but not absolute, assurance
against material misstatement or loss.
Risk management governance
The risk management governance
structure includes the Executive
Committee (from which are identified
the owners accountable for each
principal risk) and our risk management
committees whose shared
responsibilities include:
• Ensuring that risks including new,
potential and emerging risks are
identified, assessed and managed
effectively within defined risk appetites
and limits.
• Ensuring that risks associated with
the Group’s principal risk categories
are identified, analysed and managed
appropriately.
• Ensuring that changes in the internal
business and external macro
environment that affect the principal
risks are kept under review and
responded to appropriately.
• Driving completion of the actions
required to reduce risk exposure and
improve risk mitigation.
• Driving an appropriate risk management
culture that promotes and creates
balanced risk-taking behaviour and clear
accountability.
• Demonstrating robust governance of
risk management by reviewing and
challenging risk management across
the Group.
In line with good governance the risk
management committees undertake
regular reviews of business unit and
financial risks and receive reports from
business units and risk owners reflecting
their specialist areas and technical
knowledge. The Executive Committee
also undertake deep dive reviews of all
the principal risks through the course of
the year and receive reports from the risk
management committees and principal
risk owners.
In addition, the Audit Committee and
Board review the suitability and
effectiveness of risk management
processes and controls on behalf of
the Board and receive updates from
management at each meeting. The
Board also receives updates on the
risk management framework.
Internal control
The Group has a well-defined internal
control system supported by policies
and procedures, documented levels of
authority which support decision-making
and accountability for 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 management enabling
them to make decisions on behalf of the
Group and its businesses on a day-to-day
basis. The most recent review of the
schedule of matters by the Board was
in December 2020. 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.
Under authority delegated by the Board,
the Audit Committee, approves and
implements a programme of internal
audits covering various aspects of the
Group’s activities for the next financial
year. The programme evolves based on an
assessment of the key risks of the Group,
the existing assurance and controls
in place to manage the risks, the core
financial control framework and
observations arising from management’s
review, discussion and challenge by the
Audit Committee including responses to
findings from the observations arising
from the work of the Internal Audit
function and support of other specialist
advisers. The programme is reviewed
66 Drax Group plc Annual report and accounts 2020
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.
During 2020 internal audits were
performed either by team members
of the Group’s internal audit function
or with effect from July 2020 by KPMG
who was formerly the Group’s co-source
internal audit function provider. The
internal audit function reports to the
CFO and the appointment of KPMG
was 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 the
status of management responses to
the findings and recommendations and
details of the actions that management
propose to take. Each meeting of the
Executive Committee considers the
status of closing recommended actions.
In addition, the Audit Committee receives
a full internal audit and quarterly internal
controls update report at each meeting.
Based on the assessments undertaken
by each of the Executive Committee and
the Audit Committee during 2020 and
considered at the meeting of the Board
held in finalising the Annual report and
accounts, 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 see page 98.
Overall risk assessment
The Board has assessed the principal risk
categories including assessing continued
emerging risks arising from the
unexpected events of the Covid-19
pandemic and the ongoing uncertainty
experienced during the year concerned
with Brexit. As an immediate response
to the pandemic, the Group deployed its
disaster recovery arrangements which
facilitated assessment of the potential
impact and subsequent monitoring of
mitigation measures. As the appreciation
of key issues and challenges matured,
the initial crisis threat was de-escalated,
and actions were monitored through
established teams.
Throughout the year particular attention
was given to ensure the Group remained
as materially unaffected by possible
Drax Group plc Board
Audit Committee
Group Executive Committee
1st line of defence
2nd line of defence
3rd line of defence
Management controls
Risk management
Internal Audit
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Policies and procedures
Compliance
Understanding of
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Oversight by
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Brexit outcomes including a no deal exit
from the EU. Any additional change in
managing these and other new and
emerging risks has not materially
affected the categorisation of the
Group’s principal risks. Therefore the nine
principal risk categories disclosed on
pages 69 to 77 remain unchanged from
2019, when climate change was added as
a principal risk reflecting the increasing
medium to longer term focus on such
risks, and their importance to the Group’s
strategy and the nature of the Group’s
sector and operations.
Risk impact of Covid-19
The ongoing Covid-19 pandemic has
had and is expected to continue to have
an impact on the global economy, our
customers, suppliers and the health,
safety and wellbeing of our employees
and contractors. The Group prioritises
health, safety and wellbeing and has
put in place a number of actions and
additional measures to safeguard all
those who are still required to attend
the Group’s operational sites. This
includes the Group ensuring it remains
cognisant of any continual changing
guidelines issued by the UK Government
and US authorities. All of the actions
implemented enabled the Group to meet
its obligations as part of the UK’s critical
national infrastructure, generating power
and supporting the UK’s energy market
and our business customers while
protecting our employees.
The Group has an incident crisis
management process enabling timely
response to events when they occur
which comprises of strategic (led by the
Executive Committee), in addition to
tactical and operational level teams (led
by management). In response to Covid-19
these teams developed and implemented
additional policies and procedures
around health, safety, IT systems, remote
working practices, wellbeing
communications and engagement. In
response to the continual changing
environment created by the pandemic
constant monitoring of these plans and
their effectiveness is being undertaken.
Since the start of the pandemic and as
it has evolved, the Board has received
regular reports from management and
supported critical decisions connected
with the Group’s response to the events
and activities as outlined above. This has
included for example, how the Group has
adjusted its working practices across all
of its operation sites, its communication
strategy with and on safeguarding its
employees, implementing new IT
infrastructure to support changes in
working practices away from offices,
and being able to continue to accurately
track its financial and non-financial
business performance. The Board also
received reports on how Covid-19 might
impact risks in the medium to longer
term enabling them to reassess the
future impact on all of the Group’s
principal risks. Further details on how
the Group responded to the pandemic
is detailed in the section “Our Covid-19
response’” on pages 34 and 35.
The impact of Covid-19 on each principal
risk and the mitigating actions adopted in
response to the risk are detailed on pages
69 to 77 and the changes arising from
Covid-19 are denoted by the
Covid-19 symbol.
Drax Group plc Annual report and accounts 2020 67
Strategic reportGovernanceFinancial statementsShareholder information
Principal risks and uncertainties continued
The Group has kept under review its
financial forecasts and its best estimates
of the financial impact of the associated
risks which were initially disclosed in the
trading update issued in April 2020 and
thereafter in the Half Year results. The
initial analysis has remained broadly
unchanged in terms of the impact on
the Group for the 2020 financial year
and is fully reflected in its viability
statement (see page 64). Additional
information on the commercial and
financial impact for the Group of Covid-19
during the 2020 financial year can be
found on pages 20 to 27.
The Board recognise that going forward
the effects of the Covid-19 pandemic
continues to carry inherent uncertainties
and future impacts may well continue to
evolve even when events have returned
to relative normality. These impacts could
lead to further change in UK Government
policy, macroeconomic policy and the
behaviours of people and markets that
may impact some of the Group’s risks.
The Board continues to have regular
engagement with management on the
Group’s response to any of these risks in
order to assess, monitor and promptly
respond to any evolving impact of
Covid-19 on our operations and business,
including impacts for all our stakeholders.
Risk impact of Brexit
Throughout 2020 the Group continued to
monitor and prepare for the UK’s customs
exit from the EU including managing for a
no deal Brexit. An internal working group
consisting of relevant management
chaired by a member of the Executive
Committee, regularly reviewed
developments in negotiations and
possible effects on the Group’s activities.
This included updating the Executive
Committee and Board on Brexit risks and
initiatives to mitigate the impact from a
range of possible negotiation outcomes
that continually changed during the
transition period while operating under
the withdrawal agreement until the 24
December 2020 when the UK/European
Union Free Trade Agreement (FTA) was
officially announced. Throughout the EU
exit process, Drax held Chairmanship of
the Energy UK trade association Brexit
Working Group which undertook regular
meetings attended by various UK
Government organisations. Post the
transition period management directly,
and through its association with Energy
UK have continued to monitor closely the
release and interpretation of further
details relating to the FTA in order that
we can look to clarify fully the potential
impacts on our trading operations, supply
chain and regulatory requirements. The
Group’s ongoing focus will be to ensure
that our business mitigates any adverse
effects to its operations from the FTA
and it has put in place a number of
actions and measures to manage risks it
identified around a number of key areas.
These included:
• Considering the Finance and Commodity
Trading risks from potential restrictions
in access to financial, carbon, renewable
energy Guarantee of Origin certificates,
(GoOs) and commodity markets.
The Group developed contingency plans
to respond to the revised approach to
carbon trading post 1 January 2021 to
allow it to effectively meet the Group’s
regulatory requirements relating to
carbon. There were also preparations to
ensure the Group’s ability to secure and
continue to trade renewable energy
GoOs, as well as operations to manage
its other financial and commodity
exposures, such as FX, effectively from
1 January 2021. The Group is adapting
to the post FTA environment, particularly
with close monitoring of the detailed
implementation of UK Allowances,
including possible linkage to the EU
Emissions Trading Scheme (ETS).
• Considering the people risks from
potential constraints in free movement
of people and access to talent. Further
consideration and planning have been
placed on Group-wide recruitment and
retention, talent management and
succession planning.
• Considering the risks from potential
import constraints and tariffs on the
Group’s fuel and critical commodity
supply. An operational review considered
alternative port arrangements, a review
of goods at risk of shortage and planning
for key plant operations supplies. This
included engaging with supply chain
partners to ensure their Brexit readiness
and managing for increased supply lead
times. Other potential import risks
associated with UK Government policy
arose as a result of Covid-19, where the
need to give priority to the importing
of other products such as medicines
and the closing of French ports to UK
import and export freight, increased the
potential to add further congestion and
delays to the import of critical spares
and commodities.
• Considering potential changes to
regulation and policy and the risks from
loss of engagement with European-
based stakeholders to discuss emerging
policy and understand potential
divergence of compliance requirements
and/or market rules. The Group
continues to promote the benefits
of biomass and is engaged with
government, regulators, and other
interest groups, both in the UK and
internationally. This is to ensure our
views and positions on current and
forthcoming legislation, regulations,
energy and environmental policy issues,
that may have implications for our
business, are represented and that we
are able to listen to and consider the
views of others in helping to reach
consensus on the future for biomass.
Generally, the overall financial and
non-financial risk impact to the Group of
Brexit to date has been minimal. However,
the above key risk areas still remain
a focus of the Group. While the UK
Government continues to develop plans
to manage the longer-term economic
effects of Covid-19 there is additionally
future uncertainty about any additional
economic effects which may result
from the implementation of the FTA
on our customers, suppliers and other
stakeholders. For these reasons, the
Group will continue to monitor any
potential change to Brexit risks during
2021 as the full interpretation
and implementation of the FTA takes
place and where necessary expects to
update its mitigating actions to minimise
any effects on business operations.
Principal risk categories
The Group has identified nine principal
risk categories that it considers having
material operational impact and
probability to its business. These and
other key risks are considered within
an established programme by which
management, executive and the Board
consider how risk and our ability to
respond to risks evolves. Set out below
are the principal risks reflecting that
assessment:
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. Climate Change
9. People
68 Drax Group plc Annual report and accounts 2020
Risk level change from previous year
Up/increasing
Down/reducing
No change Covid-19 Impact
Environment, health and safety
Context
The safety, health and wellbeing of our employees and contractors, wherever they work in respect of the Group’s business,
is a priority for the business and is vital to the continued success of the Group. 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 and environmental management are foundational to 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. We have a focus on emerging
legislation and regulatory changes in both safety and environmental aspects. These are important for our people and our
reputation and we recognise the value attributed to effective measures and good practices by our stakeholders.
Risk and impact
• Our operations involve a range of potential
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.
• The biomass that we use to generate
electricity is combustible so 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.
• We operate various plants at high
temperatures and pressures, as well as
requiring a focus on maintaining dam
integrity, as we generate electricity at
400kV for transmission onto the
National Grid.
Covid-19
• Specific challenges arose and remain
areas of potential risk with safeguarding
our employees and contractors. Many
have been required to fundamentally
change their day-to-day working, as they
are expected to work from home to reflect
UK Government guidelines and also
management’s assessment of the most
appropriate way to safeguard the health
and wellbeing of all of our colleagues.
Where key workers have been required to
continue to work on our generation and
biomass production facilities, actions have
been required to provide new guidance on
working practices in response to the
changes in managing the virus. The
planned outage at Drax Power Station
required additional planning, financial
resources, and management oversight.
Key mitigations
• Maintaining robust management systems
designed to mitigate risk.
• Training employees to a high level of
competence, to appreciate and manage
environment, health, and safety risks.
• Tracking and reporting events and near
misses, prompt investigations and timely
implementation of corrective actions.
• Regular monitoring of processes and
Changes in factors impacting risk in 2020
• Personal safety performance for the year
with TRIR and LTIR continues in line with
industry benchmarks.
• Use of a Group-wide reporting tool for
environment, health and safety incidents.
• Creation of a new role and appointment
of a Group HSE Director with responsibility
to drive HSE improvements via a cohesive
strategy across all our businesses.
incidents to identify trends in performance.
• At our Daldowie fuel plant, we have been
• Routine auditing of compliance against
standards, policy, and procedures.
• A proactive and structured approach to
supporting the wellbeing of our colleagues,
by focusing on promoting personal
resilience and encouraging healthy habits
for physical wellbeing.
• Engaging with regulators and stakeholders
to identify improvements to our systems
and operations.
• Proactive identification of future
legislation and appropriate investment to
optimise performance.
• Effective governance framework including
an executive level Safety, Health,
Environment and Wellbeing Leadership
Committee, to oversee governance, review
and challenge the management of safety,
health, environment, and wellbeing risks
across the Group.
• Development of plans for 2021 that align
all businesses to the key focus areas to
drive improvement in our HSE
performance, whilst building upon the
2019 One Safe Drax vision and aligning
with our Safe People, Safe Systems &
Process, and Safety Assurance approach.
• Raising awareness through shared
experiences of events or near misses with
colleagues across different sites. This
includes sharing of videos and interviews
of those who had first-hand experience of
the events.
working to deliver sustained improvements
to our odour minimisation strategy and
commissioned an upgrade to our
regenerative thermal oxidiser (RTO).
• We invested in significant upgrades to
our turbines and associated equipment
at Drax power station which will result
in lower carbon emissions and improved
fuel efficiency.
Covid-19
• Significant changes were introduced
to working arrangements with HSE
leadership’s top priority being, the health
and wellbeing of all of our colleagues.
This involved fully supporting all
employees through that change and
providing support which focused on
physical, emotional and mental wellbeing.
• Risk assessments were undertaken at
each operating site to identify mitigations
to reduce the likelihood of workplace
transmission of the virus and to protect
key workers. All employees except those
required on operational sites have been
asked to work from home in line with
Government’s advice both in the UK and
US. The Group’s HSE response is adjusted
according to the continual changing UK
Government and US authority guidelines.
Drax Group plc Annual report and accounts 2020 69
Strategic reportGovernanceFinancial statementsShareholder information
Principal risks and uncertainties continued
Risk level change from previous year
Up/increasing
Down/reducing
No change Covid-19 Impact
Political and regulatory
Context
We remain alert to changes in Government policy at UK and EU level. The energy sector is subject to detailed legislation and
regulation that is frequently changing as the economic and industrial trends towards decarbonising and decentralising
become more exacting. In addition, the wider regulatory and compliance environment applicable to businesses is also
increasing with growing requirements in transparency and accountability.
Covid-19
• The increased and ongoing pressures from
managing the pandemic are impacting UK
Government priorities and finances, which
in turn could delay the introduction of
new legislation to deliver the required
investment frameworks required to
support progress in reducing carbon
emissions and addressing the issues of
climate change. Such changes could also
result in reduced Government investment
in technologies or other activities which
are essential in enabling aspects of our
strategy, for example Carbon Capture..
Risk and impact
• Changes to UK Government policy,
regulations or tariffs may increase the
costs to operate, reduce operational
efficiency and affect our ability to realise
our strategy, which may adversely affect
our financial and operational performance,
results and cash flows. Issues include
reform to legal framework following Brexit;
data privacy regulation; network access
and electric charging arrangements;
environmental regulation; wholesale
market arrangements including access
and impacts on liquidity; and consumer
service and affordability requirements.
• A more complex and challenging
regulatory environment increases the
costs to operate, the threat of regulatory
investigation, the risk of non-compliance,
and penalties/sanctions. Brexit may create
further uncertainty and additional costs
associated with changes in regulatory
reporting or divergence in compliance
requirements.
• Biomass represented 75% of our
generation in 2020 (77% in 2019) and,
longer term, we are aiming to increase our
biomass self-supply to five million tonnes
per annum. The regulatory environment is
evolving which could increase costs and
mean anticipated returns are significantly
lower than expectations. Our ability to
influence EU requirements on biomass
acceptability/sustainability may be
impaired post-Brexit.
• Following the UK’s transition to the EU/UK
FTA, the UK Government has announced it
will establish its own ETS. The aim is to link
the new UK ETS to the EU ETS to ensure
continued alignment on decarbonisation
via a market-based pricing regime,
although this will take time and there is
no guarantee it will come to fruition. The
price of carbon under the UK ETS remains
unknown as the auctioning of allowances
is not expected to begin until Q2 2021.
Until that point, UK energy markets are
likely to use the EU ETS price as a proxy,
however this is by no means a perfect
hedge and there is the potential that
once trading of UK allowances commence
there could be a number of teething
issues such as limited market liquidity
in a smaller market.
Key mitigations
• Engaging with politicians across the
political spectrum and Government
officials, to understand and influence
perception, and communicate our
socio-economic value in supporting the
UK’s ambition to achieve net zero by 2050.
• Working with stakeholders to maintain
Drax as a thought leader on priority policy
and regulatory issues.
• Engaging with regulators and industry
bodies to understand their priorities and
seek to influence strategic direction of,
and ensure compliance with, regulatory
requirements.
• Working with Energy UK to identify market
improvements, enhance competition and
develop voluntary codes of practice.
• Maintaining regulatory and compliance
control frameworks to mitigate the risk of
non-compliance covering risk assessment;
policy development; adequate process;
training; audit; and continual
improvement.
• Working with leaders and key stakeholders
in those regions where Drax is seeking to
evolve its economic impact, to identify
areas of common purpose and share ideas
for creating jobs, investment and new
growth opportunities.
Changes in factors impacting risk in 2020
• Overall risk levels heightened as a result of
increased regulatory intervention within
the Group’s Generation and Customer
business and lack of clarity around UK
Government policy some of which resulted
from Covid-19 and Brexit.
• The ongoing and drawn out negotiations
around Brexit during the year and the
subsequent transition to the UK/EU FTA
continued to create uncertainty.
Weakened sterling and difficulties in cross
border trade can influence fuel costs and/
or lead to financial distress issues with our
customers. Delays at ports can affect our
supplies of fuel and components although
the nature of our dedicated supply chain
mitigates this risk.
• Many ancillary services require policy,
regulatory and market change to ensure
generators are suitably compensated for
these services.
• The UK Government has introduced a
price cap for domestic power retailers; we
remain vigilant to the risk that this could
be extended to some SMEs.
• The smart meter roll out continues and
the obligation to install a smart meter
for every customer by the middle of 2021
(where reasonable steps have been
exhausted) will move to fixed annual
targets thereafter.
• Further failures of small energy suppliers
(and resulting cost mutualisation across
the industry).
• The UK Government has confirmed it
believes that the Carbon Price Support
is set at approximately the right level,
although the longer-term level is
dependent on prevailing commodity prices
and terms within the UK/EU FTA.
• Ofgem is reviewing the way in which
network businesses are remunerated and
user access is procured/costs allocated,
which will impact the cost base of
generators and retailers.
Covid-19
• The financial impact on Government
funding over the immediate and longer
term will result in a reassessment of
investment priorities for this and future
administrations both in the UK and
elsewhere which could affect Drax
business model and financial prospects.
• Ofgem is reviewing the fundamental
design of the power market in light of
the impact on balancing costs of Covid-19
demand-levels (which offer an insight to
the future supply/demand balance) and
general efficiency/effectiveness of market
with increasing proportion of zero
marginal cost generation.
70 Drax Group plc Annual report and accounts 2020
Strategic
Context
The Group’s purpose is to enable a zero carbon lower cost energy future, with an ambition to become a carbon negative
company by 2030. Underpinning the Group’s purpose and ambition are three strategic aims:
1) to build a long-term future for sustainable biomass,
2) to be the leading provider of power system stability, and
3) to give all our customers control of their energy.
Through this strategy the Group aims to deliver long-term growth opportunities, including investment in new technologies
for alternative fuels, which we believe have the potential to support earnings beyond 2027, when the subsidies we receive
for generating electricity from biomass are curtailed.
Additionally, the Group aims to deliver higher quality, diversified and sustainable earnings, whilst also supporting the UK’s
ambition to achieve net zero by 2050.
Risk and impact
Strategic risks are defined as those that
could materially undermine any of the
Group’s strategic aims.
Sustainable biomass
Building a long-term future for sustainable
biomass requires the achievement of an
economically sustainable level of fuel cost
relative to other energy sources. A primary
objective is to increase biomass self-supply
to five million tonnes per annum and reduce
the cost of generation to £50 per MWh by
2027 to achieve and sustain an economic
level of cost for sustainable biomass
generation.
• There is a risk to the availability of feasible
expansion opportunities and the successful
identification and delivery of initiatives to
reduce the current cost of biomass.
• Irrespective of the economics of
sustainable biomass there is a risk that
biomass is not accepted either in the UK
or in other jurisdictions as a renewable
source of energy. Growth opportunities,
investment and innovation into new
technologies required to further improve
the economics and carbon reduction
potential of sustainable biomass could
therefore all be limited.
System stability
The power market in which we operate
continues to evolve and with it the
requirements for system stability products,
new technology solutions and the market
to procure them. To be a leading provider
of system stability, we need to build the
right portfolio of assets and associated
business models.
To enable us to build the right portfolio
of assets and associated business models
to achieve our aim, it is important that
the market values flexibility and system
services at the right economic levels,
and procures those services through
mechanisms that we are able to participate
in effectively.
• There is a risk that the market does not
value flexibility and system services at the
right economic levels or procures those
services through mechanisms that we
are not able to participate in effectively.
• There is a risk that unexpected changes
to electricity supply and demand could
reduce electricity demand and volatility,
and therefore limit the market for system
stability products.
System stability
• We maintain and invest into a central
Group market modelling capability and
embed it into planning and option
assessment and test/cross check against
third party scenarios.
• Continually evaluate a) the current
Customer Control
Drax aims to enable all its business
customers to decarbonise their energy
sources and control energy use and cost.
• The Customers business needs to
compete profitably in all the customer
segments it serves. As the market evolves,
there is a risk that the economic viability of
the Customers business is undermined by
changes in market operations and rules, or
an emerging mismatch in some segments
between Drax’s aim and services and the
requirements of the customer.
Capital
Delivering any one of the strategic aims
requires the ability to access and
effectively allocate the capital required
while maintaining a corporate credit rating
in the BB range.
• There is a risk that investor sentiment
moves away from Drax and its strategic
direction. This could happen if for example
sustainable biomass becomes unattractive,
or Drax allocates capital poorly and
underperforms.
Key Mitigations
Sustainable biomass
• Adoption of an integrated plan to expand
biomass self-supply capability, reduce
the cost of sustainable biomass to an
economically sustainable level and
develop innovative approaches to fuels.
Allocation of c. £600 million with rigorous
tracking and reporting on cost reduction
achieved.
• Drax is a pro-active advocate for
sustainable biomass. An Independent
Advisory Board is tasked to challenge our
science-based approach and assumptions
on sustainable biomass and publish their
recommendations.
and projected performance of our own
portfolio of assets, and b) the value gained
from changing the composition of the
asset portfolio to better fulfil a strategy
in line with the Group’s view of the
market outlook.
Customer control
• The Customers business introduced
a programme to reshape the customer
portfolio in 2020, including emphasising
growth in the customer segments aligned
to Drax’s purpose.
• The organisation includes a new growth
unit from which Drax branded electric
vehicles and electric assets propositions
were launched to support decarbonisation
and control of customers’ energy.
Capital
• We continue to run a full investor
relations programme, covering equity
and debt markets.
• The Group has evolved further its
approach to capital allocation. This
provides rigour and consistency in
assessing the technical, financial, and
strategic justification of new projects
across the Group, in particular for
investments in new and emerging
technologies.
Changes in factors impacting risk in 2020
• The Brexit negotiations during the year
and subsequent transition to
the UK/EU FTA had a relatively immaterial
impact on the Group’s strategic aims.
• The disposal of the Group’s CCGT portfolio
announced on 15 December 2020, which
completed on 31 January 2021, combined
with our commitment to close the coal
generation assets, delivers a fully
renewable generation portfolio for system
services. However, it reduces the assets
available to provide system flexibility.
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Principal risks and uncertainties continued
Risk level change from previous year
Up/increasing
Down/reducing
No change Covid-19 Impact
Strategic continued
• Markets for system stability continue
evolving, with the introduction of the
new ESO market for synchronous
compensation. The Group bid successfully
for a contract for Cruachan and will watch
to see how the market evolves.
• Experience from the Group’s €250 million
bond issue indicates that demand exists
for “green” investment, and with it a view
that the strategic risk for access to capital
is not currently high.
Biomass acceptability
Covid-19
• Demand for electricity fell in the
Customers business and some customers
experienced financial distress. Therefore,
focus shifted during 2020 from the
delivery of strategic aims to managing the
impact.
• There was a slowdown in the delivery
of the Government agenda on the
environment, with a delay to COP26
and the publication of a white paper
on Energy.
• However, publications such as from
the Committee on Climate Change and
the Government indicate a growing
commitment to bioenergy carbon capture
and storage (BECCS), and with it
acknowledgement that sustainable
biomass is seen as an accepted part
of the UK’s future.
Context
Sustainability legislation at EU and UK level, as well as in other countries in which we operate and where we source biomass, in
addition to public understanding of the benefits of the supply chain and technology is evolving. Attitudes to the benefits of
biomass as a renewable source may not align with our strategy and investment case, which may impact our plans and mean
that actual returns differ from those we expected. Brexit introduced new risks as the ability of the UK to influence future EU
policy on biomass sustainability requirements is likely to reduce and there is the potential for policy divergence which might
make our operations and obligations more complex and costly.
Risk and impact
• Sustainability policy changes on the
Key mitigations
• Increased transparency in how we
sourcing and use of biomass in the UK, EU
or other countries in which we operate or
from which we source biomass could be
unworkable and make it difficult for us to
comply with policy requirements or
adversely affect our ability to claim subsidy
in support of economic biomass
generation. Changes in policy could
increase costs, make it difficult to source
biomass, or reduce the current support
for the benefits of biomass.
evidence sustainability.
• Working with academics, think tanks
and specialist consultants to improve
understanding and analysis of the benefits
of biomass.
• Engaging with key eNGOs to discuss
issues of contention.
• Forging closer relationships with suppliers
on sustainability through the supplier
relationship programme.
• Maintaining strong processes to ensure
• Detractors and some environmental
compliance with regulation.
non-governmental organisations (eNGOs)
may influence policymakers against
biomass use resulting in reduced support
for the benefits of biomass.
• Being outside the EU may reduce the UK’s
influence on biomass acceptability and
future sustainability requirements,
potentially leading to multiple compliance
requirements (policy divergence).
• Increased engagement across all
European Institutions (Commission,
Parliament, Council), and relevant UK
Government departments.
• Developing and maintaining strong
relationships with policymakers.
• Continued engagement within our supply
chain to ensure compliance with prevailing
regulations and standards, as well as
opportunities to enhance actions which
support sustainable and responsible
sourcing strategies and bio-diversity
which is integral to our philosophy.
Changes in factors impacting risk in 2020
• BEIS has announced it will create a new
bioenergy strategy that will be published
in 2022, reassessing the role of biomass
in the context of achieving net zero.
• Evidencing of our forest biomass sourcing
commitments.
• The Independent Advisory Board (IAB)
of scientists, and leaders in the field of
sustainability providing impartial advice
and guidance operated throughout 2020.
• The EU has confirmed it will review several
relevant pieces of legislation including the
EU ETS, LULUCF, REDII – potentially giving
rise to policy changes and some possible
divergence in sustainability criteria
between the UK and Europe.
• Any tightening of reductions in GHG
emissions targets in Europe and increased
number of commitments to coal phase out
among EU Member States provides the
opportunity to supply new markets with
sustainable biomass.
Covid-19
• The UK Government discussions on policy
changes have continued. Indications are
that as part of the wider economic
recovery plans, UK Government will bring
forward and have a greater focus on its
sustainability policies.
72 Drax Group plc Annual report and accounts 2020
Plant operations
Context
The reliability of our operating plants both in the UK and the US is critical to our ability to create value for the Group. Some
of our plants are old, for example, Drax Power Station was built approximately fifty years ago and our hydro plants nearly
one hundred years ago. The plants and production facilities are highly complex and require careful management to operate,
with many required to run flexibly and promptly to respond to the demands of the electricity system. For Drax Power Station
specifically, the plant was originally constructed to generate electricity from coal, and we have converted four of the six units
to use biomass, rather than the fuel for which they were originally designed.
Risk and impact
• As plant ages, the operational reliability
Key mitigations
• Implementing a comprehensive plant
Covid-19
• The risks for the potential to lose
production time as a result of key
operational employees being affected
by the pandemic increased. The Group
continues to operate all of its plants in line
with the latest UK Government and US
authorities’ guidelines whilst protecting
the safety of its employees and sub-
contractors. The measures implemented
by management to address the increased
risks resulted in additional costs and
challenges associated with the 2020
outages across our generating assets and
in particular the planned outage of Unit 3
at Drax Power Station.
and integrity could reduce. Single or multi
point failures of plant across our portfolio,
and incidents arising from the handling
and combustion of biomass, could result
in forced outages in our generation or
pellet production plants.
investment and maintenance programme,
that is risk-based and reflects the
challenges of operating complex
equipment, some of which is old,
supported by engineering excellence.
• Ensuring plant is designed to prevent
• Successful generation using biomass
and control major hazards.
requires stringent quality to be maintained
throughout our pellet production plants
and the supply chain, which continues
to evolve and mature. Our suppliers may
experience operational or financial
difficulties which impair their ability to
sustain continued compliance or result
in inadequate standards being met. Poor
quality could result in additional costs
(as we may be required to source material
from other suppliers) or inadequate
volume of materials, leading to loss of
generation which could adversely affect
financial performance and results.
• Brexit could impede the future availability
and delivery of materials or parts longer
term or increase our costs to operate in
securing such items.
Covid-19
• Given ongoing uncertainty over the timing
and availability of measures to support a
return to more normal working patterns
it is unclear whether future planned or
unplanned events at our sites could incur
additional costs or delays in execution
which could impact operational
performance and/or future financial
results. The pandemic has impacted the
financial and operational performance
of many businesses. The prolonged period
of such impacts could result in businesses
on which Drax relies failing or being
restricted in their ability to deliver products
or services as we might normally expect.
This could have further impact in the
event we suffer interruptions or forced
outages or increase our costs to operate
where we need to find alternative
suppliers or business partners.
• Maintaining robust management systems,
designed to identify and mitigate risk.
• Maintaining the stringent safety
procedures in place for handling biomass
and dust management.
• Managing the plant as a portfolio to
ensure losses are minimised.
• Undertaking significant research and
development on the production of wood
pellets, as well as the handling and burning
of biomass.
• Full testing of all biomass supplies prior
to acceptance, and the use of contractual
rights to reject out of specification
cargoes.
• Sampling and analysis through the supply
chain, to increase understanding of causes
of fuel quality issues.
• Maintaining insurance in place to cover
losses from plant failure where possible.
• Employing advanced condition monitoring
systems to alert any possible plant failures
before they occur where practicable.
Changes in factors impacting risk in 2020
• Completion of a significant planned
maintenance outage on Unit 3 at
Drax Power Station with installation
of a new high-pressure turbine unit
and replacement hot reheat pipework
and upgraded unit control system.
• Planned maintenance outages across
the hydro and CCGT fleet which included
major overhauls of the gas turbine at
Damhead Creek and steam turbines
at both Damhead Creek and Shoreham.
• Baton Rouge rail chambering yard fully
commissioned.
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Principal risks and uncertainties continued
Risk level change from previous year
Up/increasing
Down/reducing
No change Covid-19 Impact
Trading and commodity
Context
Sales of power and Renewable Obligation Certificates (ROCs) represented £1,699 million (2019: £1,857 million) of our revenue
from continuing operations in 2020 in our Generation business and our Customers business made sales of £2,119 million (2019:
£2,226 million) of electricity and gas.
The margins derived from our Power Generation and Customers businesses are influenced by the liquidity of the commodity
markets and our ability to secure desired prices in a volatile market. Non-commodity costs are also volatile and inherently
difficult to hedge.
The income value derived through the generation of ROC’s was £490 million (2019: £528 million). The value which we derive
from ROC’s can change from that of prior years and our future forecasts.
Risk and impact
• Liquidity and volatility in trading
Key mitigations
• Ensuring high levels of forward power
Changes in factors impacting risk in 2020
• Sterling exchange rates against the US
conditions and unexpected changes in
commodity prices could result in lower
margins and a reduction in cash flow
in our Generation business.
sales for 2021 to 2023 and the Contract
for Difference for the one biomass
generation unit reduces our exposure
to volatility.
• Delivery of commercial value from the
• Operating three biomass units under
flexibility of our portfolio and leveraging
a complicated supply chain with uncertain
running regimes requires effective
execution of our trading strategy and
opportunities to trade being available
in a liquid market.
• The Generation business may fail to
secure future system support services
contracts which are a source of revenue
diversity for the Group, amounting to £118
million in 2020.
• The value of ROCs generated may be
lower than forecast, for example if the
recycle value outturns are below our
projections due to higher than anticipated
renewable generation.
• Supplier failures continue to lead to
supplier mutualisation processes being
invoked (whereby their costs and
commitments are shared among other
suppliers), notably for ROCs, resulting in
increased costs, albeit this level is capped.
a single ROC cap for Drax Power Station
provides increased opportunities for
greater flexibility of generation and to
add additional value.
• Additional value is provided through the
increased flexibility and optimisation
capabilities provided by Drax’s hydro assets.
• Customers’ energy supply and commodity
price exposures for fixed price sales are
hedged with third parties where necessary.
• Purchasing wood pellets under long-term
contracts with fixed pricing increases
price certainty over extended periods.
• Engaging with wood pellet suppliers to
ensure delivery schedules are met and any
shortfalls addressed to limit the impact on
power generation.
• Hedging fluctuations in ROC generation
from wind farms through weather
derivatives.
• The value of the Group’s ROC production is
hedged by selling ROCs to the Customers
supply business and other counterparties.
This is supplemented by assessing
opportunities to mitigate Recycle Fund
volatility and analysing possible outturns.
• Significant hedging of forward foreign
exchange (see pages 206 and 223 for
more details).
• Coal stocks are being managed for
remaining commercial operations and
Capacity Market obligations.
Dollar, Canadian Dollar and Euro have been
volatile due to uncertainty surrounding
Covid-19, Brexit and the US elections.
• Power prices across 2020 were generally
lower than previous years with low market
liquidity and increased volatility in
short-term prices.
• Depressed wood pellet prices due to
planned and unplanned outages across
the industry. This limits Drax’s ability to
mitigate any unplanned outage due to its
scale of biomass generation in the market.
• The replacement of the EU ETS following
Brexit is a risk that the business continues
to monitor with mitigations planned for
the current scenarios outlined by the
UK Government.
• Brexit and the subsequent transition
to the UK/EU FTA continues to create
uncertainty in regulation within the UK as
well as power interconnectivity between
Europe and the UK.
Covid-19
• The potential bad debt risk increased as
a result of the impact to the markets and
the economy. The Group continues to
hedge commodity and foreign exchange
exposures on a long-term basis protecting
against any near-term volatility in prices
and hedges energy supply to provide
support to its energy customers.
74 Drax Group plc Annual report and accounts 2020
Information systems and security
Context
Our IT systems and data are essential to supporting the delivery of the day-to-day business operations of the Group and make
sure our financial, legal, regulatory and compliance obligations are met. Our systems must also evolve in order to contribute
to the delivery of our strategy. The systems need to be fit for purpose and the confidentiality, availability and integrity of the
systems and data needs to be ensured.
Risk and impact
• Any absence or delay to the
implementation of key IT systems
transformation affects our ability to
deliver our strategy and results in
additional unforeseen costs.
• Reduced performance or reduced
availability of IT systems, data and facilities
affecting our operations adversely. For
example, interrupting supply of electricity
or impeding the accurate recording of
electricity supplied to and used by our
customers.
• Security compromise of our systems
and data including personal data; causing
operational and financial impact and
regulatory non-compliance.
Key mitigations
• Maintaining and refreshing business
continuity, disaster recovery and crisis
management plans.
• Maintaining effective and up-to-date
cyber security measures, including a
protect, detect, respond and recover
strategy, which evolve to address known
new or potential threats.
• Implementing a Group IT Strategy and
identifying key projects to deliver
Group-wide services, improving security,
resilience and performance. The IT Board,
a sub-committee of the Executive
Committee, provides oversight and
governance.
• Periodic external assessment of the
integrity and adequacy of our IT and cyber
security arrangements which are assessed
and challenged by subject matter experts,
as well as the Board and Audit Committee.
• Scenario events in which we assess our
capability to respond to potential
circumstances or threats.
Changes in factors impacting risk in 2020
• The enforcement of key compliance
regulations such as the NIS Directive,
which is ongoing, have increased the
potential financial cost to the business.
• Work continued on integrating hydro and
gas asset systems where it was applicable
to do so.
• Further work embedding the IT operating
model has been undertaken to better
support strategic objectives of the Group
and improve efficiency of technology
processes.
• Ongoing programme of improvement
to security, monitoring of key IT controls
and IT and security risk management.
• A formalised and approved new Target
Architecture which enables us to deliver
the IT systems and capabilities flexibly
and in support of business needs.
Covid-19
• There continued to be a manageable
impact on the delivery timelines of a
number of planned IT activities, driven
by the availability of resources and other
priorities to ensure the business remained
operational. The adoption of new
technology and changes in existing IT
systems was necessary to facilitate the
safe home working for many of the Group’s
employees and has helped to improve the
IT environment.
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Principal risks and uncertainties continued
Risk level change from previous year
Up/increasing
Down/reducing
No change Covid-19 Impact
Climate Change
Context
According to the Intergovernmental Panel on Climate Change, global warming is likely to reach 1.5°C as early as 2030,
causing changes in the climate system with associated impacts. It is important we assess the impact of climate change
on our business and our preparedness to manage risks related to both the physical impacts of climate change and the
transition to a low carbon economy.
Key mitigations
• Sourcing from a wide geographical range
Changes in factors impacting risk in 2020
• Short-term interruption to fibre production
at our LaSalle Pellet Production plant
during the year caused primarily by adverse
weather conditions in the US in 2020.
• Ongoing development and review of
external greenhouse gas corporate
accounting and reporting guidance,
frameworks, and standards.
• Publication and implementation of
a new Climate Policy for the Group.
• Completion of work by Strathclyde
University to understand the potential
changes in long-term weather patterns at
Cruachan Dam. Results show that current
predicted extremes are manageable.
Covid-19
• The economic recovery plans that are
starting to emerge indicate the UK
Government will use the opportunity to
bring forward policy and actions that help
drive corporate focus on sustainability and
climate change action.
of third-party pellet mills.
• US Pellet Production business has
developed stockpiles to alleviate
incidences of wet weather-related
production interruption.
• Aspects of the physical impacts of climate
change on new installations are addressed
under planning laws.
• Working with Energy UK on a framework
to better manage the physical impacts of
climate change on thermal generating
facilities.
• Modelling of reservoir spillway capacities
at Cruachan Dam, to understand capacity
for extreme weather events. Robust
business strategy informed by net zero
2050 scenario.
• Establishment of a carbon negative
ambition and a Climate Policy,
underpinning a business strategy
consistent with UK Government climate
change policy.
• Engagement with stakeholders, including
close liaison with UK Government, on
future policies.
• Diversification of generation portfolio
with acquisition completed in 2018.
• Strong innovation team tracking
technology advances and developing
new technologies such as BECCS.
Risk and impact
• Physical impacts of climate change to our
operations include increased incidence
and severity of extreme weather events,
such as drought and heavy rainfall, that
may impact production. Hurricanes have
increased in frequency and intensity in the
US Gulf, which can disrupt our business
and supply chain. For example, heavy
rainfall affected our US Pellet Production
business and third-party pellet mill
sourcing areas in the winter of 2019.
Severe rainfall in the UK also resulted in
significant flooding to areas surrounding
our Drax Power Station in early 2020
which affected the ability of people and
materials to reach site for a short period.
• Policy risks related to the transition to a
low carbon economy include UK
Government changes in climate policy
that may impact generation, such as
unabated gas generation. Future revisions
to greenhouse gas accounting
methodologies have the potential to
impact biomass generation.
• Technology risks related to the transition
to a low carbon economy include
technology and innovation not developing
as expected, impacting delivery of the
Group’s carbon negative ambition and
business strategy.
• Reputation and market risks related to
the transition to a low carbon economy
include increased activity by NGOs,
the potential for reduced investor and
customer confidence, delays to our
strategy (for example more stringent
qualifying regimes or approval processes
linked to developing existing or new
facilities) and challenges with employee
recruitment and retention.
76 Drax Group plc Annual report and accounts 2020
People
Context
We need to ensure we have an agile and inclusive working environment where people from diverse backgrounds and
experience are enabled to connect, develop, and succeed both in their own careers as well as in the delivery of objectives
which support the Group’s strategy. We believe recruiting, empowering and retaining the right people in place with the
leadership, management, specialist skills and engagement is critical in the delivery of strategic plans now and in the future.
Risk and impact
• Our performance and the delivery of
Key mitigations
• Conducting a comprehensive and
our strategy is dependent upon having
high-quality, suitably experienced
employees and engaged colleagues at
all levels of the organisation reflecting
the diversity in wider society.
• Whilst we continue to invest in our people,
including supporting them in the
development of their capabilities through
training and development programmes, we
may be unable to recruit and retain people
with the necessary skills and experience
which could in turn affect our ability to
execute our strategy. Examples include
our ability to recruit people supporting
work on new technologies such as BECCS
and alternative fuels and the expansion
of our biomass facilities in the US.
• The Group is undertaking significant
change associated with implementing
our strategy and improving operational
effectiveness. Examples include the
closure of our Coal generating assets and
also changes to our operations where we
generate electricity as we transition to
alternative viable fuels.
systematic assessment of our talent
and succession plan.
• Implementing consistent Group-wide
performance management, potential
assessment, and career development
frameworks.
• Providing workforce engagement forums
enabling colleagues and management to
communicate, share ideas and views on
any business-related issues, gain feedback
and explore opportunities for new ways
of working such as our Fit for the Future
programme.
• Conducting regular colleague surveys to
monitor engagement levels and alignment
of people with Group values (you can read
more about this on page 61).
• Continued investment employees personal
and career development to enhance
business performance and provide the
Group with a relevant pipeline of talent in
critical roles.
• Ensuring regular colleague
communications, and involvement in the
business through our MyVoice Forums
(more information on the work in these
areas in 2020 can be found on pages 61).
• Maintaining reward packages that aid
recruitment and retention.
• A diversity and inclusion strategy that
aligns to our organisational vision and
goals (you can read more about our work
in this area on pages 60).
• Engaging our colleagues with defining the
behaviours that sit behind our Values (you
can read more about our work in this area
on pages 58 and 59).
Changes in factors impacting risk in 2020
• During the year, the Group’s focus on
implementing its HR strategy has
mitigated various risks and lessened the
probability and impact of the overall
people risk category. The Group is aware
that, as it manages the wider context
of rapidly changing people risks, the
HR strategy will need to remain agile
to address anticipated increases to
probability and impact in the short-term.
• We reviewed our HR strategy and
reshaped our priorities putting together
a comprehensive five-year HR plan
centred around:
1. developing our HR foundations
to enable the organisation to be
efficiently fit for the future.
2. raising business performance and
building organisational capability
through the empowerment of
our people.
3. continuing to develop and improve to
be best in class for people leadership.
4. supporting the delivery of Drax plans,
purpose, and operational excellence
as part of business as usual.
5. ongoing development of our
workforce engagement forums.
6. making the organisational and people
changes to align with ‘fit for the
future’ thinking, driving consistency,
efficiencies, improvements in decision
making and reduction in cost.
Covid-19
• There has been a wide change in working
practices in particular for office-based
employees. Management continues to
provide an increased focus on “keeping
our people safe” within business continuity
planning throughout the pandemic,
through increased communications and
wellbeing activity, community activity, and
making appropriate policy changes.
Strategic report
The Strategic report is set out on pages 1 to 77 of this document and was approved by the Board of Directors on 24 February 2021.
Will Gardiner
CEO
Drax Group plc Annual report and accounts 2020 77
Strategic reportGovernanceFinancial statementsShareholder information
Positively
contributing
to the climate
change
agenda
It’s exciting to be part of
Drax as we step up our
efforts to lead on biomass
sustainability standards, to
positively contribute to the
climate change agenda, and
to be a force for good in the
communities and forests
that supply us.
In 2020 we published the first
of a series of Catchment Area
Analyses that take a close
look at how forests have
responded to increased
demand from us. Those
published so far cover over
60% of our supplies and mills
in three key geographies –
the US South, British
Columbia, and the Baltics.
We also published a Biomass
Carbon Calculator to more
accurately measure emissions
in wood pellet supply chains.
We worked with the
Earthworm Foundation to
launch the Healthy Forest
Landscape approach, which
tracks trends in carbon stock,
forest cover, biodiversity and
community well-being.”
Richard Peberdy,
Group Head of Sustainable
Forests
Weyerhaeuser tree nursery,
Hazlehurst, Mississippi
78 Drax Group plc Annual report and accounts 2020
Creating the
workforce
of the future
I wanted to do something
more practical and gain
industry experience alongside
getting relevant qualifications.
The most challenging aspect
initially was being the only
female technician on my site
– in fact, I was the first ever
female technician on site! It
was quite intimidating, but
everyone was really friendly,
welcoming and supportive.
It’s such a great team. Doing
an apprenticeship is a great
way of gaining experience
in an industry that you’re
interested in and helping
to build your confidence.”
Danielle Nicholson
Danielle Nicholson studied
aeronautical engineering at
university, and joined Drax in 2019
as a Mechanical Technician
Apprentice at our Daldowie site
near Glasgow.
Drax Group plc Annual report and accounts 2020 79
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report: Letter from the Chair
How have we delivered
for our stakeholders during
these difficult times?
Clarity of purpose, a positive culture and
strong governance have enabled us to
continue to deliver for our stakeholders
Our purpose, strategic aims and values
Purpose and ambition
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 direct business operations globally – creating
a carbon negative company
Our strategic aims are:
To build a long-term future for sustainable biomass
By expanding our sustainable bioenergy supply chain and
reducing costs we are developing options for long-term
biomass operations – renewable generation, negative carbon
emissions, system support services and third party supply of
biomass to international markets
To be the leading provider of power system stability
Through a portfolio of flexible and renewable generation,
and large industrial and commercial customer supply
business, we will provide system support services to allow
the power system to utilise intermittent renewable energy
accelerating the UK’s decarbonisation en route to 2050
To give our customers control of their energy
We provide our customers with renewable energy, and the
opportunity to control and optimise energy use and cost,
helping us support the energy system
Our Values
• We care about what matters
• We are a can-do kind of place
• We see things differently
• We listen carefully
• We do what we say we will do
80 Drax Group plc Annual report and accounts 2020
Philip Cox CBE, Chair
Dear shareholders,
I am pleased to present our Corporate
Governance Report.
2020 has created many new challenges
for companies large and small, and
society as a whole. Drax responded to
the impact of Covid-19, whilst also
working to maintain well managed and
properly conducted day-to-day activities.
In other sections of the annual report,
we have explained aspects of our
response to the pandemic, underpinned
by a clear priority to keep our employees
safe, support their wellbeing and enable
them to adjust to new ways of working.
Informed by our values – of caring about
what matters – we have also worked
hard to put into place support for our
colleagues, wider communities,
customers and partners. Alongside this,
we have remained focused on our
business performance, prospects and
resilience – to continue the delivery
of our strategy throughout 2020 and
for the longer term, in conjunction with
maintaining transparency and clarity in
our reporting to shareholders, business
partners, Government and employees.
Our strong governance framework,
culture and values have played a critical
part in enabling us to respond to the
pandemic and its economic and social
impact in conjunction with safeguarding
the business imperatives which underpin
long-term sustainable value creation. As
part of the Critical National Infrastructure
our work has never been more important,
and I am immensely proud of the
outstanding work of our employees
across the Group, as they adjusted to
their home and working lives in ways that
would have seemed unimaginable before
the pandemic. They have risen to the
challenge of supporting the safety of
fellow employees and loved ones, whilst
continuing to focus on running the
business. Working together, they have
provided the energy and critical system
support services that the country needs
to keep the lights on and to power
industry and businesses.
Covid-19 and the Board’s response
The Drax Board adapted to the changing
ways of operating in response to the
pandemic. Deploying online video
conferencing, the Board held additional
meetings throughout April, May and June
to oversee management’s response and
understand the impact on employees,
customers, suppliers and business
partners. These meetings were attended
by the Executive Committee, together
with key members of senior management
as necessary. Each meeting started with
a report on our employees, focusing
on the measures taken to protect key
workers at operational sites, and how
the Company was implementing home
working arrangements where possible.
The report also provided updates on the
wellbeing of employees as they adapted
to changes in their lives and working
practices. The Board also oversaw the
operational response to continuing to
deliver the Group’s key objectives during
the pandemic. You can read more about
this on page 88.
The Board has been kept appraised
of the measures being taken and
appreciates the open and honest
discussions with management and the
collegiate response to the pandemic.
The way the business has performed
during this period is a testament to the
strength of the organisational structures
and the commitment and hard work
of employees at all levels. It is also a
testament to the strong sense of shared
purpose and values and I am delighted
that our 2020 workforce engagement
survey has seen our engagement score
improve during the pandemic. You can
read more about this on page 61.
Engaging with our stakeholders
2020 demonstrated the importance
of effective engagement with all
stakeholders, and of ensuring the Board
has a good understanding of how
prevailing issues and potential decisions
might impact those stakeholders. During
the year, we continued to deliver our
investor relations programme and, before
the Covid-19 lockdown, we hosted site
visits for investors and analysts at Drax
Power Station, which included
discussions on our sustainability
objectives. We also hosted meetings
to discuss our work with BECCS, and
to meet our Chief Innovation Officer.
Our Head of Climate Change and Head
of Investor Relations attended an ESG
conference where we discussed carbon
abatement, coal closure and biomass
sustainability.
Due to constraints on holding face-to-
face meetings, the CEO, CFO and Head of
Investor Relations engaged with existing
shareholders and new investors primarily
via phone calls and video calls. Key areas
of discussion were our biomass strategy,
biomass sustainability, the role of system
support services, the future potential for
gas and progress with BECCS. Reflecting
increasing interest in new technologies
aimed at reducing carbon emissions, we
have conducted and participated in a
number of presentations and seminars
on negative emissions and the role of Drax.
In addition to our full and half-year results
we issued a trading update in April (an
early stage in the pandemic), in which
we set out our expectations for the
Group. These included quantifying the
anticipated financial impact of Covid-19
and re-affirming our sustainable and
growing dividend policy. Our assessment
of the potential impact from Covid-19
remained consistent throughout 2020
with that initial report.
Reflecting feedback from investors and
the 2019 investor perceptions study
conducted by Makinson Cowell, we have
continued to develop our programme
of ESG reporting and engagement.
This includes developing our reporting
towards the disclosure requirements
for the Task Force on Climate-Related
Financial Disclosures (TCFD), which we
incorporate in this year’s annual report
on pages 32 and 33.
As mentioned above, our employees
play a critical part in the success of our
business and delivering our strategy.
Throughout 2020 our CEO, Will Gardiner,
and I met quarterly with the chairs of the
MyVoice workforce engagement forums.
Each meeting featured an agenda of
proposed topics, which were previewed
in advance with the attendees. For
example, the meeting in September had a
presentation on the whistleblowing
resources available to employees. In June,
Nicola Hodson, who is a Non-Executive
Director and Chair of the Remuneration
Committee gave a presentation on the
Remuneration Policy and the approach
being taken to reflect that policy in
Group-wide reward.
Informed by our values –
of caring about what matters
– we worked hard to put
into place support for our
colleagues, wider communities,
customers and partners.”
We also identified particular topics
which allow attendees to consult with
employees and report to the meeting on
feedback. In turn, Will Gardiner and I have
been able to have discussions about the
Group’s response to Covid-19, including
how such events have informed our
strategy and purpose. We have also
offered feedback and expressed our
appreciation for how our people have
contributed to these matters. There is
additional information about the MyVoice
forums on pages 61 and 92, and more
about our stakeholder engagement,
and the factors we consider in decision-
making, on pages 90 and 91.
Culture and governance
We are proud of our culture at Drax and
it is this culture that drives our values.
A fundamental element is acting with
integrity – what we call, doing the right
thing. The Board and I seek to set a
clear and positive tone from the top
to promote these principles, which in
turn drive standards and practices in
all aspects of our work.
In 2020, we asked our colleagues from
across the business to articulate their
thoughts about the essence of Drax and
what they believe sets us apart. Our five
values – We care about what matters;
We are a can-do kind of place; We see
things differently; We listen carefully and
We do what we say we will do – describe
what employees felt amounted to the
Drax experience. You can read more
about this on pages 58 and 59.
The Board and management promote
openness and a collaborative culture
across the Group. Our people are
respected irrespective of their
background, are enabled to realise their
potential, and contribute to delivering
our purpose and strategy. We have
always placed, and will continue to place,
particular emphasis on the safety and
wellbeing of our people. The Group’s
response to Covid-19 highlighted the
deep-rooted sense of caring at all levels,
as the business sought to support
employees and wider stakeholders.
Drax Group plc Annual report and accounts 2020 81
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report: Letter from the Chair continued
Board changes
In April 2020, Andy Koss stepped down
from the Board after four years as an
Executive Director and 15 years with
the Group. I would like to thank Andy
for his valuable service over this time.
He has made a major contribution to
the transformation of Drax into a
leading generator and supplier of
renewable energy.
During the year, the Board approved
the re-appointments for a second term
of three years for both David Nussbaum,
Senior Independent Director, and Nicola
Hodson, Chair of the Remuneration
Committee. Also in 2020, and following
a rigorous formal review led by our
Senior Independent Director, the Board
confirmed its support for my continuing
as a Non-Executive Director and Chair
for a further (and final) three-year term.
You can find more information on that
review on page 96.
I am grateful for the continued support
from my Board colleagues as we move
forward in delivering on our purpose
and strategy. You can find out more
about each of these re-appointments
in the Nomination Committee Report
on page 94.
Philip Cox CBE
Chair
From discussions in the Boardroom, to
conversations with the MyVoice forums,
to local initiatives, we have sought to
understand and respond to the
challenges and needs of others. You can
read more about our culture and values
on pages 58 to 63.
In a normal year, we would aim to hold
Board meetings at different locations and
meet local employees and management
in person. However, this has not been
possible in 2020. The Board discussed
this challenge in late spring and
considered how we might achieve
meaningful engagement without direct
contact. We decided to prepare video
messages from the Non-Executive
Directors, providing an opportunity
for them to share information about
themselves and discuss matters they
are passionate about.
Nicola Hodson recorded a video and
wrote a letter to all employees to
introduce herself. She explained the
role of the Remuneration Committee and
how pay in the wider workforce is linked
to executive pay, and emphasised her
commitment to diversity and inclusion.
Launched in August, Nicola’s video
received over 1,200 views on the Group’s
intranet. At our September meeting with
the MyVoice forum chairs we sought
feedback and reaction to the video and
letter. Following positive feedback, John
Baxter also recorded a video to discuss
one of his key areas of focus; health and
safety. This was launched in December.
The Board has been very pleased with
the feedback received and, in 2021, we
hope to build on this approach as one
aspect of ongoing engagement with
the workforce. We will continue to seek
new and innovative ways to engage
with the workforce both in person,
which we very much hope can return
to normal, and remotely.
Diversity
The Board is committed to building a
supportive, diverse and inclusive working
environment where everyone can be
themselves. This is a regular topic of
discussion at our Executive Committee
and Board meetings. In 2017 we set a
target to increase female representation
in senior leadership roles across the
Group to 40% by the end of 2020. We
have not yet progressed as intended –
at December 2020, 29% of our senior
leadership workforce (our top four career
levels) was female, with 31.5% females in
the total workforce – however during
2020, the Board challenged management
on the work required to improve in this
area and to commit the necessary
resources and time to make more
impactful progress. This has included
expanding the coverage of our inclusion
work to cover broader aspects of diversity.
Will Gardiner is an active member of
the POWERful Women “Energy Leaders
Coalition”, which is committed to driving
meaningful change in gender diversity
in the energy sector. As part of this,
Will took part in the POWERful Women
conference in October and spoke at a
panel of CEOs about diversity in Drax.
The Board recognises that diversity
goes beyond gender. In July 2020, our
Executive Committee participated in
a workshop led by Dan Robertson from
Vercida Consulting. Those attending
considered in depth how, through the
personal commitment of our executive
team, Drax can deliver change in all areas
of diversity.
We are working to support action
across the wider organisation, and Dan
Robertson also attended and presented
to our leadership team of 50 senior
managers in December. These discussions
are one part of enabling change through
engagement with our wider workforce.
We have taken a number of measures,
including sharing information on our
intranet about the value Drax places in
enabling and supporting diversity. We
have also reviewed our recruitment
policies and practices, and the associated
training for managers and leaders, and
developed a new Diversity and Inclusion
Policy. We launched this across the Group
in September 2020, as part of our new
Code of Conduct. You can read more
about our diversity and inclusion activities
on pages 60 and 95.
We regularly engage with our workforce
through our annual survey and quarterly
voice forums, as well as individual
conversations, to understand how we
can enable change. The feedback from
our employees has been very positive
to the steps we are taking, and their
continued support and commitment
to change will be important in realising
our objectives.
We see this as a long-term programme
across the organisation, enabled by short
and medium-term objectives that have
been considered by the Board. During
2021, the Board will assess and challenge
management on the objectives as part
of ensuring meaningful progress.
82 Drax Group plc Annual report and accounts 2020
Governance at Drax
Leadership and purpose
How the Board promotes the long-term sustainable success
of the business and considers and engages with our various
stakeholders
Division of responsibilities
The role of the Board and the Directors
• Corporate governance report (page 80)
i. Governance Framework
ii. Culture
iii. Stakeholder engagement
iv. Director development and induction
v. Board activities in 2020
• Working with our stakeholders (page 90)
• Director biographies (page 84)
• Board roles and key responsibilities (page 91)
• Composition and Independence (page 92)
Composition, evaluation and succession
The work of our Nomination Committee, and how we ensure
the Board and Committees operate effectively
• Nomination Committee Report (page 94)
i. Succession planning and diversity
ii. Evaluation
Audit, risk and internal control
The work of our Audit Committee, how we ensure the
integrity of the reporting and how we manage risk and
oversee internal controls
• Viability statement (page 64)
• Principal risks and uncertainties (page 66)
• Audit Committee report (page 98)
Remuneration
The work of our Remuneration Committee, how our pay
policies and practices support the purpose and strategy, the
link to long-term sustainable performance and alignment
across the Group
• Letter from Remuneration Committee Chair (page 109)
• Remuneration Policy (page 113)
• Annual report on remuneration (page 124)
• Covid-19 impact on executive remuneration (page 30)
Compliance with the UK Corporate Governance
Code 2018 (Code)
A revised Code, which can be found on the Financial
Reporting Council website at www.frc.org.uk, took effect
from 1 January 2019.
Reports on how Drax, the Board and its Committees had
satisfied the Principles and Provisions of the Code were
considered formally at two meetings during 2020. The meetings
included discussions about the steps being taken and how
they might evolve in 2020, the effectiveness of employee
engagement, and how the Board assesses, monitors and
constructively influences culture. The actions taken in
addressing recommendations from the most recently
completed externally-led performance evaluation were also
discussed. It is the Board’s view that the Company applied
the principles and complied in full with the provisions of
the Code during 2020.
Drax Group plc Annual report and accounts 2020 83
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report: Board of Directors
How does the Board of Directors provide
strong stewardship of the Group?
The Board shapes our purpose, strategy, culture and values
to generate long-term sustainable value.
Key to Committees
A Audit Committee
N Nomination Committee
R Remuneration Committee
Chair of Committee
Philip Cox CBE
Chair
N R
Contribution and Experience
Philip is an experienced leader
of large businesses, having held
both executive and non-executive
roles, including in the energy
sector. As Chair, Philip cultivates a
culture of openness, transparency
and honesty in which
constructive debate and
challenge occurs and in which
all directors contribute fully, His
responsibilities at Drax include
Board composition and
succession, Board governance
and stakeholder engagement.
He was previously CEO of
International Power plc, having
formerly been CFO. Prior to this
he held a senior operational
position at Invensys plc and was
CFO at Siebe plc. As a non-
executive he was previously
Chair of Kier Group plc, the Senior
Independent Director at Wm
Morrison Supermarkets plc,
Chair of Global Power Generation
and a member of the boards of
Talen Energy Corporation, PPL,
Meggitt plc and Wincanton plc.
Appointment to the Board:
January 2015
Appointment as Chair:
April 2015.
Will Gardiner
CEO
Andy Skelton
CFO
Contribution and Experience
Will has a strong track record
of building and leading well-
managed companies and creating
value. He has been a key architect
of our purpose and strategy,
driving the sustainability agenda
from the top, including Drax’s
response to the climate change
crisis, and ensuring that we are
delivering for our stakeholders.
He provides leadership of the
executive team and takes
responsibility for important
external relationships and
stakeholder management. Will
is also a non-executive board
member of the Sustainable
Biomass Program.
Will joined Drax in 2015 as CFO
and was appointed as CEO in
January 2018. He has a wealth
of experience in finance and
technology, having held CFO and
divisional Finance Director roles
at a number of major companies,
including CSR plc (acquired by
Qualcomm, Inc in 2015) and Sky.
He has dual US-UK citizenship and
has lived and worked in the UK
since 1998.
Appointment to the Board:
November 2015
Contribution and Experience
Andy has over 20 years of strong
finance and commercial skills,
alongside substantial experience
in the technology sector. Since
joining Drax two years ago he has
driven efficiency and operational
excellence across the Group to
provide a sound framework from
which we can deliver our purpose
and strategy. Andy is responsible
for financial control and planning,
corporate finance, investor
relations, tax, IT, procurement,
risk and internal audit and is Chair
of the Group Ethics and Business
Conduct Committee (EBCC).
He also represents Drax as a
board member of the Northern
Powerhouse Partnership.
Andy was previously CFO at
Fidessa Group plc and has held
a number of senior finance
positions at CSR plc, Ericsson
and Marconi, including two years
as CFO of Ericsson Nikola Tesla.
Andy has a BA in accounting
and finance and qualified as a
chartered accountant in 1994.
Appointment to the Board:
January 2019
84 Drax Group plc Annual report and accounts 2020
Gender diversity (%)
(As at 31 December 2020)
Composition (%)
(As at 31 December 2020)
Tenure in years (%)
(As at 31 December 2020)
Female
Male
29
14
29
57
Non-executive
Executive
Chair
28.6
28.6
0-2
2-4
5-6
71
42.8
David Nussbaum
Senior Independent
Non-Executive Director
A N R
Vanessa Simms
Independent Non-Executive
Director
A N R
Nicola Hodson
Independent Non-Executive
Director
A N R
John Baxter
Independent Non-Executive
Director
A N R
Contribution and Experience
Vanessa has extensive experience
in senior finance roles across
several different industries,
including real estate,
telecommunications and medical
devices. Her broad and varied
experience in finance, risk and
internal control is invaluable in
her role as Chair of the Audit
Committee.
