TIDMDRX
RNS Number : 3978U
Drax Group PLC
29 July 2020
29 July 2020
DRAX GROUP PLC (Symbol: DRX)
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 JUNE 2020
Robust performance, delivering for stakeholders, progressing
biomass strategy
Six months ended 30 June H1 2020 H1 2019
Key financial performance measures
Adjusted EBITDA (GBP million)(1)(2) 179 138
Cash generated from operations
(GBP million) 226 229
Net debt (GBP million)(3 () 792 924
Interim dividend (pence per
share) 6.8 6.4
Adjusted basic earnings per
share (pence)(1) 10.8 2.0
Total financial performance
measures
Coal obsolescence charges (224) -
Operating (loss) / profit (GBP
million) (32) 34
(Loss) / profit before tax
(GBP million) (61) 4
Basic (loss) / earnings per
share (pence) (14.0) 1.0
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Financial highlights
-- Group Adjusted EBITDA up 30% to GBP179 million (H1 2019: GBP138 million)
- Includes estimated GBP44 million impact of Covid-19,
principally in Customers SME business
- GBP34 million of capacity payments (H1 2019: nil) following
re-establishment of the Capacity Market
- Strong biomass performance in both Pellet Production and
Generation
-- Strong cash generation and balance sheet
- GBP694 million of cash and total committed facilities
- Extended GBP125 million ESG CO(2) emission-linked facility to
2025
- DBRS investment grade rating
-- Sustainable and growing dividend
- Expected full year dividend up 7.5% to 17.1 pence per share
(2019: 15.9 pence per share), subject to good operational
performance and impact of Covid-19 being in line with current
expectations
- Interim dividend of 6.8 pence per share (H1 2019: 6.4 pence
per share) - 40% of full year
Operational highlights
-- Biomass self-supply - 9% reduction in cost, 15% increase in
production and improved quality vs. H1 2019
-- Generation - 11% of UK's renewable electricity, strong
operational performance and system support services
-- Customers - lower demand and an increase in bad debt
provisions, principally in SME business
Progressing plans to create a long-term future for sustainable
biomass
-- Targeting five million tonnes of self-supply at GBP50/MWh(4)
by 2027 from expanded sources of sustainable biomass
- Plan for $64 million ($35/t, GBP13/MWh(4) ) annual savings on
1.85Mt by 2022 vs. 2018 base
- Investment in new satellite plants in US Gulf - targeting 20%
reduction in pellet cost versus current cost
-- BECCS(5) - developing proven and emerging technology options
for large-scale negative emissions
-- End of coal operations - further reduction in CO(2) emissions
and lower cost operating model for biomass
Outlook
-- Full year Adjusted EBITDA, inclusive of c.GBP60 million
estimated impact of Covid-19, in line with market consensus
-- Evaluating attractive investment options for biomass growth:
cost reduction and capacity expansion
-- Strong contracted power sales (2020-2022) 34TWh at
GBP51.4/MWh and high proportion of non-commodity revenues
Will Gardiner, CEO of Drax Group said: "With these robust
half-year results, Drax is delivering for shareholders with an
increased dividend while continuing to support our employees,
communities and customers during the Covid-19 crisis.
"As well as generating the flexible, reliable and renewable
electricity the UK economy needs, we're delivering against our
strategy to reduce the costs of our sustainable biomass and we're
continuing to make progress pioneering world-leading bioenergy with
carbon capture technologies, known as BECCS, to deliver negative
emissions and help the UK meet its 2050 net zero carbon target.
"National Grid stated this week that the UK can't reach net zero
by 2050 without negative emissions from bioenergy with carbon
capture and storage. BECCS delivers for the environment and also
provides an opportunity to create jobs and clean economic growth in
the North and around the country."
Operational review
Pellet Production - capacity expansion, improved quality and
reduced cost
-- Adjusted EBITDA up 213% to GBP25 million (H1 2019: GBP8 million)
- Pellet production up 15% to 0.75Mt (H1 2019: 0.65Mt) - impact
of adverse weather in H1 2019
- Cost of production down nine per cent to $154/t(6) (H1 2019:
$170/t(6) )
- Reduction in fines (larger particle-sized dust) in each
cargo
-- Cost reduction plan - targeting $64 million ($35/t,
GBP13/MWh(4) ) annual savings on 1.85Mt by 2022 vs. 2018 base
- Expect to deliver $27 million of annual savings by end of 2020
- a saving of $18/t vs. 2018
- Greater use of low-cost fibre, LaSalle (improved rail
infrastructure, woodyard and sawmill co-location) and relocation of
HQ from Atlanta to Monroe
- Savings from projects to be delivered in 2020-2022
- 0.35Mt capacity expansion (LaSalle, Morehouse and Amite),
increased use of low-cost fibre, improved logistics and other
operational enhancements
-- $40 million investment in three 40kt satellite plants in US
Gulf - commissioning from 2021, potential for up to 0.5Mt
- Use of Drax infrastructure and sawmill residues - targeting
20% reduction in pellet cost versus current cost
Power Generation - flexible, low-carbon and renewable
generation
-- Adjusted EBITDA up 45% to GBP214 million (H1 2019: GBP148 million)
- Limited impact from Covid-19 - strong contracted position
provided protection from lower demand, reduction in ROC(7) prices
offset by increased system support services
- GBP34 million of Capacity Market income (H1 2019: nil; GBP36
million in relation to H1 2019 subsequently recognised in H2 2019
following re-establishment of the Capacity Market)
- GBP54 million of Adjusted EBITDA from hydro and gas generation
assets (H1 2019: GBP36 million)
- System support (Balancing Market, ancillary services and
portfolio optimisation) up 8% to GBP66 million (H1 2019: GBP61
million)
- Good commercial availability across the portfolio - 91% (H1
2019: 87%)
-- Covid-19 - business continuity plan in place to ensure safe and uninterrupted operations
-- Biomass generation up 16% to 7.4TWh (H1 2019: 6.4TWh)
- Strong supply chain (impact of adverse weather in H1 2019) and
record CfD availability (Q2 2020 - 99.5%)
-- Pumped storage / hydro - excellent operational and system support performance
-- Gas - excellent operational and system support performance,
Damhead Creek planned outage underway
-- Coal - 10% of output in H1 2020 - utilisation of coal stock
before end of commercial generation (March 2021)
Customers - managing the impact of Covid-19 on SME business
-- Adjusted EBITDA loss of GBP37 million (H1 2019: GBP9 million
profit) inclusive of estimated GBP44 million impact of Covid-19 -
reduced demand, MtM loss on pre-purchased power and increase in bad
debt, principally in SME business
-- Covid-19 - implemented work from home procedures to allow
safe and continuous operations and customer support
-- Good performance in Industrial and Commercial market - new
contracts with large water companies providing five-year revenue
visibility, while supporting the Group's flexible, renewable and
low-carbon proposition
-- Monitoring and optimisation of portfolio to ensure alignment with strategy
Other financial information
-- Total financial performance measures reflects GBP108 million
MtM gain on derivative contracts, GBP224 million coal obsolescence
charges and GBP10 million impact (GBP6 million adjusted impact)
from UK Government's reversal of previously announced corporation
tax rate reduction resulting in revaluation of deferred tax asset
and increased current tax charge
- Additional c.GBP25-GBP35 million for coal closure costs
expected to be reported as exceptional item in H2 2020 when coal
consultation process is further advanced
-- Capital investment - continuing to invest in biomass
strategy, some delay in investment due to Covid-19
- H1 2020: GBP78 million (H1 2019: GBP60 million)
- Full year expected investment GBP190-GBP210 million (was
GBP230-GBP250 million), includes 0.35Mt expansion of existing
pellet plants and $20 million initial investment in satellite
plants ($40 million in total)
-- Net debt of GBP792 million, including cash and cash
equivalents of GBP482 million (31 December 2019: GBP404
million)
- Remain on track for around 2.0x net debt to Adjusted EBITDA by
end of 2020
Notes:
(1) Adjusted Results are stated after adjusting for exceptional
items (including acquisition and restructuring costs, asset
obsolescence charges and debt restructuring costs), and certain
derivative financial instruments fair value remeasurements.
(2) Earnings before interest, tax, depreciation, amortisation,
excluding the impact of exceptional items and certain
remeasurements.
(3) Borrowings less cash and cash equivalents.
(4) Assuming a constant rate of $USD1.45/GBPGBP.
(5) BioEnergy Carbon Capture and Storage.
(6) Cost of production in US biomass self-supply business - raw
fibre, processing into a wood pellet, delivery to port of Baton
Rouge and loading to vessel for shipment to UK - Free on Board
(FOB).
Cost of ocean freight, UK port and rail cost reflected in
Generation business accounts in addition to price paid to US
business for the wood pellet.
(7) Renewables Obligation Certificate.
Forward Looking Statements
This announcement may contain certain statements, statistics and
projections 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 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 expectations reflected
in such statements are reasonable, no assurance can be given that
such expectations will prove to be correct and because these
statements involve risks and uncertainties, actual results 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 factors
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 and webcast arrangements
Management will host a webcast presentation for analysts and
investors at 9:00am (UK Time), Wednesday 29 July 2020.
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 will be made available from 7:00am
(UK time) on Wednesday 29 July 2020 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: Wednesday 29 July 2020
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9:00am (UK time)
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Webcast Live Event Link: https://secure.emincote.com/client/drax/drax007
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Conference call and pre-register https://secure.emincote.com/client/drax/drax007/vip_connect
Link:
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Start Date: Wednesday 29 July 2020
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Delete Date: Thursday 31 December 2020
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Archive Link: https://secure.emincote.com/client/drax/drax007
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For further information, please contact:
rosie.corbett@fticonsutling.com
Website: www.drax.com
Business Review
Introduction
Drax Group's ("Drax" / "The Group") purpose is to enable a zero
carbon, lower cost energy future. This informs our strategy through
which we aim to build a long-term future for sustainable biomass,
become the leading provider of system stability in the UK and give
customers control of their energy.
Today, Drax is the fourth largest energy generator in the UK
operating a portfolio of renewable biomass, hydro and gas assets to
deliver flexible, renewable and low-carbon generation, and system
support services. Through our use of sustainable biomass we are
also the UK's largest source of renewable electricity and the
world's fourth largest producer of sustainable biomass pellets.
Through our Customers business we supply renewable electricity, gas
and energy solutions to UK businesses, as well as providing a route
to market for over 2,000 renewable energy installations - typically
wind and solar.
Drax has reduced its reported carbon emissions by over 85% since
2012 and expects to end commercial coal generation in March 2021.
Building on this progress, in 2019, we announced a world first
ambition to become carbon negative by 2030 using BioEnergy Carbon
Capture and Storage (BECCS).
Through these activities and our strategy, we expect to deliver
higher quality earnings, reduce commodity exposure and create
opportunities for growth aligned with the UK's legally binding
objective to become carbon neutral by 2050. This underpins our
continued commitment to a sustainable and growing dividend.
Summary of H1 2020
Safety remains a primary focus and in the first half of 2020 the
Total Recordable Incident Rate was 0.32 (H1 2019: 0.30). This
reflects an increase in the number of minor reportable injuries. We
take any increase in the number of reportable incidents seriously
and have implemented processes to improve risk assessment,
alongside a campaign to raise awareness of good practice, ensuring
the correct personal protective equipment is used. With major
planned outages at Drax Power Station and Damhead Creek during 2020
there has also been a high level of safety engagement with
contractors prior to coming on site.
Like many companies, and in common with wider society, Covid-19
has been the dominant challenge in the first half of 2020. For Drax
this was principally in relation to our Customers business, which
has seen a significant reduction in electricity demand, the cost
associated with exiting hedged positions as market prices have
fallen and an increased risk of customer business failure and bad
debt, resulting in an estimated impact on Adjusted EBITDA of GBP44
million. Against this backdrop we have supported a range of
stakeholders and continued to make good progress with our strategy,
whilst delivering a strong trading and operational performance.
Adjusted EBITDA of GBP179 million increased by 30% compared to
H1 2019 (GBP138 million), reflecting high levels of renewable
electricity generation, system support services, the reinstatement
of Capacity Market payments and a strong performance in Pellet
Production, offsetting the impact of Covid-19 on the Customers
business.
Full year Adjusted EBITDA remains in line with market
expectations, underpinned by good operational availability for the
remainder of 2020. This is inclusive of the impact of Covid-19,
where we continue to estimate a potential full year impact on
Adjusted EBITDA of c.GBP60 million. There remains a range of
potential outcomes for the Group's financial performance in 2020
depending on the depth and duration of the wider economic downturn
caused by Covid-19.
Our balance sheet is strong with cash and total committed
facilities of GBP694 million at 30 June 2020 and net debt of GBP792
million - on target for around 2.0x net debt to Adjusted EBITDA for
the full year. A three-year extension of the Group's innovative
GBP125 million CO(2) emission-linked ESG debt facility to 2025
enhanced the strength of the balance sheet, extending the maturity
profile.
In assessing dividend payments, the Board has considered its
wider stakeholder obligations in addition to our commitment to
shareholders. Subject to the continued good operational performance
seen in the first half of 2020 and the overall impact from Covid-19
remaining in line with the position we set out in April 2020, we
expect to pay a dividend for the 2020 financial year of 17.1 pence
per share (approximately GBP68 million), a 7.5% increase on 2019.
This is consistent with our policy to pay a dividend which is
sustainable and expected to grow as the strategy delivers an
increasing proportion of stable earnings and cash flows. As has
been our practice since the policy's inception in 2017, 40% of the
expected full year dividend will be paid for the first six months
of 2020, 6.8 pence per share (approximately GBP27 million).
Supporting all stakeholders through the Covid-19 pandemic
As a strategic part of the UK's critical national
infrastructure, we recognise our responsibility to support the
country's response to Covid-19. We have remained in close contact
with the UK Government and are committed to supplying the flexible,
low-carbon and renewable electricity the UK needs, not least to the
250,000 businesses, including care homes, hospitals and schools we
supply through our Customers business. Our operations have
continued throughout the lockdown, we have not sought any Covid-19
financial support from the UK Government and no employees have been
furloughed.
Our primary focus is the safety and wellbeing of our employees,
where we aim to create a diverse and inclusive workplace that is
both safe and supportive.
We have implemented an established business continuity plan
which has allowed many employees across the Group to work from
home. In addition to social distancing measures and increased
remote working, we have implemented enhanced safety protocols at
our sites, which will support the safe delivery of major planned
outages this summer at Drax Power Station and Damhead Creek.
We appreciate the broader challenge that Covid-19 has created
for many stakeholders and are actively working to support our
customers, particularly in the SME market, which we believe has
been hardest hit.
In addition, we have supported our communities with a range of
initiatives including free electricity and gas for care homes,
laptops to support home learning for primary school children and
targeted charitable donations in the UK and US. We believe that
supporting stakeholders is the right thing to do and will help
those impacted by Covid-19.
Throughout the period we have remained committed to our
environmental standards, upheld our commitment to sustainability in
our biomass supply chains and continued to consult on plans to end
coal generation.
Operational performance
In the US, our Pellet Production operations reported Adjusted
EBITDA of GBP25 million up 213% (H1 2019: GBP8 million). This was a
strong performance, reflecting high levels of production, improved
pellet quality and a continued focus on cost reduction.
Pellet production in the first half of 2020 was 0.75 million
tonnes, an increase of 15% (H1 2019: 0.65 million tonnes), which
reflects good fibre availability compared to H1 2019 which, due to
heavy rainfall, experienced restricted commercial forestry activity
and a lower level of low-cost fibre availability.
Pellet quality, as measured by the level of fines (larger
particle-sized dust) in each cargo, improved in the first six
months of 2020, reflecting our focus on incremental improvements to
our processes. Lower levels of fines result in biomass that is
easier and safer to handle throughout the supply chain. As such
there are safety, operational and cost imperatives in reducing the
level of fines and we continue to work hard to deliver these
improvements.
We remain focused on opportunities across the supply chain to
deliver savings as part of our target to reduce the cost of biomass
to GBP50/MWh(1) by 2027. As a part of this goal we have previously
identified a programme of improvements, efficiencies and
investments which we believe will reduce the cost of biomass by
$35/tonne (GBP13/MWh(1) ) on our existing portfolio by 2022
compared to 2018 (programme commenced in 2019). In the first half
of 2020 this programme alongside increased output and other
operational improvements delivered a cost saving of $16/tonne
compared to H1 2019 ($170/tonne), a saving of nine per cent.
We expect this programme to deliver further benefits in the
second half of 2020 through to 2022, associated with the previously
outlined 350kt expansion of the Morehouse, Amite and LaSalle
plants, increased use of low-cost fibre and improved logistics,
such as the commissioning of an enlarged chambering yard at the
Port of Baton Rouge - allowing 80-car train sets to operate from
our LaSalle and Morehouse plants.
In Generation, the portfolio has performed strongly, with
Adjusted EBITDA of GBP214 million, up 45% versus the first half of
2019 (GBP148 million).
The portfolio produced six per cent of the UK's electricity
between October 2019 and March 2020 (the most recent period for
which data is available), with Drax Power Station alone producing
ten per cent of the UK's renewable electricity - the largest single
source of renewable electricity in the UK, enough to power four
million homes. This level of renewable generation, combined with
the flexibility of our portfolio, allows the Group to support the
continued deployment of intermittent renewables and the UK's plans
for decarbonisation.
Portfolio availability (calculated based on the availability of
each generation asset weighted by EBITDA contribution) was 91% (H1
2019: 87%) and includes CfD availability of 99.5% in Q2 2020,
offsetting lower availability in Q1 2020. We believe that this was
a strong performance which reflects the diligence and skill of our
teams working with the added complexity of social distancing
constraints.
The continued operation of our biomass supply chain remains key
to flexible and renewable generation. This supply chain has a high
level of operational resilience designed to mitigate potential
disruption. To date there has been no material impact from Covid-19
on our supply chain or those of our key suppliers.
Major planned outages on one biomass unit at Drax Power Station
(which includes a turbine upgrade) and at Damhead Creek are taking
place over the summer. Once completed the upgrade at Drax Power
Station will deliver incremental thermal efficiency improvements
and lower maintenance costs, further reducing the cost of
generation using biomass. Reflecting the physical restrictions
brought about by Covid-19 these outages are now more time consuming
and in recognising these limitations, a planned turbine upgrade at
Shoreham Power Station has been postponed until 2021.
Merchant power prices remain an important part of the Group's
earnings, but by focusing on flexible, renewable and low-carbon
generation, which includes index-linked renewable schemes, capacity
payments and system support services, the importance of merchant
power prices has reduced. Between 2020 and 2022 we have a strong
forward sold power position with 34TWh contracted at GBP51.4/MWh,
providing strong visibility of power sales and revenues. Beyond
this period, whilst an exposure exists, it is largely associated
with the three biomass units which operate under the Renewable
Obligation Certificate (ROC) scheme. ROC generation equates to
around 10TWh per year - around half of the portfolio's annual
output.
System support services (Balancing Market, ancillary services
and portfolio optimisation) was GBP66 million (H1 2019: GBP61
million), ahead of our expectations. The increase reflects a
reduction in demand for electricity caused by Covid-19, which has
meant that the UK electricity system has become increasingly
dominated by low marginal cost intermittent and inflexible
generation, such as wind, solar and nuclear. This has necessitated
the system operator to take more actions to balance the system,
procuring system support services from flexible generators like
Drax.
