REG - Drax Group Plc - Half-year Report
26/07/2022 07:00
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RNS Number : 6883T Drax Group PLC 26 July 2022
26 July
2022
DRAX GROUP PLC (Symbol: DRX)
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022
Strong performance, supporting security of supply, investment in renewables
Six months ended 30 June H1 2022 H1 2021
Key financial performance measures
Adjusted EBITDA (£ million)((1)(2)) 225 186
Continuing operations 225 165
Discontinued operations - gas generation - 21
Net Debt (£ million)((3)()) 1,101 1,029
Adjusted Basic EPS (pence)((1)) 20.0 14.6
Interim dividend (pence per share) 8.4 7.5
Total financial performance measures from continuing operations
Operating profit (£ million) 207 84
Profit before tax (£ million) 200 52
Will Gardiner, CEO of Drax Group, said "As the UK's largest generator of
renewable power by output, Drax plays a critical role in supporting the
country's security of supply. We are accelerating our investment in renewable
generation, having recently submitted planning applications for the
development of BECCS at Drax Power Station and for the expansion of Cruachan
Pumped Storage Power Station.
"As a leading producer of sustainable wood pellets we continue to invest in
expanding our pellet production in order to supply the rising global demand
for renewable power generated from biomass. We have commissioned new biomass
pellet production plants in the US South and expect to take a final investment
decision on up to 500,000 tonnes of additional capacity before the end of the
year.
"As carbon removals become an increasingly urgent part of the global route to
Net Zero, we are also making very encouraging progress towards delivering
BECCS in North America and progressing with site selection, government
engagement and technology development.
"In the UK and US we have plans to invest £3 billion in renewables that would
create thousands of green jobs in communities that need them, underlining our
position as a growing, international business at the heart of the green energy
transition."
Financial highlights
· Adjusted EBITDA £225 million up 21% (H1 2021: £186 million)
· Strong liquidity and balance sheet - £539 million of cash and
committed facilities at 30 June 2022
- Expect to be significantly below 2 times Net Debt to Adjusted EBITDA by
the end of 2022
· Sustainable and growing dividend - expected full year dividend up
11.7% to 21.0 p/share (2021: 18.8 p/share)
- Interim dividend of 8.4 p/share (H1 2021: 7.5 p/share) - 40% of full year
expectation
Progress with strategy in H1 2022
· To be a global leader in sustainable biomass - targeting 8Mt of
capacity and 4Mt of sales to 3(rd) parties by 2030
- Addition of 0.4Mt of operational pellet production capacity
- New Tokyo sales office opened July 2022
· To be a global leader in negative emissions
- BECCS - UK - targeting 8Mt of negative emissions by 2030
- Planning application submitted and government consultation on GGR business
models published with power BECCS business model consultation expected "during
the summer"
- BECCS - North America - targeting 4Mt of negative emissions by 2030
- Ongoing engagement with policy makers, screening of regions and locations
for BECCS
· To be a leader in UK dispatchable, renewable power
- >99% reduction in scope 1 and 2 emissions from generation since 2012
- UK's largest generator of renewable power by output - 11% of total
- Optimisation of biomass generation and logistics to support security of
supply at times of higher demand
- Planning application submitted for 600MW expansion of Cruachan and
connection agreement secured
Outlook for 2022
· Expectations for full year Adjusted EBITDA unchanged from 6 July
2022 update which reflected optimisation of biomass generation and logistics
to support UK security of supply this winter when demand is high, a strong
pumped storage performance and agreement of a winter contingency contract for
coal
Future positive - people, nature, climate
· People
- Diversity and inclusion programme - inclusive management, promoting social
mobility via graduates, apprenticeships and work experience programmes
- Continued commitment to STEM outreach programme
· Nature and climate
- Science-based sustainability policy fully compliant with current UK and EU
law on sustainable sourcing and aligned with UN guidelines for carbon
accounting
- Biomass produced using sawmill and forest residuals, and low-grade
roundwood, which often have few alternative markets and would otherwise be
landfilled, burned or left to rot, releasing CO(2) and other GHGs
- Increase in sawmill residues used by Drax to produce pellets - 67% of
total fibre (FY 2021: 62%)
- 100% of woody biomass produced by Drax verified against SBP, SFI,
FSC®((4)) or PEFC Chain of Custody certification with third-party supplier
compliance primarily via SBP certification
Operational review
Pellet Production - increased production, flexible operations to support UK
generation, addition of 0.4Mt of capacity
· Adjusted EBITDA up 13% to £45 million (H1 2021: £40 million)
- Pellet production up 54% to 2.0Mt (H1 2021: 1.3Mt) (including Pinnacle
since 13 April 2021)
· Addition of c.0.4Mt of new production capacity
- Commissioning of Demopolis and Leola, expect to reach full production
capacity in H2 2022
· Total $/t cost of $146/t((5)) - 2% increase on 2021 ($143/t((5)))
- Increase in utility costs in Q2-22 (>20% increase)
- Fuel surcharge - barge and rail to port (> 10% increase)
- Commissioning costs at Demopolis and Leola plants
- Net reduction in other costs, inclusive of optimisation of supply chain to
meet reprofiling of Generation
- No material change in fibre costs
· Areas of focus for further savings - wider range of sustainable
biomass fibre, continued focus on operational efficiency and improvement,
capacity expansion, innovation and technology
· Continue to target final investment decision on up to 0.5Mt of
new capacity in H2 2022
Generation - increased recognition of value of long-term security of supply
from biomass and pumped storage
· Adjusted EBITDA from continuing operations £205 million up 24%
(H1 2021: £165 million)
- Optimisation of biomass generation and logistics to support security of
supply at times of higher demand
- Summer - lower power demand, lower power generation and sale of reprofiled
biomass
- Winter - maximise biomass deliveries to support increased generation at
times of higher demand
- Four small, planned biomass outages completed in H1, supporting higher
planned generation in H2-22
- Strong portfolio system support performance (balancing mechanism,
ancillary services and optimisation)
- Higher cost of sales - logistics optimisation, biomass and system costs
· Six-month extension of coal at request of UK government - winter
contingency contract for security of supply
- Closure of coal units in March 2023 following expiration of agreement with
ESO at end of March 2023
- Fixed fee and compensation for associated costs, including coal
- Remain committed to coal closure and development of BECCS, with no change
to expected timetable
· As at 21 July 2022, Drax had 25.4TWh of power hedged between 2022
and 2024 on its ROC and hydro generation assets at an average price of
£95.9/MWh, with a further 2.3TWh equivalent of gas sales (transacted for the
purpose of accessing additional liquidity for forward sales from ROC units and
highly correlated to forward power prices) plus additional sales under the CfD
mechanism
Contracted power sales 21 July 2022 2022 2023 2024
ROC (TWh)((6)) 11.7 8.8 4.5
- Average achieved £ per MWh 87.2 98.3 109.5
Hydro (TWh) 0.3 0.1 -
- Average achieved £ per MWh 133.1 242.0 -
Gas hedges (TWh equivalent) (0.1) 0.5 1.9
- Pence per therm 361.0 145.8 135.0
Lower expected level of ROC generation in 2023 due to major planned outages on
two units
Customers - renewable power under long-term contracts to high-quality I&C
customers and decarbonisation products
· Adjusted EBITDA of £24 million (H1 2021: £5 million loss) -
continued improvement following impact of Covid-19 - principally in the SME
business
- Includes benefit of excess contracted power sold back into
merchant market
· Continued development of Industrial & Commercial (I&C)
portfolio
- 6.9TWh of power sales - 21% increase compared to H1 2021 (5.7TWh)
- Focusing on key sectors to increase sales to high-quality counterparties
supporting generation route to market
- Energy services to expand the Group's system support capability and
customer sustainability objectives
· SME - increasingly stringent credit control in SME business to
reflect higher power price environment
Other financial information
· Total operating profit from continuing operations of £207
million (H1 2021: £84 million), including £130 million mark-to-market gain
on derivative contracts and £27 million of exceptional costs
· Total profit after tax from continuing operations of £148
million includes an £8 million non-cash charge from revaluing deferred tax
balances following confirmation of UK corporation tax rate increases from 2023
(H1 2021: £6 million loss including a £48 million non-cash charge from
revaluing deferred tax balances)
· Capital investment of £60 million (H1 2021: £71 million) -
primarily maintenance
- Full year expectation of £290-£310 million, includes £120 million for
Open Cycle Gas Turbine projects, £20 million BECCS FEED and site preparation,
and £10 million associated with new pellet capacity, subject to final
investment decision (FID)
· Depreciation and amortisation of £121 million (H1: £89 million)
reflects inclusion of Pinnacle for a full six months, plant upgrades and
accelerated depreciation of certain pellet plant equipment in line with
planned capital upgrades
· Group cost of debt below 3.6%
· Cash Generated from Operations £185 million (H1 2021: £138
million)
· Net Debt of £1,101 million (31 December 2021: £1,044 million),
including cash and cash equivalents of £288 million (31 December H1 2021:
£317 million)
- Continue to expect Net Debt to Adjusted EBITDA significantly below 2 times
by end of 2022, reflecting optimisation of generation and logistics to deliver
higher levels of power generation and cash flows in H2 2022
Notes:
(1) Financial performance measures prefixed with "Adjusted" are
stated after adjusting for one-off exceptional items that, by their nature,
do not reflect the trading performance of the Group (revaluation of deferred
tax balances reflecting future increases in UK CT rates, acquisition costs,
gain on sale of Combined Cycle Gas Turbine generation assets, restructuring
costs, debt restructuring costs and asset obsolescence charges and
impairments), and certain remeasurements on derivative contracts. Adjusted
EBITDA and EPS measures exclude amounts attributable to non-controlling
interests.
(2) Earnings before interest, tax, depreciation, amortisation,
gains/losses on disposal of assets and impairment of non-current assets,
excluding the impact of exceptional items and certain remeasurements, earnings
from associates and earnings attributable to non-controlling interests.
(3) Borrowings less cash and cash equivalents, excluding amounts
attributable to non-controlling interests.
(4) FSC License code: FSC-C119787.
(5) Total $/t cost of production in Pellet Production - raw fibre,
processing into a wood pellet, delivery to Drax port facilities in US and
Canada, loading to vessel for shipment and overheads - Free on Board (FOB).
Cost of ocean freight, UK port and rail cost reflected in Generation business
accounts in addition to price paid to Pellet Production for the biomass
pellet.
(6) Typical estimated annual biomass generation from ROC and CfD units
c.14TWh based on estimated biomass availability, incrementally lower in 2023
due to major planned outages on two ROC units, expected to result in lower ROC
cap versus 2022.
Forward Looking Statements
This announcement 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"),
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 Drax'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.
Results presentation webcast arrangements
Management will host a webcast presentation for analysts and investors at
9:00am (UK Time), Tuesday 26 July 2022.
The presentation can be accessed remotely via a live webcast link, as detailed
below. After the meeting, the webcast recording will be made available and
access details of this recording are also set out below.
A copy of the presentation slides will be made available from 7:00am (UK time)
on Tuesday 26 July 2022 for download at:
www.drax.com>>investors>>results-reports-agm>>
#investor-relations-presentations or use the link
https://www.drax.com/investors/results-reports-agm/#investor-relations-presentations
Event Title: Drax Group plc: Half Year Results
Event Date: Tuesday 26 July 2022
9:00am (UK time)
Webcast Live Event Link: https://secure.emincote.com/client/drax/drax021
(https://secure.emincote.com/client/drax/drax021)
Conference call and pre-register Link: https://secure.emincote.com/client/drax/drax021/vip_connect
(https://secure.emincote.com/client/drax/drax021/vip_connect)
Start Date: Tuesday 26 July 2022
Delete Date: Tuesday 25 July 2023
Archive Link: https://secure.emincote.com/client/drax/drax021
(https://secure.emincote.com/client/drax/drax021)
For further information, please contact: rosie.corbett@fticonsutling.com
Website: www.drax.com (http://www.drax.com)
CEO Business Review
Introduction
The Group's purpose is to enable a zero carbon, lower cost energy future and
this drives our commitment to address climate change. Since 2012, the actions
the Group has taken have reduced our generation scope 1 and 2 carbon emissions
by over 99%. We are the UK's largest source of renewable power by output, a
leading source of reliable and flexible generation and our ambition is to
become a carbon negative company by 2030.
The world must act now to address the climate crisis and limit global warming
to 1.5(o)C above pre-industrial levels. We need more renewable energy, more
flexible energy systems to make the best use of intermittent wind and solar
energy, and crucially, greenhouse gas removal technologies, like Bioenergy
with Carbon Capture and Storage (BECCS), to remove carbon from the atmosphere.
Globally there is increased recognition and policy support for sustainable
biomass and BECCS. We believe that Drax is a world leader in sustainable
biomass and that BECCS can become a world leading, UK-led, exportable solution
for large-scale negative emissions. These benefits will only be possible with
the right biomass - sustainable biomass. At Drax we are committed to using the
right biomass to ensure positive outcomes for the climate, nature and people
and we have put in place policies, controls and reviews to support this.
The UK Government has signposted an ambition for at least 5Mt p.a. of negative
emissions from BECCS and Direct Air Capture by 2030, 23Mt p.a. by 2035 and up
to 81Mt p.a. by 2050. To support this ambition, in July 2022, the government
published a consultation on engineered Greenhouse Gas Removals (GGRs).
Separately, the government has publicly stated its intent to publish a power
BECCS business model consultation during summer 2022 in order to develop the
financial model required to support BECCS, recognising its advanced
technological readiness and the co-benefits of both power and negative
emissions.
Aligned with our strategy, we have outlined £3 billion of planned investment
in growth by 2030. This includes the expansion of our North American supply
chain, BECCS in the UK and dispatchable non-thermal generation via the
expansion of our Cruachan Pumped Storage Power Station in Scotland. We expect
this plan to be fully funded from future cashflows and by 2030 we anticipate
being significantly below 2 times Net Debt to Adjusted EBITDA, providing
additional capacity to support the options we are developing to invest in
BECCS in North America.
The Intergovernmental Panel on Climate Change (IPCC), the UK's Climate Change
Committee (CCC) and the Coalition for Negative Emissions have all outlined a
clear role for BECCS, identifying a requirement of between 2 billion and 7
billion tonnes of negative emissions globally from BECCS per year. Recognising
the importance of this opportunity we are also continuing to develop options
for BECCS projects outside of the UK.
At the same time as addressing the global challenge of climate change, we must
also address the challenge of energy security of supply this winter. At the
request of the UK Government, we have entered into an agreement with National
Grid pursuant to which our two legacy coal-fired units at Drax Power Station
will remain available to provide a "winter contingency" service to the UK
power system from October 2022 until the end of March 2023, at which point the
units will close. The units will not generate commercially for the duration of
the agreement and will only operate if and when instructed to do so by
National Grid.
Summary of H1 2022
Safety remains a primary focus and in the first half of 2022 the Total
Recordable Incident Rate was 0.41 (H1 2021: 0.14). The increase in part
reflects a widening of the scope and improvement in the recording of incidents
in our North American operations, which now includes contractors in the
Pinnacle operations we acquired in 2021. Over the last 12 months we have begun
implementing a rigorous HSE improvement plan in our North American business as
we align safety and environmental practices across the Group. We expect
investments in training, human resource and capital projects to deliver
improved performance.
Adjusted EBITDA of £225 million represents a 21% increase compared to H1 2021
(£186 million). This strong performance reflects increased pellet sales, a
strong generation performance across the portfolio and improved profitability
in our Customers business. Whilst we have seen some limited inflationary
pressures in our cost base, most notably in respect of utilities and bunker
fuel, the integrated nature of our biomass supply chain and operations,
combined with long-term contracts in place for fibre, pellet procurement and
freight continue to provide a good level of protection from any cost
increases. Further, with indexation of UK renewable schemes and third-party
sales contracts, inflationary pressure in our cost base is largely offset by
increased revenues.
Our balance sheet is strong with total cash and committed facilities of £539
million as at 30 June 2022 and Net Debt of £1,101 million. Consistent with
our fully funded plans for investment in growth to 2030, we continue to target
long-term Net Debt to Adjusted EBITDA of around 2 times, but now expect to be
significantly below this level by the end of 2022.
We expect to propose a dividend for the 2022 financial year of £84 million,
an 11.7% increase on 2021, consistent with our policy to pay a dividend which
is sustainable and expected to grow. As has been our practice since we
implemented the policy in 2017, 40% of the expected full year dividend will be
paid for the first six months of 2022, £34 million or 8.4 pence per share.
H1 operational performance
Pellet Production
In North America, our Pellet Production business reported Adjusted EBITDA of
£45 million, up 13% (H1 2021: £40 million). This primarily reflects higher
levels of production and sales from existing assets, and the addition of new
capacity following the acquisition of Pinnacle in April 2021.
We produced 2.0Mt of pellets, an increase of 54% (H1 2021: 1.3Mt), which
reflects a full six months-worth of production from Pinnacle's 10 pellet
plants following the acquisition in April 2021, increased capacity at
Morehouse and LaSalle, Louisiana, and incremental commissioning volumes at
both Demopolis, Alabama and Leola, Arkansas.
The headline Free On Board (FOB) production cost (the cost of producing
biomass pellets and transferring them to a port in North America for onwards
transit) across the portfolio was $146/t, an increase of 2% on 2021 (2021:
$143/t). In addition to the inflation impact on utilities and bunker fuels
described above, this reflects a number of other factors.
During the first half of 2022, the Group completed the commissioning of its
360Kt plant at Demopolis, Alabama and its 40Kt satellite plant in Leola,
Arkansas, with lower production volumes during commissioning adding
temporarily to the average cost per tonne. Both plants are expected to reach
full production capacity in H2 2022.
The Pellet Production business provided flexibility in biomass supply,
supporting efforts to optimise biomass generation from summer to winter
periods, and support UK security of supply at times of higher demand in the
coming winter. As a result, some additional cost was incurred in Pellet
Production, but additional value was created for the Group as a whole.
The reprofiling of biomass logistics also enabled accelerated maintenance work
at a number of pellet plants in the first half of 2022 and this is expected to
support higher output in H2 2022.
Strong demand for forest products in construction and manufacturing markets
continues to support good fibre residue availability. Taking account of
changes in fibre mix by plant, there was no material change in overall fibre
cost. However, as outlined in our April 2022 Trading Update, there has been an
incremental increase in transportation costs in North America, as well as
higher utilities costs associated with power and gas in Q2.
Due to the Group's long-term hedging of freight costs, there has been no
material impact associated with higher market prices for ocean freight, other
than higher bunker fuel costs. The Group uses long-term contracts to hedge its
freight exposure on biomass for its Generation business, and following the
acquisition of Pinnacle, has taken steps to optimise freight requirements
between production centres in North America and end markets in Asia and
Europe.
Between 2018 and 2021, average FOB costs for the portfolio have reduced from
$166/t to $143/t. Whilst we expect to see continued limited inflationary
pressures as mentioned above, we also see opportunities for continued cost
reduction in line with our strategy.