In May 2021 Vanessa will begin
a new role as CFO of Land
Securities Group plc. Vanessa is
currently CFO of Grainger plc and
has worked in finance for 20
years, holding a number of senior
positions within Unite Group plc,
including Deputy Chief Financial
Officer. Prior to that Vanessa was
UK finance director at SEGRO plc.
Vanessa is a Fellow of the
Association of Chartered Certified
Accountants.
Appointment to the Board:
June 2018
Contribution and Experience
Nicola brings valuable technology
expertise, as well as having
extensive experience in business
and digital transformation,
sales and IT in leading global
companies. As Chair of the
Remuneration Committee Nicola
brings to the role a wide range
of experience of international
business, government
organisations, and dealing with
a variety of stakeholders.
She is currently Vice-President,
Global Sales and Marketing, Field
Transformation at Microsoft, and
was Chief Operating Officer of
Microsoft UK. Previously she had
P&L and sales roles at Siemens,
CSC (now DXC) and Ernst & Young.
Nicola is a Non-Executive Director
of Beazley plc.
Appointment to the Board:
January 2018
Contribution and Experience
John brings to Drax highly
valuable engineering, health and
safety, and energy generation
experience, with over 45 years
working across the nuclear,
electricity, oil and gas sectors.
John was previously at BP plc,
most recently as Group Head of
Engineering & Process Safety,
prior to which he worked at the
UK utility Powergen plc as Group
Engineering Director, as well as
roles as a UKAEA Board member
and also as a nuclear submarine
engineer officer. He is a Non-
Executive Director of Sellafield
Ltd and chairs the Sellafield Board
Committee on Environment,
Health, Safety & Security.
He is a Chartered Engineer, Fellow
of both the Royal Academy of
Engineering and the Royal Society
of Edinburgh. John has served as
President of both the Institution
of Mechanical Engineers and
The Welding Institute.
Appointment to the Board:
April 2019
Contribution and Experience
David’s wealth of experience in
international development and
environmental matters, and his
experience as Finance Director
of a listed industrial company, is
of huge value to Drax, contributes
significantly to the Board’s
understanding of the stakeholder
and sustainability landscape, and
helps to inform Board discussions
and decision-making.
David is Chief Executive of The
Elders, a group of independent
global leaders working to promote
peace and human rights, Deputy
Chair of the International
Integrated Reporting Council,
Board member of the
International Budget Partnership,
member of the Advisory Council
of Blueprint for Better Business,
and a member of the Ethical
Investment Advisory Group of the
Church of England. He was
previously CEO of WWF-UK, CEO
of Transparency International,
Finance Director and Deputy CEO
of Oxfam, and Finance Director of
Field Group plc. In a non-executive
capacity, David was Vice-Chair
of Shared Interest Society, Chair
of Traidcraft plc, and
Non-Executive Director of Low
Carbon Accelerator Limited.
Appointment to the Board:
August 2017
Drax Group plc Annual report and accounts 2020 85
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report: Executive Committee
Role of the Executive Committee
The Executive Committee focuses on the
delivery of the Group’s strategy, financial
structure, planning and performance,
organisational development, and the
delivery of change. This is enabled by
engagement with the workforce and
other stakeholders, including the UK
Government and NGOs. We also
collaborate with other businesses and
agencies, for example our partners in the
Zero Carbon Humber Partnership. There
are more details about such engagement
on pages 40 to 45. The Executive
Committee also develops and considers
policies and procedures that provide an
effective framework for operating in line
with required standards, laws and
regulations, for example our Code of
Conduct which was launched following
Board approval in October 2020 and our
policy on Diversity and Inclusion
launched in September 2020.
The Executive Committee meets
informally on a weekly basis in addition
to 11 monthly meetings each calendar
year. In addition, the Executive
Committee attended several meetings
of the Board between April and June
in response to the Covid-19 pandemic.
The Executive Committee considers
business performance against the annual
plan and progress in realising longer-term
objectives. Reports are provided on each
of the business units covering financial
and non-financial metrics. The latter
include, for example, matters affecting
the safety and wellbeing of our workforce
which is the opening agenda item for
each meeting. Ethics and values are also
a standing agenda item. During 2020,
as the impact of Covid-19 deepened, the
regular in-depth evaluation of financial
performance included detailed
assessment of cashflow and associated
assets and liabilities. More on the
financial review is covered in the report
of the Audit Committee on page 98.
In 2020, the Executive Committee
reviewed in depth all nine principal
risks, as identified on pages 66 to 77.
It considered stakeholder engagement,
with a focus on the political landscape
that could impact Drax’s ability to
execute its strategy. A summary of the
Committee’s activities can be found in
the table below.
Where relevant to the matters under
discussion, papers are distributed ahead
of meetings to brief Committee members
on matters to be discussed. Members
also received presentations on various
business issues by senior managers
within the business units. Biographies
of the Executive Committee members
can be found on the website drax.com/
about-us/corporate-governance/
Summary of the Executive Committee’s 2020 activities
Health, safety and wellbeing
• Considered regular updates from
business units, including on process
and behavioural safety and culture,
with a particular focus on health,
safety and wellbeing in light of
Covid-19
• Used input from the MyVoice forums
to implement plans to address
wellbeing across the Group
• Considered improvements in the
capture and reporting of information
on the Group’s safety and
environmental practices and how
these could be shared with the Board
• Reviewed the Group’s Wellbeing;
Diversity and Inclusion; Dignity at
Work; and Flexible Working policies
Governance
• Reviewed and updated the formal
governance structure of sub-
committees with responsibility for
operational performance; capital
allocation; risk management; IT and
security; and health, safety and
environment
• Reviewed updated HR and Group
Code of Conduct policies
• Reviewed and approved the
Climate Policy
Operations
• Considered the biomass supply chain,
procurement and investment
proposals to increase production
capacity and self-supply
• Reviewed the Generation portfolio
operating model
• Considered options for alternative fuel
supplies, such as woodchips and other
forms of agricultural residues
• Considered the future of flexible
generation, including options for flexible
gas generation
• Monitored progress of the planned
outages at Drax Power Station and
Damhead Creek
• Monitored the biomass supply chain and
operating procedures at our various sites
to ensure resilience against potential
issues surrounding Covid-19
• Considered gender pay gap reporting
and monitored initiatives undertaken
to close the earnings gap
• Considered diversity and inclusion issues
and initiatives being undertaken by the
Diversity and Inclusion Steering Group
established in 2019 (see page 60 for
more information)
• Delivered actions identified following
the 2019 workforce engagement survey
results (see page 61 for more
information)
• Engaged with the trade unions on pay
and the implementation of changes
to working practices
Stakeholders
• Oversaw the corporate response to
Covid-19 in supporting our customers
and communities (see case studies on
pages 34 and 35
• Considered the impact upon employees
and wider stakeholders of the proposed
closure of the coal units operated at
Drax Power Station
• Considered the political landscape and
implications for future investments and
execution of strategy, including the
impact of Covid-19 on potential future
funding and also the potential impact
of Brexit
• Considered Group-wide reward and
recognition structures, how they align
with the culture and values and how
prevailing reward mechanisms might
best be used across the Group, with
due regard for the Remuneration Policy
Finance and capital
• Considered the issuance of a new
Euro Bond facility which successfully
completed in October 2020
• Considered the impact of Covid-19
on our ability to maintain our dividend
policy, with due regard to the financial
and operational performance of the
Group
• Reviewed capital allocation plans in
support of investment opportunities
for organic growth in the business and
processes for approval
Risk
• Focused on one principal risk in
detail at each committee meeting
• Received regular updates on Brexit,
including action plans and key
mitigations
86 Drax Group plc Annual report and accounts 2020
A sound governance framework underpins our purpose and supports effective
decision making and the delivery of our strategy
Drax Group plc Board
Responsible for setting the Group’s purpose and values, and for setting and overseeing the
Group’s strategy and risk appetite. It also monitors performance, making sure that the
necessary controls and resources are in place to deliver the Group’s plans and that the Group
meets its responsibilities to its various stakeholders
Audit Committee
Oversees financial
reporting, internal
controls and risk
management systems,
internal and external
audit effectiveness
Nomination
Committee
Makes recommendations
on the size, diversity and
composition of the Board
and succession planning
for the Directors and
senior executives
Remuneration
Committee
Oversees the Group’s
approach to
remuneration, ensures
pay policies support the
purpose and strategy and
sets pay for the Executive
Directors and members of
the Executive Committee.
It also considers the
alignment of reward
across the wider business
Executive Committee
Focuses on the Group’s
strategy, financial
structure, planning and
performance, governance
framework, succession
planning and
organisational
development below
Board level
Page 98
Page 94
Page 108
Page 86
Executive Committee
Ethics and
Business
Conduct
Committee
Monitors ethical
behaviour and
practices across
the business
Capital
Allocation
Process
Committee
Provides
oversight,
coordination
and approval
for capital
deployment
proposals
IT Board
Provides
oversight and
coordination
of IT activities
and strategy,
information
systems and
security risk
Financial Risk
Management
Committee
Provides
oversight and
challenges
the effective
management
of all financial
risks, including
trading,
commodity,
treasury and
currency
Operating
Review
Committees
(Pellet
Production,
Generation
and
Customers)
Reviews the
operational
and financial
performance
of the business
units
Group HSE
Committee
Reviews and
challenges the
management of
processes and
people safety,
health,
environment and
wellbeing risks
Drax Group plc Annual report and accounts 2020 87
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report continued
Focus on effective management and
the role of the Board during Covid-19
The Covid-19 pandemic has been an unprecedented and
rapidly evolving crisis requiring effective, agile and timely
decision-making by the Board and management.
Deploying online video conferencing, the Board responded
to the initial phase of the pandemic by holding a series of
additional Board meetings throughout April, May and June.
The purpose was to oversee management’s response and
to understand the impact on employees and customers.
Members of the Executive Committee attended these
meetings, together with other key members of senior
management as necessary. Each meeting commenced
with a report on the safety and wellbeing of employees.
This included implementing office closures, arrangements
for working from home where possible, the impact on the
mental wellbeing of employees, and adapting working
practices. In particular, the Company wanted to protect key
workers at the power stations and processing plants, and to
develop clear safety principles for those required to work on
our sites. The Board also oversaw the operational response
to continuing to deliver the Group’s key objectives during
the pandemic. You can read more about this on page 81.
The meetings also discussed management’s assessment
of the potential financial and operational impact of the
pandemic on the Group’s business, and expectations on
the ability to execute the Group’s key objectives. The Board
received regular updates on the Group’s liquidity position,
trading figures and cash flow. Given the timing of the early
phase of the pandemic, and its proximity to April’s Annual
General Meeting, the Board considered carefully (in
conjunction with advisers) its capacity to pay the final
dividend and the appropriateness of doing so. The Board
took due regard for the Group’s projected cash generation,
in addition to external considerations including the views
of the UK Government and shareholders, and the experience
of all stakeholders in their relationship with Drax.
The Board also considered feedback from the workforce
MyVoice forums, particularly in relation to the Group’s
response to Covid-19. The Board considered communication
plans, as well as engagement with key stakeholders such
as the Government, Ofgem and the National Grid. There were
also updates on the rapid IT-led response to support home
working, distribute equipment and change systems to ensure
the stability and security of remote operations. The Board
discussed and agreed a series of support measures for
affected communities and stakeholders. You can read
more about this on pages 34 and 35.
Role of the Board
The Board determines: the Group’s purpose, strategy and
business model for long-term value creation; appetite for
risk and risk management policies; annual plan and budget,
to ensure that the Group has the necessary resources to
deliver the strategy; key performance indicators to measure
performance against strategic objectives; stakeholder
engagement, including shareholder engagement and
engagement with the workforce; acquisitions, disposals, and
other transactions outside delegated limits; material changes to
accounting policies or practices; significant financial decisions;
capital structure and dividend policy; the effectiveness of the
Group’s governance structure, including business conduct,
ethics and whistleblowing; prosecution, defence or settlement
of material litigation; Directors’ Remuneration Policy; the terms
of reference of Board committees; and the Board structure,
composition and succession.
Terms of reference
The Board has a schedule of matters reserved for its decisions
and formal terms of reference for its Committees. These are
reviewed periodically and the terms of reference of the
committees of the Board are available to view on the Group’s
website at www.drax.com.
Matters not specifically reserved to the Board and its
Committees under their terms of reference, or for shareholders
in General Meeting, are delegated to the Executive Committee
or otherwise delegated in accordance with a schedule of
delegated authorities approved by the Board. These were
reviewed by the Board and updates approved in December 2020.
How the Board functions
Routinely, prior to the formal meeting of the Board, the Chair
and the Non-Executive Directors meet in private without
management being present. This allows the Chair and Non-
Executive Directors to exchange views and share any concerns
before the meeting starts. At each Board meeting, the CEO gives
a report on key business, operational and safety matters and
reports on the Group’s financial performance. The Board also
receives regular reports on performance against the business
plan, operational and financial performance, periodic business
reports from senior management across the Group, and updates
on investor relations and wider stakeholder engagement.
During 2020, there was a focus on understanding the
operational and financial impact arising from Covid-19. This
included, for example, the ability of smaller customers within
our Customers business unit to make payments and take
alternative appropriate measures. These measures included the
ability to defer payment deadlines, to forgive certain overdue
payments, or to apply discounts to help support customers
experiencing severe financial hardship. Brexit remained a
regular and key agenda item during the year, with updates from
management on the planning for 1 January 2021, consideration
of the potential risks and appropriate mitigations and the
post-transition phase. You can read more about this in Principal
Risks and Uncertainties on pages 66 to 77.
The Board receives regular industry, regulatory and topical
updates from internal specialists and from external experts
and advisers. In June, for example, Francis Sullivan, Board Chair
of the Sustainable Biomass Program, attended a call with the
Board where biomass sustainability and key stakeholders were
discussed. During the meeting, the Board also discussed the
means by which Drax could engage with those supportive to,
88 Drax Group plc Annual report and accounts 2020
and those against the use and expansion of biomass as
a renewable fuel source.
The core activities of the Board and its Committees are
documented and planned on a forward agenda. A list of matters
arising from each meeting is maintained and followed up at
subsequent meetings. The Group Company Secretary advises
the Board on governance matters, ensuring good information
flows within the Board, its committees, the Executive
Committee and senior management. The Group Company
Secretary is responsible for ensuring the Board complies with
all relevant processes and for assessing compliance with the
Listing, Prospectus, Disclosure Guidance and Transparency
Rules, the Corporate Governance Code and the Companies Act.
An important part of this is effective collaboration with other
parties across all Group functions. Good training, regular
discussions on key issues, and support from those in areas
of critical operational risk in evaluating areas for change are
also imperative.
All Board Committees are authorised to obtain legal or other
professional advice as necessary to perform their duties.
This includes securing the attendance of external advisers
at meetings and seeking required information from any member
of the Group’s workforce.
The Company’s Articles of Association (the Articles) give the
Directors power to authorise conflicts of interest when they
are presented with such matters for their review. The Board has
an effective procedure to identify potential conflicts of interest,
consider them for authorisation and record them. In 2020, no
conflicts of interest were identified. The Articles also allow the
Board to exercise voting rights in Group companies without
restriction (for example, to appoint a director to a Group
company). The Articles were reviewed by the Board in 2020 to
make sure they reflect best practice and evolving regulation.
For example, the revised Articles include provisions to enable
the use of technology to support the conduct of general
meetings, with shareholders attending remotely. A resolution
seeking approval for the new Articles reflecting the changes
(more details of which are set forth in the notice of meeting) will
be proposed at the Annual General Meeting being held in April
2021. The current Articles are available on the Group’s website
at www.drax.com.
Culture
The Board routinely monitors and assesses the Group’s culture,
including a MyVoice annual workforce engagement survey.
Health and safety, as a standing Board agenda item, is one
of the first subjects under consideration at every meeting.
The discussion includes absolute measures such as injury rates,
as well as the prevailing safety culture and safety processes
around the business. The CEO provides regular updates to the
Board regarding workforce engagement and feedback from the
meetings between the Chair, CEO and the chairs of the MyVoice
forums. You can read more about engagement with the
MyVoice forums on page 92.
The Group Ethics and Business Conduct Committee (EBCC),
a sub-committee of the Executive Committee, meets quarterly
and monitors and supports initiatives to enhance and assess
ethical behaviour and business conduct across Drax. The EBCC
supports the Group’s commitment to doing the right thing in
its business practices by making sure there are appropriate
communications to raise awareness. This sub-committee also
ensures the provision of training that informs behaviours in
accordance with our values and ethical principles (as set out
in the “Doing the right thing” handbook). In 2020, this handbook
was replaced by the Drax Code of Conduct, which covers ethics
and broader topics including health, safety and the
environment. This was approved by the Board, published on the
Drax website and intranet, and deployed across Drax in October
2020 as a mandatory read for the whole workforce. It also forms
part of the Drax induction for new starters, including relevant
non-permanent workers.
As part of the Drax commitment to influencing positive
change in its operations, the Board approved a Supplier Code
of Conduct at its meeting in October 2020. This forms part of
Drax’s processes to onboard new suppliers, who Drax expects
to act in accordance with its code. Suppliers are also expected
to work together with Drax to the benefit of the communities
in which they operate.
The EBCC conducts an annual review and risk assessment
of each compliance programme, covering anti-bribery and
corruption (including conflicts of interest), fair competition,
financial crime, privacy, Speak Up (whistleblowing), and supply
chain human rights. The Business Ethics team reports regularly
to the Audit Committee on investigations and key matters, and
annually on EBCC activities for the year. Members of the EBCC
include an Executive Director (the CFO, who is Chair of the
EBCC) and two Executive Committee members (the Director
of Corporate Affairs and the UK Portfolio Generation Director).
This supports an understanding of business culture and
attitudes, and informs Board and Executive Committee
discussions. The subject of ethics and values is a standing
agenda item for the Executive Committee, with the CFO
responsible for raising such matters as Chair of the EBCC.
A new Speak Up (whistleblowing) policy was approved by
the Board in February 2020 and published across the Group
in March 2020. The Group Company Secretary is the
Whistleblowing Officer. A compliance programme dedicated to
Speak Up was introduced during the year and, for the first time,
a Speak Up risk assessment and risk register were presented
to the EBCC for review. The Business Ethics team supports
oversight of the external, anonymous and confidential, Speak
Up service available within Drax. This has been extended to
third parties, such as suppliers and visitors to our sites, and is
available in multiple languages and promoted in our Supplier
Code of Conduct. The team also responds to any reports from
within Drax, as well as those referred to the Company via the
external service. Specific guidance was published in July 2020
for all employees and for managers, (since they may receive
a Speak Up report). In addition, the topic of Speak Up and a
commitment to non-retaliation against reporters was included
in the new management excellence training module for
managers. Speak Up is prominently featured in both the new
Drax Code of Conduct and Supplier Code of Conduct, the latter
encouraging Drax suppliers to have their own Speak Up service.
Regular updates on Speak Up reports and cases are provided
to the Executive Committee and the Board.
The Board receives regular updates on whistleblowing, and
a quarterly report on business ethics is presented to the Audit
Committee on “entity controls” which includes Speak Up
(whistleblowing) matters. An annual report of EBCC activities
is made to the Audit Committee, including Speak Up reports and
investigations. Four whistleblowing related matters remained
under investigation at the date of this report.
Drax Group plc Annual report and accounts 2020 89
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report continued
Focus on Board decision-making
and stakeholder considerations
On 27 February 2020 Drax announced that it had proposed
to end commercial coal generation at Drax Power Station
effective in March 2021 – ahead of the UK’s 2025 deadline
– with formal closure of the coal units in September 2022.
The Board concluded that this decision was vital to support
the Company’s long-term strategy to be carbon negative by
2030. Throughout the decision-making process, the Board
considered and kept in mind the likely impact on various
stakeholders.
From the latter half of 2019, management had undertaken
detailed planning of scenarios on the future of coal-based
generation. In particular, these plans considered a scenario
where Capacity Market contracts were not secured in the
Auction in early 2020. Throughout the assessment phases,
the Board and management were kept informed on the
evaluation, including the possible impact of alternative
scenarios on the environment and various stakeholders.
These included employees, trade unions, and the local
community. This evaluation also considered what levels of
financial and non-financial support would be required for
those affected. Non-financial support, for example, includes
on-site career transition services from independent experts,
and retraining packages to enable development of new skills
and alternative placements within other functions.
Discussions also evaluated the positive impact of ceasing
coal-based generation early, in particular on the environment
and reduced carbon emissions. The Board agreed that
stopping the use of coal supported the Group’s purpose –
to enable a zero carbon lower cost energy future. The Board
also felt it was the right long-term decision for the business,
our communities and the environment. In addition, this is
an important step on the Group’s journey to become carbon
negative by 2030. The long-term economics of coal
generation remained challenging and in 2019 coal generation
represented only 3% of the Group’s electricity production.
The Board also discussed engagement with Government,
local politicians and National Grid in the period following
the Auction. In January 2020, Drax did not take a Capacity
Market agreement for the period beyond September 2022
given the low clearing price. Management presented further
analysis to the Board in February 2020, recommending at
that stage to proceed with a closure of commercial coal
generation, which the Board approved.
Following the decision and announcement, consultation
on all key areas was undertaken with trade unions and
employee representatives. Feedback from this process
was considered, allowing the Board to assess the process
undertaken to date and consider further measures to
be implemented, for example resulting in changes and
enhancements to the financial and retraining packages.
The Board recognises that the engagement scores for the
Generation business were on average below the scores for
the Group as a whole in 2020. This is a business area that
has been through considerable change in 2020, therefore,
management, colleagues and discussions forums, including
the MyVoice forums, are working on actions plans to improve
engagement scores in 2021.
90 Drax Group plc Annual report and accounts 2020
Drax seeks to ensure that employees and relevant “associated
persons”, such as certain types of contractors, receive
appropriate communications and training on key matters
underpinning ethical behaviours. These include Anti-Bribery and
Corruption (including Conflicts of Interest), Fair Competition,
Financial Crime, Privacy, Supply Chain Human Rights and Speak
Up (whistleblowing). Drax also regularly reviews its suite of
policies to ensure continuous improvement. There’s more
information on our approach to the management of ethics and
integrity in the Sustainable Business section page 61.
Diversity
We explain our work promoting diversity on pages 60 and 95.
The table below shows the gender diversity split on the Board
and in the wider workforce at 31 December 2020.
Male
Female
Total
Gender
No.
%
No.
%
No.
%
Board members
Senior managers(1)
All employees(2)
Total
5
31
71.4
67.4
2,034 68.5
2,070 68.5
2
15
935
952
7
28.6
32.6
46
31.5 2,969
31.5 3,022
100
100
100
100
(1) Direct reports of the Board (i.e. Executive Committee) and their direct reports
(2) Excluding Board members and senior managers
Board leadership of stakeholder engagement
We have a well-established programme of engaging with a wide
range of stakeholders who are key to the successful delivery
of our strategy. These include shareholders, government,
regulators, environmental bodies and trade unions. We know
that actions taken today will shape the longer-term
performance of Drax and determine our impact on the wider
world, including our contribution to action on climate change.
Such engagement broadens our understanding of the issues
we take into account, informs our decision-making and helps
to protect the long-term interests of stakeholders.
The Board is responsible for engagement with stakeholders
and ensures that appropriate Board time is given to discussing
stakeholders and sufficient resources are available for the
Group to effectively engage. The Corporate Affairs team
maintains a detailed map of our key stakeholders and the
concerns they have raised and the date of meetings with them.
Members of executive management, including Executive
Directors, provide regular updates to the Board, to ensure
awareness and inform discussions. The Board takes these
opportunities to assess and challenge management’s approach
relating to engagement. During the spring and early summer of
2020, the Board held regular calls with executive management.
The Board heard reports on the engagement strategy with the
UK Government, shareholders, customers, local community and
employees with due regard for the Covid-19 pandemic. These
discussions explored the appropriate approach to engagement,
with guidance from external advisers (including remuneration
advisers, Corporate Brokers, and sustainability experts) on
various aspects of the Group’s operations and decision-making.
These informed the Board’s approval of initiatives including
enabling our employees to work safely in the right working
environment, whether on-site at the plants or remotely from
home. The Board also approved the provision of support to Care
Homes and laptops to children.
The CEO’s report to the Board regularly includes a section
detailing activity around key stakeholder relations and the
relevant feedback received from stakeholder interactions. During
2020, this extended to outlining key initiatives in ESG matters in
response to expectations of NGOs as well as current and
potential investors. In June 2020, the Board received a detailed
update on stakeholder engagement including the critical issues
being addressed by the Group and the proposed strategy for
engagement with stakeholders.
Number of meetings held
The Board and its Committees have regular scheduled meetings
and hold additional meetings as required. The Board has eight
scheduled meetings each year, with the Board meeting at least
annually to specifically consider strategy. Directors are
expected, where possible, to attend all Board meetings, relevant
Committee meetings, the Annual General Meeting (AGM) and
any other General Meetings.
Supporting the Board’s duty to promote the success of the
Company as set out in Section 172 of the Companies Act 2006,
Board discussions, and supporting papers, for material decisions
consider the likely impact on those stakeholders affected by the
decision. You can find our Section 172 Statement on page 40.
The article on page 90 provides an example of this in action
in respect of the decision in 2020 to close the coal units. For
more detailed information on our stakeholders and how we
engage with them please refer to our “Stakeholder” section
on pages 40 to 45.
Directors’ development and induction
To assist the Board in undertaking its responsibilities, a
programme of training and development is available to all
Directors, with training needs assessed as part of the Board
evaluation procedure. The Board programme includes regular
presentations from management and informal meetings to
build understanding of the business and sector, or in areas
recognised as being technically complex. Such training is
intended to support a deeper understanding as well as
equipping the Non-Executive Directors with insight into how
Drax’s approach compares with the practices of its peers.
During the year, external consultants FMCR led one-to-one
training with each director on Corporate Treasury. Directors
considered the day-to-day activities of the Drax treasury
function, the governance associated with decision-making
and reporting, and the evaluation of the management of
key risks together with the associated mitigation.
Directors also had access to the advice and services of the
Group Company Secretary throughout 2020. Directors may
take independent advice at the Company’s expense, when it
is judged necessary in order to discharge their responsibilities
effectively. No such independent advice was sought in 2020.
All new Directors receive a comprehensive and tailored
induction programme, including meetings with key managers,
site visits, and briefings on key operational matters, Board
procedures and governance matters.
Board induction
Operational review
Financial review
Strategic overview
Directors’ duties and
responsibilities
Additional specific training
with internal specialists as
appropriate
Governance structure
Visits to key sites
Meetings with shareholders
(as appropriate)
Meetings with external advisers
(as appropriate)
Review of previous minutes
and meeting papers and
meetings with external advisers
Meetings with other
Board members, and finance,
legal, regulatory, compliance and
other managers
Other key documents including
strategy and audit reports
Board roles
The key responsibilities of members of the Board are as follows:
Position
Chair
CEO
CFO
Senior Independent
Non-Executive
Director
Independent
Non-Executive
Directors
Role
Responsible for leading and managing the
Board, its effectiveness, and governance.
Makes sure Board members are aware of,
and understand, the views and objectives
of major shareholders and other key
stakeholders. Helps to set the tone from
the top in terms of the purpose, goal, vision
and values for the whole organisation.
Responsible for the day-to-day
management of the business, developing
the Group’s strategic direction for
consideration and approval by the Board
and implementing the agreed strategy.
Supports the CEO in developing and
implementing strategy, in relation to the
financial and operational performance
of the Group.
Acts as a sounding board for the Chair
and a trusted intermediary for other
Directors. Available to discuss any
concerns with shareholders that cannot
be resolved through the normal channels
of communication with the Chair or the
Executive Directors.
Responsible for bringing sound
judgement and objectivity to the Board’s
deliberations and decision-making process.
Constructively challenge and support the
Executive Directors. Monitor the delivery
of the strategy within the risk and control
framework set by the Board.
Time commitment
Directors’ commitments outside of Drax are kept under review
to make sure they have sufficient time to dedicate to the
business and effectively perform their role. Under the terms
of the Chair’s letter of appointment, the Chair is expected to
commit between 50 and 70 full days a year to this role. Under
the Non-Executive Directors’ letters of appointment, each is
expected to commit 12 to 15 full days a year. That includes
attendance at Board meetings, the AGM, one annual Board
strategy off-site event and at least one site visit each year
(although this was not possible in 2020 due to Covid-19).
In addition, Non-Executive Directors are expected to devote
appropriate preparation time ahead of each meeting. The
time commitment expected in respect of their membership
of the Audit, Nomination and Remuneration Committees is an
additional three to four full days a year in each case. However,
in practice, considerably more time is devoted, particularly by
the Chairs of the Committees.
Drax Group plc Annual report and accounts 2020 91
Strategic reportGovernanceFinancial statementsShareholder information
Corporate Governance Report continued
Executive Directors may, with the prior approval of the Chair,
take on one additional role in an external listed company. None
of the Executive Directors have taken on such a role. Non-
Executive Directors may, with the prior approval of the Board,
take on additional roles provided the individual can continue
to devote sufficient time to meet the expectations of their role.
Non-Executive Directors are encouraged to undertake visits
to Drax operations, and spend time with management and
the workforce. This is designed to build and then maintain
their knowledge of the developing business and to understand
the operational challenges. It was not possible for the Non-
Executive Directors to make site visits in 2020, due to Covid-19.
However, the additional Board meetings from April to June
allowed considerable time for listening to management and
understanding operational challenges. These meetings also
enabled the Board to assess the effectiveness of actions being
taken and to scrutinise both the financial and non-financial
impacts of the pandemic.
Focus on workforce engagement
The MyVoice Forums were established in 2019 to facilitate
effective and direct engagement between the Board and
the workforce. The Company has four divisional employee
forums, comprising elected representatives from across
the business. A member of the senior leadership team and
an HR representative support these divisional forums and
attend each meeting. The chairs of these forums then
meet quarterly with the Chair and CEO.
During 2020, engagement with the MyVoice forum chairs has
been invaluable in helping the Board gain ongoing feedback
in a period of rapid and significant change to the way we live
and work. The engagement has helped to support the
business in managing the transition to remote working and
ensuring the safety and wellbeing of our workforce.
The forums provided feedback from employees on the
Company’s response to the first phase of the pandemic.
The rapid response and the Company’s commitment and
support was welcomed, and the fact that no colleagues had
been furloughed was acknowledged. The forums particularly
recognised and highlighted the challenge to the wellbeing
of colleagues. In response, the Group provided mental health
awareness training for managers, online workshops to help
build resilience, an ongoing wellbeing campaign to help
colleagues stay safe and well both physically and mentally
during lockdown, and engagement activities to help keep
employees connected.
In the second half of the year, forum discussions turned
to recovery plans and future ways of working. The forums
collated employee feedback that helped to inform our
flexible working policies, launched in November, giving
employees greater choice in how they want to work in the
future. Following the Board’s strategy week at the end of
October, the Chair and CEO provided the forum chairs with
a summary of the strategy discussions. They also provided
updates on the Q3 performance and the latest situation
regarding Covid-19.
92 Drax Group plc Annual report and accounts 2020
Board composition and independence
The Board has reviewed the independence of each Non-
Executive Director. None of the Non-Executive Directors
who served during the year had any material business or other
relationship with the Group, and there were no other matters
that were likely to affect their independence of character
and judgement. The Board recognises that in view of the
characteristics of independence set out in the Code, length
of service is an important factor when considering the
independence of Non-Executive Directors and that directors
who have served more than nine years may not be considered
independent.
The Board considers all the Non-Executive Directors to be
independent.
The annual engagement survey was conducted in October
and the chairs were given early visibility of the results for
the Group and their business areas. The chairs then gathered
feedback on areas highlighted for more action, to help
understand what was driving the results. The Group HR
Director then attended a meeting of the chairs to discuss
feedback and decide what actions should be taken. At the
final meeting of the year, the chairs discussed what worked
well during 2020 and the future areas of focus for
improvement. This was followed by a further two separate
workshops with the chairs to discuss plans to evolve the
forums in 2021.
Nicola Hodson, Chair of the Remuneration Committee, joined
a quarterly meeting in June 2020 to introduce herself and
present on the role of the Committee. She explained how
engagement with shareholders helped to set the 2020
remuneration policy for Executive Directors and senior
management. She also outlined the Committee’s work in
reviewing policies for the wider workforce, to make sure
executive remuneration aligned with wider Company pay
policy and Company culture. The meeting also included a
question and answer session with the chairs. Following this
meeting, Nicola recorded a video to introduce herself to the
entire workforce, discussing pay and conditions around the
Group, her role and background, and her passions such as
diversity and inclusion. This was accompanied by a letter to
the whole workforce setting out in more detail the role of the
Committee and how pay aligns across the Group. Following
positive feedback to Nicola’s engagement, the Board
committed to engage more in this manner and, in December
2020, John Baxter recorded a video for all employees,
introducing himself, describing his long career in engineering
and discussing one of our key priorities; health and safety.
The Chair and CEO provide updates to the Board following
each meeting with the MyVoice chairs to make sure that all
directors understand the views of employees. Nicola Hodson
also provided feedback to the Board following her discussion
on remuneration with the MyVoice forum chairs.
Board attendance 2020
The table below shows the number of meetings held and the directors’ attendance during 2020.
Director
John Baxter
Philip Cox
Will Gardiner
Nicola Hodson
Andy Koss(2)
David Nussbaum
Andy Skelton
Vanessa Simms
Date appointed as a director and member of the Board
Scheduled meetings(1) No. of meetings attended
% of meetings attended
17 April 2019
1 January 2015
16 November 2015
12 January 2018
1 January 2016
1 August 2017
2 January 2019
19 June 2018
8
8
8
8
2
8
8
8
8
8
8
8
2
8
8
8
100%
100%
100%
100%
100%
100%
100%
100%
Notes:
(1)
(2)
The scheduled meetings that each individual was entitled to, and had the opportunity to, attend.
Andy Koss stepped down as a Director on 7 April 2020.
Summary of the Board’s activities in 2020
Over four days in October 2020, the Board conducted a detailed review of strategy, using online video conferencing.
Management delivered a series of presentations to the Board and Executive Committee and there were discussions on
progress made during the year in delivering on strategic imperatives. The review also considered investment opportunities
and objectives over a five- to ten-year horizon. This included investment in the current business and emerging technologies,
emerging and projected trends, the developing environmental landscape and Drax’s contribution to addressing climate change.
Health, safety and wellbeing
• Considered regular updates from business units, including on
process and behavioural safety and culture, with a particular
focus on health, safety and wellbeing in light of Covid-19
• Monitored the implementation of the new Group-wide
Operations
• Considered and approved the closure of commercial
coal generation
• Considered and monitored the potential impact of Covid-19
on supply chains
incident management reporting system
• Considered the Group’s flexible and renewable generation
• Used input from the MyVoice forums to implement plans
strategy and approved the sale of gas assets
• Approved the Group’s trading strategy
• Monitored business performance against the business plan
• Considered the IT and data strategy of the Group
Finance and strategy
• Approved the 2021 Business Plan and the Strategic Plan
to 2024
• Approved the proposed refinancing
• Reviewed the dividend policy
• Approved the final and interim dividends
• Approved the 2019 Annual report and accounts
• Approved the 2020 half-year report and accounts
Risk
• Considered the Group’s risk appetite and approach
to risk management
• Reviewed the Group’s principal risks,
• Considered the finance and risk update
• Received regular updates from management on Brexit,
including action plans and key mitigations
to address wellbeing across the Group
• Reviewed the Group Wellbeing, Diversity and Inclusion,
Dignity at Work and Flexible Working policies
• Reviewed and approved the Climate Policy and approved
Drax becoming a TCFD Supporter
Governance
• Reviewed Articles of Association, to update in line with
the Code and best practice
• Considered the Board composition and strengthened
the Executive Committee with a new appointment
• Approved the Modern Slavery Act statement
• Completed a full review of the Company’s compliance
with the Code
• Considered and approved the updated Corporate Crime
policy and the Fair Competition policy
Stakeholders
• Considered the Group’s key stakeholders and
approved a framework for ensuring due consideration
in decision-making
• Engaged with the workforce through MyVoice Forums
and considered employees’ feedback
• Considered the outcomes of the Employee Voice Survey
and agreed follow up actions
• Approved the Group Diversity Policy
• Approved the new Group Wellbeing Policy
• Received regular updates on Investor Relations programmes,
including an Investor Relations audit report presented in
the autumn
Drax Group plc Annual report and accounts 2020 93
Strategic reportGovernanceFinancial statementsShareholder information
Nomination Committee report
How does the Nomination
Committee support the
Group’s purpose?
Having the right mix of skills, experience and
diversity on the Board and throughout the
business is key to achieving our purpose
Committee members
Philip Cox (Chair)
John Baxter
Nicola Hodson
David Nussbaum
Vanessa Simms
Attending by invitation
CEO
Number of meetings held in 2020: Two
The Group Company Secretary is Secretary to the Committee.
Attendance in 2020
Committee member
John Baxter
Philip Cox(1)
Nicola Hodson
David Nussbaum
Vanessa Simms
Date appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
17 April 2019
22 April 2015
12 January 2018
1 August 2017
19 June 2018
2
2
2
2
2
2
1
2
2
2
100%
50%
100%
100%
100%
(1) Did not attend the meeting in September 2020 at which his re-appointment
as Chair was considered.
Terms of reference
The Committee’s terms of reference are reviewed
annually by the Committee and then by the Board, most
recently in January 2021. The terms of reference are
available on the Group’s website at
www.drax.com/governance
94 Drax Group plc Annual report and accounts 2020
Philip Cox CBE, Chair
Role of the Committee
The Committee’s principal responsibilities are to:
• Keep under review the Board’s structure, size and composition
(including requisite skills, diversity, knowledge and experience)
• Ensure there is a succession planning process for the directors
and other senior managers, including the identification of
candidates from both within and outside Drax that align
with the objectives of the business and Group
• Conduct the search and selection process for new directors,
taking advice from independent search consultants as
appropriate
• Monitor and challenge initiatives and progress in addressing
diversity and inclusion
• Report on Board evaluation
Nomination Committee activities since the last report
• Considered re-appointment of the Chair for a third term
• Considered the re-appointments of two Non-Executive Directors
• Reviewed the skills of the Board
Introduction
I’m pleased to present the Nomination Committee Report for
the year ended 31 December 2020.
As Chair of the Nomination Committee, I make sure that there
is a formal process for regularly reviewing the balance of skills,
experience and diversity at Board and senior management
levels. This process also ensures the people in those roles are
capable of understanding, challenging and enabling the
strategic imperatives of Drax, both in the near and medium
term. The Nomination Committee continues to focus on the
need for Drax to reflect a diversity of backgrounds and
perspectives. The Board is committed to playing a role in
shaping that activity and ensuring diversity and inclusion are a
fundamental part in recruitment, retention, career progression
and personal development. We recognise that such activity
contributes to the culture and values of the Group as well as
to its long-term success.
The Committee considers management’s actions in attracting
new talent and developing the careers of people, enabling them
to realise their potential. A key aspect of this involves executive
management supporting employees in balancing their work
responsibilities, maintaining a quality of life outside of Drax,
and embracing and embodying our values. During meetings
held in 2020, we have regularly discussed the ways in which
our leaders are encouraged to consider and communicate
these aspects. We have also considered the effectiveness of
such work, based upon feedback I have heard at the quarterly
MyVoice Forum meetings, the results of our annual employee
engagement survey, and the CEO’s reports.
Succession planning and diversity
Each year the Committee reviews the Group’s succession plan,
identifying those employees with the potential to progress into
more senior roles across a timeframe of one to five years. The
review focuses on factors including technical skills, experience,
behaviours and attitudes. This is to ensure the business has the
right leaders in place to deliver our strategy collaboratively and
transparently and in ways that support our purpose and culture.
Drax has undergone a series of changes in recent years,
including the appointment of three new non-executive
directors since 2018 and one new executive director. Over
the same period six senior executives have joined the Group’s
Executive Committee. In April 2020, Andy Koss stood down as
an executive director by reason of redundancy. Out of a total
of seven board members at 31 December 2020, two are female.
Two of the Executive Committee’s eight members are female.
The Board and senior management recognise that Drax needs
to do more, at all levels of the business, to support people from
diverse backgrounds. In September 2020, the Diversity and
Inclusion Policy was updated and, following approval by the
Board, launched across the Group. The review included aspects
of new and emerging best practice and regulatory
developments, including in the area of senior management
and Board diversity. The policy goes beyond gender, with a clear
commitment to a supportive, diverse and inclusive working
environment, where you can be yourself and your contribution
matters. The policy now covers all protected characteristics
as well as educational and professional background, all of
which are important for social diversity activities.
During 2021 we intend to implement our revised Diversity and
Inclusion plan that supports our commitment to an inclusive
culture for all. This multi-faceted plan will include renewing
our approach to data, educating and inspiring our colleagues
on diversity and inclusion and ensuring we pay attention to
attracting the broadest talent available to Drax. It is supported
by a Group wide Code of Conduct, new Flexible Working
Policies, and revised Family Friendly Policies. We have invested
in additional resource to lead this plan and our new Diversity
and Inclusion Manager joined in January to lead and drive the
plan across the organisation.
Our recruitment processes support both our succession
planning and our diversity and inclusion activities. We operate
programmes that encourage a diverse workforce to pursue
careers and qualifications that fit with the opportunities that
Drax offers. These include apprenticeship schemes, training
programmes, and experience days where young people can
learn more about what we do and the roles available. All of
these activities are an important part of our role in the industry.
This engagement is two-way as we listen to people from diverse
backgrounds to better understand what barriers exist and what
support would be required to encourage them to join a business
such as Drax. In October 2020, we announced a £180,000
five-year partnership with Selby College in Yorkshire that will
enable the college to deliver community education programmes
and support for retraining. This will ensure students are
developing the skills needed in the innovative clean
technologies that will help to drive a zero carbon economy.
You can find out more about our programmes on page 56.
The Executive Committee participated in an externally-led
workshop looking at how we need to change to enable diversity.
As mentioned above, the reports of the CEO to the Board now
include regular updates on the work being done to support
diversity and inclusion. You can find out more about this on
page 60.
Our succession planning is mindful of the evolution of the
Group. We must be prepared to look outside the Company, as we
believe that will contribute a fresh perspective to delivering the
Group’s objectives. As explained in other sections of this report,
the safety and wellbeing of the workforce is a matter of priority
that is discussed at all Board meetings. The Board recognises
the importance of ensuring we have the right skills and
capabilities to enable a proactive approach to health and safety.
This is particularly true as we continue to grow and implement
new methods of working to improve business performance. In
2019, the Board appointed John Baxter as a Non-Executive
Director and he brings extensive experience of engineering,
safety and workplace governance. During 2020, as part of
regular Board meetings, members of the Committee were kept
informed on the search and selection process for a new Group
Health & Safety Director. This resulted in the appointment of
Dr Vanessa Forbes, who has over 20 years’ experience. This
includes health, safety and environmental matters in corporate,
regulatory and consulting roles across complex and hazardous
multi-site operations. Following her induction and
familiarisation with the Group, Vanessa attended a Board
meeting in September where she presented her initial views
and thoughts on opportunities for change.
Non-Executive Directors: terms of appointment
Under the Board’s policy, Non-Executive Directors are
appointed for an initial term of three years. The term can be
renewed by mutual agreement if the Board is satisfied with
the director’s performance and commitment and a resolution
to re-elect at the appropriate AGM is successful. The Board
will not normally extend the aggregate period of service of any
independent Non-Executive Director beyond nine years and
will rigorously review any proposal to extend a Non-Executive
Director’s aggregate period of office beyond six years.
In 2020, the Board considered the re-appointments of both
David Nussbaum, Senior Independent Director, and Nicola
Hodson, Chair of the Remuneration Committee, each for a
second term of three years. The Board considered their skills
and contribution, together with the feedback from the most
recent externally supported evaluations of the Board and our
Committees. Following this, the Board approved extensions of
their appointments for a further three years, respectively taking
effect from 1 August 2020 and 12 January 2021.
Board and Committee evaluation
Recognising it needs to regularly monitor performance, the
Board conducts an annual performance evaluation, fully
inducts new Board members, and ensures ongoing Board
development activities. Board Alchemy conducted an
externally-led evaluation of the Board’s performance in the
autumn of 2019 and reported the findings to the Board in
November 2019. The table on page 97 summarises the
recommendations and how we responded to them in 2020. The
Board considered possible responses to the recommendations
Drax Group plc Annual report and accounts 2020 95
Strategic reportGovernanceFinancial statementsShareholder information
Nomination Committee report continued
at a meeting in September, with detailed discussion on the
initiatives to address recommendations and areas for potential
further improvement.
As the Chairs of the Audit Committee and Remuneration
Committee were relatively new in post in 2019, the Board
was the primary focus that year. However, it was agreed that
a formal, externally-led, review of the Committees should be
performed in 2020. Board Alchemy also led that review in the
autumn, and the Board considered the results at a meeting
in December. In conducting the Committee evaluations,
Board Alchemy interviewed all members of the Audit and
Remuneration Committees in autumn 2020. Ahead of this, each
of the Directors completed a detailed questionnaire on how
they viewed the role of the Committee and how it functions. As
part of the evaluations, Board Alchemy also met with the Group
Company Secretary and key internal stakeholders who attend
and/or support the Committees. Board Alchemy has no other
connection with the Group or individual Directors.
Spotlight on the Chair’s re-appointment
Report of Senior Independent Director
In 2020, Philip Cox indicated his willingness to serve for a
third, and final, term of three years. It is the Group’s policy
to rigorously review any proposal to extend a Non-Executive
Director’s aggregate period of office beyond six years. As
such, and as Senior Independent Director, I led a review in
the summer of 2020 into Philip’s re-appointment as Chair.
I spoke individually with each of the Non-Executive and
Executive Directors to seek their views on Philip’s
performance and key strengths. A variety of options were
considered and discussed in the course of these reflections
At the September Committee meeting, which Philip did not
attend, the Non-Executive Directors discussed feedback
from that engagement. Committee members considered a
number of different aspects of Philip’s leadership, the
evolution of Drax, and the likely skills required looking
forward. The factors under discussion included: the
management of significant changes in Board composition
over the last three years; feedback from the 2019 Board
evaluation that concluded Philip showed good leadership,
invested the necessary time, cultivated good dynamics and
an open and transparent Board culture, and ensured there
was appropriate Board focus on the long term; the views of
the two executive directors; the opportunity to change the
skills and diversity of Board membership; the relationship
between the Chair and the CEO; and the effectiveness of
the Board under Philip’s leadership.
Following these discussions, the Committee unanimously
recommended to the Board that Philip be re-appointed for
a further, and final, term of three years when his second term
expired at the end of 2020. Looking ahead, the Committee
also proposed that the recruitment process for a successor
as Chair should start early enough to allow for a thorough
recruitment process. This would also facilitate an overlap
period when the Chair-designate could join the Board with
sufficient time to complete a meaningful onboarding process.
David Nussbaum
Senior Independent Non-Executive Director
96 Drax Group plc Annual report and accounts 2020
The evaluation concluded that the Committees were well led by
effective, inclusive chairs and the Committee members had the
requisite skills and experience to provide valuable contributions
and effective challenge. The review confirmed that effective
planning routines now in place supported the Committees in
ensuring sufficient time to consider matters in advance of
decisions being required.
It was noted that “teach-in” sessions provided for the Audit
Committee by Drax management and external specialists on
key topics, such as treasury and hedging, helped to ensure
members of the Committee were up to speed on technical
areas. Further, the review noted there is good dialogue and
constructive relationships between the Audit Committee Chair,
CFO and the external audit partner. The Remuneration
Committee was mindful of the impact of decisions and
recommendations on a wide range of stakeholders, and there
had been effective communication with the workforce by the
Remuneration Committee Chair who engaged with colleagues
to explain the Group’s remuneration practices.
Skills and knowledge of the Board
A key responsibility of the Committee is to ensure the Board
maintains a balance of skills, knowledge and experience
appropriate to the long-term operation of the business and
delivery of the strategy. As in previous years, the Nomination
Committee has reviewed the Board’s composition and
considered whether the:
• Board contains the right mix of skills, experience and diversity
• Board has an appropriate balance of Executive Directors and
Non-Executive Directors
• Non-Executive Directors are able to commit sufficient time
to the Company to discharge their responsibilities effectively
Following the review, the Committee was satisfied that the
Board continued to have an appropriate mix of skills and
experience, now and for the future, to operate effectively. All the
Directors have many years of experience, gained from a broad
range of businesses. Collectively. they bring a range of expertise
and sector knowledge to Board deliberations, which encourages
constructive, challenging and insightful discussions.
Renewal and re-election
Any newly appointed Director is required to submit themselves
for election at the first AGM following their appointment.
Drax has adopted the provisions of the Code, providing for all
Directors to seek re-election annually. Accordingly, John Baxter,
Philip Cox, Will Gardiner, Nicola Hodson, David Nussbaum, Andy
Skelton and Vanessa Simms will all retire at the forthcoming
AGM and being eligible, will offer themselves for re-election.
The evaluation and review of the Board and its Committees,
described above, concluded that the Directors offering
themselves for re-election continue to demonstrate
commitment, management and business expertise in their
particular role and continue to perform effectively. Further
information of the service contracts for the Executive Directors
and letters of appointment for the Non-Executive Directors are
set out in a table on page 129. The Executive Directors’ service
contracts and Non-Executive Directors’ letters of appointment
are available for inspection (by prior arrangement) during
normal business hours at the Company’s registered office.
They will also be available for inspection at the venue of the
AGM, prior to that meeting, details of which are contained
in the Notice of Meeting.
Our targets for 2020
What we did
Supporting non-executive
Board members by
(i) improving the quality
of Board papers,
(ii) making presentations
at Board meetings
more effective, and
(iii) regularising the
programme of Board
development (teach-ins)
and bringing a greater
external perspective
to these sessions
Give greater focus to
executive succession
planning while continuing
to periodically review Board
composition and non-
executive succession
Continuing to increase the
focus on understanding
stakeholder perspectives
and giving consideration
to what the Board’s role
should be in stakeholder
engagement
The Board held several “teach-in” sessions in 2020,
including a presentation on biomass acceptability
and one-to-one training supported by external
consultant FMCR on Treasury and FX. The Board
also saw broker presentations on Drax activities
(for example considerations around the full-year
and half-year dividends, including the views of
key stakeholders).
The chair of Sustainable Biomass Program (SBP)
attended a Board meeting to discuss governance,
biomass sustainability, and the views of third
parties including NGO’s.
To achieve greater focus on the quality and
timeliness of Board papers, a template has been
A detailed review in the early part of 2020, focused
on the structure of the Generation business.
A further detailed review will be undertaken in
early 2021 to consider both Board and executive
succession – something planned originally for
autumn 2020. However, due to several strategic
projects being undertaken in the second half of
2020, this was deferred until there was greater
clarity on the future shape of the business.
The Board received regular updates on stakeholder
views and perspectives. For example, as part of
assessing the possible early closure of the Group’s
coal units, the Board received management’s
analysis of the key stakeholders within and outside
the Group. The Board considered the impact of
the decision on the local community and the steps
being taken to support those employees who
would be affected. This included, for example,
employee assistance programmes for those
affected by the changes being made to working
practices and workforce numbers. Updates were
also received on engagement with unions and
employee representatives through the course of
adopted. Contributors have been given support to
ensure greater clarity in identifying the key issues
for consideration, both in the papers and live
discussions. Most papers are now reviewed by the
Executive Committee before submission to the
Board, to make sure the content reflects the
business issues/matters for debate and includes
– where applicable to the subject matter – an
assessment of key stakeholders.
Members of the Executive Committee attended
Board meetings and supported discussions on
a range of key decisions. The evaluation of the
closure of the Group’s coal units, when wider
management also attended and presented to
the Board, is just one example.
Work on Diversity across the wider organisation
has been the subject of a detailed review by
management. Through the CEO reports, the Board
has been appraised of the work being undertaken
by the executive, including an Executive
Committee workshop supported by a Diversity
and Inclusion facilitator.
the year. For more information on this work, please
see page 90. The Board also regularly discussed
the evolving views of stakeholders on sustainability
(for example, see the first item in this table) and the
views and wellbeing of employees in response to
the Covid-19 pandemic.
In June, the Board considered a report presented
by the External Affairs Director and Group Director
of Corporate Affairs. This explained engagement
with stakeholders in the first half of the year and
plans for the second half including, for example,
with business partners, regional leaders and
representatives in the north east of England in
connection with Drax’s BECCS programme.
Continue work on values
and behaviour and consider
how the Board should get
assurance that the culture
it is looking for is in place
Through a combination of the CEO’s regular reports
to the Board, as well as the MyVoice Forums (which
have been attended by the CEO, Chair and in
June the Chair of the Remuneration Committee),
the Board has received feedback on key topics
impacting the organisation, its culture, values
and delivery against its purpose.
The Board received and considered – with help
from members of the Executive Committee –
regular updates on safety and employee wellbeing.
It also reviewed how the business has adjusted
working practices in response to Covid-19. KPIs,
process safety and wider safety initiatives are also
reported to the Board at each meeting.
The CEO relayed to the Board the positive response
received from employees and the leadership team
on how the Group’s purpose, values and culture
have been shared and enacted. This included
sharing the autumn 2020 Employee Engagement
survey results – which were above the benchmark
– and agreeing actions with the Board. It also
included sharing the work on bringing the values
to life across the organisation.
A detailed programme reviewing and updating the
Group’s suite of policies is in progress, to underpin
the Group’s culture and values. In September, for
example, the Board approved the revised Code of
Conduct and, in October, a separate Supplier Code.
The latter sets out expectations of the standards
for Drax’s suppliers.
During the year, I met regularly with the Non-Executive
Directors in the absence of the Executive Directors. Separately,
the Senior Independent Director held a meeting with the
Non-Executive Directors without me being present, as required
by Provision 12 of the Code.
This report was reviewed and approved by the Nomination
Committee.
Philip Cox CBE
Chair of the Nomination Committee
24 February 2021
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Strategic reportGovernanceFinancial statementsShareholder information
Audit Committee report
What are the key areas
of focus for the Audit
Committee?
We are focused on ensuring fair
and balanced performance reporting is
in place, underpinned by a robust system
of internal control
Committee members
Vanessa Simms ( Chair)
David Nussbaum
John Baxter
Nicola Hodson
The Board is satisfied that the Committee’s membership has
the appropriate level of independence, skills and recent and
relevant financial experience. Vanessa Simms, a chartered
certified accountant, is CFO of Grainger plc. David Nussbaum
is a chartered accountant who has served in a number of
senior financial roles. Details of the skills and experience of
the Committee members can be found on pages 84 to 85.
Attending by invitation
Chair of the Board, CEO, CFO, Financial Controller, Head of
Financial Reporting, Internal auditor (KPMG), External auditor
(Deloitte LLP).
The Group Company Secretary acts as Secretary to the
Committee.
Number of meetings held in 2020: Four.
In addition to the below, Vanessa attended a number of
planning meetings to consider key agenda items, discussing
the agenda, planning for papers and ensuring that her
expectations were satisfactorily reflected in the matters
discussed and explained.
Attendance in 2020
Committee member
Date appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
17 April 2019
John Baxter
Nicola Hodson
12 January 2018
David Nussbaum 1 August 2017
19 June 2018
Vanessa Simms
4
4
4
4
4
4
4
4
100%
100%
100%
100%
Terms of reference
The Committee’s terms of reference are reviewed
annually by the Committee and then by the Board. The
terms of reference are available on the Group’s website at
www.drax.com.
98 Drax Group plc Annual report and accounts 2020
Vanessa Simms, Chair
Letter from the Chair of the Committee
2020 has seen significant challenges for our people, customers,
partners, communities and businesses in general. Circumstances
such as those experienced due to Covid-19 are impactful across
all aspects of our society and in such times we rely on a
combination of resolve, initiative and strong engagement,
underpinned by the values by which we live and work and the
standards we set for the way in which we conduct ourselves.
From the earliest phase of Covid-19, the Audit Committee
contributed to the work of the wider Board and management
in assessing how Drax was placed to respond to the pandemic.
As part of that we also sought to understand business
effectiveness at sustaining day-to-day operations and effective
internal controls, as our people went through material changes
in adapting to both new working patterns and evolving external
issues. Regular Board calls took place from April 2020 which
considered the approach being taken to enable our employees
to adapt to home working and the provision of equipment and
secure online access by which to perform their roles. This
included assessing the resilience of our systems in enabling
access, recording and storage of business-critical information
as part of maintaining sound internal controls.
As well as assessing business resilience, the Committee
challenged management’s assessment of the potential financial
impact to the Group. This included understanding the financial
performance of each business unit, and the factors most
likely to affect the expected results, judged against both
management’s expectations and those of external stakeholders.
During the initial phase of the pandemic, management provided
thorough analysis to the Board and Audit Committee of the
expected demands on the Group’s distributable reserves and
cash resources ahead of the trading update published in April.
As part of this review, the Non-Executive Directors challenged
management in their evaluation of whether or not the Group
would need to seek support under measures introduced by
the UK Government, including furloughing. This supported an
assessment that the Group was in a strong position to maintain
its regular operations, meet the projected demands on its
financial resources, and to continue to employ and pay all
of our people and meet our obligations to third parties. We
also assessed the appropriateness of paying the final dividend
in May and received feedback on the views of shareholders,
UK Government and advisers, which resulted in a decision
to maintain the original recommendation to shareholders
of paying the 2019 final dividend of 9.5p per share. A similar
approach was taken in reaching a conclusion in respect
of the 2020 interim dividend, and the overall appropriateness
of maintaining the Group’s capital distribution policy.
A trading update was issued at the AGM, held on 22 April 2020,
outlining the anticipated impact of Covid-19 on the Group’s
financial prospects for 2020. This was reiterated at the time
of issuing our Half Year results to 30 June 2020 (Half Year) and
has remained consistent in the reporting of our financial results
for the full year.
Elsewhere in this report, see page 40, we explain actions taken
to support stakeholders and communities. The measures
adopted responded to engagement by our External Affairs team
and took into account the views and ideas expressed by our
employees. We also considered initiatives with our customers
that could relieve the pressure of meeting payments as part of
proposals submitted by our Customers business’ management
team. These initiatives required appropriate analysis of the
capacity of the Group in setting and fulfilling commitments,
which was supported by initial challenge and consideration
by the Audit Committee and Board.
Such engagement and understanding of the business
performance, and the capacity of the Group to carry through
its strategic imperatives whilst also responding effectively to
emerging challenges will continue to be required through 2021.
This recognises that the pandemic will continue to impact
society as a whole in the year ahead. In tandem with the specific
measures I have outlined, the Audit Committee has continued to
assess actions associated with effective management, reporting
and internal controls in fulfilling the Group’s priorities through
2020 and into 2021 as well as safeguarding good governance.
On page 25 we explain the refinancing of elements of the
Group’s debt during 2020. The Audit Committee supported
the Board in considering the proposed structure of the new
facilities, the terms and capacity of the Group to service such
arrangements through the longer term. It is encouraging to
note that a growing proportion of the facilities extend beyond
2027, and that as part of the terms Drax continues to
incorporate provisions linked to the delivery of our ESG
commitments. Such provisions were considered by the Audit
Committee. in supporting the adoption of the new facilities.
Whilst Covid-19 has been, and we expect will continue to be, an
important area of the work of management and the Committee,
the business, financial performance and delivery of our strategy
remained key areas of focus for us during 2020.
Drax’s commitment to reducing carbon emissions is a
fundamental part of our purpose. In February 2020, the Board
announced the decision to end commercial coal generation in
March 2021, with formal closure of the coal units in September
2022. In the period leading up to the decision, the Audit
Committee discussed in detail the analysis of the proposed
closure on the Group’s financial model, and the timing of any
decision in respect of the Group’s reporting obligations, with
due regard for the importance of the Capacity Market Auction
outcome which was announced on 31 January 2020, following
the Group’s financial year end in December 2019. In conjunction
with the decision to proceed with the closure, the Committee
considered and challenged the initial assessment of the
financial impact and reviewed the form of disclosure released
to markets and included in the annual report for 2019 as a post
balance sheet event. In assessing the financial impact, particular
attention was given to the anticipated closure costs and the
useful lives and potential impairment of relevant assets at Drax
Power Station which were disclosed in the Half Year results.
During 2020, the Audit Committee remained attentive to the
schedule of matters for which it has delegated responsibility,
in addition to other issues which arose during the course of
the year. The effectiveness of our internal controls is one such
aspect of the Committee’s delegated remit and during 2020
we continued to receive regular reports on areas which were
evaluated by our Internal Audit team. This included assessment
of the transition to a single payroll function across the UK
Group, reviews of cyber security controls and IT controls, and
a review of the findings in respect of the Group’s biomass
sustainability, required in respect of the Contract for Difference
and Renewables Obligation schemes. A number of these reports
were supported by external specialists, bringing particular
knowledge and an external perspective to the reviews and
findings submitted to the Committee.
As with all such reports, our Internal Audit team also track
actions taken in addressing recommendations and the outcome
of those actions are also considered in subsequent meetings
by the Committee, which forms an important part of both
continuous improvement and addressing potential weaknesses.
During 2020, in conjunction with the retirement of the Head
of Group Risk and Internal Audit, the Committee determined
to separate out these two functions. The change provided
the opportunity to review how the activities were managed,
and to bring in additional and broader expertise and specialist
capabilities to support the Group. Following a review, it was
agreed to appoint KPMG as internal auditor. KPMG have in
previous years supported discreet elements of our internal
audit work and they commenced their new role following
the Half Year.
The appointment of KPMG to lead internal audit ensures that
internal controls reflect not only the evolution of the Group but
also bring to bear the advancement in standards and industry
practices in which leading external consultants are a key
contributor. A Head of Risk is in position, who shadowed the
in-depth assessment of principal risks undertaken at the Half
Year. This included assessing the impact of Covid-19, which we
recognised merited proportionate disclosure in the Half Year
results in keeping with the guidelines issued by the FRC. The
findings from the detailed review undertaken through the
second half of the year in support of the principal risk
disclosures can be found on pages 66 to 67.
In addition to the change introduced in the outsourcing of the
internal audit function, the Committee supported management
in evaluating changes to oversight of health, safety and
environmental. On page 95 we explain the appointment of
Vanessa Forbes as new Group Health, Safety and Environment
Director. The Committee also supported the appointment of
external HSE specialists to augment the Group’s internal
capabilities. This resulted in the appointment in November 2020
of DNV GL Limited, a company forming part of a global business
with extensive experience in HSE matters.
Overall, the Committee has been pleased with the progress
made through the course of 2020 and the responsiveness
to requested actions and initiatives arising from the internal
audits, despite the challenge of working remotely.
Drax Group plc Annual report and accounts 2020 99
Strategic reportGovernanceFinancial statementsShareholder information
Audit Committee report continued
Such work is an important part of assurance but also of building
strength across the range of financial and non-financial
operations which underpin the Group. It also helps to reinforce
the values and culture which inform how as individuals, teams
and a Group we perform our work.
Role of the Committee
The role of the Committee is to assist the Board in fulfilling
its oversight responsibilities which includes undertaking
the following:
In October 2020, the Chair of the Board received a letter from
the FRC regarding our 2019 annual report, in connection with
a thematic review of climate disclosures. I worked with the Chair
of the Board, management, and also Deloitte as our external
auditors in considering the matters raised, and the responses
and areas in which we considered improvements could be
made. As with all stakeholders, the feedback we have received
from the FRC helps to inform how we act, including how we
provide information to wider stakeholders that enables them
to understand our business and performance.
In the rest of this report we outline the other activities of
the Committee and the teams which support its areas of
responsibility. Continued focus on such matters is important if
we are to maintain the required standards expected of us and
support the growth and delivery of business opportunities for
the Group as we implement our strategy for the longer term.
• monitoring the integrity of the financial statements and other
information provided to shareholders
• reviewing significant financial reporting issues and judgements
contained in the financial statements
• advising the Board on whether the Committee believes the
Annual report and accounts are fair, balanced and
understandable
• maintaining an appropriate relationship with the Group’s
external auditor and reviewing the effectiveness and objectivity
of the external audit process
• maintaining and monitoring the non-audit services policy
• reviewing the systems of internal control and risk management
• monitoring and reviewing the effectiveness of the internal audit
function
• making recommendations to the Board (to put to shareholders
for approval) regarding the appointment of the external auditor
The Chair of the Committee reports on the Committee’s
activities and considerations at each Board meeting following
the Committee’s meeting. The minutes of each Committee
meeting are circulated to all members of the Board.