Cruachan Power Station, which is an important source of system
support, was also successful in a tender process to procure
specific non-generation services - inertia and reactive power. The
contract commenced in July 2020 and is worth up to GBP5 million per
year over six years. This was the first tender of its kind and we
expect the system operator to conduct further tenders over the
coming years. We expect the demand for system support services to
grow as the system decarbonises and becomes increasingly reliant on
intermittent and inflexible generation.
The Group's portfolio of hydro and gas assets has performed well
in the first half of 2020 with Adjusted EBITDA of GBP54 million (H1
2019: GBP36 million), based on system support services, the
reinstatement of capacity payments and peak power generation.
Following the decision in February 2020 to end coal operations
we expect to end commercial coal generation in March 2021. Closure
is expected to result in annual cost savings of GBP25-35 million,
which will help to support the financial model for long-term
biomass generation when the current renewable schemes end in March
2027. A consultation process commenced earlier this year and
subject to the outcome, closure is expected to result in one-off
cash costs of GBP25-35 million, which we expect to provide for when
discussions are more advanced in the second half of the year. As a
result of the expected end to commercial coal operations, an
obsolescence charge of GBP224 million was recognised in the H1 2020
accounts as an exceptional item, which will result in an ongoing
reduction in the depreciation charge.
The Customers business reported a loss at an Adjusted EBITDA
level of GBP37 million (H1 2019: GBP9 million profit). This
reflects the significant reduction in demand caused by Covid-19,
the cost associated with exiting hedged positions as market prices
have fallen and the increased risk of business failure and bad debt
- principally in the SME market, which represents c.30% of monthly
billing. This represents most of the estimated impact to date of
Covid-19 on the Group, the majority of which is reflected in the
Customers business H1 result. However, even with social distancing
measures eased we expect the impact of Covid-19 to continue in the
second half of 2020.
The Industrial & Commercial business has performed better
and has added long dated contracts with water utilities to the
portfolio providing revenue visibility over the next five years.
Looking beyond the impact of Covid-19 we will continue to monitor
the portfolio to ensure alignment with the Group's strategy.
The Customers business has a differentiated market position -
selling purely renewable power while helping over 2,000 independent
renewable generators, access the market. In the same way that the
Generation business provides system support, so too can our
industrial customer portfolio. Over time, we expect this business,
through efficiency and demand-side response, to contribute
increasingly to system support. We continue to believe this
approach will support long-term growth.
Biomass strategy
Biomass has an important role to play in global energy markets
as a flexible and sustainable source of renewable energy, as well
as its potential to deliver negative emissions. Key to securing
this long-term role is reducing the cost of biomass, to a target
level of GBP50/MWh(1) and developing greater control of our biomass
supply chain, which can also support further cost reductions. At
this level, alongside other supply chain opportunities, we believe
that the Group's biomass activities can be economic when the
current UK renewable support schemes end in 2027.
To enable this strategic objective the Group is targeting five
million tonnes of self-supply capacity by 2027 (1.5 million today,
plus 0.5 million tonnes in development), which we believe will
provide greater scope for operational leverage and cost reduction.
These savings will be delivered through further optimisation of
existing biomass operations, greater utilisation of post-processing
residues and an expansion of the fuel envelope to incorporate other
low-cost renewable fuels across the expanded self-supply chain. We
also remain alert to sector opportunities for organic and inorganic
growth which could support the realisation of this strategy.
Progress in the first half of 2020 included the approval of
three new 40kt satellite plants, which will utilise sawmill
residues and leverage our existing US Gulf infrastructure to
produce, we believe, biomass at around 20% below the current cost
of production. In time we believe this model could provide up to
0.5 million tonnes of additional low-cost biomass residues.
The Group has continued to invest in innovation and our Research
and Development team is evaluating lower cost sustainable biomass
materials, such as bagasse (sugar cane residue) and UK fuels,
including energy crops. The chemistry of these materials is more
challenging than the current biomass material used, but the cost
savings could be significant. As a producer and user of biomass at
scale we believe that Drax is well placed to develop a wider range
of lower cost biomass materials, subject to our strict
sustainability policies. In time these materials could represent a
significant amount of the sustainable biomass we require and,
alongside other supply chain opportunities, are a means by which we
believe we can reduce the cost of biomass to GBP50/MWh(1) .
We expect global demand for wood pellets to increase by c.60%
this decade, inclusive of Drax's requirement, as other countries
develop decarbonisation programmes which acknowledge the benefits
of sustainable biomass for generation. Whilst there is an abundance
of sustainable biomass globally, there remains limited capacity to
convert these fibres to energy dense pellets, which have a
low-carbon footprint and lower cost associated with transportation.
As a result, we expect the global market for biomass to remain
structurally short. We are therefore exploring options to service
biomass demand in other markets - Europe, North America and Asia
alongside the UK. In doing so we are creating optionality over our
use of sustainable biomass.
BECCS
The UK's Committee on Climate Change (CCC) has clearly set out
what is required for the country to achieve its legally binding
objective of being net zero by 2050. This includes an important
role for BECCS to remove CO(2) from the atmosphere and safely store
it, creating negative emissions. BECCS is the only large-scale
solution for negative emissions with renewable electricity and
system support capabilities. We believe Drax is a world leader in
integrated biomass supply chains and generation, enabling the Group
to provide BECCS across our four biomass generating units at Drax
Power Station, removing up to 16 million tonnes of CO(2) , around a
third of the CCC's target for bioenergy in the UK. In doing so our
ambition is to become a carbon negative company by 2030.
Drax Power Station is sited in the Humber region, the UK region
with the highest absolute level of CO(2) emissions, owing to the
industry and manufacturing located there. This makes the Humber
region the natural site for large-scale Carbon Capture and Storage,
which could be applied to other industries in addition to BECCS. We
continue to work in partnership with Equinor, National Grid and
others as part of the Zero Carbon Humber campaign, which we believe
can bring new investment, new jobs and world-leading and exportable
negative emissions technologies to the UK.
The technology to deliver post-combustion BECCS exists and is
proven at scale. In autumn 2020, we expect to commence a trial of
one such technology provided by Mitsubishi Heavy Industries. This
solvent technology is being used globally, notably at the Petra
Nova facility in Texas, USA, the world's largest post-combustion
carbon capture plant, capturing 1.4 million tonnes of CO(2) a year.
In addition, we are developing innovative technology options,
including C-Capture, a partnership between Leeds University, Drax,
IP Group and BP, which has developed an organic solvent which could
also be used as part of our BECCS project.
Subject to the right support from the UK Government, we stand
ready to develop and deliver this necessary contribution to the UK
achieving net zero emissions by 2050.
Biomass sustainability
Under well-established UK and European legislation, sustainably
sourced biomass is a renewable source of energy. The legal
framework and science which underpins this treatment is clear.
Carbon emitted in the generation of renewable electricity is
absorbed by and accounted for in the growth of forest stock. This
is based on well-established principles set out by the
International Panel on Climate Change, a UN body, which reconfirmed
its long-standing position on sustainably sourced biomass in
2019.
The Group provides full disclosure of the carbon emissions
associated with our generation activities as part of our annual
reporting. We also report the carbon emissions associated with our
biomass supply chain, providing a greater level of disclosure than
other forms of electricity generation which also have carbon
emissions associated with their supply chains.
We maintain a rigorous and robust approach to biomass
sustainability, ensuring the wood fibre used and pellets produced
are fully compliant with the UK's mandatory standards as well as
those of the EU. We use low-cost sawmill residues and forest
residues, which are a by-product of commercial forestry processes,
and thinnings from growing forests, which help improve forest
stocks and forest health. The CO(2) emissions from using
sustainably sourced biomass to produce electricity are balanced by
the absorption of CO(2) from growing forests.
We are committed to continuously raising those standards, so
that our sourcing policies evolve as the science develops. Our
responsible sourcing is in line with the recommended sourcing
practices set out by Forest Research - the UK's principal
organisation for forestry and tree-related science. We have also
set up an Independent Advisory Board which provides independent
advice in all areas of our biomass sourcing. It has already
reviewed our biomass policy and confirmed that it reflects the
recommendations made by Forest Research. We apply these standards
to our own activity and those of our third-party suppliers.
Looking at the evidence, we are seeing the positive effects that
sustainable sourcing practices are having on the carbon stored. In
the southeast US, where we source most of our biomass, increased
demand for wood fibre has directly contributed to increased growth
and protection of forests. Inventories have increased by over 90%
since 1950 as more carbon is stored year after year, despite
harvests also increasing.
Other developments
We are continuing to develop options for new gas generation
which we believe is necessary to provide greater flexibility to the
electricity system as it becomes more dependent on intermittent and
inflexible generation. As a part of the development options for
these projects we are also assessing the potential to introduce
hydrogen as part of the fuel mix to further reduce the carbon
intensity of these projects. Investment remains subject to an
appropriate clearing price in a future Capacity Market auction.
Outlook
Full year Adjusted EBITDA remains in line with market
expectations, underpinned by good operational availability for the
remainder of 2020 and the impact of Covid-19 being in line with the
position we set out in April 2020. These assumptions underpin our
expectation for the full year dividend.
In Pellet Production we are focused on the continued production
of good quality pellets at the lowest cost and expect to deliver
further cost savings in the second half of 2020. We will also
continue to progress plans to develop five million tonnes of
low-cost biomass supply by 2027.
Our Generation proposition is strong: flexible, renewable and
low-carbon electricity and system support services. We will
continue to provide high levels of renewable electricity to the UK
and expect the flexibility of our portfolio to continue to service
the increasingly important market for system support services. In
addition, we continue to develop our ambition for negative
emissions with BECCS.
In our Customers business, we are addressing the ongoing
challenges brought about by Covid-19 and will continue to monitor
the portfolio to ensure it remains aligned with our strategic
objectives. Through our Industrial & Commercial portfolio we
also expect to develop our presence in the market for system
support through flexible demand management and other value-added
services.
We are making good progress with the delivery of our strategy
and will build on this to deliver our targets. We will also
continue to play an important role in our markets as well as
realising our purpose of enabling a zero carbon, lower cost energy
future for the UK.
Notes:
(1) Assuming a constant rate of $USD1.45/GBPGBP.
Financial Review
Six months ended 30 June
2020 2019
-------------------------------- -----------
Adjusted Revenue (GBP million) 2,205 2,227
Adjusted EBITDA (GBP million) 179 138
Adjusted Profit After tax (GBP
million) 43 8
Total Revenue (GBP million) 2,219 2,232
Total Operating (Loss)/Profit
(GBP million) (32) 34
Total (Loss)/Profit After tax
(GBP million) (56) 4
Cash from Operating Activities
(GBP million) 168 199
Dividend (pence per share) 6.8 6.4
As at As at
30 June 31 December
2020 2019
----------- --------------
Net Debt (GBP million) 792 841
----------- --------------
Introduction
The first six months of 2020 will be remembered for the
emergence of Covid-19, which continues to develop and evolve, with
most of the financial impact to date experienced in our Customers
business.
Against this backdrop, the Group has delivered a robust
financial performance with Adjusted EBITDA of GBP179 million, an
increase of 30%, or GBP41 million from the same period in 2019 (six
months ended 30 June 2019: GBP138 million). The result for the six
months ended 30 June 2020 includes an estimated GBP44 million of a
total expected GBP60 million negative impact on our full year
expectations due to Covid-19. In addition, we have recorded GBP34
million of Capacity Market income in the first half of 2020. In
2019, GBP36 million of such income due in respect of the first half
of the year was not recognised until the reinstatement of the
Capacity Market in November 2019.
Following the announcement that commercial coal generation will
cease at Drax Power Station in March 2021, associated assets have
been fully written down in the first half of the year, resulting in
an asset obsolescence charge of GBP224 million in the income
statement, recognised as an exceptional item.
Total operating profit includes the effect of remeasurement
gains of GBP108 million (six months ended 30 June 2019: gains of
GBP1 million) on derivative contracts and the GBP224 million of
asset obsolescence charges in relation to coal generation assets
(six months ended 30 June 2019: GBPnil). Reflecting the impact of
these items, the total operating loss for the six months ended 30
June 2020 was GBP32 million, compared to an operating profit of
GBP34 million in the same period last year.
The improvement in Adjusted EBITDA was underpinned by high
levels of renewable electricity generation, system support
services, the reinstatement of Capacity Market payments and a
strong performance in Pellet Production, offsetting the impact of
Covid-19 on the Customers business.
The Group's liquidity position is strong and provides a solid
platform from which we can continue to execute our strategy, with
cash of GBP482 million and total cash and total committed
facilities of GBP694 million at the balance sheet date. Since the
trading update issued in April, we have continued to review and
refine our forecasts for the impact of Covid-19 and our full year
expectations remain unchanged.
In Customers, performance was adversely affected by significant
sector-wide impact from Covid-19. Lockdown and social distancing
measures in the UK resulted in lower power demand, an increase in
costs to exit previously hedged positions and an increase in bad
debt charges due to higher expected credit losses.
Our balance sheet remains robust, supported by strong cash flow
from operations, with net debt at 30 June of GBP792 million
compared to GBP841 million at 31 December 2019. This delivers a net
debt to Adjusted EBITDA ratio of 1.8x, based on a rolling 12-month
period at 30 June 2020, ahead of our 2.0x target. This includes
GBP44 million of Capacity Market income recognised in Adjusted
EBITDA during the second half of 2019 which related to earlier
periods.
During the period we extended the contractual maturity of our
existing GBP125 million Environmental, Social and Governance (ESG)
facility, by three years to 2025. This further extends the profile
of our facilities which include maturities out to 2029.
We remain committed to a sustainable and growing dividend.
Subject to the continued good operational performance seen in the
first half of 2020 and the overall impact from Covid-19 remaining
in line with the position we set out in April 2020, we expect to
pay a dividend for the 2020 financial year of 17.1 pence per share
(approximately GBP68 million), a 7.5% increase on 2019. This is
consistent with our policy to pay a dividend which is sustainable
and expected to grow as the strategy delivers an increasing
proportion of stable earnings and cash flows.
The Board has resolved to pay an interim dividend in respect of
the six months ended 30 June 2020 of 6.8 pence per share (six
months ended 30 June 2019: 6.4 pence per share), representing 40%
of the expected full year dividend.
Financial Performance
Adjusted EBITDA
Group consolidated Adjusted EBITDA for the six months ended 30
June 2020 of GBP179 million reflects a GBP41 million, or 30%,
increase on the same period last year (six months ended 30 June
2019: GBP138 million) and was underpinned by good operational
performance and asset availability. Our strong generation hedge
book continues to provide a measure of protection against lower
demand and power prices following the emergence of the Covid-19
pandemic. At the same time, the reduction in demand has resulted in
additional requirements for system support services, which our
portfolio of generation assets is well placed to provide.
Our Generation business contributed Adjusted EBITDA of GBP214
million (six months ended 30 June 2019: GBP148 million), an
increase of GBP66 million or 45% on the equivalent period last
year. Part of the increase reflects the reinstatement of the
Capacity Market during the second half of 2019, with associated
income of GBP34 million recognised in the first half of 2020 (2019:
GBPnil due to suspension), and the remainder driven by higher
levels of biomass generation and system support services.
At Drax Power Station, biomass operations performed well,
supported by 88% availability of the CfD unit (six months ended 30
June 2019: 82%), although the value of ROC generation was
negatively impacted by a reduction in ROC recycle prices due to
reduced demand during lockdown. Total biomass output of 7.4 TWh in
the first half of 2020 was significantly higher than for the same
period last year (six months ended 30 June 2019: 6.4 TWh), largely
due to industry-wide challenges with biomass production and supply
in the first half of 2019. We continue to deliver a high proportion
of non-commodity related earnings through renewable support schemes
(CfD and ROC), Capacity Market and system support services.
Our hydro, pumped storage and gas asset portfolio continued to
perform well in the period, contributing Adjusted EBITDA of GBP54
million (six months ended 30 June 2019: GBP36 million), the
increase largely attributable to the timing of Capacity Market
income in 2019. Cruachan Power Station continues to perform
strongly, delivering critical system support services during a
period of increased volatility for the UK electricity network.
We continue to capture significant value in both the short-term
and prompt markets due to the flexibility of our generating assets.
This value has in part helped to offset a reduction in ROC recycle
expectations due to lower demand caused by Covid-19. The first half
result also benefits from the outage profile at Drax Power Station,
with no major planned outages completed (six months ended 30 June
2019: one major planned outage). The outage programme for the full
year includes one planned biomass unit outage (2019: two planned
biomass outages); however, the cost of delivering the single
biomass outage in the second half of the year will be increased due
to implementation of social distancing measures to ensure the work
can be carried out safely.
Performance in our Pellet Production business has been
excellent, both in terms of quality and quantity of pellets.
Adjusted EBITDA for the first half of the year was GBP25 million
(six months ending 30 June 2019: GBP8 million), which includes GBP3
million of insurance proceeds received in respect of a business
interruption claim due to weather disruption in the first half of
2019.
This improved performance has been driven by a record level of
production and a significant increase in pellets delivered. Pellets
delivered in the first six months of the year were 0.75Mt (six
months ended 30 June 2019: 0.59Mt), an increase of 162kt or 28%
compared to the same period last year, partly due to restrictions
in 2019 resulting from the challenging weather conditions in the US
Southeast, which restricted commercial forestry activity.
We have made continued good progress with biomass cost-saving
initiatives, with lower fibre costs and improved transportation
efficiency delivering savings compared to the first half of 2019.
As a result, the overall cost per tonne of pellets produced in the
six months ended 30 June 2020 was nine per cent lower than for the
same period in 2019.
Our Customers business delivered an Adjusted EBITDA loss of
GBP37 million in the period, reflecting a significant impact of
Covid-19 on results of approximately GBP44 million. Excluding this
estimated impact of Covid-19 in the period, Adjusted EBITDA is more
in line with the GBP9 million reported for the six months ended 30
June 2019.
We have experienced significantly reduced demand in the
Customers business as a consequence of lockdown and social
distancing measures in the UK. Combined electricity and gas volumes
sold in the first six months of 2020 of 8.8TWh were almost 10%
lower than last year (six months ended 30 June 2019: 9.7TWh). As a
result, revenues have reduced, and we incurred costs to exit
previously hedged positions as market prices have fallen. We
estimate this impact in the period to be approximately GBP15
million.
Our expectation of increased business failure and bad debt
resulting from the impact of Covid-19 is reflected, and is the
principal driver behind the increase, in the charge for impairment
losses on trade receivables for the six months ended 30 June 2020
of GBP26 million (six months ended 30 June 2019: GBP13 million).
The provision is based on a consistent methodology, adjusted to
reflect our initial experience and assumptions in respect of cash
collections and potential customer business failures in the period
since lockdown came into effect in March 2020. In addition, we
retain a level of credit insurance cover.
Central and other costs of GBP23 million (six months ended 30
June 2019: GBP24 million) are slightly lower than the prior year.
This includes an additional GBP2 million of investment in
innovation compared to the same period last year, with a
corresponding reduction in other corporate costs.
Total Operating Profit/Loss
The Total operating loss for the six months ended 30 June 2020
of GBP32 million has decreased from a profit of GBP34 million for
the first six months of 2019. This includes the effect of
remeasurement gains and losses on derivative contracts and
exceptional items that are excluded from Adjusted results. The
combined impact of certain remeasurements and exceptional items on
Total operating profit was a charge of GBP116 million (six months
ended 30 June 2019: charge of GBP1 million).
