Inside Drax Drax Group plc Annual report and accounts 2011 2011 Welcome to Drax

Drax is predominantly a power generation business responsible Drax is so much more for meeting some 7% of the UK’s electricity demand. Currently owning than the UK’s largest, and operating the largest power station in the UK, we are committed to reducing our carbon footprint. cleanest and most Through the progressive expansion of the use of sustainable biomass, as a replacement for coal, we aim efficient coal-fired to provide a low carbon, low cost and reliable power generation business power station... well into the future. At the other end of the supply chain, through our retail arm, Haven Power, we serve the needs of over 40,000 We are focused on business sites. Our intention is to grow a significant retail business providing us with a valuable alternative maximising value and to trading through the wholesale achieving our vision electricity market. of becoming a bold, customer oriented power generation and retail business, driven by biomass innovation. detailed account of our operations during 2011. during operations our of account detailed a gives report This market. electricity UK the in business aretail and ageneration both We operate Our business 07 649 36 Corporate and social responsibility social and Corporate More on: keypriorities Our More on: 01—49 01—49 Contents Financials 81—128 Governance 50—80 review Business 66 65 62 50 36 32 22 18 16 08 06 04 02 127 122 118 117 116 87 86 85 84 83 82 81 Remuneration Committee report Committee Remuneration report Committee Nominations report Committee Audit Corporate governance responsibility social and Corporate uncertainties and risks Principal performance Operational and financial Marketplace Principal performance indicators Chief Executive’s statement results Delivering Drax business ofthe value the Maximising Chairman’s introduction Glossary Shareholder information sheet balance Company to the Notes Company balance sheet auditor’sIndependent report Company – statements financial consolidated to the Notes Consolidated cash flow statement in equity Consolidated statement of changes Consolidated balance sheet comprehensive income Consolidated statement of Consolidated income statement auditor’sIndependent report Group – accounts 2011 accounts Annual report and Drax Group plc 01

Financials Governance Business review 02 Drax Group plc Annual report and accounts 2011

Chairman’s introduction

During 2011, we delivered strong operational performance across the business. Although we experienced a good deal of uncertainty in the power-related commodity markets, I am pleased to report earnings (EBITDA) for 2011 of £334 million (2010: £392 million) and an operating profit of £366 million (2010: £279 million). In accordance with our dividend policy, the Board proposes a final dividend in respect of 2011 of 11.8 pence per share, equivalent to £43 million. This would give a total dividend for the year of 27.8 pence per share (2010: 32.0 pence per share). We continue to make progress in reducing our carbon footprint, something which is now well embedded in and central to our business strategy. In just a matter of weeks we will embark on the last stage of the largest steam turbine modernisation programme in UK history, which brings with it a carbon dioxide emissions saving of one million tonnes a year. Haven Power Limited, our electricity retail company serving business customers, made good progress implementing its IT business platform which is critical to realising its growth ambitions. We are delighted with the growth achieved in 2011 and the real value that the Group is now deriving from the company’s success. It complements well our existing trading capabilities and provides a credit efficient, direct sales channel for an increasing proportion of our power. Electricity generation from sustainable biomass remains our focus and we continue to believe that this technology has considerable potential and an important role as a low carbon, cost effective, reliable and flexible source of renewable power for the UK. I am delighted to say that our view is being echoed by those in Government and elsewhere, which is encouraging. We have continued to work with the Government throughout the year to advance the case for sustainable biomass and secure an appropriate level of support. We have welcomed the dialogue that we have been afforded and appreciate the extensive work undertaken by the Government on the biomass agenda.

Earnings demonstrate good The UK’s largest ever steam business performance despite turbine modernisation programme uncertainty in the power-related nearing completion commodity markets £334m * Profit before interest, tax, depreciation, amortisation, Earnings (EBITDA)* gains and losses on disposal of property, plant and equipment 2010: £392m and unrealised gains and losses on derivative contracts ye year’s achievements would have possible. been for their hard work andcommitment, without which noneof this progress during andmy 2011 sincere thanks goto all Group staff Throughout the business Ibelieve we have madesignificant can befound in the Corporate governance section of this report. Details of the Board, its function, performance andeffectiveness future appointments to the Board andother senior appointments. diversity is oneof the factors taken into account when considering Consequently, we established apolicy to ensure that gender Reporting Council consultation onpossible changes to the Code. recommendations of both the Davies Report and the Financial Women onBoards, in February the 2011, Board considered the its decision making. Following publication of the Davies Report, and knowledge in order to improve the quality of the Board and appointed to the Board have complementary skills, experience selection process, we have endeavoured to ensure that those In recent years through ourformal, rigorous andtransparent on matters of strategy andits development. challenging constructively the Group’s management, particularly annually. Ournon-executive directors play amajor role in and those which are delegated, andthese are reviewed at least a clear statement onwhich matters are reserved for the Board Chairman andourChief Executive, Dorothy Thompson. We have There is aclear division of responsibilities between myself as effectiveness of the Board have beenapplied. like to comment onhow the principles relating to the role and given in the UKCorporate Governance Code (the “Code”), Ishould On more governance-related matters and in line with the guidance for ourshareholders. including the economics of the support offered, is attractive biomass. However, we will only doso if the regulatory regime, to increase greatly ourelectricity generation from sustainable 20 February 2012 Chairman Charles Berry in the emerging biomass energy sector andwe are ready We have enhanced ourtechnical andcommercial expertise IT business platform for growth growth for platform IT business progress, implementing its good made has Haven Power rs ar

achievements

would

have a key focus for the business business the a key for focus remains biomass sustainable from generation Electricity the Group’s achievements to underpin continue Staff accounts 2011 accounts Annual report and Drax Group plc 03

Financials Governance Business review 04 Drax Group plc Annual report and accounts 2011

Maximising the value of the Drax business Our business model Our overriding objective is to maximise the value of the Drax business whilst increasing our electricity generation from biomass, and so reducing our carbon footprint, subject to the availability of appropriate levels of regulatory support. Our profitability is determined by both the difference between the price at which we sell our power and the cost of coal and carbon, known as the “dark green spread”, and increasingly by the “bark spread” for co-firing, which is the difference between power price and renewable support and the cost of biomass. From this starting point there are several steps in the Drax value chain, with each one adding incremental value to the business and ultimately maximising the value of our business and delivering our gross margin.

1 Fuel We now make use of a range of fuels, including coal, Key facts for 2011 biomass and others which are economically advantageous. k 9.1 million tonnes of coal burnt 2 How we maximise value k 1.3 million tonnes For the last nine years we have burnt biomass in place of of biomass burnt some of our coal, when economic to do so. Beyond biomass, k 0.7 million tonnes we also have the ability to burn other fuels, such as petcoke of economically advantageous and pond fines, which can be economically advantageous. fuels burnt By diversifying our fuel sources, not only are we less reliant on a single fuel type, but we are able to capture value from commodity market cycles, and in the case of biomass avoid the cost of carbon.

2 Trading Through keeping a constant eye on the commodity Key facts for 2011 markets within which we operate we are able to optimise k 26.4TWh net the commercial despatch of our power. sales of power k 11.9 million tonnes How we maximise value of CO2 emissions As the largest power station in the UK we are able to utilise allowances purchased economies of scale through, for example, procuring fuel at k 1.2 million competitive prices. Our trading strategy to hedge our power Renewables sales with coal and carbon purchases enables us to lock in Obligation value in the near, short and long term. We are always looking Certificates sold to increase the trading options available to us, for example, for renewable power generated through our retail business. We benefit from having a physical asset to trade around and through a seamless interface with the operations side of the business we derive value from the 1 operational characteristics of the power station, such as high availability and flexibility, enabling us to extract value even when market conditions are poor. 5 3 4 environment with a policy of regarding compliance compliance ofregarding apolicy with environment the on impact our reducing towards We work twice almost UK, the in station power coal-fired efficient most and cleanest largest, isthe Station Power Drax us with an alternative and direct route to market. providing Group, ofthe output power the for available options business customers. retail Our business increases the trading to even more service individual this bring and further grow to plans We have ambitious UK. the throughout businesses key by player arecognised have become and marketplace the in growth significant achieved We have already value wemaximise How backed by dedicated customer support. supply electricity tailored costeffective, sizeswith of all businesses providing on isfocused business retail Our costs and reduce emissions ofCO emissions reduce and costs carbon save on weburn, ofcoal amount the to reduce able weare project upgrade turbine our and biomass sustainable burning sector. Through coal-fired the in position leadership in pursuit of maintaining ou performance forefrontofenvironmental atthe toWe be strive value wemaximise How with legislation as a minimum level of achievement. ofsupply. to security critical services support to provide and when needed, both to meet our contractual obligations there consistently weare Together means that demand. in to changes quickly to us respond allows station power ofour flexibility the addition, In reliability. and availability high to deliver able weare to maintenance, safety from business, generation ofthe side operational ofthe aspects all and carbon savings. With leading performances across withitcoal brings which project upgrade turbine our through efficiency overall our improving weare UK, the in station power coal-fired efficient most the Already value wemaximise How station. power largest next sizeofthe the which, like ash, is sold to the construction industry. construction to the issold ash, like which, our flue gas desulphurisation process, we produce gypsum through dioxide, ofsulphur emissions reducing By stream. ownrevenue creates its but costs, landfill saves on only not which coal, burning from produced ofash sales the to maximise We aim by-products. ofour sales through 4 5 3

Generation Retail Environment r commercial and environmental environmental and r commercial 2 . We generate revenue k k k k 2011 for Key facts 2011 accounts Annual report and Drax Group plc 05 k k k 2011 for Key facts k k k 2011 for Key facts

outage rate outage planned 6.2% the end of the year the of end the at supply on sites business 40,000+ by volume growth sales >100% 3.3TWh supplied of gypsum sold tonnes million 0.7 sold ash of tonnes million 1.2 sustainable biomass through co-firing of CO tonnes million 2.0 rate outage 5.8% forced availability 88.4% plant Station Power capacity of Drax connected 3,960MW 2 saved saved

Financials Governance Business review 06 Drax Group plc Annual report and accounts 2011

Delivering results Our business is influenced by external factors, which we manage to the very best of our ability. Through focusing on our six key priorities we aim to achieve our vision and maximise shareholder value. We have a clear intent… Our vision for Drax is to be a bold, customer oriented power generation and retail business, driven by biomass innovation.

We have two strategic initiatives to enable us to achieve our vision, namely: Our project to convert Drax Power Our programme for the expansion Station into a predominantly of our retail business, Haven Power biomass fuelled generating asset, subject to securing the necessary regulatory support

Influenced by… There are many external factors with the potential to have an impact on our business. We aim to be alert to all the identified principal risks and uncertainties, and manage them to the very best of our ability: k Commodity market risk k Counterparty risk k Ratings risk k Electricity wholesale market risk k Biomass strategy risk k Plant operating risk k Regulatory and political risk

More on: 32 Principal risks and uncertainties (1) efforts onthe following key priorities: to maximise the value of the Drax business, we will focus our In order to achieve ourvision andouroverriding objective our six key priorities… …delivered through strong performance: strong consistent, delivering is …which turn in excellence operational Maintain our coal generation capacity from Maximise profitability for are: 2011 performance indicators Some of ourprincipal weIn 2011 achieved: 22 Our turbine upgrade project will be completed in 2012. The other strand of our carbon abatement work is delivering our biomass biomass our delivering is work abatement carbon our of strand other The 2012. in completed be will project upgrade turbine Our framework. These two key priorities from 2010 have, therefore, been absorbed within ‘progress our biomass strategy’. biomass our ‘progress within absorbed been therefore, have, 2010 from priorities key two These framework. 16 Principal performance indicators More on: Operational and financial performance More on: 10 16 (2010: 784t/GWh) (2010: 0.26) (2010: 0.10 (2010: 80%) Load factor Total recordable rate injury share) per pence 64 80% (2010: 784t/GWh) (2010: 760t/GWh Underlying earnings dioxideCarbon emissions (2010: £204 million) 56 (2010: £551£225 million million) Net cash Gross profit million) £392 (2010: million £501 £334 million EBITDA (2010: £1,648 million) million £1,836 Total revenue customer base Grow ourretail supporting capital structure optimal an Maintain 09 31 strategy, which also encompasse leadership across ouroperations Deliver excellent people biomass strategy Progress our

pence per share s influencing the regulatory regulatory the s influencing accounts 2011 accounts Annual report and Drax Group plc 07 (1) 43 13

Financials Governance Business review 08 Drax Group plc Annual report and accounts 2011

Chief Executive’s statement

Introduction Commodity markets A number of significant global events The business performed well in 2011 against a backdrop in 2011 combined to create uncertainty of volatile commodity markets and significant regulatory in the commodity markets in which developments. In our generation and retail businesses, we operate. we maintained our focus on excellence in operations, The gas market continued to be the tight cost control and disciplined capital project execution. dominant factor in driving power prices. Both the unrest in North Africa and the Preparation for our biomass expansion is now well advanced. Middle East and the incident at one of Japan’s nuclear power stations which We completed extensive combustion trials in 2011, and are now increased the country’s demand for confident in our technical ability to be predominantly biomass liquefied natural gas (“LNG”), fuelled. However, it is important to note that moving ahead contributed to increasing gas prices with our plans remains dependent on securing appropriate through the middle of the year. Thereafter, exceptionally mild weather regulatory support and a strong investment case. in the fourth quarter saw gas prices Good financial results, the successful conclusion, in April, come under pressure and begin to fall. to the Group’s Eurobond financing structure and the bank Coal prices moved within a relatively refinancing we completed in July, leave us with a strong narrow range throughout the year. balance sheet which provides a solid foundation for future Carbon prices reached their lowest point for two years amid fears for the investment in the business. Eurozone economies. Looking ahead, the introduction of the carbon price support Strategy mechanism by the UK Government from April 2013 is likely to erode the Our vision for Drax is to be a bold, customer oriented power competitive position in the market generation and retail business, driven by biomass innovation. of our coal-fired generation business, but at the same time it strengthens We have two key strategic initiatives to enable us to achieve the case for biomass generation. our vision, namely, our project to convert Drax Power Overall, gas prices were resilient through Station into a predominantly biomass fuelled generating much of the year and we saw improving asset, subject to securing the necessary regulatory support, dark green spreads, the difference and our programme for the expansion of Haven Power Limited between the price of power and the cost of coal and carbon, for coal-fired (“Haven Power”). generators. In the last quarter of the year, however, spreads began to drift down as the unusually mild weather for the time of year continued. Bark spreads for co-firing, the difference between power price and renewable support and the cost of biomass, remained weak, with most traded biomass commanding lower margins than coal.

Retail performance Haven Power is meeting our growth expectations with over double the retail sales of 2010 during 2011. The growth has been driven largely by our progression in the industrial and commercial (“I&C”) market, supported by the implementation of a new IT platform which is working well. “We are pleased to report adoubling of Opening up Opening up routes to market our sales volumes over the last year, driven and commercial market.” commercial and largely by ourprogression in the industrial Chief Executive, Haven Power Haven Executive, Chief Peter Bennell Grow our retail customer base customer retail our Grow keypriorities: our of One 4 20% Datamonitor Survey. in SME market in 2011 customer satisfaction 1 for No. Ranked service Customer customer growth. tosupport implemented New IT platform IT processes 2 1 1 2 3 accounts 2011 accounts Annual report and Drax Group plc 09 Haven Power. Haven through are output sales of our generation forward of 20% Some Trading during the year. the during our customer numbers progress in growing real made We have Customers 4 3

Financials Governance Business review 10 Drax Group plc Annual report and accounts 2011

Chief Executive’s statement

One of our key priorities: Maintain operational excellence Delivering industry-leading performance “We work hard to maintain the reliability, availability and flexibility of the power station so that we can make a vital contribution to the nation’s security of supply.”

Peter Emery Production Director

1

4

1 3 Health and safety Turbine upgrade 2011 was a record We are nearing the year for Drax, with our completion of our best ever performance turbine upgrade on total recordable programme which injury rate. will deliver an overall efficiency improvement 2 of 5%. Waste management All waste generated as 4 part of the operation Industrial and maintenance of Emissions Directive the power station is We are working on the carefully managed. options available to us for compliance with the Industrial Emissions Directive from 2016. 0.10 2 3 from 2013. business this in to break-even target our with track on weremain 2011, in loss asmall made Power Haven Although Power. Haven through are sales forward ofour 20% some Currently, movements. price power price, provide a hedge against adverse atafixed secured when sales, These market. electricity to wholesale the to market for our power sales compared compared sales power our for to market route efficient acredit provides Power Haven through output our Selling Survey. Datamonitor 2011 the in market the small and medium enterprise (“SME”) ranked No. 1 for customer satisfaction in being through ofthat recognition see this business, and we were pleased to for proposition to iscentral our service An excellent standard of customer control on costs. costs. on control atight keeping whilst performance operating this We delivered cost. and optimum balance between performance the to determine plant coal-fired benchmarking with UK and international extensive through set been has which of5%, target long-term withour line is in availability excluding planned outages, plant in any reduction measures which For rate, year, the forced outage our measure in 2005. the using webegan rate since injury best performance on total recordable continue with to the industry-leading, be statistics safety Our undertaken. work renewal ofthe of some complexity the given especially time, good in completed was for 2011 outage unit single The security. and stability ofsystem support in Grid, Systemto Operator, the National generation output and balancing services business through providing flexible to the value to deliver able we were and reliability throughout 2011 meant that availability our years, previous in As 2011. deliver industry-leading performance in to wecontinued 2010, in performance for operating year Following arecord Operating performance predominantly biomass fuelled. to become capability technical the in wehave confidence and encouraging to date have trials been ofthe results The critical trials. cost was necessary to support these associated the but development, and research our to support biomass significant volumes of uneconomic We burnt conditions. operating varying different throughputs and under at materials biomass of sustainable variety ofawide trials combustion with work development and research our year, the we extended During commercial electricity generation. for used being capacity co-firing our of half than withless ofbiomass, burn commercial our severely limited This to burn. economic not was purchase for available biomass ofthe much co-firing, for available support ofrenewable level to low the due Unfortunately, capacity. full year, than the atless but during well operated facility co-firing biomass Our research anddevelopment Renewable output and Strategic capital investment plan). investment Strategic capital (see million of£200 order the in to be SCR, including IED, withthe compliance of cost the estimate We currently burn is an consideration. important ofbiomass level the Accordingly, mix. fuel and others, than flexibility more allowing (“SCR”) reduction catalytic selective as such technologies withsome flexibility, solution for compliance are plant optimal the determining in factors key The 2016. from (“IED”) Directive Emissions Industrial ofthe standards emissions stringent more with the options available to us for compliance the on work our furthering We are year. the during burnt total fuel ofthe 9% for accounted biomass) commercial and fines pond (petcoke, fuels advantaged These we burn. which coal bituminous standard the over footprint carbon lower or margin have ahigher which offuels burn our We continued to work on increasing accounts 2011 accounts Annual report and Drax Group plc 11

Financials Governance Business review 12 Drax Group plc Annual report and accounts 2011

Chief Executive’s statement Through the trials we achieved high In February 2011, in conjunction with levels of biomass burn over sustained Alstom UK Limited and National Grid periods, during which time we were also Carbon Limited, we lodged an application able to demonstrate the plant’s flexibility. for European funding for a new, stand- We have an advanced understanding of alone 426MW oxy-fired carbon capture the chemistry dynamics, and we have and storage demonstration project based been working closely with third party at the Drax Power Station site. Following experts to understand any longer term consideration by the UK Government the plant efficiency or capacity reduction project was one of seven put forward to implications. the European Investment Bank in May 2011 for further consideration. In January We have also extended our research 2012, industrial gases provider, BOC (a and development work to cover more member of The Linde Group), joined the fuels and further analysis of the likely consortium, further strengthening the emissions of nitrogen oxides, to help project. The outcome of the application determine the optimal solution for for European funding will not be known IED compliance as described earlier. until the second half of 2012. The final results of these trials are due in the second half of 2012. The final support level under the Legislative and regulatory framework is the main driving regulatory framework force which will determine the mix of In July 2011, the Electricity Market sustainable biomass materials and Reform (“EMR”) White Paper was supply contract tenors, which in turn published. The White Paper represents determines the extent to which we co-fire a major change for the electricity sector. and, therefore, the performance of the We do, however, believe that reform plant itself. of the electricity market is essential to creating the right environment to Further carbon abatement stimulate the huge investment necessary to provide adequate, affordable and In addition to the carbon dioxide (“CO2”) sustainable supplies of electricity into savings through burning biomass in place the 2020s and beyond. of coal, savings were made through In December, an EMR Technical Update efficiency improvements, with the was published, providing further detail progress of our turbine upgrade project on the Government’s preferred options making a key contribution. The low for market reform. The document pressure and high pressure turbine confirmed the intention to implement modules of five of our six generating a market-based capacity auction with units have now been replaced and are the aim of ensuring capacity availability. operating as expected, which means we A more detailed design of the mechanism are approaching an overall efficiency will be developed during this year. for the power station of 40%. Within the EMR, a new low carbon With only three low pressure turbine support mechanism, Feed-in Tariff with modules to be replaced during the Contracts for Difference (“FiT CfD”) first of two unit outages in 2012 we are has also been confirmed. This will replace nearing completion of the project, which the Renewables Obligation in 2017 commenced in 2007. On completion, for new renewable generation facilities, 3 the improved efficiency of the power but not those already in operation. station will lead to a reduction in CO2 It is proposed that both the capacity emissions of one million tonnes a year. mechanism and the FiT CfD arrangements will be run by a single central body, the System Operator. 1 3 Greenhouse Pelleting facilities gas saving In order to further In 2011, the average enhance the security greenhouse gas saving of supply, we are resulting from burning exploring direct biomass in place of investment in further coal was 81%. biomass pellet plants.

2 4 Sustainability Procurement Assessment of the All of our biomass is full life cycle carbon procured against our footprint of sustainable own industry-leading, biomass is now well robust sustainability developed. criteria. 4 2 “Establishing the biomass supply chain logistics Harvesting Harvesting a sustainable resource components of ourbiomass work.” and procuring sustainable biomass are critical Director of Biomass Business Matthew Rivers Progress our biomass strategy biomass our Progress keypriorities: our of One

81%1 accounts 2011 accounts Annual report and Drax Group plc 13

Financials Governance Business review 14 Drax Group plc Annual report and accounts 2011

Chief Executive’s statement The 2011 Budget confirmed the In addition to our focus on sustainable We will also engage in spot and shorter introduction of a carbon price support biomass co-firing, we have been working term opportunistic purchases, with mechanism, as part of the EMR, which we with Siemens Project Ventures on our the ability to cope with a wide fuel are against. We believe there is potential dedicated biomass developments. envelope being key to securing value for conflict with the existing EU Emissions We expressed disappointment with in this market. Trading System (“EU ETS”) and given the the proposed level of support for this We will try to develop further UK sources cap and trade nature of the EU ETS, the technology, which makes the investment of fuel. Although this is likely to remain floor price will have no impact on overall case for independent generators highly a small proportion of our total fuel mix. CO2 emissions, since any reduction in the challenging. The development planned Despite targeting various geographies UK’s emissions will simply result in higher for the Drax Power Station site has and fibre sources, we expect to see an emissions elsewhere in the EU. We also proved the most challenging for a early concentration in North America. believe that the introduction of price number of reasons, including its inland support will, in all likelihood, distort the location which increases logistics costs. All our biomass is procured against wholesale market. Nevertheless, we have Given the significant financial liability our own industry-leading, robust actively engaged with the Government on that we would face were we to delay sustainability criteria, which include the detail and design of the mechanism. our investment decision until we have greenhouse gas emission reduction certainty over the final support level for requirements, and habitats and In advance of the renewable support dedicated biomass we have decided to biodiversity protection, as well as socio- arrangements proposed under the EMR, cancel the project. economic considerations in the source the much awaited consultation on the areas. A programme of independent future support levels for renewable We are exploring a number of options audits ensures all our suppliers comply technologies from 2013 was published available to us for structuring the with our sustainability criteria. by the Government in October. This will development planned for the Port of apply to all renewable generation Immingham site so as to make it a viable We firmly believe that robust, mandatory facilities accredited before April 2017. proposition. sustainability criteria are vital to maintain and enhance public acceptance, and We were particularly pleased to see We participated fully during the ensure that sustainable practices are recognition in the consultation of the Government’s consultation process with implemented. Assessment of the full strategically important role that a view to securing appropriate support to life cycle carbon footprint of biomass, sustainably sourced biomass electricity progress our biomass plans and now that that is, from field to furnace, is now well can play in the future UK renewable the consultation has closed we await the developed, especially in the UK where energy mix. In seeking to maximise the Government’s response, which we expect a mandatory life cycle standard comes deployment of the cheapest renewable to be published in the Spring. into effect in 2013. technologies, specific support levels or bands have been proposed for the We are now in our fifth year of calculating increased use of sustainable biomass in Biomass supply chain the life cycle carbon footprint of all the existing coal-fired power stations through and sustainability biomass we procure and we are enhanced co-firing and full conversion. Establishing the biomass supply chain confident that our sustainable biomass fuel sourcing strategy will meet the The new bands have been created logistics and procuring sustainable current mandatory standard which will in recognition of the greater capital biomass against our robust sustainability ensure we continue to earn regulatory investment that is required to either policy are critical components of our support from April 2013. Our calculations co-fire large volumes of biomass or work to deliver a biomass future for the show that the range of sustainable convert existing coal-fired stations to Group. Despite the immature and biomass materials we have burnt over burn solely biomass. bespoke nature of the supply chain, we believe we will be able to secure sufficient the last few years has a far lower carbon The proposed support level for enhanced sustainable biomass to meet our footprint than that of fossil fuel-fired co-firing will enable us to increase our ambition to become a predominantly generating plant. In 2011, the average sustainable biomass burn. However, biomass fuelled generator. greenhouse gas saving resulting from to maximise our potential and secure burning biomass in place of coal our renewable output out to 2020 and There are four strands to our fuel was 81%, compared to the EU fossil beyond we require a moderate uplift on contracting strategy. We are looking to fuel comparator. the proposed level of support. This would secure term rights to sustainable guarantee that this cost effective form of biomass through both direct contracts renewable generation will be available to for delivered biomass pellets and help meet the UK’s 2020 targets and will contracts for unprocessed fibre to lead to lower electricity prices for the UK provide greater security over the fibre consumer, who will otherwise bear the source. In order to enhance the security cost of the more expensive alternatives. of supply from such contracts we are also exploring direct investment in biomass pellet plants. of supply for strategic fuel supplies. supplies. fuel for strategic of supply security to enhance chain supply biomass the in investment be also may There modifications. plant in investment further as well as Station Power atDrax facilities handling and storage fuel additional in be will investment ofthis Much million. of£400–£450 range the in investment Phase 2 requires significant further co-firing facilities as described above. facilitiesco-firing above. as described existing our from benefit full to secure million of£50 investment committed 1isthe Phase capability. biomass of our development to the phases two are There capability and IED compliance. biomass of our development further the are plan ofthe components principal The case. investment astrong and support securing appropriate regulatory investment remains on dependent toit is important note again that further However, expansion. biomass further for plan investment capital strategic the on progress good made We have also higher margins than coal. commands which is, that economic, is which biomass burn only wewill so, doing In band. co-firing enhanced the sobiomass, enablin sustainable co-firing from output of our to up 20% to produce capability the to provide modifications plant limited other and storage biomass new in 2012 in million to £50 invest we have committed facilities, co-firing existing our from benefit full the to secure Therefore, support. co-firing to receive enhanced threshold of 15% of output necessary proposed the to meet is insufficient co-firing capacity of 12.5% of our output output ofour of12.5% capacity co-firing However, existing our burn. biomass will enable us to increase our sustainable co-firing level for enhanced support proposed the above, described As investment plan Strategic capital g qualification for generator. into a predominantly biomass fuelled ofDrax transformation the begin and be able to finance our investment plans wewould case, investment astrong and levelofsupport appropriate with an that, strategy. We expect trading our and rating credit our capital, working include considerationsimportant for funding for our funding requirements. Other Other requirements. funding for our foundation agood provides end, year at million of£225 cash withnet sheet, investment plan, our strong balance strategic our to progress aposition in are ifwe that to recognise isimportant It million. of£200 order the in to be SCR, including compliance, IED of cost the estimate wecurrently above, As described in Operating performance responsibility section on page 42. social and Corporate the in detail more in isdescribed people our after performance. Our approach to looking business to better leads them motivating and engaging that recognise we and people to our a responsibility We have spirit. team and achievement energy, ofhonesty, values the share we Group the Throughout operations. excellent people leadership across our to deliver itapriority we consider akey and are resource people Our Our people change change targets. change UK’s 2020climate the to meeting contribution asignificant make also but renewable generation for the consumer, effective ofcost volumes large secure only not wewill biomass sustainable by fuelled generator renewable transforming Drax into a predominantly reliable low electricity. carbon Through and effective cost to deliver ability the being them key amongst electricity, ofrenewable asource as of biomass benefits the advocated We have long UK. ofthe mix energy renewable future the in to play has biomass sustainable strategically important role that ofthe recognition isnow There capacity on the system. flexible and reliable retaining whilst of 9.5 million tonnes ofCO tonnes million of 9.5 allocation wehave an (2008–2012) ETS EU ofthe II Phase for whereas addition, In 2013. beyond markets our in visibility However, islittle there margins. at good secured were which sales, power forward from hedge withastrong We 2012 enter Looking ahead 20 February 2012 Chief Executive Dorothy Thompson contribution to reducing CO effective cost and timely a significant, to make ready weare such, With case. investment astrong proving and support dependent upon appropriate regulatory are However, plans our fuelled. to become predominantly biomass We willcontinue withpreparations our agenda. regulatory and legislative the our dialogue with the Government on continue wewill shareholders, to our value to delivering acommitment With building options to burn advantaged fuel. on focus to our retain and performance cost and operating leading to deliver work hard our to continue We intend forecasts. market in recognised are influences ofthese Both 2013. April from mechanism support price carbon cost of impact the introduction of the 2020). We will also have the increased (2013– III Phase in receive any allocation not wewill Plan, Allocation National UK the under annum per allowances target s. accounts 2011 accounts Annual report and Drax Group plc 15 2 emissions emissions 2 emissions, emissions,

Financials Governance Business review 16 Drax Group plc Annual report and accounts 2011

Principal performance indicators Our principal performance indicators provide a snapshot of how we are performing against our overriding objective to maximise shareholder value, and the progress we are making against our strategic initiatives and key priorities.

Maximise profitability from our coal generation capacity

Net sales TWh Average achieved £/MWh Average cost of fuel £/MWh price of electricity excluding carbon 26.4TWh £55.6 per MWh £33.3 per MWh (2010: 26.4TWh) (2010: £51.6 per MWh) (2010: £25.7 per MWh)

26.4 26.4 55.6 33.3 22.6 52.0 51.6 25.4 25.7

2009 2010 2011 2009 2010 2011 2009 2010 2011

The aggregate of net merchant sales Power revenues divided by volume of Fuel costs excluding carbon divided by and net Balancing Mechanism activity net sales (includes imbalance charges) volume of net sales Why we measure Why we measure Why we measure Net sales tracks the volume of power we can The average achieved price of electricity tracks The average cost of fuel excluding carbon tracks sell at positive margins. the power price component of the dark green the fuel cost component of the dark green spread spread achieved. achieved, and reflects the value captured from Comment effective fuel procurement and diversified fuel The increase in power prices following the growth Comment sources. in demand for gas in the aftermath of the Japanese The higher prices achieved in 2011 reflect the earthquake, made it economic for us to generate impact of world events on market prices for Comment more volume in the Summer overnight periods, power, as well as our contracted position at Higher volumes of sustainable biomass burn thereby sustaining the high levels of output seen the start of the year. and rising coal prices combined to increase our in 2010. average cost of fuel in 2011.