In undertaking its duties, each member of the Committee has
access to the services of the Chief Financial Officer and the
Group Company Secretary and their resources, as well as
access to external professional advice. In addition, the Chair
holds meetings with the Chief Financial Officer out of cycle
from the formal meetings and also attends planning meetings
with those preparing for forthcoming meetings of the
Committee in order to discuss relevant papers and key matters.
100 Drax Group plc Annual report and accounts 2020
February
Item under review
• The 2019 year-end review
of accounting issues and
judgements
• Consideration of the 2019
annual report, financial
statements and preliminary
results announcement and
post-balance sheet disclosure
in respect of the coal closure
• The internal control
framework update on
effectiveness of internal
controls and update on risk
management
• Final report from Deloitte on
their 2019 audit findings
• Internal audit reviews
summary and audit planning
• The Audit Committee’s
effectiveness – feedback
arising from 2019 internal
evaluation
April
July
December
• Management update on
accounting issues and
judgements including
expectations on the likely
impact of Covid-19 and the
potential impairment of
coal assets
• The external auditor’s
management letter for the
2019 audit
• Update on the internal control
environment, particularly in
light of changes to working
practices due to Covid-19
• Review of the whistleblowing
policy, including incidents
reported and investigation
outcomes
• IT internal controls review
including Cyber Security
• Progress of the internal audit
plan, outstanding actions and
recent reports
• The effectiveness of the 2019
external audit process
• Review of internal audit
function and appointment
of KPMG as internal auditor
• Senior Accounting Officer
reporting to HMRC
• Assurance on the ability of
the Group to pay the 2019
final dividend.
• The 2020 interim review
of accounting issues and
judgements, including the
coal closure impairment
review and bad debt
provisioning
• Review of Group’s approach
to IFRS 9 (biomass trading)
• Report from Deloitte on their
2020 interim review findings
• Consideration of the 2020
half-year financial report and
results announcement
• Management update on
accounting issues and
judgements, and focus areas
affecting the 2020 financial
statements
• Planning report from Deloitte
on the 2020 audit and
proposed audit fees
• Review and approval of the
external auditor’s 2020 terms
of engagement
• Update on the internal control
environment
• Half year risk review, including
• Review of the risk
key risks and mitigations
arising from Covid-19
• Group Tax Strategy
• The Audit Committee’s terms
of reference
• The Auditor Independence
Policy
• Assurance on the ability of
the Group to pay the 2020
interim dividend.
management framework
• Consideration of the
whistleblowing report and
details of the recent incidents
• Update on progress with the
Group Financial Control
Framework project
• Internal audit plan for 2021,
assurance mapping, recent
reports and outstanding
actions
• Discussion on audit partner
rotation and determination on
the new appointment in place
prior to the 2020 year end
audit
• Review the Group’s response
to the FRC’s enquiries in
respect of the 2019 Annual
report
The Committee allows time at each meeting to speak in the
absence of management with each of the external auditor and
the internal auditor. The Committee’s understanding with both
the external and internal auditor is that, if they should at any
time become aware of any matters giving them material
concern, they should promptly draw it to the Committee’s
attention via the Chair of the Committee. No such issues
were raised in 2020.
Committee Activities in 2020
The Committee follows a programme of work designed to
ensure that sound risk management processes, a robust system
of internal control and fair and balanced performance reporting
are in place.
The Committee undertakes its duties reflecting an annual work
plan, which is agreed each November for the following calendar
year. In addition, where appropriate to activities in the Group or
to reflect changes in applicable regulations, additional agenda
items are incorporated to ensure members of the Committee
have the opportunity to consider and contribute to an analysis
of material issues. The main areas of work undertaken by the
Committee during 2020 at its routinely scheduled meetings
are set out in the table above.
Explanations of the critical accounting judgements, estimates
and assumptions are set out in detail throughout the notes to
the consolidated financial statements, with a summary on page
152. The Committee reviewed these aspects of the financial
statements, paying particular attention to those issues that
involved the most subjective and complex judgements, namely
impairment of fixed assets, valuation of derivative financial
instruments, valuation of bad debt provisions and accuracy
of unbilled revenue, which are discussed on page 102.
In October 2020, the Group received a letter from the FRC’s
Corporate Reporting Review team, requesting information
about certain matters arising from their review of the Group’s
2019 Annual report and accounts as part of its thematic review
of climate disclosures. As a result of the correspondence, the
Group has sought to enhance clarity in certain disclosures,
particularly in relation to impairment, in the 2020 Annual report
and accounts. The Committee reviewed and approved the
Group’s responses to the FRC’s enquiries at its meeting in
December 2020.
The review conducted by the FRC was based solely on the
Group’s published report and accounts and does not provide
any assurance that the report and accounts are correct in all
material respects.
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Audit Committee report continued
Reviewing the effectiveness of the system of risk management
and internal controls
The Committee received updates on the Group’s internal
control environment and reviewed internal audit reports at
each of the four meetings held during 2020. Particular focus
was given to how the business was strengthening the IT and
Security control frameworks in response to Covid-19, which saw
the majority of employees transition to working remotely over
a short timeframe. This included acquiring, configuring and
deploying laptops and associated hardware, facilities for
meetings, provision for employees to operate ‘call centre
capability’ in support of the Customers business, changes to
security controls in response to wider working from home, and
promoting awareness amongst employees of the heightened
threats from fake websites, phishing attacks and fraud.
In addition, the Committee received updates on the financial
risks and financial controls covering each of the Group’s
business units. The various updates, reviews and reports
allowed both control and audit issues to be discussed with
management. Risk mitigations and progress with previously
agreed actions were also monitored and progress discussed.
At its December meeting, the Committee also received an
update on a project to review, document and implement a single
Group-wide financial control framework, bringing together
good practice from across the Group’s businesses to form
a single, consistent policy and minimum set of standards,
applicable across the entire Group.
No material issues have arisen with the operation of controls
in individual business units during 2020.
The Committee reviewed the categories used to report to
shareholders and other stakeholders the Principal Risks and
Uncertainties explained in the report (see pages 66 to 77).
The review included discussion of retaining a disclosure
associated with ongoing uncertainty from Brexit and Covid-19.
The explanation of the principal risks also reflects the review
by the Committee and separate evaluations by the Executive
Committee, supported by a presentation by the Head of
Group Risk.
The Committee also reviews information arising from
Whistleblowing reports as appropriate to the circumstances and
matters under review. The Committee considers the scope of
investigation and the appropriateness of the steps being taken.
The Board is also updated on these reviews. An explanation of
the Group’s Whistleblowing policy can be found on page 63.
Reviewing key accounting estimates and judgements
The significant issues in relation to the financial statements were as follows:
Matter
Issue and key judgements
Factors considered and conclusions reached
Valuation of derivative
financial instruments
The Group makes extensive use of derivative
financial instruments to manage key risks facing
the business. The balance sheet includes
significant assets and liabilities arising from
derivatives which are stated at their fair value.
In particular the fair values of forward foreign
currency purchase contracts reduced
substantially in the financial period following the
strengthening of sterling against the US dollar.
The fair values for derivative financial instruments
are determined using forward price curves and,
where an instrument incorporates an element of
optionality, an option pricing model.
The inputs to these calculations include
assumptions regarding future transactions
and market movements, as well as credit risk,
and are therefore subjective. The nature of the
calculations is inherently complex and given
the size of the portfolio small variations in
assumptions can have a material effect upon
the overall fair value.
The Committee reviewed the Group’s derivative
position in February, July and December 2020,
having regard in particular to the judgemental
areas described in note 7.2 to the financial
statements. The Committee considered the
position as at 31 December 2020 at its meetings
on 15 and 22 February 2021.
At each meeting, management provided updates
on movements in market prices that underpin
changes in the fair value of the derivative
portfolio and highlighted the treatment applied
to any new types of derivative instrument for
the Committee’s consideration.
The Committee has concluded that the fair value
calculations had been performed in a reasonable
and consistent manner, that the disclosure in the
financial statements was appropriate and that
the key controls underlying the calculations were
fit for purpose.
102 Drax Group plc Annual report and accounts 2020
Matter
Issue and key judgements
Factors considered and conclusions reached
Impairment of fixed assets
The Group reviews its fixed assets (or, where
appropriate, groups of assets in CGUs) for
potential impairment. Impairment reviews are
conducted on an ongoing basis and are triggered
by either the existence of potential indicators of
impairment or, in the case of goodwill and other
intangible assets with indefinite useful lives,
conducted at least annually.
The Customers and Pellet Production businesses
generate independent cash flows to be
equivalent to the operating entities within those
businesses resulting in three CGU’s for Haven
Power, Opus Energy and Drax Biomass. The
Generation business considers its assets that
generate independent cash flows to be the eight
individual sites that share common infrastructure
and control functions. The Group’s four OCGT
development assets were treated as a single CGU
for impairment purposes.
If an indication of potential impairment exists,
goodwill is allocated to the CGU, or the CGU
contains an intangible asset with an indefinite
useful life. the recoverable amount of the asset
or CGU is assessed with reference to the present
value of the future cash flows expected to be
derived from its value in use or its expected
fair value.
Assumptions that underpin the assessment of
value in use for each CGU are based on the most
recent approved business plan, and include all of
the necessary costs expected to be incurred to
generate the cash inflows from the CGUs assets
in their current state and condition.
Impairment reviews rely on assumptions and
management key judgements regarding future
market prices, cashflow forecasts, discount rates
and the use of appropriate sensitivities.
At its meeting in July 2020, the Committee
reviewed analysis prepared by management that
determined Drax Power Station should be treated
as two CGUs following the announcement to
close commercial coal generation in March 2021.
At the same time, the Committee reviewed the
forecasts and analysis supporting the conclusion
that the recoverable amount of the coal CGU was
zero, and the associated fixed assets should be
written off in full. The Committee challenged
management’s analysis and in particular
considered the difficulties associated with
ensuring completeness of the impairment charge,
noting the history of the site as a single combined
generator.
Also in July 2020, the Committee reviewed a
paper from management that updated the overall
2019 impairment analysis for the half year and
concluded that, despite an impact from Covid-19
on headroom for the Customers CGUs, no
impairment was required.
In December, the Committee reviewed
management’s proposed approach to conducting
impairment reviews for the 2020 year end. The
results of that analysis were reviewed at the
Committee’s meetings in February 2021. The
Committee paid particular attention to the
reviews in respect of:
• The Opus Energy CGU, considering the significant
impact of Covid-19 on the CGU in the period and
challenging management’s scenario analysis
taking into account plans for future operations
• The OCGT projects, reflecting the status of the
development projects and risk associated with
future plans and execution.
Having considered management’s reports, and
challenged the approach and key assumptions
made, the Committee concluded that the
approach to impairment reviews was appropriate
and no further impairment charges were
necessary over and above those booked in
respect of specific coal asset obsolescence.
Finally, the Committee reviewed the impairment
disclosures in the annual report and concluded
that the key judgements and sensitivities had
been appropriately disclosed, and the matters
considered as part of the response to the FRC’s
letter received during the period had been
appropriately addressed.
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Audit Committee report continued
Matter
Issue and key judgements
Factors considered and conclusions reached
Accuracy of unbilled
Customers revenue and bad
debt provisions
Revenue from electricity and gas supplied to
customers between the date of the last meter
reading and the financial year end is based on
estimates in relation to the volume of energy
consumed and the valuation of that consumption.
The Covid-19 pandemic has increased the Group’s
expectation of payment delays and business
failure, particularly in the SME segment. This is
reflected in an increased income statement
charge in respect of expected credit losses and
an increase in related provisions held on the
balance sheet at 31 December 2020.
The Committee reviewed with management
the process for and assumptions applied in
determining the calculation of unbilled receivables,
noting that historically, financial settlements had
been closely in line with the amounts accrued in the
consolidated financial statements.
The Committee also reviewed the approach for
calculating the expected credit losses associated
with Customers sales, as described in more detail in
note 3.6 to the financial statements. Particular focus
was given to the development of the probability
model (described in note 3.6) and
the ability of the model to reflect updated
assumptions as the Group’s experience of cash
collections and settlements changed following the
advent of the Covid-19 pandemic. The Committee
considered and challenged management’s
representations around the
need for additional incremental provision over and
above that indicated by the model, to reflect the
current systemic uncertainty in the economic
environment.
The Committee reviewed with management
the key assumptions applied in determining
the calculation of unbilled receivables noting
the reliance of third party data for estimates and
actual usage volumes from meter readings and the
external auditors testing assurance that confirmed
the models work appropriately.
The Committee concluded that the calculation
of expected credit losses going forward using
the probability methodology was appropriate and
resulted in a final provision that was supportable and
appropriate prudent in the current economic
circumstances. The Committee was also satisfied
that disclosure in the financial statements detailing
the approach had been made appropriately.
Areas of particular focus – insights on the Committee’s work
Throughout the year, the Committee has provided oversight to
management’s execution of key strategic projects, considering
the key judgements made and the impact of such projects on
the financial statements.
At its meeting held in February 2020, the Committee received
a report from management covering the Board’s potential
decision to close coal generation at Drax Power Station. In
particular, the Committee challenged management on the key
judgement related to the timing of changes in the assessment
of cash-generating units at Drax Power Station, which
ultimately led to the impairment of associated assets being
recognised. On 31 January 2021, the Group concluded the sale
of its portfolio of CCGT assets to VPI Generation Limited. At its
meeting in December 2020, the Committee satisfied itself that
the proposed presentation of the transaction in the financial
statements was appropriate. The actual presentation was
subject to a final review and was approved as part of the
February 2021 meetings. As part of this approval, the Committee
noted that the key judgement (the timing of the assessment of
the CCGT portfolio as a discontinued operation and held for
sale), and the main source of estimation uncertainty (being the
fair valuation of the £29 million contingent consideration) were
not material, but concluded that the approach adopted on both
items was appropriate.
During the year, the Group issued new euro-denominated senior
secured notes and entered new Infrastructure term loan
facilities. The proceeds from these new facilities were drawn
in November 2020 and used, along with cash reserves, to
redeem the existing sterling 2022 bond and ESG loan facility.
The Committee reviewed the approach taken to accounting for
the new facilities and the redemption of the existing facilities
by management. Particular focus was given to the treatment of
refinancing costs as exceptional items in the income statement.
In addition, reflecting the increased proportion of the Group’s
debt denominated in foreign currencies, the Committee
reviewed and approved a proposal from management to include
an additional presentation of net debt in the 2020 Annual
Report, that incorporates the effect of derivative financial
instruments used to fix the sterling value of debt repayments
at maturity. As part of its review, the Committee noted that the
proposed new measure would likely be useful to users of the
accounts by removing FX volatility from the calculation, better
reflecting the economics of the Group’s contractual position.
104 Drax Group plc Annual report and accounts 2020
Reviewing the 2020 Annual Report & Accounts
At its meeting held in December 2020, the Committee received
reports from management on its planning for the various
elements of the 2020 annual report, including a timetable for
preparation of drafts and the contributions being made by
members of the wider management and executive teams in
drafting, peer review and commenting on the sections. That
meeting also discussed how such review would support
ensuring the annual report was fair, balanced and
understandable.
Between the year-end date and the date of the approval of the
Annual report and accounts, the Committee met on 15 February
2021 to understand progress with the audit and discuss a paper
covering key accounting estimates and judgements, as well as
reviewing the key year-end work completed around principal
risks. The meeting was attended by management and Deloitte.
The Committee met again on 22 February 2021 principally to
review the draft 2020 Annual report and accounts and the
external auditor’s findings. The Committee reviewed papers
prepared by management on key areas of disclosure and
explanation within the accounts, and also a report from
Deloitte LLP (“Deloitte“) setting out their audit findings.
Also reviewed were internal controls, forecasts and relevant
assumptions made in preparing the Viability Statement and
considering the appropriateness of adopting the going
concern basis in preparing the financial statements. Having
challenged the assumptions around availability of finance
and covenant compliance made in the process and considered
the appropriateness of the three-year period of assessment,
the Committee concluded that the Viability Statement
disclosed on page 64 was robust and that the Statement
was fair and balanced.
The Committee considered and reviewed management’s
disclosure on exceptional items and the adjustments which
were taken through the middle column on the presentation
of the three-column income statement, (which can be found
on page 154 referring where necessary to the agreed
accounting policy).
Fair, balanced and understandable
As a result of its review of the Annual report and accounts,
underpinned by its discussions with operating and finance
management regarding the strategic report, and with the
Group finance team regarding the financial statements, the
Committee advised the Board that, in the Committee’s view,
the Annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Company’s and
Group’s position and performance, business model and strategy.
Review of Committee effectiveness
In line with the FRC’s Guidance on Committees, the Committee
periodically reviews its own effectiveness. During the autumn
of 2020, an externally facilitated review of the performance
of the Committee was undertaken. The outcome of the review
found that the Audit Committee works well, with an effective
Chair and committee members all providing valuable
contributions and effective challenge. The review also found
effective planning routines are in place, ensuring there is
sufficient time to consider matters in advance of decisions
being required, and the challenges of surprises or disruption
can be mitigated. It was noted that ‘teach-in’ sessions provided
by Drax management and external specialists on key topics,
such as treasury and hedging, helped to ensure members of
the Committee were up to speed on technical areas. Further,
the review noted there is good dialogue and constructive
relationships between the Audit Committee Chair, CFO and
the external audit partner.
External Audit
Effectiveness of external audit
The Committee reviewed the effectiveness of the external
auditor in April 2020 and does so annually. Deloitte LLP
(Deloitte), who have performed the role of external auditor
continuously since the Company’s listing in 2005, were
reappointed in 2017 following a competitive tender process.
Anthony Matthews acts as Audit Partner and has significant
listed company auditing experience working within the energy
and resource sector and had previously led the Group’s
Customer business unit audit.
The Committee’s review primarily considered the independence
and objectivity of Deloitte, their professional competence,
past performance and the robustness of the audit process.
The full assessment in 2020 by the Committee considered
feedback from members of the Finance and wider management
team. Views were sought on such matters as the quality of work
and engagement in the course of planning and undertaking
their audits and reviews at both Group and business unit level.
The Committee also assessed the oversight of the financial
reporting process, in particular the Committee’s own
discussions with the auditors of the audit work performed
on areas of higher audit risk and the basis for the auditor’s
conclusions on those areas, as well as the depth of the
auditor’s understanding of the Company’s business.
As also reported in the 2019 Annual report and accounts,
in January 2020, the FRC’s Audit Quality Review (AQR) team
submitted its final report and findings to the Group regarding
Deloitte’s audit of the Group’s 2018 financial statements.
At its February 2020 meeting the Committee considered
in detail the findings of the FRC’s review. In advance of this
meeting the Chair and Audit Partner discussed the findings and
the Chair met with the Acting Director of the FRC responsible
for the AQR report.
The Committee noted three areas recommended for
improvement in relation to the work performed on testing the
rebasing of certain financial instruments, the documentation
of the acceptable range applying to the valuation of power
contracts and the estimation of unbilled revenue in one of the
business units. A fourth area related to the work completed on
the purchase price valuation, which was appropriately disclosed
as provisional in 2018 and finalised in the 2019 financial
statements. At the meeting, the Audit Partner explained how
Deloitte had responded to the AQR’s findings and the measures
taken to address relevant matters. The Committee noted
Deloitte’s confirmation of improvements to the work completed
in the 2019 audit in these areas. The Committee also requested
Deloitte ensure the responses to the FRC’s findings are
evidenced in all future audits when relevant. The Committee
noted that no adjustments to the financial statements were
required as a result of this review.
Drax Group plc Annual report and accounts 2020 105
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Audit Committee report continued
Having considered the results of the review, the actions taken,
and improvements made by Deloitte to address the areas
identified, the Committee concluded that there were no matters
which cast doubt on the fundamental quality of the audit.
Details of the amounts paid to the external auditor during the
year for audit and other services are set out below and in note
2.3 to the consolidated financial statements on page 164.
Schedule of fees paid to Deloitte LLP
Audit fees:
Statutory audit of Drax Group
Statutory audit of the Company’s
subsidiaries
Total audit fees:
Interim review
Other assurance services
Corporate refinancing fees
Reporting accountant fees
GOO & FITS compliance audit
BEIS assurance report
Total non-audit fees:
Total auditor’s remuneration
Year ended
31 December
2020
£000’s
Year ended
31 December
2019
£000’s
1,025.0
863.9
38.0
1,063.0
98.0
2.0
110.0
116.0
–
–
326.0
1,389.0
36.0
899.9
96.2
2.0
100.0
–
70.0
10.0
278.2
1,178.1
Audit fees payable for the audit of the Group’s consolidated
financial statements in 2020 includes £88,000 in relation to
the 2019 audit.
Certain non-audit services were performed by Deloitte during
the year. The external auditors should not provide non-audit
services where it might impair their independence or objectivity
to do so. To ensure this principle is followed, the engagement for
the provision of any non-audit services requires prior approval
from the Committee Chair or Committee. Agreement to allow
the audit firm to perform additional services is taken after
considering that the non-audit services policy has been fully
applied and that any engagements were in the best interests
of the Group and its key stakeholders.
During the year there was an increase in the level of non-audit
services provided by Deloitte which in total amounted to
£326,000, of which £98,000 covered the Group’s Interim
review. The Committee was satisfied that the overall levels
of audit and non-audit fees were not of a material level relative
to the income of Deloitte as a whole.
The Committee were also satisfied that the level of non-audit
fees was below the 70% cap based on the average audit fee
for the preceding three years.
Subsequent to the balance sheet date, Deloitte are providing
ongoing support in a limited reporting accountant role in
respect of the shareholder circular for the proposed acquisition
of Pinnacle Renewable Energy Inc. This work was reviewed
and approved by the Audit Committee in accordance with
the policies outlined above, with due consideration given
to independence and in the context of the fee cap for
non-audit services.
Based on its overall review of effectiveness of the external
audit and auditor discussions, feedback from management,
interactions and satisfactory consideration and response to
the FRC’s AQR, the Committee concluded it was satisfied that
the external auditor and audit was effective and agreed that
their work demonstrated an ongoing commitment to audit
quality. The Committee was satisfied the audit process was
robust and Deloitte had shown strong levels of technical
knowledge and provided appropriate professional scepticism.
Independence of external audit
The Group has an Auditor Independence Policy (“AIP”) which
defines procedures and guidance under which the Company’s
relationship with its external auditor will be governed, and forms
part of the means by which the Committee is able to satisfy
itself that there are no factors which may, or may be seen to,
impinge upon the independence, objectivity and effectiveness
of the audit process. The AIP was reviewed by the Committee
in July 2020. Within its most recent review the Committee
considered areas of development in practice and guidance in
the factors which the Committee should consider in evaluating
the key tenets of independence, objectivity and effectiveness.
The main features of the AIP are:
• review the quality and cost effectiveness of the audit and
the independence and objectivity of the external auditor
• a requirement to rotate the lead audit partner every five years,
and processes governing the employment of former external
auditor employees
• a policy governing the engagement of the auditor to conduct
non-audit work, under which the general principle will be that
no non-audit services are undertaken by the incumbent audit
firm, unless the work to be allocated requires a certificate or
other assurance of the Company’s appointed auditor, the
services provided relate to interim review and the reporting
accountant activity or exceptional circumstances warrant it,
and only then where the Committee is satisfied the
engagement of the audit firm is justified on merits which are
clearly articulated by management and agreed in advance by
the Committee.
Anthony Matthews will rotate off the audit in 2021, at the end
of a five-year period of involvement. During 2020, the
Committee reviewed the CVs of potential replacement partners
from Deloitte and approved the appointment of Makhan Chahal
from 2021. The decision was based upon the depth of Makhan’s
sector experience, relevant FTSE 100 and 250 signing partner
experience and experience with complex trading and hedging
positions.
The balance between the fees paid to the external auditor
for audit and non-audit work is monitored by the Committee.
The AIP is available on the Company’s website: www.drax.com.
The Committee also receives reports from the external
auditor on its own processes and procedures, to ensure its
independence and objectivity and to ensure compliance
with the relevant standards.
106 Drax Group plc Annual report and accounts 2020
In addition, at each of its scheduled meetings, the Committee
received reports detailing progress with implementing
recommendations previously raised by internal audit to allow
them to effectively monitor management’s responses. The Chair
of the Committee, independent of management, maintains
direct contact with both the internal and external auditor,
allowing open dialogue and feedback.
The Committee recognises the importance of maintaining and
evolving effective policies and procedures for the day-to-day
operational activities of the Group. This spans such matters
as engineering practices, maintenance, process safety and
training which are integral to ensuring our employees are
suitably enabled with the requisite knowledge and equipment
to perform their work effectively and safely. The Committee
reviewed and supported the appointment of a new external
consultant, DNV GL Limited, tasked with the internal audit of
the Group’s health, safety and environmental practices. The
Committee also determined that KPMG should, as part of
their 2021 programme, undertake reviews of the policies and
procedures pertaining to operational and engineering activities.
This is intended to augment ongoing work which is being
undertaken by management to update Group-wide policies
and procedures.
The Committee has considered the overall effectiveness
of internal audit, based on the quality of its plan and the
information provided in its reporting, and is satisfied that the
revised model described above remains appropriate for the
Group on the basis of quality, experience and expertise. In
reaching this conclusion, the Committee considered the views
of management and the external auditors, as well as its own
assessment of the quality of reports and support provided
by the internal audit function.
This report was reviewed and approved by the Audit Committee
on 24 February 2021.
Auditor Reappointment
The Group has fully complied with the provisions of The
Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Committee Responsibilities) Order 2014.
The Committee recommended to the Board that a resolution
to reappoint Deloitte as the Company’s external auditor should
be put to shareholders at the AGM in April 2021 following
discussions at its meeting held on 22 February 2021.
Internal Audit
The Group historically operated a co-sourced model for its
internal audit function. Under this model, the internal team
conducted core financial and operational controls reviews.
Reviews of specialist technical areas, including controls
over regulatory compliance, were outsourced to firms with
appropriate experience and qualifications, primarily KPMG,
following consultation with the Committee.
During 2020 the Committee assessed the best approach to
sustaining high quality internal audit and risk management
functions. As part of a detailed review, the Chair of the
Committee and the CFO assessed potential partners for a fully
outsourced internal audit model, subsequently meeting with
the preferred partner. At its meeting in April the Committee
considered the options available and determined that the
internal audit and risk management functions be separated,
moving to a fully outsourced internal audit model. The
Committee noted that the outsourced partner would allow the
Group to draw on particular skills, prevailing market knowledge
and wider industry-relevant experience, such as in IT and
security, trading and commodities. KPMG was selected as the
new internal auditor, to be supported by an internal team, which
would also provide the opportunity to extend their capabilities
and knowledge.
Fees will be agreed on an audit by audit basis depending on
scope. A detailed plan to manage the handover and the
engagement with key internal stakeholders from finance,
risk, existing internal audit team members, management and
the Committee was approved and subsequently executed.
The Committee reviews and approves the internal audit plan
for the year. Its review is designed to ensure that priority is given
to the areas of highest risk for the Group and that the audit
work focuses on key controls, to optimise the level of assurance
provided to the Committee and to management. The Committee
receives reports at each meeting regarding the internal audit
programme and reviews undertaken.
Recommendations are made to management for control
improvements as appropriate. Topics dealt with by internal audit
reports reviewed by the Committee during 2020 included IT and
Cyber controls, procurement and payroll.
Drax Group plc Annual report and accounts 2020 107
Strategic reportGovernanceFinancial statementsShareholder information
Remuneration Committee report
How has Drax ensured that
executive remuneration
outcomes have been both
fair and appropriate?
Despite 2020 being a challenging year,
management has delivered solid business
results and progressed the Group’s strategy,
and the remuneration outcomes for the
Executive Directors and senior management
appropriately reflect this
Committee members
John Baxter
Philip Cox
David Nussbaum
Vanessa Simms
Attending by invitation
CEO, Chief Transformation Officer, Head of Reward and
External remuneration advisers.
The Group Company Secretary is the Secretary to
the Committee.
Number of meetings held in 2020: Five
In addition to the below, Nicola attended a number of
planning meetings to consider key agenda items, planning
for papers and ensuring the expectations of Nicola were
satisfactorily reflected in the matters discussed and
explained.
Attendance in 2020
Committee member
Date appointed
a member
Maximum
possible
meetings
No. of
meetings
attended
% of
meetings
attended
17 April 2019
John Baxter
22 April 2015
Philip Cox
Nicola Hodson
12 January 2018
David Nussbaum 1 August 2017
19 June 2018
Vanessa Simms
5
5
5
5
5
5
5
5
5
5
100%
100%
100%
100%
100%
This Directors’ Remuneration Report has been prepared in
accordance with Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations
2008, as amended (the Regulations) and the provisions of
the Code.
Terms of reference
The Committee regularly reviews its terms of reference,
and the Board also then reviews these terms. The most
recent review was in March 2020. The terms of reference
are available on the Group’s website at
www.drax.com/governance
108 Drax Group plc Annual report and accounts 2020
Nicola Hodson, Chair
Role of the Remuneration Committee
The principal responsibilities of the Remuneration Committee
(the Committee) are to:
• keep under review the implementation of the Directors’
Remuneration Policy.
• determine the remuneration strategy and framework for the
Executive Directors and senior management, ensuring that
executive remuneration is aligned to the Group’s purpose, values
and strategy.
• determine, within that framework, the individual remuneration
packages for the Executive Directors and senior management.
• approve the design of annual and long-term incentive
arrangements for Executive Directors and senior management,
including agreeing targets and payments under such
arrangements.
• determine and agree the general terms and conditions of
service and the specific terms for any individual within the remit
of the Committee, either on recruitment or on termination.
• determine the policy for, and scope of, executive pension
arrangements.
• oversee any major changes in employee remuneration
throughout the Group, ensuring there is a consistency with
the culture and values of Drax.
Key Remuneration Committee activities in 2020
• completed a full review of the Remuneration Policy (the Policy),
including a comparison of the Policy against the requirements
of the Corporate Governance Code, and finalised engagement
with shareholders.
• reviewed and provided input to management’s proposals on
remuneration matters on protecting and supporting employees
through Covid-19.
• reviewed and contributed to the full review of reward
arrangements for all employees across the Group below Board
and senior management.
• considered and approved the remuneration of Executive
Directors and senior management.
• reviewed the salary increases and aggregate bonuses paid
in all businesses and corporate functions.
• considered and approved the Committee’s Annual Report
on Remuneration for 2019.
• considered items relating to the redundancy arrangements
of Andy Koss, a former Executive Director.
Annual Statement to Shareholders
Dear shareholders,
On behalf of the Remuneration Committee (the Committee).
I am pleased to present the Directors’ Remuneration Report
for the 2020 financial year. In April 2020, our shareholders
approved the new Directors’ Remuneration Policy (Policy) with
94.61% of votes in favour. They also approved the Annual Report
on Remuneration for 2019, with 98.82% of votes in favour.
The Committee and I are grateful to our shareholders for their
continued support.
The report is set out in the following sections:
Section
Annual Statement to Shareholders on pages
Remuneration at a glance on pages
Directors’ Remuneration Policy on pages
Annual Report on Remuneration for 2020 on pages
Page
109 – 110
111 – 112
112 – 122
123 – 133
Our aim at Drax is to ensure transparency with our shareholders
and wider stakeholders in the development and implementation
of remuneration and associated governance. The vote in April
2020 for the new Policy followed extensive consultation with
our major institutional shareholders. This helped to inform
important decisions on the design of the Policy, including for
example, pension arrangements where from 1 January 2023
the contribution rates for existing Executive Directors will be
aligned with the rate for new joiners to the wider workforce.
We explain the full Policy on pages 112 to 122 and provide details
of the Committee’s decisions in respect of implementing the
new Policy during the 2020 financial year.
As noted throughout the annual report, 2020 was a very
challenging year but it has also been a year of achievements
that should make us proud. The Group has delivered a strong
performance in 2020 and management has worked hard to
keep colleagues safe and well informed during significant
change to working practices. Together we have continued
to deliver essential services to the country.
As I mentioned on pages 30 and 31, the Committee has given
very careful consideration to the impact of Covid-19 on
remuneration outcomes, and our discussions have been
applicable to Executive Directors, senior management, as well
as to all other colleagues. The principal focus of the Committee
has been to ensure outcomes are fair and appropriate with
respect to business performance, and consistent across the
wider workforce.
Review of decisions made during 2020
Annual assessment of performance
The Committee determines the remuneration of the Executive
Directors and members of the Executive Committee against
the strategic objectives and priorities of the Group. For 2020,
we achieved this through assessing performance against a
combination of strategic business and financial metrics. The
Group Scorecard reflects these metrics, and you can see details
on page 124.
A high proportion of total remuneration is delivered through
variable pay, rewarding the achievement of a balance of Group
short-term and long-term targets. For the 2020 plan, there
continued to be no personal performance element in the
determination of bonuses for Executive Directors and members
of the Executive Committee.
As described by Will Gardiner on pages 10 to 14, the Group
has delivered solid financial performance in 2020 and has
continued to progress key strategic objectives. The 2020 Group
Scorecard included metrics reflecting key objectives for all
major business areas, including Pellet Production, Generation
and Customers. While the performance in the Pellet Production
and Generation businesses remained very strong in 2020,
the Customers business was more significantly impacted by
Covid-19 and this was reflected in the financial performance of
this business area. The detailed review of achievement against
the performance metrics in the 2020 Group Scorecard is on
pages 124 and 125.
The Committee determined that the overall performance
outcome against the Group Scorecard represents a fair
reflection of the Group’s performance during the financial year
and did not exercise any discretion in its determination for
bonus outturn. The outcome of the Group Scorecard was 0.90
and this score results in 45% of the maximum annual bonus
being paid to Executive Directors. Of the total bonus awarded,
46.67% was with respect to delivery of financial performance
and this will be paid in cash in March 2021. The remaining
53.33% was with respect to the delivery of strategic objectives
and, in accordance with the Policy, will be deferred into shares
for the Executive Directors and which will ordinarily vest after
three years (in 2024). There are further details about this
outcome on pages 124 and 125.
This score also forms part of the performance assessment for
the Performance Share Plan awards granted in March 2018.
Further details are provided below.
Long-term assessment of performance
Awards which were granted in 2018 under the Performance
Share Plan (PSP) were subject to performance criteria under
the previous Policy approved by shareholders in 2018. Vesting
for such awards over the three-year period from 1 January 2018
to 31 December 2020 was based on two measures. These were
Relative Total Shareholder Return (TSR), accounting for 50% of
the award, and the three-year average of the Group Scorecard,
which accounted for the remaining 50% of the award. The
Group’s TSR over the period was between the median and
upper quartile, leading to 74.4% vesting for this element. The
average Group Scorecard outcome over the same period was
0.95 leading to 40.0% vesting for this element. The overall
vesting outcome for the 2018 PSP awards is therefore 57.2%
of the maximum.
The Committee determined that the vesting outcome was
appropriate in the context of performance over the three year
performance period and therefore no exercise of discretion was
applied to the overall vesting. Drax’s share price at 31 December
2020 was 39% higher than the start of the performance period,
given the averaging periods over which TSR has been
calculated, this equates to a return of 15% based on the six
month averaging period prior to the start and end of the
performance period. These returns represent a strong result
for our shareholders, particularly in the current environment.
Drax Group plc Annual report and accounts 2020 109
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Remuneration Committee report continued
Performance is assessed against a broad FTSE 350 comparator
group, for many of whom shareholder returns have been
negative over the performance period. Although Drax’s share
price was initially impacted by Covid-19 in early 2020, it has
recovered strongly, with a shareholder return of 28% from 1
January 2020 to the end of the year. The Committee is satisfied
that Covid-19 has not impacted the performance outcome in
a manner which unfairly favours participants, and is confident
that this return represents genuine strong performance and
delivery of our strategy in an extremely challenging climate.
You can find more details on page 31.
Base salary increases
For the 2020 pay review, all Executive Directors were given
an increase in base salary of 3%. This took effect in April 2020
and was in line with increases applied to the wider workforce.
For pay increases taking effect from 1 April 2021, the Committee
has taken into consideration the current and potential further
impact of Covid-19 on the Company, the shareholders, employees
and wider stakeholders. Accordingly, the Committee has agreed
to apply a 2% base salary increase for the Executive Directors,
which is aligned with average increases for the wider workforce.
Pension
Under the new Policy approved last year, any new Executive
Directors joining Drax would receive a pension contribution (or
cash payment in lieu of pension contribution) that is consistent
with those of new joiners to the wider workforce (which is
currently 10% of base salary).
Existing Executive Directors will retain their current pension
contribution until 31 December 2022, which is 20% of base
salary for Will Gardiner and 16% for Andy Skelton. From 1 January
2023, these contribution rates will reduce in line with those
of new joiners at that time.
LTIP
Earlier this month we announced our intention to acquire
Pinnacle Renewable Energy Inc., which is subject to Drax and
Pinnacle shareholder approval, and court and regulatory
approvals. If the acquisition is approved, it is expected to be
completed in Q2 or Q3 2021. It is intended that the 2021 LTIP
grant is made on the normal timetable at the beginning of April
2021, but the targets for the Cumulative Adjusted Earnings
Per Share performance condition (EPS) will be set as soon as
practicable following either, the completion of the acquisition,
or confirmation that the acquisition will not proceed. This will
allow the EPS target, which is cumulatively measured over the
three year performance period, to accurately reflect the impact
of the acquisition and to align with the shareholder experience
over the performance period. Full information regarding the
targets for the performance conditions for the 2021 LTIP grant
will be announced via RNS no later than three months after
the completion of the acquisition.
Leaving arrangements for Andy Koss
Andy Koss, CEO Generation, stood down from the Board on
7 April 2020 and left employment with Drax on 30 June 2020,
by reason of redundancy. Accordingly, the Committee
concluded that “good leaver” remuneration provisions should
apply under our Policy, as announced on 8 April 2020. We have
provided details of his leaving arrangements on pages 126 to
127. The Board determined that this role was no longer required
and therefore no successor has been appointed.
Workforce engagement
I believe that engagement with stakeholders is important in both
informing the decisions of the Committee and in communicating
how the Committee conducts its work and reaches key
decisions. In 2020, I met with the chairs of the MyVoice Forums
via video conference to explain the role of the Committee, how
executive pay is set, how it aligns with the wider workforce pay
and Company culture, and to answer directly any questions they
had. It was a really engaging session and the insight I gained was
invaluable. We will aim to continue to maintain an ongoing and
transparent dialogue with our employees.
Following this meeting, I recorded a video which was released
to the wider workforce of Drax Group plc. I also wrote to all
colleagues to share information, incorporating the feedback
I had received from my engagement with shareholders. I also
provided details of the Policy and the link to wider decisions
on remuneration.
Committee performance
In the autumn of 2020, the performance of the Committee was
assessed as part of an externally led Board evaluation exercise.
As part of the scope of this exercise, the Board considered the
composition and diversity of the Committee and how effectively
members work together to achieve objectives and make
decisions. I am pleased to report that the Committee is
operating effectively, and the Board takes assurance from the
quality of the Committee’s work. You can read more about this
on page 95.
Summary
Along with other members of the Committee, I am proud of how
we have kept to the principles of keeping everyone safe while
keeping the lights on in 2020. Moreover, I am satisfied that the
2020 remuneration outcomes for the Executive Directors and
senior management fairly reflect the performance of the Group
during this challenging period. These outcomes also provide a
fair and consistent approach to remuneration across the Group
and remain in shareholders’ interests. The Committee remains
alert to the potential challenges which Covid-19 may bring
through 2021 and how these might impact reward outcomes,
consistent with our commitment made when the pandemic
first arose.
I hope that having read the information in this report, you will
vote in support of the Annual Report on Remuneration for 2020
at the AGM in April 2021.
110 Drax Group plc Annual report and accounts 2020
Remuneration at a glance
This section provides a summary of the remuneration earned by each of the Executive Directors in 2020. Further detail is outlined
in the Annual Report on Remuneration which starts on page 123.
Total remuneration
Will Gardiner (CEO) £000s
Will was in office for the full year.
2020
2019
557
111
439
541
108
368
86
18
129
767
25
Total
1,900
Total
1,121
Andy Skelton (CFO) £000s
Andy was in office for the full year. As he joined the organisation on 2 January 2019, he has no PSP award due to vest until 2022.
2020
2019
363
58
245
23
355
57
224
23
Total
689
Total
659
Base salary
Pension
Annual bonus
LTIP
Other benefits and ShareSave
Implementation of the Policy in 2020
Below is a summary of the key features of our Directors’ Remuneration Policy (Policy), which was approved by shareholders at the
2020 AGM and so became effective from that meeting. There is also a summary of how the Committee applied the Policy in 2020.
Element
Key features of the Policy (adopted in 2020)
Implementation of Policy in 2020
Base salary
• The Committee targets market level, as determined by
Pension and
other benefits
reference to appropriate comparator companies selected
with consideration for factors such as sector, size and
international presence.
• An Executive Director in post at the start of the Policy
period, and who remains in the same role throughout
the Policy period, would normally receive an increase
in line with the average annual percentage increase
in base salary of all other employees in the Group.
• An Executive Director is entitled to a contribution to
the Group’s defined contribution pension plan, a cash
payment in lieu of pension, or a combination of pension
contribution and cash in lieu of pension.
• Until 31 December 2022, the pension contribution rates
for existing Executive Directors are 20% of base salary for
Will Gardiner and 16% for Andy Skelton. From 1 January
2023, the contribution rates will be aligned to those of
new joiners (which is currently 10%).
• Other benefits provided as appropriate.
Annual bonus
• The maximum opportunity is 175% of base salary for
Will Gardiner and 150% for other Executive Directors.
• 60% of the bonus award is measured on financial metrics,
and 40% on strategic metrics.
• Bonus earned for the strategic metrics is deferred, but
total bonus outcome is subject to a minimum of a 40%
deferral. The portion of bonus which is deferred into
shares is subject to a three-year vesting period and which
must be retained for a further two years.
• Clawback and malus provisions apply.
• For the pay increases made in April 2020, all Executive
Directors received an increase in base salary of 3%.
• These increases were in line with increases applied
to the wider workforce.
• The employer pension contribution in 2020 for Will
Gardiner and Andy Koss (up to the date of his departure)
was 20% of base salary, and it was 16% for Andy Skelton.
• Will Gardiner’s employer contribution is delivered as cash
in lieu, whereas for Andy Koss (up to the date of his
departure) and Andy Skelton, it is delivered in part
pension contribution and part as cash in lieu.
• Other benefits received included a car benefit, life
assurance, income protection, the opportunity to
participate in all-employee share plans on the same basis
as other employees, annual private health assessment
and annual private medical cover.
• The 2020 annual bonus outcome as a percentage
of maximum opportunity was 45%, of which 21% was
based on performance against financial metrics and
24% against strategic metrics.
• The strategic element of the bonus outcome (which is
equivalent to 53.33% of the total bonus award) will be
deferred into shares under the Deferred Share Plan.
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Remuneration Committee report continued
Element
Key features of the Policy (adopted in 2020)
Implementation of Policy in 2020
Long term
incentive
• For awards made under the LTIP which was introduced in
2020, the maximum award level is 200% of base salary
for Will Gardiner and 175% for other Executive Directors.
• Vesting is subject to long term performance conditions,
measured over a three-year performance period.
• Shares must be retained for a further two years from
vesting.
• Clawback and malus provisions apply.
• The 2020 LTIP award is based on the three-year
performance period to 31 December 2022, based on Total
Shareholder Return (TSR) relative to FTSE 350, which has
a 50% weighting, and Cumulative Adjusted EPS (EPS),
which also has a 50% weighting.
• The 2018 PSP (granted under the provisions of the 2018
Remuneration Policy) will vest at 57.2% of the maximum
and was based on the performance of TSR relative to
FTSE 350 (50% weighting) and the average Group
Scorecard outcome of the preceding three performance
years (50% weighting).
Shareholding
requirement
• The requirement is 250% of base salary for Will Gardiner
• Will Gardiner has met the shareholding requirement,
and 200% for other Executive Directors.
• A post-cessation shareholding requirement, equal to
the employment shareholding requirement, applies for
a two-year period after cessation. Only shares for awards
granted after the 2020 AGM will be included.
with a shareholding at the date of this report equivalent
to 369% of base salary, which includes 296,760 shares
he acquired in the open market.
• Andy Skelton is working towards meeting the shareholding
requirement and has a shareholding as at the date of the
report of 174% of base salary, which comprises 142,976
shares which he acquired in the open market.
• Andy Koss stepped down as a Director on 7 April 2020,
which was before the current Policy was approved by
shareholders on 22 April 2020. His shareholding at the
date of stepping down was 52% of base salary.
Directors’ Remuneration Policy – approved by shareholders in 2020
The current Directors Remuneration Policy (Policy) was approved by our shareholders at the AGM held on 22 April 2020 and
therefore became effective from that date and will be binding until the close of the 2023 AGM, unless varied by shareholders
at a General Meeting prior to then. The Policy is set out in full in this section.
The scenario charts have been updated to reflect fixed pay expectations for 2021 and the impact on the annual bonus and
LTIP awards.
Base salary
Base salary helps to attract, reward and retain the right calibre of Executive Director to deliver the leadership and
management needed to execute the Group’s strategy and business plan.
Practical operation
Base salary reflects the role, the executive’s skills and
experience, and market level. To determine the market level,
the Committee reviews remuneration data on executive
positions at companies which the Committee considers to
be appropriate comparators. The comparator companies are
selected, with advice from the Committee’s remuneration
advisers, taking into account factors such as, but not limited
to, sector, size, and international presence.
On appointment, an Executive Director’s base salary is set
at the market level, or below if the executive is not fully
experienced at this level. Where base salary on appointment
is below market level to reflect experience, it will be
increased over time to align with the market level, subject
to performance.
Base salaries of all Executive Directors are generally
reviewed once each year, with increases applying from April.
Reviews cover individual performance, experience,
development in the role, market comparisons and pay
reviews for the wider workforce.
Maximum potential value
The base salaries of Executive Directors in post at the start
of the policy period, and who remain in the same role
throughout the policy period, will not usually be increased
by a higher percentage than the average annual percentage
increase in salaries of all other employees in the Group.
Exceptions to this, subject to performance and development,
are where:
(i) An Executive Director has been appointed at below
market level to reflect experience. Under this scenario,
increases will be capped at 5% above the average annual
percentage increase in salaries of all other Group
employees.
(ii) An Executive Director has been promoted internally (or
the scope or nature of their role has changed) and their
salary is below market level. Under this scenario, increases
will not be capped and the Committee can increase base
salary to the market level within an appropriate
timeframe.
112 Drax Group plc Annual report and accounts 2020
Annual bonus
The award of annual bonus will be based on annual performance against financial and operational measures linked to the
business plan. The aim of the deferred portion of the annual bonus is to further align executives to shareholders’ interests,
by linking share-based reward to long-term sustainable performance.
Practical operation
The maximum opportunity will be split between two
elements:
Financial element – performance is based on financial and
operational metrics. This element represents 105% of salary
for the CEO and 90% of salary for other Executive Directors.
Subject to the minimum level of deferral noted below, this
element will be paid in cash.
Maximum potential value
Role
CEO
Other Executive Directors
Maximum opportunity
(% of base salary)
175%
150%
Performance measures
The performance conditions applicable to the annual bonus
awards are split between the two elements:
Strategic element – performance is based on strategic and
other non-financial metrics. This element will represent 70%
of salary for the CEO and 60% of salary for other Executive
Directors. This element will be paid in shares deferred for
a period of three years.
Financial element – performance measures based on annual
financial and operational targets, which will be linked directly
to the performance of the Group and determined by the
Board. The Committee may amend the measures used each
year in line with business strategy.
Strategic element – performance measures based on
non-financial and strategic targets, which will be determined
annually by the Board and will be aligned with the business
strategy.
The weighting of the respective elements is 60% on financial
elements and 40% on strategic elements. The Committee
has the discretion to vary the weightings from year to year.
In exceptional circumstances such that the Committee
believes the original measures and/or targets are no longer
appropriate, the Committee has discretion to amend
performance measures and targets during the year.
A minimum of 40% of the total bonus outcome will be
deferred into shares in the form of nil cost options under the
Deferred Share Plan (DSP), regardless of the pay outcomes
of the financial and strategic elements. If this amount is not
attained by the strategic element, a portion of the financial
element will also be deferred into shares in order to achieve
this minimum level of deferral.
A two-year holding period applies to DSP awards post-
vesting, during which Executive Directors may not sell
the shares, except to pay any tax due.
Dividends or dividend equivalents (which may assume
notional reinvestment) are paid on DSP awards.
There is no payment for below threshold performance.
The outcome for threshold performance is 0% of maximum.
The outcome for target performance is 50% of maximum.
In certain circumstances, the Committee can apply malus
and clawback to cash bonus awards.
Targets, outcomes and resulting payouts are published in
the Annual Report on Remuneration.
The Committee will review the formulaic outcome of the
bonus award and has the discretion to amend the final
outcome to make sure that bonus payments reflect overall
performance. The use of such discretion will be explained
fully in the relevant Annual Report on Remuneration.
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Long Term Incentive Plan (LTIP)
The Group’s LTIP provides long-term alignment with shareholders based on the outcomes of Relative Total Shareholder
Return (TSR) and Cumulative Adjusted Earnings Per Share (EPS).
Practical operation
Under the LTIP, Executive Directors may at the discretion
of the Committee receive an annual grant of shares.
Shares vest on the third anniversary of the grant, subject
to continued service or in exceptional circumstances earlier
subject to specified “good leaver” termination provisions,
and the achievement of performance conditions over a three
year period determined by the Committee. Vested awards
are then subject to a further holding period of two years for
Executive Directors.
Dividends or dividend equivalents (which may assume
notional reinvestment) may be paid on LTIP awards.
There is no payment for below threshold performance.
The outcome for threshold performance is 25% of maximum.
The Committee will include an override provision in each
grant under the LTIP. This will give the Committee discretion
to determine that no vesting shall occur, or that vesting shall
be reduced, if there are circumstances (relating to the
Group’s overall performance or otherwise) which make
vesting when calculated by reference to the performance
conditions alone inappropriate.
Maximum potential value
Role
CEO
Other Executive Directors
Maximum opportunity
(% of base salary)
200%
175%
In exceptional circumstances the Committee may on
recruitment grant a percentage of salary in excess of
these amounts. Further detail is provided on page 119.
Performance measures
Two performance measures apply to LTIP awards and they
are as follows:
(i) TSR performance over three years relative to the
FTSE 350 (50% of award), vesting as follows:
Below Median = 0% of maximum
Median = 25% of maximum
Upper Quartile = 100% of maximum
(ii) Cumulative Adjusted EPS performance over three years,
(50% of award), vesting as follows:
Below Threshold = 0% of maximum
Threshold = 25% of maximum
Maximum = 100% of maximum
In certain circumstances, the Committee can apply malus or
clawback to unvested/vested awards, as set out in the notes
to the policy table.
Straight line vesting occurs between performance levels
for both conditions.
The Committee reserves discretion to:
(i) amend the performance conditions/targets attached
to outstanding awards granted under this Policy, in the
event of a major corporate event or significant change
in economic circumstances, or a change in accounting
standards having a material impact on outcomes; and
(ii) adjust the vesting of LTIP awards and/or the number
of shares underlying unvested LTIP awards, on the
occurrence of a corporate event or other reorganisation.
In the event of a change of control, the treatment of
long-term incentives will be determined in accordance
with the plan rules.
114 Drax Group plc Annual report and accounts 2020
Pension
Pension provision is one of the components to attract, reward and retain the right calibre of executive, to ensure delivery
of the leadership and management needed to execute the Group’s purpose and strategy.
Practical operation
Executive Directors are entitled to a contribution to the
Group’s defined contribution pension plan, a cash payment
in lieu of pension (subject to normal statutory deductions),
or a combination of pension contributions and cash in lieu
of pension.
Maximum potential value
Existing Executive Directors will receive the following
pension contribution rates until 31 December 2022.
• CEO – 20% of salary
• CFO – 16% of salary
From 1 January 2023, the contribution rates for existing
Executive Directors will be aligned with the rate for new
joiners to the wider workforce (currently 10% of salary).
The pension contribution rate for any new Executive Director
will be aligned with the wider workforce rate from the date of
appointment.
Performance measures
No performance measures apply.
Benefits
Benefits are provided to be market competitive as an integral part of Executive Directors’ total remuneration.
Practical operation
Executive Directors receive a car benefit, life assurance,
income protection, the opportunity to participate in all-
employee share plans on the same basis as other employees,
annual private health assessment and annual private
medical cover. Additional benefits may be provided if the
Committee considers them appropriate.
Maximum potential value
Benefits are set at a level appropriate to the individual’s role
and circumstances.
The maximum opportunity will depend on the type of benefit
and cost of its provision, which will vary according to the
market and individual circumstances.
Relocation expenses are paid, where appropriate, in
individual cases. Executive Directors’ relocation expenses
are determined on a case-by-case basis. The Policy is
designed to assist the Executive Director to relocate to a
home of similar standing.
Performance measures
No performance measures apply.
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Shareholding requirement
The shareholding requirement aligns the interests of Executive Directors with shareholders.
Practical operation
The shareholding requirement for the CEO is 250% of salary
and for the other Executive Directors is 200% of salary. This
is to be achieved within a period five years after the date
of the 2020 AGM (or after the date of appointment for new
Executive Directors if this is later) from vested shares derived
from awards under the Company’s share plans.
Maximum potential value
N/A
Performance measures
N/A
Until this level is reached, Executive Directors who receive
shares by virtue of any share plan award or who receive DSP
awards are expected to retain 50% of the shares received net
(i.e. after income tax and national insurance contributions).
Shares which have not vested and are subject to performance
conditions will not count towards the requirement. Unvested
awards subject to service only (e.g. DSP awards) will count
towards the guideline on a net of tax basis.
Shares vesting in respect of awards granted after the 2020
AGM will be held in the Group’s Employee Benefit Trust until
the shareholding requirement is met and all share disposals
will be subject to the Company’s share dealing code.
Post cessation shareholding requirement
The Group’s post-cessation shareholding requirement aligns the interests of Executive Directors with shareholders over
the longer term beyond their departure from the Group.
Maximum potential value
N/A
Performance measures
N/A
Practical operation
A post-cessation shareholding requirement, equal to the
employment shareholding requirement (or the shareholding
on departure if lower) applies for a two year period after
cessation of employment. For clarity, the post-cessation
shareholding requirement is 250% of salary for the CEO
and for the other Executive Directors is 200% of salary. In
addition, shares vesting during this period will remain subject
to the two-year post-vesting holding period, which may
therefore extend beyond the two-year period for which the
post-cessation shareholding requirement applies.
Only shares relating to awards which are granted after the
date of the 2020 AGM will be included for the purposes of
this requirement. Shares purchased by the Executive
Director (including those from all employee share plans),
will not be included.
Shares counting towards this requirement will not be
released from the Employee Benefit Trust during the period in
which the post-cessation shareholding requirement applies,
to support enforceability. Acceptance of the post-cessation
shareholding requirement will be a condition of participation
in all share awards granted after the 2020 AGM and will be
included in the grant documentation for awards.
Both Will Gardiner and Andy Skelton have entered into such
an agreement.
116 Drax Group plc Annual report and accounts 2020
Performance measures and approach to setting targets
The measures for elements of variable pay will be:
• In respect of the annual bonus plan, financial, strategic and operational measures consisting of targets set by the Committee
each year in conjunction with the Board. The targets are aligned with key business goals determined at the start of each year
• In respect of shares granted under the LTIP from April 2020, a combination of:
– Relative TSR, which aligns Executive Director remuneration with creation of long-term shareholder value;
– Cumulative Adjusted EPS, which aligns Executive Director remuneration with the realisation of our earnings growth plans,
which is a major determinant of shareholder value.
• The Committee sets targets for the performance measures each year, taking into account market conditions, the business plan
and other circumstances as appropriate. A summary of the measures that apply for the following year are disclosed in the
Annual Report on Remuneration.
Elements of previous policy that will continue
Remuneration component and link to
strategy
Performance Share Plan awards made
in 2019 link long-term share-based
incentives to TSR and to the
achievement of Business Plan
strategic targets.
DSP awards made in 2019 and 2020
until they vest three years later or
lapse, as applicable.
Practical operation
Vesting is subject to achievement of
performance conditions and
continued service or “good leaver”
termination provisions. Further details
of the terms were included in the
relevant Annual Report on
Remuneration at the time of grant.
Vesting is subject to continued service
or “good leaver” termination provisions.
Further details of the terms of the
awards were included in the relevant
Annual Report on Remuneration at the
time of grant.
Performance measures
Vesting of conditional awards is
subject to relative TSR performance
and average Group Scorecard
outcome over three years.
N/A
Circumstances in which malus or clawback may apply
Malus and clawback for the annual bonus – the Committee may reduce the performance outcome, or may require an
Executive Director to repay any amount of cash bonus it considers appropriate, in circumstances of:
• material financial misstatement;
• fraud or misconduct;
• material failure of risk management and corporate failure;
• if assessment of a performance condition is found to have been based on an error, inaccuracy or misleading information;
• in other circumstances that the Committee considers justifying the operation of the clawback provision.
The clawback period is two years from the date a bonus is paid. If a repayment of bonus is required, the Committee may
reduce the number of shares that may vest under the DSP or LTIP arrangements by an appropriate amount.
The Committee may also reduce the number of shares, or clawback shares for a two year period commencing on vesting
under an LTIP and/or DSP awards in circumstances of:
• material financial misstatement
• fraud or misconduct
• material failure of risk management and corporate failure
• if assessment of a performance condition is found to have been based on an error, inaccuracy or misleading information
• in other circumstances that the Committee considers justifying the operation of these provisions
If a repayment of a share award is required, the Committee may reduce the number of shares that may vest under the DSP
or LTIP arrangements, and/or may reduce the amount of any annual bonus by an appropriate amount.
Drax Group plc Annual report and accounts 2020 117
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Remuneration Committee report continued
Committee’s judgement and discretion
In addition to assessing and making judgements on the meeting of performance targets and the appropriate incentives
payable, the Committee has certain operational discretions it can exercise in relation to Executive Directors’ remuneration.
These include, but are not limited to:
• reviewing the formulaic outcome of the cash bonus, DSP and LTIP awards and applying discretion to amend the final outcomes,
to ensure that the outcomes reflect overall performance or an individual executive’s performance;
• deciding whether to apply malus or clawback to an award;
• determining whether a leaver is a “good leaver”.
Where such discretion is exercised, it will be explained in the relevant Annual Report on Remuneration.
Remuneration scenarios
The composition and value of the Executive Directors’ remuneration packages at below threshold (minimum), target and
maximum performance scenarios under the Drax Group Policy are set out in the charts below. The assumptions used in the
charts are provided in the following table:
Description
Minimum
Target
Maximum
Maximum
(with 50%
share price
appreciation)
Annual bonus
None
Long term incentive
None
Fixed remuneration
Base salary is the rate payable
as determined by the Board
following the annual review.
Benefits and pension
entitlement remain as disclosed
in the Policy.
50% of the maximum
opportunity.
Maximum cash bonus and
deferred shares (175% of salary
for CEO and 150% of salary for
other Executive Directors).
Maximum cash bonus and
deferred shares (175% of salary
for CEO and 150% of salary for
other Executive Directors).
62.5% vesting (midpoint between
threshold and maximum).
Maximum LTIP opportunity (200%
of salary for CEO and 175% of salary
for other Executive Directors) with
no allowance for share price
appreciation or dividend
equivalents.
Maximum LTIP opportunity (200%
of salary for CEO and 175% of salary
for other Executive Directors) with
allowance for 50% share price
appreciation over the three-year
performance period and no
allowance for dividend equivalents.
Will Gardiner (CEO)
Andy Skelton (CFO)
£000
3500
3000
2500
2000
1500
1000
£704
500
100%
£3,421
50%
£2,849
40%
35%
29%
25%
21%
£1,920
37%
26%
37%
0
Minimum
Target
£000
3500
3000
2500
2000
1500
1000
500
0
£1,661
39%
34%
27%
£1,987
49%
28%
23%
£1,136
36%
25%
39%
£448
100%
Maximum
Maximum
(with 50%
share price
appreciation)
Minimum
Target
Maximum
Maximum
(with 50%
share price
appreciation)
Fixed remuneration
Annual bonus
Long-term incentive
118 Drax Group plc Annual report and accounts 2020
Approach to recruitment remuneration
The Committee will apply the components set out in the table on pages 112 to 118 to determine the remuneration of newly
appointed Executive Directors. Base salary will be set at a level appropriate to the role and the experience of the Executive
Director being appointed. Where this is below the market level, it will be adjusted over time to align with the market level,
subject to good performance. The incentive provision for a new Executive Director will include an annual bonus of up to 150%
of salary, or 175% of salary for the CEO, with financial and strategic elements as set out in the Policy table above, and an LTIP
award of up to 175% of salary, or 200% of salary for the CEO (in exceptional circumstances the Committee may on recruitment
grant a percentage of salary in excess of these amounts but in such circumstances it would be capped at 300% of salary).
The Committee may also determine it appropriate to honour prevailing contract commitments for an individual in the event
they are promoted to an Executive Director position.
In relation to Executive Directors appointed from outside the Group, where the Committee considers it to be necessary to
secure the appointment of the Executive Director, the Committee may:
• pay compensation for loss of benefits on resignation from a previous employer, such as loss of long-term share incentives
(subject to the right to phase any payment to reflect performance, the requirement to mitigate loss and the Group’s right
to claw back any amount which is subsequently paid to the Executive Director by the former employer, and to claw back
an appropriate proportion of the payment if the Executive Director leaves soon after appointment). Any compensation made
will not exceed the value of the benefits lost as determined by the Committee acting fairly and reasonably;
• agree a rate for employer pensions contributions, or salary supplements in lieu of pension contribution, which reflects the
contribution rate for the wider workforce at the date of appointment;
• make appropriate payments in circumstances where an Executive Director is relocated from outside the UK.
Service agreements and termination
Executive Directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’
notice. They are available for inspection at the Group’s registered office.
Element
Notice periods
Details
Executive Directors may be required to work during the notice period or may be provided with pay in lieu
of notice if not required to work the full notice period.
Compensation
for loss of
office
Under each of the Executive Directors’ service agreements, the Group has the right to make a payment
in lieu of notice of termination, the amount of that payment being the salary and benefits that would have
accrued to the Executive Director during the contractual notice period. For the avoidance of any doubt
this excludes any performance bonus (or cash equivalent) for the relevant period of unworked notice.
If an Executive Director’s employment is brought to an end by either party, and if the Committee considers
that it is necessary to pay the Executive Director a termination payment, the Committee’s policy, in the
absence of a breach of the service agreement by the Executive Director, is to determine an Executive
Director’s termination payment in accordance with his/her service agreement. The termination payment
will be calculated based on the value of base salary and contractual benefits that would have accrued to
the Executive Director during the contractual notice period. The Committee will seek mitigation to reduce
the amount of any termination payment to a leaving Executive Director when appropriate to do so, having
regard to the circumstances and the law governing the agreement. It may, for example, be appropriate to
consider mitigation if the Executive Director has secured another job at a similar level. Mitigation would
not apply retrospectively to a contractual payment in lieu of notice.
In addition, the Executive Director may be entitled to a payment in respect of his/her statutory rights.
The Group may pay reasonable fees for a departing Executive Director to obtain independent legal advice
in relation to their termination arrangements and nominal consideration for agreement to any contractual
terms protecting the Group’s rights following termination. No service agreement includes any provision
for the payment of compensation upon termination. Any compensation payable in those circumstances
would need to be determined at the time and in the light of the circumstances.