Generation
Our portfolio generated 5% of the UK's electricity between April 2021 and
April 2022 (the most recent period for which data is available) and 11% of the
UK's renewable electricity over the same period, making Drax the largest
renewable generator by output.
Adjusted EBITDA of £205 million from continuing operations was an increase of
24% on H1 2021 (£165 million from continuing operations). This reflects
strong biomass generation and pumped storage hydro performance, providing high
levels of dispatchable renewable and low-carbon electricity and system support
services, more than offsetting incrementally higher biomass costs and grid
charges.
Against the backdrop of increasing concern around European energy security, in
the first half of 2022 we have optimised our biomass generation and logistics
(based on the amount of available biomass across the year), buying back summer
positions and reprofiling biomass deliveries to move generation from summer to
winter periods, providing additional security of supply to the UK at times of
expected higher demand. We expect to benefit from incrementally higher power
prices in the winter period versus the summer but have incurred additional
cost to enable these measures.
The current operating environment increases the importance of appropriate
investment to ensure good operational performance and availability. By
optimising generation across all four biomass units, we believe we can reduce
wear and tear and the risk of forced outage across the portfolio.
Additionally, by reprofiling generation from summer to winter periods, we have
also been able to deliver planned maintenance outages on all four units, which
should support operational availability in the second half of 2022.
Our hydro operations - Cruachan Pumped Storage Power Station (Cruachan), and
the Lanark and Galloway hydro schemes - have performed strongly. These assets
provide renewable electricity, system support services and Capacity Market
income. Taken together with the Daldowie energy from waste plant, Adjusted
EBITDA was £53 million (H1 2021: £34 million). This increase reflects the
provision of additional system support activity and good asset availability.
The Group's generation assets have continued to play an important role
providing stability to the UK power system and crucially we are not dependent
on gas supply to generate. Our portfolio of dispatchable biomass generation,
and flexible pumped storage are key to an integrated and reliable energy
system with high levels of renewable electricity and system stability. System
stability is not purely about the marginal cost of a MWh of power but the
provision of the non-generation system services that a well-functioning,
reliable power system requires. Our biomass and pumped storage hydro assets
are well placed to do this.
In March 2022, we secured Capacity Market agreements for our hydro and pumped
storage assets providing revenues of around £15 million in the delivery
period October 2025 to September 2026.
In January 2022, our two legacy coal units were called into the Balancing
Mechanism by the system operator for limited operations to support security of
supply. These short-term measures helped to stabilise the power system during
periods of system stress and did not result in any significant increase in the
Group's total carbon emissions.
Separately, in March 2022, we signed a development agreement with Engineering,
Procurement and Construction (EPC) contractor Mytilineos for the development
of three 299MW Open Cycle Gas Turbine (OCGT) developments. Each plant is
expected to require investment in the region of £100 million and we expect to
invest around £120 million in 2022 in order that we can fulfil our
obligations under the Capacity Market agreements. This investment is
underpinned by a 15-year Capacity Market agreement for delivery between 2024
and 2039. We are continuing to evaluate options for these projects, including
their potential sale.
Customers
Our Customers business has performed well with Adjusted EBITDA of £24 million
(H1 2021: £5 million loss). This is a significant improvement on 2021, which
was impacted by Covid-19 - principally in the SME business. This includes a
benefit from the resale of forward purchased power which was not required by
customers, and was sold back into the merchant market above the contracted
rate.
Over the past two years we have restructured the Customers business -
streamlining operations with the closure of offices in Oxford and Cardiff -
and rebranded the Haven Power Industrial & Commercial (I&C) business
to Drax Energy Solutions. These changes will support the development of our
core I&C supply business, which has performed well with growth in the
contracted sales position to high-quality customers.
We see an important role in supporting the decarbonisation of I&C
businesses through the supply of renewable energy, asset optimisation,
electric vehicle services and carbon offset certificates, which we believe
could evolve in the future to the provision of negative emissions.
Alongside restructuring the Customers business, we have continued to evaluate
operational and strategic options for the SME part of the business.
Strategy update
Our strategy is designed to realise our purpose of enabling a zero carbon
lower cost energy future and our ambition to be a carbon negative company by
2030.
The strategy includes three complementary strategic pillars, closely aligned
with global energy policies, which increasingly recognise the unique role that
biomass can play in the fight against climate change. These pillars are to be
a global leader in sustainable biomass pellets; to be a global leader in
negative emissions; and to be a UK leader in dispatchable, renewable power.
The development of these three pillars is underpinned by the Group's continued
focus on safety, sustainability and biomass cost reduction.
A global leader in sustainable biomass pellets
We believe the global market for sustainable biomass will grow significantly,
creating international opportunities for sales to third-parties, BECCS,
generation and other long-term uses of biomass.
To support this expected growth in demand for biomass products, Drax is
targeting 8Mt of pellet production capacity by 2030, which will require the
development of over 3Mt of new biomass pellet production capacity to
supplement existing capacity and developments. We are developing a pipeline of
organic projects, principally focused on North America, and expect to take a
final investment decision on up to 500Kt of new capacity in the second half of
the year.
In addition to own-use biomass pellets, Drax currently sells around 2Mt of
biomass each year to third parties in Asia, Europe and the UK under long-term
index-linked contracts, with total contracted revenues of $4.4 billion. We aim
to double annual sales to 4Mt per year by 2030 and to support this process, in
July 2022, the Group formally opened its new sales office in Japan, and is
continuing to develop a European sales team based in London.
Drax is differentiated as a major producer, supplier and user of biomass,
active in all areas of the supply chain, with long-term relationships and 20
years of experience in biomass operations. The Group's innovation in
coal-to-biomass engineering, together with the development of a leading
position in negative emissions, can be deployed alongside its large, reliable
and sustainable supply chain to support customer decarbonisation journeys with
long-term partnerships. We expect to sell all the biomass we produce at an
appropriate market price (both for own use at Drax Power Station and to
third-parties), typically under long-term contracts.
A global leader in negative emissions
We plan to transform Drax Power Station, adding BECCS to two biomass
generating units to permanently remove 8Mt of CO(2) from the atmosphere each
year by 2030. The project is well developed, the technology is proven and an
investment decision could be taken in 2024, subject to the right investment
framework. This could mean that the first BECCS unit would be operational in
2027 and a second in 2030.
Drax Power Station is in the Humber region, an area with one of the highest
absolute level of carbon emissions in the UK, due to the number of industrial
sites in the area. This makes the region a natural location for large-scale
carbon capture and storage infrastructure for energy and industry.
The UK Government recognises the important role which BECCS has to play in
delivering net zero, requiring at least 5Mt of CO(2) per year from BECCS and
other engineered GGR by 2030. To support this ambition, in July 2022, the
government published a consultation on engineered GGRs. Separately, in order
to develop the financial model required to support BECCS - and reflective of
its advanced technological readiness and the co-benefits of both power and
negative emissions - the government has publicly stated its intent to publish
a power BECCS business model consultation during summer 2022.
We expect deliverability to be an important part of the UK Government's
selection criteria. Our technology partner Mitsubishi Heavy Industries (MHI)
has a proven large scale technical solution which we are adapting for the
first two units at Drax Power Station. In June 2022 we submitted a planning
application for BECCS and are conducting a Front-End Engineering and Design
study which will provide the detailed design information and costings to
support the investment decision, and following the end of coal operations we
will continue early site preparation works.
Alongside MHI's technology, we are supporting other innovative options for
carbon capture. For example, Drax is an equity shareholder in C-Capture
Limited, which is developing an organic solvent technology that could be used
for BECCS and other applications, which we believe could deliver significant
long-term cost savings for future projects.
To capitalise on our belief in the global need for BECCS and the technical
expertise gained from our Drax Power Station project, our ambition is to
deliver 4Mt of negative CO(2) emissions each year from BECCS outside of the UK
by 2030. Accordingly, we are currently developing models and locational
preferences for international BECCS developments, with a primary focus on
North America.
Recognising this global opportunity for the role of biomass and BECCS, we are
also evaluating other vectors for the use of biomass, including other
industrial processes.
A UK leader in dispatchable, renewable power
The UK's plans to achieve net zero by 2050 will require the electrification of
heating and transport systems, resulting in a significant increase in demand
for electricity. We believe that intermittent renewable and inflexible
low-carbon energy sources - wind, solar and nuclear - could help meet this
demand. However, this will only be possible if the remaining power sources can
provide the dispatchable power and non-generation system support services
required to ensure security and stability of supply and to limit the cost to
the consumer.
Long-term biomass generation and pumped storage hydro can provide these
increasingly important services and we are developing an option for new pumped
storage - Cruachan II - to provide an additional 600MW of dispatchable
long-duration storage to the power system. A planning application was
submitted in May 2022. The location, flexibility and range of services it can
provide makes Cruachan strategically important to the UK power system. A final
investment decision could be taken in 2024 and the development operational by
2030. Any investment decision will depend on the right regulatory framework.
People, Nature and Climate positive
We remain committed to delivering positive people, climate and nature
outcomes, which we believe are highly complementary to our business model, in
which sustainable biomass and greenhouse gas emissions are a central focus.
Biomass - when sustainably sourced - is a renewable, low-carbon source of
energy, and an important part of both UK and international renewable energy
policy, in many instances using material which the timber industry cannot
utilise. The legal frameworks and scientific principles which underpin this
assessment are clear. Carbon emitted in the generation of renewable
electricity from biomass is absorbed by and accounted for in the growth of
forest stock. This is based on well-established principles set out by the UN
Intergovernmental Panel on Climate Change, which reaffirmed its long-standing
position on sustainably sourced biomass in 2019. This interpretation is
reflected in the European Union's second Renewable Energy Directive (REDII)
and Taxonomy rules, which mirror REDII. A third iteration of RED is currently
in development and builds on this increased ambition around renewable energy
deployment, including the continued evolution of rules around sustainable
biomass sourcing and a greater role for BECCS, in addition to proposals to
accelerate the decarbonisation of sectors such as heavy industry, heating and
aviation.
We continue to identify opportunities to further reduce greenhouse gas
emissions at all stages of the supply chain and in July 2022, we signed a
memorandum of understanding with Japanese shipping company MOL to develop wind
assisted sail technologies for use in shipping biomass.
Within the Group we remain committed to a programme of diversity and
inclusion, which includes the delivery of inclusive leadership and management
programmes, as well as the promotion of social mobility through our graduate,
apprenticeship and work experience programmes.
Outlook - 2022 and beyond
In Pellet Production, we are focused on the continued production of good
quality pellets at the lowest cost and the expansion of our production
capacity and expect to take a final investment decision on up to 500Kt of new
capacity in the second half of the year.
In Generation, through the optimisation of our biomass generation, we expect
to deliver higher volumes of dispatchable renewable power, when the UK system
needs it most, supporting decarbonisation, security of supply and ultimately
helping to reduce cost to the consumer.
In Customers, we are focused on opportunities to develop our I&C business.
Our long-term focus is on progressing our strategy: to be a global leader in
sustainable biomass pellets; to be a global leader in negative emissions; and
to be a UK leader in dispatchable, renewable generation. Through these
strategic objectives, we expect to create opportunities for long-term
international growth underpinned by strong cash generation and attractive
returns for shareholders, and to deliver value for our other stakeholders.
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, and
our ambition to become a carbon negative company by 2030, underpinned by the
development of BECCS.
CFO Financial Review
Six months ended
30 June 2022 30 June 2021
Financial performance (£m) Total operating profit 207 84
Exceptional costs and certain remeasurements (103) (8)
Adjusted operating profit 104 76
Adjusted depreciation, amortisation, losses on disposal of fixed assets and 121 89
income from associates
Adjusted EBITDA from continuing operations 225 165
Adjusted EBITDA from discontinued CCGT operations - 21
Adjusted EBITDA from continuing and discontinued operations 225 186
Adjusted EBITDA (£m) Pellet Production 45 40
Generation 205 165
Customers 24 (5)
Innovation, capital projects and other costs (49) (35)
Discontinued CCGT operations - 21
Adjusted EBITDA from continuing and discontinued operations 225 186
Capital expenditure (£m) Capital expenditure 60 71
Cash and Net Debt (£m unless otherwise stated) Cash generated from operations 185 138
Net Debt 1,101 1,029
Net Debt to Adjusted EBITDA (times*) 2.5 2.5
Cash and committed facilities 539 666
Earnings (pence per share) Adjusted Basic 20.0 14.6
Total Basic 37.2 6.2
Distributions (pence per share) Interim dividend 8.4 7.5
*Adjusted EBITDA is calculated on a rolling last 12 months basis.
Following the acquisition of Pinnacle in 2021, the Group acquired investments
with non-controlling interests. For the purpose of alternative performance
measures (Adjusted EBITDA, Adjusted EPS and Net Debt), the Group excludes
amounts directly attributable to non-controlling interests from the values
disclosed. The amount of Adjusted EBITDA attributable to the non-controlling
interest in the six months ended 30 June 2022 is immaterial.
The sale of Drax Generation Enterprise Ltd (which contained the Group's CCGT
portfolio) to VPI Generation Limited completed in January 2021. The income,
expenditure and cash flows for the operations disposed of for the previous
period and for the full year ended 31 December 2021 have been presented as
discontinued operations. Income statement amounts presented in this financial
review are for continuing operations only unless otherwise stated.
Reconciliations between continuing, discontinued and total amounts for each
period are shown in the notes.
Tables in this financial review may not add down/across due to rounding.
References to 'the period' throughout refer to the six months ended 30 June
2022. References to 'the comparative period' throughout refer to the six
months ended 30 June 2021.
Introduction
Adjusted EBITDA of £225 million in the period represents a 21% increase on
the £186 million achieved in the six months ended 30 June 2021. This strong
performance reflects increased pellet sales, a strong performance across our
generation portfolio and improved profitability in our Customers business.
Results for the first half of 2021 included an estimated £10-15 million
adverse impact from Covid-19, which has not recurred in 2022.
Excluding the discontinued gas operations, disposed of in January 2021,
Adjusted EBITDA from continuing operations increased 36% compared to the prior
period.
Whilst we have seen some inflationary pressures in our biomass cost base, most
notably in respect of utilities and bunker fuel, the integrated nature of our
biomass supply chain and operations, combined with long-term contracts in
place for fibre, pellet procurement and freight continue to provide a good
level of protection from any cost increases. Further, with indexation of UK
renewable schemes and third-party sales contracts, inflationary pressure in
our cost base is offset by revenue growth.
Total operating profit of £207 million compares to £84 million in the
comparative period. In addition to the increase in underlying earnings across
each of our operating segments, this result includes a net benefit of £103
million relating to exceptional items and certain remeasurements, as described
in note 6, which primarily reflects the increasing value of future contracts
for the purchase of foreign currency as sterling has weakened during the
period.
Our Pellet Production business contributed £45 million of Adjusted EBITDA in
the six months to 30 June 2022, a 13% increase on the £40 million for the
comparative period. This was driven primarily by a 54% increase in the volume
of pellets produced. Our pellet plants produced 2.0Mt of pellets in the first
half of this year and shipped 2.4Mt, compared to production and shipment of
1.3Mt in the first half of 2021. Of this volume, 1.0Mt was sold to third
parties (H1 2021: 0.4Mt).
The headline Free On Board (FOB) production cost (the cost of producing
biomass pellets and transferring them to a port in North America for onwards
transit) across the portfolio was $146/t, an increase of 2% on the FY 2021
cost of $143/t primarily reflecting the inflationary impact on utilities and
bunker fuel noted above. The increase in production costs is described in more
detail below.
The Generation business contributed £205 million of Adjusted EBITDA, a 11%
increase on the prior period (H1 2021: £185 million), which included £21
million from the discontinued CCGT operations. Our biomass generation, pumped
storage and hydro assets all contributed to this increase, delivering good
operational performance, flexible generation and strong system support
services.
Against the backdrop of increasing concern around European energy security,
during the first half of 2022 we have optimised our biomass generation and
logistics (based on the amount of available biomass across the year), buying
back summer positions and reprofiling biomass deliveries to move generation
from summer to winter periods, providing additional security of supply to the
UK at times of expected higher demand. We expect to benefit from incrementally
higher power prices in the winter period versus the summer but have incurred
additional cost to enable these measures.
Our Customers business delivered Adjusted EBITDA of £24 million, a
significant improvement on a £5 million loss in the first half of 2021 which
was impacted by Covid-19 - principally in the SME business. Improved
profitability also includes a benefit from lower customer demand, with excess
power sold back into the wholesale market.
We continue to deliver strong cash generation with Cash generated from
operations of £185 million, representing growth of 34% compared to the prior
period. While maintaining robust capital discipline, our strong cash
generation provides capacity to invest in growth and support the payment of a
sustainable and growing dividend, in line with our long-standing capital
allocation policy.
We have strong liquidity, with available Cash and committed facilities at the
period end of £539 million (31 December 2021: £549 million).
We closed the period with a Net Debt to Adjusted EBITDA ratio of 2.5 times
(Adjusted EBITDA calculated on a last 12 months basis) and continue to expect
this will be significantly below 2.0 times by the end of 2022.
Consistent with our policy to pay a dividend which is sustainable and expected
to grow, the Board has resolved to pay an interim dividend of 8.4 pence per
share (£34 million) and expects this to be 40% of a full year dividend of
21.0 pence per share (£84 million), subject to continued good operational
performance in the second half of the year. This represents an 11.7% increase
on 2021.
Adjusted EBITDA
Continuing and discontinued operations
The results of the CCGT assets, the sale of which completed on 31 January
2021, are presented as discontinued operations in the prior year. The period
to 30 June 2022 contained no results in relation to discontinued operations. A
reconciliation of the results for the six months ended 30 June 2021 is
contained within note 6 to the Condensed consolidated interim financial
statements.
Pellet Production
The Pellet Production business contributed £45 million of Adjusted EBITDA in
the six months to 30 June 2022, a 13% increase on the £40 million for the
comparative period. This was driven primarily by a 54% increase in the volume
of pellets produced. Our pellet plants produced 2.0Mt of pellets in the first
half of this year and shipped 2.4Mt, compared to production and shipment of
1.3Mt in the first half of 2021. Of this volume, 1.0Mt was sold to third
parties (H1 2021: 0.4Mt).
Since the start of the cost reduction programme in 2018 up until the end of
2021, the headline FOB production cost (the cost of producing biomass pellets
and transferring them to a port in North America for onwards transit) reduced
$23/t (14%) and was $143/t for the full year 2021.
Overall, our costs have been well controlled in the period, however we have
seen an increase of 2% in FOB production costs to $146/t in the first half of
2022. This increase primarily reflects the impact of inflation on utility
costs (>20% increase) and fuel surcharges (>10% increase). It also
reflects higher average production costs during commissioning of the plant at
Demopolis in Alabama which we expect to achieve full production capacity in
the second half of the year. Excluding these items, we continued to make
progress on our cost reduction initiatives with a small reduction across the
balance of production costs.
With continued good fibre availability and taking account of changes in fibre
mix by plant, there was no material change in overall fibre cost.
During the period the Pellet Production business provided flexibility in
biomass supply, to support the reprofiling of biomass generation at Drax Power
Station. While this resulted in some additional cost in Pellet Production
during the first half of the year, additional value was created for the Group
across the full year, demonstrating the value of our integrated business
model.