Maintain operational excellence

Lost time injury rate (“LTIR”) Total recordable injury rate (“TRIR”) Plant availability %

0.08 0.10 88% (2010: 0.13) (2010: 0.26) (2010: 92%)

0.13 0.26 89 92 88

0.09 0.08 0.17

0.10

2009 2010 2011 2009 2010 2011 2009 2010 2011

The frequency rate is calculated on the The frequency rate is calculated on the Average percentage of time the units were following basis: lost time injuries/hours worked following basis: (lost time injuries + worse than available for generation x 100,000 first aid injuries)/hours worked x 100,000 Why we measure Why we measure Availability tracks our operating performance, These injury rate metrics track our health and safety performance and enable us to maintain a enabling assessment of, and providing guidance positive health and safety culture. for, our operational regime and maintenance investment plans. Comment The 2011 LTIR and TRIR represent a record year for health and safety performance at Drax. Our safety Comment record continues to be industry-leading and was delivered alongside a significant amount of project We continue to demonstrate our leadership activity. We need to retain focus on this area as we enter a year of double outage. position in the coal-fired generation sector, with the impact of enhanced co-firing trials marginally lowering 2011 availability. marketplace and continued high availability. high continued and marketplace the in position competitive our reflects and factor, load aconsistent in resulted 2011 and 2010 Stable generation output (net sales) across Comment Station. Power Drax of competitiveness the and Load factor tracks our operating performance measure we Why of total available generation capacity Net sent out generation as a percentage average cost. fallen significantly, thereby slightly reducing our have prices carbon power. Subsequently related the sold we when 2010, during in locked were contracts carbon 2011 our of proportion A large Comment achieved. spread green dark the of component The average cost of carbon tracks the carbon cost measure we Why purchased allowances of byvolume divided costs Carbon Load factor Average costofcarbon (2010: 80%) 80% (2010: £12.6 pertonne) £12.6 (2010: £12.0 2009 2009 68 14.3 per tonne 2010 2010 80 12.6 Generation Generation 2011 2011 80 12.0 £/tonne % CO enterprise customer base. medium and small the in growth stable by supported market, commercial and industrial the in expansion planned Power’s Haven by driven is volumes retail in growth The Comment business. retail our in growth of rate the of A measure measure we Why Power Haven arm, supply retail our through distributed sales Net project. upgrade turbine the from resulting improvements efficiency the through made were 2 million tonnes of CO of tonnes 2 million saved trials, co-firing enhanced our through burnt biomass sustainable of levels higher The Comment Station. Power Drax of our progress in reducing the carbon footprint illustrates emissions carbon of measure This measure we Why Retail customer volumes customer Retail Carbon dioxide emissions (2010: 1.4TWh) (2010: 3.3TWh (2010: 784 tonnesperGWh) (2010: 760 tonnesperGWh customer base retail Grow our Progress ourbiomassstrategy 2009 2009 815 0.7 2 emissions rate per unit of output of unit per rate emissions 2010 2010 784 1.4 2 in the year. Further savings savings year. Further the in 2011 2011 760 3.3 Retail t/GWh TWh biomass burnt in 2011 than previous years. previous than 2011 in burnt biomass sustainable of volumes higher in resulted year the during co-firing enhanced of development and research the for undertaken trials the However, capacity. full toits used not was facility co-firing our that meant support of levels Low Comment from renewable and sustainable sources. power producing in progress our tracks burnt Measuring the levels of sustainable biomass measure we Why year the during burnt fuel biomass sustainable of Tonnes the year, resulting in an overall increase in net cash. net in increase overall an in year, resulting the during payments dividend meet and loan term the cash generated exceeded that required to repay net the capital, working in increase an Despite Comment our future obligations. business, alongside sufficient liquidity to manage our tosupport maintained is structure capital efficient an ensures cash/(debt) net Monitoring measure we Why costs finance deferred of net borrowings less investments, cashIncludes short-term and Sustainable biomass burnt biomass Sustainable Net cash/(debt) (2010: 907,000 tonnes) 1,265,000 tonnes (2010: £204 millionnetcash) (2010: £225 millionnetcash capital structure optimal supporting an Maintain 2009 2009 (54) 381,000 2010 2010 204 907,000 accounts 2011 accounts Annual report and Drax Group plc 17 Generation 2011 2011 225 700,000 R&D 565,000 Group tonnes £m

Financials Governance Business review 18 Drax Group plc Annual report and accounts 2011

Marketplace

From a nationalised, centrally planned system, the UK The UK electricity market electricity sector has been transformed over the last The UK electricity market is characterised by six large vertically 22 years. integrated companies and a number Privatisation, liberalisation and energy policy have shaped of smaller “independent” companies. Drax is an example of an independent the market and driven increasing consolidation and company, which until 2009 was solely market reform. focused on the generation of electricity. Complex arrangements and mechanisms have evolved to Today, the energy mix of the UK benefits from a diversity of fuel sources, including match the supply and demand of a product which is not gas, coal, nuclear and renewables, which stored, yet is vital to everyday life. is a key contributor to security of supply. In 2010 (the latest figures available), the generating capacity of the UK’s major power producers was some 83,200MW. The final consumption of electricity in 2010 was approximately 330TWh. The six large vertically integrated players have control, either through ownership or long-term contracts, of some 64% of the total generation capacity and have a combined interest of over 91% in the supply market, and over 99.5% in the domestic gas and electricity sector. Drax has a 5% share in the generation capacity market and typically meets 7% of the UK’s electricity needs. Through our retail arm, Haven Power, we serve over 40,000 business sites, Our role in the supply chain together accounting for sales of 3.3TWh Our interests in the electricity supply chain cover the generation, of power in 2011. wholesale and retail markets.

Generation Drax Power Station meets 7% of the UK’s electricity needs and is the largest single source of renewable power in the UK. There are two routes to market for our power.

Wholesale market Retail Various mechanisms exist to allow Haven Power is a retail company serving our power to be traded at the wholesale the electricity needs of business level in Great Britain. customers and providing an alternative route to market for our power.

Forward Short-term Balancing SMEs I&C contract market mechanism (Small and medium (Industrial and market (24 hours (one hour enterprises) commercial (several years before) before) businesses) before) fired plants to be called on to generate. margin we will be the first of the coal- ofthe first the be wewill margin so even when coal-fired plant is at the isatthe plant coal-fired evenso when and plant coal-fired for UK order merit ofthe top isatthe Station Power Drax With excellent reliability availability, and margin. at the operates plant gas-fired then high are prices Ifgas plant. marginal the becomes k k k generation or coal-fired generation, determine which plant, gas-fired will coal and gas for example, sources, fuel ofthe relative prices the and price The wholesale market operates on by the individual market players. taken positions physical the and system, the on ofcapacity availability the prices, commodity underlying the as such factors, of byanumber driven are prices Power prices Wholesale sub-markets: marketelectricity trades across three specific The seasons. GB wholesale or hours half specific for example, periods, for specific traded be also can It ofdelivery. ahead years to up several and to real-time close traded be can Power bilaterally. and brokers exchanges, power markets, futures and viaforward place Trading take can (“GB”). Britain Great in level wholesale atthe traded to be to power exist allow mechanisms Various market electricity The wholesale

supply and demand on the system. the on demand and supply itto balance to enable for electricity bids and offers accepts Operator System the which market) through (real-time Mechanism Balancing and positions; contractual their tune to fine market the opportunity participants gives which exchanges over power short-term bilateral market operated requirements; in response to market participants’ ofdelivery ahead to years up several struck to be contracts allowing market futures and forward long-term * Source: Digest of UK Energy Statistics 2011 Statistics Energy UK of Digest * Source: commodities in which we deal. deal. we which in commodities tothe exposures tomanage us allow market to routes and capability trading Our operate. we which within markets the of experience and knowledge vast has team trading Our capability trading Our by fuel type, 2010* Generation capacity Obligation basis), 2010* Obligation (Renewables sources renewable Electricity generated from and sludge (anaerobic digestion, (landfill gas):(landfill Biomass 12.4% Biomass

etc): Gas (CCGT) 22.5% 32,209

Coal 23,085

Nuclear

Hydro: 8.2% 10,865 Biomass (co-firing):

Renewables (excluding conventional

11.2% stations using renewables sources) 6,124

Dual-fired photovoltaics: 5,576 0.2% Solar Offshore wind: Oil

31.9% 3,778 Onshore 13.6% wind:

Gas turbines (OCGT) and oil engines MW

% 1,560 by end sector, 2010* by end consumption Electricity by fuel input, 2010* supplied electricity Net Other: (commercial premises, transport and agriculture) 47% Gas: Renewables: public administration, 7% 31.9% Imports: 1% Other: 1% accounts 2011 accounts Annual report and Drax Group plc 19 Nuclear: 16% Domestic: Industrial: 37.1% 31.0% 28% Coal: % %

Financials Governance Business review 20 Drax Group plc Annual report and accounts 2011

Marketplace

Forward gas price pence per therm Forward power price £/MWh Commodity markets A number of significant global events Q Summer 11 Q Summer 12 Summer 11 Summer 12 during 2011 have impacted to increase Q Winter 11 Q Winter 12 Winter 11 Winter 12 uncertainty in the commodity markets 80 70 in which we operate. 60 The price of oil is a key driver of 60 50 wholesale price. In mainland Europe, 40 gas prices are linked under contract to 40 30 oil prices, and given that the UK imports

20 a significant amount of gas and that gas 20 is used to generate around 45% of the 10 UK electricity, any changes in wholesale 0 0 gas prices will impact wholesale Jul 11 Jul Jul 11 Jul Jan 11Jan Sep 11 Sep Jan 11Jan Jul 10 Jul Sep 11 Sep Mar 11 Mar Nov 11 Nov Jul 10 Jul Mar 11 Mar Nov 11 Nov May 11 May May 11 May Jan 12 Jan Jan 12 Jan Jan 10Jan Sep 10 Sep Jan 10Jan Sep 10 Sep Mar 10 Mar Nov 10 Nov Mar 10 Mar Nov 10 Nov May 10 May May 10 May electricity prices. The trends in commodity prices Forward coal price (API 2) $/tonne Carbon price (Phase II EUA) €/tonne witnessed in 2010 and 2011 are described further in the following Q Calendar year 11 Q Calendar year 13 Dec 2010 Dec 2012 paragraphs and are illustrated in Q Calendar year 12 Dec 2011 Dec 2013 the accompanying charts.

140 20 Gas 120 The unrest in North Africa and the 16 100 Middle East during the first half of 2011

80 12 put upward pressure on oil markets despite fears of an economic downturn. 60 8 This in turn drove up gas prices which 40 4 were then further strengthened by 20 the increase in demand following the 0 0 Japanese earthquake, and Germany’s Jul 11 Jul 11 Jul Jan 11Jan 11Jan Sep 11 Sep 11 Sep Jul 10 Jul 10 Jul Mar 11 Mar 11 Mar Nov 11 Nov 11 Nov May 11 May 11 May Jan 12 Jan 12 Jan Jan 10Jan 10Jan Sep 10 Sep 10 Sep Mar 10 Mar 10 Mar Nov 10 Nov 10 Nov May 10 May 10 May decision to close its older nuclear plants. The Japanese earthquake reduced market perceptions of liquefied natural Dark green spread £/MWh gas (“LNG”) availability. Gas prices held during the Summer, Summer 11 Summer 12 Winter 11 Winter 12 before softening during the final quarter of the year as demand was far lower than 25 market expectation as a result of the mild winter experienced in the UK and Europe. 20 This was compounded by the Eurozone 15 crisis which further reduced gas demand.

10 LNG and shale gas remain key drivers of the long-term gas markets. Shale gas 5 is largely a US phenomenon in the near-term. Horizontal drilling technology 0

Jul 11 Jul has advanced, but research papers Jan 11Jan Sep 11 Sep Jul 10 Jul Mar 11 Mar Nov 11 Nov May 11 May Jan 12 Jan Jan 10Jan Sep 10 Sep Mar 10 Mar Nov 10 Nov May 10 May remain divided on the marginal cost and available volumes at the lower end of the cost scale. However, the US has significant reserves that could enable it to become relatively self sufficient. This could reduce its LNG requirements, freeing up more volume for the Asian and European markets depending on their relative market price. In the longer term, other countries such as China may also exploit potentially large shale gas reserves. of the year. year. of the increase experienced in the second half withasmall 2010, throughout range narrow afairly in traded prices Carbon Carbon winter. mild the during levels demand oflower a result as year ofthe end the towards slightly across the continent. Prices reduced plant, and relatively high gas prices nuclear older ofits closure the following due2011 to increased demand German of half first the for year on year higher 150% circa were to Europe US exports annum. per tonnes at2billion estimates this market with current consumption in player significant most isthe China 2011. during market coal steam global the Asian demand continued to influence EUprices. to support particularly from China, continued for Atlantic coal, demand Asian and Colombia. In addition, strong on production in Australia, Indonesia severe weather causing constraints with market Pacific the in tightening year. ofthe reflected months This final coal prices increased significantly in the of2010, half first the through stability ofprice period Following acontinued Coal weakened. prices gas as quarter final the in dropping then and stabilising year, ofthe half before first over the by the gas market increasing during 2011, driven to be continued prices Power plant closures. some were there and line on came side significant new gas-fired capacity weather. supply the To on this, balance a result of the unseasonably cold likely most was this occasions both on although December, in levels record reached year,of the demand and increase in demand in the first quarter asmall was There relatively stable. was demand power 2010, During Power remain strong. may well markets global production, possibility of increased shale gas even withthe that so rapidly is rising term. Furthermore, demand for gas have little in impact the short- to medium- therefore, will, and infancy their in US are the outside However, developments increase this. to potential isthe there and alone UK the in planted have been crops coppice rotation short other and of miscanthus ofhectares thousands 2000, in Scheme Crop UK’s Energy ofthe start the Since grass. elephant as known commonly miscanthus, and willow coppice rotation short include crops energy. Energy ofproducing purpose for the specifically planted are that crops are These crops Energy timber. for felled are trees after discarded often are that branches and tops tree thinnings, bark, as such residues, forestry and can be produced from managed forests Sustainably produced woody biomass Forestry products and residues farming. UK supports and forfarmers stream income a new provides energy to produce of biomass use the offarming, by-product unwanted an may be what on avalue placing By used. be also can fines, cork as such available. Residues from non-food crops, readily are they and for farming, available they do not reduce the amount of land production offood by-products are they energy production. Importantly, because for biomass as used be all can more, many and cake olive flour, shells, cocoa grape husks, peanut husks, straw,as oat such production, offood by-products The residues Agricultural very useful, source of biomass. another, offer materials Recovered crops. energy and residues, and products forestry residues, agricultural used to generate electricity are ofbiomass types common three The energy. to produce used if not discarded be often would they that and sustainable be can and renewable be can they that are fuels ofbiomass range wide important characteristics shared by the the but forms, different many in comes Biomass used in energy production Types ofbiomass Biomass pace of economic recovery. renewable generation build rate and the the as such factors, macroeconomic and bypolitical driven largely seems pricing III, into Phase bankable surplus Eurozone economies. With any Phase II for the fears amid late in lows November year two reaching of2011, half second the in sharply dropped Prices earthquake. Japanese ofthe aftermath immediate the in rising before of2011 start the at flat fairly remained prices Carbon more than double or even treble. or double than more could this by2030 and demand energy primary ofour 20% meet could biomass by2020sustainable that estimated has Technology AEA UK, the In 2020. by target energy renewable 20% EU’s the reaching in effort total ofthe a half for around responsible be and years, few next over the double will biomass of use the that indicated EUhas The requirements. energy primary ofits 20% enough to supply the world with10%- world the to supply enough be could ofbiomass sources sustainable by2050, that estimates It gas. and coal oil, after world the in resource energy largest fourth isthe biomass to the International Energy Agency, According source. fuel plentiful and available readily isadiverse, Biomass Availability of biomass wood. recoverable of producers large very are sectors demolition and construction The fuel. abiomass as used be could that material ofa example isan wood Recovered Recovered materials biomass we burn. the all of footprint carbon the monitoring of year fifth our in Weare audited. independently sustainability whichindustry-leading policy is Our biomass is procured against our Biomass procurement Energy crops Energy and residues and Forestry products Agricultural residues Agricultural accounts 2011 accounts Annual report and Drax Group plc 21

Financials Governance Business review 22 Drax Group plc Annual report and accounts 2011

Operational and financial performance

Introduction EBITDA was £334 million for the year ended 31 December 2011 compared to £392 million in 2010 and underlying basic earnings per share were 56 pence compared to 64 pence last year. Our 2011 profit is in line with expectations, which increased during the year with an improvement in the trading environment, although commodity prices did soften towards the end of the period. Earnings were below 2010 levels, which benefited from the accelerated hedge which we put in place during 2008 when wholesale margins were higher. We have continued to exercise tight control over our cost base and our spend on capital projects. 2011 was a record year for health and safety performance at Drax and we have been supported by strong operational performance. Our retail business, Haven Power Limited (“Haven Power”), is meeting our growth expectations, with sales of 3.3TWh compared to 1.4TWh in 2010, largely as a result of the planned growth in its industrial and commercial (“I&C”) customer base, along with a continued increase in the volumes sold to the small and medium enterprise market (“SME”). In April, we were pleased to report that we had reached agreement with HMRC over the Eurobond tax position, resulting in cash tax relief of £180 million. This has enabled us to release £148 million of cash to the business so far, with a further £32 million to follow over the coming years as we utilise the remaining losses. In July, we completed the refinancing of our letter of credit, working capital and term loan facilities, which were due to mature in December 2012. These facilities were replaced by a £310 million revolving credit facility, maturing in April 2014, with the term loan repaid in full out of cash on hand. At the upcoming Annual General Meeting, the Board will recommend a final dividend for 2011 of 11.8 pence per share, taking total dividends for the year to 27.8 pence per share, or £101 million. This review includes further explanation and commentary in relation to our principal performance indicators and the results for the year.

More on: 16 Principal performance indicators All results relate operations. All results to continuing Results of business of Results (1) Fuel costs in respect of generation predominantly comprise coal, sustainable biomass and carbon dioxide (“CO dioxide carbon and biomass sustainable coal, comprise predominantly generation of respect in costs Fuel (1) Notes: (3) Grid charges include transmission network use of system charges (“TNUoS”), balancing services use of system charges (“BSUo charges system of use services balancing (“TNUoS”), charges system of use network transmission include charges Grid (3) market. the in purchased power represents purchases power of Cost (2) (7) Calculated using underlying earnings, being profit attributable to equity shareholders adjusted to exclude the after tax im tax after the toexclude adjusted shareholders toequity attributable profit being earnings, underlying using Calculated (7) (6) EBITDA is defined as profit before interest, tax, depreciation, amortisation, gains and losses on disposal of property, plan (5) Other operating and administrative expenses excluding deprec LECs. and metering ROCs, fees, broker include costs retail (4) Other Net finance costs Operating profit Unrealised gains/(losses) on derivative contracts EBITDA Earnings per share Profit before tax before Profit equipment and plant ofproperty, disposal on loss and amortisation Depreciation, Other retail costs Fuel costs in respect of generation Total revenue — Underlying basic — Underlying diluted — Statutory basic — Statutory and unrealised gains/(losses) on derivative contracts Other operating and administrative expenses excluding depreciation, amortisation Gross profit Total ofsales cost — Underlying diluted — Underlying Cost of power purchases ofpower Cost Profit for the year attributable to equity shareholders shareholders toequity attributable year the for Profit Grid charges — Before exceptional items and impact of corporation taxrate change ofcorporation impact and exceptional items — Before Tax credit/(charge) Tax credit/(charge) — Exceptional items — Exceptional — Impact of change in rate of corporation tax on deferred tax deferred taxon rate in ofcorporation ofchange — Impact administrative expenses. (6) (3) (4) (7) (7) (2) (1) iation, amortisation and unrealis (5) ed gains and losses on deriva 2 ”) emissions allowances, together with petcoke and oil. oil. and petcoke with together allowances, emissions ”) t and equipment and unrealised gains and losses on derivative contracts. pact of unrealised gains and losses on derivative contracts, and exceptional items. tive contracts include salaries, maintenance costs and other S”) and distribution use of system charges (“DUoS”). charges system of use distribution and S”) 31 December 2011 pence per share per pence (1,020.8) (1,335.1) 1,835.9 Year ended 464.6 500.8 (172.3) 366.2 333.6 (167.2) (24.4) 126.5 338.1 (117.6) (87.5) (57.2) 197.9 (28.1) 89.8 126 127 16.1 56 55 £m accounts 2011 accounts Annual report and Drax Group plc 23 31 December 2010 pence per share (1,097.9) 1,648.4 Year ended (840.9) (158.6) (165.8) 550.5 254.9 279.2 188.4 (66.5) (60.5) (82.2) 391.9 (52.2) (24.3) (74.1) (9.0) 7.6 64 64 52 52 £m —

Financials Governance Business review 24 Drax Group plc Annual report and accounts 2011

Operational and financial performance

Segmental information Revenue bridge £m

Year ended Year ended 31 December 31 December 2011 2010 2011 2010 £m £m 2,000 1,750 Power sales 1,641.0 1,528.2 ROC and LEC sales 69.2 25.1 Ancillary services income 17.4 34.6

Other income 7. 6 8.1 1,750 Total generation revenue 1,735.2 1,596.0 1,500 Retail revenue 275.5 124.3 Inter-segment sales (174.8) (71.9) Total Group revenue 1,835.9 1,648.4 1,500 Gross Margin

Generation gross margin 484.4 535.8 1,250 Retail gross margin 16.4 14.7 1,250 Total Group gross margin 500.8 550.5 EBITDA Generation EBITDA 336.1 393.4 Retail EBITDA (2.5) (1.5) 1,000 Generation Retail Inter- Group 1,000 Generation Retail Inter- Group segment segment Total Group EBITDA 333.6 391.9

Gross margin £m Net generation split by customer1

Q RetailQ Generation Retail: Retail: 600 13% 6%

500

400

300 2011 2010

200

100

Wholesale: Wholesale: 0 2011 2010 87% 94%

(1) Retail sales based on volume at Notional Balancing Point

Group revenue analysis Biomass burn by month cumulative tonnes (Mt)

Power and retail sales (£m) Net power sold (TWh) Q 2009 Q 2010 Q 2011 Other income (£m) Average achieved price (£/MWh) 1.4 26.4TWh 26.4TWh

1.2 Includes 0.6 million tonnes of R&D trial burn 22.6TWh £55.6/MWh 1.0

£52.0/MWh £51.6/MWh 0.8 £90m £79m £66m £1,746m 0.6 £1,583m £1,410m 0.4

0.2

2009 2010 2011 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec burnt during 2011. 2011. during burnt than usual from sustainable biomass thereby ROCs, period benefiting earlier compliance ofcurrent a number sold wehave addition, In 2011. during for sale increased the number of ROCs available which 2010, during burn biomass as a result of an increase in sustainable 2011 in to £69million 2010 in million £25 ROC and LEC sales have increased from 2010. and 2011 both in 26.4TWh was sold power Net East. Middle the and Africa North in unrest the and earthquake Japanese ofthe impact felt the markets when half first the in particularly but awhole, as year the during average on prices power higher as well as position, contracted our reflects electricity of price achieved average Our 2010. in MWh per to £51.6 compared MWh, per to £55.6 2011 December 31 ended year for the price electricity achieved an increase in the average wholesale from resulted 2011 in sales power Higher £8million). of (2010: £8million income other and million) £35 (2010: million of£17 income services ancillary million), £25 (2010: of£69million sales LEC and million), ROC £1,528 (2010: million of£1,641 sales power includes Total 2011 in revenue 2010. in generation million compared million £1,735 to £1,596 was 2011 December 31 ended year for the Total revenue generation Revenue Generation results (excluding CO (excluding MWh per offuel cost average The 2010. in million to £841 compared 2011, in million Fuel £1,021 were costs fuels) other and biomass sustainable costs(coal, Fuel by-products (ash and gypsum). of sale the includes income Other margins from these activities. appropriate earning and system, the to akey play supporting role continued wehave Grid, withNational place in contract no wehad whilst For 2011, reliability. and flexibility plant’s the through value weadd where Mechanism, Balancing the from to profit potential less wehad that fact bythe offset somewhat was benefit their 2010, in months Summer the during despatch predictable gave us certainty of income and more contracts these Whilst 2010. during Grid Response contracts in place with National Frequency Firm the from revenue services incomeAncillary includes content) in 2011 and 88% in 2010. 2010. in 88% and content) 2011 in heat (by burnt oftotal fuel 87% around different maturities. Coal represented with contracts priced variable fixed or either under sources international and ofdomestic avariety from purchased was coal This 2010. in tonnes 9.4 million compared2011, to approximately December 31 ended year the in of coal tonnes 9.1 approximately million We burnt coal. especially movements, price bycommodity and Executive’s statement Chief the in described work development and research the following burn biomass by fuel mix, in particular higher sustainable increase in average fuel prices was driven The 2010. in to £25.7 compared 2011, December 31 ended year the for £33.3 Fuel burn composition (heat) composition burn Fuel Biomass Biomass: R&D: 4% 5% Petcoke: 2 emissions allowances) was was allowances) emissions 1% Pond fines: 2011 3% 87% Coal: level of generation. same the to achieve 2010, in than burn biomass ofsustainable levels higher and improvements efficiency ofplant aresult was This 2010. in tonnes compared to approximately 12.9 million approximately 11.9 million tonnes NAP, UK the under was allocated excess ofthose in 2011, December 31 ended year the for requirement Our CO international sources. and ofdomestic avariety from dates maturity withdifferent contracts price tonnes of CO of tonnes million of9.5 allocation an has Drax (2008–2012), EUETS ofthe II For Phase CO NAP. UK the under We purchase annum Fuel costs(COFuel mix. fuel awider manage to ability our in improvements further demonstrate 2011, in burn fines pond and The increases in our sustainable biomass volumes. large in to burn techniques handling and blending specific requires and to coal, discount at asignificant trades which residue, mining is acoal fines relative Pond to coal. pricing its by isdriven volume petcoke burn Our tonnes). million 0.4 (2010: fines of pond tonnes million 0.6 tonnes) and million 0.2 ofpetcoke (2010: tonnes million 0.1 burnt We also Executive’sChief statement. the in described work development and This increase is a result of the research 6%). (2010: content byheat burnt oftotal fuel 9% tonnes) representing sustainable 0.9 biomass (2010: million of tonnes million 1.3 weburnt 2011, In Biomass: 2 emissions allowances under fixed fixed under allowances emissions 6% 2 Petcoke: emissions allowances 3% 2 emissions allowances per 2 Pond fines: emissions allowances) emissions 2010 3% accounts 2011 accounts Annual report and Drax Group plc 25 88% Coal:

Financials Business review 26 Drax Group plc Annual report and accounts 2011

Operational and financial performance Our average price of carbon is a function Biomass research and development Cost of power purchases of the timing of purchases under fixed work Retail cost of power purchases price contracts in the forward and The biomass research and development were £171 million for the year ended near-term markets. The average price work described in the Chief Executive’s 31 December 2011 compared to expensed for purchased CO2 emissions statement cost around £19 million in 2011. £71 million for the year ended allowances during the year ended This includes £11 million within generation 31 December 2010. Haven Power 31 December 2011 was £12.0 per tonne gross margin (the impact of burning purchases power in the wholesale compared to £12.6 per tonne in 2010. uneconomic biomass principally), market for delivery to its retail customers. The majority of our 2011 carbon operating costs of £3 million (e.g. expert The vast majority of these purchases requirement was contracted during technical advice in relation to biomass are from Drax Power Limited and are 2010 and the first half of 2011 when combustion and chemistry) and capital eliminated on a group basis. The increase prices were higher than in the second investment of £5 million (new conveyors in retail cost of power purchases is a half of 2011 (see Commodity markets). and fuel handling infrastructure). result of the significant increase in sales This is in line with our hedging strategy volumes and power prices. We believe this work has placed Drax to purchase carbon when we sell the in the best possible position to deliver Grid charges related power. a step change as quickly and efficiently Haven Power incurred £60 million Cost of power purchases as possible in the volumes of sustainable of grid charges during the year ended We purchase power in the market when biomass we burn, if support is at an 31 December 2011 and £28 million the cost of power in the market is below appropriate level. during the year ended 31 December 2010. our marginal cost of production in Charges have increased as a result of respect of power previously contracted As a result of these factors, generation higher sales volumes together with for generation and delivery by us, and gross profit for the year ended substantial increases in the rates charged to cover any shortfall in generation. 31 December 2011 was £484 million by the distribution network operators. For the year ended 31 December 2011, compared to £536 million in 2010. Other retail costs the cost of purchased power for the Other retail costs include broker fees, generation business was £172 million, Operating and administrative expenses ROCs, LECs and metering and compared to £165 million incurred in Generation other operating and were £29 million in the year ended 2010, as a result of the higher power administrative expenses before 31 December 2011, compared to prices in 2011 as described in depreciation and amortisation were £11 million in 2010. In addition to higher Commodity markets. £148 million for the year ended volumes, costs have increased in 2011 due Grid charges 31 December 2011, compared to to the much larger than expected uptake Grid charges for generation for £143 million in 2010. The cost increase of the subsidy for solar photovoltaic the year ended 31 December 2011 were of £5 million largely reflects the panels, which has resulted in very large £58 million, compared to £54 million biomass investment in research and increases to the FiT levelisation costs in the year ended 31 December 2010. development work described above. being charged to suppliers. The slight increase resulted from an increase in the £/MWh charged by Generation EBITDA for the year ended Retail gross profit for the year ended National Grid reflecting the impact 31 December 2011 was, therefore, 31 December 2011 was £16 million of additional variable generation, such £336 million compared to £393 million compared to £15 million in 2010. as wind turbines, on their costs to in 2010. Although sales volumes have increased balance the system. significantly, margins within the I&C market remain relatively low. Retail results Operating and administrative expenses Revenue Retail operating and administrative Group operating and £m Retail revenue of £276 million for the administrative expenses expenses excluding depreciation and year ended 31 December 2011 was 123% amortisation were £19 million for the year 170 higher than the revenue of £124 million ended 31 December 2011, £3 million for the year ended 31 December 2010. higher than for 2010. The increase largely 165 This substantial growth is in line with relates to staff costs following the growth our strategy to grow Haven Power, in the business and certain entry costs 160 with retail sales being a credit efficient into the I&C market. alternative to selling power in the 155 wholesale market. The growth in sales has been secured at satisfactory As a result, retail EBITDA for both the years ended 31 December 2011 and 150 margins and good credit quality. 2010 was a loss of £2 million. Retail sales volumes have increased from 145 1.4TWh in the year ended 31 December We remain on track to achieve our target 2010 to 3.3TWh in 2011 following planned of break even EBITDA for this business 140 growth in the I&C customer base and from 2013.