Drax Group plc Annual report and accounts 2020 119
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Remuneration Committee report continued
Element
Treatment of
annual bonus
on termination
Details
All bonus payments are discretionary. The Committee will consider whether a departing Executive
Director should receive a cash bonus and deferred share award in respect of the financial year in which,
and/or immediately preceding which, the termination occurs, pro-rated to reflect the period of the
performance year completed at the date of termination. The Committee will take into account
performance; the reason for termination; cooperation with succession; any breach of goodwill; adherence
to contractual obligations/restrictions; and any other factors which they believe should be taken into
account. The service contract for Will Gardiner as CEO, does not entitle him to any payment of bonus
on termination of employment.
If the employment ends in any of the following circumstances, the Executive Director will be treated
as a “good leaver” and the Executive Director will be eligible for an annual bonus:
Treatment of
unvested
long-term
incentive and
deferred share
awards on
termination
• redundancy;
• retirement;
• ill-health or disability, proved to the satisfaction of the Group;
• death.
If the termination is for any other reason, an award will be at the Committee’s discretion and it is the
Committee’s policy to ensure that any such award properly reflects the departing Executive Director’s
performance and behaviour towards the Group. Therefore the amount of any such award will be
determined, taking into account (i) the Executive Director’s personal performance and behaviour towards
the Group and (ii) the Group’s performance.
If an award is made, it will normally be paid/granted as soon as is reasonably practicable after the Group
performance element has been determined for the relevant period. There may be circumstances in which
the Committee considers it appropriate for the award to be made earlier, for example, on termination due
to ill-health, in which case, on-target performance shall be assumed.
The Committee will consider the extent to which deferred and conditional share awards held by the
Executive Director under the DSP and LTIP should lapse or vest. Any determination by the Committee
will be in accordance with the rules of the relevant plan.
In summary, the rules of the LTIP provide that awards will vest (pro-rated to the date of employment
termination) if employment ends for any of the following reasons (“long-term good leaver reasons”):
• redundancy;
• retirement;
• ill-health or disability, proved to the satisfaction of the Company;
• death;
• change of control.
If employment ends for any other reason, the participant may be deemed a “good leaver” at the
Committee’s discretion. In doing so, it will take account of all relevant circumstances, in particular, the
Group’s performance; the Executive Director’s performance and behaviour towards the Group during
the performance cycle of the relevant awards; and other relevant factors, including the proximity of
the award to its maturity date.
Awards which vest subject to satisfaction of performance conditions, will be time pro-rated, and will
ordinarily vest on the normal vesting date subject to the post-vesting shareholding period.
The rules of the DSP provide that deferred bonus awards will vest (in full) if employment ends for any
of the good leaver reasons detailed above. If employment ends for any other reason, the participant may
be deemed a “good leaver” at the Committee’s discretion. In doing so it will take account of all relevant
circumstances, in particular, the Group’s performance; the Executive Director’s performance and
behaviour towards the Group during the performance cycle of the relevant awards, and a range of
other relevant factors, including the proximity of the award to its maturity date.
The rules of the DSP and LTIP also provide that in circumstances where awards vest, they do so at the
normal vesting date, unless the Committee exercises discretion to vest awards earlier.
Outside
appointments
Executive Directors may accept external Board appointments, subject to the Chair’s approval.
Normally only one appointment to a listed company would be approved. Fees may be retained by
the Executive Director.
120 Drax Group plc Annual report and accounts 2020
Consideration of circumstances for leavers
The Committee will consider whether the overall value of any benefits accruing to a leaving Executive Director is fair
and appropriate, taking account of all relevant circumstances. Examples of circumstances in which the Committee may
be minded to award a cash bonus, DSP award and/or permit the vesting of LTIP and/or DSP awards include:
• the Executive Director’s continued good performance up to and following the giving of notice;
• the Executive Director accommodating the Company in the timing of his/her departure and handover arrangements.
Conversely, the Committee may be minded not to allow such payments if the reason for the departure is (for example)
due to poor performance or if the Executive Director does not continue to perform appropriately following notice.
Remuneration of Non-Executive Directors and Chair
Maximum potential value
Overall aggregate fees paid to all
Non-Executive Directors will remain
within the limit as stated in the
Company’s Articles (currently
£1,000,000).
Remuneration
component and link
to strategy
Fees
To attract a Chair and
independent Non-
Executive Directors
who, together with the
Executive Directors, form
a Board with a broad
range of skills and
experience.
Practical operation
The Chair’s remuneration is determined by the
Committee whilst that of the other Non-Executive
Directors is determined by the Chair and the Executive
Directors. These are determined in the light of:
• fees of the Chair and Non-Executive Directors of other
listed companies selected for comparator purposes,
on the same basis as for Executive Directors;
• the responsibilities and time commitment;
• the need to attract and retain individuals with the
necessary skills and experience.
Non-Executive Directors’ fees are reviewed periodically
against market comparators.
Non-Executive Directors receive an annual base fee.
Additional annual fees are paid:
• to the Senior Independent Director (which includes the
fee for chairing a Board Committee other than the Audit
Committee);
• to the Chair of the Audit Committee;
• to the Chair of the Remuneration Committee;
• to the Chair of any other committee (this is not paid to
the Chair of the Nomination Committee if he or she is
also the Chair of the Board).
Non-Executive Directors are not entitled to participate
in any performance related remuneration arrangements.
Expenses
Reasonable travel and accommodation expenses are
reimbursed as applicable.
Non-Executive Directors do not receive any benefits in kind, nor are they eligible for any annual performance bonus, pension
or any of the Group’s share-based reward plans.
The Chair’s notice period is six months whilst the other Non-Executive Directors have a notice period of one month. Further
information on the service agreements of the Non-Executive Directors can be found on page 129.
Drax Group plc Annual report and accounts 2020 121
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Remuneration Committee report continued
Differences between the policy and that of the remuneration of employees generally
The following differences apply between the remuneration of Executive Directors and the policy on the remuneration
of employees generally:
• Executive Directors and a number of senior employees are eligible for LTIP awards, although there are differences in the
quantum of the grants that are made;
• Annual bonus levels vary across the workforce, but deferral of bonuses into DSP awards applies only to Executive Directors;
• Employees in the collective bargaining unit have a contractual right to receive an annual bonus, subject to the Group’s
performance and continued employment, whereas Executive Directors and all other UK-based employees participate in
a discretionary bonus plan;
• Employer pension contribution (or salary supplement) are up to 10% of salary for new joiners from 1 July 2019, irrespective
of seniority. There are legacy pension contribution arrangements which continue to be in operation for employees who joined
prior to 1 July 2019. From 1 January 2023 the contribution rates for existing Executive Directors will be aligned with the rate
for new joiners to the wider workforce (currently 10% of salary);
• In some cases hourly paid employees qualify for overtime payments.
Context
Wider employee population
In determining Executive Director remuneration, the Committee also takes into account the level of general pay increases
within the Group. Employees are not directly consulted on the Policy, however as referenced on page 110, there are a number
of existing channels designed to capture the views of the workforce on remuneration, including the MyVoice forums.
The Committee’s policy is that annual salary increases for Executive Directors should not exceed the average annual salary
increase for the wider employee population unless there is a particular reason for a higher increase, such as a change in the
nature or scope of responsibilities or if an Executive Director has been appointed at a salary below market level reflecting
experience in the role.
The Committee also considers external market benchmarking to inform executive remuneration decisions. External market
benchmarking is also considered in relation to remuneration decisions of the wider workforce.
Environmental, social and governance issues
The Committee is able to consider corporate performance on environmental, social and governance issues when setting
the remuneration of Executive Directors. Specific measures can be included in the strategic element of the annual bonus.
The Committee is also able to consider these issues in determining whether to exercise its discretion to adjust formulaic
outcomes of the annual bonus and LTIP.
122 Drax Group plc Annual report and accounts 2020
Annual Report on Remuneration
The relevant sections of this Report have been audited as required by the Regulations and, in accordance with the Regulations,
this part of the report will be subject to an advisory vote at the AGM to be held on 21 April 2021.
Single total figure of remuneration – Executive Directors (audited information)
The table below sets out the single figure of remuneration and the breakdown for each Executive Director for 2020, together with
comparative earnings for 2019:
Director
Will Gardiner
Andy Skelton (7)
Andy Koss (8)
Year
2020
2019
2020
2019
2020
2019
Salary (1)
(£000)
557
541
363
355
92
337
Benefits (2)
(£000)
18
18
16
15
4
16
Bonus (3)
(£000)
439
368
245
224
62
214
Long Term
Incentives
(£000)
767(4)
86(5)
–
–
–
103(5)
Pension
(£000)
111
108
58
57
18
67
Other (6)
(£000)
7
–
7
8
–
–
Total
Remuneration
(£000)
1,900
1,121
689
659
176
737
Total
Fixed Pay
(£000)
687
667
437
427
114
420
Total
Variable Pay
(£000)
1,213
454
253
232
62
317
Notes:
(1) Base salary is the amount earned in 2020 and in 2019.
(2) Benefits include car allowance, private medical insurance, life assurance and permanent health insurance.
(3)
(4)
Bonus is value of the award from the 2019 and 2020 annual bonus plans. It includes the value of bonus deferred and paid in shares after three years subject only
to continued service.
Represents the value of the 2018 PSP award which should vest in March 2021, together with the dividend shares in relation to those vested shares. The value of the
award is calculated based on the average share price over the last quarter of 2020, which was £3.187. The value of the award attributable to share price appreciation
for Will Gardiner is £132,112. This is based on the growth in the value of the shares due to vest (excluding dividend shares) from the grant share price (£2.552) to the
average share price over the quarter to 31 December 2020 (£3.187).
(5) 2019 numbers (for the 2017 PSP award) are restated to reflect the actual share price on vesting of £1.954 on 15 May 2020.
(6)
Represents the value of the Sharesave Awards granted in 2019 and 2020 respectively. The 2020 Sharesave Awards are based on the share price on grant (£1.588)
less the exercise price (£1.271).
(7) Andy Skelton joined on 2 January 2019 and therefore was not granted an award under the 2017 or 2018 PSP.
(8)
Andy Koss stepped down from the Board on 7 April 2020 and therefore in the table above the remuneration he earned in 2020 is in respect of the period 1 January
2020 to 7 April 2020. The bonus Andy earned with respect of the period 8 April 2020 to 30 June 2020 is outlined in the payment for loss of office section of this
report, along with other details of his loss of office payments. Andy’s 2018 PSP award should vest in March 2021 and has been excluded from the single figure table
as the performance period ended after he stepped down from the Board. For further information refer to the payment for loss of office section of this report.
Base salaries – Executive Directors
The base salaries of the Executive Directors as at 31 December 2020, together with comparative figures as at 31 December 2019,
are shown in the following table:
Director
Will Gardiner
Andy Skelton
Andy Koss (1)
Base salary at 31 December 2020
(£000)
561
366
–
Base salary at 31 December 2019
(£000)
545
355
339
Percentage increase
(1 April 2020)
3.0%
3.0%
3.0%
Notes:
(1) Andy Koss stepped down from the Board on 7 April 2020 and remained in employment with Drax until 30 June 2020.
The base salaries of Will Gardiner, Andy Skelton and Andy Koss were reviewed with effect from 1 April 2020, in line with Policy,
and increased by 3%. This was aligned with the average increase for the wider workforce.
Single total figure of remuneration – Non Executive Directors (audited information)
The table below sets out the single figure of remuneration and breakdown for each Non-Executive Director for 2020 together
with comparative figures for 2019:
Director
Philip Cox
John Baxter (1)
Nicola Hodson
David Nussbaum (2)
Vanessa Simms
Year
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
Notes:
(1) Appointed on 17 April 2019.
(2) Since 1 January 2019 he has donated his gross fees to charity.
Base fee
(£000)
250
250
55
39
55
55
55
55
55
55
Additional fee for
Senior Independent
Director
(£000)
–
–
–
–
–
–
10
7
–
–
Additional fee for
Chairing a Committee
(£000)
–
–
–
–
10
7
–
–
10
7
Total
(£000)
250
250
55
39
65
62
65
62
65
62
Drax Group plc Annual report and accounts 2020 123
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Remuneration Committee report continued
Annual fees – Non-Executive Directors
The current annual fee structure of the Non Executive Directors, is shown in the following table:
Director
Chair
Non-Executive Director base fee
Senior Independent Director
Audit Committee Chair
Remuneration Committee Chair
Nomination Committee Chair (1)
Fees at 31 December 2020
(£000)
Fees at 31 December 2019
(£000)
Percentage increase
250
55
10
10
10
7.5
250
55
10
10
10
7.5
0%
0%
0%
0%
0%
0%
Notes:
(1) This is not paid if the Chair of the Nomination Committee is also Chair of the Board.
Annual bonus outcome (audited information)
A summary of the Committee’s assessment in respect of the 2020 Group Scorecard is set out in the following table:
Key Performance Indicator
Financial
Group Adjusted EBITDA (£m)
Cost of Production ($/GJ)
Customers Business
Contribution (£m)
Average Net Debt (£m)
Overall Financial KPIs
Strategic
Safety
(total recordable incident rate)
Progress on Strategic Projects
Environmental, People,
Reputation
Overall Strategic KPIs
Weighting
Low target
(0% of max earned)
Target
(50% of max earned)
Stretch target
(100% of max earned)
Outturn
Score
(out of 2)
Weighted Score
(out of 2)
25%
10%
10%
15%
60%
10%
10%
20%
40%
100%
414
9.15
50.5
(940)
460
8.71
56.1
(900)
506
8.27
61.7
(860)
412
8.61
ND
(849)
0.27
Partially
Achieved
Partially
Achieved
0.21
Achieved
Achieved
0.15
Strongly
Achieved
Strongly
Achieved
0.29
Between Achieved &
Strongly Achieved
Between Achieved &
Strongly Achieved
0.0
1.2
0.0
2.0
0.0
1.5
1.63
0.0
0.12
0.0
0.30
0.42
0.0
0.15
0.33
0.48
0.90
Overall bonus outcome
(total bonus award)
Proportion of total bonus award earned for Financial KPIs
Proportion of total bonus award earned for Strategic KPIs
0.90 (45% of maximum)
46.67% (0.42/0.90)
53.33% (0.48/0.90)
The targets were aligned with the Group’s strategy and 2020 Business Plan and reviewed regularly by the Board as part of their
ongoing scrutiny of business and executive performance. The targets were set at the start of the financial year, prior to the
outbreak of the Covid-19 pandemic. No adjustment to the performance targets has been made. Outlined below is a brief synopsis
of the Key Performance Indicators (KPIs) used and their strategic rationale.
• Group adjusted EBITDA – was our principal financial metric, combining the underlying performance of each business to give a Group
outcome. Group adjusted EBITDA for 2020 was £412 million relative to a target and budget of £460 million. Unfortunately, Drax fell
below the low end of this range (score of 0). However, in the context of impacts of Covid-19, this was a relatively strong performance.
The outturn of this metric was part of the Group’s independent financial audit.
• Cost of Production – reducing the cost of biomass production will make a positive contribution to the Group’s financial performance
in the medium term and beyond 2027. Despite many challenges that 2020 brought to the southern US region including hurricanes,
tornadoes and Covid-19, Drax Biomass was still able to deliver a cost of production of 8.61, which was below the target for the year
of 8.71 (score of 1.2).
• Customers business contribution – driving profitability is the key priority of focus for our Customers business. Unfortunately, Drax fell
below the low end of the target range which was set but this was wholly due to the impacts of Covid-19 (score of 0).
• Average net debt – a structural reduction in debt is a key objective for the Group with progress assessed against weighted average
net debt targets measured within the financial year. Average net debt was £849 million, and thereby beating the stretch target of
£860 million (score of 2).
• Safety – safety is a key priority for the business and in the 2020 Scorecard it was measured against Total Recordable Incident Rate
(TRIR), which is defined as the number of incidents per 100,000 hours worked. The TRIR score was 0.29, which unfortunately was
below the threshold target of 0.27 (score of 0). In 2020, all teams had to contend with Covid-19 mitigations in the workplace, which
have been changing in line with rapid updates in UK Government policy. In addition, across the Group, we are pleased to report that
there were no major impact environmental or process safety events.
124 Drax Group plc Annual report and accounts 2020
• Progress on Strategic Projects – progress on key projects are of critical importance for Drax in progressing the Group’s strategy.
There were two projects which were included in this metric. The first was the delivery of the Morehouse Bioenergy Expansion, which
would increase the capacity of the plant whilst also supporting reduced cost of production for pellets. We are pleased to report that
the project was completed successfully, and it was completed in line with all key targets which were set. The second was progress
on advancing our BECCS strategy. Substantial progress was made in 2020, across all critical path activities of our BECCS strategy.
The choice of projects, and the assessment of the performance of them in 2020 was subject to approval of the Board (score of 1.5).
• Environmental, employee and sustainability practices, and our reputation, are a critical part of our values, vision and how Drax will
create long-term sustainable returns for shareholders. In 2020 the assessment of our environmental practices was derived from
the Group’s 2020 CDP rating, which supports our commitment around tackling climate change. This is combined with independent
ratings of how well we engage and support our employees and independent ratings of our reputation and sustainable business
practices, which formed the basis of this metric. In assessing the performance of this metric the Committee reviewed quantitative
outcomes, such as the assessment prepared by an external agency tracking reputation, and determined an overall score of 1.63.
The Committee completed an in-depth review of the score for each of the performance measures, ensuring these were individually
appropriate, and then reviewed the overall outcome, to determine whether to exercise its discretion and adjust the final score.
The Committee also considered the impact of Covid-19 on the Group’s performance and felt that the outcomes were reflective
of the Group’s strong financial and strategic performance, as well as wider employee and shareholder experiences. No discretion
was exercised by the Committee in determining the bonus outcome. The Committee approved the Group Scorecard result for 2020
at a meeting held on 23 February 2021, subject to the final approval of the financial results and Annual report and accounts by the
Directors on 24 February 2021.
Bonus earned for 2020
The table below sets out the bonuses earned in 2020 and the split between cash and deferred elements.
Director
Will Gardiner
Andy Skelton
Andy Koss
Max bonus opportunity
(as % base salary)
Total bonus outcome
(as % of maximum)
Total bonus outcome
(as % base salary)
Total bonus outcome
(£000)
46.67% paid in cash
(£000)
53.33% deferred in shares
(£000)
175%
150%
150%
45%
45%
45%
78.8%
67.5%
67.5%
439
245
116
205
114
54
234
131
62
In accordance with the Policy, the portion of the total bonus earned with respect to the strategic KPIs (53.33% of the total bonus
award) is deferred into shares for a period of three years. The portion of the total bonus earned with respect to the financial KPIs
(46.67% of the total bonus award) is to be paid in cash in March 2021.
PSP incentive outcomes (audited information)
The vesting outcome for awards granted in 2018 under the Performance Share Plan (PSP), which were subject to performance
conditions over the three year period from 1 January 2018 to 31 December 2020 and will vest in March 2021 is provided in the tables
below.
Performance Condition
Relative TSR vs FTSE 350 constituents
Weighting
50%
Performance for
threshold vesting (15%)
Performance for
maximum vesting
Median
Upper quartile
Average Corporate Score for 2018,
2019 and 2020
50% Average score of
0.75
Average score
of 1.5
Actual performance
Above median
(rank of 106,
out of 316)
0.95
(scores 1.05,
0.90 and 0.90)
Vesting
(% of max)
74.4%
40.0%
57.2%
The Committee considered the impact of Covid-19 on the Group’s performance and this was appropriately reflected in the Relative
TSR outcome and 2020 Scorecard. No discretion was therefore exercised by the Committee in determining the 2018 PSP outcome.
The table provides the awards due to vest based on this vesting result.
Director
Will Gardiner
Andy Koss
Awards granted
(as % of base salary)
Awards granted
Awards vesting
(as % of base salary)
175%
175%
363,725
218,063
138%
377%(1)
Awards vesting
208,050
93,548
Dividend
shares earned
32,678
14,688
Total shares
due to vest
240,728
108,236
Total value
(£000)
£767
£345
Notes:
(1)
This is the total value of award vesting as a percentage of base salary earned for the period of 2020 prior to when Andy stepped down from the Board (1 January
2020 – 7 April 2020).
Drax Group plc Annual report and accounts 2020 125
Strategic reportGovernanceFinancial statementsShareholder information
Remuneration Committee report continued
LTIP awards granted in 2020 (audited information)
The table below shows the conditional awards granted under the Long Term Incentive Plan (LTIP) to Executive Directors on 7 May
2020.
Director
Will Gardiner
Andy Skelton
Award granted
(as % of salary)
200%
175%
Number of shares granted (1)
Face value of awards granted
(£000)
562,506
320,697
1,122
640
Note:
(1)
The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £1.9953. In accordance with the LTIP rules,
dividend shares are awarded at the time and in the event that awards actually vest. No dividend shares are awarded where the initial awards lapse.
The performance conditions that apply to the LTIP awards granted in 2020 are set out below.
Performance Condition
Relative TSR vs FTSE 350 constituents
Cumulative Adjusted EPS
Weighting
50%
50%
Performance for
threshold vesting
Vesting at
threshold performance
Performance for
maximum vesting
Vesting at
maximum performance
Median
100.1p
25%
25%
Upper Quartile
117.5p
100%
100%
Straight line vesting occurs between performance levels for both conditions. Performance for both conditions is measured over
three financial years to 31 December 2022.
DSP awards granted in 2020 (audited information)
The table below shows the deferred share awards granted under the Deferred Share Plan (DSP) to Executive Directors on 30 March
2020 in respect of bonus earned for performance in 2019. Awards will vest after three years subject to continued service only.
Director
Will Gardiner
Andy Skelton
Andy Koss
Value of deferred bonus
(£000)
Number of shares granted (1)
129
78
75
82,195
49,985
47,741
Note:
(1)
The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £1.5657. In accordance with the DSP rules,
dividends in respect of the deferred shares are reinvested in additional shares, which vest when the deferred shares vest.
Sharesave options granted in 2020 (audited information)
On 15 April 2020 grants of Sharesave options were made to Will Gardiner and to Andy Skelton (23,603 shares each). The exercise
price is £1.271, which represents a 20% discount to the prevailing share price at the time of offer, and is the same for all employees
who elected to participate in the Sharesave. The face value of the awards was £43,689 for both Will Gardiner and Andy Skelton,
which is based on the share price of £1.851 on 15 April 2020. The options will vest after five years subject to continued service and
continued contributions.
Pension entitlements for defined contribution schemes (audited information)
Executive Directors are entitled to receive a contribution to the Group’s defined contribution pension plan, cash in lieu of pension
contributions or a mixture of these. The employer contribution for Will Gardiner in 2020 was 20% of base salary, as was the
employer contribution for Andy Koss until he left Drax on 30 June 2020. The employer contribution for Andy Skelton was 16%.
Will Gardiner’s employer contribution is delivered as cash in lieu of pension, whereas for Andy Skelton it is delivered in part as
contributions to Group pension plan and part as cash in lieu (this was the same for Andy Koss). No Executive Director was a
member of a defined benefit pension scheme.
Payments to former directors (audited information)
Dorothy Thompson, former CEO, was entitled to pro-rata vesting of a PSP award made in 2017. A total of 12,617 shares vested in
May 2020, including dividend shares, based on performance vesting of 18%, as outlined in last year’s report. Of this, 5,348 shares
were sold to cover tax and the balance of 7,269 shares were subject to a two-year holding period and will be held in trust on her
behalf and eligible for release in May 2022.
Payments for loss of office (audited information)
Andy Koss stepped down from the Board on 7 April 2020. Andy’s employment was terminated on the grounds of redundancy
and he continued to be employed until 30 June 2020 (the termination date) as a special adviser to Will Gardiner in order to provide
leadership on a programme of works and to ensure an orderly transition. For the period from 8 April 2020 up to his termination
date, Andy received the following payments:
• Salary of £80,517.
• Payment in lieu of pension of £16,103.
• Benefits of £3,766 (car allowance and continued coverage under the Company’s private medical and insured benefits plans).
126 Drax Group plc Annual report and accounts 2020
On termination Andy received a redundancy payment of £10,222, calculated in accordance with the statutory formula, and a
payment in respect of his untaken accrued holiday of £21,664. He was also entitled to payment in lieu of the remainder of his
12 months’ notice period (“PILON”) which had not elapsed as at the date of his termination date (the period of 1 July 2020 to 7 April
2021), in respect of base salary, pension and other benefits (car allowance and insured benefits). In accordance with the terms
of his service agreement, the PILON payment was to be made in three instalments. The first instalment of PILON, equal to 50%
of the total payment, was paid to him within 30 days of the termination date. The total payment for the first instalment was
£167,061 and it consisted of:
• Salary of £134,430.
• Payment in lieu of pension of £26,886.
• Benefits of £5,745 (car allowance and insured benefits).
As Andy found alternative employment during the unexpired period of the 12 months’ notice period, payments for the second
and third instalments of PILON (for the remaining 50%) were not paid.
Finally, from his date of termination, Andy’s outstanding Sharesave options (8,551 shares) became exercisable for a period of
six months.
As Andy’s employment was terminated on the grounds of redundancy, he was treated as a good leaver under the rules of the Annual
Bonus Plan, DSP and PSP, as set out in the Remuneration Policy. For the period of 1 January 2020 to 30 June 2020, Andy earned
a pro-rata annual bonus award of £116,149 (of which £54,349 is attributable to the period 8 April 2020 to 30 June 2020) as follows:
• Financial elements: £54,203, to be paid in cash.
• Strategic elements: £61,946, to be deferred as an award under the DSP, vesting in the normal timescales in accordance with the rules
of the DSP.
Outstanding awards under the DSP and PSP will vest at the same time as other participants’ awards. The outstanding PSP awards
will be pro-rated for completed months of service between the grant date and 30 June 2020 and will be subject to performance
measured at the end of the performance period. Vested shares will be subject to the two-year post-vesting holding period, where
required by the relevant Directors’ Remuneration Policy.
Award
2018 PSP
2019 PSP
2018 DSP
2019 DSP
2020 DSP
Date of grant
Awards granted
Pro-rated number of awards
Vesting date
5 March 2018
28 March 2019
5 March 2018
28 March 2019
30 March 2020
218,063
153,863
32,055
22,617
47,741
163,547
64,110
32,055
22,617
47,741
5 March 2021
28 March 2022
5 March 2021
28 March 2022
30 March 2023
Statement of Directors’ shareholding and share interests (audited information)
The shareholding guidelines under the current Directors’ Remuneration Policy require Executive Directors who receive shares
by virtue of share plan awards, or who receive deferred bonus share awards under the DSP, to retain 50% of the shares received
net (i.e. after income tax and national insurance contributions) until the value held is equal to at least 250% of salary for the CEO
and 200% of salary for other Executive Directors. Only shares that are not subject to performance conditions count towards the
threshold (shares owned by the Director and unvested awards subject to service only – DSP awards – on a net of tax basis). As at
31 December 2020, or the date of ceasing to be a Director if earlier, the shareholding guidelines were as detailed in the table below:
Directors’ interests in shares
Director
Will Gardiner (4)
Andy Skelton (5)
Andy Koss (6)
Number of shares (1)
Value at year end (2)
552,689
169,468
101,275
£2,072,585
£635,505
£177,839
Shareholding
(as % of base salary)
Shareholding guideline (3)
369%
174%
52%
250%
200%
200%
Notes:
(1)
(2)
The number of shares also includes shares purchased in the open market by the Executive Director and those acquired through participation in Sharesave
programmes.
Based on the mid-market quotation on 31 December 2020 of £3.75 for incumbent Directors and the mid-market quotation on 7 April 2020 of £1.756 for Andy Koss,
being the date he ceased to be a Director.
(3) Under the existing Directors’ Remuneration Policy.
(4)
296,760 shares recorded for Will Gardiner were purchased in the open market between 2015 and 2020 (includes 467,114 shares owned plus 85,575 unvested
DSP shares on a net of tax basis).
142,976 shares recorded for Andy Skelton were purchased in the open market between 2019 and 2020 (includes 142,976 shares owned plus 26,492 unvested
DSP shares on a net of tax basis).
(5)
(6) The information for Andy Koss is as at 7 April 2020, which is the date he stepped down from the Board.
Drax Group plc Annual report and accounts 2020 127
Strategic reportGovernanceFinancial statementsShareholder information
Remuneration Committee report continued
Directors’ interests under share plans
Director
Will Gardiner
2017 BMP
2017 PSP
2018 DSP
2018 PSP
2019 DSP
2019 PSP
2020 DSP
2020 LTIP
2016 Sharesave
2020 Sharesave
Total
Andy Skelton
2019 PSP
2019 Sharesave
2020 DSP
2020 LTIP
2020 Sharesave
Total
Andy Koss (3)
2017 BMP
2017 PSP
2018 DSP
2018 PSP
2018 Sharesave
2019 DSP
2019 PSP
2020 DSP
Total
Date of grant
As at
1 January 2020
Awards made
during the year
Number of shares
vesting during
the year
Number of shares
lapsing during
the year
As at
31 December 2020
Date of vesting (1) Value of awards (2)
28 March 2017
15 May 2017
5 March 2018
5 March 2018
28 March 2019
28 March 2019
30 March 2020
7 May 2020
5 April 2016
15 April 2020
28 March 2019
27 March 2019
30 March 2020
7 May 2020
15 April 2020
28 March 2017
15 May 2017
5 March 2018
5 March 2018
28 March 2018
28 March 2019
28 March 2019
30 March 2020
50,486
213,326
40,327
363,725
38,941
247,245
0
0
14,778
0
968,828
165,607
10,084
0
0
0
175,691
40,130
169,567
32,055
218,063
8,551
22,617
153,863
0
644,846
0
0
0
0
0
0
82,195
562,506
0
23,603
668,304
0
0
49,985
320,697
23,603
394,285
0
0
0
0
0
0
0
47,741
47,741
50,486
38,398
0
0
0
0
0
0
0
0
88,884
0
0
0
0
0
0
40,130
30,522
0
0
7,600
0
0
0
78,252
0
174,928
0
0
0
0
0
0
14,778
0
189,706
0
10,084
0
0
0
10,084
0
139,045
0
54,516
951
0
89,753
0
284,265
£0
0 28 March 2020
£0
15 May 2020
0
£151,226
5 March 2021
40,327
5 March 2021 £1,363,969
363,725
£146,029
38,941
£927,169
247,245
£308,231
82,195
7 May 2023 £2,109,398
562,506
£0
1 May 2021
0
23,603
£58,512
1 June 2025
£5,064,533
1,358,542
28 March 2022
28 March 2022
30 March 2023
165,607
0
49,985
320,697
23,603
559,892
28 March 2022
1 May 2024
30 March 2023
7 May 2023
1 June 2025
£621,026
£0
£187,444
£1,202,614
£58,512
£2,069,596
0 28 March 2020
15 May 2020
0
5 March 2021
32,055
5 March 2021
163,547
1 May 2021
0
28 March 2022
22,617
64,110 28 March 2022
47,741
30 March 2023
330,070
£0
£0
£56,289
£287,189
£0
£39,715
£112,577
£83,833
£579,603
Notes:
DSP and Bonus Matching Plan (BMP) awards are not subject to performance conditions. The BMP is the legacy long-term incentive plan which preceded the PSP.
There are no awards which have vested but have not been exercised.
(1) The vesting date shown reflects the three-year anniversary but the Committee reserves the right to change the vesting date by a period not exceeding 30 days
(2)
Based on the mid-market quotation on 31 December 2020 of £3.75 (a share price of £1.756 at 7 April 2020 for Andy Koss). For Sharesave options, this is the intrinsic
value, e.g. based on the excess value at 31 December 2020 over and above the exercise price.
(3) Andy Koss stepped down from the Board on 7 April 2020 and was not granted an award under the 2020 LTIP.
Non Executive Directors’ shareholdings
There is no shareholding requirement for Non-Executive Directors. The table below shows the shareholdings of the Non-Executive
Directors, and their connected persons, and the value as at 31 December 2020, when the share price was £3.75 per share.
Director
John Baxter
Philip Cox
David Nussbaum
Nicola Hodson
Vanessa Simms
Number of shares
Value at year end
10,000
60,000
0
0
0
£37,500
£225,000
£0
£0
£0
128 Drax Group plc Annual report and accounts 2020
Service agreements or contracts for services
The following table shows, for each director of the Company at 24 February 2021, or those who served as a director of the
Company at any time during the year ended 31 December 2020, the start date and term of the service agreement or contract
for services, and details of the notice periods. New contracts for services for Philip Cox, Nicola Hodson and David Nussbaum
were agreed in 2020.
Director
Will Gardiner
Andy Skelton
Andy Koss (1)
John Baxter
Philip Cox
Nicola Hodson
David Nussbaum
Vanessa Simms
Contract start date
Contract term (years)
Unexpired term
at date of publication
Notice period
by the Company (months)
Notice period
by the Director (months)
16 November 2015
2 January 2019
6 June 2005
17 April 2019
1 January 2021
12 January 2021
1 August 2020
19 June 2018
Not applicable
Indefinite term
Not applicable
Indefinite term
Not applicable
Indefinite term
1 years and 2 months
3 years
3 years 2 years and 11 months
3 years 2 years and 11 months
3 years 2 years and 6 months
4 months
3 years
12
12
12
1
6
1
1
1
12
12
12
1
6
1
1
1
Note:
(1) Andy Koss stepped down from the Board on 7 April 2020.
Relative importance of spend on pay
The table below illustrates the relative importance of spend on pay compared to other disbursements from profit, namely
distributions to shareholders and capital expenditure. These were the most significant outgoings from the Group in the last
financial year, other than normal operating costs.
Remuneration – 2020
Remuneration – 2019
Capital Expenditure – 2020
Capital Expenditure – 2019
Dividends – 2020
Dividends – 2019
£68m
£63m
£212.7m
£184.4m
£228.6m
£172.1m
0
£50,000,000
£100,000,000
£150,000,000
£200,000,000
£250,000,000
Drax Group plc Annual report and accounts 2020 129
Strategic reportGovernanceFinancial statementsShareholder information
Remuneration Committee report continued
Drax 10 year Total Shareholder Return performance to 31 December 2020
The graph below shows how the value of £100 invested in both the Company and the FTSE 350 Index (Index) on 31 December 2010
has changed. This Index has been chosen as a suitable broad comparator against which the Company’s shareholders may judge
their relative returns given that the Company is a member of the FTSE 350 Index. The graph reflects the Total Shareholder Return
for the Company and the Index referred to on a cumulative basis over the period from 31 December 2010 to 31 December 2020.
300
250
200
150
100
50
0
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Dec 20
Drax
FTSE 350
CEO’s pay – last 10 financial years
Year
CEO’s total single figure (£000)
Bonus (% of maximum awarded)
LTIP Awards
(% of maximum vesting)
2011
1,196
100%
2012
1,406
100%
2013
3,360
100%
2014
1,854
73%
2015
1,248
46%
2016
1,581
88%
2017
1,236
53%
2018
1,885
53%
2019
1,121
45%
2020
1,900
45%
–
–
– 40.52% 21.66%
15.43%
0% 57.63% 18.00% 57.20%
Percentage change in Directors’ remuneration compared with the wider employee population
The table below shows how the percentage change in the Directors’ salary/fees, benefits and bonus (where applicable) between
2019 and 2020 compares with the percentage change in the average of each of those components of pay for a group of
employees. There are several employer entities but no employees who are specifically employed by Drax Group plc. As a result,
the Committee has selected all Group employees below Executive Director level based in the UK, as the vast majority of employees
are based in the UK and this provides the most appropriate comparison.
Will Gardiner
Andy Skelton
Andy Koss (1)
Philip Cox
John Baxter
Nicola Hodson
David Nussbaum
Vanessa Simms
Average for UK employees
Salary/fees
(percentage (increase)
Taxable benefits
(percentage (increase)
Bonus
(percentage increase)
3.0%
3.0%
3.0%
0%
0%
0%
0%
0%
3.0%
0.0%
0.0%
0.0%
N/A
N/A
N/A
N/A
N/A
0.0%
19.2%
9.4%
9.4%
N/A
N/A
N/A
N/A
N/A
0.0%
Notes:
(1)
Andy Koss stepped down from the Board on 7 April 2020 and continued to be employed until 30 June 2020. In this table his remuneration has been annualised
to provide a representative comparison.
The Non Executive Directors only receive a fee and the existing fees were unchanged in 2020. The average base salary increase
resulting from the April 2020 pay review was 3% for the wider workforce, which was the same base salary increase which Will
Gardiner, Andy Skelton and Andy Koss received. With respect to taxable benefits, there were no material change to Drax’s existing
benefits policies in 2020, both respect to benefits offered and level of cover. The bonus opportunities for all employees except the
Executive Directors were unchanged in 2020, and the 2020 Scorecard outcome was the same as the 2019 Scorecard outcome
(0.90). The bonus opportunity for Will Gardiner increased from 150% of salary to 175% in 2020, and for Andy Skelton and Andy Koss
it increased from 140% to 150%.
130 Drax Group plc Annual report and accounts 2020
CEO pay ratio
The table below sets out the CEO pay ratio for 2020, along with the comparative ratio for 2019. The pay ratios have been calculated
using actual earnings for the CEO and UK employees. The CEO total single figure remuneration is given on page 123 of this report.
Financial Year
2020
2019
Methodology 25th Percentile Pay Ratio (P25) 50th Percentile Pay Ratio (P50)
75th Percentile Pay Ratio (P75)
Option A
Option A
65:1
42:1
38:1
25:1
25:1
16:1
Notes:
(1) The outturn of this KPI is part of the Group’s independent financial audit
The methodology used for calculating the 2019 and 2020 pay ratios was the same. The total remuneration of all UK employees
of the Group on 31 December 2020 has been calculated on a full-time (and full-year) equivalent basis using the single figure
methodology and reflects their actual earnings for 2020. The only exception is for employees with Defined Benefit (DB) pensions,
where the employer contribution to the respective schemes has been used in the calculation (rather than the single figure
methodology) to reduce the administrative complexity. This is likely to undervalue the DB pension value. No adjustments (other
than to achieve full-time and full-year equivalent rates) were made and no components of remuneration have been omitted. Of
the three options permitted to calculate the percentiles, the Committee has chosen option A (the calculation of the total pay and
benefits for 2020 for all UK employees on an FTE basis), as we believe it is the most robust and most statistically accurate method
of the options permitted and it is in line with the preference of BEIS.
Set out in the table below is the base salary and the total pay and benefits for each of the identified employees.
Element
Base Salary
Total Pay and Benefits
25th Percentile (P25)
50th Percentile (P50)
75th Percentile (P75)
£25,565
£29,237
£35,137
£49,793
£64,485
£76,968
Base salaries of all employees, including Executive Directors, are set with reference to a range of factors including market practice,
experience and performance in role. The CEO has a larger portion of his pay based on performance of the business than the
individuals at P25, P50 and P75. The Committee believe that our senior executives should have a significant portion of their pay
directly linked to the performance of the business, but recognise that this does mean the pay ratios will fluctuate each year
depending on business performance and associated outcomes of incentive plans. The 2020 pay ratios report a wider gap between
actual earnings of the CEO and UK employees (than compared to the 2019 CEO pay ratios) and this is ultimately due to a higher
vesting of the 2018 PSP than the increase in the maximum bonus opportunity in the vesting of the 2017 PSP which was included
in the 2019 CEO pay ratios (57.2% versus 18.0% respectively) and the increase in bonus opportunity in 2020 for the CEO.
The Group is comprised of various different business units and teams with different levels of pay, including call centre staff, support
staff and engineers. The Committee reviews information about employee pay, reward and progression policies of the Group and,
(given the relative differences in responsibilities of the roles, the pay relativities between grades within the organisation, and the
positioning of pay versus the wider market), is comfortable that the median pay ratio is consistent with these policies.
Statement of implementation of the Remuneration Policy in 2021
This section sets out the proposed implementation of the Directors’ Remuneration Policy in 2021. No deviations from the procedure
for the implementation of the policy are proposed.
Base salary
Below are the base salaries of the Executive Directors to take effect on 1 April 2021. This is an increase of 2.0%, which is consistent
with the base salary increases for the wider workforce in accordance with the Policy.
Will Gardiner
Andy Skelton
Base salary as at 1 April 2020
£000
Base salary as at 1 April 2021
£000
Percentage increase
561
366
572
373
2.0%
2.0%
Benefits and pension
There are no changes intended to the benefits provided to Executive Directors. Pension contributions for the existing Executive
Directors will be unchanged compared to 2020 but will be aligned with the rate applicable for new joiners to the wider workforce
(currently 10% of base salary) from 1 January 2023.
Drax Group plc Annual report and accounts 2020 131
Strategic reportGovernanceFinancial statementsShareholder information
Remuneration Committee report continued
Annual bonus
The Group Scorecard measures for 2021 have been established for the Group and for each Group business. The 2021 Scorecard
will include fewer metrics than in the Scorecards of previous years. This will enable the metrics which are included in the 2021
Scorecard to have a more meaningful weighting, and more impact on the outturn of the 2021 Bonus.
We announced on the 8 February 2021 the proposed acquisition of Pinnacle Renewable Energy Inc., which is subject to Drax and
Pinnacle shareholder approval, and court and regulatory approvals. As this transaction would materially impact all metrics in the
2021 Scorecard, it is not possible to set the precise targets at this time. The targets will be set as soon as is practicable once there
is confirmation of whether the acquisition will or will not proceed. As far as possible, details of performance against the metrics
will be disclosed in the 2021 Annual Report on Remuneration. The following table sets out the categories and a description of
the measures.
Target
Reason for use
Financial metrics
(60% weighting in the Scorecard)
Group adjusted EBITDA (1)
Leverage (2)
Strategic metrics
(40% weighting in the Scorecard)
Progress on strategic projects
Environmental, employees and sustainability/
reputation (2)
Adjusted EBITDA is our principal financial metric, combining the underlying performance
of each business to give a Group outcome.
A structural reduction in debt is a key objective for the Group with progress assessed
against weighted average net debt targets measured within the financial year.
This element will assess progress against key strategic projects. The choice of projects
included in this measure will be subject to approval of the Board.
Sustainability and Environmental practices are a critical part of our values, vision and
how Drax will create long-term sustainable returns for shareholders. We have adopted
an environmental KPI which supports our commitment around tackling climate
change. This is combined with independent rating of how well we engage and support
our employees, in addition to an independently determined rating of our reputation in
sustainable business practices
Notes:
(1) The outturn of this KPI is part of the Group’s independent financial audit
(2) The outturn of this KPI is independently reviewed
LTIP
The Committee intends to grant LTIP awards to Executive Directors of 200% of salary for the CEO and 175% of salary for the CFO.
For the TSR element, performance will be assessed versus the constituents of the FTSE 350 with threshold vesting (25% of
maximum) for performance in line with the median and maximum vesting for performance in line with upper quartile.
If the acquisition of Pinnacle Renewable Energy Inc. is approved, it is expected to be completed in Q2 or Q3 2021. It is intended that
the 2021 LTIP grant is made on the normal timetable at the beginning of April 2021, but the targets for the EPS performance
condition will be set as soon as practicable following either, the completion of the acquisition, or confirmation that the acquisition
will not proceed. This will allow the EPS target, which is cumulatively measured over the three year performance period, to more
accurately reflect the impact of the acquisition and to align with shareholder experience over the performance period. Full
information regarding the targets associated with the performance conditions for the 2021 LTIP grant will be announced via RNS
no later than three months after the completion of the acquisition.
Non-Executive Directors’ fees
The Chair and Non-Executive Directors’ fees were reviewed by the Board in February 2021, and it was agreed that they would
increase by 2% for 2021. The increase of 2% is consistent with the average increase of the wider workforce resulting from the 2021
pay review. The new annual fee structure will be disclosed in the 2021 Annual Report on Remuneration.
Shareholder voting
The table below shows the voting outcome at the 2020 AGM on the 2019 Annual Report on Remuneration. The votes cast
represent 81.05% of the issued share capital. In addition, shareholders holding 9,833 shares abstained.
Voting on the 2019 Annual Report on Remuneration
Number of votes
Proportion of votes
For
317,761,152
98.82%
Against
3,781,556
1.18%
The table below shows the voting outcome at the 2020 AGM on the Directors’ Remuneration Policy. The votes cast represent
81.05% of the issued share capital. In addition, shareholders holding 11,106 shares abstained.
Voting on the 2020–23 Directors’ Remuneration Policy
Number of votes
Proportion of votes
For
Against
304,206,978
94.61%
17,334,456
5.39%
132 Drax Group plc Annual report and accounts 2020
Committee activity and key decisions in 2020
The key matters considered and decisions reached by the Committee in 2020 are shown in the table below:
Our workforce
Reviewed the application of the increases from the annual salary review
Approved the outcome of the 2019 Group Scorecard and approved the outturn of the 2019 Group Bonus Plan
Reviewed 2020 Gender Pay Gap statistics and approved the reporting of them
Adopted the 2020 Group Scorecard for the purpose of determining relevant aspects of 2020 remuneration
Reviewed the findings from a review of the all employee Total Reward Offering and inputted on resulting changes
Executives and senior management
Approved a proposal for members of the Executive Committee and senior staff salary review
Approved Executive Director and Executive Committee member annual bonus awards for 2019
Approved the Deferred Share Plan and LTIP awards for 2020
Approved the vesting of the 2017 PSP awards
Committee governance
Reviewed the Directors’ Remuneration Policy which was put to shareholders for approval at the 2020 AGM and consulted with
major shareholders on the key proposed changes
Considered and approved the 2019 Annual Report on Remuneration
Approved the operation of the all-employee Sharesave Share Plan in 2020 and approved in principle the operation of share plans in
2021
Received an update on workforce engagement
Reviewed the fees paid to PwC as, the Committee’s remuneration adviser and reviewed PwC’s independence
In 2020, the Remuneration Committee was chaired by Nicola Hodson. Other members of the Remuneration Committee during
the year were John Baxter; Philip Cox; David Nussbaum and Vanessa Simms, all of whom are independent Non-Executive Directors.
The Group Company Secretary was secretary to the Committee. The CEO was invited to attend meetings of the Committee, except
when his own remuneration was discussed, as was the Chief Transformation Officer and the Head of Reward.
Adviser to the Committee
The adviser to the Committee for the year was PwC. PwC is an independent adviser appointed by the Committee in October 2010,
following a competitive tender process, to advise on market practice and remuneration of Executive Directors and Non-Executive
Directors. PwC is a member of the Remuneration Consultants Group and a signatory to its Code of Conduct. In addition, the
Committee has satisfied itself that the advice it receives is objective and independent as PwC has confirmed there are no conflicts
of interest.
From time to time the Group engages PwC to provide financial, taxation and related advice on specific matters. The Committee
will continue to monitor such engagements in order to be satisfied that they do not affect PwC’s independence as an adviser to
the Committee. PwC was paid £101,000, excluding VAT, during 2020 in respect of advice given to the Committee determined on
a time and material basis.
This report was reviewed and approved by the Remuneration Committee.
Nicola Hodson
Chair of the Remuneration Committee
24 February 2021
Drax Group plc Annual report and accounts 2020 133
Strategic reportGovernanceFinancial statementsShareholder information
Directors’ report
This report contains information which the Company is obliged to disclose and which cannot be found in the strategic, financial,
sustainability or corporate governance reports of this document.
The Directors present their annual report on the affairs of the Group, together with the financial statements and auditor’s report
for the year ended 31 December 2020. The Directors’ report required under the Companies Act 2006 is comprised of this Report,
the Corporate Governance Report and the Audit, Nomination and Remuneration Committee Reports.
Information about the use of financial instruments by the Company and its subsidiaries is given in note 7.1 to the consolidated
financial statements on page 206.
Directors
The following Directors held office throughout the year:
Philip Cox
Will Gardiner
Andrew Skelton
Andrew Koss (until 7 April 2020)
David Nussbaum
Nicola Hodson
Vanessa Simms
John Baxter
The appointment and replacement of directors is governed by the Company’s Articles of Association (“Articles”), the UK Corporate
Governance Code, the Companies Act 2006 and related legislation.
Annual General Meeting (AGM)
The AGM will be held at 11.30am on 21 April 2021 at 8-10 The Lakes, Northampton NN4 7YD. A separate document contains
the notice convening the AGM and includes an explanation of the business to be conducted at the meeting.
Dividends
An interim dividend of 6.8 pence per share was paid on 2 October 2020 (2019: 6.4 pence), to shareholders on the register on
21 August 2020.
The Directors propose a final dividend of 10.3 pence per share (2019: 9.5 pence), which will, subject to approval by shareholders
at the AGM, be paid on 14 May 2021, to shareholders on the register on 23 April 2021.
Details of past dividends can be found on the Company’s website at www.drax.com/investors/dividend-history.
Share capital
Drax Group plc has a Premium Listing on the London Stock Exchange and currently trades as part of the FTSE 250 Index, under
the symbol DRX and with the ISIN number GB00B1VNSX38.
The Company has only one class of equity shares, being ordinary shares of 11 16⁄29 pence each, with each ordinary share having
one vote. Shares held in treasury do not carry voting rights.
Details of movements in the Company’s issued share capital can be found in note 4.5 to the financial statements on page 188.
Shares in issue
At 1 January 2020
Issued in period
At 31 December 2020
Treasury shares at 31 December 2020
Total voting rights at 31 December 2020
Issued between 1 January and 24 February 2021
At 24 February 2021
Treasury shares at 24 February 2021
Total voting rights at 24 February 2021
134 Drax Group plc Annual report and accounts 2020
410,475,731
373,203
410,848,934
13,841,295
397,007,639
1,180
410,850,114
13,841,295
397,008,819
Authority to purchase own shares
At the AGM held on 22 April 2020, shareholders authorised the Company to make market purchases of up to 10% of the issued
ordinary share capital. At the 2021 AGM, shareholders will be asked to renew the authority to make market purchases of up to
10% of the issued ordinary share capital. More details on resolution 16 can be found in the Notice of Meeting.
Interests in voting rights
Information provided to the Company in accordance with the Financial Conduct Authority’s Disclosure and Transparency Rules
(DTR) is published in a timely manner on the London Stock Exchange’s Regulatory News Service – a Regulatory Information Service
and also on the Company’s website.
As at 24 February 2021, the following information had been received in accordance with DTR5 from holders of notifiable interests
in the voting rights of the Company. The information provided below was correct at the date of notification. However, investors are
only obliged to notify the Company when a notifiable threshold is crossed and therefore it should be noted that the holdings below
may have changed but without crossing a threshold.
Date last
notification
made
Number of
voting rights
directly held
Number of
voting rights
indirectly held
Artemis Investment Management
BlackRock Inc
Invesco Limited
Orbis Holdings Limited
Schroders plc
6 May 2020
22 Jun 2020
22 Oct 2020
12 Feb 2021
24 Feb 2021
–
–
–
–
–
20,017,855
23,524,482
38,578,024
20,018,646
57,373,627
Notes:
(1) As at the date of the last notification made to the Company by the investor, in compliance with DTR
Number of
voting rights
in qualifying
financial
instruments
–
1,178,747
–
–
4,761
Total number
of voting
rights held
% of the issued
share capital
held (1)
20,017,855
24,703,229
38,578,024
20,018,646
57,378,388
5.04%
6.22%
9.71%
5.04%
14.45%
Rights and obligations attaching to shares
The rights attaching to the Company’s Ordinary Shares are set out in the Articles, available on the Company’s website at
www.drax.com/policies. The Articles may only be changed by shareholders by special resolution. The Company is proposing to
adopt new Articles at the 2021 AGM. Further details of the proposed changes are contained in the Notice of Meeting for the AGM.
Attention should be given to the following sections within the Articles, covering the rights and obligations attaching to shares:
• Variation of rights – which covers the rights attached to any class of shares that may be varied with the written consent of the
holders of not less than three-quarters in nominal value of the issued shares of that class, or with the sanction of an extraordinary
resolution passed at a separate General Meeting of the holders of those shares.
• Transfer of shares – provides detail of how transfers of shares in certificated and uncertificated form may be undertaken. It also
sets out the Directors’ rights of refusal to effect a transfer and the action that Directors must take following such refusal. It should
be noted that a shareholder does not need to obtain the approval of the Company, or of other holders of shares in the Company,
for a transfer of shares to take place.
• Voting and deadlines for exercising voting rights – these sections of the Articles deal with voting on a show of hands and on a poll.
They also cover the appointment of a proxy or corporate representative. In respect of voting deadlines, the Articles provide for
the submission of proxy forms not less than 48 hours before the time appointed for the holding of the meeting. It has been the
Company’s practice since incorporation to hold a poll on every resolution at Annual General Meetings and General Meetings.
A trustee holds shares on behalf of employees in respect of the Group’s Share Incentive Plan. The voting rights attached to such
shares are not directly exercisable by the employees. The employee may direct the trustee on how to vote at a General Meeting
and the trustee may only cast its vote in respect of shares over which it has received a valid direction from employees.
Disabled employees
The Company gives full consideration to applications for employment by disabled persons, bearing in mind the aptitudes of the
applicant concerned. In the event of employees becoming disabled, every effort is made to ensure that their employment with
the Group continues, and that appropriate training is arranged. It is the policy of the Group that the training, career development
and promotion of disabled persons should, so far as possible, be identical to that of other employees.
Drax Group plc Annual report and accounts 2020 135
Strategic reportGovernanceFinancial statementsShareholder information
Directors’ report continued
Political donations
Drax is a politically neutral organisation and did not make any political donations in 2020. The Company regularly engages with
regulators and policymakers (including those associated with political parties and governments) to listen and contribute to
discussions on a wide range of matters. Such engagement is an important part of our strategy and contributing to initiatives
enabling the UK in its goal of being carbon neutral by 2050. Further information on how we engage with stakeholders can be found
on pages 40 to 45, and our Political Engagement Policy can be found on the Company’s website at: www.drax.com/about-us/
drax-political-engagement-policy.
While we do not believe that any expenditure incurred as a result of this engagement would be considered a political donation under
the Companies Act 2006 (“the Act”), due to the broad definition of political donations and as a matter of good governance and
transparency, we have provided information on areas of expenditure which may be regarded as falling within the scope of the Act.
During the year ended 31 December 2020, Drax exhibited at, and held events at, conferences organised by political parties, spending
a total of £11,180 (2019: £41,065). These events allow Drax to present its views on a non-partisan basis to politicians from across the
political spectrum and non-political stakeholders such as NGOs and other listed and non-listed companies. These payments do not
indicate support for any political party. The recipients were the Conservative Party (£1,700) and the Labour Party (£9,480).
At our 2021 AGM, Drax will be seeking renewal from shareholders of the existing authority approved at the 2020 AGM. More details
are contained in the Notice of Meeting.
Other significant agreements
• A £300 million facility agreement dated 20 December 2012 (as amended and restated on 10 December 2015 and 21 April 2017 and
as further amended and restated on 18 November 2020) between, amongst others, Drax Corporate Limited and Barclays Bank PLC
(as facility agent) (the “Facility Agreement”).
• A £35 million term facility agreement dated 20 December 2012 (as amended and restated on 10 December 2015 and 21 April 2017
and as further amended and restated on 18 November 2020) with Drax Corporate Limited as borrower (the “Term Facility
Agreement”).
• An indenture dated 26 April 2018 (as amended and supplemented from time to time, including by a supplemental indenture dated
12 February 2019 and a supplemental indenture dated 16 May 2019) between, amongst others, Drax Finco plc and BNY Mellon
Corporate Trustee Services Limited (as Trustee) governing $500 million 6.625% senior secured notes due November 2025 (the “2018
Indenture”).
• An indenture dated 4 November 2020 between, amongst others, Drax Finco plc and BNY Mellon Corporate Trustee Services Limited
(as Trustee) governing €250 million 2.625% senior secured notes due 2025 (the ”2020 Indenture” and, together with the 2018
Indenture, the “Indentures”).
• A £375 million term loan facilities agreement dated 24 July 2019 between, amongst others, Drax Corporate Limited and Banco
Santander S.A., London Branch (as facility agent) (the “2019 Private Placement”).
• A £98 million and €126.5 million term loan facilities agreement dated 18 August 2020, amongst others, Drax Corporate Limited
and Banco Santander S.A., London Branch (as facility agent) (the “2020 Private Placement”).
Under the Indentures, a change of control (a “Notes Change of Control”) occurs if any person other than Drax Group plc becomes
the ultimate beneficial owner of more than 50% of the voting rights of Drax Group plc’s direct subsidiary, Drax Group Holdings
Limited (unless replaced by a successor parent company), or else if all or substantially all of the assets of Drax Group Holdings
Limited are disposed of outside of the Group. No later than 60 days after any change of control, Drax Group Holdings Limited
must offer to purchase any outstanding notes at 101% of the principal amount of such notes plus accrued
interest and other unpaid amounts.
Under the Facility Agreement, the Term Facility Agreement, the 2019 Private Placement and the 2019 Private Placement, a change
of control occurs if any person or group of persons acting in concert gains control of Drax Group plc or if Drax Group plc no longer
holds directly 100% of the issued share capital of Drax Group Holdings Limited (subject to carve-outs for the interposition of an
intermediate holding company) or else if a Notes Change of Control occurs. Following a change of control, if any lender requires,
it may by giving notice to the relevant Group entity within 30 days of receiving notice from such Group entity that a change of
control has occurred, cancel its commitments and require the repayment of its share of any outstanding amounts within three
business days of such cancellation notice being given.
136 Drax Group plc Annual report and accounts 2020
Directors’ interests and indemnity arrangements
Other than a service contract between the Executive Directors and a Group company no director had a material interest at any
time during the year in any significant contract with the Company or any of its subsidiary undertakings. There are no agreements
between the Group and its Directors providing for compensation for loss of office or employment because of a takeover bid.
The Company has appropriate indemnity insurance cover in place in respect of legal action against Directors of the Company
and its subsidiaries.
Strategic report
The Strategic report on pages 1 to 77 contains disclosures in relation to workforce engagement, stakeholder engagement, diversity,
Greenhouse Gas emissions, future development and research activities.
Post balance sheet events
On 15 December 2020 the Group announced the sale of Drax Generation Enterprise Limited, owner of four Combined Cycle Gas
Turbine (CCGT) power stations, to VPI Holding Limited for consideration of up to £193.3 million, subject to customary adjustments.
The sale completed on 31 January 2021. Following the sale the Group no longer operates any CCGTs.
On 8 February 2021, the Group announced that it had signed an agreement with Pinnacle Renewable Energy Inc. (Pinnacle),
providing for the acquisition by Drax Canadian Holdings Inc., an indirect, wholly-owned subsidiary of Drax, of the entire issued share
capital of Pinnacle (the Acquisition). The Acquisition will be implemented by way of a statutory plan of arrangement in accordance
with the laws of the Province of British Columbia, Canada, at a price of C$11.30 per share (representing a premium of 13% based on
the closing market price as at 5 February 2021 of C$10.04 per share and valuing the fully diluted equity of Pinnacle at C$385 million
(£226 million), with an implied enterprise value of C$741 million, including C$356 million of net debt.) The Acquisition, which remains
subject to Drax and Pinnacle shareholder approval, court approval, regulatory approvals and the satisfaction of certain other
customary conditions, is expected to complete in the second or third quarter of 2021.
Auditors and the disclosure of information to the auditor
So far as each person serving as a Director at the date of approving this report is aware, there is no relevant audit information,
being information needed by the auditor in connection with preparing the report, of which the auditor is unaware. Having made
enquiries of fellow directors, each Director has taken all steps that he/she ought to have taken as a Director to ascertain any
relevant audit information and to establish that the auditor is aware of that information. This information is given and should be
interpreted in accordance with the provisions of Section 418 of the Companies Act.
Resolutions will be proposed at the AGM for (i) the reappointment of Deloitte LLP as the auditor of the Group; and (ii) authorising
the Directors to determine the auditor’s remuneration. As explained, the Audit Committee reviews the appointment of the auditor,
the auditor’s effectiveness and its relationship with the Group, including the level of audit and non-audit fees paid to the auditor.
Further details on the work of the auditor and the Audit Committee are set out in the Audit Committee report on pages 98 to 107.
The Directors’ report was approved by the Board on 24 February 2021 and is signed on its behalf by:
Brett Gladden
Group Company Secretary
Registered office: Drax Power Station, Selby, North Yorkshire, YO8 8PH
Drax Group plc Annual report and accounts 2020 137
Strategic reportGovernanceFinancial statementsShareholder information
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are
required to prepare the group financial statements in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union and have elected to prepare the Parent Company financial statements in
accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable
law), set out in FRS 101 “Reduced Disclosure Framework”. Under company law the Directors must not approve the accounts unless
they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company
for that period.
In preparing the Parent Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained
in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the entity’s financial position and
financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a
whole;
• the Strategic report includes a fair review of the development and performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties
that they face; and
• the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 24 February 2021 and is signed on its behalf by:
Will Gardiner
CEO
138 Drax Group plc Annual report and accounts 2020
Verification statements
Verification Statement from Lloyd’s Register Quality Assurance Limited
Lloyd’s Register Quality Assurance Limited (“LR”) has provided independent limited assurance to Drax Corporate Limited (“Drax”)
over specific data within the Drax Group plc Annual Report 2020 (“the Report”) including the following:
• Group GHG emissions (Scope 1 and 2)
• Group GHG emissions (Scope 3)
• Water abstraction and discharge
• Total Recordable Injury Rate
• Employment data on headcount
• Group energy consumption
• Percentage of emissions in the UK
• Group generation emissions intensity
• Group emissions intensity
The assurance was conducted in accordance with the International Standard on Assurance Engagements (ISAE) 3000.
LR’s full independent limited assurance statement can be found at www.drax.com/sustainability
Summary Assurance Statement from Bureau Veritas UK Ltd
Bureau Veritas UK Ltd has provided independent assurance to Drax Group Plc over its ‘average biomass supply chain
greenhouse gas emissions’ data as reported in its Annual report and accounts 2020.
The assurance process was conducted in accordance with International Standard on Assurance Engagements (ISAE) 3000
Revised, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (effective for assurance
reports dated on or after December 15, 2015), issued by the International Auditing and Assurance Standards Board.
Bureau Veritas’ full assurance statement includes certain limitations, exclusions, observations, and a detailed assurance
methodology and scope of work.
The full assurance statement with Bureau Veritas’ independent opinion can be found at www.drax.com/sustainability
Drax Group plc Annual report and accounts 2020 139
Strategic reportGovernanceFinancial statementsShareholder information
Giving our
workforce
a voice
I’ve chaired one of the
workforce (MyVoice)
engagement forums for
almost two years, In that time,
the forums have transformed,
and we’ve really been able to
shape how information is
effectively fed back and forth
between our Board and our
colleagues. We’ve formed
open and honest relationships,
enabling everyone to have
their say on the things that
matter to them at work, from
wellbeing through to training
and practical ways of working.
We can now proudly say that
our colleagues – through their
My Voice Forums – have been
able to influence and have a
real, measurable impact on
many decisions that our
business and the Board have
made during 2020.”
Lucy Walton,
Internal Comms Business Partner
and MyVoice forum chair
Biomass Domes at Drax Power
Station, Yorkshire
140 Drax Group plc Annual report and accounts 2020
Doing the
right thing
In 2020, we developed and
published two Codes of
Conduct, one for colleagues
and one for suppliers. These
Codes cover a wide range of
important topics that help
underpin our culture of acting
with integrity and doing the
right thing. They provide
colleagues, non-permanent
workers, and suppliers with
valuable guidance on the
standards and behaviours
expected when working at,
or with, Drax. The colleague
Code also includes embedded
videos, which act as a really
helpful training tool.
Developing the Codes was a
fantastic project management
opportunity and involved
collaboration with many
colleagues across the
business. Deployment has
been a great success, with lots
of positive feedback received.”