Net fair value remeasurement gains on derivative contracts
included in operating profit were GBP108 million (six months ended
30 June 2019: GBP1 million) reflecting movements in the
mark-to-market position on our portfolio of commodity and financial
derivative contracts, to the extent they do not qualify for hedge
accounting. The nature and purpose of our portfolio of derivative
contracts is described in more detail in note 14 to the Condensed
Consolidated Interim Financial Statements.
The derivative remeasurement gains in the first half of the year
are predominantly the result of the weakening of sterling following
Covid-19, reflecting the relative strength of our hedged position
for currency purchases. The gains largely reverse losses recognised
in the second half of 2019 as sterling strengthened.
In the first half of the year, we also recorded a GBP224 million
exceptional asset obsolescence charge against coal generation
assets at Drax Power Station, following the decision announced in
February 2020 to cease commercial coal generation in March 2021. In
the first half of 2019 we recorded exceptional acquisition and
restructuring costs of GBP3 million in relation to the integration
of the acquired hydro, pumped storage and gas assets into the wider
group.
Profit/Loss After Tax and Earnings per Share
Adjusted profit after tax of GBP43 million compares to GBP8
million for the first six months of 2019, resulting in Adjusted
earnings per share (EPS) of 10.8 pence (six months ended 30 June
2019: 2.0 pence).
Improvements in Adjusted profit after tax and EPS largely
reflect the growth in Adjusted EBITDA described above and a
reduction in depreciation charges in the second quarter following
the write-down of the coal assets described above. Net interest and
similar charges included in Adjusted results were GBP28 million
(six months ended 30 June 2019: GBP28 million), in line with the
same period last year. Within this figure, interest on our
borrowings increased by GBP1 million to GBP26 million, reflecting a
full period of debt service costs, after the acquisition bridge
facility used to part-fund the acquisition of hydro, pumped storage
and gas assets was refinanced between May and July last year. This
increase was offset by a net reduction in non-cash charges for
provision unwinds and the release of deferred financing costs.
The Total loss after tax includes remeasurements on derivative
contracts and exceptional items, as described above, net of the tax
impact associated with these items.
Reflecting the write-down of the coal assets in the period, the
Total loss after tax of GBP56 million represents a GBP60 million
reduction from Total profit after tax of GBP4 million for the first
six months of 2019, with a corresponding reduction in Basic EPS
from 1.0 pence to a loss per share of 14.0 pence for the first six
months of 2020.
The Total tax credit for the period was GBP5 million (six months
ended 30 June 2019: GBPnil) and is comprised of a tax charge of
GBP13 million on Adjusted pre-tax profits and a tax credit of GBP18
million in relation to derivative remeasurements and exceptional
items. The Total tax credit includes a charge of GBP10 million due
to revaluation of deferred tax balances following the reversal of
the reduction in UK tax rates to 17% from 1 April 2020. GBP4
million of this charge relates to coal assets and is therefore
included in the exceptional tax charge for the period.
The effective tax rate applicable to the Group's Adjusted
pre-tax profits, before taking into account the effect of changes
in tax rates, of 13% is lower than the standard rate of corporation
tax in the UK. For interim periods, the effective tax rate is based
on our forecast tax rate for the full year, which benefits from
patent box and research and development expenditure credits,
primarily in respect of our biomass operations.
Capital Expenditure
We maintain a disciplined approach to capital expenditure, with
all significant projects subject to appraisal and prioritisation by
a Capital Committee prior to approval, overall ensuring adherence
to our capital allocation policy and maintenance of an appropriate
net leverage profile.
Total capital expenditure of GBP78 million in the first half of
2020 was higher than GBP60 million in the first six months of
2019.
The increase principally reflects execution of our strategy,
with significant investments made in the expansion of our US pellet
production facilities, alongside smaller projects within our
generation portfolio to enhance efficiency and a planned CCGT
outage at Damhead Creek.
Our full year expectations for capital expenditure have reduced,
with a number of projects delayed due to Covid-19. This includes
non-essential works at Drax Power Station, and delayed timing of
some investments in our biomass supply chain.
Further investments to increase our biomass self-supply capacity
have been approved and will commence in the second half of 2020, in
respect of three satellite plants. We expect total full year
capital investment of GBP190-210 million (year ended 31 December
2019: GBP172 million).
Cash and Net Debt
We have a strong focus on cash flow discipline and maintaining a
robust balance sheet, underpinned by prudent risk management which
provides protection in times of economic uncertainty and a strong
platform from which to execute our strategy.
The Group continued to produce strong cash generated from
operations in the first half of 2020, with a total inflow of GBP226
million (six months ended 30 June 2019: GBP229 million) before
interest and tax payments. This reflects our focus on cashflow
discipline and continued management of working capital. The
increase in Adjusted EBITDA, cash received in respect of 2019
Capacity Market income in January 2020 (GBP72 million) and a net
cash inflow resulting from increased generation and a corresponding
reduction in inventories largely offset outflows due to an increase
in ROC assets.
Net cash generated from operating activities in the period was
GBP168 million (six months ended 30 June 2019: GBP199 million). In
2020, the Group falls into the new arrangements in respect of
corporation tax payments for very large companies in the UK for the
first time. As a result, the Group must now make tax payments
earlier than under the previous regime. Cash taxes paid in the
first half of 2020 were GBP24 million higher than for the same
period last year which includes the one-time impact of this change
in the year of transition.
Our liquidity position is strong, a view shared by our rating
agencies following an upgrade of our liquidity assessment in the
period from Adequate to Strong. At 30 June 2020 we held cash of
GBP482 million (31 December 2019: GBP404 million), total borrowings
were GBP1,274 million (31 December 2019: GBP1,245 million) and as a
result net debt was GBP792 million (31 December 2019: GBP841
million). During the first half of 2020, the Group was assigned its
first Short-Term Issuer rating equivalent to investment grade,
affirming the strength of our balance sheet, strong near-term
contracted earnings and depth and breadth of liquidity sources.
Our net debt to EBITDA ratio, based on reported Adjusted EBITDA
for the last 12 months of GBP451 million, was 1.8x at 30 June 2020
compared to 2.1x at 31 December 2019. After adjusting for timing
differences related to Capacity Market income and cash across the
current and previous period, the net debt to EBITDA ratio was 1.9x
at both 30 June 2020 and 31 December 2019. We continue to target a
net debt to EBITDA ratio of less than 2.0x for the full year to 31
December 2020.
In addition to cash on hand, the Group has access to a GBP315
million revolving credit facility (RCF), available to manage low
points in the cash cycle, which expires in 2021. No cash has been
drawn under the RCF for over two years. Available cash on hand and
committed, undrawn facilities provide substantial headroom over our
short-term liquidity requirements.
The small increase in borrowings in the first half of the year
principally reflects the effect of movements in exchange rates on
the carrying amount of US dollar denominated debt. The Group holds
cross-currency swap instruments that fix the value of interest and
principal repayments.
During the first half of the year, we completed a three-year
extension to the GBP125 million ESG facility. The final contractual
maturity of this facility is now 2025. Our overall cost of debt,
taking into account the effect of instruments used to swap US
dollar denominated payments into sterling, remains below 4% per
annum.
Net cash released from working capital in the first six months
of 2020 was GBP18 million (six months ended 30 June 2019: GBP35
million). We actively optimise our working capital position by
managing payables, receivables and inventories to ensure that the
working capital committed is closely aligned with operational
requirements. As in previous periods, we have continued to deliver
working capital benefits, in terms of cash flow, from making sales
and purchases of ROC assets and rebasing foreign currency exchange
contracts.
Historically, cash from ROCs has typically been realised several
months after the ROC was earned, usually at the end of the ROC
compliance period; however, the Group is able to limit the overall
impact of ROCs on working capital by making separate sales and
purchases in the compliance period. During the first half of 2020,
such transactions generated a net cash outflow of GBP82 million due
to more purchases than sales in the period, contributing to an
overall working capital outflow from ROCs of GBP213 million as the
level of ROC assets held on the balance sheet also increased due to
generation in the period. The Group also has access to facilities
enabling it to sell ROC trade receivables arising on a non-recourse
basis. Utilisation of these facilities at 30 June 2020 was GBP47
million (31 December 2019: GBPnil).
In the first half of the year, the Group rebased several foreign
currency contracts, which resulted in a working capital benefit
with total cash released from rebased trades still outstanding at
30 June 2020 of GBP88 million (in the year ended 31 December 2019,
total cash released from rebased trades still outstanding at 31
December 2019 was GBP84 million). A similar exercise for
cross-currency swaps resulted in cash released from outstanding
trades at 30 June 2020 of GBP59 million (31 December 2019: GBP23
million).
The Group holds a large portfolio of forward and option
contracts for various commodities and financial products. These
contracts are held to de-risk the business, by protecting the
sterling value of future cash flows in relation to the sale of
power or purchase of key commodities. We manage our exposures in
accordance with our trading and risk management policies. These
policies provide flexibility to optimise our trading position,
working capital and liquidity when market conditions allow, whilst
ensuring downside protection and prudent risk management are
maintained. We will continue to monitor opportunities to optimise
our position during the second half of the year.
In addition, the Group has access to a GBP200 million
receivables monetisation facility, which accelerates associated
cash flows and mitigates exposure to credit risk, as well as a
number of payment facilities to leverage scale and efficiencies in
transaction processing. We also facilitate a supply chain financing
scheme, which enables certain suppliers to accelerate liquidity and
which supports the wider working capital efficiency of the Group.
There are no changes to the Group's payment terms under this
arrangement, nor would there be if the arrangement was to fall
away. The balances outstanding at 30 June 2020 and the change in
utilisation in respect of each of these facilities is set out in
note 11 to the Condensed Consolidated Interim Financial
Statements.
The overall net cash inflow for the period was GBP71 million
(six months ended 30 June 2019: outflow of GBP46 million), after
cash payments for capital expenditure of GBP59 million (six months
ended 30 June 2019: GBP68 million), dividend payments of GBP38
million (six months ended 30 June 2019: GBP34 million), net
proceeds from new borrowings and repayment of existing borrowings
of GBPnil million (six months ended 30 June 2019: GBP550 million)
and payments in respect of acquisitions of GBPnil million (six
months ended 30 June 2019: GBP692 million).
Distributions
We have a well-established capital allocation policy - a
commitment to robust financial metrics that underpin our strong
credit rating, invest in our core business, pay a sustainable and
growing dividend and return surplus capital to shareholders as
appropriate.
At the Annual General Meeting on 22 April 2020, shareholders
approved payment of a final dividend for the year ended 31 December
2019 of 9.5 pence per share (GBP38 million). The final dividend was
paid on 15 May 2020.
On 28 July 2020, the Board resolved to pay an interim dividend
for the six months ended 30 June 2020 of 6.8 pence per share (GBP27
million), representing 40% of the expected full year dividend. The
interim dividend will be paid on 2 October 2020 with a record date
of 21 August 2020.
Subject to good operational performance and the impact of
Covid-19 being in line with expectations, the Board expects to
recommend a full year dividend of 17.1 pence per share (GBP68
million) with regards to the 2020 financial year.
The Board is confident that this level of dividend is
sustainable and expects it to grow as the implementation of the
business strategy generates an increasing proportion of stable
earnings and cash flows. In determining the rate of growth in
dividends the Board will take account of future investment
opportunities and the less predictable cash flows from the Group's
commodity-based businesses. If there is a build-up of capital in
excess of the Group's investment needs the Board will consider the
most appropriate mechanism to return this to shareholders.
Other Information
Update on Coal Closure
In February, we announced the decision to end commercial coal
generation at Drax Power Station in March 2021, with the units
remaining available to meet existing Capacity Market obligations
until September 2022.
Following this announcement, we have recognised in the first
half of 2020 an asset obsolescence charge of GBP224 million in
respect of coal generating assets at Drax Power Station, reflecting
the limited residual value in these assets following the decision
to close.
The consultation process in relation to coal closure is ongoing
and, as a result, the Group is not yet in a position to provide for
the wider costs of coal closure and no such costs are reflected in
the Condensed Consolidated Interim Financial Statements.
We continue to expect total costs in the range of GBP25-35
million, in relation to employee termination benefits and
incremental costs of decommissioning the coal assets, with an
ongoing reduction in total operating costs of GBP25-35 million per
annum.
Covid-19
We continue to monitor and assess developments and the potential
impact of the Covid-19 pandemic on our operations and financial
performance. Our full year expectations are based upon a financial
forecast that reflects our central assumptions regarding the likely
duration of the pandemic, the duration and nature of restrictions
such as social distancing, which can affect the demand for, and
price of, power, alongside wider macroeconomic factors.
We anticipate a circa GBP60 million impact on Adjusted EBITDA
for 2020 as a result. The majority of this is expected to arise in
the Customers business, due to the reduction in demand, an increase
in costs to exit previously hedged positions and increase in bad
debt risk described above. The full year outturn assumes that the
gradual easing of lockdown in the UK will continue on its current
trajectory in line with government guidance, but that continued
social distancing measures will remain in place throughout
2020.
We have modelled both a reasonable worst case and more extreme
scenarios to test the Group's financial resilience. To date, such
modelling has indicated that, whilst there will be a financial
impact, a significant proportion of which we have recognised in the
first half of 2020, none of the scenarios modelled would result in
an impact to the Group's liquidity, solvency, ratings or covenants
that could not be remediated by taking mitigating action.
Consequently, the directors have a reasonable expectation that
the Group will continue in existence for the next twelve months and
therefore, have adopted the going concern basis when preparing the
Condensed Consolidated Interim Financial Statements.
Restatement of Comparative Financial Information
The Condensed Consolidated Interim Financial Statements include
comparative information in respect of the six months ended 30 June
2019 and the year ended 31 December 2019.
The comparatives for the six months ended 30 June 2019 have been
restated from the figures originally published in respect of the
following items that were updated during the second half of 2019
and included in the Group's audited financial statements for 2019,
to ensure comparability with the current period amounts:
-- Finalisation of the acquisition date fair values in respect
of the portfolio of hydro, pumped storage and gas assets acquired
in 2018.
-- Correction of a historical error identified in respect of
translation of fixed assets in our US business into the
consolidated financial statements.
-- A change in the presentation of amounts in relation to
rebased foreign currency exchange contracts in the balance
sheet.
Further details in respect of these items are included in the
introduction to the Condensed Consolidated Interim Financial
Statements and note 19. The restatements affect the 30 June 2019
balance sheet and other comprehensive income for the six months
ended 30 June 2019 only. Reported profit and cash flows for the six
months ended 30 June 2019 are unchanged.
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 monitors 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 2020. Following
this review and noting the potential impact of Covid-19 and Brexit
(detailed below), the Board is satisfied that the Group's principal
risks reported previously remain materially unchanged. Further
details of the Group's principal risks and uncertainties can be
found on pages 54 - 61 of the 2019 Annual Report and Accounts,
which is available at www.drax.com .
Covid-19
Since late February 2020, the Board has received regular reports
from management connected with the Group's response to the Covid-19
pandemic. This has included, for example, how the Group has
adjusted its working practices, implemented new IT infrastructure
to support those changes in working practices and tracked business
performance.
More recently the Board has received and reviewed reports on how
Covid-19 might impact the Group's principal risks looking forward
into the second half of the year.
The Covid-19 pandemic has had a significant impact on many
aspects of society and the global economy, and the duration and
depth of these impacts remain uncertain. The resulting market
environment has led to a significant reduction in demand for power,
an increase in the costs of selling pre-contracted power back into
the market and the increased risk of business failure and bad debt
in the businesses we supply, all of which have primarily impacted
our Customers business. Each of these, and other developments which
have not yet been identified due to the uncertainties associated
with Covid-19, could adversely affect our business in the second
half of the year. Against this backdrop we have continued to make
good progress with our strategy, whilst delivering a strong trading
and operational performance.
The Group has mobilised effectively to put in place additional
measures to mitigate the impacts of identified risks. Our Incident
Management process comprising strategic (led by the Executive
Committee), tactical and operational level teams have developed and
implemented additional measures and are continuously monitoring our
plans and their effectiveness in response to the rapidly changing
environment.
The health, safety and wellbeing of all employees, contractors
and visitors remains of paramount importance to us and we are
taking all possible actions to help them, whilst continuing to
support the UK's energy market. In respect of Generation,
reflecting its importance as critical national infrastructure, we
have focussed on being able to operate and generate whilst
protecting our employees and contractors, and accordingly this has
been, and is expected to continue to be, a matter of priority. Our
Customers business has demonstrated that it can still operate
effectively through remote working.
Proactive measures have been implemented to safeguard all those
who are still required to attend the Group's operational sites to
ensure compliance with the UK government guidelines and those
issued by US authorities. Updates on these measures are provided
regularly to executive management and the Board.
It is recognised that Covid-19 continues to carry inherent
uncertainties (as would any subsequent outbreak or pandemic) and
the impacts continue to evolve which could lead to further changes
in Government policy, macroeconomic policy and the behaviours of
people and markets that may impact some risks. The Board continues
to have regular engagement with management on the Group's response
to these risks in order to assess, monitor and promptly respond to
any evolving impact of Covid-19 on our operations and business,
including impacts for all our stakeholders.
Additional information on the commercial and financial impact
for the Group of Covid-19 can be found in the Business Review and
Financial Review.
Brexit
We continue to monitor and prepare for the UK's exit from the
European Union. Until the negotiations on timescales and the
details of agreements are concluded, the wider economic, political
and regulatory uncertainty arising from Brexit remains. Progress
during the transition phase and trade negotiations will continue to
be monitored particularly for any potential impacts on our supply
chain and regulatory requirements if an agreement is not reached by
the end of the transition period and the UK move to trading on WTO
terms. We continue to promote the benefits of biomass and are
engaged with government and regulators in the UK and
internationally to ensure the Group's views and positions on
current and forthcoming legislation and regulations, and on energy
and environmental policy issues that may have implications for our
business, are represented.
The contents of the Business Review, Financial Review and
Principal Risks and Uncertainties sections of this report were
approved by the Board on 28 July 2020.
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
28 July 2020
Condensed Consolidated Interim Financial Statements
Introduction
The Condensed Consolidated Interim Financial Statements provide
information about the financial performance (Condensed consolidated
income statement), 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 balance sheet and Condensed
consolidated cash flow statement. In general, the additional
information in the notes to the financial statements is required by
IFRS or other regulations to facilitate increased understanding of
the primary statements.
Basis of preparation
The Condensed Consolidated Interim Financial Statements have
been prepared using accounting policies consistent with
International Financial Reporting Standards (IFRS) as adopted by
the EU and in accordance with IAS 34 'Interim Financial Reporting'.
The information provided in respect of the year ended 31 December
2019 does not constitute statutory accounts as defined in Section
434 of the Companies Act 2006. 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).
The impact of Covid-19 on the application of the going concern
basis is discussed in further detail in the Financial Review.
The Condensed Consolidated Interim Financial Statements were
approved by the Board on 28 July 2020.
Adoption of new and revised 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 Annual Report
and Accounts for the year ended 31 December 2019, except for the
adoption of new standards, interpretations and amendments effective
as of 1 January 2020. 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 2020.
A full listing of new standards, interpretations and
pronouncements under IFRS applicable to these Condensed
Consolidated Interim Financial Statements is presented in note
20.
Judgements and estimates
With the exception of the specific matters set out below; 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
130-131 of the Group's 2019 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.