growth continued growth in SME customer 2011 costs 2011 2010 costs 2010 Underlying

cost savings cost volumes. Haven Power Investment in Investment operating costs operating our financial statements. in recorded are they where and losses the movements in unrealised gains and shows table for power. following The contracts forward ofour mark-to-market relate to the principally sheet balance the unrealised gains and losses recognised in net the in movement the such, As biomass contracts. and coal domestic forward including purchase, sale or usage requirements, own forour held into and entered contracts for derivative exemption use own wetake the possible, Where IFRSs. under ofderivatives definition the meet which contracts forward on losses and The Group recognises unrealised gains derivative contracts on losses and gains Unrealised commissioned part-way through 2010. was facility, which co-firing for the ofdepreciation year afull includes 2011 2010. December 31 ended year the for million £52 and 2011 December 31 the balance sheet at 31 December 31 at sheet balance the Net unrealised gains/(losses) in Premium on options sold (a component of equity) recognised in the hedge reserve Fair value gains/(losses) statement income the in recognised Unrealised gains/(losses) £61 million at 31 December 2010. 2010. December at31 £61 million of sheet balance the in loss unrealised an in resulted factors Together these prices. to us floating expose which contracts, coal financial our on losses year, driving an increase in the unrealised ofthe months final the in significantly first half of prices 2010, increased of period coal price during the stability a following addition, In sheet. balance reducing2010, the unrealised gain in the narrowed considerably at December 31 had price market the and delivered be yet to had but contracted been had that power between difference the that such power 2010, pricesDuring increased, marketsCommodity section. the within described are position in our net unrealised gains and losses movements the determine largely which prices, power forward in trends The 1January at sheet balance the Net unrealised (losses)/gains in ended year the for million £57 was Depreciation and amortisation Depreciation and amortisation Central costs 31 December 31 December Year ended (61.0) 89.8 30.7 (0.7) 2.6 2011 2011 £m 31 December Year ended (232.6) (60.5) 234.1 (61.0) (2.0) 2010 2010 £m electricity at any given date. atany given electricity of price absolute bythe not spreads, green dark level market to deliver strategy byour isdriven profitability that to recognise it isimportant movements, In considering mark-to-market in million 2010. £233 of losses unrealised to net compared million, £3 was 2011 December 31 ended year the in reserve hedge the through The net unrealised gain recognised period. ofthat end atthe delivered to be yet power on positions mark-to-market of recording the and period, reporting a during delivered to power relating positions mark-to-market unwinding reserve are mainly the result of hedge the in recognised losses and sheet. Movements in unrealised gains of shareholders’ equity in the balance acomponent reserve, hedge the through effective hedges, have been recognised to be considered contracts, derivative our Mark-to-market movements on most of exchange. foreign and coal financial largely accounting; for hedge qualify not do which contracts derivative our on movements mark-to-market from arise 2010 in of£61 million losses unrealised and 2011 December 31 ended year the for million of£90 statement income the The unrealised gains recognised in 31 December 2011. at sheet balance the in million £31 recognition of an unrealised gain of drove the offactors combination This at 31 December 2011. losses unrealised the reducing thereby matured, contracts the as year the during unwound 2010 December at 31 place in contracts coal financial of the year. ofthe Anumber remainder over the stabilising before of2011, quarter first the Coal prices also continued to rise during the unrealised gain in the balance sheet. market prices, driving an increase in than higher was 2011 December at 31 delivered yet to be had but contracted been had that ofpower price average the aresult, quarter. As final the in fell significantly prices power 2011, During compared to £279 million in 2010. 2010. in million to £279 compared million £366 was 2011 December 31 ended year for the profit operating depreciation and amortisation, contracts, derivative on losses and After allowing for the unrealised gains a cash tax benefit of up to £220 million. million. to ofup £220 taxbenefit a cash with taxlosses additional accelerating potentially 2008, in unwound was to another group company, which payable byaEurobond funded partially was company asubsidiary structure, financing previous Group’s the Under from deferred on 2012 April tax liabilities. taxrate corporation in reduction of the on current deferred and tax liabilities and 2011 taxrate April from corporation in reduction ofthe impact the includes rate(an of26%). effective Tax for 2011 2010 in to £67million 21%), compared rate (an of effective million £71 was 2011 December 31 ended year the for before exceptional items taxcharge The Tax 31 December 2011. to year the in million of£3 charge interest aone-time in resulted This refinancing). and resources (see Capital refinancing the following term reduced their to reflect accelerated was facilities bank previous to relation our in costs finance ofdeferred unwind The 2010. in million with£24 compared million £28 were 2011 December 31 ended year the for costs finance Net Interest settlement of these issues. issues. ofthese settlement provisions no required longer following the being issues, release of historic tax legacy to relation in other million £18 afurther and million of£180 settlement Eurobond ofthe recognition full includes million of£198 exceptional taxcredit The as we utilise the remaining losses. years coming over the million £32 the business and will release a further to saved date to ofcash million £148 we December had31 2011, released at taxrelief. As cash million of £180 position which will result in the release tax Eurobond over the with HMRC agreement wereached 2011, April In with HMRC. benefit recognised prior to agreement no and ring-fenced, notionally saved withcash 2008, in losses potential these utilising began Group The to 52 pence in 2010. 2010. in to pence 52 126 pence respectively, compared and pence 127 were share per earnings diluted and basic and 2010, in £465 million compared million to £188 was 2011 December 31 ended year the attributable to equity shareholders for profit factors, above ofthe aresult As accounts 2011 accounts Annual report and Drax Group plc 27

Financials Governance Business review 28 Drax Group plc Annual report and accounts 2011

Operational and financial performance The forced outage and Winter forced Analysis of cash flows Operating performance % outage rates for the year ended Year ended Year ended 31 December 31 December 31 December 2011 were 5.8% and 3.9% 2011 2010 Q Forced outage rate Q Winter forced outage rate £m £m Q Planned outage rate respectively, compared to 3.4% and Cash generated from 2.4% in 2010 which was a record year. operations 281.9 484.7 10 2 planned outages 1 planned outage 2011 forced outage rate remains Income taxes paid (67.7) (56.1) consistent with our long-term target Other gains 0.7 2.0 Net interest paid (16.4) (19.5) 8 of circa 5%. Net cash from operating The planned outage rate achieved for the activities 198.5 411.1 year ended 31 December 2011 was 6.2%, 6 Cash flows from investing compared to 4.6% in 2010, with one activities major planned outage completed in both Purchases of property, plant and equipment (43.8) (62.3) 4 years. Our maintenance regime includes Short-term investments 65.0 (40.0) a major planned outage for each of Net cash generated from/ our six units once every four years. (used in) investing activities 21.2 (102.3) 2 Consequently, there is an irregular Cash flows from pattern to planned outages and financing activities Equity dividends paid (123.7) (86.5) 0 2007 2008 2009 2010 2011 associated expenditure, since in two of the four years two units will each Repayment of borrowings (135.4) (65.2) undergo a major planned outage. New borrowings 10.0 — Underlying profit attributable to equity Two units will undergo a major planned Other financing costs paid (3.8) (1.5) shareholders (that is profit excluding outage in 2012. Net cash used in financing activities (252.9) (153.2) the after tax impact of unrealised gains Health and safety Net (decrease)/increase in and losses on derivative contracts, and cash and cash equivalents (33.2) 155.6 exceptional items) was £202 million 2011 was a record year for Drax in terms of our health and safety performance. Cash at 1 January 236.0 80.4 for the year ended 31 December 2011, Cash at 31 December 202.8 236.0 Our lost time injury rate and total compared to £233 million in 2010. Short-term investments 30.0 95.0 Underlying basic and diluted earnings recordable injury rate were 0.08 and at 31 December per share were 56 pence and 55 pence 0.10 respectively for the year ended Borrowings at 31 December (7.6) (127.0) respectively in 2011, compared to 31 December 2011 compared to 0.13 and Net cash at 31 December 225.2 204.0 64 pence in 2010. 0.26 respectively in 2010. Our safety record continues to be industry-leading Cash generated from operations and was delivered alongside a significant was £282 million in the year ended Other key factors affecting amount of project activity. We continue 31 December 2011, compared to the business with our commitment to deliver a positive £485 million in 2010. The decrease was health and safety culture. Outages and plant utilisation levels largely the result of a fall of £58 million in EBITDA and a working capital outflow Year ended Year ended 31 December 31 December of £51 million in 2011, compared to 2011 2010 Liquidity and capital resources Electrical output (net sales) an inflow of £115 million in 2010. (TWh) 26.4 26.4 Net cash was £225 million as at The working capital outflow of £51 million Load factor (%) 79.7 79.7 31 December 2011, compared to in 2011 includes an increase of £24 million Availability (%) 88.4 92.1 £204 million at 31 December 2010, in the value of coal stocks, resulting from Winter forced outage rate (%) 3.9 2.4 following the refinancing in July 2011, an additional 0.2 million tonnes of stock Forced outage rate (%) 5.8 3.4 and the repayment of £135 million held at the end of 2011, and higher coal Planned outage rate (%) 6.2 4.6 of borrowings (see Capital resources (1) prices during the period (see Fuel costs – Total outage rate (%) 11.6 7.9 and refinancing). Cash and short-term coal, sustainable biomass and other fuels). Notes: deposits were £233 million as at The remaining net outflow includes (1) The forced outage rate is expressed as a percentage of 31 December 2011, compared to planned capacity available (that is, it includes a reduction for a lower carbon creditor (£21 million), planned losses). The planned outage rate is expressed as a £331 million at 31 December 2010. percentage of registered capacity. Accordingly, the reflecting the timings of payments aggregation of the forced outage rate and planned outage rate An analysis of cash flows for both will not equate to the total outage rate. with respect to our 2011 liability and a years is set out in the following table. The load factor and electrical output fall in the cost of carbon over the year (see were 79.7% and 26.4TWh respectively Fuel costs – CO2 emissions allowances). for both years ended 31 December 2011 The working capital inflow in 2010 largely and 2010. We continued to demonstrate reflects a decrease in coal stocks of our leadership position in the coal-fired 1.6 million tonnes (£84 million), resulting generation sector with plant from higher than expected generation availability of 88.4% for the year over the corresponding period. ended 31 December 2011, compared Income taxes paid were £68 million in the to 92.1% in 2010. year ended 31 December 2011, compared to £56 million in 2010. 2011 payments include settlement of the 2010 liability, as well as payments on account for 2011. reduced from 3.5% to 2%. to 2%. 3.5% from reduced has facility new our on over LIBOR margin The purposes. capital working and ofcredit letters for both used be can which and 2014, April in matures which facility credit revolving million a £310 facilities These 2012. were replaced with December in to mature due were which facilities, loan term and capital working ofcredit, letter ofour refinancing the wecompleted 2011, July In refinancing and resources Capital deposits. risk low other or society building bank, short-term in cash available isto invest policy Group’s The 2010. in compared to million an increase of £156 2011, December 31 ended year the in million £33 therefore was equivalents The decrease in cash and cash and refinancing). resources (see Capital of £65million repayments loan term and million of £87 amount includes equity dividends paid 2010 facility.revolving credit The million drawnof £10 down against the borrowings ofnew net million, of £135 repayments loan term and million £124 includes equity dividends paid of million£153 in 2010. The amount 2011 31 December compared 2011, to ended year the in million £253 was activities financing in used cash Net atinception. months three than more of withamaturity deposits short-term £40additional million), comprising (2010: of£65million investments short-term in areduction includes 2011 expenditure). (see Capital 2010 in million £62 and 2011 December 31 ended year for the million of£44 expenditure includes payments in of respect capital activities investing from flows cash Net Q Q investment Capital 100 120 80 40 60 20 Co-firing project Co-firing Plant projects 0 072008 2007 Q Q Turbine upgrade Enhanced co-firing 092010 2009 Q projects Other non-plant 2011 £m period due to major planned outages. outages. planned to major due period expenditures are increased during this maintenance while output, and prices oflower effect combined to the due Summer months is materially reduced Accordingly, cash flow during the planned outages. by is affected availability plant and lower are prices when months, Summer the in despatch lower and period Winter prices despatch and inelectricity the businessOur is seasonal with higher ofborrowing Seasonality preparing these financial statements. when ofaccounting basis concern going the to adopt continue and future, foreseeable for the existence operational in to continue resources adequate has reasonable expectation that the Group have a directors the Accordingly, current facilities. banking ofour level the within to operate able performance, shows that we should be reasonably possible changes in trading of account taking Plan, Business Our our progressive hedging strategy. to due forecasts, near-term in compliance, and good visibility of cash generation, strong covenant history arecent and facilities, banking We have significant headroom in our and risk. liquidity counterparty to exposure credit, and activities, hedging and instruments management, details on financial risk to capital approach our includes statements financial to consolidated the note 19 addition, In above. described are facilities borrowing and flows cash Our review. Business this in out set are including principal risks and uncertainties position and performance developments, future to likely affect factors with the The Group’s business activities, together concern Going 31 December 2011. at place in remained and year the during facility credit revolving new the million has drawn been £10 down against 2011. December to 31 year the in million of£3 charge interest one-time a in resulting term, reduced their to reflect accelerated been has facilities banking previous to the relation in costs finance deferred ofthe unwind The million. £65 were repayments refinancing. During 2010 scheduled debt upon full in repaid was million of £101 balance loan term remaining the and 2011 June at30 made were million £34 Scheduled debt repayments of compared to £59 million in 2010. 2010. in to million £59 compared 2011, December 31 ended year the in £45 were million additions asset Fixed Capital expenditure refinancing. and resources Capital See required. where cycle the in points low cash the managing in assists facility credit revolving million £310 Group’s The work (2010: £nil). £nil). work (2010: development and research biomass our of support in infrastructure handling fuel conveyors new and on expenditure of million £5 and upgrade, turbine the strategic carbon abatement project, major our on 2010) in million (£20 of£8million expenditure includes This during the financial year. by suppliers invoiced was Group the trade creditors against the amounts upon the ratio of amounts owed to days). isbased 21 figure The (2010: daily purchases through the year days ofaverage 22 approximately at 31 December 2011 represented creditors to trade due amounts the creditors. In respect of Group activities, trade no has Group, ofthe company parent the plc, Group Drax conditions. also comply with all relevant terms and suppliers the that provided payment, for fall due owing sums when creditors to abide by those terms and pay is policy Group’s the and transaction suppliers when negotiating each Terms of payment are agreed with practice and policy payment Creditor plan). investment Strategic capital (see Chief Executive’s statement expenditure capital result inadditional whichinvestment may opportunities toWe evaluate other continue will with budget. completed. Expenditure remains in line be will programme upgrade turbine unit outage scheduled for 2012, the Tackling adouble change). climate With responsibility, social and (see Corporate to efficiency improve units generating six all on modules turbine pressure low and pressure high the to upgrade million to to up £100 invest we expect project, upgrade turbine to the relation In accounts 2011 accounts Annual report and Drax Group plc 29

Financials Governance Business review 30 Drax Group plc Annual report and accounts 2011

Operational and financial performance Future developments As at 15 February 2012, the positions Distributions under contract for 2012, 2013 and 2014 Strategic capital investment plan were as follows: Distribution policy The Chief Executive’s statement Subject to the provisions of the describes how preparation for our 2012 2013 2014 Companies Act, the Group may by biomass expansion is now well advanced. Power sales (TWh) comprising: 22.0 9.1 3.0 ordinary resolution from time to time – Fixed price power sales (TWh) Whilst moving ahead with our plans at an average achieved price 15.1 at 6.5 at 0.4 at declare dividends not exceeding the remains dependent on securing (per MWh) £54.5 £52.7 £57.6 amount recommended by the Board. appropriate regulatory support and on – Fixed margin and structured The Board may pay interim dividends proving a strong investment case, we power sales (TWh) 6.9 2.6 2.6 whenever the financial position of the have also made good progress with the CO2 emissions allowances Group, in the opinion of the Board, hedged, including UK NAP work to scope out the capital investment allocation, market purchases, justifies the payment. plan for the project. The principal structured contracts, and The Board has previously committed components of the plan include potential benefit of biomass co-firing (TWh equivalent) 21.8 9.1 3.1 to a pay-out ratio of 50% of underlying investments in development of the Solid fuel at fixed price/hedged, earnings (being profit attributable to Drax site biomass capacity, the biomass including structured contracts equity shareholders adjusted to exclude supply chain, and in Industrial Emissions (TWh equivalent) 22.6 11.0 11.1 the after tax impact of unrealised gains Directive (“IED”) compliance. Fixed price power sales include and losses on derivative contracts,

£m approximately 1.0TWh supplied in the and exceptional items) in each year. Committed investment: period 1 January 2012 to 15 February Underlying earnings per share were Biomass capacity development (Phase 1) 2012 under the five and a quarter year 56 pence on this basis for the year – secure full benefit from existing baseload contract which commenced on ended 31 December 2011. co-firing facilities £50m 1 October 2007 and the five year 300MW Dependent on appropriate ROC support baseload contract which commenced Dividends paid and strong investment case: on 1 October 2010, both with Centrica. On 21 February 2011, the Board resolved, Biomass capacity development (Phase 2) subject to approval by shareholders at – increase Drax site capacity to Fixed margin power sales include the Annual General Meeting (“AGM”) predominantly biomass c. £250m approximately 6.9TWh in 2012, on 13 April 2011, to pay a final dividend – pellet plants to provide and 2.6TWh both in 2013 and 2014 fuel security £150m–£200m for the year ended 31 December 2010 in connection with the above contracts. IED compliance of 17.9 pence per share (£65 million). – estimate of plant retrofit cost c. £200m Under these contracts the Group will The final dividend was subsequently Net cash at December 2011 £225m supply power on terms which include paid on 13 May 2011. Centrica paying for coal, based on On 1 August 2011, the Board resolved More information on the various international coal prices, and delivering components of the capital investment to pay an interim dividend for the matching CO2 emissions allowances six months ended 30 June 2011 of plan can be found in the Chief Executive’s amounting in aggregate to approximately statement. 16.0 pence per share (£58 million), 7.2 million tonnes in 2012, and representing 50% of underlying earnings It is important to recognise that if approximately 2.4 million tonnes for the period. The interim dividend was we are in a position to progress, our in both 2013 and 2014. subsequently paid on 14 October 2011. strong balance sheet, with net cash of The contracts provide the Group with a Dividends proposed £225 million at year end, provides a good series of fixed dark green spreads, with foundation for our funding requirements. At the forthcoming AGM the Board the spreads in the first contract having will recommend to shareholders that a Positions under contract for 2012, been agreed in the first quarter of 2006 resolution is passed to approve payment 2013 and 2014 and those in the second contract having of a final dividend for the year ended We continue to follow our stated trading been agreed in October 2009. 31 December 2011 of 11.8 pence per strategy of making steady forward power share (£43 million), payable on or sales with corresponding purchases of before 11 May 2012. Shares will be CO2 emissions allowances and fuel marked ex-dividend on 25 April 2012. purchases. Our aim is to deliver market level dark green spreads across all traded This Business review was approved by market periods and, as part of this the Board on 20 February 2012. strategy, we retain power to be sold into the prompt (within season) power markets.

Tony Quinlan Finance Director “The refinancing andconclusion of future growth future Foundation for £180 million. of relief tax cash in resulted which position, tax Eurobond the over agreement with HMRC In April 2011,we reached Eurobond matures in April 2014. credit facility which million revolving £310 bya replaced were bank facilities. These ofour refinancing we completed the In July 2011, Refinancing of £225 millionof £225 at the endof 2011.” given us astrong platform onwhich Maintain an optimal supporting capital structure capital supporting optimal an Maintain to grow the business. We had net cash the Eurobond tax structure have both Head of Investor Relations Michael Scott One of our keypriorities: our of One £225m modification. plant limited other and new biomass storage in 2012 in million £50 toinvest committed wehave investment, co-firing existing benefit from our full the To secure development Biomass capability investment case. and a strong support regulatory on securing appropriate remains dependent Further investment our biomass expansion. investment plan for capital strategic progress on the We’ve made good investment plan Capital f

2011. accounts 2011 accounts Annual report and Drax Group plc 31

Financials Governance Business review 32 Drax Group plc Annual report and accounts 2011

Principal risks and uncertainties

The effective management of risks within the Group Internal control and risk management underpins the delivery of our key priorities. The Group has a comprehensive structure of governance controls in place The Board is responsible for the Group’s system of internal control and for to manage risks. Policies have been established in key areas reviewing its effectiveness. A process of the business such as trading, treasury, production and has been established for identifying, health and safety to ensure that these risks are managed evaluating and managing the significant risks faced by the Group and this in a controlled manner and in accordance with the Board’s has been in place for the year under appetite for risk. review up to the date of approval of the 2011 Annual report and accounts. The process is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable, not absolute, assurance against material misstatement or loss.

Risk management committees There are five risk management committees:

1 Treasury and commodity risk management committee 2 Safety, health, environmental and production integrity committee 3 New business risk management committee 4 Corporate risk management committee 5 Haven Power risk management committee Each Committee is responsible for ensuring that all risks associated with their specific area of the business are identified, analysed and managed systematically and appropriately. Each Committee has terms of reference that requires it to ensure that systems and controls are approved, implemented and monitored to ensure that activities are commensurate with the risk appetite established by the Board, are adequately resourced and comply with applicable legal and regulatory requirements. Each risk committee contains at least one member of the Executive Committee.

Philip Hudson Director of Corporate Affairs and Company Secretary operating effectively. is process the that Committee Audit to the ofassurance a source provide and process, management risk the of implementation and operation the in executive the directors assist committees Riskmanagement of Board. the behalf on controls ofinternal suitability the and information reviews financial internal control. The Audit Committee and this system of riskmanagement for responsible isultimately Board the – assurance and monitoring Risk appetite. risk identified with the risk the to align measures mitigation risk should be managed by applying to as that taken how to be decisions enables analysis The criteria. to same the by reference isidentified Risk appetite follows: as probability and to impact with reference logged then are Risks basis. aquarterly on committees management risk bythe reviewed are registers risk The risk. for each measures probability, ownership and mitigation and ofseverity level identified, risks the Risk registers to are used document isassessed. materialising ofits likelihood and impact the and considered, are risk Risk analysis – identified. are risks new that and effective, and appropriate are area their in controls and processes management risk the that to ensure risks review the committees, periodically management risk ofthe assistance with the risk and owners, Senior management Plan. Business ofthe formulation the during identified are Group the Risk identification – follows: as are process management risk ofthe keyThe elements Risk management process o eim High Low Medium Probability the basic causes of each ofeach causes basic the risks faced by by faced risks

Impact Low Medium High emergency planning. makes frequent reports on performance management Operational results. ofGroup publication the through is reported formally to shareholders year. of the Performance start at the set targets other and safety operating, progress against a set of financial, Corporate Scorecard which shows Group performance against a Balanced overall monitors and limits, pre-set to the compared as exposure risk trading on reports receives monthly also Board The basis. amonthly on Board to the reported and monitored subsequently Performance against the budgetis ahead. year the for budgets expenditure capital year, and of each ofoperating end the towards approval, and Plan Business five year ofarolling approval Board incorporates which monitoring, and ofplanning asystem has Group The levels accountabilities. and authority delegated structures, clear with policies control defined well and comprehensive has Group the addition, In Internal control Risk reporting place for business continuity and in processes has also Group The to executive directors. the Maintain an effective system of internal control and risk management risk and control internal of system effective an Maintain Quarterly review of risk register. Identify, monitor and manage risks manage and monitor Identify, register. risk of review Quarterly and internal control of risk management of risk management Risk Management Committees Risk Management for the system system the for responsible responsible Operating companies Board Board Risk

review the risk registers risk the review internal controls and of suitability review the Committee Audit

of any significant deficiency or aware not itwas that determined review, Board Following its the Corporate Governance Code”. UK the on Directors for Guidance Control: with “Internal in accordance the risks ethical and environmental social, operational, trading, compliance, internal control includingfinancial, considered all significant of aspects has which Committee, Audit of the reports the reviewed has It control. effectiveness of the system of internal the reviewed has Board the Committee, Audit ofthe assistance the With addressed by management. properly isbeing letter management yearly their in auditor external by the raised withpoints for dealing plan, action an that itself satisfies also Committee in relation to internal audit, the Audit work withits parallel In operations. Group’s ofthe area each within risk, manage and to identify effectively controls, includingmeasures intended internal to isalways embed aim the report, to each response in to taken be actions appropriate action. In agreeing the and bytimely rectified are deficiencies or, are not, they effectively where working are and place in are of control appropriate toreviewed ensure systems are business ofthe facets all over time, that, so isdesigned annually, updated and isreviewed which programme, The activities. Group’s ofthe aspects of internal audit reviews of different aprogramme implemented has Board the Committee, Audit the Through of internal control. system the in weakness material Policy and review and Policy accounts 2011 accounts Annual report and Drax Group plc 33

Financials Governance Business review 34 Drax Group plc Annual report and accounts 2011

Principal risks and uncertainties

Commodity market risk

Context Potential impact Examples of mitigating activities Change We experienced a great deal of uncertainty k Volatility in financial results. k Well understood progressive hedging in power-related commodity markets strategy, forward power sales with during 2011 Associated objective and key priorities k Maximise the value of the Drax business. corresponding purchases of fuel and CO2 Risk emissions allowances when profitable to k Maximise profitability from our coal k do so. We are exposed to the effect of fluctuations in generation capacity. commodity prices, particularly the price of electricity and gas, the price of coal and sustainable biomass (and other fuels), and the price of CO2 emissions allowances.

Counterparty risk

Context Potential impact Examples of mitigating activities Change The recent recession and uncertain k Additional costs associated with securing fuel k Diversified coal supply in terms of source economic growth potentially impact and other goods and services from other and counterparties. on counterparty risk suppliers. k Good portion of purchases at market indexed k Risk Failure to secure coal from other suppliers prices (no mark-to-market exposure). resulting in limitation of operations. k We rely on third party suppliers for the delivery k Diversified logistics routes. k Adverse effect on cash flow and earnings arising of fuel and other goods and services. We k Target to optimise holding of coal stocks. purchase a significant quantity of our coal under from the failure of one or more of the k Close monitoring and reporting of contracts with a number of large UK suppliers, counterparties to whom we sell power. concentration risk in suppliers. so are exposed to the risk of non-performance Associated objective and key priorities k by these suppliers. Full suite of power counterparties with strong k Maximise the value of the Drax business. credit ratings. k We enter into fixed price and fixed margin k contracts for the sale of electricity to a number Close monitoring and reporting of of counterparties, so are exposed to the risk of concentration risk in power counterparties. failure of one or more of these counterparties. k Trading contracts generally include provisions that force counterparties to post collateral if they drop below investment grade.

Ratings risk

Context Potential impact Examples of mitigating activities Change Our business model currently has k Requirement to post collateral for trading k Refinement to trading strategy to trade investment grade debt although we could positions. on credit efficient terms. operate as sub-investment grade with k Additional restrictions within facilities k actions that have been implemented Grow direct sales through Haven Power, agreements. our electricity supply business. Risk Associated objective and key priorities k Additional access to collateral through the k Our investment grade debt rating currently k Maintain an optimal supporting capital £135 million trading facility signed in 2010. underpins our ability to deliver optimal value structure (which can be either investment or from our existing trading strategy. A downgrade sub-investment grade debt with appropriate of our debt rating to sub-investment grade trading strategy). would require a modified trading strategy.