We continue to see opportunities for further cost reduction in line with our
strategy and will continue to optimise for value across the group. In addition
to increased production volumes from existing plants, during the second half
of the year we expect to take final investment decisions on up to 500Kt of
additional pellet production capacity, continuing the progress towards our aim
to develop 8Mt of production capacity by 2030. Further future savings will be
delivered through widening our sustainable fibre envelope, continued
operational efficiencies across production and logistics and development of
new technologies and innovation.
In addition to the increase in production costs explained above, there are
other factors impacting Adjusted EBITDA in the period. We have invested in
non-production costs to support future growth opportunities in North America,
and achieved margins are also impacted by the mix of where pellets are sourced
(internally produced or purchased from third parties) and whether those
pellets are sold internally or to third parties.
Generation
The Generation business contributed £205 million of Adjusted EBITDA, a 11%
increase on the prior period (H1 2021: £185 million), which included £21
million from the discontinued CCGT operations. Our biomass generation, pumped
storage and hydro assets all contributed to this increase, delivering good
operational performance, flexible generation and strong system support
services. The Adjusted EBITDA increase was partially offset by incremental
optimisation and biomass reprofiling costs, and higher system support charges.
During the period, biomass generation totalled 6.1TWh (H1 2021: 7.6TWh). The
reduction is attributable to the optimisation of biomass generation and
logistics to deliver higher levels of generation during the second half of the
year, supporting security of supply when demand is expected to be higher.
There are no major outages planned for the second half of the year across the
Generation portfolio, with the focus being on maintaining strong operational
availability and the delivery of high volumes of dispatchable renewable
generation.
To support the delivery of high levels of renewable biomass generation at
times of high demand, and mitigate the financial risk associated with a forced
outage in the current environment, we expect to run increased baseload volume
on all three ROC units, holding the CfD unit to provide resilience in the
event of an unplanned outage. The outturn for the full year will therefore
depend on operational performance of the ROC units in the second half of the
year and the price achieved for any additional CfD generation.
Our pumped storage and hydro assets continue to provide valuable support
services to the UK energy system and have performed strongly from an
operational perspective during a period of high volatility. They contributed
£53 million of Adjusted EBITDA in the period, compared to £34 million in the
first half of 2021, an increase of 56%.
The system operator called our two legacy coal units into the Balancing
Mechanism for limited operations during January, to support security of
supply. These short-term measures helped to stabilise the power system during
periods of stress and did not result in any significant increase in the
Group's total carbon emissions. The announced extension to the availability of
the coal units, as discussed in the Business Review, is expected to deliver
income in the final quarter of 2022 and first quarter of 2023.
Reflecting our policy of forward hedging power and the optimisation of biomass
generation to prioritise winter periods over summer, the average contracted
price of the ROC units has increased to £88/MWh for 2022. In practice, we
have moved summer generation on our CfD unit to winter generation on the ROC
units, supporting the system at times we expect demand to be highest. In some
cases, this has involved buying back previously sold CfD generation and
reprofiling biomass shipments at additional cost.
Customers
The Customers business contributed £24 million of Adjusted EBITDA, a
significant improvement from a loss of £5 million in the comparative period,
which included an estimated adverse impact of £10-15 million from Covid-19.
We continue to focus on customer acquisition, credit control and cash
collection. During the first half of 2022 we also benefited from the resale of
forward hedged power which was not required by customers back into the
merchant market above the contracted rate.
Total volumes sold of 9.4TWh compares to 9.0TWh in the comparative period, an
increase of 4%. The business has also achieved higher prices during the
period, reflecting prevailing market conditions.
Bad debt charges for the period totalled £26 million (H1 2021: £8 million),
which is stated net of a £3 million benefit in the period (H1 2021: net of a
£17 million benefit) in respect of resolution of legacy credit balances.
Price increases for uncontracted customers during the period have been
significantly higher than for those customers on fixed-price contracts. The
overall bad debt provision of £54 million (representing 17% of the gross
trade receivables balance) compares to £47 million at 31 December 2021
(representing 20% of gross trade receivables).
Innovation, capital projects and other costs
Innovation, capital projects and other costs of £49 million (H1 2021: £35
million) reflect increased spend on major projects which have not yet reached
the stage of capitalisation (Cruachan II, for example), increased IT costs,
predominantly driven by the change in SaaS accounting, and additional
share-based payment charges because of an increase in the volume of options
expected to vest.
Total operating profit
Total operating profit for the period increased to £207 million, from £84
million in the comparative period. This includes a net gain of £130 million
from remeasurement gains and losses on derivative contracts (H1 2021: a net
gain of £20 million), reflecting favourable movements in the valuation of our
foreign exchange portfolio as sterling weakened during the first half of 2022.
This has been partially offset by adverse movements in the valuation of
commodity contracts which do not qualify for hedge accounting, including gas
and oil. For more detail on the nature and valuation of our portfolio of
derivative contracts, see note 13 to the Condensed consolidated interim
financial statements.
Total operating profit also includes £27 million of exceptional costs in the
period (H1 2021: £12 million), as described in note 6, of which £25 million
relates to the impairment of certain intangible assets. £6 million of this
relates to previously capitalised SaaS costs, following a change in accounting
policy on 1 January 2022. For more information on this change in accounting
policy, see the 'Basis of preparation' section of the Condensed consolidated
interim financial statements.
The remaining £19 million relates to a billing system where the Group has
stopped development and where proceedings have been issued against the
supplier to recover damages for misrepresentation and breach of contract. The
Group no longer expects that any future economic benefit will be recovered as
an ongoing intangible asset. In accordance with accounting standards, the
previously capitalised balance has therefore been impaired. Following
consideration with external professional advisors, the Group continues to
believe this previously incurred expenditure will be fully recovered from the
supplier, and there has been no change in this position during the period.
Accordingly, an associated contingent asset has been disclosed, see note 14.
Adjusted depreciation and amortisation costs of £121 million increased by
£32 million compared to the first half of 2021. Of this, £13 million is
attributable to the inclusion of Pinnacle for a full six months in 2022, and
£2 million to new sites. A large part of the remaining increase reflects
planned higher levels of capital expenditure in relation to plant upgrades and
capacity expansions and includes some accelerated depreciation for existing
equipment that has been, or will be, replaced following capital investments.
Profit after tax and Earnings per share
Net interest charges for the period of £35 million are in line with the
comparative period (H1 2021: £34 million). A foreign exchange credit of £28
million (H1 2021: £2 million) has resulted from the weakening of sterling
during the first half of the year, and the subsequent revaluation of
intercompany loans denominated in foreign currencies. Further details on this
are included in note 4.
The effective tax rate applicable to the Group's Adjusted pre-tax profits of
19% (H1 2021: 11%) is in line with the standard rate of corporation tax in the
UK and incorporates the effect of higher tax rates in overseas jurisdictions.
The increase in effective tax rate from the 2021 full year rate of 12% is
attributable to an increase in profit before tax in the Group's UK entities.
For interim periods, the effective tax rate is based on our forecast tax rate
for the full year, which continues to benefit from patent box, research and
development credits, and the "super-deduction" for qualifying plant and
machinery expenditure that was announced in March 2021.
The exceptional deferred tax charge of £8 million in the period relates to
the corporation tax rate changes announced by the UK Government in 2021, and
the planned increase in headline rate from 19% to 25% in April 2023.
Adjusted profit after tax attributable to the discontinued CCGT operations was
£nil during the period (H1 2021: £19 million). The above factors all
contributed to an Adjusted Basic earnings per share figure of 20.0 pence (H1
2021: 14.6 pence) and a Total Basic earnings per share figure of 37.2 pence
(H1 2021: 6.2 pence).
Capital expenditure
Capital expenditure in the first half of the year totalled £60 million (H1
2021: £71 million). We expect capital expenditure within the Generation
business to be weighted towards the second half of the year. Expenditure on
the OCGT assets is expected to increase, reaching up to £120 million by the
end of 2022. With £10 million of capital expenditure expected in H2 2022
following final investment decision on new pellet plant capacity of up to
0.5Mt, we now expect full year capital expenditure to be in the region of
£290-£310 million.
Major sources of spend in the first half of the year included maintenance and
pellet plant development and expansions.
Cash and Net Debt
Cash generated from operations
Operating cash flow before movements in working capital and defined benefit
pension obligations for the period was £245 million (H1 2021: £141 million),
reflecting the increase in Total operating profit. Cash generated from
operations, inclusive of movements in working capital, of £185 million
compares to £138 million in the prior period.
Total cash absorbed by working capital in the period was £56 million (H1
2021: £4 million released from working capital) as shown in note 11 to the
Condensed consolidated interim financial statements.
Inventories increased during the period, resulting in part from the
reprofiling of generation into the second half of the year. The facility
available to accelerate cash flows associated with trade receivables in the
Customers business on a non-recourse basis was extended during the first half
of the year and increased in size by £100 million to £300 million. The
increased facility was fully utilised during the period, resulting in a cash
inflow of £100 million and a corresponding reduction in receivables. The
overall increase in payables during the period was driven by the cyclical
increase in ROC liabilities, offset by the return of collateral deposits
received during the second half of 2021, as the associated trades matured. An
increase in renewable certificate assets was driven by generation in the
period, partially offset by the monetisation of ROCs using available
facilities.
Net cash movements
Capital expenditure cash flows for the period totalled £83 million (H1 2021:
£63 million), with full year capital expenditure cash flows expected to be
second half weighted, as described above. Cash flows associated with capital
expenditure on the OCGT projects are expected to be significantly lower than
the accounting additions recorded in the second half of the year, as a result
of extended payment arrangements.
Corporation tax payments totalled £9 million (H1 2021: £8 million receipt),
reflecting higher UK payments on account during the current period in respect
of the expected full year tax charge for 2022.
Net Debt and Net Debt: Adjusted EBITDA
30 June 2022 30 June 2021 31 December 2021
£m £m £m
Cash and cash equivalents 288 406 317
Current Borrowings - (32) (41)
Non-Current Borrowings (1,388) (1,402) (1,320)
Net Debt before impact of hedging (1,101) (1,029) (1,044)
Adjusted EBITDA* 225 186 398
Net Debt: Adjusted EBITDA (times) 2.5 2.5 2.6
*Adjusted EBITDA is for the relevant period shown. The Net Debt: Adjusted
EBITDA ratio quoted uses a last 12 months figure.
As noted in the prior period, the cash and cash equivalents balance at 30 June
2021 reflected several planned activities. During July 2021, the Group
completed the buy-out of a minority interest in Alabama Pellets LLC for cash
consideration of US$30 million, and also utilised approximately C$130 million
of existing cash reserves in part repayment of borrowings in the wider
refinancing of debt facilities acquired as part of the Pinnacle transaction.
Our Net Debt: Adjusted EBITDA ratio remains higher than our long-term target
of 2.0 times at 30 June 2022, however, this is expected to reduce to below
this target by 31 December 2022.
Liquidity
30 June 2022 30 June 2021 31 December 2021
£m £m £m
Cash and cash equivalents 288 406 317
RCF available but not utilised 250 245 231
Customers trade receivable facility available but not utilised - 15 -
Total cash and committed facilities 539 666 549
Cash and committed facilities at 30 June 2022 of £539 million (31 December
2021: £549 million) provides substantial headroom over our short-term
liquidity requirements. In addition to cash on hand, the Group has access to
both a C$10 million Revolving Credit Facility (RCF) and a £300 million ESG
RCF, to manage low points in the cash cycle. The latter facility expires in
2024, with a one-year extension clause. No cash has been drawn under this RCF
for over three years, but £56 million (31 December 2021: £74 million) has
been drawn for letters of credit.
During the first half of the year, the Group utilised existing cash reserves
to repay its index-linked term loan facility, with a total cash outflow of
£41 million. A significant proportion, 65%, of the Group's remaining debt
falls due in a period over three years from the Balance Sheet date. Our
liquidity position remains robust, with all three of our ratings agencies
evaluating it as strong.
Derivatives
We use derivatives, including cross-currency swaps, to hedge the sterling cost
of the interest payments and future principal repayments in respect of our
facilities denominated in foreign currencies. A reconciliation of Net Debt
incorporating the impact of derivatives, in addition to Net Debt per the IFRS
balance sheet, is set out in note 10 to the Condensed consolidated interim
financial statements. At 30 June 2022, this resulted in Net Debt adjusted for
hedging of £1,116 million (31 December 2021: £1,108 million).
The overall net outflow associated with rebasing activity in the period was
£3 million (H1 2021: net outflow of £27 million). This was in relation to
rebased cross-currency swaps and foreign currency trades, where the rebasing
occurred in 2020 or prior financial years. At 30 June 2022 outstanding cash
received from rebased cross-currency swap trades was £45 million (31
December 2021: £48 million).
Distributions
In line with our long-standing capital allocation policy, the Group is
committed to paying a growing and sustainable dividend. At the Annual General
Meeting on 27 April 2022, shareholders approved payment of a final dividend
for the year ended 31 December 2021 of 11.3 pence per share. This dividend was
paid on 13 May 2022.
On 25 July, the Board resolved to pay an interim dividend for the six months
ended 30 June 2022 of 8.4 pence per share (£34 million), representing 40% of
the expected full year dividend. The interim dividend will be paid on 7
October 2022 with a record date of 26 August 2022.
Going concern
As described above, the Group's financial performance in the first half of
2022 was strong, delivering improved profitability and cash flows, and Net
Debt consistent with the same period last year.
Our financing platform is stable, with most of our principal debt repayments
due from 2025 onwards and significant liquidity headroom available from both
committed and uncommitted facilities.
The Group refreshes its business plan and forecasts throughout the year,
including scenario modelling designed to test the resilience of the Group's
financial position and performance to a number of reasonably possible downside
scenarios. Based on its review of the latest forecast, the Board is satisfied
that the Group has sufficient headroom in its cash and committed facilities,
combined with available mitigating actions, to be able to meet its liabilities
as they fall due for the foreseeable future across a range of scenarios.
Consequently, the directors have a reasonable expectation that the Group will
continue in existence for the next 12 months and therefore have adopted the
going concern basis when preparing the Condensed consolidated interim
financial statements.
The contents of the Business and Financial reviews were approved by the Board
on 25 July 2022.
Principal risks and uncertainties
The Group's financial and operating performance is subject to various risks
and uncertainties. Several of these risks are not directly within the Group's
control, such as the wider economic and political environment. We seek to
manage and address the potential impact of the risks faced by the Group in
accordance with policies approved by the Board and management, applying the
Group's risk management framework. The Board assesses the risks and
uncertainties, considering the changes to those risks over time, the possible
measures to mitigate such risks and the approach which might be taken in
managing residual risks to the Group.
The Board, as part of its half year processes, considered reports from
management reviewing the principal risks and uncertainties and how these might
evolve during the second half of 2022. This review took account of the ongoing
Russia-Ukraine conflict, the impacts on the energy markets, the cost-of-living
crisis, and the agreement reached with National Grid to make our two
coal-fired units at Drax Power Station available to operate until the end of
March 2023. All of these areas are discussed further below.
As a result of their assessment, and consideration of the below factors, the
Board concluded that the financial exposure from an unplanned plant outage had
increased. Whilst there has been no change to the integrity of the Group's
plant and machinery, volatility and increases in system prices could result in
materially increased costs should an unplanned outage occur. This is discussed
further below. The Board is satisfied that the Group's other principal risks,
as reported as part of the 2021 Annual report and accounts, all remain
materially unchanged.
Recruitment and retention of staff continues to be a challenge for many
sectors in the UK. The Group continues to monitor the availability of
candidates against the current and future skill requirements to meet our
growth plans and believe that the progress being made is sufficient to meet
foreseeable business needs.
Further details of the Group's principal risks and uncertainties can be found
on pages 76 - 91 of the 2021 Annual report and accounts, which is available at
www.drax.com (http://www.drax.com/) .
Russia-Ukraine conflict
Russian forces invaded Ukraine in February 2022 which has not only created a
humanitarian crisis but has led to extensive economic impacts felt across the
globe. Whilst the volume of Russian and Belarusian biomass purchased by the
Group has historically been very low, this line of sourcing was ceased with no
significant impact on our ability to achieve required future biomass volumes.
All efforts have been made to support our partners who operate in Ukraine and
contribute to humanitarian efforts, including a donation to the Disasters
Emergency Committee Ukraine Humanitarian Appeal.
A committee has been established with the responsibility of undertaking
cross-functional analysis, risk identification and mitigation activities to
respond to the impact of the conflict on the Group. Due diligence and
screening are ongoing to ensure that the Group is not trading with any Russian
or Belarusian counterparties.
The conflict is testing global supply chains and reinforces the importance of
resilience in the Group's biomass sourcing processes. Whilst the impact on the
Group's direct supply chain has been minimal due to the very low number of
Russian and Belarusian suppliers historically used by the business, there are
indications of a secondary impact on the business' indirect supply chains.
This is materialising in the form of upward biomass pricing pressures as
suppliers have increased costs to procure fibre due to market shortages and
inflationary pressures. The impacts of higher short term biomass prices are
mitigated however by our biomass hedging strategy which ensures a large
proportion of the long term biomass contracts in place have agreed pricing.
In addition to remaining vigilant to biomass pricing pressure, the ability of
our suppliers to fulfil contracted volumes will also remain under review due
to the impact of fibre market shortages associated with the Russia-Ukraine
conflict.
Geopolitical tensions have in the past been known to result in increased cyber
related incidents. Accordingly, the Russia-Ukraine conflict has increased the
Group's risk exposure to attacks on our systems, and those of suppliers on
whom the Group relies for integrity of service. Recent cyber-attacks across
Europe have included specific targeted attempts on critical infrastructure,
including an attack on a major service provider that saw disruption of 5,800
wind turbines in Germany.
The Group's Security and IT teams have conducted a thorough risk assessment of
our externally facing infrastructure and have implemented a robust critical
patch regime as a result of this heightened cyber security threat. Whilst the
business' response to the heightened risk has been robust, it is acknowledged
that cyber-attacks are continuously increasing in sophistication and
complexity, requiring constant assessment and response to address any
vulnerabilities on an ongoing basis.
The Russia-Ukraine conflict has also contributed to widespread energy market
volatility due to the restriction of Russian gas. The resulting commodity
price increases are discussed further below.
Cost of living and energy market conditions
Since late 2021, the UK has been experiencing increasing pressure on the cost
of living due to high inflation. In the first half of 2022 the government has
announced measures designed to mitigate these pressures, including a £16
billion package of targeted support. However, it is expected that inflation
will continue to increase at a faster rate than average incomes during the
second half of the year.
We recognise that the inflationary pressures from rising commodity prices,
including power, are providing challenges to consumers and in some cases
causing hardship. We continue to monitor how wholesale power price increases
are feeding through to end consumers in our Customers business. By building on
the actions taken during the Covid-19 pandemic, we aim to support our
customers during this challenging time by working to provide payment plans or
payment holidays where necessary. We remain alert to the possibility that this
may have an impact on our customers' ability to pay their bills, resulting in
a potential financial impact of bad debt or delayed payments.