Nicola Garrett,
Business Ethics Manager
Drax Group plc Annual report and accounts 2020 141
Strategic reportGovernanceFinancial statementsShareholder information
Section 5
Other assets and liabilities
190 5.1 Coal closure
190 5.2 Goodwill
192 5.3 Intangible assets
194 5.4 Provisions
195 5.5 Assets held for sale and discontinued operations
196 5.6 Post balance sheet events
Section 6
Our people
197 6.1 Colleagues including directors and employees
197 6.2 Share-based payments
201 6.3 Retirement benefit obligations
Section 7
Risk management
206 7.1 Financial instruments
and their fair values
209 7.2 Financial risk management
223 7.3 Hedge reserve
224 7.4 Cost of hedging reserve
225 7.5 Offsetting financial assets and liabilities
225 7.6 Contingent assets and liabilities
225 7.7 Commitments
Section 8
Reference information
226 8.1 General information
226 8.2 Basis of preparation
227 8.3 Related party transactions
Drax Group plc
228 Company financial statements
230 Notes to the Company financial statements
Financial statements contents
Financial statements
143 Independent auditor’s report to the members of Drax
Group plc
151 Financial statements
Section 1
Consolidated financial statements
154 Consolidated income statement
155 Consolidated statement
of comprehensive income
156 Consolidated balance sheet
157 Consolidated statement
of changes in equity
158 Consolidated cash flow statement
Section 2
Financial performance
159 2.1 Segmental reporting
161 2.2 Revenue
163 2.3 Operating expenses
164 2.4 Review of fixed assets
for impairment
166 2.5 Net finance costs
166 2.6 Current and deferred taxation
170 2.7 Certain remeasurements and exceptional items
171 2.8 Earnings per share
172 2.9 Dividends
172 2.10 Retained profits
Section 3
Operating assets and working capital
173 3.1 Property, plant and equipment
176 3.2 Leases
177 3.3 Other fixed asset investments
178 3.4 ROC assets
178 3.5 Inventories
179 3.6 Trade and other receivables
182 3.7 Contract costs
183 3.8 Trade and other payables
Section 4
Financing and capital structure
184 4.1 Reconciliation of net debt
184 4.2 Cash and cash equivalents
184 4.3 Borrowings
187 4.4 Notes to the consolidated cash flow statement
188 4.5 Equity and reserves
142 Drax Group plc Annual report and accounts 2020
Independent Auditor’s report
to the members of Drax Group plc
Report on the audit of the financial statements
1. Opinion
In our opinion:
• the financial statements of Drax Group plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair view of the
state of the group’s and of the parent company’s affairs as at 31 December 2020 and of the group’s loss for the year then ended;
• the group financial statements have been properly prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated and parent company statements of changes in equity;
• the consolidated cash flow statement;
• the basis of preparation and statement of accounting policies on pages 151 to 153;
• the notes 2.1 to 8.3 related to the consolidated financial statements; and
• the notes 1 to 9 related to the parent company financial statements.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law
and international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as adopted
by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework”
(United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements
section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied
to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
The non-audit services provided to the group for the year are disclosed in note 2.3 to the financial statements. We confirm that
the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit
matters
The key audit matters that we identified in the current year were:
• Valuation of commodity and foreign exchange contracts
• Estimation of Customers unbilled revenue
• Impairment of OCGT development assets
• Estimation of Opus Energy bad debt provision
Within this report, key audit matters are identified as follows:
! Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used for the Group financial statements was £12.3m In determining materiality we took into
consideration a number of metrics, but with particular focus on Earnings before Interest, Taxation, Depreciation
and Amortisation, excluding the impact of exceptional items and certain remeasurements (Adjusted EBITDA). Our
selected materiality represents approximately 3% of Adjusted EBITDA (from continuing and discontinued operations)
for the year.
Scoping
We focused our Group audit scope primarily on the audit work at four components, being Drax Generation, Haven
Power, Opus Energy and Drax Biomass. These components represent the principal business units and account for
virtually all of the Group’s net assets, revenue and profit before tax.
Significant
changes in
our approach
Estimation of the Opus Energy bad debt provision has been identified as a key audit matter in the current year. This
reflects the increase in unpredictability of the collectability of receivables caused by the financial distress created
by the Covid-19 pandemic.
Other aspects of our audit approach remain broadly consistent with the prior year.
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4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern
basis of accounting included:
• reviewing the group’s borrowing arrangements including consideration of the new £300m revolving credit facility, which
matures in 2025;
• assessing the assumptions used in the Group’s Business Plan, including performing sensitivity analysis in relation to assumptions
for future commodity prices;
• assessing the impact of Covid-19 on the Group; and
• reviewing the amount of headroom in the forecasts.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the group’s and parent company’s ability to continue as a going concern
for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the group has applied the UK Corporate Governance Code, we have nothing material to add
or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered
it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections
of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
5.1. Valuation of commodity, foreign exchange and other contracts
Key audit
matter
description
Net losses on derivative contracts recognised in the consolidated income statement in the year, from continuing
operations, are £70.3m (2019: losses of £119.2m), with related derivative assets of £283.3m and liabilities of £453.6m
recognised on the consolidated balance sheet as at 31 December 2020.
The Group has exposure to a number of different financial risks including foreign exchange risk and commodity risk,
and uses a variety of derivative contracts to mitigate these risks, including commodity contracts, floating swap
forwards and cross currency swaps.
The valuation of derivative contracts is complex and requires judgement in areas including the selection of
appropriate valuation methodologies, and assumptions, including in respect of future market prices, credit risk
factors, time value of money and spread adjustments.
Due to the inherent risks as described above, the large volume of data involved in the contract valuations, the
complex valuation methodologies and models applied, and the requirement for certain manual adjustments,
typically for credit risk, we have identified a risk of error and a potential fraud risk relating to the possibility for
management or employees of the company to value trades inappropriately.
Further detail of the key judgements are disclosed in the Audit Committee report on pages 102 to 104. Section 7 sets
out the financial risk management notes.
We tested the relevant controls related to the valuation of commodity and foreign exchange contracts.
With involvement of our internal financial instrument specialists we tested management’s key judgements and
calculations. This included testing a sample of trades undertaken to trade tickets and checking key contractual
terms such as volumes and contracted prices.
We have assessed the valuation models used by management, including any manual adjustments to determine the
fair value of the derivative instruments and performed independent valuations across a sample of both commodity
and foreign exchange contracts.
We have analysed the appropriateness of management’s forward price curve assumptions by benchmarking these
to third party sources. We also reviewed the consistency of the assumptions used across other areas of the financial
statements, such as asset impairment, where relevant.
We have challenged management’s approach and assumptions involved in assessing fair value adjustments such
as credit risk, time value of money and spread adjustments through consideration of third party data.
How the
scope of
our audit
responded to
the key audit
matter
Key
observations
From our testing, we are satisfied that the valuation of commodity and foreign exchange contracts is reasonable.
We consider the valuation models used by management to be appropriate and the forward price curve assumptions
are within acceptable ranges.
144 Drax Group plc Annual report and accounts 2020
5.2. Estimation of Customers unbilled revenue
Key audit
matter
description
The recognition of retail revenue requires an estimation of customer usage between the date of the last meter
reading and year end, which is known as unbilled revenue. Across the Customers division, unbilled revenue at the
balance sheet date amounted to £204.6m (2019: £207.6m).
The method of estimating unbilled revenue is complex and judgemental and requires assumptions for both the
volumes of energy consumed by customers and the related value.
We identified a risk of error and a potential fraud risk in relation to revenue recognition in the Customer businesses,
in particular to the estimates underpinning unbilled revenue, as these judgemental areas could be manipulated by
management to misreport revenue.
Further detail of the key judgements are disclosed in the Audit Committee report on pages 102 to 104. Accrued
income is disclosed in note 3.6.
How the
scope of
our audit
responded to
the key audit
matter
We tested the relevant controls related to the estimation of certain aspects of unbilled revenue, including controls
over the reconciliation of meter readings provided by the energy markets, and which are used by management to
estimate the power supplied. We also tested the controls over the price per unit applied in the valuation of certain
aspects of unbilled revenue.
When external market information was not available at the balance sheet date, we obtained and evaluated
management’s reconciliation of the volume of power purchased to their calculations of revenue supplied and
completed sample tests to check that the December 2020 unbilled revenue amount was subsequently billed.
We also reviewed the aggregate unbilled revenue balance from previous periods to test that the volumes recognised
were appropriate in line with the values accrued.
Key
observations
Our retrospective reviews of estimated revenues found that management have historically achieved a high level
of accuracy. We considered the estimates for revenue earned in the year to be appropriate.
5.3. Impairment of OCGT development assets
Key audit
matter
description
An asset of £47.0m (2019: £41.9m) is recognised within the consolidated balance sheet at 31 December 2020 in
relation to development assets for OCGT projects. Continued development, construction and operation of these
assets is ultimately dependent upon the ability to secure sufficient future income at an appropriate level in order to
reduce the project risk and associated returns to an acceptable level.
The business case for these projects is predicated on the ability to secure a Capacity Market contract at an
appropriate level. Historical Capacity Market clearing prices are noted to be below the levels required for further
development of these projects and we identified a key audit matter, and a potential fraud risk, in respect of the
recoverable value of these assets and whether any impairment is required.
Estimating the recoverable value of these assets requires judgement in relation to key assumptions including
discount rates, future income levels and capital costs.
Assumptions relating to long term revenues and costs are inherently difficult to assess and the headroom calculated
is highly sensitive to all these key assumptions.
Further detail of the key judgements are disclosed in the Audit Committee report on pages 102 to 104. Intangible
assets are disclosed in note 5.3.
How the
scope of
our audit
responded
to the key
audit matter
We obtained an understanding of relevant controls in relation to management’s impairment assessment process.
We have reviewed management’s models and challenged the key assumptions including discount rates, income
assumptions and capital costs. We have benchmarked income assumptions against third party reports prepared
by reputable market analysts and worked with internal valuation specialists to prepare an independent assessment
of discount rates. We have challenged management over the appropriateness of capital cost assumptions in light
of asset specifications and procurement strategies for the project.
We have undertaken analysis and testing including:
• Running a range of sensitivities including alternative scenarios to assess whether an impairment would be
required if other assumptions were adopted;
• Verifying the mathematical accuracy of the cash flow models; and
• Assessing whether the disclosures in note 5.3 of the financial statements appropriately disclose the key
judgements taken so that the reader of the accounts is aware of the impact in the financial statements of
changes to key assumptions that may lead to impairment.
Key
observations
We believe that the assumptions used by management are appropriate and supported by third party independent
assessments.
Discount rates applied by management (7.0%) are considered to be at the lowest end (that is, optimistic end) of
the range expected for projects of this nature. Based on alternative scenarios we are satisfied that no impairment
is required.
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5.4. Estimation of Opus Energy bad debt provision
!
Key audit
matter
description
The financial distress created by the Covid-19 pandemic has increased the rate of defaults across several industries
and a rise in the amount of bad debts. Management needs to exercise significant judgement over the level of bad
debt provision required on their receivables at reporting dates which is increasingly difficult due to unpredictability
of when the economic environment will improve.
We identified a risk of error and a potential fraud risk in relation to the estimation of bad debt provision for the
customers of Opus Energy given their customers are largely small and medium enterprises (“SME”), including some
in the retail, entertainment and hospitality industries. and the range of judgement that could apply is far greater
than associated with Haven Power’s larger industrial customers.
The bad debt provision associated with Opus Energy at the balance sheet date amounted to £51.4m (2019: £37.8m).
To calculate the provision, management use a bad debt model, which includes assumptions for the impact of
Covid-19 and lifetime expected credit outcomes for receivables.
Further detail of the key judgements are disclosed in the Group’s critical accounting judgements, estimates and
assumptions set out on page 152 and the Audit Committee report on pages 102 to 104. The bad debt provision
is disclosed in note 3.6.
We obtained an understanding of relevant controls related to the estimation of the bad debt provision.
With involvement of our specialist modelling team, we performed a review of the bad debt model. We tested the
completeness and accuracy of the data used in the model.
We challenged management’s assumptions, including for the impact for Covid-19, and challenged whether they
reflect the lifetime expected credit outcomes for receivables. This work included analysis of cash payment trends
and cancellation of direct debits. We benchmarked the recorded provision against alternative valuation models,
including cash collection rates and external valuations.
Based on the work performed we concluded that the bad debt provision has been appropriately stated.
How the
scope of
our audit
responded to
the key audit
matter
Key
observations
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope
of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
£12.3m (2019: £12.2m)
£6.0m (2019: £5.6m)
Basis for
determining
materiality
In determining materiality we considered by
considering a range of possible benchmarks but
with a particular focus on Adjusted EBITDA, which
excludes the impact of exceptional items and certain
remeasurements. We also considered together with
profit before and after interest and tax as well as
the scale of the balance sheet and the overall size
of the business.
Our selected materiality represents approximately
3.0% of Adjusted EBITDA (continuing and discontinued
operations) for the year (2019: 3.0%) the basis of which
is consistent with the prior year.
Component materiality for the parent company has
primarily been determined on the basis of the net assets
and capped at 49% (2019: 46%) of the materiality
identified for the Group. This is a judgement and reflects
the significant value of investments held on the balance
sheet at the year end (£724.9m). Parent company
materiality equates to 0.8% of net assets (2019: 0.8%).
146 Drax Group plc Annual report and accounts 2020
Group financial statements
Parent company financial statements
When determining materiality, we considered the
net assets of the company as its principal activity is
as an investment holding company for the Group.
Rationale
for the
benchmark
applied
We consider that Adjusted EBITDA is of particular
relevance to users of the financial statements and
is a key measure of performance used by the Group.
It excludes volatility caused in particular by the
remeasurements of derivative contracts and
exceptional items, defined as those transactions that,
by their nature, do not reflect the trading performance
of the Group in the period.
Although the sale of the non-core gas portfolio has
triggered the disclosure of discontinued operations,
we consider it appropriate to use both continuing and
discontinued operations in the calculation of Adjusted
EBITDA as the discontinued operations contributed a
full year of results to the Group.
Adjusted EBITDA
£412m
Adjusted EBITDA
Group materiality
Group materiality
£12.3m
Component materiality range
£4.3m to £6.1m
Audit Committee
reporting threshold £0.6m
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial statements as a whole.
Performance
materiality
Basis and
rationale for
determining
performance
materiality
Group financial statements
Parent company financial statements
70% (2019: 70%) of group materiality
70% (2019: 70%) of parent company materiality
In determining performance materiality, we considered the following factors:
• The low level of historical uncorrected misstatements within the consolidated financial statements;
• Our assessment of the control environment and conclusions from our testing of group wide controls; and
• The lack of significant changes in the business in the year which would impact on our ability to forecast
expected level of misstatement.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.6m (2019: £0.6m),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the
Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
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7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and
assessing the risks of material misstatement at the Group level. We focused our Group audit scope primarily on the audit work at
four components, being Drax Generation, Haven Power, Opus Energy and Drax Biomass. These represent the principal business
units of the Group and account for virtually all of the Group’s net assets, revenue and profit before tax. This is in line with our audit
approach from the prior year.
All work was performed by the UK audit team under the supervision of the Senior Statutory Auditor.
A full scope audit was performed for all significant components. This scope was selected to provide an appropriate basis for
undertaking audit work to address the risks of material misstatement identified above. Our audit work at all significant component
locations was executed at levels of materiality applicable to each individual entity which were lower than Group materiality and
ranged from £4.3m to £6.1m (2019: £4.0m to £6.0m).
At the Group level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the aggregated financial information of the remaining components
not subject to audit or audit of specified account balances.
During 2019 the Senior Statutory Auditor visited the primary locations for all four significant components. In the current year,
this has not been possible due to the Covid-19 restrictions, and we have audited all locations working remotely.
7.2. Our consideration of the control environment
We involved our IT specialists to assess relevant controls over the group’s IT systems. Working with IT specialists we identified
and assessed relevant risks of material misstatement arising from each relevant IT system and the supporting infrastructure
technologies based on the role of application in the Group’s flow of transactions. We obtained an understanding of the
IT environment as part of these risk assessment procedures. Relevant controls were identified and tested to address those
IT risks over the following systems:
• Oracle
• Aligne
• ERS Billing system at Haven Power
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our
auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion
on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report,
we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives
rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability
to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have
no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
148 Drax Group plc Annual report and accounts 2020
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
• the nature of the industry and sector, control environment and business performance including the design of the group’s
remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
• the group’s own assessment of the risks that irregularities may occur either as a result of fraud or error;
• results of our enquiries of management, internal audit and the audit committee about their own identification and assessment
of the risks of irregularities;
• any matters we identified having obtained and reviewed the group’s documentation of their policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
• the matters discussed among the audit engagement team and relevant internal specialists, including tax, pensions, IT, valuation
and financial instrument specialists regarding how and where fraud might occur in the financial statements and any potential
indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud
and identified the greatest potential for fraud in the following areas: valuation of commodity, foreign exchange and other
contracts, estimation of Customers unbilled revenue, impairment of OCGT development assets, estimation of Opus Energy bad
debt provision, cut-off of bilateral sales and working capital transactions. In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial
statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, Pensions
legislation, Tax legislation, and Regulations established by regulators in the key markets in which the Group operates, including the
Office of Gas and Electricity Markets (Ofgem). In addition, we considered provisions of other laws and regulations that do not have
a direct effect on the financial statements but compliance with which may be fundamental to the group’s ability to operate or to
avoid a material penalty.
11.2. Audit response to risks identified
As a result of performing the above, we identified estimation of valuation of commodity and foreign exchange contracts,
estimation of Customers unbilled revenue, impairment of OCGT development assets and estimation of Opus Energy bad debt
provision as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters
in more detail and also describes the specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions
of relevant laws and regulations described as having a direct effect on the financial statements;
• enquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence
with HMRC;
• in addressing the risk of fraud in cut-off of bilateral sales, in addition to our testing described above we have performed focussed
testing on trades close to the year end combined with analytical review procedures to assess accuracy and completeness of
revenue recognised; and
• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
In addition, we have challenged management on the rationale for the use of working capital transactions, entered into. We also
reviewed the accounting treatments adopted by management against the specific contractual terms and arrangements
associated with each working capital transaction and reviewed the related disclosures in the financial statements;
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members
including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations
throughout the audit.
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Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the directors’ report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the
course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
13. Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of
the Corporate Governance Statement relating to the group’s compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:
• the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material
uncertainties identified set out on pages 27, 64 and 65;
• the directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period is
appropriate set out on pages 27, 64 and 65;
• the directors’ statement on fair, balanced and understandable set out on page 138;
• the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 66 to 77;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set
out on page 66 and 67; and
• the section describing the work of the audit committee set out on page 98 to 107.
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have
not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and
returns.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the shareholders at the Annual General Meeting on
22 April 2020 to audit the financial statements for the year ending 31 December 2020 and subsequent financial periods. The period
of total uninterrupted engagement including previous renewals and reappointments of the firm is 16 years, covering the years
ending 31 December 2005 to 2020.
15.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with
ISAs (UK).
16. Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Anthony Matthews FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
24 February 2021
150 Drax Group plc Annual report and accounts 2020
Financial statements
Introduction
The consolidated financial statements provide detailed
information about the financial performance (Consolidated
income statement and Consolidated statement of
comprehensive income), financial position (Consolidated
balance sheet), reserves (Consolidated statement of changes
in equity), and cash flows (Consolidated cash flow statement)
of Drax Group plc (the Company) together with all of the entities
controlled by the Company (collectively, the Group).
The notes to the financial statements provide additional
information on the items in the Consolidated income statement,
Consolidated statement of comprehensive income, Consolidated
balance sheet, Consolidated statement of changes in equity
and Consolidated cash flow statement. The notes include
explanations of the information presented. In general, the
additional information in the notes to the financial statements
is required by law, International Financial Reporting Standards
(IFRS) or other regulations to facilitate increased understanding
of the primary statements set out on pages 154-158, as well as
voluntary information which management believe users of the
accounts may find useful, in line with the spirit of IFRS.
Basis of preparation
The financial statements have been prepared in accordance
with international accounting standards in conformity with
the requirements of the Companies Act 2006 and International
Financial Reporting Standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union.
The financial statements have been prepared on the historical
cost basis, except for certain assets and liabilities that are
measured at fair value (principally derivative financial
instruments) and the assets and liabilities of the Group’s
defined benefit pension schemes (measured at fair value
and using the projected unit credit method respectively).
Foreign currency transactions
Transactions in foreign currencies are translated into sterling
at the average monthly exchange rate to the extent that this
approximates the exchange rate prevailing at the date of
the transaction. At each balance sheet date, monetary assets
and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing at that date. Non-monetary
items are not retranslated.
Foreign exchange gains and losses arising on such
retranslations are recognised in the Consolidated income
statement within foreign exchange gains/(losses).
Foreign operations
The assets and liabilities of foreign operations with a functional
currency other than sterling are translated into sterling using
published exchange rates at the reporting date. The income
and expenditure of such operations are translated into sterling
using the average monthly exchange rate to the extent this
approximates the exchange rates prevailing at the date of the
transactions. Foreign exchange gains and losses resulting from
the retranslation of the operation’s net assets, and its results
for the year, are recognised in the Consolidated statement
of comprehensive income.
Going concern
The Group’s business activities, along with future developments
that may affect its financial performance, position and cash
flows, are discussed within the Strategic report on pages 1 to 77
of this Annual Report. In particular, Brexit and Covid-19 are
considered in the Financial Review on page 27.
In the viability statement on pages 64 to 65 the directors state
that they have a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as
they fall due over the next three years.
Consequently, the directors also have a reasonable expectation
that the Group will continue in existence for the next 12 months
and, therefore, have adopted the going concern basis in
preparing these financial statements.
Basis of consolidation
These consolidated financial statements incorporate the
financial results of the Company and of all entities controlled
by the Company (its subsidiaries) made up to 31 December each
year. At 31 December 2020, the Company owned 100% of the
equity of all subsidiaries.
Accounting policies
The significant accounting policies for the measurement of an
individual item in the financial statements are described in the
note to the financial statements relating to the item concerned
(see contents on page 142).
The accounting policies adopted in the preparation of the
consolidated financial statements are consistent with those
followed in the preparation of the Group’s annual consolidated
financial statements for the year ended 31 December 2019,
except for the adoption of new standards effective as of
1 January 2020. The Group has not early-adopted any standard,
interpretation or amendment that has been issued but is not
yet effective.
A full listing of new standards, interpretations and
pronouncements under IFRS applicable to these financial
statements is presented in note 8.2. The application of these
new requirements has not had a material effect on the financial
statements.
Judgements and estimates
The preparation of financial statements requires judgement
to be applied in forming the Group’s accounting policies. It also
requires the use of estimates and assumptions that affect the
reported amounts of assets, liabilities, income and expenses.
Actual results may subsequently differ from these estimates.
Estimates and underlying assumptions are reviewed on an
ongoing basis, with revisions recognised in the period in which
the estimates are revised and in any future periods affected.
The judgements which have the most significant effect on the
amounts recognised in the consolidated financial statements,
and the key estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year, are set
out below. Further detail, including sensitivity analysis where
appropriate for the key estimates and assumptions, is included
in the related notes.
Drax Group plc Annual report and accounts 2020 151
Strategic reportGovernanceFinancial statementsShareholder information
Financial statements continued
Critical accounting judgements
The critical judgements made in the process of applying the
Group’s accounting policies during the year that have the most
significant effect on the amounts recognised in the financial
statements are set out below.
Certain remeasurements and exceptional items – Each year
management confirms the judgements made regarding
transactions to exclude from the Adjusted Results of the Group,
as described under Alternative performance measures, below.
The judgement as to whether a transaction or group of
transactions should or should not be classified as a certain
remeasurement or an exceptional item can have a significant
impact on the Adjusted Results of the Group. An internal policy
governs the judgements made by management and in all
instances, these judgements are approved by the Audit
Committee.
See note 2.7 on page 170
Closure of coal generation at Drax Power Station – On
26 February 2020, following a comprehensive review, the Board
determined to end commercial coal generation at Drax Power
Station in March 2021, with the two coal units remaining
available to meet Capacity Market obligations until September
2022. As a result of this closure decision, which reflected that
the dependencies between the coal and biomass generating
units are no longer considered to be significant, the Group
has determined the Drax Power Station site to be comprised
of two distinct cash-generating units (CGUs), one comprised
of biomass generation assets and one comprised of coal
generation assets. Previously, the Drax Power Station site was
considered to be a single CGU. These Financial statements have
been prepared on the basis that this change occurred on the
date of the closure decision – 26 February 2020.
Following the closure decision, an impairment review was
undertaken for the CGU containing the coal generation assets.
This review indicated that the recoverable amount of the coal
assets, calculated with reference to a value in use calculation
based on the Group’s latest approved forecasts, was
significantly lower than their carrying value. As described
in note 5.1, an asset obsolescence charge of £225.9 million
has been recognised in the Consolidated income statement
in respect of the coal generation assets CGU. There were no
reasonably possible changes in the assumptions underlying the
value in use calculation that would have resulted in a material
change to the value of the asset obsolescence charge. This view
has not subsequently changed. The asset obsolescence charge
has been treated as an exceptional item and excluded from the
Group’s Adjusted Results.
See note 2.7 on page 170 and note 5.1 on page 190
Accounting for biomass purchase and sale contracts – The
Group buys and sells biomass from time to time. To date, these
contracts have been entirely for operational purposes. During
the first half of 2020, the Group approved a change in risk
management policies to permit some flexibility in trading
activity to optimise the overall portfolio position and potentially
release value in certain, limited circumstances. Following this
change, the Group undertook an assessment of whether
contracts to buy and sell biomass are within the scope of
IFRS 9. Previously, the own-use exemption was applied to these
contracts, resulting in no amounts being recognised in respect
of these contracts until they matured. If the contracts were
deemed to be within the scope of IFRS 9, and the own-use
152 Drax Group plc Annual report and accounts 2020
exemption could not be applied, this would result in these
contracts being required to be recognised at fair value as
derivative assets/liabilities from inception.
This assessment concluded that, whilst the own-use exemption
was likely to no longer apply to all biomass purchase and sale
contracts, if and when sales contracts are executed for
optimisation purposes, the nature of these contracts means
they cannot be readily net settled in cash or other financial
instruments and, as a result, they remain outside of the scope
of IFRS 9. Accordingly, the accounting for these contracts has
not changed from prior periods in these financial statements
and therefore the contracts are not recognised until delivery.
Property, plant and equipment – The weighted average
remaining useful economic life for assets at Drax Power Station
is 17 years. This is shorter than the 19 years to the current
estimate of end of station life in 2039 but extends beyond the
end date of current subsidies for biomass generation, which is in
2027. The Group does not consider the end of subsidies in 2027
to be an indicator of impairment for these assets, reflecting our
expectations for biomass generation beyond this date.
See note 3.1 on page 173
Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
carry the most significant risk of a material effect on next year’s
Financial statements – that is, the items where actual outcomes
in the next 12 months could vary significantly from the estimates
made in determining the reported amount of an asset or liability.
Measurement of expected credit loss provisions – As a result
of Covid-19, the Group has significantly increased its expectation
of potential customer business failure rates and the resulting
expected credit losses within the Customers business unit.
The Group has updated its provisioning methodology, using
data for collection performance since the implementation
of lockdown measures in the UK during March 2020 and
expectations regarding future default rates, to take account
of this increased risk. The increase in the charge for impairment
losses of trade receivables from £18.0 million in the year
ended 31 December 2019 to £43.1 million in the year ended
31 December 2020 is driven by the anticipated impacts of
Covid-19 on levels of bad debt, resulting in a closing provision,
after adjusting for actual credit losses, of £56.4 million (as at
31 December 2019: £40.7 million).
Whilst the position adopted reflects the Group’s current best
estimate of possible outcomes, actual rates of bad debt will
depend upon the severity and depth of Covid-19, the measures
applied during 2021 and beyond, and actual cash collection
rates. Accordingly, actual outturn may differ from the position
adopted by the Group in these Financial statements.
See note 3.6 on page 179
Property, plant and equipment – Property, plant and equipment
is depreciated on a straight-line basis over its useful economic
life. Useful economic lives are estimated and based on past
experience, anticipated future replacement cycles and other
available evidence. Useful economic lives are reviewed at least
annually. The carrying value of property, plant and equipment at
31 December 2020 is £1,941.1 million and depreciation on these
assets in the year, based on the useful economic lives disclosed
in note 3.1, was £125.8 million. If the useful economic lives were
to increase or decrease by three years, the impact on the
depreciation charge for the year would be approximately
£22.4 million.
Impairment – An impairment review is conducted annually of
goodwill and intangible assets with an indefinite life and as
required for other assets and CGUs where an indicator of possible
impairment exists. In 2020, an impairment assessment has been
completed for five of the Group’s CGUs which have allocated
goodwill and intangible assets with an indefinite life. The
assessment of future cash flows that underpins such a review is
based on management’s best estimate of a number of variables
including retail margins, future commodity prices, supply
volumes, capacity market clearing prices and macro-economic
conditions. Certain CGUs have reasonably possible changes in
assumptions which, if they were to change over the next twelve
months, could lead to a material reduction in headroom, or a
small impairment and are therefore additionally disclosed as a
source of estimation uncertainty in respect of the disclosures
provided. Further detail is contained within the references below.
See note 5.2 on page 190 and note 5.3 on page 192
Pension liabilities – The Group records a net surplus or liability
in its balance sheet for its obligation to provide benefits under
approved defined benefit pension schemes, less the fair value
of assets held by the pension schemes. The actuarial valuations
of the schemes’ liabilities are performed annually by an
independent qualified actuary and depend on assumptions
regarding interest rates, inflation, future salary and pension
increases, mortality and other factors, any of which are subject to
future change. Two of the key estimates within the valuation are
the discount and inflation rates. The value of the pension surplus
recognised by the Group at 31 December 2020 in relation to the
Drax ESPS scheme is £9.5 million and the value of the pension
obligation recognised in relation to the Drax 2019 scheme is £1.3
million. Sensitivities in the valuations are discussed in note 6.3.
See note 6.3 on page 201
Alternative performance measures (APMs)
The measures described below are used throughout the Annual
report and accounts, and are measures that are not defined
within IFRS but provide additional information about financial
performance and position that is used by the Board to evaluate
the Group’s trading performance. These measures have been
defined internally and may therefore not be comparable to
similar APMs presented by other companies.
Adjusted Results
The Group’s financial performance for the period, measured
in accordance with IFRS, is shown in the Total Results column
on the face of the Consolidated income statement. Exceptional
items and certain remeasurements are deducted from the
Total Results in arriving at the Adjusted Results for the year.
The Group’s Adjusted Results are consistent with the way
executive management and the Board assess the performance
of the Group. Adjusted Results are intended to reflect the
underlying trading performance of the Group’s businesses
and are presented to assist users of the financial statements
in evaluating the Group’s trading performance and performance
against strategic objectives.
The Group presents an additional subtotal in the Adjusted
Results column. Adjusted EBITDA is earnings before interest,
tax, depreciation and amortisation, excluding the impact of
exceptional items and certain remeasurements. Adjusted
EBITDA is the primary measure used by executive management
and the Board to assess the financial performance of the Group
as it provides a more comparable assessment of the Group’s
year-on-year trading performance.
Exceptional items and certain remeasurements
Exceptional items are those transactions that, by their nature,
do not reflect the trading performance of the Group in the period.
For a transaction to be considered exceptional, management
considers the nature of the transaction, the frequency of
similar events, previous precedent and commercial context.
Exceptional items are approved by the Audit Committee in
line with an approved policy.
Certain remeasurements comprise fair value gains and losses
on derivative forward contracts to the extent those contracts
do not qualify for hedge accounting, or hedge accounting is
not effective which, under IFRS, are recorded in revenue, cost of
sales or foreign exchange gains/(losses) as described above. The
Group regards all of its forward contracting activity to represent
an economic hedge. The impact of excluding these fair value
remeasurements is to reflect commodity sales and purchases
at contracted prices (the price paid or received in respect of
delivery of the commodity in question), taking into account the
impact of financial trading (such as forward foreign currency
purchases), in the Adjusted Results. The result of this adjustment
shows the impact in revenue, cost of sales and foreign exchange
gains/(losses) at the time the transaction takes place.
See note 2.7 on page 170
Net debt
The Group defines net debt as total borrowings less cash and
cash equivalents. Total borrowings includes external financial
debt, such as loan notes, term loans and amounts drawn in
cash under revolving credit facilities (see note 4.3) but excludes
other financial liabilities such as lease liabilities calculated in
accordance with IFRS 16 (see note 3.2), pension obligations
and trade and other payables. Some of this debt is denominated
in foreign currencies and the Group has entered into hedging
arrangements associated with this currency exposure.
The Group does not include lease liabilities, calculated in
accordance with IFRS 16, in the definition of net debt. This
reflects the nature of the contracts included in this balance
which, prior to the application of IFRS 16, were predominantly
not held on the balance sheet and instead were disclosed as
operating commitments. This is consistent with the Group’s
covenant reporting requirements.
The Group also discloses net debt after the impact of relevant
currency hedging derivatives. This adjusts the borrowings
figure included in the net debt calculation to take into account
the effect of financial instruments entered into to hedge
movements in, for example, foreign exchange rates in relation
to debt principal repayments. The Directors believe that this
measure provides useful information about the economic
substance of the Group’s net debt position.
Net debt to Adjusted EBITDA ratio
The ratio of net debt (as defined above) to Adjusted EBITDA
from continuing and discontinued operations, expressed
as a multiple. The Group has a long-term target for net debt
to Adjusted EBITDA of around 2.0x.
From time to time, the Group discloses a “proforma” ratio,
which includes adjustments to reflect the cash flow timing
impact of significant one-off or other events outside of the
Group’s control that, in the view of the directors, would
otherwise distort performance in the period. Where applicable,
such adjustments are described and a rationale for the
adjustment provided.
Drax Group plc Annual report and accounts 2020 153
Strategic reportGovernanceFinancial statementsShareholder information
Section 1: Consolidated financial statements
Consolidated income statement
Revenue
Cost of sales
Gross profit
Operating and administrative expenses
Impairment losses on financial assets
Adjusted EBITDA(1)
Depreciation
Amortisation
Asset obsolescence charges
Losses on disposal of fixed assets
Other gains
Acquisition and restructuring costs
Operating profit/(loss)
Foreign exchange (losses)/gains
Interest payable and similar charges
Interest receivable
Profit/(loss) before tax
Tax:
– Before effect of changes in tax rate
– Effect of changes in tax rate
Total tax (charge)/credit
Net result from continuing operations
Net result from discontinued
operations
Year ended 31 December 2020
Year ended 31 December 2019(2)
Notes
2.2
2.3
3.6
3.1
5.3
2.7
3.1
2.7
2.5
2.5
2.5
2.6
2.6
Exceptional
items and
certain
remeasurements
£m
Adjusted
Results (1)
£m
4,235.0
(3,434.8)
800.2
(391.0)
(43.1)
366.1
(133.1)
(38.4)
–
(5.9)
–
–
188.7
(2.2)
(67.7)
0.5
119.3
(9.1)
(13.8)
(22.9)
96.4
9.7
(84.2)
(74.5)
(30.0)
–
–
–
(239.3)
–
–
(1.0)
(344.8)
(0.6)
(8.6)
–
(354.0)
67.3
(4.3)
63.0
(291.0)
Total
Results
£m
4,244.7
(3,519.0)
725.7
(421.0)
(43.1)
(133.1)
(38.4)
(239.3)
(5.9)
–
(1.0)
(156.1)
(2.8)
(76.3)
0.5
(234.7)
58.2
(18.1)
40.1
(194.6)
Exceptional
items and
certain
remeasurements
£m
Adjusted
Results (1)
£m
4,457.1
(3,658.7)
798.4
(409.1)
(18.0)
371.3
(151.5)
(42.0)
–
(0.1)
0.9
–
178.6
(1.6)
(61.2)
2.0
117.8
(17.5)
(1.7)
(19.2)
98.6
10.5
(131.7)
(121.2)
–
–
–
–
–
–
–
(9.0)
(130.2)
2.0
(5.2)
–
(133.4)
25.1
–
25.1
(108.3)
Total
Results
£m
4,467.6
(3,790.4)
677.2
(409.1)
(18.0)
(151.5)
(42.0)
–
(0.1)
0.9
(9.0)
48.4
0.4
(66.4)
2.0
(15.6)
7.6
(1.7)
5.9
(9.7)
5.5
21.2
15.5
36.7
19.5
(9.3)
10.2
Profit/(loss) for the period
117.6
(275.5)
(157.9)
118.1
(117.6)
0.5
Earnings/(loss) per share:
For net result from continuing
operations
– Basic
– Diluted
For net result for the period
– Basic
– Diluted
Pence
24.3
23.8
29.6
29.0
2.8
2.8
2.8
2.8
All results are attributable to owners of the parent.
Pence
Pence
Pence
(49.0)
(49.0)
(39.8)
(39.8)
24.9
24.8
29.9
29.7
(2.5)
(2.5)
0.1
0.1
Notes:
(1)
(2) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
Adjusted Results, including Adjusted EBITDA, are defined on page 153. See note 2.7 for further details.
154 Drax Group plc Annual report and accounts 2020
Consolidated statement of comprehensive income
(Loss)/profit for the period
Items that will not be subsequently reclassified to profit or loss:
Actuarial gains/(losses) on defined benefit pension scheme
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme
Losses on equity investments
Net fair value gains on cost of hedging
Deferred tax on cost of hedging
Net fair value losses on cash flow hedges
Deferred tax on cash flow hedges
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations
Net fair value (losses)/gains on cash flow hedges
Net (losses)/gains on cash flow hedges reclassified to the income statement
Deferred tax on cash flow hedges
Other comprehensive (expense)/income
Total comprehensive (expense)/income for the year attributable to owners of the parent
Notes
6.3
2.6
7.4
2.6
2.6
4.5
7.3
2.6
Years ended 31 December
2020
£m
(157.9)
1.4
(0.3)
–
53.3
(11.7)
(33.0)
5.1
(9.3)
(38.4)
(35.7)
12.3
(56.3)
(214.2)
2019
£m
0.5
(21.5)
4.3
(0.1)
56.3
(9.7)
(112.8)
25.0
(11.2)
71.9
19.2
(19.9)
1.5
2.0
Drax Group plc Annual report and accounts 2020 155
Strategic reportGovernanceFinancial statementsShareholder information
Section 1: Consolidated financial statements continued
Consolidated balance sheet
Assets
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Right-of-use assets
Other fixed asset investments
Retirement benefit surplus
Deferred tax assets
Derivative financial instruments
Current assets
Inventories
ROC assets
Trade and other receivables
Derivative financial instruments
Current tax assets
Cash and cash equivalents
Assets held for sale
Liabilities
Current liabilities
Trade and other payables
Lease liabilities
Current tax liabilities
Derivative financial instruments
Liabilities directly associated with the assets held for sale
Net current assets
Non-current liabilities
Borrowings
Lease liabilities
Derivative financial instruments
Provisions
Deferred tax liabilities
Retirement benefit obligation
Net assets
Shareholders’ equity
Issued equity
Share premium
Treasury shares
Hedge reserve
Cost of hedging reserve
Other reserves
Retained profits
Total shareholders’ equity
Notes
As at 31 December
2020
£m
2019
£m
5.2
5.3
3.1
3.2
3.3
6.3
2.6
7.1
3.5
3.4
3.6
7.1
4.2
5.5
3.8
3.2
7.1
5.5
4.3
3.2
7.1
5.4
2.6
6.3
4.5
4.5
4.5
7.3
7.4
4.5
2.10
248.2
181.8
1,941.1
29.0
1.5
9.5
65.3
103.8
2,580.2
208.2
139.6
525.3
179.5
9.0
289.8
261.3
1,612.7
(907.0)
(7.0)
–
(311.5)
(82.5)
(1,308.0)
304.7
(1,065.7)
(23.2)
(142.1)
(91.2)
(222.0)
(1.3)
(1,545.5)
1,339.4
47.5
430.0
(50.4)
(76.0)
87.2
747.7
153.4
1,339.4
248.2
206.9
2,327.4
31.4
3.0
7.0
45.3
152.3
3,021.5
292.0
162.7
608.8
193.7
–
404.1
–
1,661.3
(1,039.2)
(6.3)
(37.8)
(216.5)
–
(1,299.8)
361.5
(1,245.2)
(26.2)
(72.9)
(54.2)
(268.9)
–
(1,667.4)
1,715.6
47.4
429.6
(50.4)
121.5
40.8
757.0
369.7
1,715.6
The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for issue by
the Board of directors on 24 February 2021.
Signed on behalf of the Board of directors:
Andy Skelton
CFO
156 Drax Group plc Annual report and accounts 2020
Consolidated statement of changes in equity
At 1 January 2019
Profit for the year
Other comprehensive (expense)/income
Total comprehensive (expense)/income for
the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.5)
Total transactions with owners
Movements on cash flow hedges released
directly from equity
Deferred tax on cash flow hedges released
directly from equity
Movements on cost of hedging released
directly from equity
Deferred tax on cost of hedging released
directly from equity
Repurchase of shares (note 4.5) (1)
Movement in equity associated with
share-based payments (note 6.2)
At 31 December 2019
Loss for the year
Other comprehensive (expense)/income
Total comprehensive (expense)/income
for the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.5)
Total transactions with owners
Movements on cash flow hedges released
directly from equity
Deferred tax on cash flow hedges released
directly from equity
Movements on cost of hedging released
directly from equity
Deferred tax on cost of hedging released
directly from equity
Movement in equity associated with
share-based payments (note 6.2)
At 31 December 2020
Issued
equity
£m
47.0
–
–
–
–
0.4
0.4
–
–
–
–
–
–
47.4
–
–
–
–
0.1
0.1
–
–
–
–
Share
premium
£m
424.7
–
–
Treasury
shares
£m
(47.1)
–
–
–
–
4.9
4.9
–
–
–
–
–
–
429.6
–
–
–
–
0.4
0.4
–
–
–
–
–
–
–
–
(3.3)
–
(50.4)
–
–
–
–
–
–
–
–
–
–
Hedge
reserve
£m
199.9
–
(16.6)
(16.6)
–
–
–
(78.9)
17.1
–
–
–
–
121.5
–
(89.7)
(89.7)
–
–
–
(133.1)
25.3
–
–
–
47.5
430.0
–
(50.4)
–
(76.0)
Cost of
hedging
£m
(8.9)
–
46.6
46.6
–
–
–
–
–
3.8
(0.7)
–
–
40.8
–
41.6
41.6
–
–
–
–
–
5.2
(0.4)
–
87.2
Other
reserves
£m
768.2
–
(11.2)
(11.2)
–
–
–
Retained
profits
£m
442.7
0.5
(17.3)
(16.8)
(58.9)
–
(58.9)
–
–
–
–
–
–
–
–
–
–
–
757.0
–
(9.3)
(9.3)
–
–
–
2.7
369.7
(157.9)
1.1
(156.8)
(64.7)
–
(64.7)
–
–
–
–
–
–
–
–
Total
£m
1,826.5
0.5
1.5
2.0
(58.9)
5.3
(53.6)
(78.9)
17.1
3.8
(0.7)
(3.3)
2.7
1,715.6
(157.9)
(56.3)
(214.2)
(64.7)
0.5
(64.2)
(133.1)
25.3
5.2
(0.4)
–
747.7
5.2
153.4
5.2
1,339.4
Note:
(1)
Repurchase of shares reflects the cost of acquiring ordinary shares as part of the share buy-back programme announced on 20 April 2018. At 31 December 2020
these shares have not been cancelled and are recognised as treasury shares
Drax Group plc Annual report and accounts 2020 157
Strategic reportGovernanceFinancial statementsShareholder information
Section 1: Consolidated financial statements continued
Consolidated cash flow statement
Years ended 31 December
Cash generated from operations
Income taxes paid
Interest paid
Interest received
Net cash from operating activities, made up of:
Net cash from continuing operating activities
Net cash from discontinued operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of software assets
Proceeds from the sale of property, plant and equipment
Proceeds from the sale of other fixed asset investment
Acquisition of subsidiaries
Net cash used in investing activities, made up of:
Net cash used in continuing investing activities
Net cash used in discontinued investing activities
Cash flows from financing activities
Equity dividends paid
Proceeds from issue of share capital
Purchase of own shares
Repayment of borrowings
New borrowings drawn down
Repayment of principal on lease liabilities
Other financing costs paid
Net cash (absorbed by)/generated from financing activities, made up of:
Net cash (absorbed by)/generated from continuing financing activities
Net cash generated from/(absorbed by) discontinued financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of changes in foreign exchange rates
Cash and cash equivalents at 31 December
Notes
4.4
2.9
4.2
2020
£m
413.4
(48.3)
(59.2)
0.3
306.2
269.7
36.5
(163.8)
(10.6)
1.6
1.5
–
(171.3)
(134.8)
(36.5)
(64.7)
0.5
–
(475.0)
298.9
(8.8)
–
(249.1)
(249.1)
–
(114.2)
404.1
(0.1)
289.8
2019
£m
471.2
(9.6)
(50.3)
2.1
413.4
384.0
29.4
(142.3)
(29.1)
–
–
(691.7)
(863.1)
(833.7)
(29.4)
(58.9)
5.3
(3.3)
(550.0)
1,202.8
(7.4)
(16.9)
571.6
571.6
–
121.9
289.0
(6.8)
404.1
Non-cash transactions recognised in the income statement are reconciled to operating cash flow as part of the disclosure provided
in note 4.4. Significant non-cash transactions in 2020 included asset obsolescence charges of £239.3 million (see note 2.7). There
were no material non-cash transactions in the previous year.
The Group recorded a net loss of £275.5 million (2019: net loss £117.6 million) arising on exceptional items and certain
remeasurements in the Consolidated income statement in 2020. Acquisition and restructuring costs of £1.0 million
(2019: £9.0 million) are included in cash generated from operations (see note 4.4) and cash paid in respect of debt restructuring
of £3.8 million in net cash from operating activities (2019: £5.2 million in cash used in financing activities). All other exceptional
items and remeasurements are non-cash and adjusted in the reconciliation shown in note 4.4.
158 Drax Group plc Annual report and accounts 2020
Section 2: Financial performance
The financial performance section gives further information about the items in the Consolidated income statement. It includes
a summary of financial performance by each of the Group’s businesses (see note 2.1), analysis of certain income statement items
(notes 2.2–2.6) and information regarding the Adjusted and Total Results, dividends and distributable profits (notes 2.7–2.10).
Further commentary on the Group’s trading and operational performance during the year, which is predominantly reflected in
Adjusted EBITDA, can be found in the Strategic report on pages 1 to 77, with particular reference to key transactions and market
conditions that have affected the results.
2.1 Segmental reporting
The Group is organised into three businesses, with a dedicated management team for each, and a central corporate office
providing certain specialist and shared functions. The Group’s businesses, which each represent a reportable operating segment
for the purpose of segmental reporting, are:
• Generation: power generation activities in the UK;
• Customers: supply of electricity and gas to business customers in the UK; and
• Pellet Production: production of sustainable compressed wood pellets at our processing facilities in the US.
Information reported to the Board, who are considered the Chief Operating Decision Maker, for the purposes of assessing
performance and making investment decisions is based on these three segments. The measure of profit or loss for each reportable
segment presented to the Board on a regular basis is Adjusted EBITDA (as defined on page 153).
Operating costs are allocated to segments to the extent they are directly attributable to the activities of that segment. Corporate
office costs are included within central costs.
Segment revenues and results
The following is an analysis of the Group’s performance by reportable operating segment for the year ended 31 December 2020.
The Board monitors the Adjusted Results for the Group by reportable operating segment as presented in the tables below. The
financial information in these tables is comprised solely of results from continuing operations. The net result from discontinued
operations of £36.7 million (2019: £10.2 million) is attributable entirely to the Generation segment and is described in further detail
in note 5.5:
Revenue
External sales
Inter-segment sales
Total revenue
Segment gross profit
Segment Adjusted EBITDA
Central costs
Consolidated Adjusted EBITDA
Asset obsolescence charge
Depreciation and amortisation
Losses on disposal of fixed assets
Acquisition and restructuring costs
Operating profit/(loss)
Net interest charge
Foreign exchange losses
Profit/(loss) before tax
Year ended 31 December 2020
Generation
£m
Customers
£m
Pellet
Production
£m
Intra-group
eliminations
£m
Adjusted
Results
£m
2,115.7
1,530.1
3,645.8
608.9
399.9
2,119.3
–
2,119.3
84.3
(38.9)
–
231.0
231.0
103.6
51.7
–
(1,761.1)
(1,761.1)
3.4
3.4
4,235.0
–
4,235.0
800.2
416.1
(50.0)
366.1
–
(171.5)
(5.9)
–
188.7
(67.2)
(2.2)
119.3
Exceptional
items
and certain
remeasurements
£m
9.7
–
9.7
(74.5)
Total
Results
£m
4,244.7
–
4,244.7
725.7
–
(50.0)
(239.3)
–
–
(1.0)
(344.8)
(8.6)
(0.6)
(354.0)
(239.3)
(171.5)
(5.9)
(1.0)
(156.1)
(75.8)
(2.8)
(234.7)
Other than acquisition and restructuring costs of £1.0 million, exceptional items and certain remeasurements relate entirely
to the Generation segment. This includes asset obsolescence charges and inventory provisions, as set out in note 2.7.
Drax Group plc Annual report and accounts 2020 159
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.1 Segmental reporting continued
The following is an analysis of the Group’s performance by reportable operating segment for the year ended 31 December 2019:
Revenue
External sales
Inter-segment sales
Total revenue
Segment gross profit
Segment Adjusted EBITDA
Central costs
Consolidated Adjusted EBITDA
Acquisition and restructuring costs
Depreciation and amortisation
Losses on disposals
Other gains
Operating profit/(loss)
Net interest charge
Foreign exchange (losses)/gains
Profit/(loss) before tax
Year ended 31 December 2019
Generation
£m
Customers
£m
Pellet
Production
£m
Intra-group
eliminations
£m
2,188.0
1,512.7
3,700.7
580.8
369.0
2,269.1
–
2,269.1
134.1
17.4
–
229.4
229.4
84.1
31.5
–
(1,742.1)
(1,742.1)
(0.6)
(0.6)
Exceptional
items
and certain
remeasurements
£m
10.5
–
10.5
(121.2)
Total
Results
£m
4,467.6
–
4,467.6
677.2
–
(46.0)
(9.0)
–
–
–
(130.2)
(5.2)
2.0
(133.4)
(9.0)
(193.5)
(0.1)
0.9
48.4
(64.4)
0.4
(15.6)
Adjusted
Results
£m
4,457.1
–
4,457.1
798.4
417.3
(46.0)
371.3
–
(193.5)
(0.1)
0.9
178.6
(59.2)
(1.6)
117.8
2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT
assets. See note 5.5.
The accounting policies applied for the purpose of measuring the segments’ profits or losses, assets and liabilities are the same
as those used in measuring the corresponding amounts in the Group’s financial statements. The external revenues and results
of all the reporting segments are subject to seasonality, with higher dispatch and prices in the winter months compared to
summer months.
Capital expenditure by segment
Assets and working capital are monitored on a consolidated basis; however, spend on capital projects is monitored by
operating segment.
Generation
Customers
Pellet Production
Central
Total
Additions
to intangible
assets
2020
£m
1.9
6.2
–
0.5
8.6
Additions
to property,
plant and
equipment
2020
£m
157.9
0.5
58.5
3.1
220.0
Additions
to intangible
assets
2019
£m
0.8
18.9
0.3
0.8
20.8
Additions
to property,
plant and
equipment
2019
£m
129.9
0.6
17.9
2.9
151.3
Total cash outflows in relation to capital expenditure during the year for continuing and discontinued operations were £174.4 million (1)
(2019: £171.4 million). See the Group Financial Review on page 20 for further details about the key capital investments in the year.
Intra-group trading
Intra-group transactions are carried out at management’s best estimate of arm’s-length, commercial terms that, where possible,
equate to market prices. During 2020, the Pellet Production segment sold wood pellets with a total value of £231.0 million
(2019: £229.4 million) to the Generation segment and the Generation segment sold electricity, gas and ROCs with a total value
of £1,530.1 million (2019: £1,512.7 million) to the Customers segment.
The impact of all intra-group transactions, including any unrealised profit arising, is eliminated on consolidation.
Major customers
Total consolidated revenue for the year ended 31 December 2020 includes £495.2 million from one individual customer (2019:
£575.7 million from one individual customer) that represented 10% or more of total revenue for the year. These revenues arose
in the Generation segment.
Note:
(1)
The difference between the cost capitalised and the cash flow in 2020 is predominantly a result of the recognition of the asset associated with the increase in the
decommissioning provision in the year, a non-cash adjustment of £28.9 million.
160 Drax Group plc Annual report and accounts 2020
2.2 Revenue
Accounting policy
Revenue represents amounts receivable for goods or services provided to customers in the normal course of business, net of trade
discounts, VAT and other sales-related taxes and excluding transactions between Group companies. Revenue is presented gross
in the income statement as the Group controls the specified good or service prior to the transfer to the customer.
Revenues from the sale of electricity by the Group’s Generation business are measured based upon metered output delivered
at rates specified under contract terms or prevailing market rates as applicable. The performance obligations for these contracts
are deemed to be a series of distinct goods that are substantially the same and transfer consecutively. Control is deemed to have
passed to the customer at the point that the electricity has been supplied. The performance obligation is satisfied over time based
on the output method; this method recognises revenue based on the value transferred to the customer. This is measured based
on energy supplied to the customer with the amount billed based on the units of electricity supplied.
The Group recognises the income or costs arising from the Contract for Difference (CfD) (see below) in the income statement
as a component of revenue at the point the Group meets its performance obligation under the CfD contract. This is considered
to be the point at which the relevant generation is delivered and the payment becomes contractually due.
Other revenues derived from the provision of services to National Grid (for example, the supply of system support services) are
recognised by reference to the stage of completion of the contractual performance obligations. Most such contracts are for the
delivery of a service either continually or on an ad-hoc basis over a period of time and thus stage of completion is calculated by
reference to the amount of the contract term that has elapsed. Depending on the contract terms this approach may require
judgement in estimating probable future outcomes.
Other revenues derived from the sale of goods (for example, by-products from electricity generation such as ash and gypsum)
are recognised at the point the control of the goods is transferred to the customer, typically at the point of delivery to the
customer’s premises.
Revenue from the sale of electricity and gas directly to business customers through the Customers business is recognised on
the supply of electricity or gas when a contract exists, supply has taken place, a quantifiable price has been established or can
be determined and the receivables are expected to be recovered. Energy supplied is measured based upon metered consumption
and contractual rates; however, where a supply has taken place but is not yet measured or billed, the revenue is estimated based
on consumption statistics and selling price estimates and is recognised as accrued income.
Revenue for contracts satisfied over time is recognised in line with the progress of those contracts. The revenue recognised
per unit of energy supplied is based on the total estimated revenue and cost inputs for fixed price Customers contracts, and
contracted prices for variable price contracts. Assumptions are applied consistently but third-party costs can be variable,
therefore actual outcomes may vary from initial estimates.
The Group is eligible for, and applies, the practical expedient available in IFRS 15 and has not disclosed information related to
the transaction price allocated to remaining performance obligations. The right to receive consideration from a customer is at
an amount that corresponds directly with the value to the customer of the Group’s performance completed to date.
CfD payments
The Group is party to a CfD with the Low Carbon Contracts Company (LCCC), a Government-owned entity responsible for delivering
elements of the Government’s Electricity Market Reform Programme. Under the contract, the Group makes or receives payments in
respect of electricity dispatched from a specific biomass-fuelled generating unit. The payment is calculated by reference to a strike
price of £100 per MWh. The base year for the strike price was 2012 and it increases each year in line with the UK Consumer Price
Index and changes in system balancing costs. The strike price at 31 December 2020 was £116.49 per MWh.
When market prices (based on average traded prices in the preceding season) are above/below the strike price, the Group makes/
receives an additional payment to/from LCCC equivalent to the difference between that market power price and the strike price,
for each MWh produced from the generating unit supported by the CfD. Such payments are in addition to amounts received from
the sale of the power in the wholesale market and either increase or limit the total income from the power dispatched from the
relevant generating unit to the strike price in the CfD contract.
Drax Group plc Annual report and accounts 2020 161
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.2 Revenue continued
ROC sales
The generation and sale of Renewable Obligation Certificates (ROCs) is a key driver of the Group’s financial performance.
The Renewable Obligation (RO) scheme places an obligation on electricity suppliers to source an increasing proportion of their
electricity from renewable sources. Under the RO scheme, ROCs are certificates issued to generators of renewable electricity
which are then sold bilaterally to counterparties, including suppliers, to demonstrate that they have fulfilled their obligations
under the RO scheme. ROCs are managed in compliance periods (CPs), running from April to March annually. CP1 commenced
in April 2002. At 31 December 2020 the Group is operating in CP19.
To meet its obligations a supplier can either submit ROCs or pay the “buy-out” price at the end of the CP. The buy-out price was set
at £30 per ROC in CP1 and rises with the UK Retail Price Index. The buy-out price in CP19 is £50.05. ROCs are typically procured in
arm’s-length transactions with renewable generators at a market price slightly lower than the buy-out price for that CP. At the end
of the CP, the amounts collected from suppliers paying the buy-out price form the “recycle fund”, which is distributed on a pro-rata
basis to suppliers who presented ROCs in a compliance period.
The financial benefit of a ROC recognised in the income statement at the point of generation is thus comprised of two parts: the
expected value to be obtained in a sale transaction with a third party supplier relating to the buy-out price and the expected value
of the recycle fund benefit to be received at the end of the CP. During the year, the Group made sales (and related purchases) of
ROCs to help optimise its working capital position. External sales of ROCs in the table below includes £495.2 million of such sales
(2019: £575.7 million), with a similar value reflected in cost of sales. See note 3.4 for further details of ROCs generated and sold by
the Generation businesses and those utilised by the Customers business in the year.
Biomass pellet sales
The Group produces biomass pellets. The performance obligation is the delivery of the pellets to the customer. Delivery of the
pellets is deemed to be when the customer obtains control of the pellets which is dependent on the individual shipping terms
of the contract, but is generally when the product is loaded onto the shipping vessel. The amount of revenue recognised is based
on the contract price for the pellets.
Further analysis of revenue for the year ended 31 December 2020 is provided in the table below:
Power Generation
Electricity sales
ROC sales
CfD income
Ancillary services
Other income
Customers
Electricity and gas sales
Other income
Pellet Production
Pellet sales
Elimination of intra-group sales
Total adjusted consolidated revenue
Certain remeasurements
Total consolidated revenue
Year ended 31 December 2020
External
£m
Intra-group
£m
Total
£m
1,049.2
650.2
342.3
36.4
37.6
2,118.8
0.5
–
–
4,235.0
9.7
4,244.7
1,156.3
373.8
–
–
–
–
–
231.0
(1,761.1)
–
–
–
2,205.5
1,024.0
342.3
36.4
37.6
2,118.8
0.5
231.0
(1,761.1)
4,235.0
9.7
4,244.7
Certain remeasurements of £9.7 million (2019: £10.5 million) are comprised of gains and losses on derivative contracts that are used
to manage risk exposures associated with the Group’s revenue, not designated into hedge accounting relationships under IFRS 9.
162 Drax Group plc Annual report and accounts 2020
2.2 Revenue continued
Revenue recognised in the period that was included within contract liabilities at the start of the year was £13.3 million (2019: £12.5
million). See note 3.8 for further details on contract liabilities.
Revenue recognised in the period from performance obligations satisfied or partly satisfied in the previous period was £nil.
The following is an analysis of the Group’s revenues for the year ended 31 December 2019:
Power Generation
Electricity sales
ROC sales
CfD income
Ancillary services
Other income
Customers
Electricity and gas sales
Other income
Pellet Production
Pellet sales
Elimination of intra-group sales
Total adjusted consolidated revenue
Certain remeasurements
Total consolidated revenue
Year ended 31 December 2019(1)
External
£m
Intra-group
£m
Total
£m
1,123.3
733.7
261.7
46.2
23.1
2,226.1
43.0
–
–
4,457.1
10.5
4,467.6
1,115.0
368.1
–
1.8
27.8
–
–
229.4
(1,742.1)
–
–
–
2,238.3
1,101.8
261.7
48.0
50.9
2,226.1
43.0
229.4
(1,742.1)
4,457.1
10.5
4,467.6
In November 2018 the UK Capacity Market was suspended and was subsequently reinstated in 2019. As a result of the
reinstatement, included within electricity sales in the 2019 table above is £6.8 million of capacity market income relating to the
period from October 2018 – December 2018.
For accounting policies and other disclosures related to contract assets including a reconciliation between opening and closing
balances, please see note 3.6.
For accounting policies and other disclosures related to costs incurred to acquire customer contracts, please see note 3.7.
2.3 Operating expenses
This note sets out the material components of operating and administrative expenses in the Consolidated income statement and
a detailed breakdown of the fees paid to the Group’s auditor, Deloitte LLP, in respect of services they provided to the Group during
the year.
The following expenditure has been charged in arriving at operating profit:
Staff costs (note 6.1)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total operating and administrative expenses
Years ended 31 December (1)
2020
£m
2019
£m
196.3
100.1
124.6
421.0
174.3
96.3
138.5
409.1
Included in total operating and administrative expenses above is £11.5 million of expenditure relating to research and development
activities (2019: £2.7 million). In addition, the Group claims Research and Development Expenditure Credit (RDEC) relief on costs
presented within cost of sales.
When defining gross profit within the financial statements, the Group follows the principal trading considerations applied by
its Generation and Customers businesses when making a sale. In respect of Generation, this reflects the direct costs of the
commodities to generate the power (such as biomass, gas, coal, and carbon, or balancing power purchased) and the relevant grid
connection costs that arise. In respect of Customers, this reflects the direct costs of supply being the costs of the power or gas
supplied, together with costs levied on suppliers such as network costs, broker costs and renewables incentive mechanisms.
Accordingly cost of sales excludes depreciation, presented separately on the face of the income statement, and staff costs to the
extent included in operating and administrative expenses and set out in the table above.
Note:
(1) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
Drax Group plc Annual report and accounts 2020 163
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.3 Operating expenses continued
Auditor’s remuneration
Audit fees:
Fees payable for the audit of the Group’s consolidated financial statements
Fees payable for the audit of the Company’s subsidiaries
Other fees:
Review of the Group’s half-year condensed consolidated financial statements
Other services
Total audit-related fees
Other assurance services
Total non-audit fees
Total auditor’s remuneration
Years ended 31 December
2020
£’000
2019
£’000
1,025.0
38.0
1,063.0
98.0
2.0
1,163.0
226.0
226.0
1,389.0
863.9
36.0
899.9
96.2
2.0
998.1
180.0
180.0
1,178.1
The Group fee relates to the audit of all the subsidiaries to a statutory materiality. In addition, certain head office companies are not
required for the Group audit opinion, the allocation of which is included in the fees payable for the audit of the Company’s
subsidiaries disclosed above. Audit fees payable for the audit of the Group’s consolidated financial statements in 2020 includes
£88,000 in relation to the 2019 audit.
Other assurance services provided by Deloitte LLP in 2020 consist of agreed upon procedures and other assurance services
provided in connection with the bond refinancing in October 2020 and the proposed acquisition of Pinnacle Renewable Energy Inc
(2019: assurance and agreed-upon procedures performed in connection with the bond issuance in May 2019).
Details of the Company’s policy on the use of the auditor for non-audit services, the reasons why the auditor was used rather
than another supplier and how the auditor’s independence and objectivity was safeguarded are set out on the Group‘s website
(https://www.drax.com/about-us/compliance-and-policies/) and discussed further in the Audit Committee Report on page 98.
No services were provided pursuant to contingent fee arrangements.
2.4 Review of fixed assets for impairment
Accounting policy
The Group reviews its fixed assets (or, where appropriate, groups of assets known as cash-generating units (CGUs)) whenever there
is an indication that an impairment loss may have been suffered. The Group assesses the existence of indicators of impairment at
least annually.
In respect of the Customers and Pellet Production businesses, the Group considers the smallest groups of assets that generate
independent cash flows to be equivalent to the operating entities within those businesses – Haven Power, Opus Energy and
Drax Biomass.
In respect of the Generation business, the Group generally considers the smallest groups of assets that generate independent cash
flows to be the individual sites that share common infrastructure and control functions. As described on page 190, following the
decision to cease commercial coal generation at Drax Power Station, a review of CGUs at that site determined the site to be
comprised of two separate CGUs (one for biomass generation assets and one for coal generation assets). Previously, Drax Power
Station was considered a single CGU. As described in further detail below and in note 5.1, following this change the coal CGU was
subsequently fully written down in the period. Accordingly, excluding the fully written down coal CGU, the Generation business is
comprised of (eight CGUs in total) – Drax Power Station (biomass), Damhead Creek, Rye House, Shoreham, Blackburn, Lanark,
Galloway and Cruachan. In addition, the Group considers impairment for the OCGTs as a whole, as these intangible assets have an
indefinite useful life.