Electricity wholesale market risk

Context Potential impact Examples of mitigating activities Change Liquidity in the market for wholesale k Inability to hedge short- to medium-term k Grow direct sales through Haven Power, electricity is dependent on there being a exposure to electricity prices through wholesale our electricity supply business. sufficient number of counterparties willing market trading. k Initiatives to be active, responsive and provide to trade actively k Increased exposure to short-term market good credit towards counterparties make Risk volatility. Drax an attractive business partner. k k Changes in the market structure or Inability to sell all of our output. k Oppose structural changes that impact consolidation of the existing generation and k Lower revenues and increased costs to achieve our market access, such as clearing and supply businesses in the UK could result in a trading objectives. margining. reduction in the number of active participants Associated objective and key priorities k Work with other independent generators in the market with whom we are able to trade. k Grow our retail customer base. (via Independent Generators Group) to achieve positive market and regulatory k Maximise the value of the Drax business. changes to improve liquidity. k Maximise profitability from our coal generation capacity. k k k k k k k k Risk to generate electricity Forced outages impact on our ability Context Risk in relation to environmental matters becoming ever more stringent, particularly and complex, are frequently changing, and many are regulations and Laws term. longer whilst maintaining security of supply over the to customers supplies delivers affordable a sustainable, low carbon energy sector which to move to need bythe predominantly driven The Government’s market reform agenda is Context Risk targets reduction carbon meeting to contribute and power, renewable flexible and cost low with UK the provide to placed well is biomass Sustainable Context Plant operating risk Regulatory andpolitical risk Biomass strategy risk

components and to carry out repairs. replacement procure and to manufacture time lead the by influenced is outages forced of duration The activities. trading conduct or plant the tooperate used systems IT the or other equipment and components including power generation plant, or transmission assets underperformance or outright failure of our the by caused be may outages Forced sterling and poses a risk to profitability. toprofitability. arisk poses and sterling increases our exposure to fluctuations against which currency foreign in priced is procure can we that biomass sustainable the of Most economics of sustainable biomass. from Government, which underpin the mechanisms support specific and framework regulatory appropriate an secure not We may could impact on our generation capacity. one from disruption Asupply risk. supply of toconcentration leading market the in suppliers biomass fewsustainable relatively are There and safety standards. health and waste, contamination, groundwater soil/ water, noise, and toair emissions on ofaspects our operations including limits many cover regulations and laws safety and health and environmental local and UK EU, The renewables. and nuclear gas, like generation less economic than other major forms of generation becoming progressively and relatively coal in result will 2013, April from Treasury HM by introduced be will which mechanism Support Price Carbon the including package, The Government’s Energy Market Reform standard but fail to meet a future standard. afuture tomeet fail but standard current the meet which contracts supply term long- sign may we that arisk is there and time, over tightened be may standards sustainability determined sustainability standards. Those pre- meets it that todemonstrate have will we Government’s renewables support mechanism, the under support for toqualify burn we biomass sustainable the for order in 2013, From April our hurdle return rates and sustainability criteria. sustainability and rates return hurdle our meet which arrangements logistics and supplies We could fail to secure sustainable biomass k k k k k k k k k k k Associated objective and keypriorities and objective Associated impact Potential Potential impact Potential Associated objective and keypriorities and objective Associated impact Potential keypriorities and objective Associated

Adverse effect on financial results. financial on effect Adverse Maintain operational excellence. levels. factors/generation load Lower Adverse effect on financial results. financial on effect Adverse Increased costs and contractual penalties. contractual and costs Increased Maintain operational excellence. revenues. Lower Progress our biomass strategy. biomass our Progress strategy. growth biomass the toprogress Inability Progress our biomass strategy. biomass our Progress stringent environmental requirements. increasingly tomeet costs investment retrofit/ plant for available funding Less k k k k k k k k k k k k Examples of mitigating activities of mitigating Examples Examples of mitigating activities of mitigating Examples Examples of mitigating activities of mitigating Examples

Business continuity plan for IT systems. IT for plan continuity Business items. time lead long particularly failure plant of event the in use for components Target to optimise holding of spare programme. maintenance and Comprehensive risk-based plant investment supply contracts. supply fuel of grandfathering the including 2013 April from support grandfathered and framework right the toobtain Government with Engage appropriate. its that extent tothe sterling in contracts secure or exposures currency Hedge Deliver our biomass strategy. biomass our Deliver projects. field green new exploring and relationships creditworthy suppliers, building new large several with discussions Advanced at EU and UK level. UK and EU at Briefing, representation and engagement infrastructure. such develop help to suppliers new with work place; in already is infrastructure logistics and plant operational arobust where suppliers with Contract generation options. Development of abatement and alternative effectiveness. effectiveness. system over assurance party third Regular Strong safety culture and related training. related and culture safety Strong accounts 2011 accounts Annual report and Drax Group plc 35 Change Change Change

Financials Governance Business review 36 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility

Our approach to corporate and social responsibility Engaging with our stakeholders We operate our business within a framework of increasingly Shareholders: k Road shows stringent and challenging legislative and regulatory k Face-to-face meetings k Reports and announcements requirements. We are, however, mindful of the still tougher k Website expectations held by our wider stakeholder group. For us, k Visit programmes corporate and social responsibility is about achieving a Employees: k Open Forum balance between the commercial and regulatory rigours k Briefing sessions of the competitive sector within which we operate and our k Staff newsletter commitment to our stakeholders as a whole. Parliament: k Briefing papers The Board has ultimate control of policies in respect of both k Face-to-face meetings k Written and oral evidence the wider corporate responsibility, such as our business k Visit programmes conduct, and our environmental, health and safety programmes. Government departments: The Board’s policies are implemented by dedicated specialists k Face-to-face meetings k Consultation responses who make sure effective processes and procedures are in k Visit programmes place to assure compliance and to identify and to report on k Via trade associations risks and opportunities. European Union: k Briefing papers k Face-to-face meetings As in previous years we have continued to invest, not only k Via trade associations to comply with environmental and health and safety Local government: requirements, but, where practicable, to go further. In 2011, k Liaison meetings k Annual consultative committee meeting we retained our presence in the FTSE4Good Index Series, k Exhibitions which is designed to measure the performance of companies k Newsletters that meet globally recognised corporate responsibility Trading counterparties: k Face-to-face meetings standards and facilitate investment in those companies. k Industry events Local community: k Sponsorship k Fund raising events k Themed campaigns k Visitor programme k Exhibitions k Newsletters Government agents/regulators: k Face-to-face meetings k Correspondence and data submission k Via trade associations NGOs and opinion formers: k Face-to-face meetings k Briefing papers Suppliers and customers: k Face-to-face meetings k Contractor briefings k Contractor safety conference Media: k Press releases k Face-to-face meetings k Visit programme Business Ethics. of Code ofour requirements the and to be accountable for upholding of standards highest behaviour the to apply world, the in are they wherever employees, our We require employees ofour isexpected What spirit. the but Code, of the letter the only to not follow expected are Employees making. decision their base should employees which under framework and rules the establishes Ethics ofBusiness Code Group’s The Code of Business Ethics business, we would forego the business. associated the losing or integrity our ofcompromising withasituation If faced of be only minimal value. offered received or hospitality may and gifts whereby We have apolicy hospitality. or gifts receiving or offering always consider the appropriateness of should employees Our activity. corrupt knowingly participate in any form of never wewill and payments improper of form any other or receive bribes or to offer, werefuse give abusiness As never acceptable. is bribery which in Group the within responsibility for a maintaining culture takes and corruption and bribery to preventing iscommitted Drax for us. in which we do business is mandatory countries ofthe regulations lawsand the with Compliance beyond. or UK the in whether to business, do consultants and contractors partners, agents, suppliers, our weexpect how but business, do Integrity not only underpins how we success. our in role acritical plays withintegrity for acting reputation Our with applicable laws and regulations. accordance in and integrity with honesty, business our to conduct and standards ethical to high We have acommitment tointegrity commitment Our Business conduct or are concerned about. have may witnessed they that conduct unethical or illegal other or fraud danger, to relating some faith, good in ofinformation, to adisclosure make how on guidance provides policy The withconfidence. up to speak employees for our means aconfidential provides policy whistleblowing Group’s The Whistleblowing weexpect. standards contribute to the maintaining high can they Ethics ofBusiness Code sense within the framework of the to apply good judgement and common employees our encouraging By is. it often wrong, If itfeels dilemma. ethical face an wrong, our employees may, on occasion, and isright what obvious itisoften Whilst are maintained. of standards highest ethical behaviour the that to ensure place in procedures and policies various the on guidance clear and specific giving a booklet colleagues to our all reiterated byissuing been has to integrity commitment our addition, In bribery. towards policy ofazero tolerance adoption the through 2010 Act Bribery with the updated, and ensures compliance Business Ethics was refreshed and of Code the 2011, During reputation. to our damaging be would and financial penalties and imprisonment consequences damaging including Poor choices could have potentially maintaining secure and affordable towards a low carbon economy whilst UK ofthe transition the in to play role important wehave an We believe Tackling climate change theand environment Climate change modules to a further unit was completed. completed. was unit to afurther modules turbine pressure low three and pressure of installation ahigh the programme, upgrade ofthe year penultimate the 2011, of outage planned major the During units. sixgenerating ofour of each turbines steam pressure low and high the of upgrade million £100 isthe station power atthe programme efficiency thermal improved centre ofour The strategic carbon abatement initiatives. major, the as efficiency thermal biomass co-firing and increased our commitment to sustainable enhancing possible, where and, business principally implies retaining For asustainable us, ofelectricity. supplies at Board level. supported and discussed are Power Haven and Station Power Drax at both Environmental activities and policies sector. coal-fired the in we hold the environmental leadership position to furthering committed weare and environment the and we have to society responsibilities the We understand fully and compliance Environmental performance project. ofthe aco-sponsor as Group) Linde ofThe (aprovider, BOC member gas byindustrial joined wewere 2012, January site. In Station Power Drax at the plant demonstration storage and capture carbon oxy-fired a426MW to build funding partial for Union European to the weapplied Limited, Carbon Grid National and Limited UK withAlstom partnership year, the in during work, co-firing and In addition to our thermal efficiency framework. regulatory the in developments further awaiting while and development work on biomass research our to further we continue meantime, generator. the In fuelled over time, a predominantly biomass to become, ambition our to realising us critical are ofwhich both support, appropriate and certainty regulatory withfurther come only will This grown. be can biomass in afuture which from roots combustion has provided us with strong to source from biomass sustainable to commitment and experience Our UK. the for economy carbon a low to transition to the commitment of carbon dioxide (“CO tonnes million one ofaround saving overall thermal efficiency and an annual of5% our in load atfull improvement an in willresult which programme, the of completion the see wewill 2012, In of CO avoided the release of 4.7 million tonnes has facility co-firing largest world’s the building including 2008, since biomass of co-firing year. in the investment The saved 2.0 million tonnes ofCO tonnes million 2.0 saved and coal on reliance our we reduced biomass sustainable co-firing Through 2 and shows our continuing continuing our shows and accounts 2011 accounts Annual report and Drax Group plc 37 2 “) emissions. 2 during during

Financiialls GGovernance Business review 38 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility Our Drax Power Station and associated Disposals to land The other wastes generated as part of landfill site manages environmental We have continued to invest in site the operation and maintenance of the compliance through an environmental infrastructure to maximise the sale of ash power station are managed to ensure management system (“EMS”). This products into the construction industry they are processed or disposed of at the system is externally certified to the and to reduce the disposal of surplus ash highest point on the waste hierarchy. international standard ISO 14001 and is to landfill. In 2011, ash was sold in This has resulted in 84% of our waste subject to external audit twice a year. conformance with European construction diverted from landfill. This year’s product standards and in compliance operations have also reduced the We freely discuss our environmental with the Waste Recycling Action total production of waste by around performance and activities with our Programme (“WRAP”) quality protocol. 624 tonnes. stakeholders and are sensitive to their views and concerns. This includes This has helped us to sell 77% of the Alternative fuels colleagues, business partners and 1.5 million tonnes of ash produced in 2011 To help maintain our vital role in the contractors and we ensure that they as replacement for virgin aggregates UK economy and safeguard cost understand how they can affect our and as a cement replacement product. effective power production, our fuel environmental performance by strategy recognises the need to sustain In August, we entered into an agreement identifying the environmental aspects a ready supply of traditional quality coal to lease some of our land to Lytag Ltd of their activities and by working in a and how best to incorporate alternative (“Lytag”), a company based in Escrick, responsible manner. fuels, including different fossil fuels and North Yorkshire, which manufactures renewable and sustainable biomass We are pleased to report that there were lightweight aggregate from pulverised materials. The choice of fuels has to be no major breaches of our environmental fuel ash (“PFA”). PFA generated by the balanced with availability and flexibility consents during 2011. power station will be processed in the of supply. Lytag plant, providing another route to Emissions to air reducing the amount of ash we send The use of petcoke is now routine and We manage all our emissions effectively to landfill. our monitoring indicates that there is no and have maintained high levels of impact on the local community. In line investment in flue gas desulphurisation Any unsold ash is sent to the power with our policy on openness and and combustion control systems to station’s ash disposal site, Barlow Mound. transparency all data are discussed ensure compliance with environmental The completed area of the site has been with the Environment Agency and limits. Work continues to develop an fully restored for use as farm land and local councils. investment programme to optimise woodland. compliance with the anticipated emission We pay landfill tax on the ash disposed limits which will be in place beyond 2016. of to the site. Through the Landfill Total emissions (kt) 2011 2010 2009 Communities Fund, we are able to claim Sulphur dioxide 32.1 27.3 26.9 a tax credit against our donations to Nitrogen oxides 38.9 40.4 38.2 recognised Environmental Bodies. Dust 0.6 0.6 0.5 We have worked with Groundwork North Yorkshire since 2001 on projects Discharges to water designed to help mitigate the effects Water is a key resource to Drax Power of landfill upon our local community. Station with the great majority of the During 2011, we contributed £68,800 cooling water abstracted from the towards local community-based projects River Ouse. Other minor sources include designed to bring about sustainable the Sherwood Sandstone Aquifer and environmental benefits and contribute the town’s mains. to the social and economic regeneration

Water abstraction (Mt) 2011 2010 2009 of the area. River Ouse water 57.7 64.8 58.2 During the year, we worked with Biffa Mains water 0.2 0.2 0.2 Group Limited to introduce a new general Borehole water 2.1 1.8 1.9 and dry mixed recycling waste collection Procedures are in place to manage service to assist in recycling waste items and monitor the drainage and water such as food packaging, bottles, cans, systems on-site to ensure all discharge paper and card. We have removed consent limits are met. Last year individual waste bins at desks in order we returned 51% of extracted water to change people’s behaviour when it back to the River Ouse. Our water comes to recycling. The results speak for use in 2011 was 1.0 tonnes per GWh themselves with an additional 64 tonnes of electricity generated. of waste from these sources collected in the 250 big red bins now installed across our site and recycled in 2011. quality and service. service. and quality addition to the conventional criteria of price, social, economic and environmental factors in wider of account takes and practice procurement good of element essential an is Sustainability Good procurement practice in the local community. community. local the in suppliers medium and small particular, in partners from diverse backgrounds, working and suppliers to use we look and chain supply to our approach welike to take abalanced Overall, minimised. successfully were personnel contractor service, disruption to services and particular this for plan contingency the administration. Through implementing into go did that ofasupplier impact the to us mitigate allowing invaluable, proved has diligence additional This and monitored. logged to be suppliers or markets supply have enhanced our risk register, allowing we aresult as and distress in suppliers of signs to us recognise to enable if necessary. We also undertook training selections and timescales for changeover, involved with these risks suppliers, new ease of transference of work, potential the to take into account developed been have plans Contingency suppliers. and markets supply vulnerable our out map ofexercises to aseries We undertook base. supply our in risks mitigate develop strategies to identify and to helped has This process. existing to encompass more elements in the mapping chain supply true and planning contingency to include improved been increased and improved. The system has was chain supply procurement of our measurement performance 2011, In Non-fuel procurement Supply chain arrangements and business ethics. safety and health relations, labour rights, of compliance with legislation, human respect in suppliers our from we expect standards minimum the contracts, our in ofdocumenting, aprocess introduced when buying from overseas we have addition, In withcounterparties. liaison customer” processes and ongoing counterparty approval, “know your our through ischecked suppliers our of ofeach suitability The framework. compliance corporate astrong within wework procurer aresponsible As and Russia. Colombia USA, including world, the around basins supply major from coming remainder with the mines surface and deep UK from coal ofthe half around toof supply. We purchase continue diversity and obligations environmental exposures, commercial our managing of objective withthe ofsources range year. each a coal from Weof steam buy tonnes 8to 9million around We purchase Coal procurement chain. supply the throughout savings cost real and value reputation and delivering improved and will include safeguarding our brand meeting simple tender requirements beyond go that practices procurement create wewill principles wider these byapplying into 2012, Moving service. conventional criteria of price, and quality to the addition in factors environmental account of wider social, economic and takes and practice procurement of good is an essentialSustainability element accounts 2011 accounts Annual report and Drax Group plc 39

Financiialls GGovernance Business review 40 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility

Biomass sustainability These criteria were originally In 2011, our third party auditors carried and procurement designed in the absence of national out a range of audits on key existing and Biomass use is a high priority, but it is or international legislation, to meet or potential suppliers to confirm that they a prerequisite that it must be from a exceed any likely emerging standards are embracing our policy and are sustainable source. To ensure this we across the whole sustainability spectrum. improving their performance against have implemented comprehensive Our system is continuously improving our criteria. Auditors also undertook an criteria into our procurement activities as our experience and legislation ISAE 3000 audit of our overall biomass with the aim of assuring both the develops. In 2011, these criteria procurement, logistics and combustion availability and sustainability of the secured our leadership position in the in order to provide early experience of supply. The backbone of our criteria is utilities sector of the Forest Footprint the 2013 requirements. a high level set of principles committing Disclosure scheme. We have adopted the target for life cycle us to progressively improve the From April 2013, generators of over greenhouse gas emissions which DECC sustainability performance of 1MW capacity will have to comply with has established for 2013 and beyond, our suppliers. a set of sustainability requirements on this being similar to our previous internal Our procurement process is designed greenhouse gas savings and land use benchmark. We have also used the DECC to ensure that the production and developed by the Department of Energy model for calculating these emissions, delivery of biomass will: and Climate Change (“DECC”) in order which compares emissions from biomass to receive Renewables Obligation to the EU fossil fuel comparator and k significantly reduce greenhouse gas Certificates. We are confident that shows that average emissions savings emissions compared to coal-fired our existing policy will be sufficient across the range of biomass materials generation and, where possible, give to ensure compliance. we burnt in 2011 were of the order of preference to biomass sources that 81%, but with a wide range in savings maximise this benefit; To assist us in continually improving for individual biomass materials. our systems and the performance of k not result in a net release of carbon This provides reassurance that our our suppliers and to ensure compliance from the vegetation and soil of either current procurement practices and with our sustainability policy we use forests or agricultural lands; suppliers are robust. an experienced third party to rigorously k not endanger food supply or audit our biomass supply chain. communities where the use of biomass is essential for subsistence (for example heat, medicines, building materials); k not adversely affect protected or vulnerable biodiversity and, where possible, give preference to biomass production that strengthens biodiversity; k deploy good practices to protect and/ or improve soil, water (both ground and surface) and air quality; k contribute to local prosperity in the area of supply chain management and biomass production; and Procuring sustainable biomass k We have implemented comprehensive criteria contribute to the social wellbeing of into our procurement activities with the aim of employees and the local population assuring both the availability and sustainability in the area of the biomass production. of our biomass supplies. by Lloyd’s Register Quality Assurance. Assurance. Quality by Lloyd’s Register isapproved which standard, this to hold country the in stations power coal-fired oflarge group ofaselect isone Station East Riding of Yorkshire. Drax Power the in atGoole based plant, pellet straw our for the certification we have attained site Station and Power Drax atthe 18001, Health and Safety standard, OHSAS internationally recognised Occupational Management System to the Safety and Health ofour certification We have successful been in retaining levels of performance. sustained few isdelivering last years the management system implemented in safety the that indication is aclear rate, which injury for total recordable group Pacesetter World and European ofthe ahead weare stations power Amongst global comparator coal-fired benchmarks. international and peers sector ofour withthat favourably very to compare continues record safety Our 3million. some site Station Power totalled Drax atthe which worked, of man-hours number and year the during place took that work construction significant the of performance is commendable given recorded in Maintaining this 2005. level first was measure the since station power atthe achievement breaking arecord latter withthe industry-leading, 0.08 and 0.10 respectively, remain at rate for 2011 injury recordable total rate and injury time lost The Attaining performance leading Reporting of Injuries, Diseases and Dangerous Occurrences (1) Notes: Restricted Work Injuries Time Losing Injuries Fatality statistics safety Personal performance as our goal. leading and standard a minimum statutory requirements are viewed as which in culture safety and health to developing and maintaining a positive business philosophy. We are committed to our isfundamental injury from visitors all and contractors employees, corporate responsibility. Protecting our ofour heart isatthe safety and Health Health andsafety RIDDOR Injuries Aid First Medical Treatment Injuries Regulations. (1) reportable 207 2011 0 0 5 3 1 002009 2010 4 154 148 00 03 43 64 50 The Production Integrity Management Management Integrity Production The performance underpinning Processes consecutive years. seven for Award standards Gold Award achieved having Medal Gold once to again, be awarded the RoSPA delighted, wewere to this, addition In operational projects. scale large on working contractors or employees to those through right visitors, accompanied spectrum, of the been introduced covering, at one end have sixcourses total, In activities. on-site their and ofindividuals to arange suit tailored are courses induction safety More generally, compulsory health and ensure compliance. An internal audit process is used to visitors. as such others, and workforces other, each respective their protect to have aresponsibility contractors our weand that understanding an around built are arrangements The regulations. and legislation with current accordance in ofcontractors monitoring and control supervision, effective the health and safety responsibilities for general the to clarify place in also are procedures and processes Specific we aspire to create maintain. and the robust world-class safety culture of component afundamental are which behaviours defensive the tous develop allow tools Together these supervisors. engagement between operatives and the framework we need for open us SOSgive Four and The Pillars k k k k of Safety”: “Four Pillars Drax withthe coupled is programme safety behavioural This programme. STOP™ proven DuPont™ implementation of the internationally isour (“SOS”) Safety” on “Spotlight power station. ofthe operation effective and safe to the fundamental are which systems critical continuous improvement of business platform the business needs to deliver the to provide continues System (“PIMS”)

Weekly Safety Meeting (“POWRA”)Assessment Dynamic Point of Work Risk safety briefing ofshift start Kick-Off” “Safety Task (“TRA”) RiskAssessment improve the critical safety leadership leadership safety critical the improve to striving We constantly are Safety leadership and recognition improvement efforts forward. efforts improvement safety and health to our drive stimulus a and ideas new to provide continues GENSIP, Forum, Generators Coal the and Association of Electricity Producers the body, trade ofour programmes with the involvement active Our awards. recognition have leadership given been levels who have demonstrated safety site atall the on working People basis. aquarterly on HESAC to back line areporting and targets of set aunique has group the staff, Focusing on engagement with corporate exists. also group HESAC A Corporate upwards. standards driving and issues, consultation on health and safety staff facilitating in role to avital play management team members, continues and health occupational representatives, safety representatives, union trade including ofemployees, a range together brings which (“HESAC”), Committee Advisory Safety and A Health requirement. isa job process briefing safety the in engagement Active achievements. to recognise and record, performance our and issues safety to to specific attention draw process the site. We use the on working those all to reach vehicle communication afast-track provides process briefing Safety Bulletin” “Weekly Our year’s performance. coming forthe expectations sets year, the in conference the early Held attended. people 84 2011, In point. focal a to be continues staff and contractors The annual Safety Conference for Charter. Leadership Safety the in reaffirmed to be continue supervisors and management both of expectations The supervisors. contribution required from first line accounts 2011 accounts Annual report and Drax Group plc 41

Financiialls GGovernance Business review 42 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility Employees In 2010, we agreed a long-term pay Each year we recruit for our sponsored deal for all employees in the collective four year apprentice training programme Employment bargaining unit, that is, all production covering power station operations and The Group employed 1,150 people at the employees other than managers and engineering maintenance. We currently year end. Most of our employees work senior engineers. The pay deal extends have 18 apprentices at different stages full-time and are on permanent contracts. to 31 December 2012, providing a of the programme, with plans to recruit Our opinion surveys consistently show platform for continuing stable employee up to ten new apprentices in 2012. relations in the year ahead. that our employees are proud to work We accommodate work experience for the Group, and other measures All employees in corporate functions, requests and support local schools of engagement are also very high. Haven Power and senior production staff and colleges with their career events, For example, at Drax Power Station are employed on personal contracts, as well as supporting employees to be the annual resignation rate is only 1.6%, which are not covered by collective school governors. the average length of service is just bargaining. Formal information and At Haven Power, there are a number of under 15 years and 37% of the workforce consultation arrangements are in place leadership programmes in place for the has been with the Group for 20 years for these groups of staff, so that any operations management team, all team or more. This high level of retention is proposals for change can be discussed managers and all new team leaders. positive, as our power generation openly and with sufficient time to build in This year Haven Power has also business requires levels of skill and revisions arising out of the consultation. experience which are difficult to source introduced a “Learning to Lead” externally. Absence rates are consistently Learning and development programme focused on equipping low, at around 2% per annum. Our personal and career development potential team leaders with the skills processes are designed to equip all to progress into supervisory roles. The annual resignation rate at Haven our people with the technical skills, Throughout the Group we have a rolling Power is over 30%, reflecting the nature management and leadership programme of health and safety and of the business. This is an improving competencies, and personal behaviours first aid refresher training, to underpin figure and Haven Power management needed to achieve our Business Plan. the safety culture which is central to has recently established a working group All employees receive annual all operations. which is focused on potential actions to performance and career development reduce staff turnover. reviews. Individual targets are reviewed Internal communications We work to achieve high standards in and assessed formally through interim We use a variety of communication employment practices, for example, and final appraisal discussions with their channels to ensure that all colleagues through the avoidance of discriminatory manager. Personal development plans are kept fully informed of developments practices, and the speedy and clear include both technical training and in the Group’s operations and have resolution of queries and grievances. behavioural development, which are an opportunity to provide feedback. We review our policies and procedures delivered through a rolling programme In our 2011 Employee Survey, 96% of on a regular basis to ensure legal of internal and external learning events. respondents said they understood the direction the Group is taking. compliance and improved service levels. In 2011, we introduced a supervisor Employee relations development programme to develop a At Drax Power Station, Open Forums At Drax Power Station, 529 people pipeline of potential supervisors to fill provide a series of face-to-face meetings (68% of the workforce) are covered succession gaps at Drax Power Station. where the Chief Executive and Executive by collective bargaining arrangements. Seven participants completed the Committee present business updates Formal negotiation and consultation programme, sponsored and accredited to small groups, followed by an open takes place through the Company by Coventry University. The group question and answer session. The Committee – a joint management and developed their leadership skills through Open Forums, which are scheduled union body that meets regularly to a series of workshops, an action learning to accommodate the power station’s discuss working practices and terms and project and a 12 week secondment into operational resource requirements, cover conditions of employment for production a supervisory position. Most of the every shift pattern so that all employees employees, and to receive updates on participants have already secured a have an opportunity to attend. We use the Group’s strategy. supervisor position and work is now a variety of media at the Open Forums, underway to run a second programme including DVDs featuring colleagues during 2012. across the business. This face-to-face communication channel is much valued For approved external training by employees. programmes, our employees receive financial support, for example, course fees and expenses. The Group also supports those staff who, as members of professional institutions or associations, are required to undertake continued professional development. “Our peopleare akey resource andwe Nurturing Nurturing and team spirit. team and energy, achievement values of honesty, the share we Group Throughout the Our values training programme. apprentice year four sponsored our for recruit we year Each Apprenticeships consider it apriority to deliver excellent our talent people leadershipacrosspeople ouroperations.” Head of Human Resources Richard Neville Richard Neville 2 across our operations leadership people excellent Deliver keypriorities: our of One 1 1

the Equality Act 2010. Act Equality the with line in updated at work have been dignity and equality, and Our policies on diversity policiesOur on diversity equality and Diversity year end. year the at employees 1,150 The Group employed Number of employees 4 3 1,150 3 2 accounts 2011 accounts Annual report and Drax Group plc 43 4

Financiialls GGovernance Business review 44 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility In addition, our all-employee Through monitoring and encouraging The proportion of women communication methods include feedback, the Group is committed employed within the Group monthly team briefs and e-mail and to ensuring that none of the protected intranet communications. characteristics, such as age, race and religion, which underpin the Equality Act At Haven Power there is a framework of are barriers to working for us. individual one-to-one discussions, team meetings and staff forums. This year Performance and reward Haven Power has introduced a weekly Pay and benefits at Drax are attractive communications cascade and targeted and match or exceed the best in the Board Executive Committee communications events focused on industry sector and the local area. 11.0% 20.0% particular initiatives. The intranet is We benchmark our salaries and widely used. benefits at every level in the organisation Each month following the Haven Power against the industry sector and the Board meeting, members of the senior market as a whole. We also participate management team conduct briefing in specialist industry meetings to sessions that all staff are invited to exchange information and developments attend. These sessions update staff on in employment policy. the progress of the business and provide (2) Through a range of share plans we Senior Management Drax Power Limited an opportunity to raise questions and to Group(1) 11.4% encourage all employees to build a discuss any concerns. 19.2% personal stake in the ownership of Diversity and equality the business. We are committed to attracting a broad All core benefits, including pension, spectrum of candidates, as we believe permanent ill-health insurance, free that we are more likely to find the best or discounted private healthcare, available people if we look in the widest life insurance, maternity/paternity leave, possible talent pool. Our aim is to and the Savings-Related Share Option maintain an inclusive work environment Plan are provided to both full and part- Haven Power Group total where difference is respected. Limited(2) 25.1% time, as well as temporary, employees. 52.3% We have established a policy to ensure Recognition that gender diversity is one of the factors The achievements of our staff have been Notes: taken into account when considering (1) This excludes the Board and Executive Committee. recognised through a number of awards (2) This excludes the Board, Executive Committee and Senior future appointments to the Board and Management Group. and shortlistings for awards from other senior appointments, and in line external bodies during 2011. with the Equality Act 2010, we have updated our diversity and equality The Forest Footprint Disclosure policy and our dignity at work policy. scheme is an innovative initiative assisting businesses in assessing their We give full and fair consideration to impact on the world’s forests. For the suitable applications for employment third year running, Drax was ranked as from people with disabilities having the leader in the utilities sector based on regard to their particular aptitudes and the comprehensive sustainability criteria abilities. Through a voluntary diversity in our business procurement activities. monitoring data collection process, 6% of colleagues who responded This year staff at Haven Power helped recorded that they have a disability, the company to achieve the accolade amounting to 3.5% of the workforce. of No. 1 for customer satisfaction Where a colleague becomes disabled in the small and medium enterprise whilst employed by the Group, (“SME”) market in the external 2011 we make reasonable adjustments, Datamonitor Survey. with the assistance of advice from the occupational health team and other specialists, to help them remain in work. a general medical every three years. years. three every medical a general working in operational areas has Everyone dust. levels or noise high who are in contact with, for example, programmes to screen colleagues health team undertakes regular and ourdisease occupational risks, industrial address which policies health We have published occupational adisability. has employee an where adjustments are needed in cases or to identify where any reasonable and previous environmental exposure, conditions medical any pre-existing to identify examination or questionnaire amedical completes employee new each Group, the in to arole appointment On occur. that situations emergency and aid first to all response aprofessional ensuring and staff our ofall wellbeing and health the to promoting We committed are Health and wellbeing Annual report and accounts. 2010 our for award FTSE250” – disclosure remuneration “Best the and award –FTSE250” disclosure and stakeholder sustainability “Best for the shortlisted wewere where 2011, Transparency in Governance Awards Hermes Administrators) and Secretaries ofChartered (Institute ICSA at the governance and professional standards good upholding for acknowledged to be delighted also wewere work, project our for recognition receiving to addition In Awards 2011. Business Green the in the Renewable Energy category of shortlisted and recognised was legislation of ahead chain supply biomass to the introducing sustainability standards on work Our Awards 2011. Energy Renewable British ofthe renewables, has done the most to advance UK that company to the given Award, Company for the We shortlisted were representatives. employee or union with trade have representation, management senior committees The programmes. safety advise on occupational health and committees that help monitor and management-worker health and safety is represented in formal joint workforce Station Power Drax All the stress management. and atwork fit keeping as such areas on advice health provided sites and Chelmsford and Ipswich the both visited Power’s occupational health partners Haven week the During facilities. and benefits ofstaff promotion at greater aimed week afull had Power Haven and ovarian cancer awareness campaign. aprostate and byus, funded and UK Research Heart charity bythe run Station, Power atDrax employees all for campaign heart ahealthy included of health promotion. Promotions in 2011 Each year we have a planned programme on a frequent basis. business on travelling those for place in are programmes support training driver Executive and requirements. Driving Safety and Health and exposure with risk, programme managed in accordance are undertaken through an ongoing tests eyesight and tests hearing tests, function aslung such surveillance, health specific more cases, these In dust. coal and chemicals as such toa risk health, may pose which to materials exposed Some categories of worker are a phased retirement policy so that that so policy retirement a phased introduced We have also of65. age the number of employees working beyond have wenow a and age retirement default the weremoved 2011, In of an occupational pension. for receipt age minimum statutory the with line in benefits, retirement subscription through the payroll. payroll. the through subscription monthly for anominal Club Social and Sports Drax the join can Employees Sports and Social Club Group. the have from retired who people for year ofthe course the during events Association organise trips and other at The Retired Christmas. Employees event to acelebratory pensioners Drax weinvite over year 350 Each life. new life to their working help people transition smoothly from to courses pre-retirement and leave pre-retirement paid weoffer age retirement chosen their approaching succession planning and for employees and retirement with managers to assist reports weproduce systems information Resources From Human our requirements. to operational subject Limited, Power for Drax part-time to work continue and apply to take accrued retirement benefits over may 55or aged employee any or over is eligible to take their accrued to accrued take their overor iseligible 55 aged Any employee recruits. new to promoted actively both are which Plan, Pension Personal Power Haven the or Plan Pension Personal Group the join to eligible are employees Allother 2002. in to entrants new closed was which Scheme, Pension Supply Electricity the of Group Power Drax ofthe members are who 378 are employees There retirement and provision Pension extensive range offacilities. range extensive an offers subscription, to public open isalso which Club, Social and Sports The accounts 2011 accounts Annual report and Drax Group plc 45

Financiialls GGovernance Business review 46 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility

Caring for the community “We are committed to being a good neighbour and our “caring for the community” philosophy involves being part of our local and regional communities.”