What initially appeared to be temporary energy price volatility resulting from
short term pressures on supply at the start of 2022, now looks to be a more
sustained energy price increase. This is due to a variety of factors including
outages at French nuclear power stations and Russian gas constraints, creating
the potential for continued elevated power prices across Europe. This exposes
the business to an increased financial cost should we incur an unplanned
outage on plant, as the business would incur the cost of a significantly
heightened market price to buy back the volumes contracted but undelivered.
Whilst we do not believe the integrity of the Group's plant and machinery, and
therefore the likelihood of an outage, has increased, the financial impact of
such an occurrence has increased and could have a material impact on the
Group's results. This risk is being managed appropriately through the
business' ability to hold back a proportion of capacity as a mitigation. Price
increases in the forward market can also present challenges in respect of
liquidity and credit, requiring careful management of both ongoing exposures
and collateral requirements.
The UK Government has publicly signalled the possibility of energy market
reform, however it currently remains unclear the scale of the impact of any
such reform, or potential related changes in taxation policy.
Continued operation of coal-fired units beyond September 2022
In July 2022 the Group confirmed that, at the request of the UK Government, it
had entered into an agreement with National Grid to make our two coal-fired
units at Drax Power Station available to operate until the end of March 2023.
The units will provide a "winter contingency" service to the UK power system
and will only operate if and when instructed to do so by National Grid. Whilst
this means prolonging the UK's dependence on fossil fuels, which is not
aligned with the Group's strategy, we recognise that as part of the UK's
critical national infrastructure, we play a key role in providing security of
supply and take this responsibility seriously.
Some of the Group's facilities and equipment relating to coal-fired generation
are classed as ageing assets given Drax Power Station was built approximately
fifty years ago. Continued operation of these assets therefore brings
operational risks in maintaining the availability of assets to fulfil a
request to operate. In seeking to ensure the assets are operationally ready,
Drax will require extended supply contracts relating to maintenance, materials
and Health and Safety. Delays in renewing and placing such contracts could
have an impact on the ability of management to secure operational readiness of
the coal-fired assets.
The Group is working with operational colleagues to ensure that sufficient
resource is available to safely run six generating units, as opposed to the
previously expected four units, during this period. The Group is also
cognisant that the extended use of the coal-fired units increases the threat
of disruption to the Group's operations and supply chain from protester
action.
Before committing to extending the availability of the coal-fired units, a
thorough assessment was undertaken to ensure these potential risks could be
sufficiently managed to an acceptably low level. In addition, this six-month
extension is not expected to impact on the timing of a final investment
decision or intended commissioning date for the BECCS project. Site
preparation works for BECCS are ongoing and will accelerate following formal
closure of the coal units in March 2023.
Directors' Responsibility Statement
We confirm that to the best of our knowledge:
a) The condensed set of financial statements has been prepared in accordance
with IAS 34 "Interim Financial Reporting";
b) The interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and description of principal risks and uncertainties for the remaining
six months of the year); and
c) The interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related party transactions and changes
therein).
By order of the Board
Will Gardiner
Chief Executive Officer
25 July 2022
Condensed consolidated interim financial statements
Introduction
The Condensed consolidated interim financial statements provide information
about the financial performance (Condensed consolidated income statement and
Condensed consolidated statement of comprehensive income), financial position
(Condensed consolidated balance sheet), and cash flows (Condensed 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
certain items in the Condensed consolidated income statement, Condensed
consolidated statement of comprehensive income, Condensed consolidated balance
sheet and Condensed consolidated cash flow statement. In general, the
additional information in the notes to the financial statements is required by
International Financial Reporting Standards (IFRS), other regulations or has
been included to facilitate increased understanding of the condensed primary
statements.
Basis of preparation
The Condensed consolidated interim financial statements have been prepared
using accounting policies consistent with IFRS as adopted by the UK and in
accordance with IAS 34 'Interim Financial Reporting'. The information provided
in respect of the year ended 31 December 2021 does not constitute statutory
accounts as defined in Section 434 of the Companies Act 2006 but is derived
from those accounts. A copy of the statutory accounts for that year has been
delivered to the Registrar of Companies. The auditor's report on those
accounts was not qualified, did not draw attention to any matters by way of
emphasis and did not contain statements under Section 498(2) or (3) of the
Companies Act 2006.
The Condensed consolidated interim financial statements have been prepared on
the going concern basis and on the historical cost basis, except for certain
assets and liabilities that have been 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).
See the CFO Financial Review for further details on the application of the
going concern basis.
Condensed consolidated income statement amounts referred to herein are for
continuing operations unless otherwise stated. The discontinued operations
relate to the results of the Combined Cycle Gas Turbine (CCGT) generation
portfolio sold to VPI Generation Limited on 31 January 2021 (see pages 235 -
237 of the Group's 2021 Annual report and accounts for further details).
Reconciliations of Adjusted EBITDA between continuing, discontinued, and
combined amounts for each period are shown in note 6.
The Condensed consolidated interim financial statements were approved by the
Board on 25 July 2022.
Change in accounting policy
In 2021, the IFRS Interpretations Committee (IFRS IC) finalised its agenda
decision regarding how to account for costs of configuring or customising a
supplier's application software in a Software as a Service (SaaS) arrangement
that conveys to the customer the right to receive access to the supplier's
application software over the contract term.
The agenda decision concluded that the right to receive access does not
provide the customer with a software asset and therefore the access to the
software is a service that the customer receives over the contract term. The
agenda decision also concluded that often the configuration and customisation
costs do not result in an intangible asset of the customer. Therefore, these
costs should be recognised as an expense over the period to which they relate.
In limited circumstances, certain configuration and customisation activities
may result in a separate asset controlled by the customer. If this is the case
the asset should be assessed as to whether it is separately identifiable and
if it meets the recognition criteria of IAS 38 'Intangible Assets'.
Any changes resulting from this agenda decision are a change in accounting
policy. Assessing the impact of the agenda decision on the Group required
detailed analysis of the historical amounts capitalised. The Group has now
concluded its analysis on the impact of this agenda decision and has
subsequently applied a new accounting policy for SaaS costs, consistent with
the agenda decision, from 1 January 2022.
SaaS costs capitalised by the Group at 31 December 2021 and impacted by this
change in accounting policy had a net book value of £5.7 million. As the
impact of this change in accounting policy is immaterial, and the new policy
has been applied prospectively from 1 January 2022, no restatement of prior
periods has been necessary. The net book value of all SaaS costs capitalised
at 1 January 2022 have been written off in the current period as an
exceptional cost (see note 6). SaaS costs incurred from 1 January 2022 have
been recognised in Operating and administrative expenses.
Adoption of new and amended accounting standards
The accounting policies adopted in the preparation of the Condensed
consolidated interim financial statements are consistent with those followed
in the preparation of the Group's 2021 Annual report and accounts, except for
the change in accounting policy for SaaS costs (see Change in accounting
policy section above for further details) and the adoption of new standards,
interpretations and amendments effective as of 1 January 2022. The adoption of
new standards, interpretations and amendments in the current year has not had
a material impact. The Group has not early-adopted any other standard,
interpretation or amendment that has been issued but is not yet effective at
30 June 2022.
A full listing of new standards, amendments, and pronouncements under IFRS
applicable to these Condensed consolidated interim financial statements is
presented in note 15.
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. Judgements are also reviewed on an ongoing basis
to ensure they remain appropriate. These reviews have concluded that the
significant judgements and key sources of estimation uncertainty applicable to
the preparation of the Condensed consolidated interim financial statements are
the same as those described on pages 180-181 of the Group's 2021 Annual report
and accounts. In each case, judgements have been applied consistently and
estimates made using a consistent methodology, with inputs and assumptions
updated to reflect the Group's latest forecasts and prevailing market
conditions at the balance sheet date as appropriate.
Comparative information
The Group provides comparative financial information in these Condensed
consolidated interim financial statements for both the six months ended 30
June 2021 and the year ended 31 December 2021. Where included within text,
income statement comparatives refer to the six months ended 30 June 2021 and
balance sheet comparatives are as at 31 December 2021, unless otherwise
stated.
On 31 January 2021, the Group completed the sale of its CCGT generation
portfolio to VPI Generation Limited. The Group also acquired Pinnacle
Renewable Energy Inc. (Pinnacle) on 13 April 2021. As such the Condensed
consolidated interim financial statements for the six months ended 30 June
2021 include one month of results of the CCGT assets, the profit on disposal
of the CCGT assets, and two and a half months of results for Pinnacle. Whereas
the six months ended 30 June 2022 include no results for the CCGT assets, or
profit on disposal of the CCGT assets and includes a full six months of
results for Pinnacle. As such, the six months ended 30 June 2022 and 2021 may
not be directly comparable. See pages 229 - 231 and 235 - 237 of the Group's
2021 Annual report and accounts for further details on the acquisition and
results of Pinnacle, and the disposal and results of the CCGT assets, in 2021.
Pinnacle acquisition
The Group acquired Pinnacle on 13 April 2021. The Group had a one-year
measurement period from this date to finalise the acquisition accounting.
There were no changes during the period to the acquisition date fair values of
the identifiable assets acquired, liabilities assumed or the non-controlling
interests, that were recognised in the Group's 2021 Annual report and
accounts. See pages 229 - 231 of the Group's 2021 Annual report and accounts
for further details on the acquisition fair values recognised.
Alternative Performance Measures (APMs)
The Group uses APMs throughout the Interim Report 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 performance. These
measures have been defined internally and may therefore not be comparable to
similar APMs presented by other companies. Additionally, certain information
presented is derived from amounts calculated in accordance with IFRS but is
not itself a measure defined by IFRS. Such measures should not be viewed in
isolation or as an alternative to the equivalent IFRS measure.
Defined below are the key APMs used by the Board to assess performance. See
the APMs glossary table at the end of this report for full details of all APMs
used, the APM's closest IFRS equivalent, the reason why the APM is used by the
Group and a definition of how the APM is calculated.
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 Condensed
consolidated income statement. Exceptional items and certain remeasurements,
including the tax thereon, are deducted from the Total Results in arriving at
the Adjusted Results for the period. 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.
Adjusted basic earnings per share
Adjusted basic earnings per share is Adjusted profit from continuing and
discontinued operations attributable to the owners of the Parent Company
divided by the weighted average number of shares outstanding. This is the same
denominator used when calculating basic earnings/(loss) per share. This metric
is used in discussions with the investor community and is one of the
performance conditions under the Long-Term Incentive Plan (LTIP).
Adjusted EBITDA
Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation,
gains and losses on disposal of assets and impairment of non-current assets,
excluding the impact of exceptional items and certain remeasurements (defined
below). 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 trading performance
period-on-period. It is also a key metric used by the investor community to
assess the performance of our operations and a key measure in the Group's
balanced scorecard.
Following the acquisition of Pinnacle on 13 April 2021, the Group acquired
investments in associates and investments with non-controlling interests.
Adjusted EBITDA excludes any earnings from associates and amounts directly
attributable to non-controlling interests.
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, any related precedent and the commercial
context. Presentation of a transaction as exceptional is approved by the Audit
Committee in accordance with an agreed policy.
Certain remeasurements comprise fair value gains and losses on derivative
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, interest payable and similar charges, or foreign
exchange gains/(losses). Management believes adjusting for fair value gains
and losses recognised on derivative contracts provides readers of the accounts
with useful information as this removes the volatility caused by movements in
market prices over the life of the derivative. The Group regards all of its
forward contracting activity to represent economic hedges and therefore the
contracted price at delivery or maturity is relevant to the Group and its
performance, rather than how the contracted price compares to the current
market price, as the Group is not seeking to make trading profits through
market price movements.
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 associated financial trading (such as forward foreign currency
purchases), in Adjusted Results. The result of this adjustment shows the
impact in revenue, cost of sales, interest payable and similar charges, and
foreign exchange gains/(losses) at the time the transaction takes place.
Further information on exceptional items and certain remeasurements in the
current and comparative periods is included in note 6 to the Condensed
consolidated interim financial statements.
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 (RCF) (see
note 9) but excludes other financial liabilities such as lease liabilities
calculated in accordance with IFRS 16 'Leases', pension obligations and trade
and other payables.
As noted above, 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 are predominantly
entered into for operating purposes rather than as a way to finance the
purchase of assets. The exclusion of lease liabilities from the calculation of
Net Debt is also consistent with the Group's covenant reporting requirements.
Further information on Net Debt can be seen in note 10.
Following the acquisition of Pinnacle on 13 April 2021, the Group acquired
investments with non-controlling interests. Net Debt, as defined by the Group,
excludes the proportion of Net Debt that is attributable to non-controlling
interests.
Some of the Group's debt is denominated in foreign currencies and the Group
has entered into hedging arrangements in relation to this debt. Therefore, 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 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 is a key measure of the Group's liquidity, its ability to manage
current obligations. It is also used as a basis by debt rating agencies, the
investor community and in the calculation of the Group's financial covenant
requirements.
Net Debt to Adjusted EBITDA ratio
This is the ratio of Net Debt to Adjusted EBITDA from continuing and
discontinued operations for the rolling 12-month period, expressed as a
multiple. The Group has a long-term target for Net Debt to Adjusted EBITDA of
around 2.0 times.
Condensed consolidated income statement
Six months ended 30 June Six months ended 30 June
2022 (Unaudited) 2021 (Unaudited)
Notes Exceptional items and certain remeasure-ments Total Results Exceptional items and certain remeasure-ments Total Results
£m
£m
£m
£m
Adjusted Results(()(1))
Adjusted Results(()(1))
£m
£m
Revenue 3 3,621.5 (64.4) 3,557.1 2,177.6 (3.5) 2,174.1
Cost of sales (3,134.7) 194.0 (2,940.7) (1,807.0) 23.4 (1,783.6)
Gross profit 486.8 129.6 616.4 370.6 19.9 390.5
Operating and administrative expenses((2)) (235.7) (1.6) (237.3) (197.6) (11.9) (209.5)
Impairment losses on financial assets (26.4) - (26.4) (8.0) - (8.0)
Depreciation (105.4) - (105.4) (72.3) - (72.3)
Amortisation (15.2) - (15.2) (16.6) - (16.6)
Impairment of non-current assets - (24.9) (24.9) - - -
Losses on disposal of assets (1.0) - (1.0) - - -
Income from associates 0.8 - 0.8 0.1 - 0.1
Operating profit 103.9 103.1 207.0 76.2 8.0 84.2
Foreign exchange gains/(losses) 4 28.4 - 28.4 1.9 (0.2) 1.7
Interest payable and similar charges 4 (36.4) (0.2) (36.6) (34.5) - (34.5)
Interest receivable 4 1.1 - 1.1 0.4 - 0.4
Profit before tax 97.0 102.9 199.9 44.0 7.8 51.8
Tax:
Before impact of changes in tax rates (18.0) (26.2) (44.2) (4.9) (5.5) (10.4)
Effect of changes in tax rates - (7.8) (7.8) - (47.7) (47.7)
Total tax charge 5 (18.0) (34.0) (52.0) (4.9) (53.2) (58.1)
Net profit/(loss) from continuing operations((3)) 79.0 68.9 147.9 39.1 (45.4) (6.3)
Net profit from discontinued operations - - - 18.7 12.0 30.7
Profit/(loss) for the period 79.0 68.9 147.9 57.8 (33.4) 24.4
Attributable to:
Owners of the Parent Company 80.0 68.9 148.9 58.0 (33.4) 24.6
Non-controlling interests (1.0) - (1.0) (0.2) - (0.2)
Earnings/(loss) per share Pence Pence Pence Pence
For net result for the period from continuing operations attributable to the
owners of the Parent Company
- Basic 7 20.0 37.2 9.9 (1.5)
- Diluted 7 19.3 35.9 9.6 (1.5)
For net result for the period attributable to the owners of the Parent Company
- Basic 7 20.0 37.2 14.6 6.2
- Diluted 7 19.3 35.9 14.2 6.0
A comparative income statement for the year ended 31 December 2021 is
reproduced in note 16.
((1) Adjusted Results are stated after adjusting for exceptional items
(including integration and restructuring costs, impairment of non-current
assets and certain remeasurements). See note 6 for further details.)
((2) The 30 June 2021 Operating and administrative costs have been
re-presented to include £11.9 million of acquisition and restructuring
costs.)
((3) Profit from continuing operations of £147.9 million (2021: £(6.3)
million loss) is inclusive of £(1.0) million (2021: £(0.2) million)
attributable to non-controlling interests.)