In addition, during the six months ended 30 June 2020, the Group
made the following significant judgements in the process of
applying the Group's accounting policies in the Condensed
Consolidated Interim Financial Statements:
Closure of coal generation at Drax Power Station
On 26 February 2020, following a comprehensive review, the Board
determined to end commercial coal generation at Drax Power Station
in March 2021, with the two coal units remaining available to meet
Capacity Market obligations until September 2022. As a result of
this closure decision, which reflected that the dependencies
between the coal and biomass generating units are no longer
considered to be significant, the Group has determined the Drax
Power Station site to be comprised of two distinct cash-generating
units (CGUs), one comprised of biomass generation assets and one
comprised of coal generation assets. Previously, the Drax Power
Station site was considered to be a single CGU. The Condensed
Consolidated Interim Financial Statements have been prepared on the
basis that this change occurred on the date of the closure decision
- 26 February 2020.
Following the closure decision, an impairment review was
undertaken for the coal generation assets CGU. This review
indicated that the recoverable amount of the coal assets,
calculated with reference to a value in use calculation based on
the Group's latest approved forecasts, was significantly lower than
their carrying value. As described in note 9, an asset obsolescence
charge of GBP224.2 million has been recognised in the Condensed
consolidated income statement in respect of the coal generation
assets CGU. There were no reasonably possible changes in the
assumptions underlying the value in use calculation that would have
resulted in a material change to the value of the asset
obsolescence charge. The asset obsolescence charge has been treated
as an exceptional item and excluded from the Group's Adjusted
Results.
Accounting for biomass purchase and sale contracts
The Group buys and sells biomass from time to time. To date,
these contracts have been entirely for operational purposes. During
the first half of 2020, the Group approved a change in risk
management policies to permit some flexibility in trading activity
to optimise the overall portfolio position and potentially release
value in certain, limited circumstances. Following this change, the
Group undertook an assessment of whether contracts to buy and sell
biomass are within the scope of IFRS 9. Previously, the own-use
exemption was applied to these contracts resulting in no amounts
being recognised in respect of these contracts until they
mature.
This assessment concluded that, whilst the own-use exemption was
likely to no longer apply to all biomass purchase and sale
contracts, if and when sales contracts are executed for
optimisation purposes, the nature of these contracts means they
cannot be readily net settled in cash or other financial
instruments and, as a result, they remain outside of the scope of
IFRS 9. Accordingly, the accounting for these contracts has not
changed in these Condensed Consolidated Interim Financial
Statements.
In addition, the impact of Covid-19 has resulted in a change in
estimate in respect of the Group's provisions for expected credit
losses, as described below.
Measurement of expected credit loss provisions
As a result of Covid-19, the Group has significantly increased
its expectation of potential customer business failure rates and
the resulting expected credit losses. The Group has updated its
established provisioning methodology, using data for collection
performance since the implementation of lockdown measures in the UK
during March 2020 and expectations regarding future default rates,
to take account of this increased risk. The increase in the charge
for impairment losses of trade receivables from GBP12.5m in the six
months to 30 June 2019 to GBP26.2m in the six months to 30 June
2020 is driven by the anticipated impacts of Covid-19 on levels of
bad debt, resulting in a closing provision, after adjusting for
actual credit losses, of GBP51.6 million (as at 31 December 2019:
GBP40.7 million).
Whilst the position adopted reflects the Group's current best
estimate of possible outcomes, actual rates of bad debt will depend
upon the severity and depth of Covid-19, the measures applied
during the second half of 2020 and beyond, and actual cash
collection rates. Accordingly, actual outturn may differ from the
position adopted by the Group in these Condensed Consolidated
Interim Financial Statements.
Comparative information
The Group provides comparative financial information in these
Condensed Consolidated Interim Financial Statements for both the
six months ended 30 June 2019 and the year ended 31 December 2019.
Where included within text, income statement comparatives refer to
the six months ended 30 June 2019 and balance sheet comparatives
are as at 31 December 2019, unless otherwise stated.
Restatement of comparative information
The comparative balance sheet as at 30 June 2019 has been
restated in respect of the following items in order to adopt
consistent presentation with that applied in the Group's 2019
Annual Report & Accounts:
-- During the second half of 2019, the acquisition date fair
values of assets and liabilities acquired in the purchase of the
portfolio of hydro, pumped storage and gas assets on 31 December
2018 were finalised. As a result, finalisation of the terms of the
defined benefit pension scheme transfer resulted in a reduction in
the net opening surplus recognised by GBP1.1 million. The
finalisation of the Group's assessment of CGUs and their fair
values resulted in a net GBP0.2 million reduction in property,
plant and equipment values and a GBP0.1 million reduction in
deferred tax liabilities recognised. All of these adjustments had
corresponding impacts on goodwill. See note 19 for further
details.
-- To reflect the correction of a historical error identified
during the second half of 2019 in respect of translation of fixed
assets in the US-based business into the consolidated Group
financial statements. Application of the correct foreign exchange
rates resulted in an increase in property, plant and equipment
carrying values as at 30 June 2019 and 1 January 2019 of GBP56.6
million and GBP55.5 million respectively. As a result, other
comprehensive income for the six months ended 30 June 2019 has also
been restated by GBP1.1 million to reflect the additional movement
in the translation reserve. The correction has no impact on
previously reported profit or cash amounts. See note 19 for further
details.
-- The Group rebased a number of forward foreign currency
contracts in 2019. This released cash from the contracts with the
gains being held on the balance sheet until the contracts mature.
At 30 June 2019, the balance sheet included GBP42.9 million of such
cash received from rebasing where the relating contracts had not
yet matured and which was held in deferred income on the balance
sheet. This was the first reporting period in which cash had been
received from the rebasing of contracts, but the contracts had not
yet matured. In the 2019 Annual Report and Accounts the balance
sheet presentation of the cash received was amended such that,
rather than the fair value of the rebased contracts being based on
the pre-rebased rates and cash received being recognised as
deferred income, the fair value of the rebased contracts are
recognised based on the rebased rates and no deferred income is
recognised. Accordingly, the 30 June 2019 comparatives have been
restated to align with the application of the policy used in the
Group's 2019 Annual Report and Accounts. This has resulted in a
GBP42.9 million reduction in derivative assets and a GBP42.9
million reduction in deferred income in the 30 June 2019 balance
sheet. See note 19 for further details.
Alternative performance measures (APMs)
Alternative Performance Measures are not defined in IFRS but
provide additional information that is used by the Board to
evaluate the Group's financial position and performance. These
measures have been defined internally and may therefore not be
comparable to similar APMs presented by other companies. The APMs
presented in these Condensed Consolidated Interim Financial
Statements are defined and calculated on a basis consistent with
those presented in the Group's Annual Report and Accounts for the
year ended 31 December 2019.
Presentation of the income statement
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 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 accounts in evaluating the Group's financial
performance and performance against strategic objectives on a
consistent basis from one period to the next, excluding the
volatility of mark-to-market movements and one-off exceptional
transactions.
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. That policy
has not been amended in the six months ended 30 June 2020, nor in
either of the comparative periods presented in these Condensed
Consolidated Interim Financial Statements.
None of the financial impacts of Covid-19 on the Group's
financial performance in the six months ended 30 June 2020 have
been treated as exceptional items and they are included in Adjusted
Results in full.
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 or foreign
exchange gains/(losses). The Group regards all of its forward
contracting activity to represent an economic hedge. The impact of
excluding these fair value remeasurements is to reflect commodity
sales and purchases at contracted prices (the price paid or
received in respect of delivery of the commodity in question),
taking into account the impact of financial trading (such as
forward foreign currency purchases), in the Adjusted Results. The
result of this adjustment shows the impact in revenue, cost of
sales and foreign exchange gains/(losses) at the time the
transaction takes place.
Further information on exceptional items and certain
remeasurements in the current and previous period is included in
note 6 to the Condensed Consolidated Interim Financial
Statements.
The Group presents Adjusted EBITDA as an additional subtotal in
the Adjusted Results column. Adjusted EBITDA is earnings before
interest, tax, depreciation and amortisation, excluding the impact
of exceptional items and certain remeasurements. Adjusted EBITDA is
the primary measure used by executive management and the Board to
assess the financial performance of the Group as it provides a more
comparable assessment of the Group's year on year trading
performance.
Net debt
The Group defines net debt as total borrowings less cash and
cash equivalents. Total borrowings includes external financial
debt, such as loan notes, term loans and amounts drawn in cash
under revolving credit facilities (see note 10) but excludes other
financial liabilities such as lease liabilities calculated in
accordance with IFRS 16, pension obligations and trade and other
payables.
The Group does not include lease liabilities, calculated in
accordance with IFRS 16, in the definition of net debt. This
reflects the nature of the contracts included in this balance
which, prior to the application of IFRS 16, were predominantly not
held on the balance sheet and instead disclosed as operating
commitments.
Condensed consolidated income statement
Six months ended 30 June Six months ended 30 June
2020 (Unaudited) 2019 (Unaudited)
------ ------------------------------------------ --------------------------------------------
Exceptional Exceptional
Adjusted items Adjusted items
Results and certain Total Results(1) and certain Total
( (1) remeasure-ments Results GBPm remeasure-ments Results
Notes GBPm GBPm GBPm GBPm GBPm
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Revenue 3 2,205.3 13.8 2,219.1 2,226.6 5.8 2,232.4
Total cost of sales (1,804.1) 94.5 (1,709.6) (1,862.9) (4.4) (1,867.3)
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Gross profit 401.2 108.3 509.5 363.7 1.4 365.1
Operating and
administrative
expenses (196.2) - (196.2) (213.2) - (213.2)
Impairment losses
on trade
receivables (26.2) - (26.2) (12.5) - (12.5)
-------------------- ------ ----------- ----------------- ---------- ------------- -----------------
Adjusted EBITDA
( (2) 178.8 138.0
Depreciation (77.3) - (77.3) (83.1) - (83.1)
Amortisation (18.4) - (18.4) (19.5) - (19.5)
Asset obsolescence
charges - (224.2) (224.2) - - -
Gains on disposal
of assets 0.9 - 0.9 - - -
Acquisition and
restructuring
costs - - - - (2.7) (2.7)
Operating
profit/(loss) 84.0 (115.9) (31.9) 35.4 (1.3) 34.1
Foreign exchange
gains 4 4.4 (0.4) 4.0 3.5 - 3.5
Interest payable
and similar
charges 4 (33.3) - (33.3) (32.2) (2.3) (34.5)
Interest receivable 4 0.5 - 0.5 0.4 - 0.4
Profit/(loss)
before
tax 55.6 (116.3) (60.7) 7.1 (3.6) 3.5
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Tax:
Before impact of
changes in tax
rates (7.2) 22.0 14.8 0.7 (0.3) 0.4
Effect of changes
in tax rates (5.5) (4.3) (9.8) - - -
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Total tax
(charge)/credit 5 (12.7) 17.7 5.0 0.7 (0.3) 0.4
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Profit/(loss) for
the period
attributable
to equity holders 42.9 (98.6) (55.7) 7.8 (3.9) 3.9
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
Earnings/(loss) pence pence pence pence
per share
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
- Basic 8 10.8 (14.0) 2.0 1.0
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
- Diluted 8 10.7 (14.0) 2.0 1.0
-------------------- ------ ----------- ----------------- ---------- ------------- ----------------- ----------
All results relate to continuing operations.
A comparative income statement for the year ended 31 December
2019 is reproduced in note 21.
(1) Adjusted Results are stated after adjusting for exceptional
items (including acquisition and restructuring costs, asset
obsolescence charges and debt restructuring costs), and certain
remeasurements. See note 6 for further details.
(2) Adjusted EBITDA is defined as: Earnings before interest,
tax, depreciation and amortisation excluding the impact of
exceptional items and certain remeasurements.
Condensed consolidated statement of comprehensive income
Six months ended 30 June
-----------------------------
2020 2019
Restated(1)
(Unaudited) (Unaudited)
GBPm GBPm
-------------------------------------------------------- ------------- --------------
(Loss)/profit for the period (55.7) 3.9
-------------------------------------------------------- ------------- --------------
Items that will not subsequently be reclassified
to profit or loss:
Actuarial gains/(losses) on defined benefit
pension scheme 6.6 (6.7)
Deferred tax on actuarial gains/(losses) on
defined benefit pension scheme (1.1) 1.3
Loss on equity investments - (0.5)
Net fair value gains on cost of hedging 53.4 36.1
Deferred tax on cost of hedging (11.1) (6.9)
Net fair value gains on cash flow hedges 205.1 122.8
Deferred tax on cash flow hedges (42.5) (23.3)
Items that may subsequently be reclassified
to profit or loss:
Exchange differences on translation of foreign
operations 16.6 0.4
Fair value (losses)/gains on cash flow hedges (33.6) 49.0
Deferred tax on cash flow hedges 7.0 (9.3)
Other comprehensive income for the period 200 .4 162.9
-------------------------------------------------------- ------------- --------------
Total comprehensive income for the period attributable
to equity holders 144.7 166.8
-------------------------------------------------------- ------------- --------------
(1) Results for the six months ended 30 June 2019 have been
restated to reflect the impact on translation reserve as a result
of the correction of the historical error identified in respect of
exchange differences arising on the translation of foreign
operations. See note 19 for further details.
Condensed consolidated balance sheet
As at 31
As at 30 June December
------ ---------------------------- -----------
2019 2019
2020 Restated(1) (Audited)
(Unaudited) (Unaudited)
Notes GBPm GBPm GBPm
-------------------------------------------------- ------ ------------- ------------- -----------
Assets
Non - current assets
Goodwill 248.2 248.2 248.2
Intangible assets 191.1 216.5 206.9
Property, plant and equipment 2,123.9 2,313.8 2,327.4
Right-of-use assets 31.1 25.2 31.4
Other fixed asset investments 1.5 2.1 3.0
Retirement benefit surplus 16.3 16.6 7.0
Deferred tax assets 41.7 33.1 45.3
Derivative financial instruments 14 325.3 327.1 152.3
-------------------------------------------------- ------ ------------- ------------- -----------
2,979.1 3,182.6 3,021.5
-------------------------------------------------- ------ ------------- ------------- -----------
Current assets
Inventories 201.4 287.9 292.0
ROC assets 376.1 312.2 162.7
Trade and other receivables and contract-related
assets 473.7 389.3 608.8
Derivative financial instruments 14 221.6 227.6 193.7
Cash and cash equivalents 481.5 244.3 404.1
-----------
1,754.3 1,461.3 1,661.3
-------------------------------------------------- ------ ------------- ------------- -----------
Liabilities
Current liabilities
Trade and other payables and contract-related
liabilities (1,067.1) (999.1) (1,039.2)
Lease liabilities (7.1) (4.5) (6.3)
Current tax liabilities (15.3) (12.0) (37.8)
Derivative financial instruments 14 (134.7) (95.2) (216.5)
-------------------------------------------------- ------ ------------- ------------- -----------
(1,224.2) (1,110.8) (1,299.8)
-------------------------------------------------- ------ ------------- ------------- -----------
Net current assets 530.1 350.5 361.5
-------------------------------------------------- ------ ------------- ------------- -----------
Non - current liabilities
Borrowings 10 (1,273.9) (1,168.7) (1,245.2)
Lease liabilities (25.5) (22.0) (26.2)
Derivative financial instruments 14 (67.9) (40.6) (72.9)
Provisions (59.7) (53.9) (54.2)
Deferred tax liabilities (289.4) (332.4) (268.9)
(1,716.4) (1,617.6) (1,667.4)
-------------------------------------------------- ------ ------------- ------------- -----------
Net assets 1,792.8 1,915.5 1,715.6
-------------------------------------------------- ------ ------------- ------------- -----------
Shareholders' equity
Issued equity 47.4 47.3 47.4
Share premium 429.6 428.8 429.6
Treasury shares (50.4) (50.4) (50.4)
Hedge reserve 16 223.6 291.3 121.5
Cost of hedging reserve 84.1 21.1 40.8
Other reserves 17 773.6 768.6 757.0
Retained profits 284.9 408.8 369.7
-------------------------------------------------- ------ ------------- ------------- -----------
Total shareholders' equity 1,792.8 1,915.5 1,715.6
-------------------------------------------------- ------ ------------- ------------- -----------
(1) The balance sheet for the year ended 30 June 2019 has been
restated to reflect updated values in respect of the new Generation
assets acquired on 31 December 2018. It has also been restated to
reflect the historical correction of exchange differences arising
on the translation of foreign operations and to align the
application of the accounting policy for rebasing to that used in
the Group's 2019 Annual Report and Accounts. See note 19 for
further details.
Condensed consolidated statement of changes in equity
Cost
Issued Share Treasury Hedge of hedging Other Retained
equity premium shares reserve reserve reserves profits Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 1 January 2019 47.0 424.7 (47.1) 199.9 (8.9) 768.2 442.7 1,826.5
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Profit for the year - - - - - 0.5 0.5
Other comprehensive
income - - - (16.6) 46.6 (11.2) (17.3) 1.5
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Total comprehensive
income for the year - - - (16.6) 46.6 (11.2) (16.8) 2.0
Equity dividends
paid - - - - - - (58.9) (58.9)
Issue of share capital 0.4 4.9 - - - - - 5.3
Movements on cash
flow hedges released
directly from equity - - - (78.9) - - - (78.9)
Deferred tax on
cash flow hedges
released directly
from equity - - - 17.1 - - - 17.1
Movement on cost
of hedging released
directly from equity - - - - 3.8 - - 3.8
Deferred tax on
cost of hedging
released directly
from equity - - - - (0.7) - - (0.7)
Repurchase of shares
(1) - - (3.3) - - - - (3.3)
Movement in equity
associated with
share-based payments - - - - - - 2.7 2.7
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 31 December 2019 47.4 429.6 (50.4) 121.5 40.8 757.0 369.7 1,715.6
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 1 January 2019
- as previously
reported 47.0 424.7 (47.1) 199.9 (8.9) 712.7 442.7 1,771.0
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Restatement (2) - - - - - 55.5 - 55.5
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 1 January 2019
- restated (2) 47.0 424.7 (47.1) 199.9 (8.9) 768.2 442.7 1,826.5
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Profit for the period - - - - - - 3.9 3.9
Other comprehensive
income - restated
(2) - - - 139.2 29.2 0.4 (5.9) 162.9
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Total comprehensive
income for the period - - - 139.2 29.2 0.4 (2.0) 166.8
Equity dividends
paid - - - - - - (33.5) (33.5)
Issue of share capital 0.3 4.1 - - - - - 4.4
Movements on cash
flow hedges released
directly from equity - - - (59.0) - - - (59.0)
Deferred tax on
cash flow hedges
released directly
from equity - - - 11.2 - - - 11.2
Movement on cost
of hedging released
directly from equity - - - - 1.0 - - 1.0
Deferred tax on
cost of hedging
released directly
from equity - - - - (0.2) - - (0.2)
Repurchase of shares(1) - - (3.3) - - - - (3.3)
Movement in equity
associated with
share-based payments - - - - - - 1.6 1.6
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 30 June 2019
- restated (2) 47.3 428.8 (50.4) 291.3 21.1 768.6 408.8 1,915.5
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 1 January 2020 47.4 429.6 (50.4) 121.5 40.8 757.0 369.7 1,715.6
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Loss for the period - - - - - - (55.7) (55.7)
Other comprehensive
income - - - 136.0 42.3 16.6 5.5 200.4
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
Total comprehensive
income for the period - - - 136.0 42.3 16.6 (50.2) 144.7
Equity dividends
paid - - - - - - (37.7) (37.7)
Movements on cash
flow hedges released
directly from equity - - - (41.8) - - - (41.8)
Deferred tax on
cash flow hedges
released directly
from equity - - - 7.9 - - - 7.9
Movement on cost
of hedging released
directly from equity - - - - 1.2 - - 1.2
Deferred tax on
cost of hedging
released directly
from equity - - - - (0.2) - - (0.2)
Movement in equity
associated with
share-based payments - - - - - - 3.1 3.1
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
At 30 June 2020 47.4 429.6 (50.4) 223.6 84.1 773.6 284.9 1,792.8
------------------------- -------- --------- --------- --------- ------------ ---------- --------- --------
(1) Repurchase of shares reflects the cost of acquiring ordinary
shares as part of the share buy-back programme completed on 21
January 2019. At 30 June 2020 these shares have not been cancelled
and are recognised as treasury shares.