Rachael Hudson External Affairs Officer

3

£136,8131

1 3 Financial support Cricket in the During 2011, the Group community 4 gave financial support Our cricket initiative of £136,813 across a continues to be popular range of charitable and amongst local schools. non-charitable causes. In 2011, we staged the fifth Drax Cup 2 competition for boys Skylark Centre and girls aged under At the heart of our nine across the region. nature reserve, the Skylark Centre is 4 equipped with facilities Art in the Community to help schoolchildren Our Summer Art understand more about Schools and annual the natural habitat and art competition ecology of the area. were well supported during the year helping us to promote art learning within the National Curriculum. 2 7 enhance understanding of the business. ofthe understanding enhance to ofinformation source transparent and accessible areadily to be developed been has website ofour section investor the with private investors, communication year. the To during our aid Europe United States, and mainland Canada and we undertook investor visits to the and Half year results announcements, Preliminary ofthe each after UK the in conducted was programme and concerns. a In formal 2011, meeting views oftheir isaware Board the that to ensure also but announcements, the to assist them in their of understanding major institutional shareholders, again withour held are meetings face-to-face and greater In addition, understanding. detail further to provide presentations with conferenceup either or calls Announcements are frequently followed practicable on our website. announcements appear as soon as those and service information viaaregulatory of announcements are disseminated to the market by way business ofthe development the and Significant matters relating to trading and Interim Management Statements. report year Half accounts, and report Annual our through we communicate Meeting, General Annual to the addition In ofchannels. avariety using manner timely and accurate an in shareholders to our prospects and results shareholder value. We communicate our to delivering We committed are Investor relations relations. community to relations engagement commitments, from investor stakeholder ofour aspects other on wetouch below section; responsibility social and Corporate this throughout engagement practice and exercises stakeholder to specific made already been has Reference wedo. that all in transparent and open to be weaim and business ofour part essential an to be with all our stakeholders is considered Communication media. the and formers organisations, regulators, opinion Government, non-governmental community, local the suppliers, shareholders, employees, customers, our including diverse, and many are Like many businesses, our stakeholders stakeholders our with Engaging relations community and Stakeholder engagement on our website at website our on available made are documents All ofthese www.draxgroup.plc.uk. accounts 2011 accounts Annual report and Drax Group plc 47

Financiialls GGovernance Business review 48 Drax Group plc Annual report and accounts 2011

Corporate and social responsibility External relations Community relations Now in its seventh year, the outage As in previous years, we maintained our We are committed to being a good charity scheme raised £7,000 during engagement with public affairs audiences neighbour to our local community the year’s single outage. Through the on issues with implications for our and our “caring for the community” scheme £500 is donated for every business. With energy policy still high on philosophy involves being part of seven days that goes by without an injury the political agenda we had significant local and regional communities. requiring more than first aid treatment. engagement with Parliamentarians and Our involvement takes the form of Added to this was a further £400 officials at all levels on issues including sponsoring a variety of local charities through an initiative to collect used ear forthcoming environmental legislation, and fund raising events, promoting our plugs during the outage. As in previous renewables policy and market reform own campaigns which focus on the three years the money was divided equally issues. themes of youth sport, education and between two local charities chosen by the environment, and maintaining open Drax staff and our contractors: Willow’s The form of engagement was varied communication channels and good Wish, helping a 7 year old girl with and included both face-to-face and working relationships with the region’s cerebral palsy travel to America for a written briefings, participation in public key opinion formers. potentially lifesaving operation; and The consultations, written evidence to Steve Prescott Foundation, which raises inquiries, and visits by Parliamentarians Sponsorship and fundraising money for people suffering with cancer. and officials to Drax Power Station. As in During 2011, the Group gave financial the past, trade association membership support of £136,813 (2010: £131,450) For the fifth year running we held a proved useful during the year. The ability in total across a range of charitable charity corporate golf tournament at to meet with and discuss issues of the and non-charitable community causes. Fulford Golf Club, York. The event raised day with other interested parties has Of that total, charitable donations £14,520 for the Yorkshire Air Ambulance, facilitated representation of collective amounted to £93,878 (2010: £87,384). which provides a crucial emergency positions on energy policy matters. service for the region. A further £750 Some £18,000 of the total donations was donated following a fund raising Locally, we have continued to engage were made under the direction of our event held at the Drax annual Safety with parish, town, district and county sponsorship team, across a range of Conference for contractors and staff. councillors and officers, with the activities within a 20-mile radius of the intention of keeping them up to date with power station. Each month the team Education in the community our business issues and developments. meets to consider requests received for We provide a choice of educational Our regular communication channel with charitable donations and community experiences hosted by our team of power these and other local opinion formers sponsorship and makes awards against station guides and, at times, technical takes the form of an annual consultative our criteria of furthering community, experts. A state-of-the-art visitor centre meeting, and three meetings each year environmental and sporting interests. is of particular interest to students of with our local parish and town councillors. all ages allowing them to explore the One of the good causes supported properties of electricity, discover how No political donations were made through the sponsorship team in 2011 a power station works and consider in the UK or elsewhere during 2011 was the Children’s Heart Surgery Fund the environmental issues related to (2010: nil), and the Group’s contact Charity, at the Leeds General Infirmary, electricity generation. with those active in the political arena which supports valuable equipment, has been and will continue to be aimed resources and research for the treatment Combined with a tour of the power solely at the promotion of the Group’s of children with heart defects, whilst station, students can learn about the business interests. providing a support service both for the basic principles and development children and their families. of electricity generation, the role of The definitions of EU political expenditure different fuels in electricity generation, are broad and there is widespread doubt Drax also operates a “£ for £” and trading of electricity, environmental about the extent to which normal Give As You Earn matching scheme, issues related to burning fossil fuels, business activities, which might not be under which we match any monies raised the recycling of by-products and the thought to be political expenditure in the for, or donated to, charity by employees. role of a large industrial complex in the usual sense, could be considered to be During 2011, just over £40,000 of the local economy and community. political expenditure within the meaning total donations made were through of the legislation. The Company wishes this scheme. Another visitor opportunity exists at to avoid any inadvertent infringement our Skylark Centre that lies at the heart of the legislation and each year, though a of our ash disposal site. A nature reserve resolution at the Annual General Meeting, has been established there to provide seeks the authority of shareholders to a sanctuary for over 100 species of incur expenditure for the Company wildlife. It is specially designed to help and its subsidiaries for such purposes schoolchildren understand more about of £100,000. the natural habitat and ecology of the area. arts and digital technology. digital and arts advanced withmore to grips get them helped olds to year 14 for 11 class master a while painting, and printing t-shirt with along ofmaterials avariety using class crafts and arts an in animals and birds to bugs from creatures make to how learnt 7to 10 aged Children 2011. in year fourth their entered Curriculum, National the within learning art to promote and for education support ofour part as appreciation art develop and encourage to designed Schools, Art Summer Our over £2,800. totalling money prize in shared schools their and supplies art oftop prizes received winners the and participated 20schools Some schools. secondary and for primary competition art fifth our banner, weheld Community” “Art the the in Under School. Primary Alwoodley was school winning the running, year year,This second the for internationals. one-day and matches for test venue along-standing CCC and ofYorkshire home the Stadium, Carnegie semi-finals and final day at Headingley the in –met Leeds from School Primary School near Goole and Alwoodley School from Rotherham, Snaith Primary York, Wickersley Primary Northfield School RC from Primary English Martyrs’ – winners final area four The Association. Cricket Yorkshire the Schools’ and Board Yorkshire withthe Cricket conjunction in (“Yorkshire CCC”) Club Cricket County Yorkshire bythe organised tournament knock-out the in Yorkshire part took across schools primary 340 Around ofnine. age the under boys and of girls for teams competition acricket Cup, Drax the weran year fifth the for of cricket, game withthe links our Strengthening Curriculum. National the of part as learning sports to promote and for education support ofour part as area local the in to schools coaching cricketer, took cricket Brunt, Katherine ladies’ withEngland together staff, Cricket Board qualified coaches on our Wales and year, the England the During schools. withlocal to prove popular continued has 2006 May in launched initiative Community” the “Cricket in Our areas. woodland through walk trail anature or hunt, grubs and a bugs dipping, ofpond results the investigate and discuss can students and teachers where facilities laboratory and classroom by complemented are visits Educational the local area. local the in activities and groups to fund helping acharity ofHope, Hands for Selby raised was £2,500 initiatives some Christmas other and generosity their through and grotto to the visit came people 1,200 over residents, withlocal proved popular attraction The Grotto. into Santa’s Centre Skylark the weconverted Christmas, to run-up the in For Sundays three and face-painting. hunt for huge Easter eggs, mask-making a included which activities, the in part community. Hundreds of children took and vulnerable groups in the local helps disadvantaged young people which Goole, in Waterways Museum Yorkshire atthe based acharity Project, Sobriety for The money raise also and families forlocal games and fun provide event to an Sunday, weheld Easter On to some 7,300 visitors. host weplayed 2011, During associations. organisations, and local and professional business as well as colleges and schools attracts activities associated its and site ofthe scale sheer the and produced is power how about more of discovering year. every appeal The station power the to welcomed are ofvisitors Thousands toDrax Visitors accounts 2011 accounts Annual report and Drax Group plc 49

Financiialls GGovernance Business review 50 Drax Group plc Annual report and accounts 2011

Corporate governance

What good corporate governance means at Drax “Good corporate governance is one of the cornerstones of the success of the organisation and I believe that the systems, procedures, processes and controls that Drax has in place provide assurance to the Board and its stakeholders that the business is well governed.” Charles Berry Chairman

Chairman’s letter I am pleased to present Drax’s Corporate governance report for 2011 on behalf of our Board. This report is intended to provide you with a clear and meaningful explanation of what governance means to us and how it will guide our decision making in the future. Good governance at all levels is taken seriously at Drax and it is for the Board to set the tone and take the lead. Good governance should be second nature to everyone at Drax as they go about their day-to-day business and is not simply a set of policies and processes. The Board believes that good practice should flow throughout the Group, which in turn should guide the decisions taken on a daily basis. If we achieve this, then we can be sure that we are taking the right actions for the benefit of all our stakeholders. It is important that we continue to develop our board structures, processes and procedures to ensure that our governance remains relevant and focused on improving our business and driving our strategic priorities. During 2011, we continued to strengthen our internal control and risk management processes to ensure that they are embedded in business operations across the Group. I believe the drive for transparent reporting has continued to improve business conduct in recent years. Recently the Financial Reporting Council has built into the UK Corporate Governance Code an emphasis for organisations to actively consider the make up and diversity of their boards. Drax has established a policy to ensure that gender diversity is one of the factors taken into account when considering future appointments to the Board and other senior appointments. This year we are required to report against the UK Corporate Governance Code, which replaces the Combined Code. I am pleased to report that the Board has reviewed the new code and we comply with it. We intend to continue to observe it, to ensure ongoing good governance is maintained. A more detailed report on our corporate governance arrangements is set out on the following pages.

Charles Berry Chairman

Directors’ report The directors present their report for Drax Group plc, which should be taken to incorporate the Business review section of the annual report, the Corporate governance review and the consolidated financial review for the year ended 31 December 2011. Corporate governance The Group is committed to high standards of corporate governance, details of which are given in this Corporate governance report and the Audit, Nominations and Remuneration Committee reports set out on pages 62 to 80. The various sections of this report contain in summary certain provisions of the Company’s current Articles of Association (the “Articles”) and applicable English law concerning companies (the Companies Act 2006). This is a summary only and the relevant provisions of the Articles or the Companies Act should be consulted if further information is required. Compliance with the UK Corporate Governance Code It is the Board’s view that throughout the period commencing on 1 January 2011, there has been full compliance with the provisions of the UK Corporate Governance Code. Paul Taylor, Dorothy Thompson and Tony Thorne. Biographical notes of the directors appear below. appear directors ofthe notes Tony Biographical Taylor,Paul and Thorne. Thompson Dorothy Tony Lindsell, David Quinla Emery, Peter Cobbold, Tim Berry, Barker, Tim are Charles directors current The executive directors. four and directors non-executive independent four Chairman, non-executive ofthe consisted Board the 2011, at20February As The Board of directors Responsibilities skills: and Qualifications: Previous experience: External appointments: Committee membership: toAppointment the Board: Responsibilities skills: and Qualifications: Previous experience: External appointments: Committee membership: toAppointment the Board: Responsibilities skills: and Qualifications: Previous experience: External appointments: Committee membership: toAppointment the Board: has responsibility for the development of the enhanced co-firing facilities at Drax. at facilities co-firing enhanced the of development the for Tony responsibility a has tohim. reporting functions Procurement and IT, Facilities, Management, Risk Relations, Investor the has he addition, In banke Group’s the with relationships for and Group, the of management financial the for Tony responsible is Director, Finance As and (ACA). Wales England in Accountants Chartered of Institute the of Associate an and Studies Business with Chemistry in degree (Hons) BSc Director. Finance Group tothe deputy the Finance, of From 2005 Director was Control. Financial and Relations Investor Finance, Corporate Audit, Internal within positions senior of anumber hold to on went he where & Spencer Marks joined subsequently and &Lybrand Coopers with Accountant aChartered as Tony qualified A non-executive director of the Port of London Authority. London of Port the of director A non-executive Executive. 2008. 1 September agreed by the Board on 14 December 2005 and was reviewed and varied by the Board on 23 October 2006. October 23 on Board the by varied and reviewed was and 2005 December 14 on was Board the by writing, in agreed out set is Executive Chief the and Chairman the between responsibilities of division The agen bodies. regulatory Government and suppliers, customers, with relationships external important the for responsibility takes leadership and team provides executive She the implementation. effective and timely its securing and approval Board for strategy business developi appropriate including business, its and Group the of stewardship the of aspects all for responsible is Dorothy Executive, Chief As Economics. in MSc and (Hons) BSc plc. Powergen for was treasurer group subsequently assistant and banking in initially was Dorothy 1998, in NV InterGen tojoining Prior capacity of Netherlands. the and UK 3,160MW the some across totalling plants, power gas-fired four of operation and management the for responsible Inc., Bechtel and NV Shell of subsidiary generation power NV, the InterGen of business European the of head the previously was Dorothy plc. Matthey Johnson of director A non-executive Executive. 2005. September in Drax joined having 2005, October 20 directors are challenged non-executive and tested the before in a robust laid manner. matters that ensures he turn in and team management senior the and facin directors challenges executive the business the understand tofully order in Executive Chief the with closely liaises He directors. and executive the non-executive between cohesion ensuring Board effective an of leadership the for responsible is Charles Chairman, As Management. in MSc and Engineering Electrical in (Hons) BSc plc. Group THUS of and plc Eaga of Chairman non-executive aformer developmen also is renewables Charles as such transactions, strategic and retailing energy business, trading the as well as capacity of generating 6,200MW over for responsibility with Operations, UK Company’s the of Executive Chief was Charles to2005, in From 2000 1999. Board tothe appointed was and 1991 in ScottishPower joined He sector. power UK the within experience extensive has Charles plc and Scotland of of Trust Impax Environmental Securities of Markets plc. director anon-executive plc, Senior of Chairman-designate and director A non-executive Nominations (Chairman) and Remuneration. 2008. April 17 on Chairman appointed was and 2005 December 15 Chief Executive Dorothy Thompson Chairman Berry Charles Finance Director Quinlan Tony accounts 2011 accounts Annual report and Drax Group plc 51 g ng an ng an lso lso n, n, cies cies

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Financials Governance Business review 52 Drax Group plc Annual report and accounts 2011

Corporate governance

Peter Emery Production Director

Appointment to the Board: 20 October 2005, having joined Drax in June 2004.

Committee membership: Executive.

External appointments: A director of the Association of Electricity Producers and a member of The Energy Research Partnership.

Previous experience: Peter joined Esso Petroleum upon leaving university and held a number of analyst and managerial roles in the UK before moving to Esso’s parent, Exxon in the US to co-ordinate its downstream marketing and distribution investments outside North America and Canada. Peter returned to Esso’s Fawley Oil Refinery in 1992 as plant technical services manager. In 1997, he became refinery maintenance manager and in 2002, he was appointed operations manager with full management and operational responsibility for Fawley Oil Refinery, the UK’s largest refinery. He was also a member of ExxonMobil’s European leadership team for refining.

Qualifications: BSc (Hons) in Mining Engineering, FIMMM and completed the Advanced Management Programme at INSEAD in 2007.

Responsibilities and skills: As Production Director, Peter is responsible for the operation of the Group’s plant and equipment. This includes all aspects of safety management, plant integrity, engineering support and design, maintenance and plant design. Peter also has responsibility for leading the Company’s carbon capture and storage activity.

Paul Taylor Retail and Trading Director

Appointment to the Board: 1 September 2011, having joined Drax in July 2004.

Committee membership: Executive. Paul is also Chairman of the Group’s retail subsidiary, Haven Power Limited.

External appointments: None.

Previous experience: Paul has more than 15 years experience in energy trading previously working for TXU Europe and Powergen/E.ON UK. At TXU Europe Paul led the UK electricity trading function responsible for trading a combined portfolio of over 7GW of power plant and a retail position of more than 50TWh. Before energy trading Paul worked in operational research.

Qualifications: BSc (Hons) in Business Operation and Control.

Responsibilities and skills: As Retail and Trading Director, Paul has responsibility for the trading of power and other associated commodities. He is also responsible for the retail division, Haven Power, which sells electricity to customers in the industrial and commercial and small and medium enterprises markets.

Tim Barker Senior independent non-executive director

Appointment to the Board: 20 October 2005, having joined Drax in June 2004, and was appointed as the Senior Independent Director on 15 December 2005.

Committee membership: Remuneration (Chairman), Audit and Nominations.

External appointments: A non-executive director of several other companies including the European subsidiary of the Investment Bank Jeffries Group Inc. and Chairman of an early stage company developing a new energy storage technology.

Previous experience: From 1993, Tim was Vice Chairman of Kleinwort Benson Group plc and from 1998, until his retirement in 2000, he was Vice Chairman of Dresdner Kleinwort Benson. Notably, he was involved with a number of clients in the energy sector and was an adviser to the UK Government on the privatisation of the electricity sector. In the mid-1980s, Tim was Director General of the City Panel on Takeovers and Mergers. He is a former Chairman of Robert Walters plc and was the senior independent non-executive director of Electrocomponents plc.

Qualifications: MA (Hons) in Economics.

Responsibilities and skills: As the Senior Independent Director, Tim’s counsel is of great importance to the Board and its Committees. His knowledge and experience of financial markets provides the Board with added insight. No person, other than those mentioned above, served as a director or as an alternate director at any time during the year. 2011. April 13 (“AGM”) on Meeting General Annual ofthe conclusion at th year. ofthe adirector as retired He part only for director non-executive independent an as Group the served Grasby Mike 2011. December 31 ended year the throughout Group the served above detailed directors non-executive independent ofthe Each Responsibilities skills: and Qualifications: Previous experience: Responsibilities skills: and Qualifications: Previous experience: External appointments: Committee membership: toAppointment the Board: External appointments: Committee membership: toAppointment the Board: Responsibilities skills: and Qualifications: Previous experience: External appointments: Committee membership: toAppointment the Board: Chairman of the Audit Committee. Audit the of Chairman as role his and Board tothe asset asignificant are audit and finance of areas the in experience relevant and recent David’s (FCA). Wales and England in Accountants Chartered of Institute the of Fellow Limited. Group the Board, Turnbull Practices Committee and Auditing the the European Financial Board, Reporting Advisory Standards Accounting International the of Committee Advisory Standards the reporting, including tofinancial relating bodies professional of anumber on served has He sectors. industry of arange across extensive experience has and services assurance and audit in specialised He years. 30 nearly for &Young Ernst at apartner was David a recently retired chief executive also adds a different dimension to his contribution. tohis dimension adifferent adds also executive chief Tony a is retired that fact a recently The markets. global into expansions considers Drax as importance great of is experience Tony’s geographical Economics. Agricultural in (Hons) BSc o President Mexico. in and companies planning Shell the strategic including roles, management senior in world the throughout working International, Shell years 20 with spent he tothis Prior business. packaging SCA’s of corrugated President was he Previously 2010. May in Board the from retirement his until 2001 from group, products office and packaging international the plc, Smith DS of Executive Tony Chief was Service. Ambulance Coast East South the of Chairman Audit, Nominations and Remuneration. 29 June 2010. Panel. Review Reporting Financial the of Chairman Deputy and plc, Oil Premier of director A non-executive Audit (Chairman), Nominations and Remuneration. 2008. 1 December Committees. His role as an active chief executive in a different sector adds a different dimension to his contribution. tohis dimension adifferent adds sector adifferent in executive chief active an as role His its and Board Committees. tothe significantly tocontribute placed well is he that means experience engineering and financial of blend Tim’s (FCA). Wales and England in Accountants Chartered of Institute the of aFellow and Engineering Mechanical in (Hons) BSc period. year 18 an over positions management and operational financial senior of anumber held he where 1989 in plc) Group TI (formerly plc Group Smiths joined aChartered and as 1987 in qualified Accountant and Engineer aMechanical as trained He companies. of Group Chloride the for responsible positi Emerson, in asenior held he Chloride of takeover Electric’s Emerson Following Officer. Operating Chief as 2007 in them solutio joined power having secure of provider international leading the plc, Group Chloride of Officer Executive Chief the previously was Tim Plc. Rue La De of director executive an and Executive Chief Audit, Nominations and Remuneration. 27 September 2010. Tony Thorne Independent non-executive director David Lindsell Independent non-executive director Tim Cobbold Independent non-executive director Group. David is a former non-executive director of Gartmore accounts 2011 accounts Annual report and Drax Group plc 53 e

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Financials Governance Business review 54 Drax Group plc Annual report and accounts 2011

Corporate governance

Directors’ interests, indemnity arrangements and other significant agreements Other than a deed of indemnity between each director, the Company and each of its subsidiaries in respect of claims made and personal liability incurred as a result of the bona fide discharge of the directors’ responsibilities and a service contract between the executive directors and a Group company, or as noted in the Remuneration Committee report, no director had a material interest at any time during the year in any contract of significance with the Company or any of its subsidiary undertakings. There are no agreements between the Group and its directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. The Board has reviewed the independence of each non-executive director. None of the non-executive directors who has served during the year had any material business or other relationship with the Group, and there were no other matters that were likely to affect their independence of character and judgement. The Board therefore considers all of the non-executive directors to be independent.

Selection, appointment, review and re-election The Articles provide that one-third of directors, not including directors appointed by the Board, (rounded down to the nearest whole number) shall retire by rotation each year but are eligible to submit themselves for re-election by shareholders and that directors shall not serve longer than the third AGM following their election without being re-elected by shareholders. Notwithstanding the provisions of the Articles, and in accordance with the UK Corporate Governance Code, the Company will continue to propose all directors for annual re-election. Accordingly each of Tim Barker, Charles Berry, Tim Cobbold, Peter Emery, David Lindsell, Tony Quinlan, Dorothy Thompson and Tony Thorne will retire at the forthcoming AGM and, being eligible, offer themselves for re-election. The Articles require that, following appointment to the Board, directors submit themselves for election by shareholders at the first AGM following their appointment. Paul Taylor was appointed to the Board after the last AGM and, therefore, will retire and offer himself for election by shareholders at the AGM to be held on 18 April 2012. The evaluation of the Board described on page 55 concluded that the directors offering themselves for election or re-election (in line with the provisions contained in the Articles) continue to demonstrate commitment, management and industry expertise in their particular role and perform effectively. The election or re-election of each director is recommended by the Board. Details of the service contracts for the executive directors and letters of appointment for the non-executive directors are set out in a table on page 76. It is the Board’s policy that each non-executive director will be appointed for a term of three years which, subject to the Board being satisfied as to the director’s performance and commitment and a resolution to re-elect at the appropriate AGM, may be renewed by mutual agreement. However, it is the Board’s policy not to extend the aggregate period of service of any independent non-executive director beyond nine years and, any proposal made to extend a non-executive director’s aggregate period of office beyond six years is the subject of a rigorous review. Such reviews in cases where a director remains in office after six years, will be conducted annually, as part of the evaluation of the Board. The Board is satisfied that all the directors are able to devote sufficient time to their duties as directors. be benefit in the Board reviewing certain of its past decisions. The Board will act onthis suggestion and, as an example, will (“Independent Audit”), an independent strategic governance consultancy thathasno other connection with theCompany. the performance ofthe Board, its committees andindividual also arranged appropriate insurance cover in respect of legal action against directors ofthe Company and its subsidiaries. or practices; significant financial decisi directors receive aninduction, including being provided with information about the Group and their responsibilities, meetings review each individual director’s development requirements and make appropriate arrangements to address them. All new The Board iscommitted to the development of allemployees an as required byprovisionA.4.2of theUKCorporate Governance Code. and the Senior Independent non-executiveDirector directors held withoutthe meetings Chairman withthe being present, During the year, theChairman held directors a meetingwith inthethe non-executive absence of theexecutive directors, health and safety management hasresulted in a moreeffective process. consider whether its decision taken in 2010 to change the mannerin which it scrutinises and receives assurance inrespect of progress had been made on the areas forimprovement identified by the 2010 review. Thereview suggested that there would The findings of the review were presented to the Board. didnot The disclosereview any areas of concernand found that good commissioned Independent Audit to conduct a followupreview,which wascarried out through aquestionnaire based process. effectiveness, all ofwhich the Board acted uponthe aspartprocess ofcontinuing of improvement. During 2011, the Board directors withabroadrange of relevant experience.re The In particular,thecomposition and mix of the Board wereconsidered to management group, and concluded that the Board wasstrong and appeared well equipped to meet the challenges ahead. The 2010review involved individual interviews witheach director, theCompanySecretary and members ofthesenior The effectiveness ofthe Board is vitalto the success ofthe Group. During 2010,theCompany undertookareview toevaluate directors’development reviewsand Performance which are available to viewontheGroup’swebsite The Board has adopted a schedule of matters reserved fordecision its andformal termsofreference foritscommittees consider strategy. The Board has seven scheduled meetings eachadditional year, meetingsand arranges if the need arises. There are also three functions How theBoard involving presentationsrelevant on topics. with key managersand visits to theGroup’s sites.In liabilities incurred, in eithercase arising outof the bona fidedischarge by the director ofhis or herduties. The Company h Each director has the benefit of adeed ofindemnity fromthe Company and its subsidiaries in respect ofclaimsmade and board ofa group company without this counting asa conflictrequiring authorisation). also allow the Board to exercise voting right giving risetopotential conflicts of interest are identified to the Board, considered forauthorisation and recorded. The Arti The Articlesgive the directors power to approve conflicts of and for the management ofthe Group’s internal control and risk management framework and processes. Company Secretarial, Environmental, External Affairs, Group Legal, HumanResources, and Regulatory and Policy functions, as Director ofCorporate Affairs, heisalsoresponsible foradvising the Board on legal matters andhas responsibility forthe responsible for compliance withtheCompanies Act, the Listing, Prospectus andDisclosure andTransparency Rules. Inhis role within the Board, itscommittees andsenior management, and ensuring that Board processes are complied with.He is also The Company Secretary isresponsiblefor advising the Board on allgovernance matters, ensuring good information flows advice at the Company’s expense. During sought 2011,nodirector independent legal advice pursuant to the policy. The Board has adopted a policy wherebydirectors may, in the furtherance of their duties, seek independent professional committee meetings. management. Directors are briefed onmatters to be discussed at meetings by papers distributed in advance of Board and The Board receives regular reports on performance Business againstPlan the and periodic business reports from senior or otherwise delegated in accordance witha schedule ofdelegated authorities approved by the Board. and itscommittees under their terms ofreference, ortoshareholders in General Meeting, are delegated to the ChiefExecutive Committees; and the Board structure, composition and succession. Matters which are notspecifically reserved to the Board defence or settlement ofmaterial litigation; policy; Group remuneration the terms ofreference andmembership of Board scheduled business updates for the Board by telephone conference call.Inaddition, the Board meets atleastannually to with senior management to be briefed on the Group’s business at least annually, and specific Board training days are arranged indicators; acquisitions and disposals and other transactions outside delegated limits; material changes to accounting policies the Group’s appetite forrisk; the internal control and risk policies; management the Business Plan and principal performance ons; capital structure and dividend policy; shareholder communications; prosecution, s ingroupcompanieswithout restriction (e.g. at www.draxgroup.plc.uk. TheBoarddetermines: the Group’sstrategy; addition, each non-executiveaddition, director visits operational sites andmeets port made anumber ofrecommendations to enhance Board directors. This was performedbyIndependent Audit Limited interest. The Board hasadopted aprocedure bywhichsituations d directors and has reviewed and will periodically continue to be appropriate with astrong cadre ofnon-executive so as to appoint a director tothe accounts 2011 accounts Annual report and Drax Group plc 55 as cles

Financials Governance Business review 56 Drax Group plc Annual report and accounts 2011

Corporate governance

Committees of the Board The Board has established the following standing committees:

Committee Membership Audit Committee David Lindsell (as Chairman), Tim Barker, Tim Cobbold and Tony Thorne. Nominations Committee(1) Charles Berry (as Chairman), Tim Barker, Tim Cobbold, David Lindsell and Tony Thorne. Remuneration Committee(1) Tim Barker (as Chairman), Charles Berry, Tim Cobbold, David Lindsell and Tony Thorne.

Notes: (1) Mike Grasby was a member of the Nominations and Remuneration Committees until he retired from the Board at the conclusion of the AGM on 13 April 2011.

Details of the work of each of the Committees are given in the respective reports of those Committees on pages 62 to 80. The terms of reference for these Committees are reviewed annually by each Committee and then by the Board. The terms of reference of each Committee are available on the Group’s website at www.draxgroup.plc.uk. There is also an Executive Committee through which the Chief Executive discharges her duties in respect of the day-to-day management of the Group. The Executive Committee membership currently comprises: Dorothy Thompson (Chief Executive), Peter Emery (Production Director), Philip Hudson (Director of Corporate Affairs and Company Secretary), Tony Quinlan (Finance Director) and Paul Taylor (Retail and Trading Director). The Deputy Company Secretary acts as Secretary to the Executive Committee. Board and Board Committee attendance The table below shows the number of meetings, and attendance at them by directors of the Board, Audit, Nominations and Remuneration Committees of Drax Group plc during 2011. The number in brackets represents the maximum number of meetings that each individual was entitled to and had the opportunity to attend.

Time on Time the Board with Drax(1) Audit Nominations Remuneration (years/months) (years/months) Board(2) Committee Committee Committee Tim Barker 6/2 7/6 7(7) 4(4) 3(3) 4(4) Charles Berry 6/0 6/0 7(7) 3(3) 4(4) Tim Cobbold 1/3 1/3 7(7) 4(4) 3(3) 4(4) Peter Emery 6/2 7/6 7(7) Mike Grasby(3) 5/6 7/4 3(3) 2(2) 3(3) David Lindsell 3/0 3/0 7(7) 4(4) 3(3) 4(4) Tony Quinlan 3/4 3/4 7(7) Paul Taylor(4) 0/4 7/6 2(2) Dorothy Thompson 6/2 6/3 7(7) Tony Thorne 1/6 1/6 7(7) 4(4) 3(3) 4(4)

Notes: (1) This includes both the time spent on the Board of Drax Group plc and also the effective predecessor companies Drax Group Limited and Drax Power Limited, up to 31 December 2011. (2) In addition to the Board meetings identified above, there have also been three teleconference calls to discuss various matters and there was one meeting held to specifically consider strategy. (3) Mike Grasby retired as a director on 13 April 2011. (4) Paul Taylor was appointed as a director on 1 September 2011.