( )
( )
Condensed consolidated statement of comprehensive income
Six months ended 30 June
2022 2021
(Unaudited) (Unaudited)
£m £m
Profit for the period 147.9 24.4
Items that will not subsequently be reclassified to profit or loss:
Remeasurement gains/(losses) on defined benefit pension schemes 25.7 (0.4)
Deferred tax on remeasurement of defined benefit pension schemes (6.3) (0.6)
Net fair value (losses)/gains on cost of hedging (31.8) 4.8
Deferred tax on cost of hedging 5.9 (4.8)
Net fair value gains/(losses) on cash flow hedges 183.1 (4.1)
Deferred tax on cash flow hedges (43.2) 4.7
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translation of foreign operations 51.1 (0.8)
Net fair value losses on cash flow hedges (420.9) (29.9)
Net gains on cash flow hedges reclassified to the Condensed consolidated 6.8 36.4
income statement
Deferred tax on cash flow hedges 103.3 (2.0)
Other comprehensive (expense)/income for the period (126.3) 3.3
Total comprehensive income for the period attributable to equity holders 21.6 27.7
Attributable to:
Owners of the Parent Company 19.8 28.7
Non-controlling interests 1.8 (1.0)
( )
Condensed consolidated balance sheet
As at 30 June As at 31 December
Notes 2022 2021 2021
(Unaudited) £m (Unaudited) £m (Audited)
£m
Assets
Non-current assets
Goodwill 431.6 412.6 416.3
Intangible assets 156.7 208.2 188.6
Property, plant and equipment 2,327.0 2,228.8 2,310.7
Right-of-use assets 124.3 122.6 119.8
Investments 7.5 6.1 5.5
Retirement benefit surplus 78.5 14.6 48.9
Deferred tax assets 28.0 71.6 28.7
Derivative financial instruments 13 439.2 125.9 357.5
3,592.8 3,190.4 3,476.0
Current assets
Inventories 281.7 203.8 199.1
Renewable certificate assets 357.0 407.1 301.4
Trade and other receivables and contract-related assets 673.5 391.8 641.9
Derivative financial instruments 13 1,458.8 401.7 888.6
Current tax assets - 5.9 -
Cash and cash equivalents 288.4 405.7 317.4
3,059.4 1,816.0 2,348.4
Liabilities
Current liabilities
Trade and other payables and contract-related liabilities (1,326.8) (1,027.8) (1,211.1)
Lease liabilities (17.2) (11.9) (15.1)
Current tax liabilities (1.5) - (3.4)
Borrowings 9 - (31.9) (40.6)
Derivative financial instruments 13 (1,706.1) (491.7) (962.7)
(3,051.6) (1,563.3) (2,232.9)
Net current assets 7.8 252.7 115.5
Non-current liabilities
Borrowings 9 (1,388.4) (1,401.9) (1,320.4)
Lease liabilities (116.2) (111.9) (110.8)
Derivative financial instruments 13 (523.8) (168.1) (541.8)
Provisions (74.3) (84.5) (86.4)
Deferred tax liabilities (202.0) (303.5) (225.3)
(2,304.7) (2,069.9) (2,284.7)
Net assets 1,295.9 1,373.2 1,306.8
Shareholders' equity
Issued equity 47.9 47.5 47.7
Share premium 433.1 431.3 432.2
Hedge reserve (336.2) (65.1) (177.4)
Cost of hedging reserve 42.5 81.6 78.5
Other reserves 754.3 697.3 706.0
Retained profits 329.5 138.1 198.3
Total equity attributable to owners of the Parent Company 1,271.1 1,330.7 1,285.3
Non-controlling interests 24.8 42.5 21.5
Total shareholders' equity 1,295.9 1,373.2 1,306.8
Condensed consolidated statement of changes in equity
Issued equity Share premium Hedge reserve Cost of hedging reserve Other reserves((1)) Retained profits Total
£m £m £m £m £m £m £m
Non-controlling interests £m
At 1 January 2021 47.5 430.0 (76.0) 87.2 697.3 153.4 - 1,339.4
Profit/(loss) for the year - - - - - 79.7 (0.5) 79.2
Other comprehensive (expense)/income - - (127.1) 9.6 8.7 28.9 (2.6) (82.5)
Total comprehensive (expense)/income for the year - - (127.1) 9.6 8.7 108.6 (3.1) (3.3)
Equity dividends paid - - - - - (70.9) - (70.9)
Issue of share capital 0.2 2.2 - - - - - 2.4
Acquisition of subsidiary with non-controlling interests - - - - - - 39.6 39.6
Investment from non-controlling interests - - - - - - 6.5 6.5
Transactions with non-controlling interests - - - - - (0.2) (21.5) (21.7)
Total transactions with the owners in their capacity as owner 0.2 2.2 - - - (71.1) 24.6 (44.1)
Movements on cash flow hedges released directly from equity - - 33.2 - - - - 33.2
Deferred tax on cash flow hedges released directly from equity - - (7.5) - - - - (7.5)
Movement on cost of hedging released directly from equity - - - (23.7) - - - (23.7)
Deferred tax on cost of hedging released directly from equity - - - 5.4 - - - 5.4
Movement in equity associated with share-based payments - - - - - 7.4 - 7.4
At 31 December 2021 47.7 432.2 (177.4) 78.5 706.0 198.3 21.5 1,306.8
At 1 January 2021 47.5 430.0 (76.0) 87.2 697.3 153.4 - 1,339.4
Profit/(loss) for the period - - - - - 24.6 (0.2) 24.4
Other comprehensive income/(expense) - - 5.1 - - (1.0) (0.8) 3.3
Total comprehensive income/(expense) for the period - - 5.1 - - 23.6 27.7
(1.0)
Equity dividends paid - - - - - (41.0) - (41.0)
Issue of share capital - 1.3 - - - - - 1.3
Acquisitions - - - - - - 40.1 40.1
Investment from non-controlling interests - - - - - - 3.4 3.4
Total transactions with owners in their capacity as owner - 1.3 - - - (41.0) 3.8
43.5
Movements on cash flow hedges released directly from equity - - 7.4 - - - - 7.4
Deferred tax on cash flow hedges released directly from equity - - (1.6) - - - - (1.6)
Movement on cost of hedging released directly from equity - - - (7.2) - - (7.2)
-
Deferred tax on cost of hedging released directly from equity - - - 1.6 - - 1.6
-
Movement in equity associated with share-based payments - - - - - 2.1 2.1
-
At 30 June 2021 47.5 431.3 (65.1) 81.6 697.3 138.1 1,373.2
42.5
At 1 January 2022 47.7 432.2 (177.4) 78.5 706.0 198.3 21.5 1,306.8
Profit/(loss) for the period - - - - - 148.9 (1.0) 147.9
Other comprehensive (expense)/income - - (170.9) (25.9) 48.3 19.4 2.8 (126.3)
Total comprehensive (expense)/income for the period - - (170.9) (25.9) 48.3 168.3 21.6
1.8
Equity dividends paid - - - - - (45.2) - (45.2)
Issue of share capital 0.2 0.9 - - - - - 1.1
Investment from non-controlling interests - - - - - - 1.5 1.5
Total transactions with owners in their capacity as owner 0.2 0.9 - - - (45.2) 1.5 (42.6)
Movements on cash flow hedges released directly from equity - - 15.9 - - - - 15.9
Deferred tax on cash flow hedges released directly from equity - - (3.8) - - - - (3.8)
Movement on cost of hedging released directly from equity - - - (13.3) - - (13.3)
-
Deferred tax on cost of hedging released directly from equity - - - 3.2 - - 3.2
-
Movement in equity associated with share-based payments - - - - - 4.5 4.5
-
Deferred tax on share- based payments - - - - - 3.6 3.6
-
At 30 June 2022 47.9 433.1 (336.2) 42.5 754.3 329.5 1,295.9
24.8
((1) Other comprehensive income in respect of other reserves
relates wholly to movements in the translation reserve.)
Condensed consolidated cash flow statement
Six months ended 30 June Year ended
31 December
Notes 2022 2021 2021
(Audited)
(Unaudited) £m (Unaudited) £m £m
Cash generated from operations 11 185.4 137.8 354.5
Income taxes (paid)/refunded (9.0) 8.0 12.4
Interest paid (33.0) (30.9) (60.5)
Interest received 0.6 0.2 0.1
Net cash from operating activities, made up of: 144.0 115.1 306.5
Net cash from continuing operating activities 144.0 133.3 322.9
Net cash from discontinued operating activities - (18.2) (16.4)
Cash flows from investing activities
Purchases of property, plant and equipment (78.4) (60.3) (191.0)
Purchases of intangible assets (4.4) (3.0) (18.7)
Acquisition of subsidiaries net of cash acquired - (203.5) (203.5)
Proceeds on disposal of assets - 0.1 0.7
Proceeds on disposal of subsidiary net of cash disposed and costs of disposal - 185.5 183.7
Net cash from investing activities, made up of((1)): (82.8) (81.2) (228.8)
Net cash from continuing investing activities (82.8) (266.7) (412.5)
Net cash from discontinued investing activities - 185.5 183.7
Cash flows from financing activities
Equity dividends paid 8 (45.2) (41.0) (70.9)
Acquisition of additional shares from non-controlling interests - - (21.5)
Proceeds from issue of share capital 0.9 1.3 2.4
Investment from non-controlling interests 1.5 3.4 6.5
Repayment of other borrowings 9 (41.4) (5.8) (256.3)
New borrowings drawn down 9 - 130.4 302.6
Principal repayment of lease liabilities (8.5) (6.1) (13.2)
Net cash generated from financing activities, made up of: (92.7) 82.2 (50.4)
Net cash from continuing financing activities (92.7) 82.2 (50.4)
Net cash from discontinued financing activities - - -
Net (decrease)/increase in cash and cash equivalents (31.5) 116.1 27.3
Cash and cash equivalents at beginning of the period 317.4 289.8 289.8
Effect of changes in foreign exchange rates 2.5 (0.2) 0.3
Cash and cash equivalents at end of the period 288.4 405.7 317.4
( )
((1) The split of net cash from investing activities for the six
months ended 30 June 2021 has been re-presented to show the £185.5 million
received on disposal of the CCGT assets within net cash from discontinued
investing activities, previously presented within net cash from continuing
investing activities.)
Notes to the Condensed consolidated interim financial statements
1. General information
These notes provide additional information about the disclosures within the
Condensed consolidated interim financial statements. Further information can
be found in the Group's 2021 Annual report and accounts on pages 188-275.
Drax Group plc (the Company) is incorporated in England and Wales under the
Companies Act. The Company and its subsidiaries (collectively, the Group)
principally operate in the electricity market within the UK, and the
sustainable compressed wood pellet market globally. The address of the
Company's registered office and principal establishment is Drax Power Station,
Selby, North Yorkshire, YO8 8PH, United Kingdom.
2. 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 services. The Board reviews the performance of each of these businesses
separately, and each represents a reportable segment:
Pellet Production: production of sustainable compressed wood pellets at our
processing facilities in North America and their subsequent sale;
Generation: power generation activities in the UK; and
Customers: supply of electricity and gas to business customers in the UK.
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 Innovation, capital projects and other costs.
When defining gross profit within the financial statements, the Group follows
the principal trading considerations applied by its Pellet Production,
Generation and Customers businesses when making a sale. In respect of the
Pellet Production business, this reflects the direct costs of production,
being the fibre, fuel and drying costs, in addition to direct freight and port
costs, or third-party pellet purchases. In respect of Generation, this
reflects the direct costs of the commodities to generate the power 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 indirect overheads and staff costs
(presented within operating and administrative expenses), and depreciation
(presented separately on the face of the Condensed consolidated income
statement).
Seasonality of trading
The primary activities of the Group are affected by seasonality. Demand in the
UK for electricity and gas is typically higher in the winter period (October
to March) when temperatures are lower, and thus drives higher prices and
dispatch. Conversely, demand is typically lower in the summer months (April to
September), when prices are lower.
This trend is experienced by all of the UK-based businesses, as they operate
within the UK electricity and gas markets and is most notable within the
Generation business due to its scale and the flexible operation of generation
plant when prices are lower in the summer.
The Pellet Production business incurs certain costs that are higher in winter
months due to the impact of weather conditions, such as fibre drying costs and
heating costs. Production volumes and margins are typically higher in the
summer months. The business is protected from demand fluctuations as a result
of seasonality by regular production and dispatch schedules under its
contracts with customers, both intra-group and externally.
Segment revenues and results
The following is an analysis of the Group's performance by reportable segment
for the six months ended 30 June 2022. The financial information in the tables
below is comprised solely of results from continuing operations. There were no
amounts attributable to discontinued operations in the six months ended 30
June 2022. Total profit before tax from discontinued operations in the six
months ended 30 June 2021 was £32.7 million and was £25.8 million for the
year ended 31 December 2021. These amounts were attributable entirely to the
Generation segment. A reconciliation of Adjusted EBITDA from continuing and
discontinued operations by reportable segment is contained within note 6.
Six months ended 30 June 2022 (Unaudited)
Pellet Production Generation Customers £m Innovation, capital projects and other Intra-group eliminations Exceptional items and certain remeasure-ments Total Results
£m £m
£m £m
£m £m
Adjusted Results
£m
Revenue
External sales 157.9 1,795.1 1,668.5 - - 3,621.5 (64.4) 3,557.1
Inter‑segment sales 199.6 1,337.4 - - (1,537.0) - - -
Total revenue 357.5 3,132.5 1,668.5 - (1,537.0) 3,621.5 (64.4) 3,557.1
Cost of sales (241.8) (2,846.7) (1,578.1) - 1,531.9 (3,134.7) 194.0 (2,940.7)
Segment gross profit 115.7 285.8 90.4 - (5.1) 486.8 129.6 616.4
Operating and administrative expenses (70.6) (81.1) (40.2) (43.8) - (235.7) (1.6) (237.3)
Impairment losses on financial assets - - (26.4) - - (26.4) - (26.4)
Depreciation and amortisation (59.4) (47.1) (12.4) (1.7) - (120.6) - (120.6)
Impairment of non-current assets - - - - - - (24.9) (24.9)
Losses on disposal of assets (0.3) (0.7) - - - (1.0) - (1.0)
Income from associates 0.8 - - - - 0.8 - 0.8
Operating (loss)/profit (13.8) 156.9 11.4 (45.5) (5.1) 103.9 103.1 207.0
Foreign exchange (losses)/gains (1.5) 1.0 (0.2) 29.1 - 28.4 - 28.4
Net interest and similar charges (12.1) (1.8) (1.9) (19.5) - (35.3) (0.2) (35.5)
(Loss)/profit before tax (27.4) 156.1 9.3 (35.9) (5.1) 97.0 102.9 199.9
Six months ended 30 June 2021 (Unaudited)((1))
Pellet Production Generation Customers £m Innovation, capital projects and other Intra-group eliminations Adjusted Results Exceptional items and certain remeasure-ments Total Results
£m £m
£m £m £m £m
£m
Revenue
External sales 41.3 1,058.8 1,077.5 - - 2,177.6 (3.5) 2,174.1
Inter‑segment sales 143.9 660.1 - - (804.0) - - -
Total revenue 185.2 1,718.9 1,077.5 - (804.0) 2,177.6 (3.5) 2,174.1
Cost of sales (107.3) (1,466.3) (1,033.5) - 800.1 (1,807.0) 23.4 (1,783.6)
Segment gross profit 77.9 252.6 44.0 (3.9) 370.6 19.9 390.5
-
Operating and administrative expenses (38.0) (88.1) (40.7) (30.8) - (197.6) (11.9) (209.5)
Impairment losses on financial assets - - (8.0) - - (8.0) - (8.0)
Depreciation and amortisation (23.0) (49.4) (15.2) (1.3) - (88.9) - (88.9)
Gains/(losses) on disposal of assets 0.3 (0.2) (0.1) - - - - -
Income from associates 0.1 - - - - 0.1 - 0.1
Operating profit/(loss) 17.3 114.9 (20.0) (32.1) (3.9) 76.2 8.0 84.2
Foreign exchange gains/(losses) 0.8 2.7 - (1.6) - 1.9 (0.2) 1.7
Net interest and similar charges (8.5) (2.0) (2.9) (20.7) - (34.1) - (34.1)
Profit/(loss) before tax 9.6 115.6 (22.9) (54.4) (3.9) 44.0 7.8 51.8
((1) The segmental results for the six months ended 30 June 2021
have been re-presented to reflect the presentation adopted in the 2021 Group
Annual report and accounts.)
Year ended 31 December 2021 (Audited)
Pellet Production Generation Customers £m Innovation, capital projects and other Intra-group eliminations Exceptional items and certain remeasure-ments Total Results
£m £m
£m £m
£m £m
Adjusted Results
£m
Revenue
External sales 163.1 2,651.2 2,359.6 - - 5,173.9 (85.9) 5,088.0
Inter‑segment sales 286.7 2,031.1 - - (2,317.8) - - -
Total revenue 449.8 4,682.3 2,359.6 - (2,317.8) 5,173.9 (85.9) 5,088.0
Cost of sales (267.0) (4,131.9) (2,255.9) - 2,323.7 (4,331.1) 134.3 (4,196.8)
Segment gross profit 182.8 550.4 103.7 - 5.9 842.8 48.4 891.2
Operating and administrative expenses (96.9) (198.9) (81.7) (70.9) - (448.4) (21.5) (469.9)
Impairment losses on financial assets - - (16.3) - - (16.3) - (16.3)
Depreciation and amortisation (61.4) (103.4) (30.5) (3.6) - (198.9) (0.5) (199.4)
Losses on disposal of assets (1.0) (7.8) (0.4) (0.2) - (9.4) - (9.4)
Income from associates 0.3 - - - - 0.3 - 0.3
Operating profit/(loss) 23.8 240.3 (25.2) (74.7) 5.9 170.1 26.4 196.5
Foreign exchange (losses)/gains (0.8) 2.0 (0.1) (0.2) - 0.9 (5.1) (4.2)
Net interest and similar charges (19.6) (4.4) (5.6) (40.9) - (70.5) (0.3) (70.8)
Profit/(loss) before tax 3.4 237.9 (30.9) (115.8) 5.9 100.5 21.0 121.5
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 2021 Annual report and
accounts except for the change in accounting policy for SaaS costs (see Change
in accounting policies section for further details).
Capital expenditure by segment
Assets and working capital are monitored on a consolidated basis; however,
spend on capital projects is monitored by segment.
30 June 2022 30 June 2021 31 December 2021
Unaudited Unaudited Audited
Capital Capital Capital Capital Capital Capital
additions to additions additions to additions additions to additions
intangible to property, intangible to property, intangible to property,
assets plant and assets plant and assets plant and
equipment equipment equipment
£m £m £m £m £m £m
Pellet Production - 28.8 - 39.4 8.2 108.6
Generation 0.8 26.3 1.1 21.7 3.4 103.2
Customers 1.8 - 4.6 0.1 8.9 0.1
Innovation, capital projects and other 1.3 1.2 - 4.5 1.8 3.6
Total 3.9 56.3 5.7 65.7 22.3 215.5
Geographical analysis of revenue and non-current assets
Revenue from continuing operations (based on location of customer) Non-current assets((1))
£m (based on asset's location)
£m
30 June 30 June 31 December 30 June 30 June 31 December
2022 2021 2021 2022 2021 2021
Unaudited Unaudited Audited Unaudited Unaudited Audited
£m £m £m £m £m £m
North America 5.6 2.1 11.5 1,059.1 933.4 987.4
Europe 18.0 6.7 39.1 - - -
Asia 94.6 29.6 93.0 - - -
UK 3,438.9 2,135.7 4,944.4 1,988.0 2,044.9 2,053.5
Total 3,557.1 2,174.1 5,088.0 3,047.1 2,978.3 3,040.9
( )
((1) Non-current assets comprise goodwill, intangible assets, PP&E,
right-of-use assets and investments.)
3. Revenue
Revenue represents amounts receivable for goods or services provided to the
customer in the normal course of business, net of trade discounts, VAT and
other sales-related taxes, and excluding transactions between Group companies.
During the period, the Group made sales (and related purchases) of Renewable
Obligation Certificates (ROCs) to help optimise the Group's working capital
position. External sales of Renewable certificates below include £276.3
million of such sales (six months ended 30 June 2021: £140.0 million), with a
similar value reflected in cost of sales.
As described in further detail on page 254 of the Group's 2021 Annual report
and accounts, certain electricity sales in the Generation segment are
typically made under forward-dated contracts with customers. Between inception
and maturity these contracts meet the definition of a derivative financial
instrument and are measured at fair value on the Group's balance sheet (see
note 13). Fair value gains and losses on power sales contracts that have not
matured are typically recognised in the hedge reserve. At maturity, revenue is
recognised in the Group's Adjusted Results at the price agreed in the
contract, reflecting the amount received for the delivery of power.
For further details on the revenue streams listed below see pages 191 and 192
of the Group's 2021 Annual report and accounts.