If an indication of potential impairment exists, the recoverable amount of the asset or CGU in question is assessed with reference
to the present value of the future cash flows expected to be derived from the continuing use of the asset or CGU (value in use) or
the expected price that would be received to sell the asset to another market participant (fair value less costs to sell). The initial
assessment of recoverable amount is normally based on value in use.
164 Drax Group plc Annual report and accounts 2020
2.4 Review of fixed assets for impairment continued
The assessment of future cash flows is based on the most recent approved business plan and includes all of the necessary
costs expected to be incurred to generate the cash inflows from the CGU’s assets in their current state and condition, including
an allocation of centrally managed costs. Future cash flows include, where relevant, contracted cash flows arising from the
Group’s cash flow hedging activities and as a result the carrying amount of each CGU includes the mark-to-market value of those
cash flow hedges. Assessments of future cash flows consider relevant environmental and climate factors. In particular, macro-
economic, commodity price and third-party cost assumptions reflect considerations in respect of growth in renewable
technologies, electrification and the impact of relevant policies on longer-term supply and demand profiles.
The additional value that could be obtained from enhancing the Group’s assets is not reflected, nor the potential benefit of any
future restructuring or reorganisation that the Group is not yet committed to. In determining value in use, the estimate of future
cash flows is discounted to present value using a rate reflecting the specific risks attributable to the CGU in question.
If the recoverable amount is less than the current carrying amount in the financial statements, a provision is made to reduce the
carrying amount of the asset or CGU to the estimated recoverable amount. Impairment losses are recognised immediately in the
income statement.
Goodwill balances and intangible assets with an indefinite useful economic life are assessed for impairment annually (see note 5.2
and 5.3).
Assessment of indicators of impairment
In February 2020, the Board determined to end commercial coal generation at Drax Power Station in March 2021, with the two coal
units remaining available to meet Capacity Market obligations until September 2022. As a result of this closure decision, which
reflected that the dependencies between the coal and biomass generating units are no longer considered to be significant, the
Group determined the coal generation assets at Drax Power Station were now a separate CGU. An impairment review was
subsequently performed on the coal CGU which resulted in an asset obsolescence charge of £225.9 million, the total net book
value of the assets concerned, being recognised due to the recoverable amount of the CGU being significantly lower than its
carrying amount. Following this charge, the assets in the coal CGU have been fully written down. See note 5.1 for further details.
During the year, the Board also made the decision not to pursue the option to develop a new CCGT at Drax Power Station. This
led to the assets associated with this project becoming obsolete, and therefore an asset obsolescence charge of £13.4 million has
been recognised due to the carrying value of these assets being significantly higher than their recoverable amount of £nil, which
led to the assets being fully written off. In addition to the £13.4 million obsolescence charge, £1.1 million of associated costs are
included within the £30.0 million exceptional operating expenses. See note 2.7.
A review of the Group’s remaining CGUs gave rise to an indicator of impairment for the two CGUs which comprise the Customers
business unit, as a result of the impact of Covid-19 on their financial performance during 2020. As goodwill is attributed
to both of these CGUs, an impairment review is performed annually, see note 5.2.
In determining that no indicator of impairment existed in respect of the remaining CGUs, the Group considered changes in market
prices for commodities, foreign currency exchange rates, changes in macro-economic conditions, potential impacts of climate
change and regulatory requirements since the previous balance sheet date, and the impact of such changes on the Group’s
long-term planning models and future forecast cash flows. Particular consideration was given to assumptions regarding biomass
generation and biomass prices post-2027, when current subsidies for biomass generation are due to expire. Our forecasts indicate
that the majority of the carrying amount of the CGU is supported by pre-2027 cash flows. Whilst the Group has a strategic
imperative to reduce biomass prices over time, as part of a strategy to secure a long-term future for biomass generation, the
long-term models that inform impairment conclusions are subjected to an additional sensitivity to identify the risk that biomass
prices do not reduce significantly in the period up to and following the cessation of subsidies. Further consideration of biomass
prices is included in the Strategic report on pages 1 to 77. Drax Power Station is viewed as having a useful life until 2039 at least and
an expectation of continuing to be in operation until that time.
Impairment considerations for CGUs where goodwill has previously been allocated are set out in note 5.2.
Separate consideration has been given to the impact on the OCGT development assets, see note 5.3.
Apart from the coal generation CGU and Drax Power Station CCGT specific assets, all impairment reviews conducted in
2020 indicated adequate headroom to conclude that no impairment charges were required. Accordingly, apart from the asset
obsolescence charges recognised in relation to the coal generation assets and Drax Power Station CCGT (see note 5.1), no other
amounts have been charged to the income statement in respect of asset impairment in 2020 (2019: No asset obsolescence
charge). Sensitivity analyses are disclosed in respect of the Opus, Lanark and Galloway CGUs and indefinite life OCGT assets
in notes 5.2 and 5.3 respectively. Further sensitivities are not provided on other assets because there are no reasonably possible
sensitivities which would lead to an impairment.
Drax Group plc Annual report and accounts 2020 165
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.5 Net finance costs
Finance costs reflect expenses incurred in managing the debt structure (such as interest payable on bonds) as well as foreign
exchange gains and losses, the unwinding of discounts on provisions for reinstatement of the Group’s sites at the end of their
useful lives (see note 5.4), net interest charged on the Group’s defined benefit pension scheme obligations (see note 6.3) and lease
liabilities (see note 3.2). These are offset by interest income that the Group generates through efficient use of short-term cash
surpluses, for example through investment in money market funds.
Refinancing activity in 2020
Changes in the Group’s financing structure during 2020 are described in note 4.3.
As described in note 2.7, £8.6 million (2019: £5.2 million) of costs associated with the restructuring of the Group’s financing
structure during the year have been excluded from Adjusted Results and are presented as an exceptional item.
Interest payable and similar charges:
Interest payable on borrowings
Interest on lease liabilities
Unwinding of discount on provisions
Amortisation of deferred finance costs – excluding amounts identified below
Other financing charges
Total interest payable and similar charges included in adjusted results
Interest receivable:
Interest income on bank deposits
Net finance credit in respect of defined benefit scheme (note 6.3)
Total interest receivable included in adjusted results
Foreign exchange losses included in adjusted results
Total recurring net finance costs included in adjusted results
Exceptional costs of debt restructure:
Fees to exit existing facilities (note 4.3)
Acceleration of deferred costs in relation to previous facilities
Total exceptional costs of debt restructure
Certain remeasurements on financing derivatives
Total net finance costs
Years ended 31 December
2020
£m
(57.1)
(1.0)
(0.4)
(5.9)
(3.3)
(67.7)
0.3
0.2
0.5
2019(1)
£m
(49.8)
(1.0)
(3.8)
(4.2)
(2.4)
(61.2)
1.3
0.7
2.0
(2.2)
(1.6)
(69.4)
(60.8)
(3.8)
(4.8)
(8.6)
(0.6)
–
(5.2)
(5.2)
2.0
(78.6)
(64.0)
Note:
(1) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
Foreign exchange gains and losses in net finance costs arise on the retranslation of non-derivative balances denominated in
foreign currencies to prevailing rates at the balance sheet date.
2.6 Current and deferred taxation
The tax charge includes both current and deferred tax. Current tax is the estimated amount of tax payable on this year’s taxable
profits (which are adjusted for items upon which the Group is not required to pay tax or, in some cases, for items which are not
allowable for tax purposes) and adjusted for estimates for previous years. Deferred tax is an accounting adjustment which reflects
where more or less tax is expected to arise in the future due to differences between the accounting and tax rules. This is reflected
in differences between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used
in the computation of taxable profits. The tax credit reflects the estimated effective tax on the loss before tax for the Group for
the year ended 31 December 2020 and the movement in the deferred tax balance in the year, so far as it relates to items recognised
in the income statement.
Accounting policy
Current tax, including UK corporation tax and foreign tax, is based on the taxable profit or loss for the year in the relevant
jurisdiction. Taxable profit or loss differs from profit/loss before tax as reported in the income statement, because it excludes
items of income or expenditure that are either taxable or deductible in other years or never taxable/deductible. The Group’s liability
(or asset) for current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been
enacted or substantively enacted by the balance sheet date.
166 Drax Group plc Annual report and accounts 2020
2.6 Current and deferred taxation continued
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable
that taxable profits will be available against which deductible temporary differences can be utilised.
Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other
comprehensive income or directly in equity, in which case the current and deferred tax are recognised in other comprehensive
income or directly in equity respectively.
The Group has utilised the relief available under the research and development expenditure credit regime (RDEC). Under this
regime, research and development tax credits are accounted for as development grants, in line with IAS 20 Government Grants and
are recorded in operating profit within the income statement, with the corresponding receivable being offset against corporation
tax payable.
In accounting for taxation, the Group makes assumptions regarding the treatment of items of income and expenditure for tax
purposes. The Group believes that these assumptions are reasonable, based on prior experience and consultation with advisers.
Full provision is made for deferred taxation at the rates of tax prevailing at the period end date unless future rates have been
substantively enacted. Deferred tax assets are recognised where it is considered more likely than not that they will be recovered.
Where such assets relate to losses incurred by a business unit, particularly one with a history of losses, the Group seeks evidence
other than its own internal forecasts to support recognition of the related deferred tax asset.
Total tax credit comprises:
Current tax
– Current year
– Adjustments in respect of prior periods
Deferred tax
– Before impact of tax rate changes
– Adjustments in respect of prior periods
– Effect of changes in tax rate
Total tax credit
Tax (credited)/charged on items recognised in other comprehensive income:
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme
Deferred tax on cash flow hedges
Deferred tax on cost of hedging
Tax credited on items released directly from equity:
Deferred tax on cost of hedging
Deferred tax on cash flow hedges
Years ended 31 December
2020
£m
2019(1)
£m
11.2
(12.3)
(62.4)
5.3
18.1
(40.1)
29.0
10.0
(39.3)
(7.3)
1.7
(5.9)
Years ended 31 December
2020
£m
0.3
(17.4)
11.7
(5.4)
Years ended 31 December
2020
£m
0.4
(25.3)
(24.9)
2019(1)
£m
(4.3)
(5.1)
9.7
0.3
2019(1)
£m
0.7
(17.1)
(16.4)
UK corporation tax is the main rate of tax for the Group and is calculated at 19% (2019: 19%) of the assessable profit or loss for the
year. Tax for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Certain deferred tax liabilities were valued at 17% in the prior period, being the UK corporation tax rate that had been substantively
enacted at the balance sheet date. On 17 March 2020 the UK Government substantively enacted a main UK corporation tax rate of
19%, giving rise to a charge of £18.1 million (2019: £1.7 million) due to the effect of changes in the tax rate.
Note:
(1) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
Drax Group plc Annual report and accounts 2020 167
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.6 Current and deferred taxation continued
The tax charge for the year can be reconciled to the profit before tax as follows:
Profit/(loss) before tax
Profit/(loss) before tax multiplied by
the rate of corporation tax in the UK
of 19% (2019: 19%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Effect of changes in tax rate
Difference in overseas tax rates
Patent box benefit
Tax effect of RDEC credit
Total tax charge/(credit)
Year ended 31 December 2020
Year ended 31 December 2019(1)
Exceptional
items
and certain
remeasurements
£m
(354.0)
Adjusted
Results
£m
119.3
Total
Results
£m
(234.7)
Exceptional
items
and certain
remeasurements
£m
(133.4)
Adjusted
Results
£m
117.8
22.6
(67.3)
(44.7)
22.4
(25.2)
(7.0)
2.5
13.8
0.1
(8.0)
(1.1)
22.9
–
–
4.3
–
–
–
(63.0)
(7.0)
2.5
18.1
0.1
(8.0)
(1.1)
(40.1)
2.7
0.6
1.7
(0.2)
(8.0)
–
19.2
–
0.1
–
–
–
–
(25.1)
Total
Results
£m
(15.6)
(2.8)
2.7
0.7
1.7
(0.2)
(8.0)
–
(5.9)
As a result of tax relief arising from the UK Patent Box regime (see below), partially offset by US federal tax rates of 21%, in the
medium term the Group anticipates that the underlying effective tax rate will be marginally lower than the main rate
of corporation tax in the UK.
Drax Power was granted a patent to protect certain intellectual property it owns and which attaches to the technology developed
to manage the combustion process in generating electricity from biomass. Under UK tax legislation the Company is entitled to
apply a lower rate of tax to some of its profits each year which are derived from utilisation of that technology.
Note:
(1) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
168 Drax Group plc Annual report and accounts 2020
2.6 Current and deferred taxation continued
The movements in deferred tax assets and liabilities during each year are shown below.
Deferred tax (liabilities)/assets
At 1 January 2019
Credited/(charged) to the
income statement
Credited to other comprehensive
income in respect of actuarial gains
Credited to other comprehensive
income in respect of cash flow hedges
Charged to other comprehensive
income in respect of cost of hedging
Credited to equity in respect
of cash flow hedges
Charged to equity in respect
of cost of hedging
Effect of changes in foreign
exchange rates
At 1 January 2020
Credited to the income statement
Charged to other comprehensive
income in respect of actuarial gains
Credited to other comprehensive
income in respect of cash flow hedges
Charged to other comprehensive
income in respect of cost of hedging
Credited to equity in respect
of cash flow hedges
Charged to equity in respect
of cost of hedging
Effect of changes in foreign
exchange rates
Transferred to liabilities held for sale
At 31 December 2020
Deferred tax balances (after offset)
for financial reporting purposes:
Net deferred tax asset
Net deferred tax liability
Financial
instruments
£m
Accelerated
capital
allowances
£m
Non-trade
losses
£m
(63.8)
(202.9)
2.0
Intangible
assets
£m
(26.1)
Trade
losses
£m
22.2
Other
liabilities
£m
(33.2)
Other
assets
£m
17.7
Total
£m
(284.1)
25.3
8.3
(0.3)
6.0
5.6
5.7
(5.9)
44.7
–
5.1
(9.7)
17.1
(0.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4.3
–
–
–
–
4.3
5.1
(9.7)
17.1
(0.7)
–
(26.7)
9.1
–
(194.6)
13.0
–
1.7
0.6
–
(20.1)
4.4
(0.3)
27.5
6.7
–
(27.5)
4.2
–
16.1
1.0
(0.3)
(223.6)
39.0
–
17.4
(11.7)
25.3
(0.4)
–
–
13.0
–
–
–
–
–
–
(1.4)
(183.0)
13.0
–
–
(183.0)
–
–
–
–
–
–
–
2.3
2.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.3)
(0.3)
–
–
–
–
17.4
(11.7)
25.3
(0.4)
–
–
(15.7)
(0.7)
–
33.5
–
–
(23.3)
(0.3)
–
16.5
(1.0)
(1.4)
(156.7)
–
(15.7)
33.5
–
–
(23.3)
16.5
–
65.3
(222.0)
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so, otherwise they are shown
separately in the balance sheet.
Within the above deferred tax balances is a net deferred tax asset of £33.5 million (2019: £27.8 million) in relation to start-up losses
and other temporary differences in the US-based Pellet Production business. Based on its business plan and reflecting continuing
improvement in operational performance, the Group anticipates that it will generate sufficient profits in the medium term against
which to utilise this asset.
Drax Group plc Annual report and accounts 2020 169
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.7 Certain remeasurements and exceptional items
The Group presents Adjusted Results in the Consolidated income statement. The Directors believe that this approach is useful and
provides a clear and consistent view of trading performance. Certain remeasurements and exceptional items are excluded from
Adjusted Results and presented in a separate column. The Group believes that this presentation provides useful information about
the financial performance of the business and is consistent with the way executive management and the Board assess the
performance of the business.
The Group has a policy and framework for the determination of transactions as exceptional. Transactions presented as exceptional
are also all approved by the Audit Committee. See the Audit Committee Report on page 98 for further details.
In these financial statements, the following transactions have been designated as exceptional items and presented separately:
• Asset obsolescence charges, which related to coal-specific assets associated with the decision to cease commercial coal generation
in 2021 and the decision not to pursue the option of creating a CCGT at Drax Power Station. (2020)
• Operating expenditure which was incurred as a direct result of the decision to cease commercial coal generation. (2020)
• Restructuring and integration costs associated with the acquisition and on-boarding of Drax Generation Enterprise Limited (formerly
ScottishPower Generation Limited) into the Group. (2019)
• Costs incurred as a result of restructuring the Group’s debt in 2020 and 2019, including facility break costs and the acceleration
of the amortisation of deferred finance costs associated with the redeemed facilities. Interest costs in 2019 that related to the
acquisition bridge facility were classified as exceptional, as they relate directly to the acquisition described above.
• Costs and credits arising as a result of major transactions, namely deal costs and costs to close out outstanding trades on the disposal
of the CCGTs, more detail can be found in note 5.5, and proposed acquisition of Pinnacle Renewable Energy Inc.
• Certain remeasurements constitute gains or losses on derivative contracts to the extent that those contracts do not qualify for
hedge accounting, or hedge accounting is not effective, and those gains or losses are either i) unrealised and relate to the delivery
of commodity contracts in future periods, or ii) are realised in relation to the delivery of commodity contracts in the current period.
Once the gains or losses are realised, the previously recognised fair value movements are then reversed through remeasurements
and recognised within Adjusted Results either as revenue or cost of sales. The effect of excluding certain remeasurements from the
Adjusted Results is to reflect commodity sales and purchases at contracted prices i.e. at the all-in-hedged amount paid or received
in respect of the delivery of the commodity in question, to better reflect the trading performance of the Group in Adjusted Results.
Years ended 31 December
Exceptional items:
Inventory provision as a result of coal closure
Acquisition and restructuring costs(2)
Operating expenditure
Asset obsolescence charges
Exceptional items included within Operating Profit
Cost of debt restructure (note 2.5)
Exceptional items included in Profit Before Tax
Taxation on Exceptional items
Exceptional items after taxation
Remeasurements:
Net fair value remeasurements on derivative contracts included in revenue
Net remeasurements realised on maturity of derivative contracts included in revenue
Net fair value remeasurements on derivative contracts included in cost of sales
Net remeasurements realised on maturity of derivative contracts included in cost of sales
Net remeasurements reclassified to profit or loss on discontinued hedges included in cost of sales
Net fair value remeasurements on derivative contracts included in Foreign exchange gains
Remeasurements included in Profit Before Tax
Taxation on certain remeasurements
Remeasurements after taxation
Reconciliation:
Adjusted results
Exceptional items after tax
Remeasurements after tax
Loss after tax
2020
£m
(4.8)
(1.0)
(30.0)
(239.3)
(275.1)
(8.6)
(283.7)
48.6
(235.1)
8.7
1.0
(46.6)
(28.2)
(4.6)
(0.6)
(70.3)
14.4
(55.9)
96.4
(235.1)
(55.9)
(194.6)
2019(1)
£m
–
(9.0)
–
–
(9.0)
(5.2)
(14.2)
2.6
(11.6)
(11.4)
21.9
(76.4)
(55.3)
–
2.0
(119.2)
22.5
(96.7)
98.6
(11.6)
(96.7)
(9.7)
Note:
(1) 2019 figures have been re-presented for the impact of discontinued operations accounting in relation to the sale of the CCGT assets. See note 5.5.
(2)
Acquisition and restructuring costs of £1.0 million relate to costs incurred at the balance sheet date in respect of the proposed acquisition of Pinnacle Renewable
Energy Inc. The Group treats all costs associated with material transactions as exceptional where such costs span multiple periods.
170 Drax Group plc Annual report and accounts 2020
2.7 Certain remeasurements and exceptional items continued
Asset obsolescence charges in the table above is comprised of:
Asset obsolescence charges for property, plant and equipment due to coal closure (note 3.1)
Asset obsolescence charges for intangible assets due to coal closure (note 5.3)
Asset obsolescence charges due to decision not to develop CCGT at Drax Power Station
Total asset obsolescence charges
2.8 Earnings per share
2020
£m
225.1
0.8
13.4
239.3
Earnings per share (EPS) represents the amount of earnings (post-tax profits) attributable to each ordinary share in issue. Basic
EPS is calculated by dividing the Group’s earnings (profit after tax in accordance with IFRS) by the weighted average number of
ordinary shares that were in issue during the year. Diluted EPS demonstrates the impact if all outstanding share options that would
vest on their future maturity dates if the conditions at the end of the reporting period were the same as those at the end of the
contingency period (such as those to be issued under employee share schemes – see note 6.2) were exercised and treated as
ordinary shares as at the balance sheet date.
Earnings attributable to equity holders of the Company (£m), made up of:
Net result from continuing operations
Net result from discontinued operations
Number of shares:
Weighted average number of ordinary shares for the purposes of basic earnings per share (millions)
Effect of dilutive potential ordinary shares under share plans
Weighted average number of ordinary shares for the purposes of diluted earnings per share (millions)
Years ended 31 December
2020
(157.9)
(194.6)
36.7
396.8
8.2
405.0
2019
0.5
(9.7)
10.2
395.5
1.9
397.4
Repurchased shares (see note 4.5) are not included in the weighted average calculation of shares. For the purpose of
calculating diluted earnings per share, the weighted average calculation of shares excludes any share options that would
have an anti-dilutive impact.
Total earnings per share
(Loss)/earnings per share – basic (pence)
(Loss)/earnings per share – diluted (pence)
Years ended 31 December
2020
2019
(39.8)
(39.8)
0.1
0.1
Application of the same calculation to Adjusted profit after tax of £117.6 million results in Adjusted basic EPS of 29.6 pence and
Adjusted diluted EPS of 29.0 pence (2019: Adjusted profit after tax of £118.1 million, Adjusted basic EPS of 29.9 pence and Adjusted
diluted EPS of 29.7 pence).
Earnings per share from continuing operations
Loss per share – basic (pence)
Loss per share – diluted (pence)
Years ended 31 December
2020
2019
(49.0)
(49.0)
(2.5)
(2.5)
Application of the same calculation to Adjusted profit after tax from continuing operations of £96.4 million results in Adjusted basic
EPS of 24.3 pence and Adjusted diluted EPS of 23.8 pence (2019: Adjusted profit after tax from continuing operations of £98.6
million, Adjusted basic EPS of 24.9 pence and Adjusted diluted EPS of 24.8 pence).
Earnings per share from discontinued operations
Earnings per share – basic (pence)
Earnings per share – diluted (pence)
Years ended 31 December
2020
9.2
9.1
2019
2.6
2.6
Application of the same calculation to Adjusted profit after tax from discontinued operations of £21.2 million results in Adjusted
basic EPS of 5.3 pence and Adjusted diluted EPS of 5.2 pence (2019: Adjusted profit after tax from discontinued operations of
£19.5 million, Adjusted basic EPS of 4.9 pence and Adjusted diluted EPS of 4.9 pence).
Drax Group plc Annual report and accounts 2020 171
Strategic reportGovernanceFinancial statementsShareholder information
Section 2: Financial performance continued
2.9 Dividends
Amounts recognised as distributions to equity holders in the year (based on the number of shares
in issue at the record date):
Interim dividend for the year ended 31 December 2020 of 6.8 pence per share paid on 2 October 2020
(2019: 6.4 pence per share paid on 11 October 2019)
Final dividend for the year ended 31 December 2019 of 9.5 pence per share paid on 15 May 2020
(2018: 8.5 pence per share paid on 10 May 2019)
Years ended 31 December
2020
£m
2019
£m
27.0
37.7
64.7
25.4
33.5
58.9
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 2020 of 10.3 pence per share (equivalent to approximately £41 million)
payable on or before 14 May 2021. The final dividend has not been included as a liability as at 31 December 2020. This would bring
total dividends payable in respect of the 2020 financial year to £68 million.
The Group has a long-standing capital allocation policy. This policy is based on a commitment to robust financial metrics that
underpin the Group’s strong credit rating, investment in the core business, paying a sustainable and growing dividend, and
returning surplus capital to shareholders. The Board is confident that the dividend is sustainable and expects it to grow as the
implementation of the Group’s strategy generates an increasing proportion of stable earnings and cash flows. In determining the
rate of growth in dividends the Board will take account of future investment opportunities and the less predictable cash flows from
the Group’s commodity-linked revenue streams.
In future years, if there is a build-up of capital in excess of the Group’s investment needs, the Board will consider the most
appropriate mechanism to return this to shareholders.
Consideration of sustainability, including a link to our dividend, can be found in the Market context section on pages 2 and 3.
2.10 Retained profits
Retained profits are a component of equity reserves. The overall balance reflects the total profits the Group has generated over
its lifetime, reduced by the amount of that profit distributed to shareholders. The table below sets out the movements in retained
profits during the year:
At 1 January
(Loss)/profit for the year
Remeasurement gains/(actuarial losses) on defined benefit pension scheme (note 6.3)
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme (note 2.6)
Equity dividends paid (note 2.9)
Loss on equity investment
Net movements in equity associated with share-based payments (note 6.2)
At 31 December
Years ended 31 December
2020
£m
369.7
(157.9)
1.4
(0.3)
(64.7)
–
5.2
153.4
2019
£m
442.7
0.5
(21.5)
4.3
(58.9)
(0.1)
2.7
369.7
Distributable profits
The capacity of the Group to make dividend payments is primarily determined by the availability of retained distributable profits
and cash resources.
The Parent Company financial statements set out on pages 228 to 234 of this Annual report, disclose the Parent Company’s
distributable reserves of £191.5 million. Sufficient reserves are available across the Group as a whole to make future distributions
in accordance with the Group’s dividend policy for the foreseeable future.
The majority of the Group’s distributable reserves are held in holding and operating subsidiaries. Management actively monitors
the level of distributable reserves in each company in the Group, ensuring adequate reserves are available for upcoming dividend
payments and that the Parent Company has access to these reserves.
The immediate cash resources of the Group of £289.8 million are set out in note 4.2 and the recent history of cash generation
within note 4.4. The majority of these cash resources are held centrally within the Group by Drax Corporate Limited for treasury
management purposes and are available for funding the working capital and other requirements of the Group.
The Group’s financing facilities (see note 4.3) place certain conditions on the amount of dividend payments to be made in any
given year. The Group expects to be able to make dividend payments, in line with its policy, within these conditions for the
foreseeable future.
172 Drax Group plc Annual report and accounts 2020
Section 3: Operating assets and working capital
This section gives further information on the operating assets we use to generate revenue and the short-term liquid assets
and liabilities, managed during day-to-day operations, that comprise our working capital balances.
3.1 Property, plant and equipment
This note shows the cost, depreciation and net book value of the physical assets controlled by the Group that are used in the
businesses to generate revenue. The cost of an asset is what was paid to purchase or construct the asset. Depreciation reflects
the usage of the asset over time and is calculated by taking the cost of the asset, net of any residual value, to the income statement
evenly over the useful economic life of the asset. An asset’s net book value is its cost less any depreciation (including impairment,
if required) charged to date.
Accounting policy
Property, plant and equipment assets are initially measured at cost. Cost comprises the purchase price (after deducting trade
discounts and rebates), any directly attributable costs of bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management and the estimate of the present value of the costs of dismantling
and removing the item and restoring the site. Property, plant and equipment are stated at cost less accumulated depreciation
and any provision for impairment in value.
The Group constructs many of its assets as part of long-term development projects. Assets that are in the course of construction
are not depreciated until they are ready for use in the way intended.
Depreciation is provided on a straight-line basis to write down assets to their residual value evenly over the estimated useful
economic lives (UEL) of the assets from the date that they are brought into use (where relevant, limited to the expected
decommissioning date of the site where the asset is located).
In accordance with IFRS 5, the depreciation on the Gas-fired assets ceased in December 2020, the point at which the assets were
classified as, and transferred to, assets held for sale (note 5.5).
The table below shows the weighted average remaining useful economic lives of the main categories of assets held at the balance
sheet date:
Freehold buildings
Plant and equipment
Electricity generation assets:
Drax Power Station common plant
Drax Power Station biomass-specific assets
Drax Power Station coal-specific assets
Hydro-electric plants (including pumped storage)
Pellet production plant
Other plant, machinery and equipment
Decommissioning asset
Plant spare parts
Average UEL
remaining
22
15
18
–
43
12
15
19
17
Freehold land held at cost is considered to have an unlimited useful life and is not depreciated. The value of freehold land held
at 31 December 2020 is £10.5 million.
The Group’s total commitment for future capital expenditure is disclosed in note 7.7.
An impairment charge is recognised immediately if the carrying value of an asset exceeds its recoverable amount. The Group’s
policy is to recognise an impairment charge through accumulated depreciation and impairment if the asset will continue to be
used by the Group or if the asset will be subsequently sold. Assets that will no longer be used by the Group are disposed of by
removing both the cost and any accumulated depreciation and impairment.
Electricity generation assets are grouped according to the fuel type of the plant. Certain assets at Drax Power Station are common
to the whole plant and are shown separately. Common plant that will continue to be used for biomass generation post coal closure
will continue to be recognised. Any common plant that will no longer be used post coal closure has been considered and impaired
as necessary as part of the asset obsolescence charge recognised relating to the coal closure (see note 5.1).
Pellet production plant includes the US-based assets of the Group’s Pellet Production segment and the assets at the Daldowie
Fuel Plant near Glasgow.
Plant spare parts are depreciated over the remaining useful life of the relevant power station or plant.
Drax Group plc Annual report and accounts 2020 173
Strategic reportGovernanceFinancial statementsShareholder information
Section 3: Operating assets and working capital continued
3.1 Property, plant and equipment continued
Costs relating to major inspections, overhauls and upgrades to the power stations are included in the asset’s carrying amount or
recognised as a separate asset, as appropriate, if the recognition criteria are met; namely, when it is probable that future economic
benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and
maintenance costs are expensed as incurred.
Estimated useful lives and residual values are reviewed annually, taking into account regulatory change and commercial and
technological obsolescence, as well as normal wear and tear. Residual values are based on prices prevailing at the balance sheet
date. Any changes are applied prospectively.
Significant estimation uncertainty
Asset lives are reviewed annually at each balance sheet date taking into consideration the impact of climate and environmental
change. see note 2.4 for further details.
In February 2020, the Government announced its intention to bring forward the closure date for coal by one year to October 2024.
Following a comprehensive review of operations, on 26 February 2020, the Board approved a proposal to accelerate the closure of
the Group’s two remaining coal-fired generating units at Drax Power Station from 2025 to 2022 (see note 5.1). This acceleration of
the closure of the coal generation assets at Drax Power Station, along with a continued reduction in the interdependencies
between the coal generation assets and the biomass generation assets at the site, has resulted in the coal generation assets
becoming a separate CGU. The coal CGU has been reviewed for impairment and, as a result of this review, an asset obsolescence
charge of £225.9 million has been recognised in the current year, of which £225.1 million relates to property plant and equipment.
See note 2.7 for further details.
At each balance sheet date the Group reviews its property, plant and equipment to determine whether there is any indication that
these assets may be impaired. The Group’s accounting policy in respect of impairment, along with details of the impairment review
conducted during 2020, are set out in note 2.4.
Cost:
At 1 January 2019
Additions at cost
Disposals
Issues/transfers
Effect of foreign exchange rates
At 1 January 2020
Additions at cost
Disposals
Asset obsolescence (note 2.7)
Issues to maintenance projects
Transfers between categories
Transfers to intangible assets
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Accumulated depreciation and impairment:
At 1 January 2019
Depreciation charge for the year
Disposals
Issues/transfers
Effect of foreign exchange rates
At 1 January 2020
Depreciation charge for the year
Asset obsolescence (note 2.7)
Disposals
Issues to maintenance projects
Transfers between categories
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Net book value at 31 December 2019
Net book value at 31 December 2020
174 Drax Group plc Annual report and accounts 2020
Freehold land
and buildings
£m
Plant and
equipment
£m
Plant spare
parts
£m
Assets under the
course of
construction
£m
495.6
0.4
–
(70.0)
(4.1)
421.9
–
(1.4)
–
–
13.0
–
(40.8)
(3.4)
389.3
78.2
12.8
–
–
(0.9)
90.1
13.6
0.2
(0.4)
–
0.2
(0.3)
(1.0)
102.4
331.8
286.9
2,733.5
5.3
(0.8)
123.6
(9.9)
2,851.7
29.6
(16.7)
–
–
109.2
–
(129.5)
(8.0)
2,836.3
971.9
142.7
(0.7)
–
(2.2)
1,111.7
128.0
223.3
(10.2)
–
(4.5)
(29.9)
(2.8)
1,415.6
1,740.0
1,420.7
66.0
8.2
(1.4)
(3.7)
–
69.1
6.5
–
–
(5.4)
2.9
–
(3.5)
–
69.6
20.6
3.5
(1.1)
(4.9)
–
18.1
2.5
1.6
–
(1.2)
4.3
(0.4)
–
24.9
51.0
44.7
123.2
137.4
(0.9)
(54.6)
(0.5)
204.6
183.9
–
(13.4)
–
(125.1)
(5.7)
(52.2)
(3.3)
188.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
204.6
188.8
Total
£m
3,418.3
151.3
(3.1)
(4.7)
(14.5)
3,547.3
220.0
(18.1)
(13.4)
(5.4)
–
(5.7)
(226.0)
(14.7)
3,484.0
1,070.7
159.0
(1.8)
(4.9)
(3.1)
1,219.9
144.1
225.1
(10.6)
(1.2)
–
(30.6)
(3.8)
1,542.9
2,327.4
1,941.1
3.1 Property, plant and equipment continued
The charge for depreciation to the income statement comprises the following:
Total depreciation charged on property, plant and equipment
Total depreciation and impairments charged on right-of-use assets (note 3.2)
Less:
Depreciation charged on property, plant and equipment held for sale (note 5.5)
Depreciation charged on right-of-use assets held for sale (note 5.5)
Depreciation charged for continuing operations
Plant and equipment shown above includes the following categories of assets:
Biomass and
coal plant
£m
Hydro-electric
plant
£m
Gas thermal
plants
£m
Pellet
production
plant
£m
Cost:
At 1 January 2019
Additions at cost
Disposals
Issues/transfers
Effect of foreign exchange rates
At 1 January 2020
Additions at cost
Disposals
Transfers between categories
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Accumulated depreciation and impairment:
At 1 January 2019
Depreciation charge for the year
Disposals
Issues/transfers
Effect of foreign exchange rates
At 1 January 2020
Depreciation charge for the year
Asset obsolescence
Disposals
Transfers between categories
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Net book value at 31 December 2019
Net book value at 31 December 2020
1,924.6
–
(0.4)
46.0
–
1,970.2
29.1
(6.3)
79.9
–
–
2,072.9
914.2
91.5
(0.3)
8.2
–
1,013.6
70.9
223.2
(5.2)
(4.1)
–
–
1,298.4
956.6
774.5
379.5
–
–
87.0
–
466.5
–
–
4.5
–
–
471.0
–
15.0
–
–
–
15.0
13.3
–
–
(0.2)
–
–
28.1
451.5
442.9
120.6
–
–
(2.9)
–
117.7
–
–
11.8
(129.5)
–
–
–
11.3
–
–
–
11.3
18.6
0.1
–
(0.1)
(29.9)
–
–
106.4
–
296.4
4.8
–
(8.7)
(9.9)
282.6
–
(10.4)
12.2
–
(8.0)
276.4
49.2
22.2
–
(6.7)
(2.2)
62.5
22.7
–
(5.0)
(0.1)
–
(2.8)
77.3
220.1
199.1
Years ended 31 December
2020
£m
144.1
7.9
(18.3)
(0.6)
133.1
Other
£m
12.4
0.5
(0.4)
2.2
–
14.7
0.5
–
0.8
–
–
16.0
8.5
2.7
(0.4)
(1.5)
–
9.3
2.5
–
–
–
–
–
11.8
5.4
4.2
2019
£m
159.0
6.9
(13.8)
(0.6)
151.5
Total
plant and
equipment
£m
2,733.5
5.3
(0.8)
123.6
(9.9)
2,851.7
29.6
(16.7)
109.2
(129.5)
(8.0)
2,836.3
971.9
142.7
(0.7)
–
(2.2)
1,111.7
128.0
223.3
(10.2)
(4.5)
(29.9)
(2.8)
1,415.6
1,740.0
1,420.7
Issues and transfers reflect changes in the categorisation of assets during the period e.g. when an asset under construction is
complete, it is transferred to the relevant depreciable asset category, or the issue of spare parts for use in repair and maintenance
projects. When spare parts are utilised in such projects, the net book value of the part is transferred from the property, plant and
equipment balance and recognised as an expense in the income statement within operating costs.
Drax Group plc Annual report and accounts 2020 175
Strategic reportGovernanceFinancial statementsShareholder information
Section 3: Operating assets and working capital continued
3.2 Leases
Accounting policy
IFRS 16 determines a control model to distinguish between lease agreements and service contracts on the basis of whether the
use of an identified asset is controlled by the Group for a period of time. If the Group is deemed to have control of an identified
asset, then a lease is recognised on the balance sheet. A right-of-use asset and a corresponding lease liability are recognised.
The right-of-use asset is initially measured at cost and is subsequently measured at cost less accumulated depreciation and
accumulated impairment losses.
The lease liability is initially measured at the present value of the future lease payments discounted using the discount rate that is
implicit in the lease. If this discount rate cannot be determined from the agreement, the liability is discounted using an incremental
borrowing rate. Incremental borrowing rates are calculated bi-annually. The borrowing rate for leased property is derived with
reference to property yields specific to the location of the leased property and property type. For non-property leases, the
borrowing rate is derived from a series of inputs including a risk-free rate based on LIBOR curves and an adjustment for credit
risk based on the Group’s credit rating. The liability is subsequently adjusted for interest, repayments and other modifications.
Lease modifications are accounted for as a separate lease where the scope of the lease increases through the right to use one or
more underlying assets, and where the consideration of the lease increases by an amount that is equivalent to the standalone price
of the increase in scope. Where a modification decreases the scope of the lease, the carrying amount of the right-of-use asset is
adjusted and a gain or loss is recognised in proportion to the decrease in scope of the lease. All other modifications are accounted
for as a reassessment of the lease liability with a corresponding adjustment to the right-of-use asset.
Lease extension or termination options are included within the lease term when the Group, as the lessee, has the discretion to
exercise the option and where it is probable that the option will be exercised.
Leases with a term shorter than 12 months or where the identified asset has a value below £3,500 are expensed to the income
statement on a straight-line basis over the term of the agreement.
Right-of-use assets
Cost and carrying amount:
At 1 January 2019
Additions at cost
Effect of foreign exchange rates
At 1 January 2020
Additions at cost
Disposals
Remeasurements
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Accumulated depreciation and impairment
At 1 January 2019
Depreciation charge for the year
Impairment
Effect of foreign exchange rates
At 1 January 2020
Depreciation charge for the year
Disposals
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Net book value at 31 December 2019
Net book value at 31 December 2020
176 Drax Group plc Annual report and accounts 2020
Land and
buildings
£m
Plant and
equipment
£m
23.4
0.9
(0.1)
24.2
6.3
(0.2)
–
(6.5)
(0.1)
23.7
–
3.5
0.3
–
3.8
3.6
(0.2)
(1.2)
0.1
6.1
20.4
17.6
13.7
0.7
(0.4)
14.0
4.7
(0.7)
0.1
–
(0.3)
17.8
–
3.1
–
(0.1)
3.0
4.3
(0.7)
–
(0.2)
6.4
11.0
11.4
Total
£m
37.1
1.6
(0.5)
38.2
11.0
(0.9)
0.1
(6.5)
(0.4)
41.5
–
6.6
0.3
(0.1)
6.8
7.9
(0.9)
(1.2)
(0.1)
12.5
31.4
29.0
3.2 Leases continued
Lease liabilities
Carrying amount:
At 1 January 2019
Additions
Interest charged to the income statement
Payments
Effect of foreign exchange rates
At 1 January 2020
Additions
Remeasurements
Interest charged to the income statement
Payments
Transfers to liabilities directly associated with assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Total
£m
37.6
1.5
1.2
(7.4)
(0.4)
32.5
11.0
0.1
1.2
(8.8)
(5.6)
(0.2)
30.2
The existence of termination, extension and purchase options have not had a material impact on the determination of the
lease liabilities.
In addition to the payments disclosed above, the Group also made total payments of £0.9 million (2019: £0.7 million) during the year
in relation to short-term and low value leases. The value of commitments for short-term and low value lease is immaterial.
The maturity of the gross undiscounted lease liabilities at 31 December 2020 is as follows:
Within one year
Within one to two years
Within two to five years
After five years
Total gross payments
Effect of discounting
Lease liabilities recognised in the balance sheet
Current portion
Non-current portion
Total
2020
£m
7.9
5.9
12.6
8.4
34.8
(4.6)
30.2
7.0
23.2
The Group recognised the following charges from continuing operations relating to leases in the income statement:
Expense for short-term leases
Interest expense on leases
Depreciation and impairment expense on leases
3.3 Other fixed asset investments
Other fixed asset investments include equity investments held by the Group.
Total
2020
£m
0.8
1.0
7.3
2019
£m
7.2
6.2
13.0
10.6
37.0
(4.5)
32.5
6.3
26.2
2019
£m
0.7
1.0
6.3
Accounting policy
Other fixed asset investments are recognised at fair value, based on quoted market prices where available, at the balance sheet
date. The Group designates all of its investments as fair value through other comprehensive income (FVOCI), as they are intended
to be held and not traded, in accordance with IFRS 9. Where quoted market prices are not available fair value is estimated based on
all available information.
At 1 January
Additions
Disposals
Fair value losses
At 31 December
Total fixed asset investments
2020
£m
3.0
–
(1.5)
–
1.5
2019
£m
2.4
0.7
–
(0.1)
3.0
During the year, the Group disposed of its entire investment in Aggregated Micro Power Holdings Limited (formerly Aggregated
Micro Power Holdings plc) for cash consideration of £1.5 million.
See note 7.1 for details on the fair value measurement of investments.
Drax Group plc Annual report and accounts 2020 177
Strategic reportGovernanceFinancial statementsShareholder information
Section 3: Operating assets and working capital continued
3.4 ROC assets
The Group earns ROC assets, which are accredited by the Office for Gas and Electricity Markets (Ofgem), as a result of burning
sustainable compressed wood pellets to generate electricity at Drax Power Station and generating renewable energy at a certain
number of the Group’s hydro plants. This note sets out the value of these assets that the Group held at the year end.
Accounting policy
ROCs are recognised as current assets in the period they are generated and are initially measured at fair value based on anticipated
sales prices. The value of ROCs earned is recognised in the income statement as a reduction to costs of sales in that period.
Where the Customers business incurs an obligation to deliver ROCs to Ofgem, that obligation is provided for in the period incurred.
At each reporting date the Group reviews the carrying value of ROC assets held against updated anticipated sales prices. Where
relevant, this takes account of agreed forward sale contracts and the likely utilisation of ROCs generated to settle the Group’s own
ROC obligations. Any impairment is recognised in the period incurred.
Historical experience indicates that the assumptions used in the valuation are reasonable; however, actual sales prices may
subsequently differ from those assumed.
ROC valuations are comprised of two parts: the expected value to be obtained in a sale transaction with a third-party supplier
relating to the buy-out price and an estimate of the future benefit that may be obtained from the ROC recycle fund at the end
of the compliance period. The recycle fund provides a benefit where supplier buy-out charges (incurred by suppliers who do not
procure sufficient ROCs to satisfy their obligations) are paid over to suppliers who presented ROCs in a compliance period on a
pro-rata basis. The estimate is based on assumptions about likely levels of renewable generation and also the demand for ROCs
over the compliance period and is thus subject to some uncertainty. The Group utilises external sources of information in addition
to its own forecasts in making these estimates. Past experience indicates that the values arrived at are reasonable, but they remain
subject to possible variation.
Carrying amount:
At 1 January
Earned from generation
Purchased from third parties
Utilised by the Customers business
Sold to third parties
At 31 December
Total
2020
£m
162.7
489.5
504.1
(376.0)
(640.7)
139.6
Total
2019
£m
216.7
527.8
513.1
(360.3)
(734.6)
162.7
Recognition of revenue from the sale of ROCs is described in further detail on page 162.
3.5 Inventories
The Group holds stocks of fuels and other consumable items that are used in the process of generating electricity and raw
materials used in the production of compressed wood pellets. This note shows the cost of biomass, coal, other fuels and plant
consumables held at the end of the year.
Accounting policy
The Group’s raw materials and fuel stocks are valued at the lower of the weighted average cost to purchase and net realisable value.
The cost of fuel stocks includes all direct costs and overheads incurred in bringing the fuel to its present location and condition,
including the purchase price, import duties and other taxes (including amounts levied on coal under the UK carbon price support
mechanism) and transport/handling costs. The Group uses forward foreign currency exchange contracts to hedge the costs
denominated in foreign currencies. Where these contracts are designated into hedge relationships in accordance with IFRS 9,
the stock cost is recognised at the hedged value and all such gains and losses are included in cost of sales when they arise.
Both biomass and coal inventories are weighed when entering, moving within or exiting the Group’s sites using technology
regularly calibrated to industry standards. The Group does not anticipate purchasing any more coal inventory. Fuel burn in the
electricity generation process is calculated using a combination of weights and thermal efficiency calculations to provide closing
inventory volumes. Both calibrated weighers and efficiency calculations are subject to a range of tolerable error. All fuel inventories
are subject to regular surveys to ensure these measurements are sufficiently accurate.
Coal inventories are verified by an independent inventory survey carried out by a suitably trained specialist and a provision
is made where the survey indicates a lower level of inventory than indicated by the methods described above. Despite being
an independent process, the survey depends on estimates and assumptions and as a result actual values may differ.
178 Drax Group plc Annual report and accounts 2020
3.5 Inventories continued
The characteristics of biomass require specialist handling and storage. Biomass at Drax Power Station is stored in sealed domes
with a carefully controlled atmosphere for fire prevention purposes and thus cannot be surveyed using traditional methods.
Biomass stock is surveyed using regularly calibrated RADAR scanning technology to support the methods outlined above.
Biomass
Coal
Other fuels and consumables
As at 31 December
2020
£m
160.1
24.4
23.7
208.2
2019
£m
164.9
103.1
24.0
292.0
The net realisable value of coal in the table above is stated after provisions of £4.8 million (2019: £nil). The majority of this provision
relates to inventory that the Group anticipates it will not be possible to utilise in the period before the coal units are closed in
September 2022.
Inventories of biomass at the 31 December 2020 include £3.1 million (2019: £2.6 million) of fibre and other raw materials to be
utilised in the production of compressed wood pellets.
The cost of inventories recognised as an expense in the year ended 31 December 2020 was £1,045.8 million (2019: £1,001.3 million).
This includes the value of write downs of inventory in the year described above of £4.8 million (2019: £nil) and the reversal of
previously written down inventories of £0.2 million (2019: £nil).
3.6 Trade and other receivables
Trade receivables represent amounts owed by customers for goods or services provided but that have not yet been paid for.
Accrued income represents income earned in the period but not yet invoiced, largely in respect of power delivered that will be
invoiced the following month.
Accounting policy
Trade and other receivables are initially measured at transaction price and subsequently measured at amortised cost.
The Group has access to receivables monetisation facilities under which trade receivables can be sold to a third party on a
non-recourse basis. Receivables sold under such facilities are accounted for at fair value through other comprehensive income
(FVTOCI) in accordance with IFRS 9 due to the objective of the business model being achieved by both collecting contractual
cashflows and the selling of the financial assets. All receivables that fall under this business model are sold under these facilities.
These receivables are derecognised at the point of sale which is shortly after the initial recognition of the receivable balance.
As a result, no fair value gains or losses have been recognised. Fees are recognised in the income statement as incurred.
Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments
Other receivables
Years ended 31 December
2020
£m
158.0
211.7
92.5
63.1
525.3
2019
£m
134.4
352.6
67.3
54.5
608.8
Trade receivables and accrued income principally represent sales of energy to counterparties within both the Generation and
Customers businesses. At 31 December 2020, the Group had amounts receivable from two significant counterparties representing
12% of total trade receivables and accrued income (2019: two significant counterparties representing 18% of total trade receivables
and accrued income).
Of total trade receivables and accrued income at 31 December 2020, £257.4 million (2019: £275.0 million) relates to the
Customers business.
Drax Group plc Annual report and accounts 2020 179
Strategic reportGovernanceFinancial statementsShareholder information
Section 3: Operating assets and working capital continued
3.6 Trade and other receivables continued
Contract assets relate to amounts for goods or services provided under customer contracts, where the entitlement to
consideration is contingent on something other than the passage of time. The Group has recognised a contract asset for any
services provided where payment is not yet due. The balances are included within accrued income. Any amount previously
recognised as a contract asset is reclassified to trade receivables at the point at which it is invoiced to the customer, usually
in the following financial period. The reconciliation from opening to closing contract assets is as follows:
At 1 January
Additions as a result of changes in the measure of progress of balances brought forward
Additions as a result of new contracts
Contract assets transferred to trade receivables
Transfers to assets held for sale
At 31 December
Years ended 31 December
2020
£m
6.7
1.9
0.1
(6.7)
(0.2)
1.8
2019
£m
4.3
6.7
–
(4.3)
–
6.7
Impairment of financial assets
Accounting policy
The Group applies the impairment model in IFRS 9 to provide for expected credit losses on the Group’s financial assets including
trade receivables, accrued income, contract assets and other financial assets. The provision for impairment of trade receivables
(including accrued income) and contract assets is measured at an amount equal to the lifetime expected credit loss. Contract
assets relate to amounts for goods or services provided under customer contracts and therefore have substantially the same risk
characteristics as the trade receivables for the same types of contracts.
For other financial assets, the Group recognises a lifetime expected credit loss provision when there has been a significant increase
in credit risk since initial recognition. If the credit risk of the financial instrument has not increased significantly since initial
recognition, the Group recognises a 12-month expected credit loss provision.
The greatest concentration of credit risk exists in the Customers business. The risk in this business is more prevalent within the
SME customer base due to the wide range of customer characteristics within the portfolio. The loss provisioning for these
customers is complex and requires a provisioning tool that is more dynamic than the provision matrix method. The provision matrix
method is used for the Group’s larger consumers within the Customers business and customers within the Generation and Pellet
Production businesses.
The Group considers default to be when a customer is in breach of its terms.
The Group writes off a financial asset when there is no realistic prospect of recovery and all attempts to recover the balance have
been exhausted. An indication that all credit control activities have been exhausted is where the debt is greater than 365 days old
or where there are insolvency issues relating to the customer.
Key sources of estimation uncertainty
As a result of Covid-19, the Group has significantly increased its expectation of potential customer business failure rates and the
resulting expected credit losses within the Customers business. Whilst the position adopted reflects the Group’s current best
estimate of possible outcomes, actual rates of bad debt will depend upon the severity and depth of Covid-19. See page 152 for
further details.
Combined probability method
During 2019, the Group implemented a new machine learning algorithm to calculate expected credit losses for its SME customer
base. The algorithm predicts the future performance of a debt on an individual account basis using a broad range of indicators that
are specific to the customer. The algorithm assesses the likelihood of the debt becoming more than 365 days past due and the
likelihood of the customer subsequently defaulting on this debt. The algorithm combines historical default experience and
economic conditions that may impact the probability of future defaults.
A binary method was adopted in 2019. This method provided in full for debt where the debt was more likely than not (i.e. more than
50% probability) to become both aged over 365 days and then subsequently default. The Group considered that the overall provision
applied from this method and other overlay assumptions was adequate to reflect the risk of default across the whole portfolio.
Since initial implementation in 2019, the algorithm has continued to learn and develop, improving the accuracy of the provisioning
estimations. The model no longer adopts a binary approach to the provisioning but instead calculates a specific probability of
default for each customer which is then applied to the corresponding debt. The model is now trained on 2020 data and so
incorporates experience of the Covid-19 impacted periods. A judgement overlay has also been included to capture Management’s
estimation of residual risk relating to Covid-19 not yet fully reflected within the data that the model has been trained on.
The Group defines low credit risk as customers that have a probability of less than 25% of defaulting.
180 Drax Group plc Annual report and accounts 2020
3.6 Trade and other receivables continued
Provision matrix method
Larger customers within the Group are grouped according to the age of the debt based on the number of days past due.
The provision rates are based on historical collection rates and an expectation of future cash collection. The rate of default
increases once the balance is 30 days past due and subsequently in 30-day increments.
The movement in the overall allowance for expected credit losses is laid out in the following table:
At 1 January
Amounts written off
Additional amounts provided against
At 31 December
Gross trade receivables
Average ECL %
Combined
probability
method
£m
37.8
(29.5)
43.1
51.4
172.1
30%
2020
Provision
matrix
method
£m
2.9
(2.7)
4.8
5.0
42.3
12%
Combined
probability
method
£m
39.5
(23.7)
22.0
37.8
157.7
24%
2019
Provision
matrix
method
£m
4.5
(3.7)
2.1
2.9
17.4
17%
Total
£m
40.7
(32.2)
47.9
56.4
214.4
26%
Total
£m
44.0
(27.4)
24.1
40.7
175.1
23%
The provision above relates to trade receivables in the Customers business. The risk of default within the Generation and Pellet
Production businesses is considered to be extremely low and the calculated provision is negligible. This is supported by strong
historic collection rates and timely receipts. The expected credit loss provision calculated for other financial assets of the Group
was negligible. In terms of sensitivity, the year end provision represents 28% of the gross Customers trade receivables balance.
If the coverage were to increase/(decrease) by 1%, the provision value would increase/(decrease) by £2.0 million.
Credit and counterparty risk are disclosed in further detail in note 7.2.
The net charge to the income statement in 2020 for impairment losses on financial assets was £43.1 million (2019: £18.0 million).
This is the net of the additional amounts provided against in relation to trade receivables of £47.9 million (2019: £24.1 million) less
a £4.8 million benefit in the period in respect of resolution of legacy credit balances (2019: £6.1 million benefit).
The value of provisions calculated using the combined probability model is set out below. This shows the trade receivables
balances for SME consumers within the Customers business grouped by the combined probability assigned by the model.
The following table shows the comparative risk profile of amounts due based on the combined probability model at 31 December.
Probability of default range %
80–100
50–79
26–49
0–25
Total
Provision for specific debt
Other adjustments
Closing provision
2020
2019
Estimated gross
carrying amount
at default
£m
Lifetime
expected
credit losses
£m
Estimated gross
carrying amount
at default
£m
Lifetime
expected
credit losses
£m
36.8
16.5
18.7
100.1
172.1
22.7
17.2
14.0
103.8
157.7
29.7
8.9
5.6
1.7
45.9
–
5.5
51.4
19.3
14.6
3.7
–
37.6
0.2
–
37.8
The other adjustments of £5.5 million reflects the judgement overlay discussed above to capture management’s estimation
of residual risk relating to Covid-19 on future cash collection performance (2019: £nil).
Drax Group plc Annual report and accounts 2020 181
Strategic reportGovernanceFinancial statementsShareholder information
Section 3: Operating assets and working capital continued
3.6 Trade and other receivables continued
The value of provisions calculated using the Group’s provision matrix method is set out below. This shows the risk profile in 30-day
increments of the trade receivables, accrued income and contract assets of the Group’s larger consumers within the Customers
business and customers within the Generation and Pellet Production businesses at 31 December 2020.
Accrued income
Balances not yet
due
Balances
not yet due
Between
0-30 days
Between
31-60 days
Between
61-90 days
Over
90 days
Trade receivables
Total
Total
Trade receivables days past due
Group
Expected credit
loss rate – %
Estimated total gross
carrying amount
at default – £m
Lifetime expected
credit losses – £m
2%
3%
15%
3%
37%
68%
12%
3%
215.2
22.9
3.5
0.7
2.5
0.4
11.3
0.3
0.6
0.2
5.0
3.4
42.3
257.5
5.0
8.5
The expected credit loss rate is a weighted average for the portfolio of larger trade receivables associated with the Customers
business. Contract assets, included within accrued income, and the majority of the trade receivables balances not yet due are held
in the Generation business where the risk of default is considered to be extremely low and immaterial to provide for. This is
supported by strong historic collection rates and timely receipts.
The provision for expected credit losses is implicit in the calculation of accrued income and as a result, the additional amounts
provided against relating to accrued income of £3.5 million (2019: £5.8 million) are recognised as a reduction of revenue in the
income statement.
The following table shows the comparative risk profile of amounts due from other customers based on the Group’s provision matrix
at 31 December 2019.
Accrued income
Balances not yet
due
Balances
not yet due
Between
0-30 days
Between
31-60 days
Between
61-90 days
Over
90 days
Trade receivables
Total
Total
Trade receivables days past due
Group
Expected credit
loss rate – %
Estimated total gross
carrying amount at
default – £m
Lifetime expected
credit losses – £m
2%
358.4
5.8
3%
7.1
0.4
9%
2.9
0.2
5%
13%
82%
17%
2%
3.8
0.2
1.2
0.2
2.4
1.9
17.4
2.9
375.8
8.7
3.7 Contract costs
The Group incurs costs of obtaining contracts in the Customers business.
Accounting policy
Management expects that incremental broker fees paid to intermediaries as a result of obtaining electricity and gas contracts
are recoverable. The Group has therefore capitalised them as contract costs at the point the fee is paid. The fees are amortised
on a straight-line basis over the contract period in line with the recognition of revenue. The balance is included within prepayments
in note 3.6. This amount includes both current and non-current balances. No impairment losses were recognised in either year. The
reconciliation from opening to closing contract costs is as follows:
At 1 January
Additions
Amortisation
At 31 December
182 Drax Group plc Annual report and accounts 2020
Years ended 31 December
2020
£m
42.3
26.9
(29.1)
40.1
2019
£m
39.0
33.7
(30.4)
42.3
3.8 Trade and other payables
Trade and other payables represent amounts the Group owes to its suppliers (for trade purchases and ongoing costs), tax
authorities and other creditors that are due to be paid in the ordinary course of business. The Group makes accruals for amounts
that will fall due for payment in the future as a result of the Group’s activities in the current period (e.g. fuel received but for which
the Group has not yet been invoiced).
Accounting policy
Trade and other payables are measured at amortised cost.
The Group facilitates a supply chain finance scheme, a form of reverse factoring under which certain suppliers can obtain early
access to funding. There are no changes to the Group’s payment terms under this arrangement, nor would there be if the
arrangement was to fall away. The amount due is recognised in trade payables.
The Group also has access to payment facilities, utilised to leverage scale and efficiencies in transaction processing. Under
these facilities the Group benefits from a short extension to payment terms, within a normal working capital cycle, for a small fee.
The original liability is derecognised and the amount due to the facility provider is recognised in other payables. Fees are
recognised in the income statement in the period incurred.
The Group does not include trade and other payables in its calculation of net debt, see note 4.1.
Trade payables
Fuel accruals
Energy supply accruals
Other accruals
Other payables
Contract liabilities
As at 31 December
2020
£m
112.9
57.9
326.2
222.0
176.9
11.1
907.0
2019
£m
175.0
86.1
364.2
208.8
183.3
21.8
1,039.2
Trade payables includes £2.5 million (2019: £4.5 million) due after more than one year.
The Group has not utilised any Covid-19 Government support schemes in the year.
Trade payables includes £43.7 million (2019: £33.1 million) related to reverse factoring. Other payables include £63.7 million
(2019: £90.6 million) due under other payment facilities.
Other payables includes £nil of ROC sales made in the period which the Group have not yet been accredited for (2019: £55.0
million).
Energy supply accruals includes £222.9 million (2019: £250.0 million) in relation to the Group’s obligation to deliver ROCs arising
from Customers activities. The remaining balance principally comprises third party grid charge accruals of £35.4 million (2019:
£42.8 million) and Feed-in-Tariff accruals of £31.6 million (2019: £30.4 million).
The Group recognises a liability in respect of its unsettled obligations to deliver emissions allowances under the EU Emission
Trading Scheme (ETS). Other accruals at 31 December 2020 includes £37.5 million (2019: £25.5 million) with respect to the Group’s
estimated net liability to deliver carbon emissions allowances. Allowances are purchased in the market and are recorded at cost.
Other accruals also includes accruals for capital and operating expenditure where the invoice has not yet been received.
Contract liabilities primarily relate to the advance consideration received from customers for fixed price electricity and gas
contracts, for which revenue is recognised based on the stage of completion of the multi-year contract. The balance reduces
as revenue is subsequently recognised in the following period, offset by further advance consideration received. The reconciliation
of opening to closing contract liabilities is as follows:
At 1 January
Revenue recognised in the year that was included in the contract liability at the start of the period
Additions as a result of cash received from customers in the period not yet recognised in revenue
At 31 December
Contract liabilities at 31 December 2020 includes £3.5 million due after more than one year (2019: £8.5 million).
Years ended 31 December
2020
£m
21.8
(13.3)
2.6
11.1
2019
£m
20.0
(12.5)
14.3
21.8
Drax Group plc Annual report and accounts 2020 183
Strategic reportGovernanceFinancial statementsShareholder information
Section 4: Financing and capital structure
This section provides further information about the Group’s capital structure (equity and debt financing) and cash generated from
operations during the year.
4.1 Reconciliation of net debt
Net debt is calculated by taking the Group’s borrowings (note 4.3) and subtracting cash and cash equivalents (note 4.2). The table
below reconciles net debt in terms of changes in these balances across the year.
Net debt at 1 January
(Decrease)/increase in cash and cash equivalents
Decrease/(increase) in borrowings
Effect of changes in foreign exchange rates
Net debt at 31 December
Years ended 31 December
2020
£m
(841.1)
(114.2)
165.3
14.1
(775.9)
2019
£m
(319.1)
121.9
(645.3)
1.4
(841.1)
Borrowings include listed bonds, bank debt and revolving credit facilities (RCFs), net of any deferred finance costs. Borrowings do
not include other financial liabilities such as IFRS 16 lease liabilities, pension obligations and trade and other payables.
The Group does not include lease liabilities, calculated in accordance with IFRS 16, in the definition of net debt. This reflects the
nature of the contracts included in this balance which, prior to the application of IFRS 16, were predominantly not held on the
balance sheet and instead disclosed as operating commitments.
A reconciliation of the change in borrowings during the year is set out in the table on page 185.
The Group has entered into cross-currency interest rate swaps, fixing the sterling value of the principal repayments in respect
of the Group’s US dollar (USD) and euro denominated debt (see note 4.3). If USD and euro balances were translated at the hedged
rate, rather than the rate prevailing at the balance sheet date, the carrying amount of the Group’s borrowings would be impacted.
The table below reconciles net debt excluding the impact of hedging instruments, as disclosed in the table above, to net debt
including the impact of hedging instruments through translating the borrowings at the hedged rates.
Net debt excluding the impact of hedging instruments at 31 December
Impact of hedging instruments
Net debt including the impact of hedging instruments at 31 December
Years ended 31 December
2020
£m
(775.9)
(43.2)
(819.1)
2019
£m
(841.1)
(3.9)
(845.0)
4.2 Cash and cash equivalents
Cash and cash equivalents include cash held in current and other deposit accounts that is accessible on demand. It is the Group’s
policy to invest available cash on hand in short-term, low-risk bank accounts or deposit accounts.
Cash and cash equivalents
As at 31 December
2020
£m
289.8
2019
£m
404.1
4.3 Borrowings
Accounting policy
The Group measures all debt instruments (whether financial assets or financial liabilities) initially at fair value, which equates
to the principal value of the consideration paid or received. Subsequent to initial measurement, debt instruments are measured
at amortised cost using the effective interest method. Transaction costs (any such costs incremental and directly attributable
to the issue of the financial instrument) are included in the calculation of the effective interest rate and are amortised over the
life of the instrument.
Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that
some or all of the facility will be drawn down. Loan commitment fees payable to the lender, which entitle the Group to draw down
at any time over a fixed period, but the repayment date is fixed regardless of when the loan is drawn down, are recognised on a
systematic basis over the period the Group is able to draw down. Loan commitment fees payable to the lender, which entitle the
Group to draw down at any time over a fixed period, but the loan has the same fixed term regardless of when the loan is drawn
down, are deferred until draw down and recognised over the life of the instrument as part of the effective interest rate, if draw down
is probable. If draw down is not probable they are recognised on a systematic basis over the period the Group is able to draw down.