Under the terms of his letter of appointment, the Chairman is expected to commit between 50 and 70 full days a year to fulfil his role. Under the non-executive’s letters of appointment, the time commitment each is expected to give in respect of membership of the Board, is 12 to 15 full days a year. That includes attendance at Board meetings, the AGM, one annual Board strategy day and at least one site visit per year. In addition, they are expected to devote appropriate preparation time ahead of each meeting. The time commitment expected in respect of their membership of committees of the Board, notably the Audit, Nominations and Remuneration Committees, is an additional three to four full days a year in each case.

of the AGM. as an alternative oneach separate resolution. Particulars ofaggregate proxies lodged will be announced to the London Stock AGM and the accompanying Form ofProxy provides for ashareholder tovote in favour or against, or toindicate abstention of theGroup’s affairs.This Annual report andaccounts understandable viewofthe Group’s activities andprospects. The Business review, on pages 2 to 49, provides an assessment This Annual report and accounts together with announcementsother public is designed to present a balanced and Group’s website. All information reported tothe market via a regulatory information service also appears as soon as practicable onthe the directorsimmediately after the meeting. of control of the Group following atakeover bid. There are noother significant agreements to whichthe Group is a in concert gains control of Drax Group plc. Under the terms ofthe two credit facility agreements, a “chang trading positions tobe collateralised. from Drax PowerLimited that a change ofcontrol has occurred, and Barclays Bank PLC, Drax Power Limitedmayhaveuncoll Under a trading agreement dated 5May 2010, as amended on 22 July2011 between, amongst others, Drax Power Limited within three business days ofsuch cancellation noticebeing given. change ofcontrol hasoccurred, cancel its commitments and notice to Drax Finance Limited and the facility agent within Drax Power Limited and Barclays Bank PLC (as Under a £310 million revolving credit facility agreement dated Other significantagreements to beconducted. London EC2R5BJat 11.30am. A separate document contains the notice convening the AGM and a description ofthe business The Annual General Meeting (“AGM”) ofthe Company on 18 willbe Aprilheld 2012, atThe Armourer’s Hall, 81 Coleman Street, Annual GeneralMeeting Additional Information will normally receive awritten response. Shareholders attend possible. Otherwise awritten response will be provided as soon aspracticable afterthe AGM. Questions asked at other times to put questions totheBoard at the AGM. Questions asked in person at the AGMwillreceive an oralresponse whenever is as interested in their concerns asitisin theconcerns of institutional and corporate shareholders. All shareholders aref The Company’s private registered shareholders consultancy firm, toadvise and assist in relationtocommunications withshareholders. year results announcements in 2011.The Group has Makinsonalso engaged Cowell Limited, an independent capital markets Executive and theFinanceDirector in the UK, Europe and These the tookUSA. placefollowing boththe preliminary and half The Board also reviews and discusses the investor feedbackfrom post-results investormeetings conducted by theChief be itcorporate governance issues orany other points they mightwish to raise. communicates directly with them, offering the opportunity inorderthathecan to understandmeet their views onthe Group, The Chairman is keen to ensureopen relationship thathemaintains an withtheGroup’s major shareholders and processes include contactswithinstitutional shareholders by the Chairman and other directors. community are available toall shareholders to downl Londonto the StockExchange. Presentationsreports givenatappro account to shareholders for the performance of theGroup, which include theAnnual report and accounts, AGMsand periodic matters thatmay influence or affect the interests ofshareholders. A number of formalcommunication channels are used to understanding of shareholder preferences and evaluatingsystematically the The Board places considerable importance on communication Relations withshareholders Governance Code. section on pages 32to35togetherwiththe Directors’ re Details ofthe Group’s system of internal control and risk management arecontained in the Principalrisks and uncertainties control Internal Exchange viaa regulatory information service and placed on the On achange of control, Barclays BankPLCmay, by giving notice to Drax Power Limitedwithin 30days of receiving notice facility agent), on a changeof control, if facilityagent), on hold, in aggregate, approximately 0.8%of oad from the Group’swebsite(www.draxgroup.plc.uk).Lessformal is despatched to shareholders atleast 20 working days before the sponsibilities statement in accordance withtheUK Corporate 30 days ofreceiving notice ateralised tradingateralised positionsuptoathreshold of £135 million. require the repayment require of itsshareany outstanding amounts ing the AGM willhavean opport 22 July2011 between, amongst others, DraxFinance Limited, with shareholders and is proactiveinobtaining an e ofcontrol” occurs ifany person or group of persons acting withdraw the uncollateralised trading line and require all Group’s website as soon as practicable after theconclusion party thattake effect, alter or priate intervals to representativespriate intervalsto investor of the economic, social,environmental and ethical from Drax Finance Limitedthata any lender requires, itmayby giving the issued share capital.The Board unity to meet informally with terminate uponachange accounts 2011 accounts Annual report and Drax Group plc 57 ree

Financials Governance Business review 58 Drax Group plc Annual report and accounts 2011

Corporate governance

Auditors and the disclosure of information to the auditor So far as each person who is a director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing the report, of which the auditor is unaware. Having made enquiries of fellow directors, each director has taken all steps that he/she ought to have taken as a director to ascertain any relevant audit information and to establish that the auditor is aware of that information. This information is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act. In accordance with Section 489 of the Companies Act, a resolution is to be proposed at the AGM for the reappointment of Deloitte LLP as the auditor of the Company. A resolution will also be proposed authorising the directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s effectiveness and relationship with the Group, including the level of audit and non-audit fees paid to the auditor. Further details on the work of the auditor and the Audit Committee are set out in the Audit Committee report on pages 62 to 64.

Share capital 16 The Company has only one class of equity shares, which are ordinary shares of 11 ⁄29 pence each. There are no restrictions on the voting rights of the ordinary shares. At 1 January 2011, 364,859,988 shares were in issue and at 31 December 2011, 364,862,718 shares were in issue. As at 20 February 2012, 364,864,494 shares were in issue.

Issue of shares Subject to the provisions of the Companies Act relating to authority and pre-emption rights and to any resolution of the Company in a General Meeting, all unissued shares of the Company shall be at the disposal of the directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper. On 1 April 2011, a total of 2,456 shares were issued in satisfaction of shares vesting in accordance with the rules of the Group’s Bonus Matching Plan to an individual who had retired from the Group. On 28 September 2011, a total of 274 shares were issued in satisfaction of share options exercised in accordance with the rules of the Group’s Savings-Related Share Option Plan to an individual who had their employment with the Group terminated due to redundancy. The shares issued represented a negligible percentage of the Company’s issued ordinary share capital prior to those shares being issued. No other ordinary shares were issued during the year. On 10 February 2012, a total of 1,776 shares were issued in satisfaction of share options exercised in accordance with the rules of the Group’s Savings-Related Share Option Plan to an individual who had retired from the Group.

Substantial shareholdings As at 20 February 2012, the Company has been notified in accordance with the Financial Services Authority’s Disclosure and Transparency Rules, of the following interests in the voting rights of the Company:

Number of voting rights Date last Number of Number of in qualifying Total % of the TR1 Notification voting rights voting rights financial number of issued share made directly held indirectly held instruments shares held capital held Invesco plc 1.3.2010 — 108,072,751 — 108,072,751 29.62% Black Rock Inc. 27.4.2011 — 30,870,078 5,516,236 36,386,314 9.97% Schroders plc 20.01.2012 — 20,668,302 15,643 20,683,945 5.66% AXA S.A 17.12.2009 1,704,050 14,952,477 — 16,656,527 4.57% Legal & General Group Plc 15.7.2010 14,478,741 — — 14,478,741 3.96% Orbis Holdings Limited 3.02.2012 — 13,447,250 — 13,447,250 3.69% Total shares held by substantial shareholders 16,182,791 188,010,858 5,531,879 209,725,528 57.47%

dealings in the shares of that classfrom taking place on an of thatclass by means ofarelevant system or any provision of the CREST Regulations. that the Articles are inconsistent with theholding that class ofshares inuncertificated of form, the transfer of title to sh system. The provisions ofthe Articles shall not apply to shares which enables title to such shares to be evidenced andtransferred withouta written instrument and which is arelevant register of the members of the Company may be heldinuncertificated form in accordance withany system outside the UK class of shares held on the branchregister of members of Companythe resident in South Africa or any other overseas branch order for the time being inforce concerningcompanies and affecting the Company, the directors may determine that any the provisions of theCompanies Act, the CREST everyother Regulations statute, and statutory instrument, regulation or transferred by means ofarelevant system or that shares ofanyclassshould cease tobeheld and transferred. Subject to Directors may determine that anyclassofshares may Shares in uncertificatedform Companies Act. The Articles provide that directors must give reasons for any re for atransfer of shares to take place. A shareholder does notneedto obtain theapproval of the Company, orof other shareholders of shares in the Company, of allotment or transfer was lodged with the Company, to the allottee or transferee, notice of the refusal. If thedirectors refuse to register anallotment or transfer, th an allotment or transfer of shares (whetherfully paid or not) in favour ofmore thanfour persons jointly. admitted to the Official Listof the London Stock Exchange, such discretion may notbeexercised in such away as to prevent therefore, refuse toregister any transferbeing ofshares (notfully paid shares) provided that, whereany such shares are The directors may, in the case of shares in certificatedin form, their absolute discretion and without assigning any reason islodged atthe transfer office (duly stamped if required) accompanied bythe relevant share certificate(s) and suchother b) isin respectof only oneclass of share;and a) The directors may decline to recognise any instrument of transfer relating to shares in certificated form unless it: of shareswhich areinuncertificated form maybeeffected by means oftheCREST system. shall remain the holderoftheshares concerned until the name ofthe transferee is entered in theregister. All transfers or onbehalfofthetransferor and(except in the paidshares) caseoffully by or onbehalf of the transferee. The transferor or in any other form acceptable to the directors and maybe All transfers of shares which are incertificated form may by be effected transfer inwriting in anyusual or common form Transfer ofshares creation or issue offurther sharesranking pari passuwith them. shares shall not, unless otherwise expressly provided in the rights shares of the class (calculated excluding any shares held as Treasury shares). The rights conferred upon the holders ofany Meeting the quorum shall be two persons holding or representing byproxy at least one-third innominal value ofthe issued extraordinary resolution passed at a separate General Meeting ofthe holders ofthose shares. At every such separate General of theholders of notlessthan three-quarters in nominal valuethe issued shares of of that class,orwith the sanction ofan Subject tostatute, the Articles specify thatrights attache Variation ofrights by theshareholders byspecial resolution. The rights and obligations attaching to the ordinary shares are setout in the Articles. TheArticles may only be changed attaching toshares Rights andobligations The Company did not purchase any of its ownshares during 2011and the Company held no Treasury shares during 2011. contained in the noticeofthe AGM. the issued ordinary share capital. At the forthcoming AGM, shareholders will be asked to renew this authority. Details are At theAGMheld on13 April 2011, shareholders resolved to authorise theCompany to make market purchases ofupto10% ownshares Authority topurchase instrument of transfer is executedbysome otherhis/her person behalf, on the authority ofthatperson so to do). evidence as the directors may reasonably requiretoshow the right be held in uncertificatedformand title tosuchshares may be d to any class of sharesmaybevariedwith thewritten consent open and proper basis. The directors may also refuse toregister underhandonly.The instrument of transfershall be signed by ey shall send within twomonths after the dateon whichthe letter of anyclass whichare in uncertificated form to the extent fusal to register atransfer of shares in accordance withthe attaching to those shares, bedeemedto be varied bythe ofthe transferor tomake the transfer (and, ifthe accounts 2011 accounts Annual report and Drax Group plc 59 ares

Financials Governance Business review 60 Drax Group plc Annual report and accounts 2011

Corporate governance

Voting Subject to the Articles generally and to any special rights or restrictions as to voting attached by, or in accordance with, the Articles to any class of shares, on a show of hands every member who is present in person at a General Meeting shall have one vote and, on a poll, every member who is present in person or by proxy shall have one vote for every share of which he/she is the holder. It has been the Company’s practice since incorporation to hold a poll on every resolution at Annual General Meetings and Extraordinary General Meetings. Where shares are held by trustees/nominees in respect of the Group’s employee share plans and the voting rights attached to such shares are not directly exercisable by the employees, it is the Company’s practice that such rights are not exercised by the relevant trustee/nominee. Under the Companies Act, members are entitled to appoint a proxy, who need not be a member of the Company, to exercise all or any of their rights to attend and to speak and vote on their behalf at a General Meeting or class meeting. A member may appoint more than one proxy in relation to a General Meeting or class meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A member that is a corporation may appoint one or more individuals to act on its behalf at a General Meeting or class meetings as a corporate representative. Deadlines for exercising voting rights Votes are exercisable at a General Meeting of the Company in respect of which the business being voted upon is being heard. Votes may be exercised in person, by proxy, or in relation to corporate members, by corporate representative. The Articles provide a deadline for submission of proxy forms of not than less than 48 hours before the time appointed for the holding of the meeting or adjourned meeting.

Restrictions on voting No member shall, unless the directors otherwise determine, be entitled in respect of any share held by him/her to vote either personally or by proxy at a shareholders’ meeting or to exercise any other right conferred by membership in relation to shareholders’ meetings if any call or other sum presently payable by him/her to the Company in respect of that share remains unpaid. In addition, no member shall be entitled to vote if he/she has been served with a notice after failing to provide the Company with information concerning interests in those shares required to be provided under the Companies Act.

By order of the Board.

Philip Hudson Company Secretary 20 February 2012 Registered office: Drax Power Station Selby North Yorkshire YO8 8PH Registered in England and Wales No. 5562053 In preparing the parent Company financial statements, the directors are required to: By order of the Board. We confirm that to the best of our knowledge:thatto thebestofour confirm We Responsibility statement may differfrom legislation in other jurisdictions. Company’s website. Legislation inthe United Kingdom governing the preparation and dissemination offinancial statements The directors are responsible for themaintenanceof thecorporate and integrity andfinancial information included on the irregularities. assets of theCompany and hence fortaking reasonable st ensure that the financial statements complywiththeCompanies Act2006.They are also responsible forsafeguarding the transactions and disclose with reasonable accuracy at any time thefinancial position of theCompany and enable them to The directors are responsible for keepingadequate accounting records that In preparing the Group financial statements, International Accounting Standard 1requires that directors: 0Fbur 02 20February 2012 FinanceDirector TonyQuinlan 20 February 2012 ExecutiveChief Dorothy Thompson they give a true andfair viewofthestate ofaffairsCompany of the and of the profitor loss of theCompany forthat period. Standards and applicable law). Under company lawthe directors mustnot approve the accounts unless they are satisfied that statements in accordancewith United Kingdom Generally Company lawrequires the directors toprepare financial statemen and regulations. The directors are responsible for preparing the Annual report and thefinancial statements in accordance with applicable law statement Directors’ responsibilities adopted by the European Union and Article 4 of theIASRegulation and have elected to prepare the parent Company financial required to prepare the Group financial statements inaccordance with International Financial Reporting Standards (IFRSs) as − − − − − − − − − −           make judgements and accounting estimates that are reasonable and prudent; select suitable accounting policies and then apply them consistently;accountingand thenapplythem policies select suitable as awhole, together witha description of the principal risks and uncertainties that they face. performance of thebusiness and the position of theCompan the management report,which is incorporat consolidation taken as awhole; and of theassets, liabilities, financial positionand profit or loss ofthe Company and theundertakings included in the the financial statements, prepared in accordance with the releva make anassessment oftheCompany's ability to continue as a going concern. performance; and provide additional disclosures when compliance withthespecif understandable information; present information, including accounting policies, in amanner that provides relevant, reliable, comparable and properly select and apply accounting policies; will continuewill inbusiness. prepare the financialstatements onthe going concern basis un and explained in thefinancial statements; and state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed understand the impact ofparticular transactions, other events and conditions on the entity’s financial position andfinancial

ed into the Directors’ report, includes 

Accepted Accounting(UnitedKingdom Accounting Practice eps for thepreventionand y and the undertakingsincluded intheconsolidation taken ic requirements in IFRSs are insufficient to enable users to ts foreach financial year. Underthat law the directors are less it is inappropriate topresume thatthe Company nt financial reporting framework, give a true and fairview are sufficient toshow andexplain theCompany’s a fairreview ofthedevelopment and detection offraud and other accounts 2011 accounts Annual report and Drax Group plc 61

Financials Governance Business review 62 Drax Group plc Annual report and accounts 2011

Audit Committee report

“The steps Drax has taken in 2011 in revising and refining its risk and governance framework should provide stakeholders with greater comfort that it is a well-run business.” David Lindsell Chairman of the Audit Committee

Membership and process The Audit Committee (the “Committee”) consisted of David Lindsell (as Chairman), Tim Barker (Senior Independent Director), Tim Cobbold, and Tony Thorne all of whom are independent non-executive directors. The Board is satisfied that the membership of the Committee meets the requirement for recent and relevant financial experience. The Company Secretary acts as Secretary to the Committee. The Committee met on four occasions in 2011, and the members’ attendance record is set out on page 56. The Chairman of the Committee reports the Committee’s deliberations to the following Board meeting and the minutes of each meeting of the Committee are circulated to all members of the Board. Role The Committee assists the Board to fulfil its oversight responsibilities. Its primary functions are to: − monitor the integrity of the financial statements and other information provided to shareholders; − review significant financial reporting issues and judgements contained in the financial statements; − review the systems of internal control and risk management; − maintain an appropriate relationship with the Group’s external auditor and review the effectiveness and objectivity of the external audit process; and − monitor and review the effectiveness of the internal audit function (which is provided by Grant Thornton UK LLP), review the internal audit plan, all internal audit reports and review and monitor management’s responses to the findings and recommendations of the internal audit function. The terms of reference for the Committee are reviewed annually by the Committee and then by the Board. The terms of reference are available on the Group’s website at www.draxgroup.plc.uk. Attendance at meetings The Chairman of the Board, the Chief Executive, the Finance Director, the Group Financial Controller and the internal and external auditor are normally invited by the Chairman of the Committee to attend meetings of the Committee. In undertaking its duties, the Committee has access to the services of the Finance Director and the Company Secretary and their resources, as well as access to external professional advice. During the year, the Committee undertook its duties in accordance with an agreed annual work plan of which the main features were: − at meetings in February and July 2011, the Committee reviewed the Group’s Preliminary results announcement and Annual report and accounts, and the Half year results announcement and Half year report respectively. On each occasion, the Committee received reports from management and the external auditor identifying accounting or judgemental issues requiring its attention and also satisfied itself of the independence and objectivity of the external auditor; − at each meeting the Committee received reports from the internal audit function on the progress of their programme for the year, reviewed new internal audit reports and monitored progress with the implementation of internal control recommendations. The Committee continues to focus on specifically identified strategic risk areas, as well as ensuring the provision of a core compliance assurance service. No significant weaknesses were identified in any of the internal audit reports although certain improvements in processes and procedures were made as a result of reviews; − in July 2011, the Committee reviewed the arrangements for the provision of the internal audit function and the performance of the current provider, Grant Thornton UK LLP. The Committee considered that outsourcing the internal audit function through Grant Thornton UK LLP continues to be effective and appropriate; consider carefully certain complexaccounting issues andmake subjective judgements. The nature oftheGroup’s activities, and the markets inwhich it operates, are suchthat from time to time there is aneed to The provisions of the Policyinclude: of theexternal auditor. the Committee annually reviewsthequality and cost effectiveness ofthe external audit and theindependence and objectivity In April 2011, the Committee considered and adopted an enhanced Auditor Independence Policy. In accordance with the Policy, audit oftheexternal Independence No contractual obligations exist that restrict the Group’s choice ofexternal auditor. for theGroupauditeveryfive years and the current audit consolidated financial statements on page 93.The external auditor isrequired torotate the audit partner responsible Details ofthe amounts paid to the external auditor during the year foraudit and other services areset out innote 5 tothe − − − − − − − −         to Drax Power Limited’s commodity trading activities. In July 2011, the results ofthisfurther phase were presented to the approved by,the Committee in April 2011. to the Committee and in addition, policy reviews covering auditor independence andwhistleblowing were put to, and strategic reviews oftax (July2011), treasury and thefinance team (both November 2011),were undertaken and presented Committee. Nothing was subject to this proce occasioning them material concern, they willimmediately it draw understanding with both theexternal and internal auditor ifthey is shouldthat, at any time become aware of anymatters auditor. Nomatters of concern weredrawn to the Committee’s attent during the year, theCommittee met three times inthe absence of management witheach ofthe external and internal Committee. The report did not identify any significant weaknesses in the controls; a policy governing the engagement oftheauditor toconduct non-auditwork underwhich: during 2011, PricewaterhouseCoopers LLP(“PwC”)further conducteda November 2011, it undertook a review ofthethe effectiveness of at meetings in April and November 2011, the Committee reviewed theCompany’s risk register and in February and and staff; them an account ofall relationships which may affect thefirm’s independence and the objectivity ofthe audit partner seeking confirmation that the auditor is,intheir professional judgement, independent of the Group and obtaining from in respect of the priorfinancial year and also r in April2011,the Committeeundertook a detailed reviewof th any financial reporting oversight role within the Group. a period of two years to elapse between individual’sthe cessation of an association with the auditor and appointment to a policy on the employment bytheGroup of former employee − − − −     the auditor may not beengaged to provide certain categories of work, including those where they may be required to there is a clear process of approval for engaging the auditorclear to for engaging of approvala process there is the balance between thefees paid to the external auditor for audit and non-audit work is monitored by the Committee; all engagements ofthe auditor toconduct non-audit work ar audit their own work ormake management decisions,or where the financial limits; and dure in the course ofthe year; and eviewed theperformance ofthe external auditor; partner, Carl Hughes, has been in placeforthree years. e management letter covering the externalauditor’s findings s ofthe external auditor, the essence ofwhich istorequire e reported to the nextmeeting of theCommittee; system of internal controls and consideration of fraud; conduct other categories of non-audit work, subject to to the Committee’sattention ion atanyofthesemeetings. TheCommittee’s auditor would act inan advocacy role for the Group; phase on theeffectiveness via the Chairmanofthe of controls applicable accounts 2011 accounts Annual report and Drax Group plc 63

Financials Governance Business review 64 Drax Group plc Annual report and accounts 2011

Audit Committee report

Internal audit Under an outsourcing arrangement, Grant Thornton UK LLP undertakes the Group’s internal audit function. Regular reports are provided to the Audit Committee regarding the audit programme and reviews undertaken. Recommendations are made to management for process improvements as appropriate. Topics dealt with by internal audit reports reviewed by the Committee during 2011 included: Senior Accounting Officer compliance; Human Resources strategy; Bribery Act compliance; payroll, Drax cyclical key financial controls; Haven key financial controls; Drax IT key controls and strategy; Haven IT key controls and strategy; and group wide risk management. External auditor Deloitte LLP was appointed auditor of the Group in 2005 and have been reappointed at each subsequent Annual General Meeting. They previously acted as auditor to the Drax group of companies prior to the listing of the Company in December 2005. Any decision to open the external audit to tender is taken on the recommendation of the Audit Committee based on the results of the performance review described below. Having reviewed their performance during the year and satisfied itself of their continuing independence and objectivity within the context of applicable regulatory requirements and professional standards, the Committee has invited the Board to recommend the reappointment of Deloitte LLP as auditor at the forthcoming AGM and a resolution to that effect appears in the notice of the AGM. The Chairman of the Committee, independent of management, maintains regular and direct contact with both the internal and external auditor. This report was reviewed and approved by the Board on 20 February 2012.

David Lindsell Chairman of the Audit Committee Nominations Committee report and senior management appointments. Webelieve that proper established a policy toensure thatthe proportion ofwomenon theBoard will be one of theconsiderations forfuture Board Director), Tim Cobbold, Mike Grasby (until 13 April2011), David Lindsell and Tony Thorne. The Company Secretary acts as This report was reviewed and approvedbythe Board on 20February 2012. at the venue, prior tothe AGM, details ofwhich are contained in theNotice of Meeting. prior arrangement during normal business hours at the Company’s registered office.They willalso be available forinspection without establishing specific aims andwithout giving undue weight to gender diversity. TheNominations Committee will pool. However, it is equally possible that setting outgender diversity targets may also have a limitingeffect. TheBoard has appointments, without specific consideration of gender diversity, the Board could unintentionally limit the available talent through setting targets or announcing aspirational goalsdesirable. isnot It is possible that in setting out attributes forne aimed at increasing diversity generally, including gender diversity. Webelieve, however, that an over prescriptive approach The Board has considered the recommendations oftheReport byLord Davies, Womenon Boards, and welcomes initiatives by shareholders attheAGMto be heldon 18April2012. subsequently appointed theRetail and Trading Director on 1 September 2011. He willretire and offerhimself for election was capable of stepping into an executive director role, when appropriate time to appoint acommercial director. The succession planning process had already established that Paul Taylor During the course ofthe year, theCommitteeconsidered the composition of the Board and concluded that it wasan performance of theBoard, itscommittees and concluded that it wasappropriate forthebusiness. The In September 2011, the Committee considered the succession planning process forthe directors andsenior managers and to all members of theBoard. redaction in the eventthat they include personal information, The Chairman of theCommittee reports the Committee’s deliberations to the following Board meeting and, subject to The Committee met on three occasions in2011, and the membe on the Group’s website atwww.draxgroup.plc.uk. The terms of reference forthe Committee are reviewed annually by Code on the annual re-election of alldirectors at the beginning of2011. all directors should besubjecttoannualre-election. TheCompany adopted the provisions oftheUKCorporate Governance The Company’s Articles provide that directors retire byrotation. However,the UKCorporate Governance Code provides that Chairman of Nominationsthe Committee Charles Berry The executive directors’ service contracts and non-executive dire re-election continue todemonstrate commitment to their particularrole and performeffectively. for re-election. The evaluation of theBoard described on the directors who are the subject ofannualre-election willretire at the forthcoming AGM and, being eligible, offer themselve The Committee met on 14 February 2012,following the completion of the Boardevaluati report and accounts. from non-executivedirectors. managers, toidentify and nominate candidates to fill vacancies among th the skills, knowledge andexperience required by it), toconsider The principal duties of theCommittee are to keep under review Secretary to the Committee. The Nominations Committee(the “Committee”) consisted of Charles Berry (as Chairman), Tim Barker (Senior Independent Further details of gender diversity in the Group are included in implement this policy in relation tofuture appointments to the Board. 

individual directors is repo individual directors outcome ofthe process whichit initiated for the review ofthe page 55concluded thatthe directors offeringthemselves for thetime wasright forthe Company. Paul Taylor was the minutes ofeach meeting of the Committee are circulated theCorporate andsocial responsibility section ofthe Annual rs’ attendancerecord is set account of the benefits ofgender diversitycanbetaken the structure, size andcomposition of the Board (including succession planning forthe directors and other senior ctors’appointment lettersof ava are the Committee and then by the Board. They are available rted intheCorporate governance report on page 55. e directors and toreview the time required on process, and determined that all of out on page56. ilable for inspectionby accounts 2011 accounts Annual report and Drax Group plc 65 w s

Financials Governance Business review 66 Drax Group plc Annual report and accounts 2011

Remuneration Committee report

“The Committee has sought to ensure that the variable elements of management remuneration achieve an appropriate balance between short-term financial and operational performance, progress towards the Group’s strategic objectives and alignment with the returns to shareholders.” Tim Barker Chairman of the Remuneration Committee

Introduction The debate in respect of executive remuneration and in particular the transparency of reporting has continued in earnest during 2011. The Remuneration Committee (“the Committee”) has welcomed this and has actively contributed. We recognise the need to build trust in the remuneration process through transparency and accountability and we are therefore supportive of many of the proposals currently being suggested by the Government following the Department for Business, Innovation and Skills reviews of narrative reporting and executive remuneration. In particular we welcome proposals that promote clear and concise reporting as evidenced by our nomination for “Best Remuneration Disclosure” in the ICSA Hermes Transparency in Governance Awards 2011. We are also considering implementing further measures to promote greater transparency within the Group. Some disclosures, particularly if they are overly prescriptive, may have unintended consequences or be subject to invalid comparisons between companies. We therefore think that it is essential to give companies flexibility to present information in a way that is relevant to their business and compensation structures. The Committee strongly supports proposals that enhance the link between performance and executive remuneration and also improve the clarity of reporting of the same. We believe that the measures of performance to which executive reward is linked should be based on the specific company’s circumstances and also individual contribution, so cannot be measured solely in terms of share price or earnings growth. This is particularly so in challenging market conditions and in companies such as Drax, where shareholders recognise that earnings volatility is inescapable. The Committee further developed this approach during the last remuneration review whereby performance measures applicable to the Bonus Matching Plan (“BMP”) for executives and senior management were adjusted to include both operational and strategic measures. Our aim was to align more closely remuneration with key strategic goals specific to Drax, in particular the development of a much more sustainable business with reduced reliance on coal, a greater focus on biomass and increased retail sales. A relative Total Shareholder Return (“TSR”) measure was also retained to ensure continued alignment of executive reward with the interests of shareholders. All participants in the BMP are subject to the share ownership guidelines as set out on page 75. The Committee has striven to maintain a balanced remuneration structure which recognises both short-term performance and the achievement of long-term strategic objectives. Financial and operational performance continue to be critical components in the Committee’s determination of remuneration for executive directors and senior staff as it is these factors that primarily determine the returns to shareholders in the short-term. Indeed, the business performed well in both of these areas during 2011 against a backdrop of volatile commodity markets. Remuneration for executives also takes into account progress in the Group’s two key strategic initiatives; to convert Drax Power Station into a predominantly biomass fuelled generating asset, subject to securing the necessary regulatory support, and the programme for the expansion of Haven Power Limited. The Committee’s assessment was that excellent progress was made during 2011 in achieving these objectives. The Committee is satisfied that remuneration incentives are compatible with the Group’s risk policies and systems, including those relating environmental, social and governance risks. 18 April2012. of theFinancial Services Authority,the relevant schedules of theCompanies Actand the Directors’ Remuneration Report the principles ofgood governance as set out in the UKCorporate The Committee has formalterms ofreference, inaccordance with Principal responsibilities report. Deloitte provided no advice to theCommittee during the year. As the Group’s auditor, Deloitte LLP(“Deloitte”) an auditannuallyofPart undertakes 2ofthe Remuneration Committee Advice totheCommittee The Committee met onfour occasions during the year and its members’ attendance record is set out on page 56. The ChiefExecutive is invited toattendmeetings ofthe Co Company. The Company Secretary acts as Secretary to theCommittee. Lindsell and Tony Thorne, all of whomareindependent non-executive directors, together withCharlesBerry, Chairman ofthe During the year, theCommittee consisted ofTim Barker (asChairman) The Committee Part 1—Unauditedinformation The RemunerationCommittee report issubject toshareholder dividedis intounaudited andaudited information. report and to state that this section has been properly prepared in accordance withtheRegulations. For this reason the report These Regulations require the Company’s auditortoreport the“Audited on information” intheRemunerationCommittee Regulations, 2002 (“theRegulations”). This Remuneration Committee report has been prepared by the Commit Philip Hudson Norton RoseLLP (“PwC”) PricewaterhouseCoopers LLP − − − − − −       across theGroup. overseeing any major changes inemployee benefit structure determining the policyfor, and scope of, executive pensionarrangements; and Committee’s remit, either on recruitment or on termination; determining and agreeing the general terms and conditions of se including agreeing the annual personaltargets and payments under such arrangements; approval of the design ofannual andlong-term incentive ar managers; determining, within that framework, the individual remuneration arrangements forthe executive directors and senior recommending to the Board the remuneration strategy and framework for the executive directors and senior managers; has overall responsibility for HR. Resources (”HR”) mattersalsoCommitteehe as tothe andhasCommittee provided assistance on Human the Secretary as to attended meetings Philip has service contracts. anddirectors’ incentives provideCommittee, to legaladviceonlong-term Appointed by the Board, with the agreement of the directors. of executiveremuneration andnon-executive in October 2010, to advise onmarket practice and by Independent Committee, adviser appointed the mmittee except when herownremuneration is beingdiscussed. rangements for executive directors andsenior managers, approval at the AnnualGeneralMeeting(“AGM”) on s throughout the Group and reviewing remuneration trends Governance Code anditcomplieswith the Listing Rules which itsprincipal responsibilities are: rvice and the specific terms forany individual within the , TimCobbold, Mike Grasby (until 13 April 2011),David tee on behalfofthe Board which has adopted financial, matters. financial, andadviceonspecific taxation related From time to time the Group engages PwC toprovide companies within the Group. assistance to theBoard, Board Committees andother Secretary for the providesadvice Groupandtherefore and and Affairs Company of Corporate Director Philip is act as principal legal advisers Group. to the LLP Rose appointed by Boardto whowere Norton the from The Group alsoreceived legaladviceand legalservicesother independence as an adviser Committee. the to PwC’s they affect donot that be satisfied to in order monitor such engagements The Committee willcontinue to accounts 2011 accounts Annual report and Drax Group plc 67

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Agenda Each year the Committee agrees an annual work schedule. The regular scheduled matters considered by the Committee in 2011 were: − review of the performance of the Group by reference to the 2010 Balanced Corporate Scorecard (“Scorecard”), including the application of the discretionary factor; − ratification of the measures and weightings of the 2011 Scorecard; − 2010 annual bonus awards to directors and senior managers by reference to the Scorecard and individual performance against personal objectives; − agreeing personal objectives for directors and senior managers for 2011; − review of base salary and overall remuneration packages for executive directors and senior managers; − review of the Chairman’s remuneration; − granting of awards under executive and all employee share plans; − consideration of vesting of awards under executive share plans (no such awards vested during 2011); and − review of advisers and the fees paid to them. In addition, with the assistance of its advisers, the Committee considered current trends in executive remuneration with particular reference to consultation on executive remuneration by the Department of Business, Innovation and Skills. The Committee considered the Company’s own remuneration policy and practices in that context. It concluded that the structure and level of executive remuneration in the Company continued to be appropriate. The Committee also considered the provision of pension benefits to executive directors in the light of changes in personal taxation. It decided not to make any change to the provision of pension benefit, save to give executives the option to be paid in cash in lieu of pension contributions for amounts in excess of the annual personal allowance of £50,000. Remuneration policy During the year the Committee reviewed and updated its terms of reference to ensure that they were sufficiently flexible and appropriate to meet the different requirements necessary to motivate and retain senior managers in all Group companies. The objectives of the remuneration policy are: − to enable the Company to recruit, retain and motivate the talent needed to achieve its business objectives; − to strengthen teamwork by enabling all employees to share in the success of the business; − to ensure alignment of executive and shareholder interests; and − to develop an approach which emphasises Total Reward.