The sources of revenue were as follows:
Six months ended 30 June 2022 (Unaudited)
External Intra-group Total
£m £m £m
Pellet Production
Pellet sales 153.1 199.5 352.6
Other income 4.8 0.1 4.9
Total 157.9 199.6 357.5
Generation
Electricity sales 1,363.6 1,312.6 2,676.2
Renewable certificate sales 370.7 24.8 395.5
CfD payment (8.3) - (8.3)
Ancillary services 32.6 - 32.6
Other income 36.5 - 36.5
Total 1,795.1 1,337.4 3,132.5
Customers
Electricity and gas sales 1,668.5 - 1,668.5
Total 1,668.5 - 1,668.5
Elimination of intra-group sales - (1,537.0) (1,537.0)
Total adjusted consolidated revenue 3,621.5 - 3,621.5
Certain remeasurements (64.4) - (64.4)
Total consolidated revenue 3,557.1 - 3,557.1
Six months ended 30 June 2021 (Unaudited)
External Intra-group Total
£m £m £m
Pellet Production
Pellet sales 39.2 143.8 183.0
Other income 2.1 0.1 2.2
Total 41.3 143.9 185.2
Generation
Electricity sales 643.2 660.0 1,303.2
Renewable certificate sales 190.6 0.1 190.7
CfD income 188.3 - 188.3
Ancillary services 21.3 - 21.3
Other income 15.4 - 15.4
Total 1,058.8 660.1 1,718.9
Customers
Electricity and gas sales 1,077.1 - 1,077.1
Other income 0.4 - 0.4
Total 1,077.5 - 1,077.5
Elimination of intra-group sales - (804.0) (804.0)
Total adjusted consolidated revenue 2,177.6 - 2,177.6
Certain remeasurements (3.5) - (3.5)
Total consolidated revenue 2,174.1 - 2,174.1
( )
( )
Year ended 31 December 2021 (Audited)
External Intra-group Total
£m £m £m
Pellet Production
Pellet sales 157.4 286.5 443.9
Other income 5.7 0.2 5.9
Total 163.1 286.7 449.8
Generation
Electricity sales 1,790.2 1,688.5 3,478.7
Renewable certificate sales 538.6 342.6 881.2
CfD income 234.9 - 234.9
Ancillary services 50.6 - 50.6
Other income 36.9 - 36.9
Total 2,651.2 2,031.1 4,682.3
Customers
Electricity and gas sales 2,358.9 - 2,358.9
Other income 0.7 - 0.7
Total 2,359.6 - 2,359.6
Elimination of intra-group sales - (2,317.8) (2,317.8)
Total adjusted consolidated revenue 5,173.9 - 5,173.9
Certain remeasurements (85.9) - (85.9)
Total consolidated revenue 5,088.0 - 5,088.0
4. 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 discount on provisions for reinstatement of the Group's sites
at the end of their useful lives, interest charged on the Group's defined
benefit pension scheme obligations and lease liabilities. These expenses are
offset by interest income on the Group's defined benefit pension scheme plan
assets and interest income that the Group generates through use of short-term
cash surpluses.
Six months ended 30 June Year ended
31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Interest payable and similar charges:
Interest payable on borrowings (29.5) (29.5) (59.2)
Interest on lease liabilities (3.2) (1.8) (4.9)
Unwinding of discount on provisions (0.4) (0.3) (0.6)
Amortisation of deferred finance costs (note 9) (3.3) (2.9) (5.7)
Other financing charges - - (0.5)
Total interest payable and similar charges included in Adjusted Results (36.4) (34.5) (70.9)
Interest receivable:
Interest income on bank deposits 0.6 0.2 0.1
Net finance credit in respect of defined benefit pension scheme 0.5 0.2 0.3
Total interest receivable included in Adjusted Results 1.1 0.4 0.4
Foreign exchange gains included in Adjusted Results 28.4 1.9 0.9
Total net interest charge included in Adjusted Results (6.9) (32.2) (69.6)
Certain remeasurements on financing derivatives (0.2) (0.2) (5.4)
Total net finance costs (7.1) (32.4) (75.0)
The Group has a number of intercompany loans denominated in the functional
currency of certain foreign subsidiaries, that are owed to a sterling
functional currency entity. Due to the weakening of sterling during the six
months ended 30 June 2022, this has resulted in a foreign exchange gain of
£28.5 million (six months ended 30 June 2021: £1.5 million loss) on the
retranslation of intercompany loans in the income statement of the sterling
functional currency entity. The foreign exchange loss (six months ended 30
June 2021: gain) on translating the foreign subsidiaries' intercompany loans
into the Group's sterling presentational currency is recognised within the
translation reserve. As such on consolidation, a foreign exchange gain (six
months ended 30 June 2021: loss) arises in the Condensed consolidated income
statement and is part of the foreign exchange gains included in Adjusted
Results amount in the table above.
5. Taxation
The tax charge for the period includes both current and deferred tax. The tax
charge is based upon the expected tax rate for the full year, which is applied
to taxable profits for the period, together with any charge or credit in
respect of prior years and the tax effect of any exceptional items and certain
remeasurements (see note 6).
Current tax, including UK corporation tax, Canadian corporate income tax, and
US corporate tax, is calculated as the income taxes payable on taxable
profits, or recoverable in respect of tax losses, for the period. Deferred tax
is calculated as the income taxes payable or recoverable in future accounting
periods in respect of temporary differences which may be taxable or allowed as
deductible. Temporary differences themselves represent the difference between
the carrying amount of an asset or liability in the financial statements and
the relevant tax base thereon.
Six months ended 30 June Year ended 31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Tax charge on continuing operations comprises:
Current tax
- Current period charge 10.2 0.2 7.7
- Adjustments in respect of prior periods - (2.8) 1.4
Deferred tax
- Before impact of tax rate changes 33.7 12.9 7.3
- Adjustments in respect of prior periods 0.3 0.1 1.0
- Effect of changes in tax rate 7.8 47.7 49.0
Tax charge 52.0 58.1 66.4
( )
The expected tax rate for the full year, before the impact of changes in tax
rates, is the same as the standard corporation tax rate applicable in the UK
of 19%, reflecting that the majority of the anticipated full year profit is
UK-based. The expected full year rate is higher than the prior year rate of
12% due to the increase in taxable profits, whilst continuing to include the
benefit of deductions for patent box and the 'super deduction' for qualifying
plant and machinery expenditure.
On 24 May 2021, the Finance Bill 2021, which contains legislation to increase
the main rate of UK corporation tax from 19% to 25% with effect from 1 April
2023, concluded its third reading in the House of Commons and was thereby
substantially enacted for IFRS purposes on that date. The Group has remeasured
the relevant deferred tax assets and liabilities to reflect this change where
these are expected to be realised or settled on or after 1 April 2023. The
impact of this rate increase for the six months ended 30 June 2022 is a £7.8
million deferred tax charge through the Condensed consolidated income
statement (six months ended 30 June 2021: £47.7 million).
6. Alternative performance measures (APMs)
The APMs Glossary table to these Condensed consolidated interim financial
statements provides details on all APMs used, the APM's closest IFRS
equivalent, the reason why each APM is used by the Group and a definition of
how the APM is calculated.
The Group presents Adjusted Results in the Condensed consolidated income
statement. The Directors believe this approach is useful and provides a clear
and consistent view of underlying 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. All transactions presented as exceptional are also approved by
the Audit Committee. See the Audit Committee Report on pages 118-129 of the
Group's 2021 Annual report and accounts for further details. In these
Condensed consolidated interim financial statements, the following
transactions have been designated as exceptional items and presented
separately:
· Impairment charges incurred on the application of a new
accounting policy for SaaS costs, consistent with the IFRS IC agenda decision,
and on costs associated with the Customers' billing system. See the Financial
Review for further details (2022, All segments).
· Costs associated with the acquisition (2021) and integration
(2022 and 2021) of Pinnacle (Pellet Production).
· Costs relating to the restructuring of the Customers business
(2022 and 2021, Customers).
· Operating expenditure which was incurred as a direct result of
the decision to cease commercial coal generation (2021, Generation).
· Impact of UK tax rate change on deferred tax balances (2022 and
2021, Generation and Customers).
Certain remeasurements comprise gains and 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. The effect of excluding certain
remeasurements from 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 more
clearly present the trading performance of the Group in Adjusted Results.
Volatility in financial and commodity markets has continued in 2022, in part
due to the conflict in Ukraine. This has resulted in significant movements in
the remeasurement gains and losses on certain derivative financial instruments
which do not qualify for hedge accounting, as shown in the table below,
principally relating to gas, certain foreign currency contracts, inflation and
oil. Further detail on the Group's derivative financial instruments is
provided in notes 12 and 13.
Six months ended 30 June Year ended 31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Exceptional Items:
Inventory provision as a result of coal closure - - (0.3)
Acquisition costs - (7.7) (7.9)
Restructuring costs (0.5) (2.2) (5.2)
Integration costs (1.1) (2.0) (4.1)
Impairment of non-current assets (24.9) - -
Coal closure costs - - (4.8)
Exceptional items included in operating profit (26.5) (11.9) (22.3)
Tax on exceptional items 5.2 (2.1) 2.5
Impact of tax rate change (7.8) (47.7) (48.6)
Exceptional items after taxation (29.1) (61.7) (68.4)
Certain remeasurements:
Net certain remeasurements included in revenue (64.4) (3.5) (85.9)
Net certain remeasurements included in cost of sales 194.0 23.4 134.6
Certain remeasurements included in operating profit 129.6 19.9 48.7
Net certain remeasurements included in interest payable and similar charges (0.2) - (0.3)
Net certain remeasurements included in foreign exchange losses - (0.2) (5.1)
Certain remeasurements included in profit before tax 129.4 19.7 43.3
Taxation on certain remeasurements (31.4) (3.4) (8.2)
Certain remeasurements after tax 98.0 16.3 35.1
Reconciliation:
Adjusted profit after tax from continuing operations 79.0 39.1 88.4
Exceptional items after tax (29.1) (61.7) (68.4)
Certain remeasurements after tax 98.0 16.3 35.1
Total profit/(loss) after tax from continuing operations 147.9 (6.3) 55.1
Six months ended 30 June
2022 202
1
(Unaudited)
(Un
aud
ite
d)
Adjusted EBITDA Adjusted profit after tax Total profit after tax Adjusted EBITDA Adjusted profit after tax Total (loss)/ profit after tax
£m £m £m £m £m £m
Continuing operations 224.9 79.0 147.9 165.0 39.1 (6.3)
Discontinued operations - - - 20.7 18.7 30.7
Total 224.9 79.0 147.9 185.7 57.8 24.4
Year ended 31 December 2021
(Au
dit
ed)
Adjusted EBITDA Adjusted profit after tax Total profit after tax
£m £m £m
Continuing operations 377.9 88.4 55.1
Discontinued operations 20.3 16.7 24.1
Total 398.2 105.1 79.2
For each item designated as exceptional or as a certain remeasurement, the
tables below summarise the impact of the item on the Adjusted Results, basic
EPS and cash flows. All exceptional items and certain remeasurement amounts
relate to continuing operations.
Six months ended 30 June 2022 (Unaudited)
Revenue £m Profit before tax Profit for the period Basic earnings per share
Gross profit £m Operating profit £m £m Pence Cash flow from operating activities
£m Tax charge £m
£m
Total Results IFRS measure 3,557.1 616.4 207.0 199.9 (52.0) 147.9 37.2
144.0
Certain remeasurements:
Net fair value remeasurement on derivative contracts 64.4 (129.6) (129.6) (129.4) 31.4 (98.0) (24.5)
-
Exceptional items:
Impairment of non-current assets - - 24.9 24.9 (5.0) 19.9 5.0 -
Restructuring costs - - 0.5 0.5 (0.1) 0.4 0.1 0.4
Integration costs - - 1.1 1.1 (0.1) 1.0 0.2 1.0
Impact of tax rate change - - - - 7.8 7.8 2.0 -
Total 64.4 (129.6) (103.1) (102.9) 34.0 (68.9) (17.2) 1.4
Adjusted totals 3,621.5 486.8 103.9 97.0 (18.0) 79.0 20.0 145.4
Six months ended 30 June 2021 (Unaudited)
Revenue £m Profit before tax Tax charge (Loss)/ profit for the period Basic (loss)/ Cash flow from operating activities
Operating profit £m £m £m earnings per share £m
Gross profit £m £m Pence
Total Results IFRS measure 2,174.1 390.5 84.2 51.8 (58.1) (6.3) (1.5) 115.1
Certain remeasurements:
Net fair value remeasurement on derivative contracts 3.5 (19.7) 3.4 (16.3) (4.1) -
(19.9) (19.9)
Exceptional items:
Acquisition costs - - 7.7 7.7 1.2 8.9 2.2 8.9
Restructuring costs - - 2.2 2.2 0.5 2.7 0.7 0.7
Integration costs - - 2.0 2.0 0.4 2.4 0.6 2.4
Impact of tax rate change - - - - 47.7 47.7 12.0 -
Total 3.5 (19.9) (8.0) (7.8) 53.2 45.4 11.4 12.0
Adjusted totals 2,177.6 370.6 76.2 44.0 (4.9) 39.1 9.9 127.1
( )
Year ended 31 December 2021 (Audited)
Revenue £m Gross profit £m Operating profit Profit before tax Tax charge Profit for the period Basic earnings per share Cash flow from operating activities
£m £m £m £m Pence £m
Total Results IFRS measure 5,088.0 891.2 196.5 121.5 (66.4) 55.1 13.9
306.5
Certain remeasurements:
Net fair value remeasurement on derivative contracts 85.9 (48.7) (48.7) (43.3) 8.2 (35.1) (8.8) -
Exceptional items:
Inventory provision as a result of coal closure - 0.3 0.3 0.3 (0.1) 0.2 0.1 -
Acquisition costs - - 7.9 7.9 - 7.9 1.8 7.9
Restructuring costs - - 5.2 5.2 (0.8) 4.4 1.1 4.4
Integration costs - - 4.1 4.1 (0.8) 3.3 0.8 3.3
Operating expenditure as a result of coal closure - - 4.8 4.8 (0.8) 4.0 1.2 -
Impact of tax rate change - - - - 48.6 48.6 12.2 -
Total 85.9 (48.4) (26.4) (21.0) 54.3 33.3 8.4 15.6
Adjusted totals 5,173.9 842.8 170.1 100.5 (12.1) 88.4 22.3 322.1
Six months ended 30 June 2022 (Unaudited)
Attributable to
Owners of the Parent Company Non-controlling interests Total
£m £m £m
Adjusted operating profit/(loss) 104.9 (1.0) 103.9
Depreciation and amortisation 119.8 0.8 120.6
Loss on disposal of assets 1.0 - 1.0
Income from associates (0.8) - (0.8)
Adjusted EBITDA from continuing operations 224.9 (0.2) 224.7
Adjusted EBITDA from discontinued operations - - -
Adjusted EBITDA from continuing and discontinued operations 224.9 (0.2) 224.7
Six months ended 30 June 2021 (Unaudited)
Attributable to
Owners of the Parent Company Non-controlling interests Total
£m £m £m
Adjusted operating profit/(loss) 76.6 (0.4) 76.2
Depreciation and amortisation 88.5 0.4 88.9
Income from associates (0.1) - (0.1)
Adjusted EBITDA from continuing operations 165.0 - 165.0
Adjusted EBITDA from discontinued operations 20.7 - 20.7
Adjusted EBITDA from continuing and discontinued operations 185.7 - 185.7
Year ended 31 December 2021 (Audited)
Attributable to
Owners of the Parent Company Non-controlling interests Total
£m £m £m
Adjusted operating profit/(loss) 170.6 (0.5) 170.1
Depreciation and amortisation 198.3 0.6 198.9
Loss on disposal of assets 9.3 0.1 9.4
Income from associates (0.3) - (0.3)
Adjusted EBITDA from continuing operations 377.9 0.2 378.1
Adjusted EBITDA from discontinued operations 20.3 - 20.3
Adjusted EBITDA from continuing and discontinued operations 398.2 0.2 398.4
( )
Six months ended 30 June 2022 (Unaudited)
Pellet Generation Customers Innovation, capital projects and other Intra-group Adjusted
Production £m £m £m eliminations Results
£m £m £m
Segment Adjusted EBITDA:
Continuing operations 45.3 204.7 23.8 (43.8) (5.1) 224.9
Discontinued operations - - - - - -
Total 45.3 204.7 23.8 (43.8) (5.1) 224.9
Six months ended 30 June 2021 (Unaudited)
Pellet Production Generation Customers Innovation, capital projects and other Intra-group Adjusted
£m £m £m £m eliminations Results
£m £m
Segment Adjusted EBITDA:
Continuing operations 39.9 164.5 (4.7) (30.8) (3.9) 165.0
Discontinued operations - 20.7 - - - 20.7
Total 39.9 185.2 (4.7) (30.8) (3.9) 185.7
Year ended 31 December 2021 (Audited)
Pellet Generation Customers Innovation, capital projects and other Intra-group Adjusted
Production £m £m £m eliminations Results
£m £m £m
Segment Adjusted EBITDA:
Continuing operations 85.7 351.5 5.7 (70.9) 5.9 377.9
Discontinued operations - 20.3 - - - 20.3
Total 85.7 371.8 5.7 (70.9) 5.9 398.2
Cash and committed facilities
The table below reconciles the Group's available cash and committed
facilities:
Six months ended 30 June Year ended 31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Cash and cash equivalents 288.4 405.7 317.4
Revolving credit facility available but not utilised((1)) 250.1 245.1 231.4
2020 Private placement facility available but not utilised - 15.3 -
Total cash and committed facilities 538.5 666.1 548.8
( )
((1) The Group's available balance on the RCF facility (includes £300 million
and C$10 million RCF, see note 9) is reduced by letters of credit drawn under
the RCF. As at 30 June 2022 £56.3 million letters of credit were drawn (as at
31 December 2021: £74.4 million).)
Adjusted EPS and Net Debt are other key APMs used by the Group. See notes 7
and 10 respectively for further details on these APMs. Further commentary on
Total cash and committed facilities is contained within the CFO financial
review.
7. Earnings per share
Earnings per share (EPS) represents the amount of earnings (post-tax profits)
attributable to each ordinary share or dilutive potential ordinary share that
the Group has in issue. Basic EPS is calculated by dividing the Group's
earnings attributable to the owners of the Parent Company (profit after tax in
accordance with IFRS) by the weighted average number of ordinary shares in
issue during the period. Diluted EPS demonstrates the impact upon Basic EPS if
all outstanding share options, that are expected to vest on their future
maturity dates, were exercised and treated as ordinary shares as at the
balance sheet date.
Shares purchased under the Group's share buy-back programme are not included
in the weighted average calculation of shares. For the purpose of calculating
Diluted EPS, the weighted average calculation of shares excludes any share
options that would have an anti-dilutive impact.
Six months ended 30 June Year ended 31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
Number of shares:
Weighted average number of ordinary shares for the purposes of Basic earnings 400.0 397.9
per share (millions)
398.4
Effect of dilutive potential ordinary shares under share plans (millions) 14.8 9.4 14.2
Weighted average number of ordinary shares for the purposes of Diluted 414.8 407.3
earnings per share (millions)
412.6
Total earnings per share
Earnings per share - Basic (Pence) 37.2 6.2 20.0
Earnings per share - Diluted (Pence) 35.9 6.0 19.3
The tables below detail the earnings attributable to owners of the Parent
Company:
Six months ended 30 June 2022 (Unaudited)
Earnings per share Earnings per share from continuing operations Earnings per share from discontinued operations
Profit after tax((1)) Basic (Pence) Diluted (Pence) Profit after tax((1)) Basic (Pence) Diluted (Pence) Profit after tax Basic (Pence) Diluted (Pence)
£m £m £m
Total Results 148.9 37.2 35.9 148.9 37.2 35.9 - - -
Adjusted Results 80.0 20.0 19.3 80.0 20.0 19.3 - - -
( )
((1) Excludes £(1.0)) (million attributable to non-controlling
interests.)