(2) Due to the historical correction of exchange differences
arising on the translation of foreign operations, other reserves
has been restated by GBP55.5 million to reflect the correct opening
balance at 1 January 2019 and by GBP56.6 million to reflect the
correct balance as at 30 June 2019. Other comprehensive income for
the six months ended 30 June 2019 has been updated by GBP1.1
million to reflect the correct movement as a result of these
changes. See note 19 for further details.
Condensed consolidated cash flow statement
Six months ended 30 Year ended
June 31 December
------ ---------------------------- -------------------
2019
2020 2019 (Audited)
(Unaudited) (Unaudited)
Notes GBPm GBPm GBPm
--------------------------------------- ------ ------------- ------------- -------------------
Cash generated from operations 11 226.4 228.8 471.2
Income taxes paid (31.6) (7.3) (9.6)
Other gains - 0.7 -
Interest paid (27.3) (23.0) (50.3)
Interest received 0.4 0.2 2.1
--------------------------------------- ------ ------------- ------------- -------------------
Net cash from operating activities 167.9 199.4 413.4
--------------------------------------- ------ ------------- ------------- -------------------
Cash flows from investing activities
Purchases of property, plant
and equipment (55.6) (55.2) (142.3)
Purchases of intangible assets (2.9) (12.5) (29.1)
Acquisition of subsidiaries - (691.7) (691.7)
Proceeds on disposal of assets 3.4 - -
-------------------
Net cash used in investing activities (55.1) (759.4) (863.1)
--------------------------------------- ------ ------------- ------------- -------------------
Cash flows from financing activities
Equity dividends paid 7 (37.7) (33.5) (58.9)
Proceeds from issue of share
capital - 4.4 5.3
Purchase of own shares - (3.3) (3.3)
Repayment of borrowings 10 - (150.0) (550.0)
New borrowings drawn down 10 - 702.9 1,202.8
Repayment of lease liabilities (4.0) (2.3) (7.4)
Other financing costs paid - (4.1) (16.9)
--------------------------------------- ------ ------------- ------------- -------------------
Net cash (absorbed by)/generated
from financing activities (41.7) 514.1 571.6
--------------------------------------- ------ ------------- ------------- -------------------
Net increase/(decrease) in cash
and cash equivalents 12 71 .1 (45.9) 121.9
Cash and cash equivalents at
beginning of the period 404.1 289.0 289.0
Effect of changes in foreign
exchange rates 6.3 1.2 (6.8)
--------------------------------------- ------ ------------- ------------- -------------------
Cash and cash equivalents at
end of the period 481.5 244.3 404.1
--------------------------------------- ------ ------------- ------------- -------------------
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 2019 Annual Report
and Accounts on pages 138-208.
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
and gas markets within the UK. The address of the Company's
registered office and principal establishment is Drax Power
Station, Selby, North Yorkshire, YO8 8PH, United Kingdom.
2. Segmental reporting
The Group is organised into three businesses, with a dedicated
management team for each, and a central corporate function
providing certain specialist and shared services. The Group's
businesses, which each represent a reportable operating segment for
the purpose of segmental reporting, are:
Generation: power generation activities in the UK;
Customers: supply of electricity and gas to business customers
in the UK; and
Pellet Production: production of sustainable compressed wood
pellets at our processing facilities in the US.
Information reported to the Board for the purposes of assessing
performance and making investment decisions is based on these three
segments. The measure of profit or loss for each reportable segment
presented to the Board on a regular basis is Adjusted EBITDA (as
defined in the basis of preparation)
Operating costs are allocated to segments to the extent they are
directly attributable to the activities of that segment. Corporate
office costs are included within central costs.
Seasonality of trading
The primary activities of our 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 our 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 thermal generation plant when prices are low
in the summer. The US-based Pellet Production business has a
regular production and dispatch schedule, driven by regular demand
from the Generation business for wood pellets, which largely
insulates it from demand fluctuations caused by seasonality.
Segment revenues and results
The following is an analysis of the Group's performance by
reporting segment for the six months ended 30 June 2020. The Board
monitors the Adjusted Results for the Group by operating segment as
presented in the tables below:
Six months ended 30 June 2020 (Unaudited)
-----------------------------------------------------------------------------------------------
Exceptional
items and
Pellet Intra-group Adjusted certain Total
Generation Customers Production eliminations Results remeasure-ments Results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Revenue
External
sales 1,173.5 1,031.8 - - 2,205.3 13.8 2,219.1
Inter--segment
sales 583.6 - 118.0 (701.6) - - -
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Total revenue 1,757.1 1,031.8 118.0 (701.6) 2,205.3 13.8 2,219.1
Segment gross
profit 317.8 30.4 53.0 - 401.2 108.3 509.5
Segment Adjusted
EBITDA 214.2 (36.8) 24.8 - 202.2
Central costs (23.4) - (23.4)
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Consolidated
Adjusted
EBITDA 178.8
Depreciation
and amortisation (95.7) - (95.7)
Asset obsolescence
charges - (224.2) (224.2)
Gains on
disposal
of assets 0.9 - 0.9
Operating
profit/(loss) 84.0 (115.9) (31.9)
Net finance
costs (32.8) - (32.8)
Foreign exchange
gains 4.4 (0.4) 4.0
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Profit/(loss)
before tax 55.6 (116.3) (60.7)
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Six months ended 30 June 2019 (Unaudited)
-----------------------------------------------------------------------------------------------
Exceptional
items and
Pellet Intra-group Adjusted certain Total
Generation Customers Production eliminations Results remeasure-ments Results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Revenue
External
sales 1,098.4 1,128.1 0.1 - 2,226.6 5.8 2,232.4
Inter--segment
sales 647.1 - 96.9 (744.0) - - -
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Total revenue 1,745.5 1,128.1 97.0 (744.0) 2,226.6 5.8 2,232.4
Segment gross
profit 261.7 71.5 32.9 (2.4) 363.7 1.4 365.1
Segment Adjusted
EBITDA 147.6 8.8 7.6 (2.4) 161.6
Central costs (23.6) - (23.6)
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Consolidated
Adjusted
EBITDA 138.0
Depreciation
and amortisation (102.6) - (102.6)
Acquisition
and restructuring
costs - (2.7) (2.7)
Operating
profit 35.4 (1.3) 34.1
Net finance
costs (31.8) (2.3) (34.1)
Foreign exchange
gains 3.5 - 3.5
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Profit/(loss)
before tax 7.1 (3.6) 3.5
-------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Year ended 31 December 2019 (Audited)
-----------------------------------------------------------------------------------------------
Exceptional
items and
Pellet Intra-group Adjusted certain Total
Generation Customers Production eliminations Results remeasure-ments Results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Revenue
External sales 2,433.8 2,269.1 - - 4,702.9 10.5 4,713.4
Inter--segment
sales 1,512.7 - 229.4 (1,742.1) - - -
------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Total revenue 3,946.5 2,269.1 229.4 (1,742.1) 4,702.9 10.5 4,713.4
Segment gross
profit 649.5 134.1 84.1 (0.6) 867.1 (132.8) 734.3
Segment Adjusted
EBITDA 407.5 17.4 31.5 (0.6) 455.8
Central costs (46.0) - (46.0)
------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Consolidated
Adjusted EBITDA 409.8
Acquisition
and restructuring
costs - (9.0) (9.0)
Depreciation
and amortisation (207.9) - (207.9)
Losses on disposal
of assets (1.2) - (1.2)
Other gains 3.1 - 3.1
Operating profit 203.8 (141.8) 62.0
Net finance
costs (60.0) (5.2) (65.2)
Foreign exchange
(losses)/gains (1.6) 2.0 0.4
------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
Profit/(loss)
before tax 142.2 (145.0) (2.8)
------------------- ----------- ---------- ------------ -------------- ---------- ----------------- ---------
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
2019 Annual Report and Accounts.
Capital expenditure by segment
Assets and working capital are monitored on a consolidated
basis; however, spend on capital projects is monitored by operating
segment.
Capital Capital Capital
Capital additions Capital additions Capital additions
additions to to property, additions to to property, additions to to property,
intangible plant and intangible plant and intangible plant and
assets equipment assets equipment assets equipment
30 June 30 June 30 June 30 June 31 December 31 December
2020 2020 2019 2019 2019 2019
Unaudited Unaudited Unaudited Unaudited Audited Audited
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------- ------------- -------------- -------------- ------------- -------------
Customers 2.8 - 9.9 0.2 18.9 0.6
Generation 0.5 50.5 0.5 44.3 0.8 129.9
Pellet Production - 23.2 0.1 4.1 0.3 17.9
Central - 1.3 0.5 - 0.8 2.9
------------------ ------------- ------------- -------------- -------------- ------------- -------------
Total 3.3 75.0 11.0 48.6 20.8 151.3
------------------ ------------- ------------- -------------- -------------- ------------- -------------
Total cash outflows in relation to capital expenditure during
the six months ended 30 June 2020 were GBP58.5 million (six months
ended 30 June 2019: GBP67.7 million).
The implementation of a new billing system in the Customers
business was stopped during 2019. Approximately GBP19 million of
costs incurred to date are held on the balance sheet, which the
Group believes have value and will be recovered in full.
Major customers
Total revenue for the six months ended 30 June 2020 includes
GBP249.5 million from one customer (six months ended 30 June 2019:
GBP237.4 million from one customer) that represents 10% or more of
the Group's total revenue for the period. These revenues arose in
the Generation segment.
3. Revenue
Revenue represents amounts receivable from goods or services
provided in the normal course of business, net of trade discounts,
VAT and other sales-related taxes, and excluding transactions
between Group companies.
During the period, the Group made sales (and related purchases)
of ROCs to help optimise our working capital position. External
sales of ROCs below include GBP249.5 million of such sales (six
months ended 30 June 2019: GBP237.4 million), with a similar value
reflected in cost of sales.
As described in further detail on page 189 of the Group's 2019
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 14).
Fair value gains and losses on power sales contracts that have not
matured are shown as certain remeasurements within revenue. At
maturity, revenue is recognised in the Group's Adjusted Results at
the price agreed in the contract, reflecting the cash received for
the delivery of power.
The sources of income were as follows:
Six months ended 30 June 2020 (Unaudited)
---------------------------------------------
External Intra-group Total
GBPm GBPm GBPm
------------------------------------ ------------- ----------------- -----------
Generation
Electricity sales 655.2 583.6 1,238.8
ROC sales 327.5 - 327.5
CfD income 159.6 - 159.6
Ancillary services 19.9 - 19.9
Other income 11.3 - 11.3
------------------------------------ ------------- ----------------- -----------
Total 1,173.5 583.6 1,757.1
Customers
Electricity and gas sales 1,031.6 - 1,031.6
Other income 0.2 - 0.2
------------------------------------ ------------- ----------------- -----------
Total 1,031.8 - 1,031.8
Pellet Production
Pellet sales - 118.0 118.0
Total - 118.0 118.0
Elimination of intra-group sales - (701.6) (701.6)
------------------------------------ ------------- ----------------- -----------
Total adjusted consolidated revenue 2,205.3 - 2,205.3
------------------------------------ ------------- ----------------- -----------
Certain remeasurements 13.8 - 13.8
------------------------------------ ------------- ----------------- -----------
Total consolidated revenue 2,219.1 - 2,219.1
------------------------------------ ------------- ----------------- -----------
Six months ended 30 June 2019 (Unaudited)
---------------------------------------------
External Intra-group Total
GBPm GBPm GBPm
------------------------------------ ------------- ----------------- -----------
Generation
Electricity sales 607.0 647.1 1,254.1
ROC sales 309.6 - 309.6
CfD income 117.0 - 117.0
Ancillary services 31.0 - 31.0
Other income 33.8 - 33.8
------------------------------------ ------------- ----------------- -----------
Total 1,098.4 647.1 1,745.5
Customers
Electricity and gas sales 1,125.8 - 1,125.8
Other income 2.3 - 2.3
------------- ----------------- -----------
Total 1,128.1 - 1,128.1
Pellet Production
Pellet sales - 96.9 96.9
Other income 0.1 - 0.1
------------------------------------ ------------- ----------------- -----------
Total 0.1 96.9 97.0
Elimination of intra - group sales - (744.0) (744.0)
------------------------------------ ------------- ----------------- -----------
Total adjusted consolidated revenue 2,226.6 - 2,226.6
------------------------------------ ------------- ----------------- -----------
Certain remeasurements 5.8 - 5.8
------------------------------------ ------------- ----------------- -----------
Total consolidated revenue 2,232.4 - 2,232.4
------------------------------------ ------------- ----------------- -----------
Year ended 31 December 2019 (Audited)
-----------------------------------------
External Intra-group Total
GBPm GBPm GBPm
------------------------------------ ----------- --------------- -----------
Generation
Electricity sales 1,364.9 1,115.0 2,479.9
ROC sales 733.7 368.1 1,101.8
CfD income 261.7 - 261.7
Ancillary services 49.9 1.8 51.7
Other income 23.6 27.8 51.4
------------------------------------ ----------- --------------- -----------
Total 2,433.8 1,512.7 3,946.5
Customers
Electricity and gas sales 2,226.1 - 2,226.1
Other income 43.0 - 43.0
------------------------------------ ----------- --------------- -----------
Total 2,269.1 - 2,269.1
Pellet Production
Pellet sales - 229.4 229.4
------------------------------------ ----------- --------------- -----------
Total - 229.4 229.4
Elimination of intra-group sales - (1,742.1) (1,742.1)
------------------------------------ ----------- --------------- -----------
Total adjusted consolidated revenue 4,702.9 - 4,702.9
------------------------------------ ----------- --------------- -----------
Certain remeasurements 10.5 - 10.5
------------------------------------ ----------- --------------- -----------
Total consolidated revenue 4,713.4 - 4,713.4
------------------------------------ ----------- --------------- -----------
4. Net interest and other finance charges
Finance costs reflect expenses incurred in managing the debt
structure (such as interest payable on bonds) as well as foreign
exchange gains and losses and the unwinding of discount on
provisions. These expenses are offset by net interest income on the
Group's defined benefit pension scheme obligation and interest
income that the Group generates through use of short-term cash
surpluses.
Year ended
Six months ended 30 June 31 December
-------------------------- ------------
2020 2019 2019
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
---------------------------------------------------------------------------- ------------ ------------ ------------
Interest payable and similar charges:
Interest payable on borrowings (26.0) (25.2) (49.8)
Interest on lease liabilities (0.6) (0.5) (1.2)
Unwinding of discount on provisions (0.3) (4.0) (4.5)
Amortisation of deferred finance costs (3.1) (1.5) (4.2)
Net finance charges in respect of defined benefit scheme - 0.4 0.8
Other financing charges (3.3 ) (1.4) (2.4)
---------------------------------------------------------------------------- ------------ ------------ ------------
Total interest payable and similar charges included in Adjusted Results (33.3) (32.2) (61.3)
---------------------------------------------------------------------------- ------------ ------------ ------------
Interest receivable:
Interest income on bank deposits 0.4 0.4 1.3
Net finance income in respect of defined benefit scheme 0.1 - -
---------------------------------------------------------------------------- ------------ ------------ ------------
Total interest receivable included in Adjusted Results 0.5 0.4 1.3
---------------------------------------------------------------------------- ------------ ------------ ------------
Foreign exchange gains/(losses) included in Adjusted Results 4.4 3.5 (1.6)
---------------------------------------------------------------------------- ------------ ------------ ------------
Total recurring net interest charge included in Adjusted Results (28.4) (28.3) (61.6)
---------------------------------------------------------------------------- ------------ ------------ ------------
Certain remeasurements
(Losses)/gains on derivative contracts recognised in interest (0.4) 0.2 2.0
Exceptional costs of debt restructure:
Acceleration of deferred costs in relation to previous and temporary
facilities - (2.5) (5.2)
---------------------------------------------------------------------------- ------------ ------------ ------------
Total other finance charges (0.4) (2.3) (3.2)
---------------------------------------------------------------------------- ------------ ------------ ------------
Total net interest charge (28.8) (30.6) (64.8)
---------------------------------------------------------------------------- ------------ ------------ ------------
5. Taxation
The tax credit includes both current and deferred tax. The tax
credit is based upon the expected tax rate for the full year which
is applied to taxable profits/(losses) for the interim period,
together with any charge or credit in respect of prior years and
the tax effect of any exceptional items (see note 6).
Current tax, including UK Corporation tax and US tax, is
calculated as the income taxes payable on taxable profits, or
recoverable in respect of tax losses, for the interim 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 Year ended
June 31 December
----------------------------- -------------
2020 2019 2019
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
------------------------------------------------ -------------- ------------- -------------
Tax credit comprises:
Current tax
* Current period charge 9.5 10.9 31.0
* Adjustments in respect of prior periods (0.4) - 10.4
Deferred tax
* Before impact of tax rate changes (23.6) (10.3) (39.0)
* Adjustments in respect of prior periods (0.3) (1.0) (7.5)
* Effect of changes in tax rate 9.8 - 1.8
Tax credit (5.0) (0.4) (3.3)
------------------------------------------------ -------------- ------------- -------------
The expected tax rate for the full year, before the impact of
changes in tax rates, is lower than the standard corporation tax
rate applicable in the UK, principally due to the tax benefit
arising from UK Patent Box claims and research and development
expenditure credits.
On 17 March 2020, the UK Government substantively enacted a
reversal of the planned reduction in the main UK Corporation tax
rate to 17%, with effect from 1 April 2020. As a result, the main
UK Corporation tax rate remains 19%. The full-year charge in
respect of this rate change is expected to be GBP19.3 million, of
which GBP9.8 million in included within the results for the six
months ended 30 June 2020. The rate change impact of GBP4.3 million
relating to the impaired coal assets has been treated as an
exceptional item and excluded from the Group's Adjusted
Results.
6. Certain remeasurements and exceptional items
The Group presents its underlying financial results in the
Adjusted Results column of the Condensed consolidated income
statement. In order to provide a clear and consistent view of
trading performance, certain remeasurements and exceptional items
are 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 approach is consistent in style and approach with
that applied by other large, listed companies in the energy
sector.
The Group has a framework for the determination of transactions
as exceptional. Transactions presented as exceptional are approved
by the Audit Committee.