The core principles of the remuneration policy are to: − pay market rates of total remuneration; − adopt different pay and benefit structures for different operating entities in the Group as appropriate to each entity’s markets, workforce and location; − ensure that there is an appropriate link between performance and reward; − award annual bonuses which are linked to the delivery of the annual Business Plan targets including the achievement of strategic objectives and personal performance; and − ensure that long-term incentives are linked to TSR and to the delivery of Business Plan targets including the achievement of strategic objectives. eerdsae ———— Employer’s pension contribution — 15 120% 225 216 39 Bonus match 130% — 18 120% 284 257 Maximum 57 120% Annual bonus — 85 345 312 69 Salary 90 508 497 101 The main components of current executivedirectors’ remuneration are summarised asfollows: Components ofremuneration and short-term and long-termremuneration. The table on page70showsthe mixofremuneration that ap Total remuneration Deferred shares Vested shares under long-term incentive plan Benefits inkind(£000) Pension contributions(£000) Annual bonus(£000) Salary (£000) out inthe following table: Each executive director received total remuneration in respect of the year from 1January to 31 December 2011tothe value set During the year underreview theremuneration package executive of directors andsenior managerswas madeup of: − − − ie Variable Fixed    period. (For awards made under theBMP in 2011 onwards). achievement of operational and strategic objectives over a three year three year TSR compared to that oftheFTSE51—150 and half on An award ofconditional shares whichvests based as to half on Drax market capitalisation, turnover and employee numbers. companies, andsecondly;commercial firstly; utilities, power generators andselected other industrial Salaries werebenchmarked in 2010 against two comparator groups, three years. against objectives. 25%ofany bonus is settled inshares deferred for individualperformance Bonuses are based50%on Group and 50%on (Car allowance, private medical etc) inkindBenefits Pension salary Base (maximum match asamultiple of annual bonus award) ( fslr) agt 5 0 6%60% 60% 60% 65% Target (% ofsalary) ( fslr) 2%2% 0 20% 20% 20% 20% (%ofsalary) companies withcomparable ooh hmsnTn una ee mr PaulTaylor Peter Emery TonyQuinlan Dorothy Thompson plied in 2011 for executive directors 1,196 ——— — conditional shares under the BMP conditionalBMP shares underthe Long-term incentive comprising All employee share plans (Performance over three years) (A mix of cash and deferred shares) Annual Executive perf Chief Chief .x15 .x1.5x 1.5x 1.5x 1.5x ormance 811 bonus Director Finance between variableandfixed,

616 Production Production Director accounts 2011 accounts Annual report and Drax Group plc 69 Retail and Director Trading 495

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Drax executive director – pay mix for 2011 % of total remuneration Chief Executive Finance Director Production Director Retail and Trading Director 100% Pension 100% Pension 100% Pension 100% Pension

BMP matching shares BMP matching shares BMP matching shares BMP matching shares 80% 80% 80% 80% Deferred annual bonus Deferred annual bonus Deferred annual bonus Deferred annual bonus

60% Cash annual bonus 60% Cash annual bonus 60% Cash annual bonus 60% Cash annual bonus

40% 40% 40% 40%

Salary Salary Salary Salary 20% 20% 20% 20%

The chart values the annual bonus at target with a 5.0% p.a. forfeiture risk applied to the mandatory deferred bonus. The BMP opportunity is based on “fair value” assuming the annual bonus pays out at target and the fair value of a BMP performance share is assessed at 45% of its face value. The following paragraphs provide more detail in relation to each of the components of remuneration for executive directors.

Base salary Executive directors’ base salaries and benefits are reviewed each year with any changes taking effect from 1 April. The review takes into account individual performance and market competitiveness, recognising that there is no obvious comparator to Drax in the market. The Committee also takes into account the level of general pay increases within the Company. The pay increase agreed on behalf of staff covered by collective bargaining arrangements is subject to a three year agreement with increases on 1 January of each year of the agreement, at RPI plus 0.3%. The increase is subject to a cap of 4.9%, which was therefore the level of the general pay increase on 1 January 2011. The agreement continues until 31 December 2012. The average pensionable pay of an executive director is nine times the average of pensionable pay for employees within the collective bargaining unit. In the light of the benchmarking exercise and the other factors considered, the Committee agreed that with effect from 1 April 2011: − Dorothy Thompson’s base salary should be increased by 2% to £510,000 − Tony Quinlan’s base salary should be increased by 2% to £346,800 − Peter Emery’s base salary should be increased by 2% to £285,600

The Committee consider these salary levels to be appropriate taking into account all of the factors set out. − Paul Taylor was appointed to the Board on 1 September 2011 at an annual base salary of £240,000. − Pensionable salary is derived from base salary only. 1 Cashflow for the year excluding impact of the investments, short-term prior topayment of equity dividends. (1) Notes: Plan objectives Strategic andBusiness Production targets Financial targets Elements A summary of the assessment is setout in the following table: to adjust the corporate score (by afactor of 1.03x), resulting in afinal corporate score of150%. Following this process,theCommittee assessed thecorporate sc directly included in the Scorecard, leading to an overallpercentage score. score byafactor between 0.75x and 1.25x(i.e. +/–25%) toreflectperformance andunexpected developments thatare not The Committee assesses corporate performance againsteach of theseme performance measures that are moredirectly in the control of management. measures and weightings achieve anappropriate balancebetween financial performance measures and other key to ensure that there is alignment with the interests ofshareholders. The Committee considers thatthe annual bonus The Committee, nevertheless, believes that the variable elements limited control. Group is substantially determined by commodity prices, and especially the dark green spread, overwhichmanagement has In setting these measures and weightings, the Committee recognises that the short-termfinancial performance ofthe Cashflow for the year excluding impact of the investments, short-term prior topayment of equity dividends. (1) Notes: Plan objectives Strategic andBusiness Production targets Financial targets Elements attributedmaximumis score tostretchtarget performance.In2011, stretch measure and is given a percentage weighting. No score isattributed if performance is below the low target and performance targets as part of the Business Planapproval process. Each element ofthe Scorecard has a low, target and The Committee determines Group performance measures a Scorecardusing forwhich the Boardsets challenging objectives and are designed to reward short-term performance. The Group operates an annual bonus scheme. Bonuses are based on both Group and individual performance against Annual performance bonus Stretch target achieved for controllable costs. because of additionala because of outages targets, except for planned outage rate, Stretch target was achieved for value added from commodity trading. Target wasachieved forvolume ofcommercially advantaged fuel combustion. Target wasachieved forIEDplans. development targets for the retail business. Between target and stretch target was achieved forcommercial and development of dedicated biomass plant. which reflected the inability to demonstrate a viable investment casefor the Overall, slightly below target wasachieved for development of biomass plans, Between target and stretch target achieved for regulatory objectives. Between target and stretch target for achieved allothersafety andoperational Stretch target achieved for total recordable injury rate. Between target and stretch target achieved for cashflow. Stretch target achieved for underlying earnings pershare. Value added through commodity trading. 20% Volume ofcommercially advantaged fuelcombustion; and Directive (“IED”) post2016 Development of plans forcompliance withIndustrial Emissions Commercial and development targets forretail business; biomass generation subject to regulatory support; Development of technical and sourcing plans to increase the level of of sustainable biomass; Regulatory —securing appropriate support for co-firing Safety and plant and operational performance. Cash flow Underlying earningsshare; per and trials which were not included in theoriginal plan. (1) andcontrollablecosts. ore for2011at 146%. TheCommittee exercised itsdiscretion of payshould besufficiently linked to financial performance the Scorecard hadthe followingelements andweightings: asures, and has a discretion to adjust the overall ssociated with plantmodifications forbiomass which achieved between lowandtarget (1)

accounts 2011 accounts Annual report and Drax Group plc 71 Weighting 20% 10% 10% 10% 15% 5% 5% 5%

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The Board determines personal performance objectives for each executive director. The Committee assesses performance against these objectives and applies an individual performance multiplier of between zero and 1.5. To determine the actual bonus awarded to each executive director, the target bonus is multiplied by the corporate score and by the personal score, subject to a cap of two times the target bonus. For bonus awards in 2011, the target bonus for the Chief Executive and the other executive directors was 65% and 60% of base salary respectively. The maximum bonus was 130% and 120% respectively. 75% of any bonus award is paid in cash and 25% is deferred in shares that vest after three years and are forfeited if the executive leaves the Group other than as a “good leaver” before the shares vest. The target and maximum bonus percentages for 2012 for the Chief Executive and the other executive directors are the same as in 2011, and bonus measures and targets have been set using a similar process to that used previously. The corporate scorecard weightings are 30% financial, 15% safety and production, 5% retail and 50% strategic and Business Plan. The weightings are set out in the following table:

Target weighting Financial performance Group underlying earnings per share(1) 20% Cash flow(2) and controllable costs 10% Total financial 30% Safety, production and retail Safety and production targets 15% Retail sales volume 5% Total safety, production and retail 20% Strategic and Business Plan Regulatory objectives 5% Biomass co-firing development 20% Biomass procurement targets 10% IED compliance plan development 5% Other 10% Total strategic and Business Plan 50% Total weighting 100% Notes: (1) Calculated using underlying earnings, being profit attributable to equity shareholders adjusted to exclude the after tax impact of unrealised gains and losses on derivative contracts, and exceptional items (see note 9 to the consolidated financial statements). (2) Cash flow for the year excluding the impact of short-term investments, prior to payment of equity dividends

Conditional share awards under the Bonus Matching Plan The Group operates the BMP as a long-term performance share plan. Awards under the BMP have been made in 2009, 2010 and 2011. Under the BMP executive directors and other senior executives receive an annual grant of conditional shares to a value of up to 1.5 times the amount of the executive’s annual bonus for the prior year. No payment is made for the shares. However, vesting is subject to service and performance conditions. In respect of existing awards, 33% of awards granted to those members of senior management who are not members of the Executive Committee will vest on the third anniversary of grant provided that the participant is still employed by the Group. Awards granted to members of the Executive Committee and the balance (i.e. 67%) of the awards granted to other members of senior management will vest on the third anniversary of grant provided the participant is still employed by the Group and subject to achievement of performance conditions determined by the Committee and described below. for executive directors and of payments in lieu are included theDirectors’ emoluments in table in Part 2ofthis report. withtheremainder ascashpension contributionsup to in lieuof £50,000 perannum pension. Detailsof pension contributions pension schemes orcash in lieu ofpension at the statedand subject rate to normal statutory deductions; or a combination of 33% Alternatively, at their option, executive directors may either ha The employer’s contribution for executive directors is 20%ofbasesalary. Executive directors are entitled to non-contributory membership ofthe Group’s defined contribution pension plan. Pension but in particular willconsider improvement in the Company’s financial, production and trading performance. 100% the Company’s performance over the period. In determining this,theCommit In addition, the Committee must besatisfied that there has also been a demonstrable and sustainable improvement in including sustainable development ofbiomass generation discretion theCommittee will pay particular regard to progress against the strategic objectives incorporated in the Scorecard period toensure anoutcome that is consistent with performancethe underlying progression of thebusiness. Inexercising its going into the average Scorecard calculation and has the discretion to adjust 15% the final outcome based on events over the In addition, at the end of the three year performance period the Remuneration Committee will ratify each of theannual results Straight-linevesting between and 15% 100% for average result and between 1 1.5. (1) Notes: 1.5 100% 1 <1 Average Scorecard outcome It isthen proposed that the Scorecard award will vest at the end ofthe three year performance period asfollows: for this purpose, beso capped. The averaging calculation is cappedalthough the annualresult reported on during the performance period, commencing startat the ofthe financial year in which the BMPaward ismade. The Scorecard award willvest by reference to theoutputs the averageof the Scorecardfor of each ofthe three years the average outcome fromthe Scorecard year over performance periodthe three (the Scorecard award). 50% ofthe BMP awardsubjecttoperformance conditionswill The Scorecard condition normally upanniversary. the Subject third to continuing service to (1) Notes: Below median At median Within upperquartile Company rankwithin thecomparator group The TSRconditionprovides for vesting asfollows: Drax shares. return received by a Draxshareholder through appreciation in theshare price, plusdividends assumed to be reinvested in relative tothe TSRover thesame period ofthe companiescomprising theFTSE51—150 (theComparatorGroup). TSR isthe the Company’s TSR overthe three year period measured from the start 50% ofsuchpartany awards thatare subject to conditions shallperformance vestsubject to acondition relating to The TSR condition Vesting of Matching of granted to Awards Vesting and the development ofthe Haven Power supply business. Executive Committee members vest byreference totheCompany’s performance against ve contributions ofthesame amountsmade totheir personal on whichthethree year calculationwill be madewillnot, of thefinancial year in which an award is granted tee willtake into accountall relevant factors 0% (1) Vesting of Matching of granted to Awards Vesting % of Scorecard vesting Award of % accounts 2011 accounts Annual report and Drax Group plc 73 other participants 100% 33% 15% 0% (1) (1) (1)

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Benefits in kind (car, private medical cover, etc.) Car allowance The Company’s policy is to offer a car allowance to executive directors and to certain senior managers, according to their role. The annual allowance is currently: £17,500 per annum for the Chief Executive; £12,000 per annum for other executive directors; and £9,000 per annum for senior managers whose remuneration is determined by the Committee. Life assurance Life assurance (in a sum assured of four times base salary) is provided for the executive directors and senior managers. Private medical cover The Company’s policy is to offer BUPA private medical cover to all employees within the Group, on a non-contributory or discounted basis according to the subsidiary company’s policy. The executive directors and senior managers receive medical cover for them and their dependants. Relocation expenses and Relocation expenses are paid where appropriate. Second base expenses provide an allowance second base expenses towards the cost of accommodation and travel when a director or senior manager is required to spend a significant amount of time at two Drax locations.

Current annualised rates of pay The following table shows the current annualised rates of base salary, benefits, bonus (at target level) and pension contributions for each of the current directors:

Annual cash Annual salary Annual fees(1) Annual bonus(2) Annual benefits(3) pension(4) £000 £000 £000 £000 £000 Tim Barker — 63 — — — Charles Berry — 220 — — — Tim Cobbold — 53 — — — Peter Emery 286 — 172 12 57 David Lindsell — 63 — — — Tony Quinlan 347 — 208 78 69 Paul Taylor 240 — 144 12 48 Dorothy Thompson 510 — 332 84 102 Tony Thorne — 53 — — — Notes: (1) Includes Board Committee membership fees paid as separate amounts. (2) The annual bonus assumes an “on target” performance yielding a bonus of 65% of base salary for Dorothy Thompson and 60% of base salary for the other executive directors, of which 25% is required to be deferred into shares. (3) Covers car allowance and second base expenses only. The cost of other benefits such as BUPA and additional life cover is not easily predicted because they are subject to price variation (the amount of which depends on personal circumstances at the time) during the year. (4) Annual contribution by the Company to the directors’ pension plans or cash in lieu.

All employee share plans The Committee operates a Savings-Related Share Option Plan (“SAYE”) and a Share Incentive Plan (“SIP”), both of which are approved by HM Revenue & Customs and must be operated on an all employee basis. The executive directors may participate in each plan upon the same terms as other employees. The plans are the main vehicles for aligning staff with TSR.

SAYE The SAYE provides for the grant of options (which, at the Committee’s discretion, may be offered at a discount of up to 20% to the market price of a share determined in accordance with the rules of the plan) linked to a savings contract which pays interest at a statutory rate. The plan was operated in 2006 and again in 2010 and 2011, so that (subject to the statutory upper aggregate limit of £250 per month on an individual’s savings under all SAYE plans) a participating employee could choose to save for either or both periods of three or five years. In each year of operation, options have been granted at the permitted discount of 20% to the prevailing share price (determined in accordance with the plan rules) resulting in option prices of: 2006 — 636.00 pence per share 2010 — 310.50 pence per share 2011 — 321.00 pence per share Options may be exercised upon successful completion of the three or five year savings contract to which they are linked. wr Award The table below detailshowthe SIPhas been operated between 2006and2009: No shares have vested since the introduction of therelevant performanceshare plan. (that is, after income tax and national insurance contributions) sharesreceived until the applicable guideline is reached. Those whoreceive shares byvirtueofshare plan awardsor and 50%of base salaryfor executive directors andother senior managerBMP participants, respectively. The Company has share ownership guidelines for executives initsperformance participating share plans. They are 100% Share ownership guidelines of theshares in issue at the dateofthis report. liability once the shares have beenheldintrust forfive The employeeyears. isentitledtoreceive dividends paid in respect the employee. Under normal circumstances, the employee willreceivet In accordance with the planrules, shares taken upbyan employee are allocated to a trustee which holdsthem onbehalf of TheSIP Trustee was purchasefunded bythe Groupto FreeandMatching the required Shares inorder avoidanyto dilution. (1) Notes: Award Matching Share Partnership Share SIP FreeShareAward 2006 2007 2008 2009 following elements: In any one tax year,the Committee may operate the SIP for the benefitof participants using any combination ofthe SIP contracts overthree and five years and contribute in total no more than £250per month. results announcement. The20%discounttothe market price is appli On 14February 2012, theCommittee agreed that invitations Details ofthe SAYEoptions held bythe executive directors are shownin the table in Part2 of thisreport. of 636pencepershare. Therefore all options u maturity date up to the end of the exercise period peaked at The fiveyearcontracts under the2006Planmatured on 1 July 2011.Themarket price of Drax Group plc shares fromthe The currentestimated dilution from subsisting awards, including exec (e.g. BMP). any ten year period and a limit of 5%share capital in any ten year period for theCompany’s discretionary share plans through atrust, subject toan overall dilution share limitfor all employee plans ofnomore than 10%ofshare capitalin All equity-based plans are funded through theissuance ofshares, orthrough the purchase ofshares in the marketplace Provision ofsharesforshare plans —dilution The SIPhas notoperated since 2009. Details ofthe shares allocated to executive directors under the SIP are shown inthe table in Part2of this report. of theshares held in trust. − − − −     allow the investment in shares of dividendsreceived in respect ofSIPshares. allocate freeMatchingShares (inamaximum ratio of allow the purchase ofPartnership Shares (up to £1,500in value subjecttoan overriding maximumof10% salary); award FreeShares(up to £3,000 invalue); (1) (1)

Participants wereallowed toinvestup tothemaxi Participants maximum of10% ofsalary) in each year. Partnership Shares matched on aone-for-one basis in each year. £2,000 worthofshares Participants received nder this plan lapsedon 31December 2011. each year. Participants received £2,500 worth ofshares in two Matching Shares for eachPartnership Share); and who receive deferred bonusshares mustretain 50% ofthenet 581.50pence per share,which was wellbelow the option price to the SAYE be made againinto 2012,following the preliminary ed and participantswill utive andallemployeeshare awards, is less than 0.5% he shares fromthe trustee withoutincurring atax mum permitted of £1,500 (subject to anoverriding be ableto take outSAYE £1,000 worthof shares. Participants received accounts 2011 accounts Annual report and Drax Group plc 75

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Service contracts Executive directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’ prior notice except that the contracts of Peter Emery and Paul Taylor are terminable by them providing six months’ notice to the Company. Under each of the executive directors’ service agreements other than the Chief Executive’s, Drax has the right to make a payment in lieu of notice of termination, the amount of that payment being the salary and benefits that would have accrued to the executive director during the contractual notice period. The following table shows for each person who has served as a director of the Company at any time during the year ended 31 December 2011, the commencement date and term of the service agreement or contract for services, and details of the notice periods. No service agreement now includes any operative provision for the payment of compensation upon early termination. Any compensation payable in those circumstances would need to be negotiated at the time and in the light of the circumstances.

Notice period Notice period by the Company by the director Contract start date Contract term (months) (months) Tim Barker 14 February 2012 3 years 1 1 Charles Berry 17 April 2011 3 years 6 6 Tim Cobbold 27 September 2010 3 years 1 1 Peter Emery 14 June 2004 Indefinite duration 12 6 Mike Grasby(1) 15 December 2005 6 years 1 1 David Lindsell 14 February 2012 3 years 1 1 Tony Quinlan 1 September 2008 Indefinite duration 12 12 Paul Taylor 1 September 2011 Indefinite duration 12 6 Dorothy Thompson 26 September 2005 Indefinite duration 12 12 Tony Thorne 29 June 2010 3 years 1 1 Notes: (1) Mike Grasby retired as a director on 13 April 2011.

Directors’ service agreements and contracts for services are available for inspection at the Company’s registered office during normal hours of business and will be available at the place of the AGM from 10.30am until the close of the meeting. External appointments The Committee recognises that executive directors may be invited to become non-executive directors of other companies and that such appointments can broaden their knowledge and experience to the benefit of the Group. The policy is that an executive director who accepts an external appointment having had the prior approval of the Board should retain the fees payable in respect of the appointment. Dorothy Thompson is a non-executive director of Johnson Matthey plc and received £50,000 in fees for that appointment during 2011. Non-executive directors The Chairman and non-executive directors receive fees in respect of their services. They do not receive any pension or benefits in kind, nor are they eligible for any annual performance bonus or any of the share-based reward plans. The Chairman’s notice period is six months whilst the other non-executive directors have a notice period of one month. The remuneration of the Chairman is determined by the Committee whilst that of the other non-executive directors is determined by the Chairman and the executive directors. This is designed to: − recognise prevailing market rates for the Chairman’s and non-executive directors’ fees in other listed companies of a similar market value or turnover to Drax; − reflect the responsibilities and time commitment; and − attract and retain individuals with the necessary skills and experience to contribute to the future growth of the Company.

Chairman The Committee determined that the Chairman’s remuneration should be increased from £200,000 to £220,000 per annum with effect from 1 April 2011. This was the first increase in the Chairman’s remuneration since his appointment in April 2008 and was agreed on the basis that it would not be increased further until at least April 2013. This is reflected in the table of annualised rates of pay on page 74. indices. These indiceshave been chosen as suitable broad comparators that performance withthechangingvalue The followinggraphshows how thevalueof £100 invested in the Value of£100invested Other CommitteeChairmanship Chairmanship Audit Committee Senior Independent Director Basic fee The feesfornon-executive directors were determined in April 2009 asshown below: Other non-executive directors to on a cumulative basis over theperiod from 31 December 2006to31 December 2011. The graphreflects theTSR (determinedaccording to usual market their relative returns given that, inrecent years, theCompany has been amember ofboth the FTSE100and FTSE250 indices. as at 31 December 2011 TSR 100 e 6Sp0 e 7Sep 08 Dec07 Sep 07 Dec 06 120 80 60 Drax performance – Drax ve Mar 07 FTSE100 Jun 07 FTSE250 (oicuecaro omte te hnteAdtCmite £10,000perannum (toinclude chair of acommittee other than the Audit Committee) rsus FTSE100 and FTSE250 and rsus FTSE100 Mar 08 u 8Mr0 Jun09 Mar09 Jun 08 of thesame amount invested at the sametime in theFTSE100 and FTSE250 e 8Sp0 e 9Mr1 u 1Sp1 Dec11 Sep 11 Jun11 Mar11 Dec09 Sep 09 Dec 08 Company on 31December 2006 haschanged and compares practice) for theCompany and each ofthe indices referred against whichtheCompany’s a 0Jn1 e 0Dec10 Sep 10 Jun10 Mar 10 shareholders mayjudge £52,500 per annum£52,500 per £10,000 perannum £7,500 per annum accounts 2011 accounts Annual report and Drax Group plc 77

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Remuneration Committee report

Part 2 — Audited information This section of the report (which has been subject to audit) sets out the remuneration paid to the directors during the year ended 31 December 2011. Directors’ emoluments The emoluments payable in respect of 2011 to directors who held office for any part of the financial year, including amounts paid to them as directors of subsidiary undertakings and compensation for loss of office were as follows:

Cash bonus in respect of Total Total Salary Fees 2011 Benefits Pension(1) 2011 2010 £000 £000 £000 £000 £000 £000 £000 Tim Barker — 63 — — — 63 61 Charles Berry — 215 — — — 215 200 Tim Cobbold — 53 — — — 53 14 Peter Emery 284 — 257 18 57 616 598 Mike Grasby(2) — 18 ———18 55 David Lindsell — 63 — — — 63 61 Tony Quinlan 345 — 312 85 69 811 780 Paul Taylor(3) 225 — 216 15 39 495 399 Dorothy Thompson 508 — 497 90 101 1,196 1,155 Tony Thorne — 53 — — — 53 27 Notes: (1) Annual contribution by the Group to directors’ pension plans or cash in lieu. (2) Mike Grasby retired from the Board on 13 April 2011 and therefore his emoluments are for only part of the year. (3) Paul Taylor was appointed to the Board on 1 September 2011. The figures in the table above show the total amounts he received, as both an employee and a director, for the period 1 January 2011 to 31 December 2011. The total for 2010 is the amount he received as an employee. Directors’ interests under the ESIP The following information shows the interests of the directors as at the end of the financial year in the Company’s ESIP:

As at 1 January 2011 As at Market value (or appointment Awards made Awards vesting Awards lapsing 31 December at the date if later) during the year during the year during the year 2011 of award (number) (number) (number) (number) (number) (pence) Peter Emery 2008 Award 39,861 — — 39,861 — 577.0 Paul Taylor 2008 Award 28,596 — — 28,596 — 577.0 Dorothy Thompson 2008 Award 71,057 — — 71,057 — 577.0 01Dfre wr —4,1 — — — — — — — — — 40,515 — — — 243,093 — — — — — — — — — — 29,173 — — — Details ofthe conditions subject towhich the above awards will vest are given onpage 72. — 175,039 23,063 12,777 — Total — 138,382 2011 Deferred Award 76,667 — — 2011 Matching Award — — — 2010 Deferred Award — — 2010 Matching Award — — — 2009 Deferred Award 10,500 — 2009 Matching Award — — 63,003 Dorothy Thompson 8,042 25,431 — Total 48,25 2011 Deferred Award 152,588 — — — 2011 Matching — Award — — 2010 Deferred Award — — 2010 Matching Award — — 2009 Deferred Award — — 17,257 — 2009 Matching Award — 103,541 — Paul Taylor 4,71 — Total 20,943 — 81,752 2011 Deferred Award 125,660 — — 2011 Matching Award — — — 2010 Deferred Award — 2010 Matching Award 2009 Deferred Award 14,195 — 2009 Matching Award 85,171 Tony Quinlan 11,581 Total 69,489 2011 Deferred Award 2011 Matching Award 2010 Deferred Award 2010 Matching Award 2009 Deferred Award 2009 Matching Award Peter Emery The followinginformation shows the interests of thedirectors asat the end ofthefinancial year intheCompany’s BMP: Directors’ interestsundertheBMP

(or appointment 1January 2011 365,657 283,608 — — — — 283,608 365,657 — — 178,019 207,266 8,3 4,0 — — 146,603 180,436 129,801 89,444 — — — — 89,444 129,801 (number) if later) later) if As at As 6——— 6——— during the year the during Awards made (number) Awards vesting vesting Awards during the year the during (number) during the year the during Awards lapsing lapsing Awards (number) (number)

31 December 385,285 649,265 243,093 327,039 152,588 219,245 138,382 125,660 175,039 103,541 48,256 69,489 20,943 63,003 23,063 76,667 10,500 40,515 25,431 81,752 (number) 29,173 17,257 12,777 14,195 8,042 85,171 11,581 4,716 As at 2011 accounts 2011 accounts Annual report and Drax Group plc 79

Market value at the dateat the 495.40 495.40 495.40 495.40 495.40 495.40 495.40 495.40 388.02 388.02 388.02 388.02 388.02 388.02 388.02 388.02 401.08 401.08 401.08 401.08 401.08 401.08 401.08 401.08 of award (pence) — — — —

Financials Governance Business review 80 Drax Group plc Annual report and accounts 2011

Remuneration Committee report

Directors’ interests under SAYE The following information shows the interests of directors as at the end of the financial year in the Company’s SAYE Plan:

As at 1 January 2011 Share options Share options Share options As at (or appointment granted during exercised during lapsed during Exercise price 31 December if later) the year the year the year per share 2011 (number) (number) (number) (number) (pence) Exercise period (number) Tony Quinlan 1 May 2013 to 2,922 — — — 310.5 31 October 2013 2,922 Paul Taylor 1 May 2013 to 2,922 — —— 310.5 31 October 2013 2,922 Dorothy Thompson 1 May 2013 to 2,922 — —— 310.5 31 October 2013 2,922

The middle market closing quotation for an ordinary share of the Company on 31 December 2011 was 545.0 pence and the daily middle market closing quotations during the financial year ranged from 371.9 pence to 581.5 pence. Directors’ interests in Drax Group plc shares The interests held by each director at the end of the financial year in the ordinary shares in the Company are shown below. All the disclosed interests are beneficial. No director had any interest at any time during the year, or since, in any security issued by the Company other than its ordinary shares.