Six months ended 30 June 2021 (Unaudited)
Earnings per share (Loss)/Earnings per share from continuing operations Earnings per share from discontinued operations
Profit after tax((1)) Basic (Pence) Diluted (Pence) (Loss)/profit after tax((1)) Basic (Pence) Diluted (Pence) Profit after tax Basic (Pence) Diluted (Pence)
£m £m £m
Total Results 24.6 6.2 6.0 (6.1) (1.5) (1.5) 30.7 7.7 7.5
Adjusted Results 58.0 14.6 14.2 39.3 9.9 9.6 18.7 4.7 4.6
( )
((1) ) (Excludes £(0.2)) (million attributable to non-controlling
interests.)
Year ended 31 December 2021 (Audited)
Earnings per share Earnings per share from continuing operations Earnings per share from discontinued operations
Profit after tax((1)) Basic (Pence) Diluted (Pence) Profit after tax((1)) Basic (Pence) Diluted (Pence) Profit after tax Basic (Pence) Diluted (Pence)
£m £m £m
Total Results 79.7 20.0 19.3 55.6 13.9 13.5 24.1 6.1 5.8
Adjusted Results 105.6 26.5 25.6 88.9 22.3 21.5 16.7 4.2 4.1
((1) Excludes £(0.5)) (million attributable to non-controlling
interests.)
8. Dividends
Six months ended 30 June Year ended 31 December
Pence per share 2022 2021 2021
(Unaudited) (Unaudited)
£m £m (Audited)
£m
Amounts recognised as distributions to equity holders in the period
(based on the number of shares in issue at the record date):
Final dividend for the year ended 31 December 2021 paid 13 May 2022 11.3 45.2 - -
Interim dividend for the year ended 31 December 2021 paid 8 October 2021 7.5 - - 29.9
Final dividend for the year ended 31 December 2020 paid 14 May 2021 10.3 - 41.0 41.0
45.2 41.0 70.9
On 25 July 2022, the Board resolved to pay an interim dividend of 8.4 pence
per share (£34 million), representing 40% of the expected full year dividend
in line with our dividend policy. The interim dividend will be paid on 7
October 2022 and the record date for entitlement to the dividend will be on 26
August 2022.
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 (Drax Group plc) has distributable reserves at 30 June 2022
of £338.8 million. Sufficient reserves are available across the Group 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 £288.4 million are comprised of
cash and cash equivalents that are accessible on demand. The recent history of
operating cash generation is set out in note 11. Most 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 9) place customary 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.
9. Borrowings
The Group's net borrowings at each period end were as follows:
As at 30 June Year ended 31 December
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
2.625% loan notes 2025 €250m((1)) 212.8 211.4 207.2
6.625% loan notes 2025 $500m((2)) 408.8 359.3 367.0
Index-linked loan £35m((3)) - 39.2 40.6
UK infrastructure private placement facilities (2019) ((4)) 371.4 368.8 370.0
UK infrastructure private placement facilities (2020) ((5)) 204.3 203.2 201.2
CAD term facility C$300m((6)) 191.1 - 175.0
Pinnacle senior debt facilities((7)) - 251.9 -
Total borrowings 1,388.4 1,433.8 1,361.0
Split between:
Current liabilities - 31.9 40.6
Non-current liabilities 1,388.4 1,401.9 1,320.4
((1) Cross-currency interest rate swaps have been used to fix the sterling
value of interest payments. This instrument also fixed the sterling repayment
of the principal. This equates to an effective sterling interest rate of
3.2%.)
((2) Cross-currency interest rate swaps have been used to fix the sterling
value of interest payments. This instrument also fixed the sterling repayment
of the principal. This equates to an effective sterling interest rate of
4.9%.)
((3) The index-linked term loan facility matured in March 2022. On maturity
the principal amount of £35.0 million plus £6.4 million of indexation was
repaid wholly from cash reserves.)
((4) £375.0 million of facilities with a range of maturities extending out to
between 2024 and 2029. Interest rate swaps have been used to fix floating
rates. This equates to an effective weighted average sterling interest rate of
3.3%.)
((5) £98.0 million and €126.5 million of facilities with a range of
maturities extending out to between 2024 and 2030. Interest rate swaps have
been used to fix sterling floating rates on sterling facilities.
Cross-currency interest rate swaps have been used to fix the sterling value of
interest payments on euro facilities. This instrument also fixed the sterling
repayment of the principal. This equates to an effective weighted average
sterling interest rate of 2.5%.)
((6) This facility matures in 2024 with the option to extend by two years,
subject to lender approval, and has a customary margin grid reference over the
Canadian dollar offered rate (CDOR). No interest rate or cross-currency
interest rate swaps are in place to hedge the facility, so the Group is
exposed to movements in both floating interest rates and movements in the
Canadian dollar.)
((7) Pinnacle senior debt facilities relate to borrowings acquired as part of
the acquisition of Pinnacle. As at 30 June 2021, this included three debt
facilities, being a revolver loan (C$20.0 million), term loan (C$266.0
million) and delayed draw (C$147.4 million). On 13 July 2021, the Group
completed the refinancing of all three Canadian dollar facilities acquired
from Pinnacle with the) (C$300.0m) (term facility described above.)
The Group has a committed £300.0 million revolving credit facility (RCF) and
a C$10.0 million RCF. These had no cash drawings as at 30 June 2022 or 31
December 2021. The Group has access to certain non-recourse trade receivable
finance facilities and payment facilities, as described in note 11, which are
utilised to accelerate working capital cash inflows and defer cash outflows.
In March 2022, the Group's index-linked term loan facility matured. On
maturity the principal amount of £35.0 million plus £6.4 million of
indexation was repaid. The loan was repaid wholly through the Group's cash
reserves.
The Group has complied with the financial covenants of its borrowing
facilities during the current period and prior year. The Group has significant
headroom and expects to continue to comply with these financial covenants in
future periods under all reasonably possible downside scenarios.
The weighted average interest rate payable at the balance sheet date on the
Group's borrowings was 3.56% (as at 31 December 2021: 3.49%).
Analysis of borrowings
Changes in borrowings during the current and prior periods were as follows:
As at 30 June 2022 (Unaudited)
Borrowings before deferred finance costs Deferred finance costs Net
borrowings
£m £m £m
Borrowings as at 1 January 2022 1,376.2 (15.2) 1,361.0
Cash movements:
Repayment of Index-linked loan (41.4) - (41.4)
Non-cash movements:
Indexation of linked loan 0.8 - 0.8
Amortisation of deferred finance costs (note 4) - 3.3 3.3
Amortisation of USD loan note premium (0.2) - (0.2)
Effect of foreign exchange rates 64.9 - 64.9
Borrowings as at 30 June 2022 1,400.3 (11.9) 1,388.4
As at 30 June 2021 (Unaudited)
Borrowings before deferred finance costs Deferred finance costs Net
borrowings
£m £m £m
Borrowings as at 1 January 2021 1,085.3 (19.6) 1,065.7
Cash movements:
Drawdown of 2020 infrastructure private placement facilities 130.8 (0.4) 130.4
Net repayment of Revolver loan (2.0) - (2.0)
Repayment of other facilities (3.8) - (3.8)
Non-cash movements:
Borrowings acquired on acquisition of Pinnacle 256.3 (1.4) 254.9
Indexation of linked loan 0.8 - 0.8
Amortisation of deferred finance costs (note 4) - 2.9 2.9
Amortisation of USD loan note premium (0.2) - (0.2)
Effect of foreign exchange rates (14.9) - (14.9)
Borrowings as at 30 June 2021 1,452.3 (18.5) 1,433.8
As at 31 December 2021 (Audited)
Borrowings before deferred finance costs Deferred finance costs Net
borrowings
£m £m £m
Borrowings as at 1 January 2021 1,085.3 (19.6) 1,065.7
Cash movements:
Drawdown of 2020 infrastructure private placement facilities 130.8 (0.5) 130.3
Repayment of debt acquired from Pinnacle (253.1) - (253.1)
Drawdown of C$300m term facility 173.1 (0.8) 172.3
Other cash movements (3.2) - (3.2)
Non-cash movements:
Borrowings acquired on acquisition of Pinnacle 256.3 - 256.3
Indexation of linked loan 2.2 - 2.2
Amortisation of deferred finance costs (note 4) - 5.7 5.7
Amortisation of USD loan note premium (0.3) - (0.3)
Effect of foreign exchange rates (14.9) - (14.9)
Borrowings as at 31 December 2021 1,376.2 (15.2) 1,361.0
10. Reconciliation of Net Debt
Net Debt is calculated by taking the Group's borrowings (note 9) and
subtracting cash and cash equivalents. Net Debt excludes the share of
borrowings and cash and cash equivalents attributable to non-controlling
interests. See the APMs glossary and the APMs section within the Basis of
preparation for further details on the calculation of Net Debt.
As at 30 June As at 31 December
2022 (Unaudited) 2021 (Unaudited) 2021
£m £m (Audited)
£m
Borrowings (1,388.4) (1,433.8) (1,361.0)
Cash and cash equivalents 288.4 405.7 317.4
Net cash and borrowings (1,100.0) (1,028.1) (1,043.6)
Non-controlling interests share of cash and cash equivalents in non-wholly (0.8) (0.8) -
owned subsidiaries
Net Debt (1,100.8) (1,028.9) (1,043.6)
The table below reconciles Net Debt in terms of changes in these balances
across the year:
Six months ended 30 June Year ended 31 December
2022 (Unaudited) 2021 (Unaudited) 2021
£m £m (Audited)
£m
Net cash and borrowings at beginning of period (1,043.6) (775.9) (775.9)
(Decrease)/increase in cash and cash equivalents (29.0) 115.9 27.6
Increase in net borrowings (27.4) (368.1) (295.3)
Net cash and borrowings at end of period (1,100.0) (1,028.1) (1,043.6)
Remove:
Non-controlling interests share of cash and cash equivalents in non-wholly (0.8) (0.8) -
owned subsidiaries
Net Debt (1,100.8) (1,028.9) (1,043.6)
Borrowings include listed bonds, bank debt and revolving credit facilities
(where drawn), net of any deferred finance costs, but do not include other
financial liabilities such as IFRS 16 lease liabilities, pension obligations
and trade and other payables.
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 (EUR) denominated debt (see note 13). If USD and EUR 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.
As at 30 June As at 31 December
2022 (Unaudited) 2021 (Unaudited) 2021
£m £m (Audited)
£m
Net Debt excluding the impact of hedging instruments (1,100.8) (1,028.9) (1,043.6)
Impact of hedging instruments (15.5) (64.7) (64.4)
Net Debt including the impact of hedging instruments (1,116.3) (1,093.6) (1,108.0)
11. Cash generated from operations
The table below reconciles the Group's profit/(loss) for the period to the
amount of cash generated from the Group's operations (i.e. producing and
selling sustainable biomass pellets, sourcing, generating and selling
electricity and gas) by adjusting for any non-cash items.
Six months ended 30 June Year ended 31 December
2022 2021 2021
(Unaudited) £m (Unaudited) £m (Audited)
£m
Profit/(loss) for the period - continuing operations 147.9 (6.3) 55.1
Profit for the period - discontinued operations - 30.7 24.1
Adjustments for:
Interest payable and similar charges 36.6 34.5 70.9
Interest receivable (1.1) (0.4) (0.3)
Tax charge 52.0 60.1 68.1
Research & Development Expenditure Credit (3.1) (2.5) (7.5)
Income from associates (0.8) (0.1) (0.3)
Depreciation of property, plant and equipment 95.6 66.3 149.8
Amortisation of intangible assets 15.2 16.3 34.4
Depreciation of right-of-use assets 9.8 6.3 15.2
Impairment of non-current assets 24.9 - -
Losses on disposal of assets 1.0 - 9.4
Gain on disposal of subsidiaries - (16.2) (16.2)
Certain remeasurements of derivative contracts((1)) (136.8) (51.5) (74.6)
Non-cash charge for share-based payments 4.5 2.1 7.4
Effect of foreign exchange rates (0.9) 1.3 1.3
Operating cash flows before movement in working capital 244.8 140.6 336.8
Changes in working capital:
(Increase)/decrease in inventories (75.2) 32.8 37.4
(Increase)/decrease in receivables (28.0) 190.6 (58.0)
Increase in payables 102.8 47.8 209.7
Increase in renewable certificate assets (55.6) (267.5) (161.8)
Total cash (absorbed by)/released from working capital (56.0) 3.7 27.3
Net defined benefit pension obligations (3.4) (6.5) (9.6)
Cash generated from operations 185.4 137.8 354.5
(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,
as well as rebasing impact.
The Group has a strong focus on cash flow discipline and managing liquidity.
This is driven by underlying performance and supporting actions taken to
manage working capital. Actions taken in the first half of the year are
largely consistent with those taken during 2021 as described on page 225 of
the Group's 2021 Annual report and accounts. The key differences in the first
half of 2022 are described below.
The cash flow impacts described below are based on the estimated impact on the
current period when compared to the cash flows that would have been received
had the Group not taken these actions. The current period impact is also
adjusted to take account of actions taken in prior years, which have
accelerated cash flows that would otherwise have been received in the current
period had no actions been taken. The intention is to present the overall
cumulative impact on the current period cash flow from the actions taken.
Cash from ROCs is typically realised several months after the ROC is earned;
however, through standard ROC sales and ROC purchase arrangements the Group is
able to accelerate cash flows over a proportion of these assets. The net
impact of these ROC purchases and ROC sales on operating cash flows for the
six months ended 30 June 2022 was a £146.4 million inflow (six months ended
30 June 2021: £34.1 million outflow). This is reflected as a decrease (six
months ended 30 June 2021: increase) in renewable certificate assets and is a
component of the overall net increase (six months ended 30 June 2021:
increase) in renewable certificate assets shown in the table above. The Group
also has access to facilities enabling it to sell ROC trade receivables on a
non-recourse basis. Utilisation of these facilities generated a net cash flow
in the six months ended 30 June 2022 of £nil (six months ended 30 June 2021:
£48.3 million inflow).
The Customers business has access to a facility which enables it to accelerate
cash flows associated with trade receivables on a non-recourse basis. The
Group has refinanced this facility during the six months ended 30 June 2022,
extending the maturity to January 2027 and increasing the size of the facility
to £300.0 million from £200.0 million. This facility generated a net cash
inflow of £100.0 million in the six months ended 30 June 2022 (six months
ended 30 June 2021: net cash inflow of £14.7 million), reflected as part of
the overall movement in receivables. Utilisation of the facility was £300.0
million at 30 June 2022 (as at 31 December 2021: £200.0 million).
The Group actively manages its liquidity requirements, including collateral
associated with the hedging of power and other commodities. As trading
positions with counterparties have matured during the period, associated cash
collateral held by the Group at 31 December 2021 has been returned, and at 30
June 2022 the Group had a net receipt of collateral from counterparties of
£46.5 million (as at 31 December 2021: £172.8 million). This has resulted in
a cash outflow of £126.3 million in the period (six months ended 30 June
2021: £35.2 million inflow) reflected primarily as a decrease (six months
ended 30 June 2021: increase) in payables in the table above.
12. Financial risk management
The Group's activities expose it to a variety of financial risks, including
commodity price risk, interest rate risk, liquidity risk, inflation risk,
counterparty risk and credit risk. The Group's overall risk management
programme focuses on the unpredictability of commodity and financial markets
and seeks to manage potential adverse effects on the Group's financial
performance.
The Group uses derivative financial instruments to hedge certain risk
exposures. Risk management is overseen by risk management committees which
identify, evaluate and hedge financial risks in close coordination with the
Group's trading and treasury functions under policies approved by the Board.
Volatility in financial and commodity markets has continued in 2022, in part
due to the conflict in Ukraine. This volatility has impacted economies and
markets around the world, including the UK energy market, which has in part
contributed to rising inflation. The geopolitical environment and concerns
over the macro-economic outlook have also contributed to a weakening in
sterling during 2022. See the Principal risks and uncertainties section for
further details on both the Russia-Ukraine conflict and energy market
conditions. As a result of these factors, the valuation of the Group's
derivative financial instruments, in particular power, gas, foreign currency
contracts, inflation and oil, remain at elevated levels compared to previous
periods.
The Customers business has seen an increase in the potential for default
within deemed supply customers during the period. Deemed supply is where
electricity or gas is supplied to a site or customer that is yet to enter into
a contract and, as a result, they are charged on a standard variable tariff
based on merchant power and gas prices. Given the increases in these standard
variable prices during the period, the recoverability of these balances has
become more challenging. The Group has updated its expected credit loss
provision to reflect this change, which has resulted in an immaterial increase
in the overall provision. As at 30 June 2022, the total expected credit loss
provision was £53.8 million (as at 31 December 2021: £46.6 million).
See pages 253 - 269 of the Group's 2021 Annual report and accounts for further
details on the Group's financial risk management.
13. Fair value financial instruments
The Group makes extensive use of derivative financial instruments for the
purpose of managing its exposure to the financial risks set out in note 12.
Where possible, the Group has taken advantage of the own-use exemption which
allows qualifying contracts to be excluded from fair value mark-to-market
accounting. This applies to certain contracts for non-financial commodities
entered into and held for the Group's own purchase, sale or usage
requirements. Other contracts are accounted for as derivatives in accordance
with IFRS 9 and are recorded in the balance sheet at fair value.
Changes in the fair value of derivative financial instruments are reflected
through the hedge reserve to the extent that the relevant contracts are
designated as effective hedges in accordance with IFRS 9, or in the Condensed
consolidated income statement where the hedge accounting requirements are not
met. To ensure these derivatives are reflected at their contracted price in
the period they relate to, these changes in fair value are not reflected
within Adjusted Results in the Condensed consolidated income statement.
For financial reporting purposes, the Group has classified derivative
financial instruments into five categories:
· 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 - oil 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 and 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
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.
The table below details the carrying amounts recognised for the Group's
derivative financial instruments:
As at 31 December
As at 30 June
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Derivative assets
Commodity contracts 1,159.4 412.2 998.8
Financial contracts 395.8 40.2 143.9
Foreign currency exchange contracts 308.2 69.2 97.5
Interest rate and cross-currency swaps 34.6 1.3 4.6
Inflation rate swaps - 4.7 1.3
Total derivative assets 1,898.0 527.6 1,246.1
Split between:
Non-current assets 439.2 125.9 357.5
Current assets 1,458.8 401.7 888.6
Derivative liabilities
Commodity contracts (1,475.3) (373.7) (1,087.9)
Financial contracts (403.8) (30.5) (90.2)
Foreign exchange contracts (106.8) (176.8) (137.7)
Interest rate and cross-currency swaps (12.8) (68.9) (48.4)
Inflation rate swaps (231.2) (9.9) (140.3)
Total derivative liabilities (2,229.9) (659.8) (1,504.5)
Split between:
Non-current liabilities (523.8) (168.1) (541.8)
Current liabilities (1,706.1) (491.7) (962.7)
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 table below details the carrying amounts of fair value financial
instruments including their levels in the fair value hierarchy:
As at 31 December
As at 30 June
2022 2021 2021
(Unaudited) (Unaudited) (Audited)
£m £m £m
Assets
Level 2
Derivative financial instruments (as above) 1,898.0 527.6 1,246.1
Level 3
Equity investment 1.5 1.5 1.5
Contingent consideration 27.7 27.7 27.7
Total assets 1,927.2 556.8 1,275.3
Liabilities
Level 2
Derivative financial instruments (as above) (2,229.9) (659.8) (1,504.5)
Total liabilities (2,229.9) (659.8) (1,504.5)
There have been no transfers during the period between Level 1, 2 or 3
category inputs.