In these financial statements, the following transactions have
been designated as certain remeasurements and exceptional items and
presented separately in current and previous periods:
Period affected
Six months ended 30 June Year ended 31 December
-------------------------------
2020 (Unaudited) 2019 (Unaudited) 2019 (Audited)
GBPm GBPm GBPm
------------------------ -------------------------------
Asset obsolescence charges
relating to coal-specific
assets written-off following
the decision to cease commercial
coal generation in March
2021.
------------------------ -------------------------------
Acquisition and restructuring costs associated
with the acquisition and on-boarding of Drax
Generation Enterprise Limited (formerly ScottishPower
Generation Limited).
---------------------------------------------------------
Costs incurred as a result of restructuring
the Group's debt in 2019, including facility
break costs and the acceleration of the amortisation
of deferred finance costs associated with the
redeemed facilities. Interest costs that relate
to the acquisition bridge facility have been
classified as exceptional, as they relate directly
to the acquisition described above.
---------------------------------------------------------
Certain remeasurements comprise gains or losses on derivative contracts
to the extent that those contracts do not qualify for hedge accounting,
or hedge accounting is not effective, and those gains or losses are
either i) unrealised and relate to the delivery of commodity contracts
in future periods, or ii) are realised in relation to the delivery of
commodity contracts in the current period. The effect of excluding certain
remeasurements from the Adjusted Results is to reflect commodity sales
and purchases at contracted prices - i.e. at the all-in-hedged amount
paid or received in respect of the delivery of the commodity in question,
to better present the trading performance of the Group in Adjusted Results.
Six months ended 30 Year ended
June 31 December
---------------------------- -------------
2020 2019 2019
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------------------------------- ------------- ------------- -------------
Exceptional items:
Acquisition and restructuring costs - (2.7) (9.0)
Asset obsolescence charges (224.2) - -
Exceptional items included within Operating
profit (224.2) (2.7) (9.0)
Cost of debt restructuring - (2.5) (5.2)
--------------------------------------------- ------------- ------------- -------------
Exceptional items included in Profit
before tax (224.2) (5.2) (14.2)
Taxation on exceptional items (1) 38.3 - 2.6
Exceptional items after taxation (185.9) (5.2) (11.6)
--------------------------------------------- ------------- ------------- -------------
Remeasurements:
Net remeasurements included in Gross
profit 108.3 1.4 (132.8)
Net remeasurements included in Net interest (0.4) 0.2 2.0
Taxation on certain remeasurements (20.6) (0.3) 24.8
Remeasurements after taxation 87.3 1.3 (106.0)
Reconciliation:
Adjusted Results 42.9 7.8 118.1
Exceptional items after tax (185.9) (5.2) (11.6)
Remeasurements after tax 87.3 1.3 (106.0)
--------------------------------------------- ------------- ------------- -------------
(Loss)/profit after tax (55.7) 3.9 0.5
--------------------------------------------- ------------- ------------- -------------
(1) Taxation on exceptional items is GBPnil where costs are
disallowable for corporation tax purposes.
7. Dividends
Six months ended Year ended
30 June 31 December
------------------------------ -------------
Pence
per
share 2020 2019 2019
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
----------------------------------------- ------- -------------- -------------- -------------
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 2019 paid 15 May 2020 9.5 37.7 - -
Interim dividend for the year ended
31 December 2019 paid 11 October 2019 6.4 - - 25.4
Final dividend for the year ended 31
December 2018 paid 10 May 2019 8.5 - 33.5 33.5
----------------------------------------- ------- -------------- -------------- -------------
37.7 33.5 58.9
----------------------------------------- ------- -------------- -------------- -------------
On 28 July 2020, the Board resolved to pay an interim dividend
of 6.8 pence per share (GBP27.1 million), representing 40% of the
expected full year dividend in line with our dividend policy. The
interim dividend will be paid on 2 October 2020 and the record date
for entitlement to the dividend will be on 21 August 2020.
Distributable profits
The capacity of the Group to make dividend payments is
determined by the availability of retained distributable profits
and cash resources.
The Parent Company has distributable reserves at 30 June 2020 of
GBP219.5 million. Sufficient reserves are available across the
Group as a whole to make future distributions in accordance with
the Group's dividend policy for the foreseeable future.
The majority of the Group's distributable reserves are held in
intermediate holding companies 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 GBP481.5 million,
comprised of cash and cash equivalents that are accessible on
demand. The recent history of operating cash generation is set out
in note 11.
The Group's financing facilities (see note 10) place certain
conditions on the amount of dividend payments that can be made in
any year. The Group expects to be able to make dividend payments,
in line with our policy and within these conditions, for the
foreseeable future.
8. 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 we have in issue. Basic EPS is calculated
by dividing the Group's earnings (profit after tax in accordance
with IFRS) by the weighted average number of ordinary shares in
issue during the period. Diluted EPS demonstrates the impact upon
the basic earnings per share 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.
Six months ended Year ended
30 June 31 December
---------------------------- -------------
2020 2019 2019
(Unaudited) (Unaudited) (Audited)
------------------------------------------------ ------------- ------------- -------------
(Loss)/earnings attributable to equity holders
of the Company GBPm (55.7) 3.9 0.5
Number of shares:
Weighted average number of ordinary shares
for the purposes of basic loss/earnings per
share (millions) 396.7 394.3 395.5
Effect of dilutive potential ordinary shares
under share plans (millions) - 2.7 1.9
------------------------------------------------ ------------- ------------- -------------
Weighted average number of ordinary shares
for the purposes of diluted loss/earnings
per share (millions) 396.7 397.0 397.4
(Loss)/earnings per share - basic (pence) (14.0) 1.0 0.1
------------------------------------------------ ------------- ------------- -------------
(Loss)/earnings per share - diluted (pence) (14.0) 1.0 0.1
------------------------------------------------ ------------- ------------- -------------
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 earnings per share, the weighted
average calculation of shares excludes any share options that would
have an anti-dilutive impact.
Application of the same calculation to Adjusted profit after tax
of GBP42.9 million results in Adjusted basic EPS of 10.8 pence and
Adjusted diluted EPS of 10.7 pence for the six months ended 30 June
2020 (six months ended 30 June 2019: Adjusted profit after tax of
GBP7.8 million, Adjusted basic EPS of 2.0 pence and Adjusted
diluted EPS of 2.0 pence). Deferred tax balances have been
remeasured in the period due to the reversal of the planned
reduction in the main UK Corporation tax rate to 17% being
substantively enacted in March 2020. Total Results for the six
months ended 30 June 2020 includes a charge of GBP9.8 million as a
result of the effect of changes in tax rate (see note 5), of which
GBP5.5 million is included in Adjusted Results for the period.
9. Coal closure
On 26 February 2020, following a comprehensive review, the Board
determined to end commercial coal generation at Drax Power Station
in March 2021, with the two coal units remaining available to meet
Capacity Market obligations until September 2022, at which point
they will be closed.
Asset obsolescence charges
Drax Power Station's coal generation assets and biomass
generation assets had previously been assessed as being part of the
same CGU, due to the interdependencies between these assets.
Following a reduction in the significance of the interdependencies
between the coal generation assets and the biomass generation
assets over time, as of 26 February 2020 they have been assessed as
being two separate CGUs. Following the coal generation assets
becoming a separate CGU, an impairment review was undertaken.
The recoverable amount of the coal generation assets was
determined based on a value in use calculation. This calculation
uses cash flow projections based on the Group's established
planning model approved by the Board covering the period through to
coal closure in September 2022.
The calculation concluded that the recoverable amount of the
coal CGU was significantly lower than the carrying amount of the
coal generation assets in the Group's balance sheet. Accordingly,
in the six months ended 30 June 2020, an asset obsolescence charge
of GBP224.2 million has been recognised to write the coal
generation assets down to their recoverable amount of GBPnil.
Sensitivity analysis indicated that any reasonably possible changes
in the key assumptions, which are the allocation of operating costs
and discount rate, would not result in a materially different
outcome.
The asset obsolescence charge and the associated deferred tax
impact have been treated as exceptional items and excluded from the
Group's Adjusted Results.
Provisions
The coal closure programme is expected to result in a reduction
of between 200 and 230 jobs from April 2021. The impact of Covid-19
has resulted in some delays to the ongoing consultations with
employees and trade unions and as a result the recognition criteria
for termination benefits has not been met at the balance sheet
date. As such, no provision for termination benefits or any other
costs relating to the coal closure have been recognised as at 30
June 2020. Consultations are expected to be concluded in the second
half of 2020 at which point any required provisions will be
recognised.
The anticipated one-off costs of closure, comprising termination
benefits and costs of disposal for associated assets, are in the
region of GBP25-35 million.
10. Borrowings
In June 2020, the Group completed a three-year extension to the
GBP125 million environmental, social and governance (ESG) facility
agreement originally entered into during July 2019. This extended
the contractual maturity of the facility to 2025. A proportion of
the interest rate under this facility is variable based on the
Group's total carbon dioxide emissions per GWh of electricity
generation.
The Group has not entered into any new financing arrangements in
the six months ended 30 June 2020.
In addition to the ESG facility, the Group's financing structure
includes a GBP375 million UK infrastructure private placement with
maturities extending out to between 2024-2029. It also includes
GBP350 million 4.25% fixed rate loan notes, US $500 million loan
notes with a fixed interest rate of 6.625%, which were swapped back
to sterling upon issuance at an effective interest rate of circa
4.85%, a GBP350 million facility comprised of a Revolving Credit
Facility (RCF) with a value of GBP315 million and an index-linked
term loan of GBP35 million with a March 2022 maturity date.
The RCF matures in April 2021 and was undrawn at both 30 June
2020 and 31 December 2019. The Group has no other committed
facilities, although it has access to certain non-recourse trade
receivable finance facilities and payment facilities, as described
in note 11, which are utilised to accelerate working capital cash
inflows and defer cash outflows.
The weighted average interest rate payable at the balance sheet
date on the Group's borrowings was 3.70% (as at 31 December 2019:
3.99%).
Analysis of borrowings
Changes in borrowings during the period were as follows:
As at 30 June 2020 (Unaudited)
----------------------------------------------------------------------------
Borrowings before deferred finance Net
costs Deferred finance costs borrowings
GBPm GBPm GBPm
---------------------------------------- --------------------------------------- ---------------------- -----------
Borrowings at 1 January 2020 1,267.5 (22.3) 1,245.2
Cash movements:
Extension of ESG facility - (0.8) (0.8)
Non-cash movements:
Indexation of linked loan 0.3 - 0.3
Amortisation of deferred finance costs
(note 4) - 3.1 3.1
Amortisation of USD loan note premium (0.2) - (0.2)
Effect of foreign exchange rates(1) 26.3 - 26.3
Borrowings at 30 June 2020 1,293.9 (20.0) 1,273.9
---------------------------------------- --------------------------------------- ---------------------- -----------
(1) The Group has cross-currency interest rate swaps in place to
hedge the sterling cash flows associated with the USD loan notes.
In addition to fixing the sterling value of interest payments over
a five-year period, this instrument fixes the sterling repayment of
the principal at GBP367.5 million in 2023, the impact of which, if
applied to the borrowings at 30 June 2020, would reduce borrowings
by GBP36.4 million.
The Group's borrowings at each period end were as follows:
As at 30 June 2020 (Unaudited)
-----------------------------------------------------------------------------
Net
Borrowings before deferred finance costs Deferred finance costs borrowings
GBPm GBPm GBPm
------------------------------------ ---------------------------------------- ---------------------- -----------
2022 fixed rate loan notes 350.0 (4.2) 345.8
2025 US $500 million loan notes 405.8 (5.5) 400.3
Index-linked loan 38.1 - 38.1
UK Infrastructure private placement 375.0 (8.3) 366.7
ESG facility 125.0 (2.0) 123.0
Total borrowings 1,293.9 (20.0) 1,273.9
Split between:
Current liabilities - - -
Non-current liabilities 1,293.9 (20.0) 1,273.9
------------------------------------ ---------------------------------------- ---------------------- -----------
As at 30 June 2019 (Unaudited)
-----------------------------------------------------------------------------
Borrowings before deferred finance costs Net
Deferred finance costs borrowings
GBPm GBPm GBPm
-------------------------------- ---------------------------------------- ---------------------- -----------
2022 fixed rate loan notes 350.0 (6.4) 343.6
2025 US $500 million loan notes 396.1 (5.9) 390.2
Index-linked loan 37.5 - 37.5
Acquisition bridge facility 400.0 (2.6) 397.4
Total borrowings 1,183.6 (14.9) 1,168.7
Split between:
Current liabilities - - -
Non-current liabilities 1,183.6 (14.9) 1,168.7
-------------------------------- ---------------------------------------- ---------------------- -----------
As at 31 December 2019 (Audited)
--------------------------------------------------------------------------------
Borrowings before deferred finance costs Deferred finance costs Net borrowings
GBPm GBPm GBPm
------------------------------------ ---------------------------------------- ---------------------- --------------
2022 fixed rate loan notes 350.0 (5.3) 344.7
2025 US $500 million loan notes 379.6 (5.9) 373.7
Index-linked loan 37.9 - 37.9
UK infrastructure private placement 375.0 (9.3) 365.7
ESG facility 125.0 (1.8) 123.2
------------------------------------ ---------------------------------------- ---------------------- --------------
Total borrowings 1,267.5 (22.3) 1,245.2
Split between:
Current liabilities - - -
Non-current liabilities 1,267.5 (22.3) 1,245.2
------------------------------------ ---------------------------------------- ---------------------- --------------
11. Cash generated from operations
The table below reconciles the Group's (loss)/profit for the
period to the amount of cash generated from the Group's operations
(i.e. sourcing, generating and selling electricity and gas) by
adjusting for any non-cash accounting items.
Six months ended 30 Year ended
June 31 December
------------------------------ -------------
2019
2020 2019 (Audited)
(Unaudited) (Unaudited)
GBPm GBPm GBPm
------------------------------------------------ -------------- -------------- -------------
(Loss)/profit for the period (55.7) 3.9 0.5
Adjustments for:
Interest payable and other charges 33.3 34.5 66.5
Interest receivable (0.5) (0.4) (1.3)
Tax credit (note 5) (5.0) (0.4) (3.3)
Depreciation and amortisation 95.7 102.6 207.9
(Gains)/losses on disposal of assets (0.9) - 1.2
Asset obsolescence charges 224.2 - -
Other non-cash gains - - (0.5)
Certain remeasurements of derivative contracts
(1) (77.3) 55.6 254.0
Defined benefit pension scheme current
service cost 4.2 3.7 7.1
Share-based payments charge 3.1 1.6 2.7
Effect of foreign exchange rates (5.8) (3.5) -
Operating cash flows before movement in
working capital 215.3 197.6 534.8
Changes in working capital:
Decrease/(increase) in inventories 92.2 (65.4) (67.8)
Decrease/(increase) in receivables 135.1 79.6 (142.6)
Increase in payables 4.0 116.4 101.6
Decrease in carbon assets - 0.3 4.3
(Increase)/decrease in ROC assets (213.4) (95.5) 54.0
Total cash released/(consumed) from working
capital 17.9 35.4 (50.5)
Defined benefit pension scheme contributions (6.8) (4.2) (13.1)
------------------------------------------------ -------------- -------------- -------------
Cash generated from operations 226.4 228.8 471.2
------------------------------------------------ -------------- -------------- -------------
(1) Certain remeasurements of derivative contracts includes the
effect of non-cash unrealised gains and losses recognised in the
income statement and cash realised from derivative contracts
designated into hedge relationships under IFRS 9, where the gain or
loss is held in the hedge reserve pending release to the income
statement in the period the hedged transaction occurs.
The Group has a strong focus on cash flow discipline and uses
various methods to manage liquidity. These methods, the most
material of which are described in further detail below, have been
used to a broadly consistent level throughout the year unless
otherwise stated.
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 on operating cash flows
for the six months ended 30 June 2020 of accelerating cash flows
through ROC purchases and ROC sales was an outflow of GBP82.4
million (six months ended 30 June 2019: GBP77.0 million inflow).
The Group also has access to facilities enabling it to sell ROC
trade receivables on a non-recourse basis. Utilisation of these
facilities was GBP47.3 million at 30 June 2020 (as at 31 December
2019: GBPnil).
From time to time, when market conditions change, the Group can
rebase foreign currency contracts (including cross-currency
interest rate swaps). In the six months to 30 June 2020 this
generated a working capital benefit, which is reflected as an
adjustment to certain remeasurements of derivative contracts in the
table above. The total cash benefit released from related trades
that remained outstanding at 30 June 2020 was GBP146.6 million (as
at 31 December 2019: GBP106.8 million). This cash benefit includes
GBP87.8 million (as at 31 December 2019: GBP84.3 million) released
from foreign currency contracts and GBP58.8 million (as at 31
December 2019: GBP22.5 million) from cross-currency interest rate
swaps.
The Customers business has access to a facility which enables it
to accelerate cash flows associated with trade receivables on a
non-recourse basis. This facility generated a net cash outflow of
GBP6.0 million in the six months ended 30 June 2020 (six months
ended 30 June 2019: net GBPnil cash impact), reflected as an
increase in receivables in the table above. The facility terms were
amended in 2019, increasing the facility size to GBP200 million
from GBP150 million. Utilisation of the facility was GBP156.2
million at 30 June 2020 (as at 31 December 2019: GBP162.2
million).
The Group has sought to normalise payments across its supplier
base resulting in certain suppliers extending payment terms and
some reducing terms. Suppliers are able to access a supply chain
finance facility provided by a bank, for which the suppliers can
receive funds in advance of the payment terms agreed with Drax. The
facility does not affect the Group's working capital, as payment
terms remain unaltered with the Group. At 30 June 2020, the Group
had trade payables of GBP29.5 million (as at 31 December 2019:
GBP33.1 million) related to reverse factoring. The Group also has
access to a number of payment facilities to leverage scale and
efficiencies in transaction processing, whilst providing a working
capital benefit for the Group due to a short extension of payment
terms within a normal working capital cycle. The amount outstanding
under these facilities at 30 June 2020 was GBP104.2 million (as at
31 December 2019: GBP90.6 million).
More detail on the Group's approach to working capital and
liquidity management is provided in note 13.
12. Reconciliation of net debt
Net debt is calculated by taking the Group's borrowings (note
10) and subtracting cash and cash equivalents. The table below
reconciles net debt in terms of changes in these balances across
the year.
As at 30 June As at 31 December
------------------------------------ ------------------
2019
2020 (Unaudited) 2019 (Unaudited) (Audited)
GBPm GBPm GBPm
--------------------------------------- ----------------- ----------------- ------------------
Net debt at 1 January (841.1) (319.1) (319.1)
Increase/(decrease) in cash and cash
equivalents 71.1 (45.9) 121.9
Increase in net borrowings (2.4) (552.7) (645.3)
Effect of changes in foreign exchange
rates (20.0) (6.7) 1.4
--------------------------------------- ----------------- ----------------- ------------------
Net debt at 30 June / 31 December (792.4) (924.4) (841.1)
--------------------------------------- ----------------- ----------------- ------------------
Borrowings include listed bonds, bank debt and revolving credit
facilities, net of any deferred finance costs. Borrowings do not
include other financial liabilities such as IFRS 16 lease
liabilities, pension obligations and trade and other payables.
The Group has entered into cross-currency interest rate swaps,
fixing the sterling value of the principal repayments in respect of
the Group's USD denominated debt (see note 10). If USD balances are
translated at the hedged rate, rather than the rate prevailing at
the balance sheet date, borrowings would be reduced by GBP36.4
million (as at 31 December 2019: GBP12.2 million). The
corresponding value of the hedging instrument is recognised at its
fair value as a derivative financial instrument.