184 Drax Group plc Annual report and accounts 2020
4.3 Borrowings continued
Fees that are paid for the availability of a facility, such that the amount and timing of draw down can vary at the Group’s discretion
(such as an RCF facility) are recognised on a systematic basis over the life of the facility.
Debt instruments denominated in foreign currencies are revalued using period end exchange rates, with any exchange gains and
losses arising recognised as a component of net interest charges in the period they arise. The Group hedges foreign currency risk
in accordance with the policy set out in note 7.2. Where hedging instruments are used to fix cash flows associated with debt
instruments, the debt instrument and the hedging instrument are measured and presented separately on the balance sheet.
Reconciliation of borrowings
The tables below show the movement in borrowings during the current and previous year:
Borrowings at 1 January
Cash movements:
Extension of ESG facility
2025 €250 million loan notes draw down
Repayment of ESG facility
UK infrastructure private placement draw down
Repayment of 2022 fixed loan notes
Non-cash movements:
Acceleration of deferred finance costs in relation to previous facilities (note 2.5)
Indexation of linked loan
Amortisation of deferred finance costs (note 2.5)
Amortisation of USD loan note premium
Effect of foreign exchange rates
Borrowings at 31 December
Year ended 31 December 2020
Borrowings
before deferred
finance costs
£m
Deferred
finance costs
£m
1,267.5
(22.3)
–
225.5
(125.0)
81.4
(350.0)
–
0.5
–
(0.4)
(14.2)
1,085.3
(0.8)
(3.4)
–
(3.8)
–
4.8
–
5.9
–
–
(19.6)
Net
borrowings
£m
1,245.2
(0.8)
222.1
(125.0)
77.6
(350.0)
4.8
0.5
5.9
(0.4)
(14.2)
1,065.7
On 10 June 2020, the Group extended the final maturity on the £125.0 million ESG facility to 2025.
On 18 August 2020, the Group agreed a new infrastructure term loan facilities agreement providing committed facilities with a
range of maturities between 2024 and 2030 further extending the Group’s debt maturity profile. The initial agreement included
sterling denominated commitments of £45.0 million and euro denominated commitments totalling €126.5 million. The agreement
also included an option for the Group to increase the facilities by up to a further £75.0 million of commitments, if agreed between
the Group and its lenders. On 18 November 2020, a further £53.0 million with a 2028 maturity was agreed under this option.
These commitments have effective interest rates of 3.7%, which is inside the Group’s current average cost of debt.
On 13 November 2020, the €31.5 million facility was drawn down, followed by £53.0 million on 2 December 2020. The remaining
committed facilities were drawn on 18 February 2021.
On 4 November 2020, the Group issued €250.0 million of euro denominated senior secured notes, with a 2025 maturity date.
The notes were issued at 100% of their nominal value and have a fixed interest rate of 2.625% which the Group has swapped
back to achieve an effective sterling equivalent rate of 3.240%.
The Group has entered into a number of interest rate swaps and cross-currency interest rate swaps to fix the variable and non-
sterling interest payments on the new infrastructure term loan facilities and euro notes. In addition to fixing the sterling value of
these interest payments over a three to six year period, the sterling repayment of the euro principals have been fixed for between
two and five years.
On 19 November 2020, the Group used the proceeds of the euro denominated notes issue, along with existing cash reserves, to
redeem the Group’s £350.0 million 2022 fixed loan notes as well as the £125.0 million ESG facility. The £350.0 million 2022 sterling
notes were redeemed at a price equal to 101.063% of the principal amount. The early redemption premium of 1.063% has been
recognised as an exceptional item.
On 18 November 2020, the Group also refinanced its existing RCF which had a maturity date of 2021. The new ESG RCF facility has
a value of £300.0 million and matures in 2025, with an option to extend by one year, with lender agreement. The facility is able to
be fully drawn in cash. The facility includes an embedded ESG component which adjusts the margin based on the Group’s carbon
intensity which is measured against an annual benchmark.
The Group’s financing structure also includes US $500.0 million loan notes and a £375.0 million UK infrastructure private
placement which was committed and drawn in 2019.
Drax Group plc Annual report and accounts 2020 185
Strategic reportGovernanceFinancial statementsShareholder information
Section 4: Financing and capital structure continued
4.3 Borrowings continued
The US senior secured notes have a fixed interest rate of 6.625% equating to an effective sterling interest rate of 4.9%. Cross-
currency interest rate swaps have been used to fix the sterling value of interest payments over a five-year period. This instrument
also fixed the sterling repayment of the principal in 2023.
The £375.0 million LIBOR-linked UK infrastructure private placement agreed in 2019 has maturities extending out to between 2024
and 2029. The Group has entered into interest rate swaps to fix the effective interest rates inside the Group’s current cost of debt.
Borrowings at 1 January
Cash movements:
2025 US $200 million loan notes draw down
£550 million acquisition bridge facility draw down
UK infrastructure private placement draw down
ESG facility draw down
Repayment of £550 million acquisition bridge facility
Non-cash movements:
Acceleration of deferred finance costs in relation to previous facilities
Indexation of linked loan
Amortisation of deferred finance costs
Amortisation of USD loan note premium
Effect of foreign exchange rates
Reclassification of finance leases
Borrowings at 31 December
Year ended 31 December 2019
Borrowings
before deferred
finance costs
£m
Deferred
finance costs
£m
622.9
(14.8)
152.8
550.0
375.0
125.0
(550.0)
–
0.8
–
(0.3)
(8.2)
(0.5)
1,267.5
(3.4)
(1.4)
(10.0)
(2.1)
–
5.2
–
4.2
–
–
–
(22.3)
Net
borrowings
£m
608.1
149.4
548.6
365.0
122.9
(550.0)
5.2
0.8
4.2
(0.3)
(8.2)
(0.5)
1,245.2
Amounts drawn against each facility in the Group’s financing structure in the current and previous year is shown in the tables
below. All borrowings are due after more than one year.
2025 €250 million loan notes
2025 US $500 million loan notes
Index-linked loan
UK infrastructure private placement facilities (2019)
UK infrastructure private placement facilities (2020)
Total borrowings
As at 31 December 2020
Borrowings
before deferred
finance costs
£m
Deferred
finance costs
£m
223.4
367.4
38.4
375.0
81.1
1,085.3
(3.3)
(5.0)
–
(7.5)
(3.8)
(19.6)
Net
borrowings
£m
220.1
362.4
38.4
367.5
77.3
1,065.7
The Group’s committed £300 million ESG RCF had no cash drawings as at 31 December 2020. The Group also has further
committed undrawn amounts under the new infrastructure term loan facilities agreement described above totalling £45.0 million
and €95.0 million. On 18 February 2021, these facilities were drawn down in full. The Group has no other committed facilities,
although it has access to certain non-recourse trade receivable finance facilities and payment facilities, as described
in note 4.4, which are utilised to accelerate working capital cash inflows and defer cash outflows.
2022 fixed loan notes
2025 US $300 million loan notes
Index-linked loan
UK infrastructure private placement facilities (2019)
ESG facility
Total borrowings
186 Drax Group plc Annual report and accounts 2020
As at 31 December 2019
Borrowings
before deferred
finance costs
£m
Deferred
finance costs
£m
350.0
379.6
37.9
375.0
125.0
1,267.5
(5.3)
(5.9)
–
(9.3)
(1.8)
(22.3)
Net
borrowings
£m
344.7
373.7
37.9
365.7
123.2
1,245.2
4.3 Borrowings continued
The Group’s financing structure, including the index-linked loan, the USD and euro loan notes, the ESG RCF, private placement and
infrastructure term loan facilities are secured against the assets of a number of the Group’s subsidiaries including property, plant
and equipment, with the exception of the Group’s US land and buildings.
In addition, the Group had a secured commodity trading line, which allowed it to transact prescribed volumes of commodity
trades without the requirement to post collateral and FX trading lines with certain banks. Counterparties to these arrangements
are entitled to share in the security as described above. During the year the Group opted to close the secured commodity trading
line and as such no further trades are able to utilise the line. The final trades utilising this line are due to mature by the end of
March 2021 and as at 31 December 2020 were valued at £0.8 million (2019: £32.7 million).
4.4 Notes to the consolidated cash flow statement
Cash generated from operations
Cash generated from operations is the starting point of the Group’s cash flow statement on page 158. The table below makes
adjustments for any non-cash accounting items to reconcile the Group’s net (loss)/profit for the year to the amount of cash
generated from the Group’s operations.
Years ended 31 December
(Loss)/profit for the year
Adjustments for:
Interest payable and similar charges
Interest receivable
Effect of foreign exchange rates
Tax credit
Depreciation and amortisation
Asset obsolescence charge
Losses on disposal
Certain remeasurements of derivative contracts
Defined benefit pension scheme current service cost
Defined benefit pension scheme past service cost
Non-cash charge for share-based payments
Provision movements recognised in the income statement
Other non-cash gains
Operating cash flows before movement in working capital
Changes in working capital:
Decrease/(increase) in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables
Decrease in carbon assets
Decrease in ROC assets
Total cash released from working capital
Defined benefit pension scheme contributions
Cash generated from operations
2020
£m
(157.9)
74.0
(0.6)
(1.0)
(31.7)
190.4
239.4
6.0
31.4
8.4
7.4
5.2
20.4
–
391.4
87.1
25.1
(98.4)
–
23.1
36.9
(14.9)
413.4
2019
£m
0.5
66.5
(1.3)
–
(3.3)
207.9
–
1.2
254.0
7.1
–
2.7
–
(0.5)
534.8
(67.8)
(142.6)
101.6
4.3
54.0
(50.5)
(13.1)
471.2
(1)
Certain remeasurements of derivative contracts includes the effect of non-cash unrealised gains and losses recognised in the income statement and cash realised
from derivative contracts designated into hedge relationships under IFRS 9, where the gain or loss is held in the hedge reserve pending release to the income
statement in the period the hedged transaction occurs.
The Group has a strong focus on cash flow discipline and managing liquidity. The Group optimises its working capital position
by managing payables, receivables and inventories to make sure the working capital committed is closely aligned with operational
requirements. When compared to the year-end position, such measures have been utilised to a broadly consistent level throughout
the year unless otherwise stated. The impact of these actions on the cash flows of the Group is described below.
Cash from ROCs is typically realised several months after the ROC is earned; however, through standard ROC sales and ROC
purchase arrangements the Group are able to accelerate cash flows over a proportion of these assets. The net impact of ROC
purchases and ROC sales on operating cash flows was a £74.0 million outflow (2019: £131.2 million inflow), due to fewer ROCs being
sold at the end of 2020 compared to the end of the previous year. This is reflected as an increase (2019: decrease) in ROC assets
and is a component of the overall net decrease (2019: decrease) in ROC assets shown in the table above. The level of ROCs
generated, purchased and sold during the period is set out in note 3.4. The Group also has access to facilities enabling it to sell
ROC trade receivables on a non-recourse basis. These facilities were utilised during the year but no amounts remained outstanding
at 31 December 2020 (2019: £nil).
Drax Group plc Annual report and accounts 2020 187
Strategic reportGovernanceFinancial statementsShareholder information
Section 4: Financing and capital structure continued
4.4 Notes to the consolidated cash flow statement continued
Utilisation of both of these methods to accelerate cash flows is higher around the middle of ROC compliance periods as the Group
has generated a large amount of ROCs but energy suppliers do not yet require ROCs to settle their obligation. At the start of the
compliance period the Group has not generated large amounts of ROCs, and towards the end of the compliance period energy
suppliers are purchasing ROCs to settle their obligation, therefore utilisation of these methods is lower as the Group has less
ROCs available.
From time to time, where market conditions change, the Group can rebase foreign currency contracts (including cross-currency
interest rate swaps). In 2020, this generated a working capital outflow due to less cash being released from rebased trades at
the end of 2020 than in the prior year. This is reflected as an adjustment to derivative remeasurements in the table on page 187.
The total cash benefit released from related trades that remained outstanding at 31 December 2020 was £80.1 million (2019:
£106.8 million). This cash benefit includes £24.4 million (2019: £84.3 million) released from foreign currency contracts and £55.7
million (2019: £22.5 million) from cross-currency interest rate swaps.
The Customers business has access to a facility which enables it to accelerate cash flows associated with trade receivables
on a non-recourse basis, which generated a net cash inflow of £7.8 million in the year ended 31 December 2020, reflected as a
reduction in receivables in the table on page 187 (2019: net cash inflow of £12.8 million reflected as a reduction in receivables
in the table on page 187). The facility terms were amended in the prior year, increasing the facility size to £200.0 million from
£150.0 million. Utilisation of the facility was £170.0 million at 31 December 2020 (2019: £162.2 million).
The Group has sought to normalise payments across its supplier base resulting in certain suppliers extending payment terms
and some reducing terms. Suppliers are able to access a supply chain finance facility provided by a bank, for which funds can be
accelerated in advance of the normal payment terms. The facility does not affect the Group’s working capital, as payment terms
remain unaltered with the Group. At 31 December 2020, the Group had trade payables of £43.7 million (2019: £33.1 million) related
to reverse factoring. The Group also has access to a number of payment facilities to leverage scale and efficiencies in transaction
processing, whilst providing a working capital benefit for the Group due to a short extension of payment terms within a normal
working capital cycle. The amount outstanding under these facilities at 31 December 2020 was £63.6 million (2019: £90.6 million).
Changes in liabilities arising from financing cash flows
A reconciliation of the movements in liabilities arising from financing activities for both cash and non-cash changes is
provided below:
Balance at 1 January
Cash flows from financing activities
Impact of foreign exchange rates
Other movements
Balance at 31 December
Balance at 1 January
Cash flows from financing activities
Impact of foreign exchange rates
Other movements
Balance at 31 December
As at 31 December 2020
Borrowings
£m
Lease liabilities
£m
1,245.2
(176.1)
(14.2)
10.8
1,065.7
32.5
(8.8)
(0.2)
6.7
30.2
As at 31 December 2019
Borrowings
£m
Lease liabilities
£m
607.6
635.9
(8.2)
9.9
1,245.2
0.5
(7.4)
(0.4)
39.8
32.5
Total
£m
1,277.7
(184.9)
(14.4)
17.5
1,095.9
Total
£m
608.1
628.5
(8.6)
49.7
1,277.7
Other movements principally relate to the amortisation of deferred finance costs and discounting of lease liabilities. In 2019 other
movements also includes the initial recognition of lease liabilities on transition to IFRS 16.
4.5 Equity and reserves
The Group’s ordinary share capital reflects the total number of shares in issue, which are publicly traded on the London
Stock Exchange.
Accounting policy
Ordinary shares are classified as equity as evidenced by their residual interest in the assets of the Company after deducting
its liabilities. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction,
net of tax, from the proceeds.
188 Drax Group plc Annual report and accounts 2020
4.5 Equity and reserves continued
Authorised:
865,238,823 ordinary shares of 11 16⁄29 pence each (2019: 865,238,823)
Issued and fully paid:
2020: 410,848,934 ordinary shares of 11 16⁄29 pence each (2019: 410,475,731)
The movement in allotted and fully paid share capital of the Company during the year was as follows:
At 1 January
Issued under employee share schemes
At 31 December
As at 31 December
2020
£m
2019
£m
100.0
100.0
47.5
47.4
Years ended 31 December
2020
(number)
2019
(number)
410,475,731
373,203
410,848,934
407,193,168
3,282,563
410,475,731
The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income.
No shareholders have waived their rights to dividends.
Shares issued under employee share schemes
Throughout January to December 2020, a total of 373,203 shares were issued in satisfaction of options vesting in accordance
with the rules of the Group’s Savings-Related Share Option Plan, Performance Share Plan and Bonus Matching Plan (deferred shares).
Share buy-back programme
In 2018 the Group announced the commencement of a £50.0 million share buy-back programme. On 21 January 2019, the buy-back
programme concluded. In total, the Group purchased 13.8 million shares for 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.
Share premium
The share premium account reflects amounts received in respect of issued share capital that exceeds the nominal value of
the shares issued. Movements in the share premium reserve reflect amounts received on the issue of shares under employee
share schemes.
At 1 January
Issue of share capital
At 31 December
Share premium
2020
£m
429.6
0.4
430.0
2019
£m
424.7
4.9
429.6
Other reserves
Other equity reserves reflect the impact of certain historical transactions, which are described under the table below:
At 1 January 2019
Exchange differences on translation of foreign operations
At 31 December 2019
Exchange differences on translation of foreign operations
At 31 December 2020
Capital
redemption
reserve
£m
1.5
–
1.5
–
1.5
Translation
reserve
£m
55.9
(11.2)
44.7
(9.3)
35.4
Merger
reserve
£m
710.8
–
710.8
–
710.8
Total other
reserves
£m
768.2
(11.2)
757.0
(9.3)
747.7
The capital redemption reserve arose when the Group completed a share buy-back programme in 2007.
Exchange differences relating to the translation of the net assets of the Group’s US-based subsidiaries from their functional currency
(USD) into sterling for presentation in these consolidated financial statements are recognised in the translation reserve.
The share premium and the merger reserve arose on the financial restructuring of the Group which took place in 2005.
Movements in the hedge reserve and the cost of hedging reserve, which reflect the change in fair value of derivative financial
instruments designated into hedge accounting relationships in accordance with IFRS 9, are set out in notes 7.3 and 7.4.
Drax Group plc Annual report and accounts 2020 189
Strategic reportGovernanceFinancial statementsShareholder information
Section 5: Other assets and liabilities
This section provides information on the assets and liabilities in the Consolidated balance sheet that are not covered in other
sections, including goodwill, other intangible assets and provisions.
5.1 Coal closure
On 26 February 2020, following a comprehensive review, the Board determined to end commercial coal generation at Drax Power
Station in March 2021, with the two coal units remaining available to meet Capacity Market obligations until September 2022, at
which point they will cease to operate.
Asset obsolescence charges
Drax Power Station’s biomass generation assets and coal generation assets had previously been assessed as being part of the
same CGU, due to the interdependencies between these assets. Following a reduction in the significance of the interdependencies
between these assets over time, as of 26 February 2020 they were assessed as being two separate CGUs. Following the coal
generation assets becoming a separate CGU and the decision to cease commercial coal generation in March 2021, an impairment
review was undertaken.
The recoverable amount of the coal generation assets was determined based on a value in use calculation. This calculation uses
cash flow projections based on the Group’s established planning model approved by the Board covering the period through to coal
closure in September 2022.
The calculation concluded that the recoverable amount of the coal CGU was significantly lower than the carrying amount of the
coal generation assets in the Group’s balance sheet. Accordingly, in the year ended 31 December 2020, an asset obsolescence
charge of £225.9 million has been recognised to write the coal generation assets down to their recoverable amount of £nil.
Sensitivity analysis indicated that any reasonably possible changes in the key assumptions, which are the allocation of operating
costs and discount rate, would not result in a materially different outcome. The discount rate used in the calculation was 8%.
The asset obsolescence charge and the associated deferred tax impact have been treated as exceptional items and excluded from
the Group’s Adjusted Results.
Provisions
As a result of the coal closure decision, one-off costs of closure, comprising termination benefits, required safety works, and costs
of disposal for associated assets will be incurred. The coal closure programme is expected to result in a reduction of 206 roles from
April 2021. Communication and consultations have been taking place since the coal closure decision regarding the reduction in
roles. These discussions and communications are sufficiently progressed that as at 31 December 2020 a restructuring provision of
£9.6 million has been recognised for these expected costs. The majority of this provision is expected to be utilised in 2021.
Total cost
Site engineering work
Redundancy
Total restructuring provisions
Pensions
Inventory write offs
Other costs
Total coal closure costs
Notes
5.4
6.3
3.5
£m
11.0
9.6
20.6
7.4
4.8
0.9
33.7
The other costs of £0.9 million in the table above were expensed in the year.
5.2 Goodwill
Goodwill arises on the acquisition of a business when the consideration paid exceeds the fair value of the identifiable assets acquired.
Accounting policy
Goodwill is initially recognised and measured at the acquisition date. Goodwill is not amortised but reviewed for impairment at least
annually. For the purpose of impairment testing, goodwill is allocated to the CGU to which it relates and the recoverable amount for
that CGU assessed. The table below shows the carrying amount of goodwill:
Cost and carrying amount:
At 1 January 2019, 31 December 2019 and 31 December 2020
CGU allocation:
Haven Power CGU: Haven Power acquired in 2009
Opus Energy CGU: Opus Energy acquired in 2017
Lanark CGU: Drax Generation Enterprise acquired in 2018
Galloway CGU: Drax Generation Enterprise acquired in 2018
Cruachan CGU: Drax Generation Enterprise acquired in 2018
190 Drax Group plc Annual report and accounts 2020
Goodwill
£m
248.2
10.7
159.2
11.3
40.1
26.9
5.2 Goodwill continued
Impairment review
Haven and Opus
The recoverable amounts of the Haven Power and Opus Energy CGUs are measured annually, based on a value in use calculation.
This calculation depends on a broad range of assumptions, the most significant of which are customer margins and supply volumes.
Estimates regarding these assumptions are based on management’s expectations of future growth, wholesale energy and
third-party costs and achieved profitability. Inherent in these assumptions are expectations about future energy prices and supply
costs. Management has projected cash flows based on a business plan period of eight years, reflecting consideration of aspects of
the plan which are realised over a long term horizon. Cash flows beyond the business plan period are inflated into perpetuity using
a growth rate of 1%. This growth rate is based on prudent expectations of market share and/or profitability along with more general
macro environmental factors which were obtained from the Group’s established planning model along with external macro-
economic forecasts. The growth rate does not exceed the relevant long-term average growth rate for the industry. The impact
of climate and environmental impacts are discussed in note 2.4. These businesses are principally focused on renewable electricity
sales and therefore consideration of climate and environmental impacts are already a key feature of their business models.
The carrying amounts and discount rates applied to each CGU are set out in the table below:
CGU
Haven
Opus
Carrying
Amount
£m
47.5
288.5
Discount
Rate
7.2%
7.2%
The expected future cash flows of the CGU were discounted using a discount rate of 7.2%, calculated based on independent
analysis commissioned by the Group, adjusted to the specific circumstances and risk factors affecting the Group’s Customers
business. The Group believes that this rate reflects the prospects for a well-established Customers business, reflecting the
comparatively long trading record and customer bases these businesses hold. The value in use of the Haven Power CGU, including
the goodwill, was significantly in excess of its carrying amount. Reflecting the significant headroom in the analysis, the Group does
not believe that any reasonably possible change in the key assumptions would result in a recoverable amount for the Haven Power
CGU that was lower than its carrying amount.
The carrying amount of the Opus Energy CGU at 31 December 2020 includes intangible assets of £111.0 million. The discount rate
was assessed as being in line with that of Haven Power at 7.2%. The recoverable amount of the Opus Energy CGU was assessed
under several scenarios that reflect the Group’s future plans for the business. In each case, whilst headroom was materially
reduced from prior years due to the impact of Covid-19 on forecasts of near-term future earnings, the recoverable amount
remained in excess of its carrying amount assuming a recovery trajectory that returns to profitability.
The Group conducted a sensitivity analysis on the estimates of future cash flows for the Opus Energy CGU and concluded that
no reasonable possible change in any of the key assumptions would result in the recoverable amount falling below its carrying
amount. It was noted that EBITDA forecasts in the business plan period would need to fall by a further 53% to completely erode
available headroom.
Lanark, Galloway and Cruachan
The Group tests the goodwill associated with the Lanark, Galloway and Cruachan CGUs annually. The recoverable amount of each
CGU was calculated based on a value in use calculation using the Group’s established planning model. The model depends on a
broad range of assumptions, the most significant of which are power prices, operating model, sources of stability income and the
discount rate applied. Estimates regarding these assumptions are based on management’s expectations of future wholesale
energy prices, operational factors and capital investment. Management has projected cash flows based on the business plan period
of 14 years. Cash flows beyond the business plan period are inflated into perpetuity using a growth rate of 2%. This growth rate is
based on macro environmental factors which were obtained from publicly available forecasts and does not exceed the relevant
long-term average growth rate for the industry. The impact of climate and environmental impacts have been discussed in note 2.4.
The carrying amounts and discount rates applied to each CGU are set out in the table below:
CGU
Lanark
Galloway
Cruachan
Carrying
Amount
£m
59.6
194.5
312.1
Discount
Rate
6.5%
6.5%
6.5%
The discount rates were calculated based on independent analysis commissioned by the Group, adjusted to the specific
circumstances and risk factors affecting the Group’s Generation business.
Drax Group plc Annual report and accounts 2020 191
Strategic reportGovernanceFinancial statementsShareholder information
Section 5: Other assets and liabilities continued
5.2 Goodwill continued
The value in use for the Cruachan CGU in the table above, including allocated goodwill, was significantly in excess of its
carrying amount. No reasonably possible change in the key assumptions would result in a recoverable amount that was lower than
its carrying amount.
The nature of the run-of-river assets and the application of fair value accounting on acquisition in 2018 results in a limited level of
headroom for the Lanark and Galloway CGUs of £4 million and £13 million respectively. The value in use calculations for Lanark and
Galloway are sensitive to the discount rate applied. An increase in the discount rate of 0.5% for Lanark and 0.4% for Galloway would
result in a recoverable amount that was lower than the carrying amount for each CGU. Having conducted a sensitivity analysis
of all key assumptions, no other reasonable possible changes that would result in the elimination of all headroom were identified.
It is not expected that there would be any reasonably possible change in key assumptions that would result in a material
impairment loss in the next 12 months.
5.3 Intangible assets
Intangible assets are not physical in nature but are identifiable and separable from other assets. Intangible assets can be acquired
in business combinations (such as the acquisition of Opus Energy during 2017) or purchased separately. The Group routinely
purchases computer software and carbon emissions allowances, which are considered intangible assets.
Accounting policy
Intangibles acquired in business combinations are measured at fair value on the acquisition date. Other intangible assets are
measured at cost. Cost comprises the purchase price (net of any discount or rebate) and any directly attributable costs to bring the
asset into the condition and location required for use as intended by management.
Intangible assets are amortised over their anticipated useful lives. Useful lives are reviewed at each balance sheet date. No
changes to useful lives were made as at 31 December 2020. Amortisation calculations are specific to each category of assets and
are explained in further detail below.
Carrying amounts are assessed for indicators of impairment at each balance sheet date. The customer-related assets and brand
are attributed to the Opus Energy CGU and details of the impairment test relating to this CGU are included in note 5.2.
Cost and carrying amount:
At 1 January 2019
Additions at cost
Transfers from Property, plant and
equipment
Utilised in the period
Effect of foreign exchange rates
At 1 January 2020
Additions at cost
Transfers from Property,
plant and equipment
Disposals
Transfers to assets held for sale
Effect of foreign exchange rates
At 31 December 2020
Accumulated amortisation
At 1 January 2019
Charge for period
Effect of foreign exchange rates
At 1 January 2020
Charge for period
Asset obsolescence (note 2.7)
Eliminated on disposal
Transfers to assets held for sale
At 31 December 2020
Net book value
At 31 December 2019
At 31 December 2020
Customer-related
assets
£m
Computer
software and
licences
£m
Brand
£m
Development
assets
£m
Carbon assets
£m
211.0
–
–
–
–
211.0
–
–
–
–
–
211.0
71.5
30.2
–
101.7
24.9
–
–
–
126.6
109.3
84.4
11.3
–
–
–
–
11.3
–
–
–
–
–
11.3
2.2
1.2
–
3.4
1.1
–
–
–
4.5
7.9
6.8
95.1
20.8
3.1
–
0.3
119.3
8.6
5.7
(1.4)
(0.5)
(0.2)
131.5
40.2
10.6
(0.2)
50.6
12.4
0.8
(1.4)
(0.5)
61.9
68.7
69.6
21.0
–
–
–
–
21.0
–
–
–
–
–
21.0
–
–
–
–
–
–
–
–
–
21.0
21.0
4.3
–
–
(4.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
342.7
20.8
3.1
(4.3)
0.3
362.6
8.6
5.7
(1.4)
(0.5)
(0.2)
374.8
113.9
42.0
(0.2)
155.7
38.4
0.8
(1.4)
(0.5)
193.0
206.9
181.8
192 Drax Group plc Annual report and accounts 2020
5.3 Intangible assets continued
Customer-related assets
Customer-related assets reflect the value of customer contracts acquired on the acquisition of Opus Energy in February 2017,
which provided the Group with access to a broad customer base with contracted cash flows. The asset valuation of £211.0 million
reflected the estimated value of the future cash flows associated with this customer base at the acquisition date and is dependent
upon estimates of both current and expected future contract margins and assumed customer retention rates. The cash flows have
been discounted using a discount rate of 10.7%. The asset has an estimated useful life from acquisition of 11 years, calculated based
on customer churn-rate analysis, and is being amortised on a reducing balance basis to reflect the diminishing rate of contract
renewals over time.
Opus Energy brand
The Opus Energy brand was acquired as part of the acquisition in February 2017 and valued at £11.3 million on a relief-from-royalty
method. The brand is being amortised on a straight-line basis over its assumed 10-year useful life from acquisition.
Computer software
Additions in the period include those in the ordinary course of business, which principally reflect ongoing investment in business
systems to support the Customers segment. Software assets are amortised on a straight-line basis over estimated useful lives
ranging from three to five years.
As at 31 December 2020, computer software assets in the course of construction amounted to £30.7 million (2019: £40.5 million).
This includes £19.2 million (2019: £19.2 million) for a billing system where the Group has stopped development in 2019 and is
engaged in active discussion with the supplier reflecting the supplier’s failure to perform under this contract. No amounts have
been provided in respect of these assets as the Group believes that the carrying amount will be recovered in full, supported by legal
advice.
Development assets
The development assets arose on the acquisition of four OCGT projects in December 2016 and reflect the value of planning and
consents. Until operations commence, the assets are considered to have an indefinite life and thus are not amortised and are
subject to impairment testing at each balance sheet date. We believe there is a need for flexible, dispatchable generation, but this
must support the UK’s target of net zero carbon emissions by 2050.
At 31 December 2020, the recoverable amount of the development assets was established using a value in use calculation derived
from the Group’s established planning model. The assessment incorporated key assumptions related to likely Capacity Market
clearing prices, construction costs, and the ongoing revenues to be derived from the projects once constructed. The Group’s
primary focus is on flexible and renewable generation; however the Group continues to see an important role for gas in the
provision of system support and we believe the OCGT projects are an attractive means though which these services could be
provided. Accordingly, the Group remains committed to the development of options for the OCGT projects and expects to recover
the carrying amount in full.
The analysis assumed a Capacity Market clearing price that was higher than recently observed clearing prices but was supported
by independent forecasts of future prices.
The expected future cash flows were discounted using a rate of 7%, which included an assessment of the level of construction and
execution risk inherent in the existing assets and quality of revenue if constructed. The analysis indicated a recoverable amount in
excess of the current carrying amount of the development assets, with headroom in excess of £50 million. The analysis is sensitive
to the key assumptions described above and the discount rate applied. Set out below are the individual changes in these
assumptions that would result in a recoverable amount that is less than the carrying amount. Whilst all of these changes would not
be expected to arise in the next 12 months, a combination of smaller changes across these assumptions could be reasonably
possible to erode headroom to £nil.
• Increasing the discount rate by approximately 1.8%
• A reduction in the Capacity Market clearing price forecast of 34%
• An increase in the total construction cost of 21%
• A reduction in system stability revenue streams of 54%
If any of these circumstances were to materialise, individually or in aggregate and without mitigation, the Group may not proceed
with the projects and the assets currently recognised on the balance sheet may be impaired. In particular, the analysis depends
upon achieving an acceptable clearing price in future Capacity Market auctions.
Carbon assets
Carbon assets arise on the purchase of carbon emissions allowances in excess of the amount allocated under the Emissions
Trading Scheme and required for the current financial year, and are measured at cost, net of any impairment. Given their short term
nature, carbon assets are not amortised.
The charge to the income statement, within fuel costs, reflects the cost of emissions allowances required to satisfy the obligation
for the current year and takes into account generation and market purchases allocated to the current financial year, and to the
extent further purchases are required, is based on the market price at the balance sheet date.
Drax Group plc Annual report and accounts 2020 193
Strategic reportGovernanceFinancial statementsShareholder information
Section 5: Other assets and liabilities continued
5.4 Provisions
The Group makes provision for reinstatement to cover the estimated costs of decommissioning and demolishing its generation
assets and remediating the sites at the end of the useful economic lives of the assets. Other provisions are made when the Group
has an obligation as a result of an event occurring in the period. During 2020, the Group has recognised a restructuring provision in
respect of coal closure.
Accounting policy
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable
that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
Specifically, provision is made for the estimated decommissioning costs at the end of the useful economic life of the Group’s
generating assets, when a legal or constructive obligation arises, on a discounted basis. The amount provided is calculated on a
site-by-site basis and represents the present value of the expected costs. The discount rate used is a risk-free rate that reflects the
duration of the liability. The average discount rate used across the Group’s decommissioning provisions is 0.75% (2019: 1.20%). The
use of a risk-free rate reflects the fact that the estimated future cash flows have built-in risks specific to the liability. An amount
equivalent to the discounted provision is capitalised within property, plant and equipment and is depreciated over the useful lives
of the related assets. The unwinding of the discount is included in interest payable and similar charges.
The Group recognises a restructuring provision when it has developed a detailed formal plan for the restructuring and has raised a
valid expectation in those affected that it will carry out the restructuring either by starting to implement the plan or announcing its
main features to those affected by it. The restructuring provision includes only the direct expenditures arising from the
restructuring programme, these are costs that would have been avoided if the restructuring programme did not go ahead. Any
costs to be incurred relating to the ongoing activities of the Group are excluded from the provision.
A provision for termination benefits is recognised at the earlier of when the Group can no longer withdraw the offer of the
termination benefit and when the Group recognises any related restructuring costs.
Other provisions include a small provision in respect of dilapidation costs for leased offices.
Carrying amount:
At 1 January 2020
Additions
Released
Unwinding of discount
Transfers to liabilities held for sale
At 31 December 2020
Decommissioning
provision
£m
Restructuring
provision (note 5.1)
£m
Other
provisions
£m
53.9
28.9
–
1.1
(13.8)
70.1
–
20.6
–
–
–
20.6
0.3
0.4
(0.2)
–
–
0.5
Total
£m
54.2
49.9
(0.2)
1.1
(13.8)
91.2
Of the restructuring provision an immaterial amount is expected to be utilised in 2021.
Decommissioning provisions are made in respect of the Group’s thermal generating plants (Drax Power Station and CCGT power
stations). The most recent updates took place in December 2020 for Drax Power Station, and September 2020 for CCGT sites. The
provision related to the CCGT sites was transferred to liabilities held for sale during the year.
Decommissioning provisions are based on the assumption that the decommissioning and reinstatement will take place at the end
of the expected useful life of each site (which varies between 2026 and 2039) and has been estimated using existing technology at
current prices based on independent third-party advice, updated on a triennial basis. During the year a comprehensive
decommissioning assessment was performed as part of the future planning for the site at Drax Power Station. This resulted in an
increase in the provision of £28.9 million.
194 Drax Group plc Annual report and accounts 2020
5.5 Assets held for sale and discontinued operations
Assets held for sale are non-current assets (or disposal groups) whose carrying value will be recovered principally through a sale
transaction rather than through continuing use. If a component of an entity is disposed of or classified as held for sale its results
are classified as a discontinued operation.
Non-current assets and the assets of a disposal group classified as held for sale are presented separately from the other assets in
the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the
balance sheet.
Accounting policy
Non-current assets (or disposal groups) whose carrying value will be recovered principally through a sale transaction rather than
continuing use are classified as held for sale if they are available for immediate sale in their present condition and if the sale is
considered highly probable. A sale is deemed highly probable if all the following criteria are met:
• the appropriate level of management is committed to a plan to sell the asset (or disposal group)
• an active programme to locate a buyer and complete the plan has been initiated
• the asset (or disposal group) are being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Once an asset (or disposal group) has been classified as held for sale it is recognised at the lower of its carrying value and fair value
less costs to sell, except for deferred tax assets, assets arising from employee benefits, financial assets, investment properties
measured at fair value and contractual rights under insurance contracts, which are exempt from this requirement and continue to
be measured in line with their relevant IFRS requirements.
Impairment losses and subsequent reversals of impairment losses are recognised in the income statement. Reversals of
impairment losses are only recognised to the extent they reverse a prior impairment. If an impairment loss is recognised in relation
to a disposal group the impairment would be allocated first to goodwill and then on a pro-rata basis to the non-current assets
within the disposal group.
A discontinued operation is a component of the Group that meets one of the following criteria:
• represents a separate major line of business or geographic area of operations
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or
• is a subsidiary acquired exclusively with a view to resale.
The component is classified as a discontinued operation at the earlier of when it is disposed of or when the component meets the
held for sale criteria.
When an operation is classified as a discontinued operation its results are presented separately in the income statement. The
results of the discontinued operation are also re-presented in the income statement as discontinued in any comparative periods.
Assets held for sale
On 15 December 2020, the Group announced it had reached agreement for the sale of Drax Generation Enterprise Limited (DGEL),
which held the Group’s CCGT power stations, to VPI Generation Limited for headline cash consideration of up to £193 million,
subject to customary adjustments. This included £29 million of contingent consideration associated with the option to develop a
new CCGT at Damhead Creek. Accordingly, these assets are a disposal group and have been recognised as held for sale at 31
December 2020. The sale subsequently completed on 31 January 2021. The results of these operations previously formed part of
the Generation segment for segmental reporting. The assets were disposed of as the assets did not form part of the Group’s core
flexible and renewable generation strategy.
The following assets and liabilities were reclassified as held for sale in relation to the agreed sale of DGEL:
Property, plant and equipment
Right-of-use assets
Trade and other receivables
Inventories
Deferred tax asset
Total assets
Lease liabilities
Provisions
Trade and other payables
Total liabilities
Net assets held for sale
Notes
3.1
3.2
2.6
3.2
5.4
As at
31 December 2020
£m
195.4
5.3
58.3
0.9
1.4
261.3
(5.6)
(13.8)
(63.1)
(82.5)
178.8
Drax Group plc Annual report and accounts 2020 195
Strategic reportGovernanceFinancial statementsShareholder information
Section 5: Other assets and liabilities continued
5.5 Assets held for sale and discontinued operations continued
Discontinued operations
The income and expenses of the CCGT portfolio have been classified as discontinued operations. The prior period comparatives
have been re-presented.
Year ended 31 December 2020
Year ended 31 December 2019
Revenue
Cost of sales
Gross profit
Operating expenses
Adjusted EBITDA
Depreciation and amortisation
Other gains and losses
Operating profit/(loss)
Net finance costs
Profit before tax on discontinued
operations
Total tax (charge)/credit
Profit after tax from discontinued
operations and total profit from
discontinued operations
Earnings per share
on profit for the period from
discontinued operations attributable
to owners of the parent
– Basic
– Diluted
Continuing operations
Discontinued operations
Total
Exceptional
items and
certain
remeasurements
£m
(25.3)
47.7
22.4
(3.3)
–
–
19.1
–
19.1
(3.6)
Adjusted
Results
£m
205.8
(127.3)
78.5
(32.6)
45.9
(19.2)
–
26.7
(0.7)
26.0
(4.8)
Total
Results
£m
180.5
(79.6)
100.9
(35.9)
(19.2)
–
45.8
(0.7)
45.1
(8.4)
Exceptional
items and
certain
remeasurements
£m
–
(11.6)
(11.6)
–
–
–
(11.6)
–
(11.6)
2.3
Adjusted
Results
£m
245.8
(177.1)
68.7
(30.2)
38.5
(15.5)
2.2
25.2
(0.8)
24.4
(4.9)
Total
Results
£m
245.8
(188.7)
57.1
(30.2)
(15.5)
2.2
13.6
(0.8)
12.8
(2.6)
21.2
15.5
36.7
19.5
(9.3)
10.2
Pence
Pence
Pence
Pence
5.3
5.2
9.2
9.1
4.9
4.9
2.6
2.6
Year ended 31 December 2020
Year ended 31 December 2019
Adjusted
EBITDA
£m
366.1
45.9
412.0
Adjusted
profit after tax
£m
96.4
21.2
117.6
Total
profit after tax
£m
(194.6)
36.7
(157.9)
Adjusted
EBITDA
£m
371.3
38.5
409.8
Adjusted
profit after tax
£m
98.6
19.5
118.1
Total
profit after tax
£m
(9.7)
10.2
0.5
5.6 Post balance sheet events
On 8 February 2021, the Group announced the proposed acquisition of Pinnacle Renewable Energy Inc. (Pinnacle), which is subject
to the approval of Drax and Pinnacle shareholders, court approval and regulatory approvals. If all required approvals are received,
the acquisition is expected to complete in the second or third quarter of 2021. Under the acquisition agreement, Drax will acquire
the entire issued share capital of Pinnacle, valuing the fully diluted equity of Pinnacle at C$385 million (£226 million at a rate of
C$1.7/£), with an enterprise value of C$741 million, including C$356 million of net debt.
196 Drax Group plc Annual report and accounts 2020
Section 6: Our people
The notes in this section relate to the remuneration of the directors and employees of the Group, including the Group’s obligations
under retirement benefit schemes.
6.1 Colleagues including directors and employees
This note provides a more detailed breakdown of the cost of employees, including executive directors of the Group. The average
number of employees in Operations (staff based at production sites), Customers services (employees in our Customers segment)
and Central and administrative functions are also provided.
Further information in relation to pay and remuneration of the executive directors can be found in the Remuneration Committee
report, starting on page 108.
Staff costs (including executive directors)
Wages and salaries
Social security costs
Pension costs (note 6.3)
Share-based payments (note 6.2)
Termination benefits
Years ended 31 December
2020
£m
147.6
17.3
24.5
6.3
17.0
212.7
2019
£m
151.6
16.2
19.6
3.5
–
190.9
£196.3 million of staff costs in the table above are included in operating and administrative expenditure (note 2.3). The remaining
amounts of £3.8 million (2019: £6.5 million) were capitalised in the year and £12.6 million (2019: £10.1 million) relates to discontinued
operations. The £17.0 million of termination benefits relates to coal closure, details can be found in note 5.1. The Pension costs of
£24.5m (2019: £19.6m) are made up of Defined contribution pension cost of £14.6m (2019: £12.5m), Defined Benefit pension current
service cost of £8.4m (2019: £7.1m) and Pension scheme admin costs of £1.5m (2019: £nil). Defined benefit past service costs of
£7.4m (2019: £nil) are recognised as termination benefits relating to the coal closure.
Average monthly number of people employed (including executive directors)
Generation operations
Pellet Production operations
Customers services
Central and administrative functions
Years ended 31 December
2020
(number)
2019
(restated number)
968
253
1,071
723
3,015
969
254
1,188
577
2,988
The Group restructured the staff hierarchies of certain employees during the year. The restructure saw employees within
administrative functions that were previously allocated to the Generation and Customers business units now allocated to Central
and administrative functions, with costs directly attributable to business units being recharged. The 2019 comparatives have been
re-presented to reflect what the comparative would have been under this new structure.
6.2 Share-based payments
The Group operates three share option schemes for employees: the Long Term Incentive Plan 2020 (LTIP 2020) for Executive
Directors and senior employees (which replaced the Performance Share Plan (PSP) from 2020), the Deferred Share Plan (DSP) for
Executive Directors, and the Sharesave Plan (SAYE) for all UK qualifying employees. The Group incurs a non-cash charge in respect
of these schemes in the income statement, which is set out below along with a detailed description of each scheme and the
number of options outstanding.
In the year the Group has granted share appreciation rights (SARs) to employees in the form of “One Drax Awards”. No Executive
Directors participate in these awards. These are cash awards that are tracked by reference to the Group share price over the
vesting period. At the grant date of the award the employee is granted a number of phantom shares based on the value of the cash
award divided by the Group share price at the date of the grant. At the end of the vesting period, the employee receives the cash
award based on the Group share price at the date of vesting.
Accounting policy
The LTIP 2020, PSP, DSP and SAYE share-based payments are equity settled. Equity-settled share-based payments are measured
at the fair value of the equity instrument at the date of grant and are recognised in the income statement on a straight-line basis
over the relevant vesting period, based on an estimate of the shares that will ultimately vest as a result of the effect of non-market
based vesting conditions, which is revised at each balance sheet date.
Drax Group plc Annual report and accounts 2020 197
Strategic reportGovernanceFinancial statementsShareholder information
Section 6: Our people continued
6.2 Share-based payments continued
The One Drax Awards are cash-settled share-based payments. Cash-settled share-based payments are recognised as a liability,
with the corresponding expense recognised as an employee benefit expense. Cash-settled share-based payments are measured at
fair value. The fair value of the amount to be paid under cash-settled share-based payments is recognised as an expense over the
period the employee becomes unconditionally entitled to the payment. The fair value of the liability for cash-settled share-based
payments is remeasured at each reporting date and at the settlement date.
Costs recognised in the income statement in relation to share-based payments during the year were as follows:
Equity settled
LTIP 2020 (granted from 2020)
PSP (granted from 2017)
DSP (granted from 2017)
BMP (granted in periods prior to 2017)
SAYE
Cash settled
One Drax awards
Total share-based payment expense (note 6.1)
Years ended 31 December
2020
£m
0.4
0.8
0.7
–
3.3
1.1
6.3
2019
£m
–
0.8
0.6
(0.5)
1.8
0.8
3.5
Of the total share-based payment expense in the table above, £0.7 million relates to discontinued operations (2019: £0.2 million).
Share Incentive Plan (SIP)
Between 2008 and 2010, qualifying employees could buy up to £1,500 worth of Partnership Shares in any one tax year. Matching
shares were awarded to employees to match any shares they bought, in a ratio of one-to-one, with the cost of matching shares
borne by the Group. There have been no awards under the SIP Partnership and Matching Share plan since 2010.
Shares in the Company held under trust and under the Company’s control as a result of the SIP are as follows:
SIP
Shares held
at 1 January
2020
(number)
70,044
Shares
acquired
during year
(number)
–
Shares
transferred
during year
(number)
(10,671)
Shares held
at 31 December
2020
(number)
59,373
Cost
at 31 December
2020
£
Nominal value
at 31 December
2020
£
Market value
at 31 December
2020
£
557
6,859
222,649
Long Term Incentive Plan 2020 (LTIP 2020)
The LTIP 2020 was introduced in 2020 for executive directors and senior employees. This replaced the Performance Share Plan
which operated from 2017 to 2019 (see below). Under the LTIP 2020, annual awards of performance and service-related shares are
made for no consideration to Executive Directors and other senior employees up to a maximum of 200% of their annual base salary.
Vesting of a proportion of shares (50%) is conditional upon whether the Group’s Total Shareholder Return (TSR) matches or
outperforms an index (determined in accordance with the scheme rules) over three years and vesting of a proportion of shares
(50%) is conditional upon performance of Cumulative Adjusted EPS over three years.
The fair value of the LTIP awards of £3.1 million made in 2020 is being charged to the income statement on a straight-line basis over
the three-year vesting period. The fair value of LTIP 2020 awards is calculated using a Monte-Carlo valuation model, which takes
into account the estimated probability of different levels of vesting. The key inputs to the valuation model for the 2020 awards are
the share price at the grant date of 203 pence, expected volatility of 37%, and risk-free interest rate of 0.05%.
Movements in the number of shares outstanding for the LTIP 2020 is shown below. As this is a new scheme in the year, there are no
comparatives presented:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
The weighted average fair value of the options granted during the year was 156 pence.
198 Drax Group plc Annual report and accounts 2020
2020
(number)
–
3,093,600
(38,432)
–
–
3,055,168
6.2 Share-based payments continued
All of the LTIP 2020 options outstanding at the end of the period had an exercise price of £nil. The weighted average remaining
contractual life was 29 months.
The number of options exercisable at the year end was nil.
Performance Share Plan (PSP)
The PSP was introduced for executive directors and senior employees to replace the BMP from 2017. Under the PSP, annual awards
of performance and service-related shares were made for no consideration up to a maximum of 175% of their annual base salary.
Vesting of a proportion of shares (50%) was conditional upon whether the Group’s Total Shareholder Return (TSR) matches or
outperforms an index (determined in accordance with the scheme rules) over three years and vesting of a proportion of shares is
conditional upon performance against the internal balanced corporate scorecard. No PSP awards were granted in 2020.
Movements in the number of shares outstanding for the PSP awards are as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
2020
(number)
3,001,565
–
(553,820)
(159,429)
(480,709)
1,807,607
2019
(number)
2,675,336
918,136
–
–
(591,907)
3,001,565
No shares were granted in the year, the weighted average fair value of the options granted during the previous year was 299 pence.
All of the PSP options outstanding at the end of the period had an exercise price of £nil (2019: £nil). The weighted average
remaining contractual life was 8 months (2019: 20 months).
The number of options exercisable at the year end was nil (2019: nil).
The weighted average share price of options exercised during the period at the date of exercise was 202 pence.
Deferred Share Plan (DSP)
In addition, the Group operates the DSP, under which executive directors defer into shares a minimum of 40% (2019: 35%) of their
annual bonus. DSP awards are granted at nil cost and vest after three years subject to continued employment or “good leaver”
termination provisions. The share price on the grant date of DSP awards made in 2020 was 149 pence (2019: 378 pence) and the
fair value of these awards of £0.3 million (2019: £1.9 million) is being charged to the income statement on a straight-line basis over
the three-year vesting period.
The fair value of DSP awards is calculated using a Monte-Carlo valuation model, which takes into account the estimated probability
of different levels of vesting. The key inputs to the valuation model for the 2020 awards are the share price at date of grant,
expected volatility of 37% (2019: 35%), and risk-free interest rate of 0.05% (2019: 0.98%).
Movements in the number of share options outstanding for the DSP awards are as follows:
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
2020
(number)
648,248
179,921
(47,115)
(90,616)
–
690,438
2019
(number)
226,588
495,366
–
–
(73,706)
648,248
The weighted average fair value of the options granted during the year was 149 pence (2019: 378 pence).
All of the DSP options outstanding at the end of the period had an exercise price of £nil (2019: £nil). 100% of the DSP options
granted in 2020 will vest in three years; the weighted average remaining contractual life was 16 months (2019: 21 months).
The weighted average share price of options exercised during the period at the date of exercise was 154 pence.
The number of options exercisable at the year end was nil (2019: nil).
Drax Group plc Annual report and accounts 2020 199
Strategic reportGovernanceFinancial statementsShareholder information
Section 6: Our people continued
6.2 Share-based payments continued
Sharesave Plan (SAYE)
In March 2020, participation in the SAYE plan was offered again to all UK qualifying employees. Options were granted for
employees to acquire shares at a price of 127 pence (2019: 298 pence), representing a discount of 20% to the prevailing market
price determined in accordance with the scheme rules. The options are exercisable at the end of three or five-year savings
contracts. The fair value of the options granted in connection with the SAYE plan of £4.9 million (2019: £2.8 million) is being
charged to the income statement over the term of the relevant contracts.
Movements in the number of share options outstanding for the SAYE plans are as follows:
2020
2019
Three-year
Weighted
average
exercise price
SAYE
three-year
(number)
Five-year
Weighted
average
exercise price
3,055,918
271
8,951,973
127
(81,835)
204
267
(81,817)
270 (2,320,423)
9,523,816
137
244
127
319
206
249
139
SAYE
five-year
(number)
1,656,746
3,225,364
(6,195)
(13,089)
(1,213,201)
3,649,625
Three-year
Weighted
average
exercise price
212
298
248
203
271
271
SAYE
three-year
(number)
3,884,950
2,090,547
(54,226)
(2,527,770)
(337,583)
3,055,918
Five-year
Weighted
average
exercise price
212
298
206
203
276
244
SAYE
five-year
(number)
1,107,394
680,463
(16,046)
(30,874)
(84,191)
1,656,746
At 1 January
Granted
Forfeited
Exercised
Expired
At 31 December
The fair value of SAYE awards is calculated using a Black-Scholes model, which compares exercise price to share price at the date
of grant. The fair value of SAYE options granted and the inputs to the option pricing model used in the current and previous year
are set out in the table below:
Grant date
Share price at grant date (pence)
Vesting period
Exercise price (pence)
Dividend yield
Annual risk-free interest rate
Expected volatility
Fair value of options granted (pence)
14 April 2020
three-year
14 April 2020
five-year
27 March 2019
three-year
27 March 2019
five-year
185
3 years
127
8.6%
0.04%
35.0%
41
185
5 years
127
8.6%
0.10%
39.6%
39
379
3 years
298
4.1%
1.00%
34.6%
100
379
5 years
298
4.6%
1.06%
38.1%
106
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three and five
years respectively. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of
non-transferability, exercise restrictions and behavioural considerations.
For the SAYE options exercised during the period, the weighted average share price at the date of exercise was 296 pence (2019:
325 pence).
The range of exercise prices of SAYE options outstanding at the end of the period was between 127 pence and 298 pence (2019:
203 pence and 319 pence). The weighted average remaining contractual life was 33 months (2019: 26 months).
The number of options exercisable at the year end was 3,857 (2019: nil).
One Drax Awards
The One Drax Award scheme is a SAR scheme that awards certain employees phantom shares. These shares are to be retained by
the employee for a period of one year. The number of phantom shares awarded to the employees is calculated by taking the cash
value awarded, divided by the Drax Group share price at the grant date. The phantom shares are tracked on the Drax Group share
price over the retention period and, at the end of this period, the intrinsic value of the phantom shares is paid to the employees.
The Group records a liability for the amount of cash to be paid to the employees calculated at FVTPL. The fair value of the SARs are
determined by reference to the share price.
All awards issued were settled before the year, as a result, there was no liability recognised at 31 December 2020 or 31 December
2019.
Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration Committee report on
page 108.
200 Drax Group plc Annual report and accounts 2020
6.3 Retirement benefit obligations
The Group operates two defined benefit and four defined contribution pension schemes.
Name of scheme
Type of Benefit
Status
Country
Drax Power Group (DPG) section of the
Electricity Supply Pension Scheme (ESPS)
Defined benefit final salary
Drax (2019) Scheme
Drax Group Personal Pension Plan
Haven Power Personal Pension Plan
Opus Energy Group Personal Pension Plan
Drax Biomass Inc. 401(K) Plan
Defined benefit final salary
Defined contribution
Defined contribution
Defined contribution
Defined contribution
Closed to new members in 2002
Closed to new members
on transfer in 2019
Open to new members
Open to new members
Open to new members
Open to new members
UK
UK
UK
UK
UK
US
Trustee governance (defined benefit pension schemes)
The UK defined benefit plans are administered by a separate board of trustees, which is legally separate from the Company.
The trustees are composed of representatives of both the employer and employees. The trustees are required by law to act in the
interest of all relevant beneficiaries and are responsible for the investment policy for the assets and the day-to-day administration
of the benefits.
Accounting policy
Payments to defined contribution schemes are recognised as an expense when employees have rendered services that entitle
them to the contributions. The income statement charge for the defined contribution scheme represents the contributions due
to be paid by the Group in respect of the current period.
For the defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit method, with
actuarial valuations being carried out at the end of each reporting period. Remeasurement of the obligation, comprising actuarial
gains and losses, the effect of the asset ceiling (if applicable) and the return on scheme assets (excluding interest), is recognised
immediately in the balance sheet with a charge or credit to the statement of comprehensive income in the period in which it
occurs. Defined benefit costs, including current service costs, past service costs and gains and losses on curtailments and
settlements are recognised in the income statement as part of operating and administrative expenses in the period in which
they occur. The net interest expense is recognised in finance costs.
Significant estimation uncertainty
Measurement of the defined benefit obligation using the projected unit credit method involves the use of key assumptions,
including discount rates, inflation rates, salary and pension increases and mortality rates. These actuarial assumptions are
reviewed annually and modified as appropriate. The Group believes that the assumptions utilised in measuring obligations under
the scheme are reasonable based on prior experience, market conditions and the advice of pension scheme actuaries. However,
actual results may differ from such assumptions.
The assumptions applied in 2020 have been prepared on a consistent basis with those in the previous period, other than inflation,
which has taken account of the expected changes as a result of RPI reform. The assumptions have been prepared in accordance
with independent actuarial advice received.
Defined contribution schemes
The Group operates four defined contribution schemes for all qualifying employees. Pension costs for the defined contribution
schemes are as follows:
Total included in staff costs
Years ended 31 December
2020
£m
14.6
2019
£m
12.5
As at 31 December 2020, contributions of £0.3 million (2019: £0.6 million) due in respect of the current reporting period had not
been paid over to the schemes. The Group has no further outstanding payment obligations once the contributions have been paid.
Defined benefit schemes
The pension surplus and liability are shown gross on the Balance Sheet as there is no legal right of offset between the two defined
benefit pension schemes. The net pension surplus for the two defined benefit pension schemes is as follows:
Drax Power Group section of ESPS
Drax 2019 Scheme
Total net surplus recognised in the balance sheet
As at 31 December
2020
£m
9.5
(1.3)
8.2
2019
£m
3.1
3.9
7.0
Drax Group plc Annual report and accounts 2020 201
Strategic reportGovernanceFinancial statementsShareholder information
Section 6: Our people continued
6.3 Retirement benefit obligations continued
The DPG section of the ESPS and the Drax 2019 scheme are collectively referred to as the Defined Benefit Schemes or the
Schemes below. At 31 December 2020, application of the accounting assumptions used in relation to the Defined Benefit Schemes,
which are described in further detail below, continued to result in a net position of surplus assets over liabilities.
The DPG section of the ESPS was closed to new members as of 1 January 2002 unless they had qualified through being existing
members of another part of the ESPS. Members who joined before this date continue to build up pension benefits as part of the
scheme. Members are typically entitled to an annual pension on retirement of 1/80th of final pensionable salary for each year of
service plus a tax-free lump sum of three-times pension.
On 31 December 2018, Drax completed a transaction to acquire assets from ScottishPower. Under the terms of the Sale and
Purchase Agreement, employees with defined benefit pension rights were also transferred to Drax.
Over the summer of 2019 each transferring member was given the option to either transfer their past service benefits into the Drax
2019 Scheme or keep their past service in the ScottishPower Pension Scheme. As part of this, 81 members agreed to transfer their
past service into the Drax 2019 Defined Benefit Scheme. From 1 January 2020, a further 15 members have begun to build up future
service within the Drax 2019 Scheme.
Under the Drax 2019 Scheme, employees are entitled to retirement benefits based on final salary on attainment of retirement age
(or earlier withdrawal or death). No other post-retirement benefits are provided. The Scheme is open to future accrual of benefits
but closed to new members.
The Schemes expose the Group to actuarial and other risks, the most significant of which are considered to be:
Investment risk
Discount rate risk
Longevity risk
Inflation risk
Credit risk
Risk management
The Schemes’ liabilities are calculated using a discount rate set with reference to corporate bond
yields; if assets underperform this yield, this will create a deficit. The ESPS Scheme holds a significant
proportion of growth assets (diversified growth funds, direct lending and absolute return bonds) which,
though expected to outperform corporate bonds in the long term, create volatility and risk in the short
term. The allocation to growth assets is monitored to ensure it remains appropriate given this Scheme’s
long-term objectives.
A decrease in corporate bond yields will increase the value placed upon the Schemes’ liabilities, although
this will be partially offset by an increase in the value of the Schemes’ bond holdings.
The majority of the Schemes’ obligations are to provide benefits for the life of the member, so increases
in life expectancy will result in an increase in the liabilities of the scheme.
The majority of the Schemes’ obligations to pay benefits are linked to inflation and, as such, higher
inflation will lead to higher liabilities. The majority of the assets held by the Scheme are either unaffected
by or only loosely correlated with inflation, such that an increase in inflation will also increase the deficit.
In most cases, caps on inflationary increases are in place to protect against extreme inflation. The
Schemes have a significant holding in liability-driven investments and a substantial proportion of this risk
is hedged.
A proportion of the Schemes’ funded liabilities are currently hedged against interest rates and inflation
using liability-driven investments. Note that the Schemes hedge interest rate risk on a statutory and
long-term funding basis (gilts) whereas AA corporate bonds are implicit in the IAS 19 discount rate and
so there is some mismatching risk to the Group should yields on gilts and corporate bonds diverge. The
Schemes’ exposure to corporate bonds mitigates this risk to some extent.
The Company and trustees have agreed a long-term strategy for reducing investment risk as and when
appropriate. This includes an asset-liability matching policy which aims to reduce the volatility of the
funding level of the Scheme by investing in assets that perform in line with the liabilities of the Scheme
so as to protect against interest rates being lower or inflation being higher than expected.
Other risks include operational risks (such as paying out the wrong benefits), legislative risks (such as the Government increasing
the burden on pension schemes through new legislation) and other demographic risks (such as making a higher proportion of
members with dependants eligible to receive pensions from the Group). The Trustees ensure certain benefits are payable on death
before retirement.
The most recent funding valuation of the DPG ESPS was carried out by Aon Hewitt, a qualified independent actuary, as at 31 March
2019. The actuarial review at 31 December 2020 is based on the same membership and other data as this funding valuation. The
scheme board accepted the advice of the actuary and approved the use of these assumptions for the purpose of assessing the
scheme cost.
The results of the latest funding valuation at 31 March 2019 have been adjusted to the balance sheet date, taking into account
experience over the period since that date, changes in market conditions and differences in financial and demographic
assumptions. The present value of the defined benefit obligation and the related current service costs were measured using the
projected unit credit method.
202 Drax Group plc Annual report and accounts 2020
6.3 Retirement benefit obligations continued
The 2019 Scheme is yet to have completed its first triennial valuation. Work commenced on the first valuation dated 31 March 2020
and is expected to conclude in 2021.
The principal assumptions for the Schemes are set out below. Where absolute assumptions differ between the two schemes,
reflecting differences in the expected duration of the scheme liabilities, a weighted average is shown.
Discount rate
Inflation (RPI)
Rate of increase in pensions in payment and deferred pensions
Rate of increase in pensionable salaries
As at 31 December
2020
% p.a.
1.5
2.6
2.6
3.2
2019
% p.a.
2.1
2.9
2.9
3.5
Mortality assumptions are based on recent actual mortality experience of scheme members and allow for expected future
improvements in mortality rates. The assumptions are that a member aged 60 in 2020 will live, on average, for a further 26 years
if they are male (2019: 26 years) and for a further 28 years if they are female (2019: 28 years). Life expectancy at age 60 for male
and female non-pensioners currently aged 45 is assumed to be 27 and 29 years respectively (2019: 27 and 29 years respectively).
The expected duration of the DPG ESPS at 31 December 2020 based on the IAS 19 position was around 20 years (2019: around 20
years). The expected duration of the 2019 Scheme at 31 December 2020 based on the IAS 19 position was 25 years (2019: 25 years).
The net surplus recognised in the balance sheet in respect of the Schemes is the excess of the fair value of the plan assets over
the present value of the defined benefit obligation, determined as follows:
Defined benefit obligation
Fair value of plan assets
Net surplus recognised in the balance sheet
As at 31 December
2020
£m
(378.1)
386.3
8.2
2019
£m
(345.4)
352.4
7.0
The total charges recognised in the income statement, within other operating and administrative expenses and finance costs,
are as follows:
Included in staff costs (note 6.1):
Current service cost
Past service cost
Included in finance costs (note 2.5):
Interest on net defined benefit surplus
Total amounts recognised in the income statement
Years ended 31 December
2020
£m
8.4
7.4
(0.3)
15.5
2019
£m
7.1
–
(0.8)
6.3
The past service cost relates to an increase in pension liability as a result of coal closure, further details can be found in note 5.1. The
calculation was performed by a qualified actuary using the same assumptions as those applied to the rest of the scheme and the past
service cost represents the difference between the liability relating to the standard Group benefits as per the current reserve in the
calculation of the Group’s IAS 19 position and the corresponding liability in respect of the equivalent redundancy benefits offered to
those employees to be made redundant.