The change in fair value of derivative financial instruments in the period has
been driven by movements in underlying commodity prices and financial markets.
The Group has a large portfolio of forward power sales and gas purchases, the
valuations of which are impacted by changes in market prices. The Group also
has a large portfolio of forward currency contracts which fix the sterling
cost of future fuel purchases denominated in foreign currencies. The Group has
entered into a number of inflation swap contracts in order to hedge annual
price increases in certain of its generation activities, such as its CfD
revenue and Capacity Market revenue, both linked to UK CPI.
Fair value measurement
· Commodity contracts - 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 - the fair value of financial contracts is calculated
by reference to forward market prices at the balance sheet date.
· Foreign currency exchange contracts - 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 indices for floating-to-fixed
swaps.
· Inflation rate contracts - 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 and the time value of
money.
The fair value of commodity contracts, financial contracts, foreign currency
exchange contracts, interest rate and cross-currency contracts, and UK RPI
inflation swaps are largely determined by comparison between forward market
prices and the contract price; therefore, these contracts are categorised as
Level 2.
Level 3 fair values
The fair value of the UK CPI inflation swaps comprises an RPI and CPI
component. Whilst the RPI component is based on observable market rates, the
CPI component 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.
The consideration receivable by the Group for the sale of the CCGT portfolio
in 2021 includes £29.0 million that is contingent on certain triggers in
respect of the option to develop the Damhead Creek land disposed of as part of
the sale of these assets. The fair value measurement for the contingent
consideration has been categorised as Level 3 based on the inputs to the
valuation techniques used.
Valuation approach Significant unobservable inputs and range of inputs (probability weighted) Relationship between significant unobservable input and fair value measurement
Contingent consideration The fair value of the contingent consideration is determined using a Forecasted future Capacity Market clearing prices: The fair value measurement would increase/(decrease) with:
discounted cash flow model. The valuation approach is based on a calculation
of the probability of the option to develop the Damhead Creek land being £4.80/kW - £75.00/kW - higher/(lower) forecasted Capacity Market clearing prices causing a
exercised. This probability is calculated using a range of forecasts for
higher/(lower) probability of the option over the Damhead Creek land being
future Capacity Market auctions and the assumption that the option to develop (£24.70/kW) exercised.
the land would be exercised if the Capacity Market price were to clear above a
certain level, providing sufficient certainty around the economics of the - a reduction/(increase) in the internal rate of return required for the
development.
Damhead Creek development to proceed causing a higher/(lower) probability of
Required internal rate of return for the Damhead Creek development to proceed: the option over the Damhead Creek land being exercised.
15.0%
(15.0%)
There have been no movements in the Level 3 fair value instruments in the six
months ended 30 June 2022.
Sensitivities are disclosed below for reasonably possible changes to the
unobservable inputs that would have a significant impact on the fair value
measurement:
Increase/(decrease) in profit before tax
£m
30 June 2022
Forecasted future Capacity Market clearing prices - Increase 75% 1.8
- Decrease 75% (12.3)
Required internal rate of return for the Damhead Creek development to proceed - Increase 4% (3.7)
- Decrease 4% 2.2
14. Contingencies
The following matters reflect potential future flows of cash, arising from
existing events, that are dependent on a future event that is outside the
control of the Group. The amount and timing of any payment or receipt is
uncertain and, in some circumstances, cannot be measured reliably.
Guarantees
In addition to the amounts drawn down as borrowings (see note 9), 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 30 June 2022, the Group's contingent liability in respect of letters of
credit issued under the RCF amounted to £56.3 million (as at 31 December
2021: £74.4 million). The probability of future cash flows as a result of
these guarantees is considered remote.
The Group also guarantees obligations in the form of surety bonds with a
number of insurers. As at 30 June 2022 the Group's contingent liability in
relation to these guarantees was £145.0 million (as at 31 December 2021:
£142.1 million). The probability of future cash flows as a result of these
guarantees is considered remote.
Collateral is sometimes required to be provided in relation to the Group's
commodity and treasury trading activities. When derivative positions are out
of the money for the Group, collateral may be required to be provided to the
counterparty. These positions reverse when contracts are settled, and the
collateral is returned. The Group typically aims to cover collateral positions
with a combination of letters of credit, surety bonds and cash.
The letters of credit and surety bond amounts above include amounts utilised
to cover commodity trading collateral requirements of £17.5 million (as at 31
December 2021: £42.5 million) and £108.0 million (as at 31 December 2021:
£107.1 million) respectively.
Contingent liabilities
HSE legal action
In the prior year the Group received notice of legal action from the Health
and Safety Executive (HSE) in relation to wood dust at Drax Power Station
regarding operations prior to 2017. No amount has been provided in respect of
this legal action as, following consultation with external professional
advisers, the Group believes it is in a strong position to be able to defend
this claim.
Contingent assets
Billing system
Drax Energy Solutions Limited has lodged a claim against a supplier for
damages caused by the supplier's misrepresentation and failure to perform
under a contract for delivery of a new billing system. The directors have
considered the potential legal outcomes of the claim with external
professional advisors and believe that a favourable outcome is probable.
However, a contingent asset has been disclosed rather than a receivable
recognised at 30 June 2022, as receipt of the amount is dependent on the
outcome of the claim.
15. Adoption of new and amended accounting standards
The following amendments became effective for the first time in 2022:
· Annual Improvements 2018-2020 Cycle - effective from 1 January
2022.
· IAS 37 - Onerous Contracts: Cost of Fulfilling a Contract -
effective from 1 January 2022.
· IAS 16 (amended) - Property, Plant and Equipment: Proceeds before
Intended Use - effective from 1 January 2022.
· IFRS 3 - Reference to the Conceptual Framework - effective from 1
January 2022.
The adoption of these amendments in the current period has not had a material
impact.
At the date of approval of this report, 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 UK Endorsement Board (UKEB) - marked by *):
· IFRS 10 (amended) - Consolidated Financial Statements and IAS 28
(amended) - Investments in Associates and Joint Ventures (2011) - effective
date deferred indefinitely.
· IFRS 17 - Insurance contracts - effective from 1 January 2023.
· IAS 1 (amended) - Classification of Liabilities as Current and
Non-current - effective date deferred until not earlier than 1 January 2024*.
· IAS 1 (amended) - Disclosure of Accounting Policies - effective
from 1 January 2023*.
· IAS 8 (amended) - Definition of Accounting Estimates - effective
from 1 January 2023*.
· IAS 12 (amended) - Income Taxes - Assets and Liabilities arising
from a Single Transaction - effective from 1 January 2023*.
Adoption of new or amended standards and relevant interpretations in future
periods is not expected to have a material impact on the financial statements
of the Group.
16. Reproduction of comparative financial information
Consolidated income statement for the year ended 31 December 2021
For information, the full Consolidated income statement and Consolidated
statement of comprehensive income for the year ended 31 December 2021 is
reproduced below.
Consolidated income statement
Year ended 31 December
2021 (Audited)
Exceptional items and certain remeasurements Total Results
£m
£m
Adjusted Results((1))
£m
Revenue 5,173.9 (85.9) 5,088.0
Cost of sales (4,331.1) 134.3 (4,196.8)
Gross profit 842.8 48.4 891.2
Operating and administrative expenses (448.4) (21.5) (469.9)
Impairment losses on financial assets (16.3) - (16.3)
Depreciation (164.5) (0.5) (165.0)
Amortisation (34.4) - (34.4)
Losses on disposal of fixed assets (9.4) - (9.4)
Income from associates 0.3 - 0.3
Operating profit 170.1 26.4 196.5
Foreign exchange gains/(losses) 0.9 (5.1) (4.2)
Interest payable and similar charges (70.9) (0.3) (71.2)
Interest receivable 0.4 - 0.4
Profit before tax 100.5 21.0 121.5
Tax
- Before impact of changes in tax rate (11.7) (5.7) (17.4)
- Effect of changes in tax rate (0.4) (48.6) (49.0)
Total tax charge (12.1) (54.3) (66.4)
Net result from continuing operations((2)) 88.4 (33.3) 55.1
Net result from discontinued operations 16.7 7.4 24.1
Profit/(loss) for the period 105.1 (25.9) 79.2
Attributable to:
Owners of the Parent Company 105.6 (25.9) 79.7
Non-controlling interests (0.5) - (0.5)
Earnings per share Pence Pence
For net result for the period from continuing operations attributable to the
owners of the Parent Company
- Basic 22.3 13.9
- Diluted 21.5 13.5
For net result for the period attributable to the owners of the Parent Company
- Basic 26.5 20.0
- Diluted 25.6 19.3
((1) Adjusted Results are stated after adjusting for exceptional items
(including acquisition costs, restructuring costs and debt restructuring
costs), and certain remeasurements, see Note 6 for further detail.)
((2) Net result from continuing operations of £88.4 million is inclusive of
£(0.5) million attributable to non-controlling interests.)
Consolidated statement of comprehensive income
Year ended
31 December
2021
(Audited)
£m
Profit for the period 79.2
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension scheme 30.7
Deferred tax on remeasurement of defined benefit pension scheme (7.2)
Deferred tax on share-based payments 5.4
Net fair value gains on cost of hedging 17.3
Deferred tax on cost of hedging (7.7)
Net fair value gains on cash flow hedges 1.1
Deferred tax on cash flow hedges 3.6
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations 6.1
Net fair value losses on cash flow hedges (182.0)
Net gains on cash flow hedges reclassified to the income statement 12.6
Deferred tax on cash flow hedges 37.6
Other comprehensive expense for the period (82.5)
Total comprehensive expense for the period (3.3)
Attributable to:
Owners of the Parent Company (0.2)
Non-controlling interests (3.1)
17. Post balance sheet events
Coal unit availability extension
In response to increased pressure on European gas markets and associated
concerns about electricity security of supply in the UK this winter, the UK
Government has asked owners of legacy coal-fired generation assets, including
Drax, to work together with National Grid to temporarily extend the life of
these assets to March 2023.
Under the terms of the agreement, Drax will be paid a fee for the service and
compensated for costs incurred, including coal costs, in connection with the
operation of the coal units in accordance with the agreement.
INDEPENDENT REVIEW REPORT TO DRAX GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2022 which comprises the income statement, the balance sheet, the
statement of changes in equity, the cash flow statement and related notes 1 to
17.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (ISRE) (UK) 2410 "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Financial
Reporting Council for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and consequently does
not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
As disclosed above, the annual financial statements of the group will be
prepared in accordance with United Kingdom adopted international accounting
standards. The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with United
Kingdom adopted International Accounting Standard 34, "Interim Financial
Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE (UK), however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the group'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
company or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for
expressing to the group a conclusion on the condensed set of financial
statements in the half-yearly financial report. Our conclusion, including our
Conclusions Relating to Going Concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the company in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" issued by the
Financial Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it in an
independent review 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, for our review work, for this report, or for the conclusions
we have formed.
Deloitte LLP
Statutory Auditor
London, UK
25 July 2022
Alternative performance measures (APMs) glossary table
The measures described below are used throughout the Half Year Report 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 performance of the Group. These measures have been defined internally and
may therefore not be comparable to APMs presented by other companies.
Additionally, certain information presented is derived from amounts calculated
in accordance with IFRS but is not itself a measure defined under IFRS. Such
measures should not be viewed in isolation or as an alternative to the
equivalent IFRS measure.
APM Closest IFRS Purpose Definition
equivalent measure
Adjusted Results Total Results The Group's Adjusted Results are consistent with the way executive management Total Results measured in accordance with IFRS excluding the impact of
and the Board assess the performance of the Group. Adjusted Results are exceptional items and certain remeasurements (defined in note 6).
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 on a consistent basis.
Adjusted Results excludes 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.
Certain remeasurements comprise fair value gains and losses that do not
qualify for hedge accounting. The Group regards all of its forward contracting
activity to represent economic hedges and therefore by excluding the
volatility caused by recognising fair value gains and losses prior to maturity
of the contracts, the Group can reflect these contracts at the contracted
prices on maturity, reflecting the intended purpose of entering these
contracts and the Group's underlying performance.
Adjusted Results are the metrics used in the calculation of Adjusted Basic and
Adjusted Diluted earnings per share.
Adjusted EBITDA Operating profit* Adjusted EBITDA is the primary measure used by executive management and the Earnings before interest, tax, depreciation, amortisation, gains/losses on
Board to assess the financial performance of the Group as it provides a more disposal of assets and impairment of non-current assets, excluding the impact
comparable assessment of the Group's year-on-year trading performance. It is of exceptional items and certain remeasurements (defined in note 6). Adjusted
also a key metric used by the investor community to assess performance of the EBITDA excludes any earnings from associates and Adjusted EBITDA attributable
Group's operations. to non-controlling interests.
Adjusted EBITDA is stated from both continuing operations and discontinued
operations.
Adjusted Basic EPS Basic EPS Adjusted Basic EPS represents the amount of Adjusted earnings (Adjusted Adjusted Basic EPS is calculated by dividing the Group's Adjusted earnings
post-tax profits) attributable to each ordinary share. attributable to the owners of the Parent Company (Adjusted profit after tax)
by the weighted average number of ordinary shares in issue during the period.
Adjusted Diluted EPS Diluted EPS Adjusted Diluted EPS demonstrates the impact upon the Adjusted Basic EPS if Adjusted Diluted EPS is calculated by dividing the Group's Adjusted earnings
all outstanding share options, that are expected to vest on their future attributable to the owners of the Parent Company (Adjusted profit after tax)
maturity dates, were exercised and treated as ordinary shares as at the by the weighted average number of ordinary shares in issue during the period
balance sheet date. and dilutive potential ordinary shares under share plans.
Net Debt Borrowings less cash and cash equivalents Net Debt is a key measure of the Group's liquidity and its ability to manage Total borrowings less cash and cash equivalents. Total borrowings include
current obligations. external financial debt, such as loan notes, term loans and amounts drawn in
cash under RCFs but excludes other financial liabilities such as lease
Net Debt is used as a basis by debt rating agencies and in the calculation of liabilities calculated in accordance with IFRS 16, pension obligations and
the Group's financial covenant requirements. trade and other payables. Net Debt excludes the proportion of cash and
borrowings in non-wholly owned entities that would be attributable to the
non-controlling interests.
Net Debt including the impact of hedging instruments Borrowings less cash and cash equivalents Net Debt including the impact of hedging instruments shows the economic Net Debt adjusted for the impact of hedging instruments. Any borrowings that
substance of the Net Debt position, in terms of actual expected future cash have hedging instruments in place are adjusted to reflect those borrowings at
flows to settle that debt. the hedged rate.
Cash and committed facilities Cash and cash equivalents This is a key measure of the Group's available liquidity and the Group's Total cash and cash equivalents plus the value of the Group's committed but
ability to manage its current obligations. undrawn facilities (including the Group's RCFs, loan facilities and the
Customers trade receivable factoring facility).
It shows the value of cash available to the Group in a short period of time.
Debt service Finance costs This is a measure showing the cost of the Group's external borrowings (bonds Interest payable and similar charges less any charges unrelated to external
and bank loans). borrowings.
Net Debt to Adjusted EBITDA ratio Borrowings less cash and cash equivalents divided by operating profit The Net Debt to Adjusted EBITDA ratio is a debt ratio that gives an indication Net Debt excluding the impact of hedging instruments divided by Adjusted
of how many years it would take the Group to pay back its debt if Net Debt and EBITDA for the last 12 months. Expressed as a ratio to 1.
EBITDA are held constant.
The Group has a long-term target for Net Debt to Adjusted EBITDA ratio of
around 2.0 times.
Cost of production Cost of sales A key metric showing the cost of produced biomass. Cost of sales attributable to biomass production plus an allocation of
indirect costs divided by tonnes of biomass produced.
Also, a key metric in monitoring the Group's strategy to reduce biomass costs.
Expressed as a cost per tonne produced.
Capital expenditure Plant, Property and Equipment (PPE) additions and Intangible asset additions Used to show the Group's total spend on PPE and intangible assets in a year. PPE additions plus Intangible asset additions excluding any additions to
decommissioning assets.
* Operating profit is presented on the Group's Condensed consolidated income
statement; however, it is not defined per IFRS. It is a generally accepted
profit measure.
Glossary
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.
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 station and to sell to
third parties in the biomass market.
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 capture and storage (CCS)
The process of trapping or collecting carbon emissions from a large-scale
source and then permanently storing them.
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 for the
additional amount. Conversely, if the market reference price is above the
strike price, the generator must pay back the difference.
Combined Cycle Gas Turbine (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 CO(2); 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.
GGR
Greenhouse gas removal.
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.
I&C
Industrial & Commercial.
IFRS
International Financial Reporting Standards.
IFRS IC
International Financial Reporting Standards Interpretations Committee.
Lost time incident rate (LTIR)
The frequency rate is calculated on the following basis: (fatalities + 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.
NGO
Non-governmental organisation.
Open Cycle Gas Turbine (OCGT)
A free-standing gas turbine, using compressed air, to generate electricity.
Planned outage
A period during which scheduled maintenance is executed according to the plan
set at the outset of the year.
RCF
Revolving credit facility.
Rebasing
Rebasing is when the Group releases cash from an open derivative contract that
is in a mark-to-market asset position by modifying the rate per the contract.
A cash payment equivalent to the reduction in the mark-to-market asset is
received by the Group from the counterparty, less any applicable fees.
Reserve
Generation or demand available to be dispatched by the System Operator to
correct a generation/demand imbalance, normally at two or more minutes'
notice.
Response
Automatic change in generator output aimed at maintaining a system frequency
of 50Hz. Frequency response is required in every second of the day.
RIDDOR
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.
SaaS
Software as a Service.
SME
Small and Medium Enterprises.
Summer
The calendar months April to September.
System operator
National Grid Electricity Transmission. Responsible for the co-ordination of
electricity flows onto and over the transmission system, balancing generation
supply and user demand.
TCFD
Task Force on Climate-related Financial Disclosures.
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.
Total Results
Financial performance measures prefixed with "Total" are calculated in
accordance with IFRS.
UK ETS
The UK Emissions Trading System is a mechanism introduced across the UK to
reduce emissions of CO(2); the scheme is capable of being extended to cover
all greenhouse gas emissions.
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.
Drax Group plc
Drax Power Station
Selby
North Yorkshire YO8 8PH
Telephone: +44 (0)1757 618381
www.drax.com
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