13. Financial risk management
The Group's activities expose it to a variety of financial
risks, including commodity price risk, interest rate risk, foreign
currency risk, liquidity risk, inflation risk, counterparty risk
and credit risk. The Group's overall risk management programme
focuses on the unpredictability of commodity and financial markets
and seeks to manage potential adverse effects on the Group's
financial performance.
The Group uses derivative financial instruments to hedge certain
risk exposures. Risk management is overseen by 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.
As the Covid-19 pandemic has progressed there have been
significant impacts to financial markets, albeit the full
longer-term macro-economic effects remain uncertain. The associated
principal risks to the Group are volatility in financial markets,
including the impact of weaker sterling affecting the cost of
biomass, the liquidity risk associated with potential increases in
borrowing costs and the availability of debt financing.
The Group has financial risk management policies in place to
mitigate and reduce exposure to these risks. A full review of these
policies alongside market sensitivities has been completed in
addition to an increased level of monitoring and actions to
appropriately manage the risks.
The Group's well-established foreign exchange hedging programme
manages the risk associated with its foreign currency exposure over
a rolling five-year period with protection against sterling
weakness in place out to 2025.
The Group maintains a mixture of cash and cash equivalents and
committed facilities to ensure sufficient funding for business
requirements. At 30 June 2020 the Group had cash and cash
equivalents of GBP481.5 million, which alongside the committed but
undrawn facilities provides significant headroom over and above the
short-term liquidity requirements. In June, the Group completed a
three-year extension to the GBP125 million ESG facility extending
its contractual maturity to 2025. After taking into account the
effect of hedging, all of the Group's borrowings are at fixed
interest rates, mitigating the risk of increases.
Credit risk associated with derivatives and investing activities
are diversified across a range of highly rated counterparties
reducing counterparty exposures, in line with the Group's
policy.
In addition to the financial market impact, the Group's
Customers business is exposed to higher credit risk, where the
impact of Covid-19 has increased the risk of potential customer
failures and expected credit losses. The Group extended its trade
credit insurance programme in 2019 and continues to use this
facility, providing mitigation to the risk of potential customer
failure.
Commodity price risk
The Group is exposed to the effect of fluctuations in commodity
prices, particularly the price of electricity, gas, coal,
sustainable wood fibre and pellets, other fuels, and CO(2)
emissions allowances. Price variations and market cycles have
historically influenced the financial results of the Group and are
expected to continue to do so.
The Group has a policy of securing forward power sales,
purchases of fuel and CO(2) emissions allowances when profitable to
do so and in line with specified limits under approved policies.
Forward power sales can be secured up to 100% of forecast
availability two years out. All commitments to sell power under
fixed-price contracts are designated as cash flow hedges as they
reduce the Group's cash flow exposure resulting from fluctuations
in the price of power.
The Group purchases sustainable biomass, coal and other fuels
under either fixed or variable priced contracts with different
maturities, principally from a number of international sources. The
Group considers all such contracts to be economic hedges. The
contracts are either outside of the scope of IFRS 9, are recognised
at fair value through profit or loss, or the Group applies the
own-use exemption or hedge accounting in accordance with IFRS
9.
Where forward power curves are less liquid, the Group uses
financially settled gas sales as a proxy for power to mitigate the
risk of power price fluctuations. The Group also purchases gas
under fixed-price contracts to meet the demand of its energy supply
customers and as a fuel for the CCGT assets within its gas-fired
generation portfolio.
The Group purchases CO(2) emissions allowances under fixed-price
contracts with different maturity dates from a range of domestic
and international sources. All commitments to purchase CO(2)
emissions allowances under fixed-price contracts are designated as
cash flow hedges as they reduce the Group's cash flow exposure
resulting from fluctuations in the price of CO(2) emissions
allowances.
Foreign currency risk
The Group is exposed to fluctuations in foreign currency rates
resulting from committed and forecast transactions in foreign
currencies, principally in relation to purchases of fuel for use in
the Generation business. These purchases are typically denominated
in US dollars (USD), Canadian dollars (CAD) or euros (EUR).
The Group also has limited exposure to translation risk in
relation to its net investment in its US subsidiary, Drax Biomass
Inc.
It is the Group's policy to hedge material transactional
exposures using a variety of derivatives to fix the sterling value
of foreign currency cash flows, except where there is an economic
hedge inherent in the transaction. The Group enters into derivative
contracts in line with the currency risk management policy,
including forwards and options, to manage the risks associated with
its anticipated foreign currency requirements over a rolling
five-year period covering contracted exposures and a proportion of
highly probable forecast transactions.
Additionally, in order to optimise the cost of funding, the
Group has issued foreign currency denominated debt in USD. The
Group utilises derivative contracts to manage exchange rate risk on
foreign currency debt.
Interest rate risk
The Group has limited exposure to interest rate risk,
principally in relation to cash and cash equivalents and floating
rate debt instruments. The Group has taken out a fixed-to-fixed
cross -- currency interest rate swap to hedge the future cash flows
associated with the US $500 million 2025 fixed rate loan notes,
effectively converting them to sterling fixed rate cash flows. The
Group has also taken out a floating-to-fixed swap to fix the
interest payments on the GBP375 million private placement and the
GBP125 million ESG facility. Through the use of these interest
rates swaps the Group has fixed all of the market-based interest
payments on its floating rate debt instruments. As such the Group
has mitigated its exposure to interest rate risk in relation to its
debt instruments.
The return generated on the Group's cash balance, or on amounts
drawn on the revolving credit facility, are also exposed to
movements in short-term interest rates. The Group manages cash
balances to protect against adverse changes in rates whilst
retaining liquidity.
Liquidity risk
The treasury function is responsible for liquidity, funding and
settlement management under policies approved by the Board.
Liquidity needs are monitored using regular forecasting of
operational cash flows and financing commitments. The Group
maintains a mixture of cash and cash equivalents and committed and
uncommitted facilities in order to ensure sufficient funding for
business requirements.
In managing liquidity risk, the Group has the ability to
accelerate the cash flows associated with certain working capital
items, principally those related to ROC sales and Customers' energy
supply sales. In each case, this is undertaken on a non-recourse
basis and accordingly, the ROCs and other items are derecognised
from the balance sheet at the point of sale. The Group also
utilises standard purchasing facilities to extend the working
capital cycle, whilst still paying suppliers on time.
Counterparty risk
As the Group relies on third-party suppliers and counterparties
for the delivery of currency, sustainable biomass and other goods
and services, it is exposed to the risk of non-performance by these
third-party suppliers. If a large supplier were to fall into
financial difficulty and/or fail to deliver against its contract
with the Group, there would be additional costs associated with
securing the lost goods or services from other suppliers.
The Group enters into contracts for the sale of electricity to a
number of counterparties. The failure of one or more of these
counterparties to perform their contractual obligations may cause
the Group financial distress or increase the risk profile of the
Group.
Credit risk
The Group's exposure to credit risk is limited to the carrying
amount of financial assets recognised at the balance sheet
date.
Of the Group's three operating segments, two are exposed to
different levels and concentrations of credit risk, largely
reflecting the number, size and nature of their respective
customers. The Pellet Production segment only trades
intra-group.
The highest risk is in the Customers segment, with a large
number of customers of varying sizes operating in a variety of
markets. In particular, Opus Energy carries lower concentrations
but higher levels of credit risk owing to a customer base comprised
largely of smaller retail and commercial entities.
In the Customers segment, credit risk is managed by checking a
company's creditworthiness and financial strength both before
commencing trade and during the business relationship. Credit risk
is monitored and managed by business sector. In response to the
increased risk from Covid-19, the Customers segment has increased
minimum credit requirements and excluded a number of identified
high-risk business types from its acquisition activity in the SME
sector. The Customers segment also extended its trade credit
insurance programme in late 2019 to increase its mitigation to
credit risk. In addition, credit risk is transferred on the billed
and unbilled receivables monetised through the non-recourse
facility described in note 11.
For the Generation segment, the risk arises from treasury,
trading and energy procurement activities, as well as the sale of
by-products from generation activities. Wholesale counterparty
credit exposures are monitored by individual counterparty and by
category of credit rating. Counterparty credit exposures are
subject to approved limits. The Group uses master netting
agreements to reduce credit risk and net settles payments with
counterparties where net settlement provisions exist. In addition,
the Group employs a variety of other methods to mitigate credit
risk: margining, various forms of parent company guarantee, deed of
charge, cash collateral, letters of credit and surety bonds. The
majority of the Generation business's credit risk is with
counterparties in related energy industries or with financial
institutions. In addition, where deemed appropriate, the Group has
historically purchased credit default swaps.
The investment of surplus cash is undertaken with the objective
of ensuring that there is sufficient liquidity at all times, so
that funds are available to meet liabilities as they fall due,
whilst securing a return from invested funds and preserving the
capital value of those funds within Board-approved policies. These
policies manage credit risk exposure by setting out minimum rating
requirements, maximum investment with any one counterparty and the
maturity profile.
Inflation risk
The Group is exposed to inflation risk on elements of its
revenues and cost base. The Group's ROC revenues are linked to UK
RPI and its Contract for Difference revenue (CfD) is linked to UK
CPI. In addition, a proportion of the Group's fuel costs are linked
to US/Canadian CPI. The Group has entered into UK CPI swaps and US
CPI swaps to hedge the future cashflows relating to a proportion of
its exposure. The Group also benefits from a natural hedge arising
from its inflation-linked borrowings (see note 10).
Capital management
The Group manages its capital to ensure it is able to continue
as a going concern; maintain a strong credit rating underpinned by
robust financial metrics; invest in its core business and pay a
sustainable and growing dividend while maximising the return to
shareholders. The capital structure of the Group consists of
shareholders' equity (excluding the hedge and cost of hedging
reserves), plus net debt. Net debt is comprised of borrowings and
cash and cash equivalents as disclosed in note 12.
The Group regularly explores options to optimise its debt
capital structure. As part of this, in order to reduce interest
costs, extend maturities and diversify finance sources, the Group
will continue to monitor the availability of various financing
options. Opportunities are evaluated in light of prevailing market
conditions, taking into account current liquidity, available terms,
execution risks and prospects for future access to capital.
14. Derivative financial instruments
As described above, the Group makes extensive use of derivative
financial instruments for the purpose of managing its exposure to
the risks set out in note 13.
Where possible, the Group has taken advantage of the own-use
exemption which allows qualifying contracts to be excluded from
fair value mark-to-market accounting. This applies to certain
contracts for physical commodities entered into and held for our
own purchase, sale or usage requirements, including forward
contracts for the purchase of ROCs and coal from domestic
sources.
Contracts which do not qualify for the own-use exemption and
which can be settled net in cash or another financial instrument -
principally power, gas, financial oil, financial coal, CO(2)
emissions allowances, interest rate and inflation swaps, and
forward foreign currency exchange contracts - are accounted for as
derivatives in accordance with IFRS 9 and are recorded in the
balance sheet at fair value (which is the difference between the
price we have secured in the contract and the price we could
achieve in the market at the balance sheet date). Changes in fair
value are recognised in the hedge reserve (note 16) to the extent
that the contracts are designated as effective hedges in accordance
with IFRS 9, or the income statement where the hedge accounting
requirements are not met. Where changes in fair value are
recognised in the income statement, they are excluded from the
Group's Adjusted Results, as described in the basis of preparation.
The Group enters into forward contracts solely for the purpose of
financial risk management and considers all of its contracts to be
economic hedges (or components of a wider strategy to fix target
prices), regardless of whether or not the specific criteria for
hedge accounting are met.
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 - freight and weather-related contracts,
as well as contracts for commodities that are not expected to be
settled through physical delivery of the commodity.
- Forward currency exchange contracts - currency related
contracts including forwards, vanilla options and structured option
products.
- Interest rate swaps - contracts which swap one interest rate
for another, including floating-to-fixed single currency
instruments and cross-currency interest rate swaps.
- Inflation rate swaps - swap contracts, such as
floating-to-fixed, which are linked to an inflation index such as
RPI or CPI.
As at 30 June As at 31 December
------------------------------- ------------------
2020 2019 2019
(Unaudited) (Unaudited)(1) (Audited)
GBPm GBPm GBPm
---------------------------- ------------- ---------------- ------------------
Assets
Commodity contracts 95.8 127.1 152.3
Financial contracts 29.9 21.2 33.7
Foreign exchange contracts 385.7 364.7 141.9
Interest rate swaps 0.2 41.7 1.7
Inflation rate swaps 35.3 - 16.4
---------------------------- ------------- ---------------- ------------------
Total assets 546.9 554.7 346.0
---------------------------- ------------- ---------------- ------------------
Split between:
---------------------------- ------------- ---------------- ------------------
Non-current assets 325.3 327.1 152.3
Current asset 221.6 227.6 193.7
Liabilities
Commodity contracts (94.1) (87.9) (121.3)
Financial contracts (59.4) (17.3) (46.2)
Foreign exchange contracts (29.4) (13.4) (114.8)
Interest rate swaps (19.7) (3.6) -
Inflation rate swaps - (13.6) (7.1)
---------------------------- ------------- ---------------- ------------------
Total liabilities (202.6) (135.8) (289.4)
---------------------------- ------------- ---------------- ------------------
Split between:
---------------------------- ------------- ---------------- ------------------
Non-current liabilities (67.9) (40.6) (72.9)
---------------------------- ------------- ---------------- ------------------
Current liabilities (134.7) (95.2) (216.5)
---------------------------- ------------- ---------------- ------------------
(1) The balances in the above table for 30 June 2019 have been
updated to reflect the additional categories presented in the
Group's 2019 Annual Report and Accounts. This has had no impact on
the total assets or total liabilities.
The total movement on the Group's derivative contract portfolio
in the six months to 30 June 2020 was GBP287.7 million (six months
ended 30 June 2019: GBP103.7 million), with GBP114.5 million (six
months ended 30 June 2019: GBP1.6 million) relating to unhedged
items being recognised in the income statement and GBP123.9 million
(six months ended 30 June 2019: GBP61.5 million) and GBP49.3
million (six months ended 30 June 2019: GBP40.6 million) relating
to hedged items being recognised in the hedge reserve and cost of
hedging reserve respectively.
The total gross movement recognised in the hedge reserve and
cost of hedging reserve of GBP129.7 million (six months ended 30
June 2019: GBP112.8 million) and GBP54.6 million (six months ended
30 June 2019: GBP37.1 million) respectively differs from the
movement on the Group's derivative contract portfolio relating to
hedged items recognised in the hedge reserve and cost of hedging in
the year by GBP5.8 million (six months ended 30 June 2019: GBP51.3
million) and GBP5.3 million (six months ended 30 June 2019: GBP4.5
million) respectively due to ineffectiveness recognised on hedged
items, gains/(losses) retained in the hedge reserve and cost of
hedging reserve relating to hedging instruments where the hedged
item has not impacted the income statement yet, or the recycling of
gains/(losses) on hedging instruments where the hedged item has
impacted the income statement but the hedging instrument has not
yet been realised.
The total unrealised gains/(losses) excluded from Adjusted
Results in the period of GBP107.9 million (six months ended 30 June
2019: GBP1.6 million) differs from (six months ended 30 June 2019:
were the same as) the movement on the Group's derivative contract
portfolio relating to unhedged items by GBP6.6 million due to
ineffectiveness recognised on hedged items being recognised in the
income statement as unrealised gains/(losses) and due to
gains/(losses) excluded from Total Results due to rebasing. The
fair value of the rebased trades is recognised on the rebased
rates, resulting in a reduction in the value of derivative
financial instruments recognised. However, the gains relating to
the cash received from rebasing are deferred from Adjusted Results
until the contracts mature.
The change in fair value of the derivative portfolio in the
period has been driven predominantly by changes in currency
exchange rates and power prices. The Group has a large portfolio of
forward currency contracts which fix the sterling cost of our
future fuel purchases denominated in foreign currencies. Given the
size of the portfolio, the fair value is highly sensitive to small
changes in foreign currency exchange rates. The unrealised gains
recognised in the first half of 2020 principally reflect the
weakening of sterling as a result of Covid-19 impacting the
market.
Fair value measurement
- Commodity contracts fair value - The fair value of open
commodity contracts that do not qualify for the own-use exemption
is calculated by reference to forward market prices at the balance
sheet date. Given the maturity profile of these contracts, liquid
forward market price curves are available for the duration of the
contracts.
- Forward foreign currency exchange contracts fair value - The
fair value of forward foreign currency exchange contracts is
determined using forward currency exchange market rates at the
balance sheet date.
- Other financial contracts fair value - The fair value of other
financial contracts is calculated by reference to forward market
prices at the balance sheet date. Given the maturity profile of
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.
Categorisation within this fair value measurement hierarchy has
been determined on the basis of the lowest level input that is
significant to the fair value measurement of the relevant asset or
liability.
The fair values of commodity contracts and financial contracts
are largely determined by comparison of observable forward market
prices with the contract price; therefore, these contracts are
categorised at Level 2 of the fair value hierarchy under IFRS
13.
The Group holds certain derivative contracts with unobservable,
and therefore Level 3, inputs (principally the CPI component of
inflation swaps). However, in each case, these inputs are not
material to the overall valuation and therefore the instruments as
a whole are determined to be Level 2 in the fair value
hierarchy.
15. Other financial instruments
We hold a variety of other non-derivative financial instruments,
including cash and cash equivalents, borrowings, payables and
receivables arising from our operations.
Fair value
Cash and cash equivalents, short-term investments, trade and
other receivables and trade and other payables generally have short
terms to maturity. For this reason, their carrying values, on the
historical cost basis, approximate to their fair value. The Group's
borrowings relate principally to the publicly traded high-yield
loan notes and amounts drawn down against term loans.
Certain financial assets and financial liabilities have been
measured at amortised cost. The terms of the instruments have been
reviewed for the existence of embedded derivatives. The 2022 fixed
rate loan notes and the 2025 USD loan notes both contain an early
repayment option that meets the definition of an embedded
derivative. However, in both cases, these have not been separated
as they are deemed to be closely related to the host contract.
At 30 June 2020, the fair value of the Group's issued loan notes
was GBP16.3 million in excess (as at 31 December 2019: GBP33.3
million in excess) of their carrying value of GBP755.8 million (as
at 31 December 2019: GBP729.6 million) based on quoted market
prices.
16. Hedge reserve
Changes in the fair value of commodity contracts, financial
contracts and financing derivatives, to the extent that they
qualify as effective cash flow hedges under accounting rules, are
recognised in the hedge reserve, a component of shareholders'
equity. The cumulative gains and losses unwind and are released to
the income statement to match the effect of the hedged cash
flows.