Drax Group plc Annual report and accounts 2020 203
Strategic reportGovernanceFinancial statementsShareholder information
Section 6: Our people continued
6.3 Retirement benefit obligations continued
Changes in the present value of the defined benefit obligation of the Schemes are as follows:
Defined benefit obligation at 1 January
Current service cost
Past service cost
Employee contributions
Interest cost
Actuarial losses
Benefits paid
Defined benefit obligation at 31 December
Years ended 31 December
2020
£m
345.4
8.4
7.4
0.2
6.9
30.5
(20.7)
378.1
2019
£m
312.2
7.1
–
0.2
9.0
49.8
(32.9)
345.4
As described in note 5.5 on 31 January the Group disposed of the CCGT portfolio. This led to 42 members, of a pre-transaction total
of 96, ceasing to accrue benefits in the Drax 2019 Scheme. However, the pension scheme did not form part of the transaction and
therefore the assets and liabilities in relation to the Drax 2019 Scheme will remain on the Group’s Balance Sheet.
The actuarial losses of £30.5 million (2019: losses of £49.8 million) reflect losses of £30.0 million arising from changes in financial
assumptions (2019: losses of £50.3 million), gains arising from scheme experience of £0.3 million (2019: losses of £3.4 million) and
losses of £0.8 million arising from changes in demographic assumptions (2019: gains of £3.9 million).
The losses due to changes in financial assumptions principally reflect the decrease in the present value of the scheme liabilities
arising as a result of the change in discount rate assumption to 1.5% (2019: 2.1%) following decreases in corporate bond yields.
Changes in the fair value of plan assets are as follows:
Fair value of plan assets at 1 January
Interest on plan assets
Remeasurement gains
Employer contributions
Employee contributions
Benefits paid
Fair value of plan assets at 31 December
Years ended 31 December
2020
£m
352.4
7.2
32.3
14.9
0.2
(20.7)
386.3
2019
£m
333.8
9.9
28.3
13.1
0.2
(32.9)
352.4
Employer contributions included payments totalling £5.3 million (2019: £5.2 million) to reduce the actuarial deficit. There were
contributions of £0.9 million outstanding at the end of the year (2019: £0.9 million).
The actual return on plan assets in the period was £39.5 million (2019: £38.2 million).
The fair values of the major categories of plan assets were as follows:
Gilts
Equities(1)
Fixed interest bonds(2)
Property
Investment funds
Cash and other assets(3)
Fair value of total plan assets
As at 31 December
2020
£m
160.7
26.8
35.6
38.3
27.2
97.7
386.3
2019
£m
100.3
24.6
30.7
36.7
36.9
123.2
352.4
Notes:
(1)
(2)
(3)
At 31 December 2020 the ESPS scheme’s long-term asset strategy was: diversified growth funds (37%), direct lending (10%), absolute return bonds (3%), liability
driven investing (40%) and long lease property (10%). The 2019 scheme’s long term investment strategy is to move gradually towards a fully hedged position but
to maintain assets which generate returns such as equity options, swap options and credit strategy
Fixed interest bonds include a mixture of corporate, Government and absolute return bonds
Other assets include £24.2 million of investments in direct lending, a type of private equity vehicle, which is not quoted in an active market (2019: £19.4 million).
The fair value of these investments is derived in accordance with International Private Equity and Venture Capital Valuation (IPEV) Guidelines. All other assets are
quoted in an active market Cash and other assets include £22.3 million in relation to a strategy to hedge liabilities and achieve active exposure
to equity returns
The pension plan assets do not include any ordinary shares issued by Drax Group plc or any property occupied by the Group.
204 Drax Group plc Annual report and accounts 2020
6.3 Retirement benefit obligations continued
The assumptions for discount rate, inflation rate, rate of increase in pensions paid and expected return on plan assets all have
a potentially significant effect on the measurement of the scheme surplus. The following table provides an indication of the
sensitivity of the pension surplus at 31 December 2020 to changes in these assumptions:
Discount rate
Inflation rate(1)
Life expectancy
– Increase
– Decrease
– Increase
– Decrease
– Increase
– Decrease
0.5%
0.5%
0.5%
0.5%
1 year
1 year
Increase/
(decrease)
in net surplus
£m
37.6
(41.6)
(33.2)
30.2
(14.6)
14.6
Note:
(1)
The sensitivity of the scheme liabilities to salary and pension increases is closely correlated with inflation
The Group is exposed to investment and other risks, as described above, and may need to make additional contributions where
it is estimated that the benefits will not be met from regular contributions and expected investment income.
The sensitivity on discount rate above is lower than the actual rate of change experienced during 2020. However, given events
and circumstances in 2020 (Covid-19 pandemic, Brexit uncertainty, US Presidential elections) we do not anticipate the same level
of movement going forwards, and therefore 0.25% is deemed an appropriate sensitivity to apply.
The DPG ESPS defined benefit obligation includes benefits for current employees of the Group (50%), former employees of the
Group who are yet to retire (5%) and retired pensioners (45%).
Future contributions
UK legislation requires that pension schemes are funded prudently (i.e. to a level in excess of the current expected cost of providing
benefits).
The last actuarial valuation of the DPG section of the ESPS was carried out by the Trustee’s actuarial advisers, Aon Hewitt, as at
31 March 2019. The 2019 Scheme is yet to have completed its first triennial valuation. Work commenced on the first valuation dated
31 March 2020 and is expected to conclude in 2021.
Such valuations are required by law to take place at intervals of no more than three years. Following each valuation, the Trustees
and the Group must agree the contributions required (if any) such that the schemes are fully funded over time on the basis of
suitably prudent assumptions. The next funding valuation of the DPG Section of the ESPS is due no later than 31 March 2022, at
which progress towards full-funding will be reviewed.
Following the latest actuarial valuation of the DPG Section of the ESPS, the Group agreed to repair the funding deficit of
£35.9 million as at 31 March 2019 over the period to 30 June 2024, subject to the actuarial assumptions adopted for the triennial
valuation as at 31 March 2019 being borne out in practice. The agreement includes payments of £7.2 million per annum (indexed
with RPI) to be paid until 30 June 2024.
The Group expects to make total contributions of £13.4 million to the Schemes during the 12 months ended 31 December 2021.
The Group has also agreed to make additional contributions over the period to 31 December 2025 to eliminate the self-sufficiency
deficit. At this point the scheme is expected to be self-sufficient and fully funded, unless material adverse changes in economic
conditions arise compared to those assumed in the valuation. The Group is confident that the additional contributions are
manageable within the Group’s business plan.
The Trust Deed provides the DPG section of the ESPS with an unconditional right to a refund of surplus assets assuming the
gradual settlement of plan liabilities over time. Furthermore, in the ordinary course of business the Trustees have no right to
unilaterally wind up, or otherwise augment the benefits due to members of the DPG section of the ESPS. Based on these rights,
any net surplus in the plan is recognised in full.
Drax Group plc Annual report and accounts 2020 205
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management
This section provides disclosures around financial risk management, including the financial instruments the Group uses to mitigate
such risks.
7.1 Financial instruments and their fair values
The Group hold a variety of derivatives and non-derivative financial instruments, including cash and cash equivalents, borrowings,
payables and receivables arising from operations.
Accounting classifications and fair values
The tables below show the carrying amounts and fair values of financial assets and liabilities, including their levels in the fair value
hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the
carrying amount is a reasonable approximation of fair value. Cash and cash equivalents (note 4.2), trade and other receivables (note
3.6) and trade and other payables (note 3.8) generally have a short time to maturity. For this reason, their carrying values, on the
historical cost basis, approximate to their fair value. The Group’s borrowings relate principally to the publicly traded high-yield loan
notes and amounts drawn against term loans (note 4.3). These financial liabilities have been measured at amortised cost.
31 December 2020
£m
Fair value-
hedging
instruments
Mandatorily
at FVTPL-
others
FVOCI-
equity
instruments
Financial
assets at
amortised
cost
Other
financial
liabilities
Total
Level 1
Level 2
Level 3
Total
Carrying amount
Fair Value
Financial assets measured at Fair value
Commodity
contracts
102.1
–
60.5
20.0
40.3
41.9
Financial contracts
Foreign currency
exchange
contracts
Interest rate and
cross-currency
contracts
0.1
6.2
–
–
12.2
–
Inflation rate swaps
Equity investments
Financial assets not measured at Fair value
Trade and other
receivables
Cash and cash
equivalents
–
Financial liabilities measured at Fair value
Commodity
contracts
–
–
–
(106.4)
–
(49.6)
(36.8)
Financial contracts
Foreign currency
exchange
contracts
Interest rate and
cross-currency
contracts
(57.0)
(136.8)
(67.0)
–
Financial liabilities not measured at Fair value
Secured bank loans
Secured bond
–
–
issues
Lease liabilities
Trade and other
payables
–
–
–
–
–
–
–
–
–
–
–
1.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
432.8
289.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
162.6
20.0
82.2
0.1
18.4
1.5
432.8
289.8
(156.0)
(36.8)
(193.8)
(67.0)
(483.2)
(483.2)
–
–
–
–
–
–
–
–
–
–
–
162.6
20.0
82.2
0.1
18.4(1)
–
(156.0)
(36.8)
(193.8)
(67.0)
(500.2)
(582.5)
(30.2)
(582.5)
(30.2)
(614.5)
–
–
(30.7)
(619.4)
(619.4)
–
–
–
–
–
1.5
–
–
–
–
–
–
–
162.6
20.0
82.2
0.1
18.4
1.5
(156.0)
(36.8)
(193.8)
(67.0)
(500.2)
(614.5)
(30.7)
Note:
(1)
The UK inflation rate swaps contain unobservable inputs in their fair value valuation techniques. However, these unobservable inputs are not material to the
valuation and therefore they have been categorised as Level 2 in the fair value hierarchy in line with IFRS 13.
206 Drax Group plc Annual report and accounts 2020
7.1 Financial instruments and their fair values continued
31 December 2019
£m
Fair value-
hedging
instruments
Mandatorily
at FVTPL-
others
FVOCI-
equity
instruments
Financial
assets at
amortised
cost
Other
financial
liabilities
Total
Level 1
Level 2
Level 3
Total
Carrying amount
Fair Value
Financial assets measured at Fair value
Commodity
contracts
152.1
–
0.2
33.7
Financial contracts
Foreign currency
exchange
contracts
76.9
65.0
–
–
–
1.7
16.4
–
Interest rate and
cross-currency
contracts
Inflation swaps
Equity investments
Financial assets not measured at Fair value
Trade and other
receivables
Cash and cash
equivalents
–
Financial liabilities measured at Fair value
Commodity
contracts
–
–
–
(83.1)
(4.0)
(38.2)
(42.2)
Financial contracts
Foreign currency
exchange
contracts
Interest rate and
cross-currency
contracts
(46.0)
(68.8)
(7.1)
–
Financial liabilities not measured at Fair value
Secured bank loans
Secured bond
–
–
issues
Lease liabilities
Trade and other
payables
–
–
–
–
–
–
–
–
–
–
–
3.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
541.5
404.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
152.3
33.7
141.9
1.7
16.4
3.0
541.5
404.1
(121.3)
(46.2)
(114.8)
(7.1)
(526.8)
(526.8)
–
–
–
–
–
1.5
–
–
–
–
–
152.3
33.7
141.9
1.7
16.4(1)
–
(121.3)
(46.2)
(114.8)
(7.1)
(548.1)
(718.4)
(32.5)
(718.4)
(32.5)
(762.9)
–
–
(33.0)
(683.0)
(683.0)
–
–
–
–
–
1.5
–
–
–
–
–
–
152.3
33.7
141.9
1.7
16.4
3.0
(121.3)
(46.2)
(114.8)
(7.1)
(548.1)
(762.9)
(33.0)
Note:
(1)
The UK inflation rate swaps contain unobservable inputs in their fair value valuation techniques. However, these unobservable inputs are not material to the
valuation and therefore they have been categorised as Level 2 in the fair value hierarchy in line with IFRS 13.
The derivative financial instruments used by the Group and not subject to the own-use exemption have been categorised as follows:
• Commodity contracts – forward contracts for the sale or purchase of a physical commodity which is expected to be settled through
physical delivery of the commodity.
• Financial contracts – freight and weather-related contracts, as well as contracts for commodities that are not expected to be settled
through physical delivery of the commodity.
• Foreign currency exchange contracts – currency related contracts including forwards, vanilla options, structured option products.
• Interest rate and cross-currency contracts – contracts which swap one interest rate for another in a single currency, including
floating-to-fixed interest rate swaps, contracts which swap interest and principal cash flows in one currency for another currency,
including fixed-to-fixed and floating-to-fixed cross-currency interest rate swaps, and interest swaptions.
• Inflation rate swaps – swap contracts, such as floating-to-fixed, which are linked to an inflation index such as RPI or CPI, and inflation
swaptions.
Drax Group plc Annual report and accounts 2020 207
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
7.1 Financial instruments and their fair values continued
Fair value measurement
• Commodity contracts fair value – The fair value of open commodity contracts that do not qualify for the own-use exemption is
calculated by reference to forward market prices at the balance sheet date.
• Financial contracts fair value – The fair value of financial contracts that do not qualify for the own-use exemption, is calculated by
reference to forward market prices at the balance sheet date.
• Foreign currency exchange contracts fair value – The fair value of forward foreign currency exchange contracts is determined using
forward currency exchange market rates at the balance sheet date.
• Interest rate and cross-currency contracts – The fair value of interest rate swaps is calculated by reference to forward market curves
at the balance sheet date for the relevant interest index. The fair value of cross-currency interest rate swaps is calculated using the
relevant forward currency exchange market rates for fixed-to-fixed swaps and by using the relevant forward currency exchange
market rates and interest index for floating-to-fixed swaps.
• Inflation rate swaps – The fair value of inflation rate swaps is calculated by reference to forward market curves at the balance sheet
date for the relevant inflation index.
Given the maturity profile of all these contracts, liquid forward market price curves are available for the duration of the contracts.
The fair values of all derivative financial instruments are discounted to reflect the credit risk inherent within the instrument.
The Group has reviewed all significant contracts for the presence of embedded derivatives. The 2025 USD loan notes, the 2025
EUR loan notes, and the infrastructure term loan facilities, all contain early repayment options that meet the definition of
embedded derivatives. However, in all cases, these do not require separate valuation as they are deemed to be closely related
to the host contract.
IFRS 13 requires categorisation of the Group’s financial instruments in accordance with the following hierarchy in order to explain
the basis on which their fair values have been determined:
• Level 1 – Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or
liabilities;
• Level 2 – Fair value measurements are those derived from inputs, other than quoted prices, included within Level 1, that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Level 3 – Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are
not based on observable market data (unobservable inputs).
Categorisation within this fair value measurement hierarchy has been determined on the basis of the lowest level input that is
significant to the fair value measurement of the relevant asset or liability.
The fair value of commodity contracts, financial contracts, foreign currency exchange contracts, interest rate and cross-currency
contracts, and US inflation swaps are largely determined by comparison between forward market prices and the contract price;
therefore, these contracts are categorised as Level 2.
The fair value of the UK inflation swaps comprises an RPI and CPI component. Whilst the RPI component is based on observable
market rates, CPI is based on unobservable rates and therefore deemed to be Level 3 in the fair value hierarchy. However, this
component is not material to the overall valuation and therefore the instruments as a whole are determined to be Level 2 in line
with IFRS 13.
The valuation technique used for non-listed equity investments comprises unobservable inputs and are therefore classified as
Level 3. However, given the valuations as a whole for Level 3 equity investments are immaterial, it is not deemed necessary to
include all Level 3 disclosures.
There have been no transfers during the year between Level 1, 2 or 3 category inputs.
Accounting for derivatives
Derivatives (subject to certain exemptions described below) must be measured at fair value, which is in essence the difference
between the price the Group has secured in the contract, and the price the Group could achieve in the market at that point in time.
Changes in fair value are recognised either within the income statement or the hedge reserve and cost of hedge reserve,
dependent upon whether the contract in question qualifies as an effective hedge under IFRS 9 (see note 7.2).
Where possible, the Group has taken advantage of the own-use exemption which allows qualifying contracts to be excluded from
fair value marked-to-market accounting. This applies to certain contracts for physical commodities entered into and held for the
Group’s own purchase, sale or usage requirements.
208 Drax Group plc Annual report and accounts 2020
7.1 Financial instruments and their fair values continued
Contracts for non-financial assets which do not qualify for the own-use exemption – principally power, gas, financial oil, financial
coal and carbon emissions allowances – are accounted for as derivatives in accordance with IFRS 9 and are recorded in the
balance sheet at fair value. Changes in fair value are reflected through the hedge reserve (note 7.3) to the extent that the contracts
are designated as effective hedges in accordance with IFRS 9, or the income statement where the hedge accounting requirements
are not met. To ensure these derivatives are not reflected in the underlying performance of the Group, they are excluded from the
Adjusted Results in the income statement.
The Group’s biomass risk management policy permits some flexibility in trading activity to optimise the overall portfolio position
and potentially release value in certain, limited circumstances. As such the own-use exemption would likely not apply to these
biomass contracts. However the nature of these contracts means they cannot be readily net settled in cash or other financial
instruments and, as a result, they remain outside of the scope of IFRS 9.
Derivative financial instruments with a maturity date within 12 months from the balance sheet date are classified as current assets
or liabilities. Instruments with a maturity date beyond 12 months are classified as non-current assets or liabilities.
Non-current derivative financial instrument assets
Current derivative financial instrument assets
Total derivative financial instrument assets
Non-current derivative financial instrument liabilities
Current derivative financial instrument liabilities
Total derivative financial instrument liabilities
As at 31 December
2020
£m
103.8
179.5
283.3
(142.1)
(311.5)
(453.6)
2019
£m
152.3
193.7
346.0
(72.9)
(216.5)
(289.4)
Total derivative financial instruments
(170.3)
56.6
The gains and losses recognised in the period relating to derivative financial instruments mandatorily measured at fair value
through profit or loss are detailed below. The Group had no financial assets or financial liabilities voluntarily designated at fair value
through profit or loss. In addition to the amounts disclosed below, gains and losses relating to derivatives qualifying for hedge
accounting are disclosed in notes 7.2 to 7.4.
Gains/(losses) on derivative financial instruments not qualifying for hedge accounting – recognised in
revenue
Gains/(losses) on derivative financial instruments not qualifying for hedge accounting – recognised in
cost of sales
Gains/(losses) on derivative financial instruments not qualifying for hedge accounting – recognised in
foreign exchange (losses)/gains
Total gains/(losses) on derivative financial instruments not qualifying for hedge accounting
Gains/(losses) recognised
2020
£m
8.7
2019
£m
(11.4)
(46.6)
(76.4)
(0.6)
(38.5)
2.0
(85.8)
7.2 Financial risk management
The Group’s activities expose it to a variety of financial risks, including commodity price risk, foreign currency risk, interest rate
risk, inflation risk, liquidity risk, counterparty risk and credit risk. The Group’s overall risk management programme focuses on
the unpredictability of commodity and financial markets and seeks to manage potential adverse effects on the Group’s
financial performance.
The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is overseen by the risk
management committees as explained in the principal risks and uncertainties section (page 66) 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 power, gas, sustainable wood fibre
and pellets, other fuels and the price of carbon emissions allowances. Price variations and market cycles have historically
influenced the financial results of the Group and are expected to continue to do so.
Drax Group plc Annual report and accounts 2020 209
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
7.2 Financial risk management continued
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. The analysis assumes all other
variables were held constant.
As a result of the increased volatility, predominantly due to Covid-19, sensitivities for larger changes in prices have been included in
the current year.
31 December 2020
Power
Carbon
Gas
Oil
7.2 Financial risk management continued
31 December 2019
Power
Carbon
Gas
Oil
Other
Impact on profit after tax
Impact on other components
of equity, net of tax
10% decrease
£m
10% increase
£m
10% decrease
£m
10% increase
£m
6.8
(2.7)
(11.0)
(7.6)
(6.8)
2.7
11.0
7.6
5.7
–
–
–
(5.7)
–
–
–
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
–
–
3.0
4.5
(0.7)
8.6
(3.7)
–
–
(0.7)
(8.6)
3.7
–
–
0.7
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. Profit after tax is
sensitive to power and carbon price changes in the current year due to the discontinuance of hedge accounting relating to certain
power and caron trades in the year. See below for further details on the power and carbon trades for which hedge accounting has
been discontinued.
Commodity risk management
The Group has a policy of securing forward power sales, purchases of fuel and carbon 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 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. If these
contracts are within the scope of IFRS 9, the Group, where possible, either applies the own-use exemption or hedge accounting
in accordance with IFRS 9. If the own-use exemption or hedge accounting are not applicable then the contracts are recognised
at fair value through profit or loss.
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 carbon emissions allowances under fixed price contracts with different maturity dates from a range of
domestic and international sources. All commitments to purchase carbon emissions allowances under fixed price contracts were
previously designated as cash flow hedges as they reduced the Group’s cash flow exposure resulting from fluctuations in the price
of carbon emissions allowances. However, in 2020, as a result of the UK leaving the EU and the EU emissions trading scheme (ETS)
no longer applying to the Group, hedge accounting of carbon was discontinued in the year. See the hedge accounting section
below for further details.
210 Drax Group plc Annual report and accounts 2020
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 carbon).
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
on continuing hedges in the year (2019: £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 was no longer
expected to occur, which would result in hedge accounting being discontinued. The main sources of ineffectiveness regarding
financial contracts would be as a result of timing differences and credit risk.
In February 2020, the Group announced its decision to cease commercial coal generation in March 2021, ahead of the 2025
deadline. The Group had a number of financial contracts that were designated as cash flow hedges in relation to the forecast
purchases of coal. As a result of this decision, the Group’s forecast coal requirements were reduced. This resulted in the cash flows
for the purchase of coal, that the financial coal contracts were hedging, no longer being expected to occur. The hedges therefore
no longer met the hedge accounting requirements, and accordingly, all gains or losses relating to these hedges were reclassified to
the income statement. This resulted in a loss of £5.6 million being reclassified to the income statement.
The Group has a number of forward purchase contracts for carbon to hedge its exposure to carbon prices under the EU ETS.
During the year it became clear that the UK was intending to set up a separate ETS once the UK had left the EU. As a result,
the purchases of EU carbon emissions allowances, that were hedge accounted, were no longer expected to occur. At this point
hedge accounting was discontinued and any gains or losses accumulated in the hedge reserve were reclassified to the income
statement. This resulted in a gain of £1.7 million being reclassified to the income statement, of which £0.7 million related to
discontinued operations.
The Group also has a number of forward sale contracts for power relating to forecast generation from the CCGT assets that are
designated as cash flow hedges. As a result of the sale of the CCGT assets on 31 January 2021, the cash flow hedges in relation
to forecast generation of the CCGT assets in the period post 31 January 2021 no longer meet the hedge accounting requirements.
This is due to the forecast transactions for the sale of power no longer being expected to occur from the Group’s perspective. As
such, at the point the forecast transactions were deemed as no longer being expected to occur, hedge accounting for these
transactions was discontinued, with the gains or losses on these contracts being reclassified to the income statement. This
resulted in a £25.3 million loss on forward power contracts being reclassified to the income statement within discontinued
operations.
A net £2.6 million loss has been recognised in the year on derivative contracts relating to the period after disposal of the CCGT
assets on 31 January 2021. This includes the above £25.3 million loss on power trades, a gain of £17.5 million relating to gas trades,
and a gain of £5.2 million relating to carbon trades. All of these amounts are included within discontinued operations.
All subsequent fair value movements on hedges that have been discontinued are recognised 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.
Drax Group plc Annual report and accounts 2020 211
Strategic reportGovernanceFinancial statementsShareholder information
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.
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.
Exposure
Commodity contracts
Sale of power
Purchase of carbon
emissions allowances
Financial contracts
Financial coal
Exposure
Commodity contracts
Sale of power
Purchase of carbon
emissions allowances
Financial contracts
31 December 2020
Notional
value of
contracts
(Mwh, tonnes)
Average
fixed price
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
1,203,257
£52.32
(36.6)
102.1
(106.4)
(3.4)
–
–
n/a
n/a
16.5
(1.6)
–
–
–
–
–
–
–
–
–
31 December 2020
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
36.6
(36.6)
(16.5)
16.5
–
–
–
Revenue
Cost of
sales
Cost of
sales
–
(65.2)
25.3
(28.8)
–
–
–
(1.7)
5.6
Revenue
Intangible
assets
Cost of
sales
Financial coal
1.6
(1.6)
31 December 2019
Notional
value of
contracts
(Mwh, tonnes)
Average
fixed price
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
4,596,250
£61.23
68.6
151.2
(79.0)
60.0
4,341,000
€25.46
396,000
£73.59
(3.3)
(4.0)
0.9
–
(4.1)
(4.0)
11.6
(3.3)
–
–
–
Exposure
Commodity contracts
Sale of power
Purchase of carbon
emissions allowances
Financial contracts
Financial coal
212 Drax Group plc Annual report and accounts 2020
7.2 Financial risk management continued
31 December 2019
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
reclassification/
transfer
£m
Exposure
Commodity contracts
Sale of power
Purchase of carbon
(68.6)
68.6
emissions allowances
3.3
(3.3)
Financial contracts
Financial coal
4.0
(4.0)
–
–
–
Revenue
Cost of
sales
Cost of
sales
–
1.6
0.4
11.7
–
–
–
–
–
Revenue
Intangible
assets
Cost of
sales/
Inventory
7.2.2 Foreign currency risk
The Group is exposed to fluctuations in foreign currency rates as a result of committed and forecast transactions in foreign
currencies, principally in relation to purchases of fuel for use in the Generation business and principal and interest payments
relating to foreign currency denominated debt. These fuel purchases are typically denominated in US dollars (USD), Canadian
dollars (CAD) or Euros (EUR), and the foreign currency debt is denominated in USD and 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 strengthening/
weakening of currencies against GBP. The analysis assumes all other variables were held constant.
As a result of the increased volatility, predominantly due to Covid-19, sensitivities for larger changes in exchange rates have been
included in the current year.
31 December 2020
USD
EUR
CAD
31 December 2019
USD
EUR
CAD
Impact on profit after tax
Impact on other components
of equity, net of tax
10% strengthening
£m
10% weakening
£m
10% strengthening
£m
10% weakening
£m
159.3
36.3
27.7
(58.7)
(22.8)
(17.8)
249.2
10.1
25.6
(204.1)
(8.3)
(21.0)
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
(84.3)
(17.0)
(4.8)
119.7
4.0
13.1
(108.5)
(3.6)
(11.9)
Profit after tax is sensitive to the strengthening/weakening of other currencies as a result of the impact on the fair value of foreign
currency derivatives not designated as hedging instruments under cash flow hedge accounting. The Group designates certain
foreign 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 USD and EUR (see
note 4.3). The Group utilises derivative contracts, including cross-currency interest rate swaps, to manage exchange risk on foreign
currency debt.
Drax Group plc Annual report and accounts 2020 213
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
7.2 Financial risk management continued
Hedge accounting
The Group designates certain foreign currency exchange contracts as hedging instruments. Foreign currency exchange 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. However, in 2020, as a result of the UK leaving the EU and the EU ETS no longer applying to the
Group, hedge accounting of carbon was discontinued in the year. See the hedge accounting section below for further details.
Cross-currency interest rate swap gains and losses that are effective at hedging the foreign exchange risk on the interest
payments are released to interest payable and similar charges. Gains and losses that are effective at hedging the foreign exchange
risk on the USD or EUR principal are released to foreign exchange gains/(losses) to offset gains and losses on retranslating the
USD and euro denominated hedged borrowings.
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 fixed-to-fixed cross-currency interest rate swap to hedge the future cash flows associated with €250 million 2025 fixed rate
loan notes to again fix the sterling cash flows payable on the debt. On the EUR denominated facilities agreed as part of the new
infrastructure term loan, both drawn and committed, the Group has fixed the sterling cash flows payable on this debt through a
combination of fixed-to-fixed and floating-to-fixed cross-currency interest rate swaps.
The main sources of ineffectiveness relating to foreign currency exchange contracts are timing differences and credit risk. The
main sources of ineffectiveness relating to cross-currency interest rate swaps are differences in the critical terms, differences in
repricing dates 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.
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 exchange contracts is recognised in cost of sales if it relates to hedges of biomass.
Ineffectiveness on cross-currency interest rate swaps that are hedging principal and interest payments are recognised in interest
payable and similar charges if the ineffectiveness relates to interest payments, and foreign exchange losses/(gains) if it relates to
the principal repayment.
There are €95 million of floating-to-fixed cross-currency interest rate swaps that are hedging both foreign currency risk and
interest rate risk. These swaps have been separated into synthetic floating-to-floating cross-currency interest rate swaps, that are
hedging foreign currency risk, and synthetic floating-to-fixed GBP interest rate swaps, that are hedging interest rate risk. The
synthetic floating-to floating cross-currency interest rate swaps are disclosed in this section, and the synthetic floating-to-fixed
GBP interest rate swaps are disclosed in note 7.2.3 relating to interest rate risk.
The average forward rates quoted below only reflect the rates applicable to the portion of the Group’s foreign currency hedging
instruments 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 2020
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
Notional
value of
contracts
(US $m €m, CAD $m)
Average
fixed/variable
rate
3,229.4
67.0
499.6
1.38
1.11
1.76
(44.2)
36.6
(51.7)
(82.3)
(0.3)
(3.4)
–
3.7
(2.2)
(3.1)
(0.2)
(5.1)
500.0
376.5
4.9%
3.32%/
3M LIBOR +
125.3bps
(1.4)
–
(47.2)
3.6
(1.5)
0.1
(1.5)
(0.8)
–
–
–
–
–
Exposure
Foreign currency purchase
contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
Interest and principal
repayments – USD
Interest and principal
repayments – EUR
214 Drax Group plc Annual report and accounts 2020
7.2 Financial risk management continued
31 December 2020
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
Exposure
Foreign currency
purchase contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
44.2
(44.2)
0.3
3.4
(0.3)
(3.4)
Interest and principal
repayments – USD
1.4
(1.4)
Interest and principal
repayments – EUR
1.5
(1.5)
(102.2)
6.5
(12.5)
–
–
–
Cost of
sales
Cost of
sales
Cost of
sales
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
–
–
–
–
–
–
–
–
–
–
(9.9)
11.8
0.3
0.3
–
–
–
–
–
–
–
Inventory
Intangible
assets
Inventory
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
Notional
value of
contracts
(US $m €m, CAD $m)
Average
fixed rate
3,713.4
90.3
527.6
1.40
1.09
1.82
(101.4)
117.6
(23.3)
(5.7)
1.6
–
13.0
(6.1)
(3.0)
37.3
(4.7)
8.1
500.0
4.9%
(8.3)
21.8
–
3.2
–
(0.7)
–
–
Exposure
Foreign currency purchase
contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
Interest and principal
repayments – USD
Drax Group plc Annual report and accounts 2020 215
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
7.2 Financial risk management continued
31 December 2019
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
Exposure
Foreign currency
purchase contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
101.4
(101.4)
5.7
(1.6)
(5.7)
1.6
Interest and principal
repayments – USD
8.7
(8.3)
Cost of
sales
Cost of
sales
Cost of
sales
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
–
–
–
–
–
(79.8)
(4.2)
3.1
–
–
–
–
–
(1.1)
8.2
–
–
–
–
–
Inventory
Intangible
assets
Inventory
Interest
payable
and similar
charges
Foreign
exchange
(losses)/
gains
7.2.3 Interest rate risk
The Group has exposure to interest rate risk, principally in relation to variable rate debt, cash and cash equivalents and the RCF,
should it be drawn. The Group has taken out a LIBOR floating-to-fixed interest rate swap to fix the interest payments on the £375
million private placement issued in 2019. On the new infrastructure term loan facilities that were agreed in the year, both drawn
and committed, the Group has fixed the interest rate payable on the £98 million of GBP denominated facilities through floating-to-
fixed LIBOR interest rate swaps. The Group has also fixed the interest rate payable on the variable rate euro denominated debt
through floating-to-fixed cross-currency interest rate swaps. As detailed in section 7.2.2 above, the floating-to-fixed cross-currency
interest rate swaps are hedging both interest rate risk and foreign currency risk, as such the disclosures relating to interest rate risk
are included in this section. See note 7.2.2 for the foreign currency risk disclosures relating to the floating-to-fixed cross-currency
interest rate swaps
At December 2020, the Group has fixed all of its debt instruments through the use of swaps and therefore has no variable rate debt
once the impact of the swaps is considered.
The return generated on the Group’s cash balance, or on amounts drawn on the RCF 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.
Interest rate benchmark reform
The only interest rate benchmarks to which the Group are exposed to within its hedge accounting relationships and that are
subject to interest rate benchmark reform are LIBOR and EURIBOR. These exposures relate to the hedge of the £375 million private
placement (2019) and £98 million of the new infrastructure term loan facilities using a floating-to-fixed LIBOR interest rate swap.
Also, €95 million of the new infrastructure term loan facilities are hedged using floating-to-fixed EURIBOR cross-currency interest
rate swaps.
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.
216 Drax Group plc Annual report and accounts 2020
7.2 Financial risk management continued
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.
The Group has not early adopted phase 2 of interest rate benchmark reform, as it has not currently replaced its existing interest
rate benchmarks.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative
financial 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 2020
Variable rate debt
Interest rate swaps
Net
31 December 2019
Variable rate debt
Interest rate swaps
Net
Impact on profit after tax
Impact on other components
of equity, net of tax
100 basis points
increase
£m
100 basis points
decrease
£m
100 basis points
increase
£m
100 basis points
decrease
£m
(3.5)
4.1
0.6
(4.2)
3.1
(1.1)
0.1
(0.1)
–
4.2
(3.1)
1.1
–
17.8
17.8
–
15.8
15.8
–
(0.4)
(0.4)
–
(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.
Certain of the Group’s variable rate debt and interest rate swaps have a floor of 0% for the benchmark interest rate. As a result of
very low or negative benchmark interest rates, a 100 basis points increase has a much larger impact on profit after tax and other
components of equity, than a 100 basis points decrease. Additionally, the group has hedges in place for debt that is committed
but not yet drawn. As a result a change in basis points has a larger impact on the profit after tax than the variable rate debt due
to the impact of the undrawn borrowings not being included. The undrawn borrowings were drawn down on 18 February 2021 and
if the impact of these undrawn borrowings on profit after tax was included at the year end, the impact of the variable rate debt
and interest rate swaps would have offset.
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.
Hedge accounting
The Group designates the floating-to-fixed GBP interest rate swaps and the floating-to-fixed cross-currency interest rate swaps
as hedging instruments against interest rate risk. The GBP interest rate swaps are hedges of the interest payments relating to the
£375 million private placement (2019) and the £98 million of facilities (£53 million drawn, £45 million committed) as part of the new
infrastructure term loan. The cross-currency interest rate swaps are hedges of both interest rate risk and foreign currency risk
relating to the €95 million of committed infrastructure term loan facilities. As such this has been separated into synthetic floating-
to-floating cross-currency interest rate swaps and synthetic floating-to-fixed GBP interest rate swaps. The synthetic floating-to-
floating cross-currency interest rate swaps swap the €95 million variable rate EURIBOR linked debt to variable rate LIBOR linked
GBP debt with a principal of £85.8m. The synthetic floating-to-fixed GBP interest rate swaps then swaps this for a fixed GBP
interest rate. Details of the floating-to-fixed GBP interest rate swaps are included in the disclosures below.
Gains and losses on the interest payments on interest rate swaps are released to interest payable and similar charges at the same
time as the interest expense on the hedged borrowings.
The main sources of ineffectiveness relating to interest rate risk hedges are differences in the critical terms, differences in
repricing dates and credit risk.
Drax Group plc Annual report and accounts 2020 217
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
7.2 Financial risk management continued
The summary of the amounts relating to the sterling interest rate hedging instruments and any related ineffectiveness in
the period is presented in the table below.
Notional
value of
contracts
£m
Average
fixed rate
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
558.8
1.06%
(15.9)
31 December 2020
Fair value
recognised in
balance sheet
(Assets)
£m
–
Fair value
recognised in
balance sheet
(Liabilities)
£m
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
(18.3)
(13.8)
–
31 December 2020
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
Exposure
Interest rate
Variable rate GBP debt
Exposure
Interest rate
Variable rate GBP debt
17.5
(15.9)
–
Interest
payable
and similar
charges
–
3.0
–
Interest
payable
and similar
charges
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
Fair value
recognised in
balance sheet
(Liabilities)
£m
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
(4.8)
(3.6)
–
Notional
value of
contracts
£m
Average
fixed rate
Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m
375.0
1.05%
(4.8)
31 December 2019
Fair value
recognised in
balance sheet
(Assets)
£m
–
31 December 2019
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
Variable rate GBP debt
4.8
(4.8)
–
Interest
payable
and similar
charges
–
0.4
–
Interest
payable
and similar
charges
218 Drax Group plc Annual report and accounts 2020
Exposure
Interest rate
Variable rate GBP debt
Exposure
Interest rate
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 and US 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 2020
UK CPI inflation swaps
US CPI inflation swaps
31 December 2019
UK 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
–
4.9
–
(4.9)
(1.6)
–
1.6
–
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 UK CPI inflation swaps as hedging instruments under cash flow hedge accounting. As such, other
components of equity are sensitive to an increase/decrease in UK inflation rates in relation to the impact on the hedge reserve
of these movements. The sensitivities in the current year have a much smaller impact on equity than in the prior year due to the
Group crystalising gains on £235 million out of the £250 million notional that was initially hedged. Profit after tax is sensitive to an
increase/decrease in UK inflation rates due to the impact these rate changes would have on the amount reclassified to the income
statement. Profit after tax is sensitive to an increase/decrease in US inflation rates due to the impact this would have on the fair
value of the unhedged US inflation swap.
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 UK CPI inflation, the Group has been able to designate
this risk component as a hedged item. UK CPI 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.
During the year the Group crystalised the gains on a number of UK inflation swaps. The forecast cash flows that these inflation
swaps were hedging are still expected to occur. Therefore the gain of £24.4 million that has been crystalised relating to these
contracts has been deferred in the hedge reserve and will be reclassified to the income statement when the hedged item impacts
the income statement.
Drax Group plc Annual report and accounts 2020 219
Strategic reportGovernanceFinancial statementsShareholder information
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.
31 December 2020
Notional
value of
contracts
(GBP)
Average
fixed rate
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
15.0
2.44%
17.0
6.2
–
1.6
24.4
31 December 2020
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
(17.0)
17.0
–
Revenue
–
(1.3)
–
Revenue
31 December 2019
Notional
value of
contracts
(GBP)
Average
fixed rate
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
Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m
Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m
250.0
2.48%
16.4
16.4
–
13.6
–
31 December 2019
Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m
Hedging
gains/(losses)
recognised in OCI
in the period
£m
Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m
Line item in the
income statement
that includes
hedge
ineffectiveness
£m
Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m
Amount
reclassified
due to the hedged
item affecting
profit or loss
£m
Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur
£m
Line item in the
income statement/
balance sheet
affected by the
transfer/
reclassification
£m
(16.4)
16.4
–
Revenue
–
–
–
Revenue
Exposure
Inflation
Inflation linked sales
contracts – CPI
Exposure
Inflation
Inflation linked sales
contracts – CPI
Exposure
Inflation
Inflation linked sales
contracts – CPI
Exposure
Inflation
Inflation linked sales
contracts – CPI
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.
220 Drax Group plc Annual report and accounts 2020
7.2 Financial risk management continued
The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include
both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from
interest rate curves at the balance sheet date.
Term loans, gross value
Loan notes, gross value
Borrowings, contractual maturity
Trade and other payables
Lease liabilities
Within
3 months
£m
2.5
–
2.5
576.0
2.1
580.6
3 months–
1 year
£m
10.4
30.1
40.5
40.9
5.8
87.2
As at 31 December 2020
1–2 years
£m
49.7
30.1
79.8
0.4
5.9
86.1
2–5 years
£m
270.5
679.5
950.0
2.1
12.6
964.7
>5 years
£m
222.8
–
222.8
–
8.4
231.2
Total
£m
555.9
739.7
1,295.6
619.4
34.8
1,949.8
Trade and other payables of £619.4 million (2019: £683.0 million) excludes non-financial liabilities such as the Group’s obligation to
deliver ROCs.
Term loans, gross value
Loan notes, gross value
Borrowings, contractual maturity
Trade and other payables
Lease liabilities
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
2–5 years
£m
16.2
39.9
56.1
4.5
6.2
66.8
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
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 3.88% (2019: 3.99%).
The following tables set out details of the expected contractual maturity of derivative financial liabilities 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 foreign currency exchange 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 currency exchange contracts
Interest rate and cross-currency contracts
Commodity contracts
Financial contracts
Foreign currency exchange contracts
Interest rate and cross-currency contracts
Inflation rate contracts
Within
1 year
£m
13.5
25.8
2,409.6
7.0
2,455.9
Within
1 year
£m
(6.7)
(42.8)
1,581.1
3.9
1.8
1,537.3
As at 31 December 2020
1–2 years
£m
17.3
9.4
381.3
10.9
418.9
>2 years
£m
7.7
1.8
767.7
53.5
830.7
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
Total
£m
38.5
37.0
3,558.6
71.4
3,705.5
Total
£m
47.6
(144.9)
4,561.5
4.1
16.8
4,485.1
Drax Group plc Annual report and accounts 2020 221
Strategic reportGovernanceFinancial statementsShareholder information
Section 7: Risk management continued
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 power 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.
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 (note 4.2)
Trade and other receivables (note 3.6)
Derivative financial instruments (note 7.1)
As at 31 December
2020
£m
2019
£m
289.8
492.7
283.3
1,065.8
404.1
588.0
433.3
1,425.4
Trade and other receivables are stated gross of the provision for expected credit losses of £59.9 million (2019: £46.5 million) and
exclude non-financial receivables such as prepayments.
Of the Group‘s three operating segments, the Generation and Customers segments 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, its SME customers carry 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. The Customers
segment extended its trade credit insurance programme in the prior year 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.
Further details on the impact of credit risk on trade and other receivables is disclosed in note 3.6.
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 based on their rating, and the maturity profile.
Whilst cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was
immaterial.
The Group is exposed to credit risk on derivative contracts, but to which the impairment requirements of IFRS 9 are not applied.
The carrying amount of these financial assets, disclosed above, represents the Group’s maximum credit risk exposure.
Capital management
The Group is disciplined in its management of 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.
222 Drax Group plc Annual report and accounts 2020
7.2 Financial risk management continued
Borrowings
Cash and cash equivalents
Net debt
Total shareholders’ equity, excluding hedge and cost of hedging reserves
As at 31 December
2020
£m
1,065.7
(289.8)
775.9
1,328.2
2019
£m
1,245.2
(404.1)
841.1
1,553.3
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 tables below detail of the gains/(losses) recognised in the year on hedging instruments, the amounts reclassified from equity
due to the hedged item affecting profit or loss, and the amounts reclassified due to the hedged future cash flows no longer being
expected to occur. See section 7.2. for further details on these amounts.
At 1 January 2019
Gains/(losses) recognised:
– Change in fair value of hedging instrument
recognised in OCI
Reclassified from equity as the hedged item has affected
profit or loss:
– Reclassified to cost of inventory
– Reclassified to cost of intangible assets (Carbon)
– 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 foreign exchange (losses)/gains
Related deferred tax, net (note 2.6)
At 31 December 2019
Gains/(losses) recognised:
– Change in fair value of hedging instrument
recognised in OCI
Reclassified from equity as the hedged item has affected
profit or loss:
– Reclassified to cost of inventory
– Reclassified to cost of intangible assets (Carbon)
– 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 foreign exchange (losses)/gains
Reclassified from equity as the hedged future cash flows
are no longer expected to occur
– Reclassified to the income statement –
included in cost of sales
– Reclassified to the income statement –
included in cost of sales
Related deferred tax, net (note 2.6)
At 31 December 2020
Hedge reserve
Commodity
price risk
£m
6.2
Foreign
currency
exchange risk
£m
193.7
Interest
rate risk
£m
–
Inflation
rate risk
£m
–
Total
£m
199.9
61.3
(113.8)
(4.8)
16.4
(40.9)
0.4
1.6
11.7
–
–
(12.9)
68.3
(77.5)
(3.4)
–
(1.1)
8.2
37.0
43.1
–
–
–
0.4
–
0.9
(3.5)
–
–
–
–
–
(2.8)
13.6
(77.1)
(1.8)
11.7
(0.7)
8.2
22.2
121.5
(21.7)
(50.8)
(15.9)
17.0
(71.4)
–
–
–
3.0
–
–
–
(28.8)
(65.2)
–
–
3.9
25.3
14.8
(3.4)
(114.7)
6.5
–
(9.6)
12.1
–
–
28.6
(84.8)
–
–
(114.7)
(22.3)
(1.3)
(66.5)
–
–
–
(6.6)
12.1
3.9
25.3
42.7
(76.0)
–
2.6
(13.8)
–
(3.3)
26.0
Drax Group plc Annual report and accounts 2020 223
Strategic reportGovernanceFinancial statementsShareholder information
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 risk
Foreign currency exchange risk
Interest rate risk
Inflation risk
Commodity contracts
Financial contracts
Foreign currency exchange contracts
Interest rate contracts
Inflation contracts
As at 31 December 2020
Within 1 year
£m
1–2 years
£m
(9.6)
(21.9)
(4.1)
1.8
(33.8)
7.7
(21.6)
(4.1)
2.6
(15.4)
>2 years
£m
(1.5)
(41.3)
(5.6)
21.6
(26.8)
As at 31 December 2019
Within 1 year
£m
1–2 years
£m
62.1
(3.0)
58.4
3.2
1.5
122.2
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)
Total
£m
(3.4)
(84.8)
(13.8)
26.0
(76.0)
Total
£m
71.6
(3.3)
39.9
(0.3)
13.6
121.5
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 held 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 foreign currency exchange risk.
The tables below detail of the cost of hedging gains/(losses) recognised in the year on hedging instruments and the amounts
reclassified from equity due to the hedged item affecting profit or loss.
At 1 January
Gains recognised:
– Change in fair value of hedging instrument recognised in OCI
Reclassified from equity as the hedged item has affected profit or loss:
– Reclassified to cost of inventory
– Reclassified to cost of intangible assets (Carbon)
Related deferred tax, net (note 2.6)
At 31 December
The expected release profile from equity of post-tax cost of hedging gains and losses is as follows:
Foreign currency exchange risk
Foreign currency exchange risk
As at 31 December 2020
Within 1 year
£m
34.5
1–2 years
£m
20.8
>2 years
£m
31.9
As at 31 December 2019
Within 1 year
£m
(3.6)
1–2 years
£m
10.5
>2 years
£m
33.9
224 Drax Group plc Annual report and accounts 2020
Cost of hedging
2020
£m
40.8
2019
£m
(8.9)
53.3
56.3
4.8
0.4
(12.1)
87.2
3.1
0.7
(10.4)
40.8
Total
£m
87.2
Total
£m
40.8
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 2020
As at 31 December 2019
Gross amounts
of financial
instruments
in the
balance sheet
£m
Related
financial
instruments
that are
not offset
£m
Gross amounts
of financial
instruments
in the
balance sheet
£m
Related
financial
instruments
that are
not offset
£m
Net amount
£m
Net amount
£m
283.3
(229.4)
53.9
346.0
(209.1)
136.9
(453.6)
229.4
(224.2)
(289.4)
209.1
(80.3)
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 2020, the
Group’s contingent liability in respect of letters of credit issued under the RCF amounted to £67.9 million (2019: £77.0 million).
The Group also guarantees obligations in the form of surety bonds with a number of insurers amounting to £86.7 million (2019:
£96.1 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
2020
£m
49.8
53.6
221.1
3,667.4
2019
£m
57.2
36.5
295.0
4,332.9
As at 31 December
2020
£m
782.4
2,400.1
484.9
3,667.4
2019
£m
840.1
2,997.4
495.4
4,332.9
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 2021–2027
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 them not being within the scope of IFRS 9 and therefore not
required to be measured at fair value (see note 7.1).
Drax Group plc Annual report and accounts 2020 225
Strategic reportGovernanceFinancial statementsShareholder 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 2020. The Group adopted the following from
1 January 2020:
IFRS 3 (amended) – Business Combinations – 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
Conceptual Framework for Financial Reporting (amended) – effective from 1 January 2020
These updates and amendments have not had a material impact on the financial statements of the Group.
In 2019 the Group elected to early adopt the ‘Amendments to IAS 39 and IFRS 7 Interest Rate Benchmark Reform’ issued in
September 2019. These amendments were therefore first reflected in the Group’s Annual Consolidated Financial Statements
for the year ended 31 December 2019.
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, and the £98m of new
infrastructure term loan facilities. The amendments are also relevant to the Group’s EURIBOR exposure on the €95 million
of new infrastructure term loan facilities.
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 16 (amended) – Covid-19 related Rent Concessions – effective for periods beginning on or after 1 June 2020
IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest Rate Benchmark Reform – Phase 2
IFRS 17 Insurance contracts – effective from 1 January 2021*
IFRS 3 (amended) – Reference to the Conceptual Framework – effective from 1 January 2022*
IAS 16 (amended) – Property, Plant and Equipment – Proceeds before Intended Use – effective from 1 January 2022*
IAS 37 (amended) – Onerous Contracts – Cost of Fulfilling a Contract – effective from 1 January 2022*
Annual Improvements 2018-2020 Cycle – effective from 1 January 2022*
IAS 1 (amended) – Classification of Liabilities as Current and Non-current – effective from 1 January 2023*
IFRS 10 (amended) – Consolidated Financial Statements and IAS 28 (amended) – Investments in Associates and Joint Ventures
(2011) – effective date deferred indefinitely*
Adoption of the other standards in future periods is not expected to have a material impact on the financial statements of
the Group. The Group will continue to monitor the developments of these new or amended standards as and when they are
endorsed for use in the United Kingdom from 1 January 2021.
226 Drax Group plc Annual report and accounts 2020
8.3 Related party transactions
A related party is either an individual or entity with control or significant influence over the Group, or a company that is linked to
the Group by investment (such as an associated company or joint venture). The Group’s related parties are primarily its key
management personnel. Amounts below are the total amount of transactions that have been entered into with any related parties
in the year.
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
2020
£’000
5,101
1,381
562
7,044
2019
£’000
4,543
636
43
5,222
Amounts included in the table above reflect the remuneration of the 14 (2019: 16) members of the Board and Executive Committee
as described on page 108, 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.
Drax Group plc Annual report and accounts 2020 227
Strategic reportGovernanceFinancial statementsShareholder information
Company financial statements
Company balance sheet
Non-current assets
Investment in subsidiaries
Deferred tax asset
Current assets
Other debtors
Amounts due from other Group companies
Cash at bank and in hand
Current liabilities
Amounts due to other Group companies
Net current liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Treasury shares
Capital redemption reserve
Retained profits
Total equity shareholders’ funds
Notes
5
6
As at 31 December
2020
£000
2019
£000
724,911
1
724,912
94
5,585
2,375
8,054
719,654
–
719,654
18
2,842
130
2,990
(14,187)
(12,790)
(6,133)
718,779
(9,800)
709,854
47,460
429,974
(50,440)
1,502
290,283
718,779
47,417
429,646
(50,440)
1,502
281,729
709,854
The Company reported a profit for the financial year ended 31 December 2020 of £68.0 million (2019: £57.3 million).
These financial statements were approved by the Board of directors on 24 February 2021.
Signed on behalf of the Board of directors:
Andy Skelton
CFO
228 Drax Group plc Annual report and accounts 2020
Company statement of changes in equity
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 1 January 2020
Share capital issued (note 6)
Profit and total comprehensive income for the year
Credited to equity for share-based payments
Equity dividends paid (note 8)
At 31 December 2020
Share
capital
£000
Share
premium
£000
47,038
379
–
–
–
–
47,417
43
–
–
–
47,460
424,742
4,904
–
–
–
–
429,646
328
–
–
–
429,974
Treasury
shares
£000
(47,143)
–
(3,297)
–
–
–
(50,440)
–
–
–
–
(50,440)
Capital
redemption
reserve
£000
Retained profits
£000
1,502
–
–
–
–
–
1,502
–
–
–
–
1,502
280,773
–
–
57,332
2,489
(58,865)
281,729
–
68,008
5,225
(64,679)
290,283
Total
£000
706,912
5,283
(3,297)
57,332
2,489
(58,865)
709,854
371
68,008
5,225
(64,679)
718,779
In 2018, 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.
Drax Group plc Annual report and accounts 2020 229
Strategic reportGovernanceFinancial statementsShareholder 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’.
The Company applied certain new and amended standards for the first time in 2020. 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
Investment in subsidiaries
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 and key sources of estimation uncertainty
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.
There were no areas of significant estimation uncertainty within these accounts.
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 24 February 2021. The net profit attributable to
the Company is £68.0 million.
The Company received dividend income from its subsidiary undertakings totalling £70.0 million in 2020 (2019: £60.5 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 2020 was £23,153
(2019: £22,050).
230 Drax Group plc Annual report and accounts 2020
5. Fixed asset investments
Carrying amount:
At 1 January
Capital contribution
At 31 December
Years ended 31 December
2020
£000
2019
£000
719,654
5,257
724,911
717,044
2,610
719,654
Investments in subsidiary undertakings
The capital contribution in 2020 and 2019 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 2020:
Power generation
Non-trading company
Trading company, fuel supply
Non-trading company
Trading company, fuel supply
Non-trading company
Dormant
Non-trading company
Wood pellet manufacturing
Dormant
Dormant
Holding company
Holding company
Dormant
Group-wide Corporate Services
Finance company
Non-trading company
Development company
Name and nature of business
Abergelli Power Limited***
Abbott Debt Recovery Limited***
Amite BioEnergy LLC*
Arkansas Bioenergy LLC*
Baton Rouge transit LLC*
DBI O&M Company LLC*
Donnington Energy Limited
Drax Biomass Acquisitions LLC*
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 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 Hydro Limited (formerly Domus
Energy Limited)
Drax Innovation Limited***
Drax Pension Trustees Limited
Drax Power Limited
Drax Pumped Storage Limited (formerly
Drax Corporate Developments Limited)
Drax Retail Developments Limited
Drax Research and Innovation
Holdco Limited***
Drax River Hydro Limited (formerly
Damhead Creek II Limited)
Drax Smart Generation Holdco Limited Holding company
Drax Smart Sourcing Holdco Limited Holding company
Holding company
Drax Smart Supply Holdco Limited
Dormant
Holding company
Dormant
Dormant
Holding company
Holding company
Trading company, power generation
Development company
Dormant
Trading company, power generation
Dormant
Country of incorporation
and registration
England and Wales
England and Wales
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
England and Wales
Delaware, USA
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
England and Wales
Cayman Islands
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Trading Company, power generation Scotland
Type of share
Registered number
Ordinary
Ordinary
Common
Common
Common
Common
Ordinary
Common
Common
Ordinary
Common
Common
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
08190497
05355799
5128116
7881707
5128759
5305470
07109298
7897331
5068290
08322715
5128115
5250168
5128118
07885329
05562058
10664639
05299523
07821368
Ordinary
SC189124
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
06657393
09887429
92144
08654218
10664715
09824989
04883589
06657336
10711130
06657454
England and Wales
Ordinary
05956747
England and Wales
England and Wales
England and Wales
Ordinary
Ordinary
Ordinary
07821911
07821375
10664625
Drax Group plc Annual report and accounts 2020 231
Strategic reportGovernanceFinancial statementsShareholder information
Notes to the Company financial statements continued
5. Fixed asset investments continued
Name and nature of business
Farmoor Energy Limited***
Haven Heat Limited
Haven Power Limited
Haven Power Nominees Limited
Hirwaun Power Limited***
Iberia Bioenergy LLC*
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
Pirranello Energy Supply Limited
Progress Power Limited***
SMW Limited**
Sunflower Energy Supply Limited
Tyler Bioenergy LLC *
Trading company, power retail
Dormant
Trading company, power retail
Non-trading company
Power generation
Non-trading company
Dormant
Trading company, fuel supply
Power generation
Trading company, fuel supply
Trading company, power retail
Trading company, power retail
Holding company, power retail
Non-trading company
Trading company, power retail
Non-trading company
Trading company, power retail
Dormant
Dormant
Power generation
Trading company, fuel supply
Dormant
Dormant
Country of incorporation
and registration
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Delaware, USA
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
England and Wales
England and Wales
Scotland
England and Wales
Delaware, USA
Type of share
Registered number
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
Common
Common
Ordinary
Common
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Common
07111074
06657428
05893966
07352734
08190283
7881704
6297176
6297174
08920458
5128117
05199937
04382246
04409377
05030694
07126582
05680956
06874709
09425319
10769036
08421833
SC165988
09735929
6297175
Drax Group plc directly holds 100% of the equity of Drax Group Holdings Limited. All other investments are held indirectly,
the effective shareholding for these investments is 100%.
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 850 New Burton Road, Suite 201, Dover DE 19904.
**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 2020 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.
232 Drax Group plc Annual report and accounts 2020
6. Called-up share capital
Authorised:
865,238,823 ordinary shares of 11 16⁄29 pence each
Issued and fully paid:
2020: 410,848,934 ordinary shares of 11 16⁄29 pence each
The movement in allotted and fully paid share capital of the Company during the year was as follows:
At 1 January
Issued under employee share schemes
At 31 December
As at 31 December
2020
£000
2019
£000
99,950
99,950
47,460
47,417
Years ended 31 December
2020
(number)
2019
(number)
410,475,731
373,203
410,848,934
407,193,168
3,282,563
410,475,731
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 2020 a total of 373,203 shares (2019: 3,282,563 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 157.
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 £191.5 million. Accordingly, the Company considers itself to have sufficient
distributable profits from which to pay the current year final dividend of £41 million. Based on a total dividend for 2020 of £68
million, the Company has sufficient distributable reserves to pay two 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 statements for
additional 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 2020 of 6.8 pence per share paid on 2 October 2020
(2019: 6.4 pence per share paid on 11 October 2019)
Final dividend for the year ended 31 December 2019 of 9.5 pence per share paid on 15 May 2020
(2019: 8.2 pence per share paid on 10 May 2019)
Years ended 31 December
2020
£m
2019
£m
27.0
37.7
64.7
25.4
33.5
58.9
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 2020 of 10.3 pence per share (equivalent to approximately £41 million)
payable on or before 14 May 2021. The final dividend has not been included as a liability as at 31 December 2020.
Drax Group plc Annual report and accounts 2020 233
Strategic reportGovernanceFinancial statementsShareholder information
Notes to the Company financial statements continued
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.
234 Drax Group plc Annual report and accounts 2020
Shareholder information
Key dates for 2021
At the date of publication of this document, the following are the proposed key dates in the 2021 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
21 April
22 April
23 April
14 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 2020, and the
graph provides an indication of the trend of the share price throughout the year.
Low during the year
(23 March 2020)
126.4 pence
High during the year
(29 December 2020)
382.4 pence
Closing price on
31 December 2020
375.0 pence
Trade Volume
Closing price on
31 December 2019
314.0 pence
Share price chart
Share price (GBX)
600
500
400
300
200
100
0
January
2020
February
2020
March
2020
April
2020
May
2020
June
2020
July
2020
August
2020
September
2020
October
2020
November
2020
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 2020, was approximately
£1,541 million (2019: £1,289 million).
Financial reports
Copies of all financial reports we publish are available from the date of publication and can be downloaded from our website.
Printed copies of reports can be requested by writing to the Company Secretary at the registered office, by clicking on “Contact Us”
on our website, or direct by e-mail to Drax.Enq@drax.com.
Drax Group plc Annual report and accounts 2020 235
12m
10m
8m
6m
4m
2m
0m
December
2020
Strategic reportGovernanceFinancial statementsShareholder information
Shareholder information continued
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 2020-2021 tax year (2019-2020: £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
236 Drax Group plc Annual report and accounts 2020
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.
Drax Group plc Annual report and accounts 2020 237
Strategic reportGovernanceFinancial statementsShareholder 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
Group 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
Financial PR
FTI Consulting LLP
200 Aldersgate, Aldersgate Street, London EC1A 4HD
Bankers
Barclays Bank PLC
1 Churchill Place, Canary Wharf, London E14 5HP
Registrars
Equiniti Limited
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA
Brokers
Royal Bank of Canada
100 Bishopsgate, London EC2N 4AA
Remuneration advisers
PricewaterhouseCoopers LLP
1 Embankment Place, London WC2N 6RH
Brokers
J.P. Morgan Cazenove
25 Bank Street, Canary Wharf, London E14 5JP
Solicitors
Slaughter and May
One Bunhill Row, London EC1Y 8YY
238 Drax Group plc Annual report and accounts 2020
Glossary
Adjusted EBITDA
Earnings before interest, tax, depreciation and amortisation,
excluding the impact of exceptional items and certain
remeasurements. Adjusted EBITDA is typically stated as the
combined value from both continuing and discontinued
operations.
Adjusted Results
Financial performance measures prefixed with “Adjusted”
are stated after adjusting for material, one-off exceptional
items (such as asset obsolescence charges, acquisition and
restructuring costs or debt restructuring costs), and certain
remeasurements on derivative contracts.
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.
BECCS
Bioenergy with carbon capture and storage, with carbon
resulting from power generation captured and stored.
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.
CCC
The UK’s Climate Change Committee
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.
ESG
Environmental, Social and Governance
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.
Frequency response
The automatic change in generation output, or in demand,
to maintain a system frequency of 50Hz
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 below) 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.
Drax Group plc Annual report and accounts 2020 239
Strategic reportGovernanceFinancial statementsShareholder information
Glossary continued
Net debt
Comprises cash and cash equivalents, short-term investments
less overdrafts and borrowings net of deferred finance costs.
Summer
The calendar months April to September.
Net debt to Adjusted EBITDA ratio
The value of Net debt divided by Adjusted EBITDA (both as
defined above), expressed as the number of times the value of
Net debt exceeds the value of Adjusted EBITDA. The Group has
a long-term target of 2.0x Net debt to Adjusted EBITDA.
NGO
Non-governmental organisation
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.
Open Cycle Gas Turbine (OCGT)
A free-standing gas turbine, using compressed air, to generate
electricity
Total results
Financial performance measures prefixed with “Total” are
calculated in accordance with IFRS.
Planned outage
A period during which scheduled maintenance is executed
according to the plan set at the outset of the year.
Value from flexibility
A measure of the value from flexible power generation, support
services provided to the power network and attractively priced
coal fuels.
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.
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.
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.
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.
240 Drax Group plc Annual report and accounts 2020
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Design and production
Cautionary note regarding forward looking statements
This annual report may contain certain statements, expectations, statistics,
projections and other information that are or may be forward-looking. The
accuracy and completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy, projected costs,
plans, beliefs and objectives for the management of future operations of Drax
Group plc (“Drax”) and its subsidiaries (the “Group”), including in respect of the
proposed acquisition of Pinnacle Renewable Energy Inc. (‘Pinnacle) and, (subject
to and conditional upon shareholders approval and other material matters
precedent to completion), thereafter the performance and integration of
Pinnacle as part of Drax, together forming the enlarged business, are not
warranted or guaranteed. By their nature, forward-looking statements involve
risk and uncertainty because they relate to events and depend on circumstances
that may occur in the future. Although Drax believes that the statements,
expectations, statistics and projections and other information reflected in such
statements are reasonable, they reflect the Company’s current view and no
assurance can be given that they will prove to be correct. Such events and
statements involve risks and uncertainties. Actual results and outcomes may
differ materially from those expressed or implied by those forward-looking
statements. There are a number of factors, many of which are beyond the control
of the Group, which could cause actual results and developments to differ
materially from those expressed or implied by such forward-looking statements.
These include, but are not limited to, factors such as: future revenues being lower
than expected; increasing competitive pressures in the industry; and/or general
economic conditions or conditions affecting the relevant industry, both
domestically and internationally, being less favourable than expected. We do
not intend to publicly update or revise these projections or other forward-looking
statements to reflect events or circumstances after the date hereof, and we do
not assume any responsibility for doing so.
www.drax.com
Drax Group plc
Drax Power Station,
Selby,
North Yorkshire
YO8 8PH
T +44(0)1757 618381