The expected release profile of post-tax hedging gains/(losses)
to the income statement is as follows:
As at 30 June 2020 (Unaudited)
----------------------------------------
Within
1 year 1-2 years 2-5 years Total
GBPm GBPm GBPm GBPm
---------------------------- -------- ---------- ---------- ------
Commodity contracts 10.9 9.7 0.9 21.5
Foreign exchange contracts 76.7 24.2 73.6 174.5
Interest rate swaps 1.1 0.6 (3.7) (2.0)
Inflation rate swaps 4.5 5.7 19.4 29.6
93.2 40.2 90.2 223.6
---------------------------- -------- ---------- ---------- ------
As at 30 June 2019 (Unaudited)(1)
------------------------------------------------
Within
1 year 1-2 years 2-5 years Total
GBPm GBPm GBPm GBPm
---------------------------------- ---------- ------------ ------------ --------
Commodity contracts 62.5 3.0 (0.1) 65.4
Foreign exchange contracts 77.2 68.9 57.7 203.8
Interest rate swaps - - 34.3 34.3
Inflation rate swaps - - (12.2) (12.2)
---------------------------------- ---------- ------------ ------------ --------
139.7 71.9 79.7 291.3
---------------------------------- ---------- ------------ ------------ --------
(1) The balances in the above table for 30 June 2019 have been updated
to reflect the additional categories presented in the Group's 2019 Annual
Report and Accounts. This has had no impact on the total.
As at 31 December 2019 (Audited)
------------------------------------------------
Within
1 year 1-2 years 2-5 years Total
GBPm GBPm GBPm GBPm
---------------------------------- ---------- ------------ ------------ --------
Commodity contracts 62.1 8.0 1.5 71.6
Financial contracts (3.0) (0.3) - (3.3)
Foreign exchange contracts 58.4 (4.3) (14.2) 39.9
Interest rate contracts 3.2 2.5 (6.0) (0.3)
Inflation rate swaps 1.5 2.6 9.5 13.6
---------------------------------- ---------- ------------ ------------ --------
122.2 8.5 (9.2) 121.5
---------------------------------- ---------- ------------ ------------ --------
17. Other reserves
Translation Total
reserve GBPm
Capital redemption Merger Restated
reserve reserve (1)
GBPm GBPm GBPm
--------------------------------- ------------------- --------- ------------ --------
At 1 January 2019 1.5 710.8 55.9 768.2
Other comprehensive expense - - (11.2) (11.2)
--------------------------------- ------------------- --------- ------------ --------
Total comprehensive expense for
the year - - (11.2) (11.2)
31 December 2019 1.5 710.8 44.7 757.0
--------------------------------- ------------------- --------- ------------ --------
At 1 January 2019 1.5 710.8 55.9 768.2
Other comprehensive income - - 0.4 0.4
--------------------------------- ------------------- --------- ------------ --------
Total comprehensive income for
the period - - 0.4 0.4
At 30 June 2019 1.5 710.8 56.3 768.6
--------------------------------- ------------------- --------- ------------ --------
At 1 January 2020 1.5 710.8 44.7 757.0
Other comprehensive income - - 16.6 16.6
--------------------------------- ------------------- --------- ------------ --------
Total comprehensive income for
the period - - 16.6 16.6
At 30 June 2020 1.5 710.8 61.3 773.6
--------------------------------- ------------------- --------- ------------ --------
(1) Due to the historical correction of exchange differences
arising on the translation of foreign operations, other reserves
have been updated by GBP55.5 million to reflect the correct opening
balance at 1 January 2019 and by GBP56.6 million to reflect the
correct balance as at 30 June 2019. Other comprehensive income for
the six months ended 30 June 2019 has been updated by GBP1.1
million to reflect to correct movement as a result of these
changes. See note 19 for further details.
18. 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 is uncertain and cannot be measured reliably and, as a
result, no amounts in respect of these matters are provided for in
the Group's financial statements.
Guarantees
In addition to the amount drawn down against the bank loans,
certain members of the Group guarantee the obligations of a number
of banks in respect of letters of credit issued by those banks to
counterparties of the Group. As at 30 June 2020, the Group's
contingent liability in respect of letters of credit issued under
the revolving credit facility amounted to GBP35.6 million (as at 31
December 2019: GBP77.0 million).
The Group also guarantees obligations in the form of surety
bonds with a number of insurers. As at 30 June 2020 the Group's
contingent liability in relation to these guarantees was GBP95.7
million (as at 31 December 2019: GBP96.1 million).
19. Prior period restatements
As described in the basis of preparation, the 30 June 2019
balance sheet has been restated in respect of the following
items:
-- During the second half of 2019, the acquisition date fair
values of assets and liabilities acquired in the purchase of the
portfolio of hydro, pumped storage and gas assets on 31 December
2018 were finalised. As a result, finalisation of the terms of the
defined benefit pension scheme transfer resulted in a reduction in
the net opening surplus recognised by GBP1.1 million. The
finalisation of the Group's assessment of CGUs and their fair
values resulted in a net GBP0.2 million reduction in property,
plant and equipment values and a GBP0.1 million reduction in
deferred tax liabilities recognised. All of these adjustments had
corresponding impacts on goodwill.
-- To reflect the correction of a historical error identified
during the second half of 2019 in respect of the translation of
fixed assets in the US-based business into the consolidated Group
financial statements. Application of the correct foreign exchange
rates resulted in an increase in property, plant and equipment
carrying values as at 30 June 2019 and 1 January 2019 of GBP56.6
million and GBP55.5 million, respectively. As a result, other
comprehensive income for the six months ended 30 June 2019 has also
been restated by GBP1.1 million to reflect the additional movement
in the translation reserve. The correction has no impact on
previously reported profit or cash amounts.
-- The Group rebased a number of forward foreign currency
contracts in 2019. This released cash from the contracts with the
gains being held on the balance sheet until the contracts mature.
At 30 June 2019, the balance sheet included GBP42.9 million of such
cash received from rebasing where the relating contracts had not
yet matured and which was held in deferred income on the balance
sheet. This was the first reporting period in which cash had been
received from the rebasing of contracts, but the contracts had not
yet matured. In the Group's 2019 Annual Report and Accounts the
balance sheet presentation of the cash received was amended such
that, rather than the fair value of the rebased contracts being
based on the pre-rebased rates and cash received being recognised
as deferred income, the fair value of the rebased contracts are
recognised based on the rebased rates and no deferred income is
recognised. Accordingly, the 30 June 2019 comparatives have been
restated to align with the application of the policy used in the
Group's 2019 Annual Report and Accounts. This has resulted in a
GBP42.9 million reduction in derivative assets and a GBP42.9
million reduction in deferred income in the 30 June 2019 balance
sheet.
The impact on the previously reported amounts in the balance
sheet as at 30 June 2019 and the statement of comprehensive income
for the six months to 30 June 2019, due to the above restatements,
are set out in the tables below.
Impact on the balance sheet as at 30 June 2019:
As at 30
June Impact As at 30
2019 of finalisation Impact June
previously of opening of historical 2019
reported acquisition translation Impact restated
(Unaudited) values error of rebasing (Unaudited)
GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Assets
Non-current assets
Goodwill 247.0 1.2 - - 248.2
Intangible assets 216.5 - - - 216.5
Property, plant and equipment 2,257.4 (0.2) 56.6 - 2,313.8
Right-of-use assets 25.2 - - - 25.2
Other fixed asset investments 2.1 - - - 2.1
Retirement benefit surplus 17.7 (1.1) - - 16.6
Deferred tax assets 33.1 - - - 33.1
Derivative financial instruments 329.0 - - (1.9) 327.1
----------------------------------- ------------- ----------------- --------------- ------------- -------------
3,128.0 (0.1) 56.6 (1.9) 3,182.6
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Current assets
Inventories 287.9 - - - 287.9
ROC assets 312.2 - - - 312.2
Trade and other receivables
and contract-related assets 389.3 - - - 389.3
Derivative financial instruments 268.6 - - (41.0) 227.6
Cash and cash equivalents 244.3 - - - 244.3
----------------------------------- ------------- ----------------- --------------- ------------- -------------
1,502.3 - - (41.0) 1,461.3
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Liabilities
Current liabilities
Trade and other payables
and contract-related liabilities (1,042.0) - - 42.9 (999.1)
Lease liabilities (4.5) - - - (4.5)
Current tax liabilities (12.0) - - - (12.0)
Derivative financial instruments (95.2) - - - (95.2)
----------------------------------- ------------- ----------------- --------------- ------------- -------------
(1,153.7) - - 42.9 (1,110.8)
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Net current assets 348.6 - - 1.9 350.5
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Non - current liabilities
Borrowings (1,168.7) - - - (1,168.7)
Lease liabilities (22.0) - - - (22.0)
Derivative financial instruments (40.6) - - - (40.6)
Provisions (53.9) - - - (53.9)
Deferred tax liabilities (332.5) 0.1 - - (332.4)
----------------------------------- ------------- ----------------- --------------- ------------- -------------
(1,617.7) 0.1 - - (1,617.6)
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Net assets 1,858.9 - 56.6 - 1,915.5
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Shareholders' equity
Issued equity 47.3 - - - 47.3
Share premium 428.8 - - - 428.8
Treasury shares (50.4) - - - (50.4)
Hedge reserve 291.3 - - - 291.3
Cost of hedging reserve 21.1 - - - 21.1
Other reserves 712.0 - 56.6 - 768.6
Retained profits 408.8 - - - 408.8
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Total shareholders' equity 1,858.9 - 56.6 - 1,915.5
----------------------------------- ------------- ----------------- --------------- ------------- -------------
Impact on total comprehensive income:
Period ended
30 June
2019
----------------------------------------------------- ------------
GBPm
----------------------------------------------------- ------------
Total comprehensive income - as previously reported 165.7
----------------------------------------------------- ------------
Impact of historical translation error 1.1
----------------------------------------------------- ------------
Total comprehensive expense - restated 166.8
----------------------------------------------------- ------------
20. Adoption of new and amended accounting standards
A number of new and amended standards became effective for the
first time in 2020. The Group adopted the following from 1 January
2020:
- IFRS 3 (amended) - Business Combinations - effective from 1
January 2020.
- IAS 1 (amended) - Presentation of Financial Statements and IAS
8 (amended) Accounting Policies, Changes in Accounting Estimates
and Errors - effective from 1 January 2020.
- Conceptual Framework for Financial Reporting (amended) -
effective from 1 January 2020.
'Amendments to IAS 39 and IFRS 7 Interest Rate Benchmark
Reform', which became effective on 1 January 2020, was adopted
early by the Group on 1 January 2019 and was therefore reflected in
the Group's Annual Consolidated Financial Statements for the year
ended 31 December 2019.
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 EU -
marked by *):
- IFRS 10 (amended) - Consolidated Financial Statements and IAS
28 (amended) - Investments in Associates and Joint Ventures (2011)
- effective date deferred indefinitely.*
- IFRS 17 Insurance contracts - effective from 1 January
2023.*
- IAS 1 (amended) - Classification of Liabilities as Current and
Non-current - effective from 1 January 2023.*
- IAS 16 (amended) - Property, Plant and Equipment - Proceeds
before Intended Use - effective from 1 January 2022.*
- IAS 37 - Onerous Contracts - Cost of Fulfilling a Contract -
effective from 1 January 2022.*
- IFRS 3 - Reference to the Conceptual Framework - effective
from 1 January 2022.*
- Annual Improvements 2018-2020 Cycle - effective from 1 January
2022.*
The following standard was issued and effective but had not yet
been endorsed by the EU and as such has not been applied in these
financial statements:
- IFRS 16 (amended) - Covid-19 related Rent Concessions -
effective from 1 June 2020.*
Adoption of the 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.
21. Reproduction of comparative financial information
Income statement for year ended 31 December 2019
For information, the full income statement for the year ended 31
December 2019 is reproduced below.
Consolidated income statement
--------------------------------------------------------
Year ended 31 December
2019 (Audited)
--------------------------------------------------------
Adjusted Exceptional
Results(1) items and
GBPm certain remeasurements Total Results
GBPm GBPm
------------------------------------------------- ------------- ------------------------ --------------
Revenue 4,702.9 10.5 4,713.4
Total cost of sales (3,835.8) (143.3) (3,979.1)
------------------------------------------------- ------------- ------------------------ --------------
Gross profit 867.1 (132.8) 734.3
Operating and administrative expenses (439.3) - (439.3)
Impairment losses on trade receivables (18.0) - (18.0)
------------------------------------------------- ------------- ------------------------
Adjusted EBITDA(2) 409.8
Depreciation (165.9) - (165.9)
Amortisation (42.0) - (42.0)
Loss on disposal (1.2) - (1.2)
Other gains 3.1 - 3.1
Acquisition and restructuring costs (3) - (9.0) (9.0)
Operating profit/(loss) 203.8 (141.8) 62.0
Foreign exchange gains/(losses) (1.6) 2.0 0.4
Interest payable and similar charges
(4) (61.3) (5.2) (66.5)
Interest receivable 1.3 - 1.3
Profit/(loss) before tax 142.2 (145.0) (2.8)
------------------------------------------------- ------------- ------------------------ --------------
Tax
* Before effect of changes in rate of tax (22.3) 27.4 5.1
* Effect of changes in rate of tax (1.8) - (1.8)
------------------------------------------------- ------------- ------------------------ --------------
Total tax credit (24.1) 27.4 3.3
------------------------------------------------- ------------- ------------------------ --------------
Profit/(loss) for the period attributable
to equity holders 118.1 (117.6) 0.5
------------------------------------------------- ------------- ------------------------ --------------
Earnings per share pence pence
------------------------------------------------- ------------- ------------------------ --------------
- Basic 29.9 0.1
------------------------------------------------- ------------- ------------------------ --------------
- Diluted 29.7 0.1
------------------------------------------------- ------------- ------------------------ --------------
All results relate to continuing operations.
(1) Adjusted Results are stated after adjusting for exceptional
items (including acquisition and restructuring costs, asset
obsolescence charges and debt restructuring costs), and certain
remeasurements.
(2) Adjusted EBITDA is defined as: earnings before interest,
tax, depreciation, amortisation, excluding the impact of
exceptional items and certain remeasurements.
(3) Acquisition and restructuring costs include costs associated
with the integration of Drax Generation Enterprise Limited
(formerly ScottishPower Generation Limited).
(4) Interest payable and other similar charges includes the cost
of debt restructure which comprises one-off costs associated with
the refinancing of the Group's debt.
Consolidated statement of comprehensive income
Year ended
31 December
2019
(Audited)
GBPm
------------------------------------------------------------------- --------------
Profit for the period 0.5
------------------------------------------------------------------- --------------
Items that will not be reclassified subsequently to profit or
loss:
Actuarial losses on defined benefit pension scheme (21.5)
Deferred tax on actuarial gains on defined benefit pension scheme 4.3
Loss on equity investments (0.1)
Net fair value gains on cost of hedging 56.3
Deferred tax on cost of hedging (9.7)
Net fair value gains on cash flow hedges (112.8)
Deferred tax on cash flow hedges 25.0
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations (11.2)
Net fair value gains on cash flow hedges 91.1
Deferred tax on cash flow hedges (19.9)
Other comprehensive income for the period 1.5
------------------------------------------------------------------- --------------
Total comprehensive income for the period attributable to equity
holders 2.0
------------------------------------------------------------------- --------------
INDEPENT REVIEW REPORT TO DRAX GROUP PLC
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 2020 which comprises the Condensed
consolidated income statement, Condensed consolidated statement of
comprehensive income, the Condensed consolidated balance sheet, the
Condensed consolidated statement of changes in equity, the
Condensed consolidated cash flow statement and related notes 1 to
21. We have read the other information contained in the half -
yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 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.
Directors' responsibilities
The half - yearly financial report is the responsibility of, and
has been approved by, 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.
As disclosed in the basis of preparation above, the annual
financial statements of the group are prepared in accordance with
IFRSs as adopted by the European Union. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with International Accounting
Standard 34 'Interim Financial Reporting' as adopted by the
European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half - yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 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.
Conclusion
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 2020 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
28 July 2020
Glossary
Adjusted EBITDA
Earnings before interest, tax, depreciation, amortisation
excluding the impact of exceptional items and certain
remeasurements.
Adjusted Results
Business performance after adjusting for material, one-off
exceptional items and certain remeasurements on derivative
contracts.
Ancillary services
Services provided to National Grid used for balancing supply and
demand or maintaining secure electricity supplies within acceptable
limits. They are described in Connection Condition 8 of the Grid
Code.
Availability
Average percentage of time the units were available for
generation.
BECCS
Bioenergy, carbon capture and storage system, with CO(2)
resulting from power generation captured and stored.
BEIS
The Government Department for Business, Energy and Industrial
Strategy, bringing together the responsibilities for business,
industrial strategy, science, innovation, energy and climate change
(formerly DECC).
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.
Black start
The procedure used to restore power in the event of a total or
partial shutdown of the national electricity transmission
system.
Capacity market
Part of the Government's Electricity Market Reform, the Capacity
Market is intended to ensure security of electricity supply by
providing a payment for reliable sources of capacity.
Carbon price support
A tax upon fossil fuel (including coal) used to generate
electricity. It is charged as a levy on coal delivered to the power
station.
Combined Cycle Gas Turbines (CCGT)
A form of highly efficient energy generation technology that
combines a gas-fired turbine with a steam turbine.
Contracts for difference (CfD)
A mechanism to support investment in low-carbon electricity
generation. The CfD works by stabilising revenues for generators at
a fixed price level known as the 'strike price'. Generators will
receive revenue from selling their electricity into the market as
usual. However, when the market reference price is below the strike
price, they will also receive a top-up payment from suppliers for
the additional amount. Conversely, if the reference price is above
the strike price, the generator must pay back the difference.
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.
Forced outage rate
The capacity which is not available due to forced outages or
restrictions expressed as a percentage of the maximum theoretical
capacity, less planned outage capacity.
Grid charges
Includes transmission network use of system charges (TNUoS),
balancing services use of system charges (BSUoS) and distribution
use of system charges (DUoS).
Headroom and footroom
Positive 'reserve' (see below) may be termed headroom and
negative reserve as footroom.
IFRS
International Financial Reporting Standards.
Inertia
The stored energy in the large rotating mass of a generator,
which assists in maintaining system stability. Wind and solar power
sources have no inertia.
Lost time incident rate (LTIR)
The frequency rate is calculated on the following basis:
(fatalities and lost time injuries)/hours worked × 100,000. Lost
time injuries are defined as occurrences where the injured party is
absent from work for more than 24 hours.
Net debt
Comprises cash and cash equivalents, short-term investments less
overdrafts and borrowings net of deferred finance costs.
Open Cycle Gas Turbine (OCGT)
A free-standing gas turbine, using compressed air, to generate
electricity.
Planned outage
A period during which scheduled maintenance is executed
according to the plan set at the outset of the year.
Reserve
Generation or demand available to be dispatched by the System
Operator to correct a generation/demand imbalance, normally at two
or more minutes' notice.
Response
Automatic change in generator output aimed at maintaining a
system frequency of 50Hz. Frequency response is required in every
second of the day.
RIDDORS
Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations.
ROCs
A Renewable Obligation Certificate ("ROC") is a certificate
issued to an accredited generator for electricity generated from
eligible renewable sources. The Renewable Obligation (RO) is
currently the main support scheme for renewable electricity
projects in the UK.
Summer
The calendar months April to September.
System operator
National Grid Electricity Transmission. Responsible for the
coordination of electricity flows onto and over the transmission
system, balancing generation supply and user demand.
Total recordable injury rate (TRIR)
The frequency rate is calculated on the following basis: (lost
time injuries + worse than first aid injuries)/hours worked ×
100,000.
Total Results
Financial performance calculated in accordance with IFRS.
Value from Flexibility
A measure of the value from flexible power generation, support
services provided to the power network and attractively priced coal
fuels.
Voltage control
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
Fax: +44 (0)1757 612192
www.drax.com
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END
IR RPMMTMTJTTRM
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