As at 31 December 2011 As at 1 January 2011 (or appointment if later) SAYE ESIP BMP SAYE ESIP BMP Ordinary SIP option share share Ordinary SIP option share share shares shares(1) shares(2) awards awards(3) shares shares(1) shares(2) awards awards(3) Tim Barker 3,462 — — — — 3,462 — — — — Charles Berry 1,730 — — — — 1,730 — — — — Tim Cobbold 1,000 — — — — ——— — — Peter Emery 30,551 2,616 — — 327,039 30,551 2,616 — 39,861 180,436 David Lindsell 7,500 — — — — 7,500 — — — — Tony Quinlan 2,500 803 2,922 — 385,285 2,500 803 2,922 — 207,266 Paul Taylor — 2,694 2,922 — 219,245 — 2,694 2,922 28,596 129,801 Dorothy Thompson 63,569 2,616 2,922 — 649,265 63,569 2,616 2,922 71,057 365,657 Tony Thorne 7,500 — — — — 7,500 — — — — Notes: (1) The SIP shares include the Free, Partnership and Matching elements of the plan. (2) The number of SAYE option shares are those which will be available to exercise at the maturity of the savings contract. (3) Includes both the Matching and Deferred elements of BMP. (4) A director is not required to hold shares of the Company by way of qualification.

No director had at any time during the financial year, or has had since, any beneficial interest in the shares of any subsidiaries. No other changes to directors’ share interests have taken place between 31 December 2011 and the date upon which this report was approved by the Board. This report was reviewed and approved by the Board on 20 February 2012.

Tim Barker Chairman of the Remuneration Committee Group –Independent auditor’s report Under the Listing Ruleswe are required toreview: 20 February 2012 London, UK Chartered Accountants and Statutory Auditor of LLP and onbehalf Deloitte for HughesCarl D (Senior MA FCA Statutory Auditor) 2011 andonthe information in the Directors’ remuneration report th We havereportedseparatelyon theparent company fi Other matters Under the Companies Act 2006wearerequired to report to you if, in ouropinion: We havenothing toreport in respect of the following: Matters onwhichwearerequir prepared is consistent withthe Group financial statements. In our opinion theinformation given in the Directors’for report thefinancial year for which the financial statementsare Opinion on other matters bythe prescribed Companies Act 2006 In our opinion theGroup financial statements: Opinion onfin consistently applied and adequately disclosed; of the reasonableness This includesan assessment of: whether the accounting areappropriate to policies the Group’s circumstances and have been reasonable assurance that the financial statements are freefrom material misstatement, whether caused by fraudor error. An audit involves obtaining evidenceabout the amountsdisclosures and in the financial statementssufficient to give Scope oftheauditfinancialstatements and Ireland). Those standards require usto comply with the Auditing Practices Board’s Ethical Standards for Auditors. Group financial statements and for being satisfied that they give atrue and fair view.Our responsibility is to audit and expr As explained more fully in the Directors’ responsibilities the statement, directorsare responsible forthepreparation of the Respective responsibilities ofdirectorsandauditor for thisreport,theopinionswe haveformed. work, or required tostate them inan auditor’ Act 2006.Our audit work has been undertakenmight sothat we state to the Company’s members those matters weare This report is made solely to the Company’s members, as a body, in accordance withChapter 3ofPart 16 of the Companies Standards (“IFRSs”)asadoptedby the European Union. reporting framework that has been applied in their preparatio Consolidated statement ofchangesinequity, t Consolidated income statement, the Consolidated statement of We haveaudited the Group financial statements ofDrax Group To themembers of Drax Group plc apparent material misstatements or inconsistencies weconsider the implications forour Report. the annual report to identify material inconsistencies withthe audited financial statements. If webecomeaware ofany and the overall presentation of the financial statements. In addition, weread all thefinancial and non-financial information an opinion on the Group financial statements inaccordance with applicable law andInternational Standards on Auditing (UK accept or assume responsibility to anyoneother than theCompany and the Company’s members as a body, forour audit − − − − − − − −         have been prepared in accordance with the requirements of have been properly preparedin accordance withIFRSs certain elementsofthereport toshareholders by theBoard on directors’ remuneration. UK Corporate GovernanceCode specified for our review; and the partof the Corporate governance statement relating to the Company’s compliance withthenine provisions ofthe the directors’statement containedwithin the reportDirectors’ inrelation togoingconcern; we havenotreceived all the information and explanations we require forour audit. certain disclosures ofdirectors’ remuneration specified bylaw are not made;or give atrue and fair view of the state ofthe Group’s affairs as at31December 2011 and ofitsprofit for the year thenended;

ancial statements ed toreportbyexception s reportandfor no other purpose. To the fullest extent permitted bylaw,wedonot he Consolidated flowstatement cash and the related notes 1to 32. Thefinancial nancial statements of Drax Group plc for the yearended31 December Groupplc for nancialstatements ofDrax as adoptedbytheEuropean Union; and n isapplicable lawandInternational Financial Reporting the Companies Act 2006and Article 4 of the IAS Regulation. comprehensive income, the Consolidatedbalancesheet, the plc for the year ended 31 December 2011whichcomprise the at is described asha significant accounting estimates ving beenaudited. made by the directors; accounts 2011 accounts Annual report and Drax Group plc 81 in ess

Financials Governance Business review 82 Drax Group plc Annual report and accounts 2011

Consolidated income statement

Years ended 31 December 2011 2010 Notes £m £m

Revenue 1,835.9 1,648.4

Fuel costs in respect of generation (1,020.8) (840.9) Cost of power purchases (172.3) (165.8) Grid charges (117.6) (82.2) Other retail costs (24.4) (9.0) Total cost of sales (1,335.1) (1,097.9) Gross profit 500.8 550.5

Other operating and administrative expenses 5 (224.4) (210.8)

Unrealised gains/(losses) on derivative contracts 19 89.8 (60.5) Operating profit 366.2 279.2

Interest payable and similar charges 6 (30.3) (26.5)

Interest receivable 6 2.2 2.2 Profit before tax 338.1 254.9

Tax:

— Before exceptional items 7 (71.4) (66.5)

— Exceptional items 7 197.9 — 126.5 (66.5)

Profit for the year attributable to equity holders 464.6 188.4

Earnings per share pence pence

— Basic 9 127 52

— Diluted 9 126 52

All results relate to continuing operations. Underlying earnings and underlying earnings per share are set out in note 9.

Consolidated statement of comprehensive income Total comprehensiveincome for theyear toequityholders attributable income/(expense)Other comprehensive Impact of corporation tax rate change on deferred tax on cashflow hedges Deferred tax on cashflowhedges beforecorporation taxrate change Fair value gains/(losses) oncash flowhedges Deferred tax on actuarial losses ondefined benefit pension scheme Actuarial losses ondefined benefit pensionscheme theyear Profit for Notes Notes 30 25 7 7 7 December ended31 Years 464.6 465.6 (0.7) (3.7) 2011 0.9 2.6 accounts 2011 accounts Annual report and Drax Group plc 83 1.0 1.9 £m (232.6) 188.4 (171.4) 65.1 (6.2) 17.0 2010 0.6 £m 1.7

Financials Governance Business review 84 Drax Group plc Annual report and accounts 2011

Consolidated balance sheet

As at 31 December 2011 2010 Notes £m £m Assets Non-current assets Intangible assets — goodwill 10 10.7 10.7 Property, plant and equipment 11 1,195.7 1,184.2 Derivative financial instruments 19 11.0 25.8 1,217.4 1,220.7 Current assets Inventories 12 137.6 116.6 ROC assets 13 32.1 33.1 Trade and other receivables 14 269.3 233.0 Derivative financial instruments 19 120.6 112.6 Short-term investments 15 30.0 95.0 Cash and cash equivalents 16 202.8 236.0 792.4 826.3 Liabilities Current liabilities Trade and other payables 17 292.8 285.0 Current tax liabilities 33.8 189.7 Borrowings 18 7.1 61.7 Derivative financial instruments 19 95.6 197.9 429.3 734.3 Net current assets 363.1 92.0 Non-current liabilities Borrowings 18 0.5 65.3 Derivative financial instruments 19 5.3 1.5 Provisions 20 30.5 6.4 Deferred tax liabilities 21 203.8 244.2 Retirement benefit obligations 30 37.0 37.3 277.1 354.7 Net assets 1,303.4 958.0 Shareholders’ equity Issued equity 22 42.1 42.1 Capital redemption reserve 24 1.5 1.5 Share premium 24 420.7 420.7 Merger reserve 24 710.8 710.8 Hedge reserve 25 63.3 59.5 Retained profits/(accumulated losses) 26 65.0 (276.6) Total shareholders’ equity 1,303.4 958.0

The consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for issue by the Board of directors on 20 February 2012. Signed on behalf of the Board of directors:

Dorothy Thompson Tony Quinlan Chief Executive Finance Director

Consolidated statement of changes inequity qiydvdnspi nt ) (2.)(123.7) 464.6 (123.7) 464.6 — — 1.0 465.6 — — 461.8 (2.8) (86.5) 3.8 188.4 3.8 — (86.5) — 188.4 — — — — (171.4) — — (4.5) — — — — — — (166.9) — — — — — At 31December 2011 — share-based payments(note 23) — — Movement in equityassociated with — — Equity dividendspaid(note8) Total comprehensive incomefor the year — — — Other comprehensive income/(expense) Profit fortheyear At 1January2011 — share-based payments(note 23) Movement in equityassociated with Equity dividendspaid(note 8) for the year Total comprehensive (expense)/income Other comprehensive expense Profit fortheyear At 1January2010

Issued equity 42.1 21154077085. 266 958.0 59.5(276.6) 710.8 420.7 1.5 1,024.7 42.1 226.4(376.8) 710.8 420.7 1.5 42.1 £m 169 8. 17.0 183.9 ————— (166.9) — 3.53.5 — ————— — 2.82.8— redemption reserve Capital 1.5 £m premium 420.7 Share £m 710.8 reserve Merger £m reserve 63.3 Hedge £m (accumulated Retained accounts 2011 accounts Annual report and Drax Group plc 85 profits/ losses) 65.0 £m 1,303.4 Total £m

Financials Governance Business review 86 Drax Group plc Annual report and accounts 2011

Consolidated cash flow statement

Years ended 31 December 2011 2010 Notes £m £m

Cash generated from operations 27 281.9 484.7 Income taxes paid (67.7) (56.1) Other gains 0.7 2.0 Interest paid (18.9) (23.0) Interest received 2.5 3.5 Net cash from operating activities 198.5 411.1 Cash flows from investing activities Purchases of property, plant and equipment (43.8) (62.3) Short-term investments 65.0 (40.0) Net cash generated from/(used in) investing activities 21.2 (102.3) Cash flows from financing activities

Equity dividends paid 8 (123.7) (86.5) Repayment of borrowings (135.4) (65.2) New borrowings 10.0 — Other financing costs paid (3.8) (1.5) Net cash used in financing activities (252.9) (153.2) Net (decrease)/increase in cash and cash equivalents (33.2) 155.6 Cash and cash equivalents at 1 January 236.0 80.4

Cash and cash equivalents at 31 December 16 202.8 236.0

Notes to the consolidated financial statements “Related party disclosures”, IFRS 1(amendment) “First time In 2011, several new, revised and amendedstandards and interpreta Adoption ofnewandrevisedaccounting standards of theGroup. Adoption ofthe other standards infuture periods is not expected to have a material impact on thefinancial statements by theEU. than the accounting period beginning on or after 1 January 2015and 1 January 2013respectively, subject to endorsement The Group is yet to assess the full impact ofadoption of IFRS 9 and IFRS 13,and intends to adopt both standards no later IAS Regulations. endorsement bythe EU). not been applied in these financial statements, were in issue of authorisationfinancial statements,date ofthese th the At of thesestandards and interpretations has not had amaterial impacton thefinancial statements ofthe Group. instruments”, IFRIC 14“Prepaymentsofaminimum funding re “Financial instruments: Presentation on classification of rights issues”, IFRIC19“Extinguishing financial liabilities with eq atfair beenmeasured thathave assetsandliabilities financial forcertain basis,except cost thehistorical on page 29,and The financial statements have been prepared on agoing concern basis, as set out in the Operational andfinancialreview on adopted by the European Union and therefore theconsolidated financial statements comply with Article 4 of theEU The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) 2. Basis ofpreparation and the saleof electricity to business customers byHaven Power Limited(“Haven Power”). and sale of electricity and by-products of the electricity genera statements, which followthese consolidated financial statements. The principal activities of the Group are the generation United Kingdom. Theoperating companies of the Group are disclosed in note 3 tothe Company’s separate financial of theCompany’s registered office and principal establishment is Drax Power Station, Selby, North Yorkshire YO8 8PH, its subsidiaries (together the“Group”)operateinelectr Drax Group plc (the “Company”)isincorporated andWales in underEngland the Companies Act. The Companyand 1. Generalinformation − − − − − − − − − − − −             1 January 2013. IAS 28(revised) “Investments inassociates and joint ventures” —effectivefor accounting periods beginning on orafter IAS 27(revised) “Separate financial statements” —effective IAS 19 (revised) “Employee benefits” —effective foraccounting periods beginning on or after 1January 2013. 1 January 2012. IAS 12 (amendment) “Deferred tax:Recovery of underlying asse periods beginning on or after 1 July 2012. IAS 1 (amendment) “Presentation— offinancialOther statements comprehensive income”— effectivefor accounting IFRS 13“Fairvaluemeasurement” —effectivefor accounting periods beginning onor after 1 January 2013. IFRS 12“Disclosure ofinterests in otherentities” —effectiv IFRS 11“Joint arrangements” — effective for accounting periods beginningon or after 1 January 2013. IFRS 10“Consolidated financial statements” — effective foraccounting periods beginning on or after 1 January 2013. 1 January 2015. IFRS 9“Financial instruments — Classification and measureme on orafter 1 July 2011. IFRS 7(amendment)“Financial instruments: Disclosures on periods beginning onor after 1 July 2011. IFRS 1(amendment) “Severe hyperinflation and removaloffixed da icity generationand supply industry withinthe UK. The address butnotyet effective (andsome of whichwerepending adoption: financial instrument disclosure”, IAS32 (amendment) e following standards and relevant interpretations, whichhave e for accounting periods beginning on orafter 1 January 2013. quirement”, and Improvements toIFRSs(2010). Theadoption tion process at Drax Power Station, Selby, North Yorkshire derecognition” —effective foraccounting periods beginning for accounting periods beginning on orafter 1January2013. nt” —effective for accounting periods beginning onor after ts” —effectivefor accounting periodsbeginning onor after tions became effective.These are IAS24(revised) tes forfirst-time adopters” — effectivefor accounting accounts 2011 accounts Annual report and Drax Group plc 87 value. uity

Financials Governance Business review 88 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

3. Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to both years presented, unless otherwise stated.

(A) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company made up to the reporting date each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

(B) Critical accounting judgements, estimates and assumptions The preparation of financial statements in conformity with IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s reasonable knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The critical accounting judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Property, plant and equipment — Estimated useful lives and residual values are reviewed annually, taking into account prices prevailing at each balance sheet date. The carrying values of property, plant and equipment are also reviewed for impairment where there has been a trigger event (that is, an event which may have resulted in impairment) by assessing the present value of estimated future cash flows and net realisable value compared with net book value. The calculation of estimated future cash flows and residual values is based on management’s reasonable estimates of future prices, output and costs, and is therefore subjective. Impairment — The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 3 (E). The recoverable amounts of cash-generating units have been determined based on value in use calculations. These calculations require the use of estimates (see note 10). Pensions — The Group operates an approved defined benefit scheme. The cost of providing benefits is determined using the projected unit credit method and actuarial valuations of the plan assets and liabilities are carried out as at the balance sheet date. Inherent in these valuations are key assumptions, including discount rates, inflation rates, expected returns on scheme assets, salary and pension increases, and mortality rates. These actuarial assumptions are reviewed annually and modified as appropriate. The Group believes that the assumptions utilised in recording obligations under the scheme are reasonable based on prior experience, market conditions and the advice of scheme actuaries. However, actual results may differ from such assumptions. Taxation — In accounting for taxation the Group makes assumptions regarding the treatment of items of income and expenditure for tax purposes. The Group believes that these assumptions are reasonable based on prior experience and consultation with advisers. Full provision is made for deferred taxation at the rates of tax prevailing at the period end dates unless future rates have been substantively enacted. Deferred tax assets are recognised where it is considered more likely than not that they will be recovered, taking into account the nature of the losses, and the certainty of the relevant offsetting income streams. Derivatives — Derivative financial instruments are stated in the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings unless specific hedge accounting criteria are met. The fair values of derivative instruments for commodities and foreign exchange rates are determined using forward price curves. Forward price curves represent the Group’s estimates of the prices at which a buyer or seller could contract today for delivery or settlement of a commodity or foreign exchange payment or receipt, at future dates. The Group generally bases forward price curves upon readily obtainable market price quotations, as the Group’s commodity and forward foreign exchange contracts do not generally extend beyond the actively traded portion of these curves. However, the forward price curves used are only an estimate of how future prices will move and are, therefore, subjective.

(C) Revenue recognition Revenue represents amounts receivable for goods or services provided in the normal course of business, net of trade discounts, VAT and other sales-related taxes, and excluding transactions with or between group companies. Revenues from the sale of electricity are recorded based upon output delivered at rates specified under contract terms or prevailing market rates as applicable. Revenues from sales of ROCs are recorded at the invoiced value, net of VAT. Revenue is recognised when the risks and rewards of ownership have been substantially transferred to a third party. economic benefits associated with the item will flow to the Group and the costth Groupthe of to the and will flow economic benefitswith theitem associated of electricity direct tocustomers through our retail Power. business, As Haven a result of the growthin the retail business, supply has taken place, a quantifiable price has beenestablished orcan be determined and the receivables are likely to of tradediscounts, VAT andClimate ChangeLevy. Revenue is recognised The estimated useful lives, beginning in2004 when theywere reset, are currently: repairs and maintenancecosts are expensed asincurred. or recognised as aseparate asset, as appropriate, if the recognition criteria are met;namely, when it is probable that future Costs relating tomajorinspections, overhauls and upgradesto prevailing at each balancesheet date. obsolescence as well as normal wearandtear, and any provis Estimated useful lives and residual values are taking intoreviewed accountcommercialannually, and technological Plant spare parts Decommissioning asset machineryOther plantand Main generating plant and freehold buildings useful lives of the assets fromthe dateofacquisition (limited are notdepreciated. accumulated depreciationFreeholdprovisionimpairmentvalue. course andconstructionany for in landandassetsin the of costs ofdismantling and removing the itemandrestoring thesit for ittobecapable of operating inthe manner intended by on disposal. carrying amount,unit islessthanits theimpairmentallocatedloss is firstreducethecarryingamount of goodwill to andthe annually ormore frequently where there is an indication beimpaired. itmay If the recoverable amountofthe cash-generating from thesynergies of thecombination. Cash-generating which units goodwillto has been allocated are tested forimpairment For the purpose ofimpairment testing, goodwill is allocated to is recognised immediately in theincome statement and is not subsequently reversed. liabilities recognised. Goodwill which isrecognised as an as the business combination over the Group’s interest in Goodwill arising onan acquisition isrecognised asan asset and (E) Goodwill separately disclosed from 1 January 2011,along withcomparatives forthe year ended31 December 2010(see note 4). segment has become moresignificant during the year ended 31 December 2011, and therefore the results of this segment are price estimates. be recovered. Energy supplied, but not yet measured or billed is Revenue fromthesaleofelectricity directtocustomers throug of anycash or cashequivalents received or paid. be measured reliably, therevenue ismeasured at the fair value ofthe goods or services given up, adjusted by the amount the amount of any cash or cash equivalents received or paid. If the fairvalueof thegoods or services received cannot is treated as giving rise to revenue. Therevenue ismeasured at the fair value ofgoods or services received, adjusted by as giving rise to revenue.Where goods or services areexchanged for goods or services of a dissimilar nature, theexchange Where goods or services are exchanged for goods or of asimilarservices natureandvalue, theexchange is not treated Depreciation is provided on astraight-line basis towritedown discounts and rebates), any directly attributable costs of bringing the asset to the location and condition necessary Property, plant and equipment are initially measuredatcos andequipment (F) Property,plant On disposal of a subsidiary, the attributable amount of goodwill is included in the determination ofthe profit or loss to itsother assets. The business activity of the Group consists of thegeneration an (D) Segmentalreporting the netfair value of the identifiable assets, liabilities and contingent management, and the estimate of the presentvalue of the set is reviewed for impairment at least annually. Any impairment t. Cost comprises thepurchasepricet. (afterdeducting trade ion forimpairment. Residualvaluesare based on prices to the expected decommissioning date ofthe power station). each ofthe Group’s cash-generating unitsexpected tobenefit assets totheir residual valu the power station are included in the asset’s carrying amountstation are includedasset’s carrying the power in the h ourretail business, Haven Power isrecorded after deduction initially measured at cost, being the excess of thecost of d sale ofelectricity at Drax Power Station, along with the sale e. Property, plant and equipment are stated atcostless calculated based on consumption statistics andselling consumptioncalculated based on on thesupplyofelectricity when a contract exists, e item can be measured reliably. All other e evenly over the estimated accounts 2011 accounts Annual report and Drax Group plc 89 3—20 Years

this 35 35 35

n

Financials Governance Business review 90 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

3. Summary of significant accounting policies (continued) (G) Impairment of property, plant and equipment At each balance sheet date the Group reviews its property, plant and equipment to determine whether there is any indication that these assets may have suffered an impairment loss. If such an indication exists, the recoverable amount is assessed by reference to the net present value of expected future cash flows of the asset (value in use) or sales value net of expenses. If an asset is impaired, a provision is made to reduce its carrying amount to the estimated recoverable amount. The discount rate applied is a pre-tax rate based upon the Group’s weighted average cost of capital and reflects the current market assessment of the time value of money and the risks specific to the business.

(H) Decommissioning costs Provision is made for the estimated decommissioning costs at the end of the useful economic life of the Group’s generating assets, when a legal or constructive obligation arises, on a discounted basis. The amount provided represents the present value of the expected costs. The discount rate used is a risk free pre-tax rate, reflecting the fact that the estimated future cash flows have built in risks specific to the liability. An amount equivalent to the discounted provision is capitalised within property, plant and equipment and is depreciated over the useful lives of the related assets. The unwinding of the discount is included in interest payable and similar charges.

(I) Inventories Inventories primarily comprise coal and biomass stocks, together with other fuels and consumables. Coal and biomass stocks are valued at the lower of the weighted average cost and net realisable value. Other stocks of fuel and consumables are valued at the lower of average cost and net realisable value.

(J) ROC assets The Group is able to claim ROCs from the Office of Gas and Electricity Markets (“OFGEM”) as a result of burning renewable fuels instead of coal. A market exists for the sale of ROCs and the Group recognises revenue in the income statement at the point where the risks and rewards of ownership have been substantially transferred to a third party. In respect of ROCs earned but not yet sold, the attributable incremental cost of generating ROCs above that of burning coal, limited to the recoverable amount expected to be realised, is included within current intangible assets.

(K) CO2 emissions allowances The Group recognises its free emissions allowances received under the UK NAP at £nil cost allocated to each financial year on a straight line basis. Any additional allowances purchased in the market are recorded at cost, within intangible assets. The Group also recognises a liability in respect of its unsettled obligations to deliver emissions allowances. The charge to the income statement within fuel costs and the liability is measured based on an estimate of the amounts that will be required to satisfy the net obligation, taking into account generation, free allowances allocated under the UK NAP, market purchases, sales and forward contracts already in place allocated to the financial year, and the market price at the balance sheet date.

(L) Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax payable or recoverable on the difference between the carrying amounts of assets and liabilities in the balance sheet and the corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is considered more likely than not that taxable profit will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that have been substantively enacted at the balance sheet date and are expected to apply in the period in which the liability is settled or the asset is realised, and is charged or credited in the income statement, except where it relates to items charged or credited to equity via the statement of comprehensive income, in which case the deferred tax is also dealt with in equity and is shown in the statement of comprehensive income.

(M) Pension and other post-retirement benefits The Group provides pensions through an approved industry defined benefit scheme and a defined contribution scheme. The cost of providing benefits under the defined benefit scheme is determined using the projected unit credit method, and actuarial valuations of the plan assets and liabilities are carried out as at the balance sheet date. Actuarial gains and losses are recognised in full in the statement of comprehensive income. The current service cost of the pension charge is deducted in arriving at operating profit in other operating and administrative expenses. The net interest cost of the pension charge is now included in finance costs and therefore deducted in arriving at profit before tax. This presentational change has resulted in the reclassification of £1.3 million costs in 2010 from salaries, in other operating and administrative expenses, to finance costs. The excess of the present value of the defined benefit obligation over the fair value of the plan assets is recognised as a liability in the balance sheet. . and from the translation at the exchange rate ruling at the balance sheet date of monetary assets and liabilities denominated The Group measuresall debt instruments, whether financial as Debt instruments (P) Financialinstruments currencies,foreign in recognised intheincome are statement. rate ruling atthe dateoftransaction. and losses Foreign resulting exchange fromthe gains settlement ofsuch transactions, of theCompany and its principal subsidiaries. currencies Transactions are translated inforeign into sterling at the exchange The Group’s consolidated financial statements are presented insterling, which isthe functional and presentational currency (O) Foreigncurrencies vesting period, based on an estimate ofthe shares that willultimately vest. Share-basedmeasured paymentsvaluefairdate are at atthe of (N) Share-basedpayments have been paid. Thecontributions arerecognised asemployee benefitexpense whenthey are duetobe paid. plans ona mandatory, contractual orvoluntary basis. The Group hasno further payment obligations once the contributions For the defined contribution scheme, the Group payscontributions of interest would be immaterial. Interest income is recognised by applying the effective interest rate, except for short-termitems where the recognition objective evidence that the Group will not be able to collect all amounts due according to the original terms ofthereceivable the effectiveinterest method. Aprovision for impairment of trade Trade andother receivables and payables— Trade and of greaterthan three months at inception. Short-term investments — Short-term investments includes cash he short-term highly liquid investments withoriginal maturities of threemonths or less, and bank overdrafts. Cash andcash equivalents —Cash and cash equivalents includes value of shares issued and the fair value of the consideration received. equity as a deduction, netoftax,from the proceeds. The share premium account records the differencebetween thenominal after deducting all ofitsliabilities. Incremental costs directlyattributabletothe issue of new shares or options are shown Issued equity — Ordinary shares areclassified as equity as evidenced bytheir residual interest in the assets of the Company Other financialinstruments asset or current liability. relationship is less than12months. Derivatives not designate of thehedge relationship ismore than 12 months, and as acurrent asset or liabilityiftheremaining maturity of thehedge The fairvalue of hedgingderivatives isclassified as asseta non-current or non-current liability if the remaining maturity Amounts deferred in equity are released in the periods when the hedged item is recognised in the income statement. deferred in equity. The gain or lossrelating to any ineffective portion is recognised immediately in the income statement. inception ofthehedge, the relationship betweenthe hedging instrum The Group designates certain hedging commodityinstruments price used riskas tocash flowhedges. address Atthe contracts are not treated as effective hedges. the hedge reserve tothe extent that contracts are treated as effective hedges, orthe income statement to the extent the are dealt with asderivatives and arerecorded at fairval the Group’s own purchase, sale orusagerequirements. Commodity contracts which donot qualify for the own useexemption Where possible, theGroup takes theownuse exemption for commodity contracts entered into andheld for the purposeof andtreasuryderivatives Commodity contracts that some or allofthefacility will be drawn down. Inthis case, thefee is deferred untilthe draw-down occurs. Fees paid on the establishment ofloan facilities arerecognised astransaction costsof the loan tothe extent that it is prob the instrument.statementover thelifeof income financial instrument) are included in the calculation of the interesteffective rate and are, ineffect, amortised through the the effectiveinterest method. Transaction costs (any such costs incremental anddirectly attributable to the issueof The effective portion ofchangesin the fair effective as hedges. that contracts areconsidered tobeeffectivecash flowhedges, orthe income statement to the extent the contracts arenot are recorded at fair value in the balance sheet with changes in The Group also uses treasury related derivatives tomanage exposure tocurrency fluctuations. Treasury related derivatives the hedging instrumentsused in hedging transactions in are highlyoffsetting changes effective incash flows of hedged items. management objectives. Furthermore, attheinceptionof the hedge and on anongoing basis, theGroup documents whether consideration paid or received.considerationmeasur paidor Subsequenttoinitial value ofderivatives thatare des other receivables and payables are measured at amortised costusing ue in thebalancesheet withchangesue in infairvalue reflected through ement, debt instruments are measured at amortised costusing d into an effective hedge d into relationship areclassified asacurren sets or financial liabilities,sets initially at thefairvalueof fair valuereflected through the hedge reserve to theextent grant and expensed on a straight linebasis over the relevant cash in hand, deposits heldatcall withbanks, other receivables isestablished subsequently where there is to publicly orprivately administered pension insurance ld ondeposits withfinancial ent andhedged item isdocumented, along with its risk ignated and qualify as cashflow hedgesare as ignated andqualify institutions, withamaturity accounts 2011 accounts Annual report and Drax Group plc 91 in able able t .

Financials Governance Business review 92 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

4. Segmental reporting Information reported to the Board and for the purposes of assessing performance and making investment decisions is organised into two operating segments. The Group’s operating segments under IFRS 8 are as follows: Generation — The generation of electricity at Drax Power Station. Retail — The supply of electricity to retail customers in the small and medium enterprise and industrial and commercial markets. The measure of profit or loss for each reportable segment, presented to the Board on a regular basis is EBITDA. Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and hence no separate asset disclosure is provided here.

Segment revenues and results The following is an analysis of the Group’s results by reporting segment for the year ended 31 December 2011:

Year ended 31 December 2011 Generation Retail Eliminations Consolidated £m £m £m £m Revenue External sales 1,560.4 275.5 — 1,835.9 Inter-segment sales 174.8 — (174.8) — Total revenue 1,735.2 275.5 (174.8) 1,835.9

Result Segment EBITDA 336.1 (2.5) — 333.6

Central costs Depreciation, amortisation and loss on disposal of property, plant and equipment (57.2) Unrealised gains on derivative contracts 89.8 Operating profit 366.2 Net finance costs (28.1) Profit before tax 338.1

The following is an analysis of the Group’s results by reporting segment for the year ended 31 December 2010:

Year ended 31 December 2010 Generation Retail Eliminations Consolidated £m £m £m £m Revenue External sales 1,524.1 124.3 — 1,648.4 Inter-segment sales 71.9 — (71.9) — Total revenue 1,596.0 124.3 (71.9) 1,648.4

Result Segment EBITDA 393.4 (1.5) — 391.9

Central costs Depreciation, amortisation and loss on disposal of property, plant and equipment (52.2) Unrealised losses on derivative contracts (60.5) Operating profit 279.2 Net finance costs (24.3) Profit before tax 254.9 Total auditor’sremuneration Total non-audit fees Taxation services Total auditrelatedfees Other services Pursuant tolegislation — interim review Other fees: Fees payable for theaudit of the Company’s subsidiaries pursuant tolegislation Fees payablefor theauditof the Audit fees: During the year theGroup obtained the following its servicesauditor, from Deloitte LLP,at fees asdetailed below: Auditor’s remuneration Total otheroperatingandadministrativeexpenses Other operating andadministrative expenses maintenanceRepairs and expenditureon property, equipment plantand Depreciation ofproperty,equipmentplant and 11) (note Staff costs(note29) The followingcharges have beenincludedoperating profit: inarrivingat 5. Operatingprofit 10% ormore of the Group’s revenue forthe year. All ofthese revenues arose in thegeneration segment. £307.0 million, £295.6 million and Total revenue forthe year ended31December 2011includes Major customers performance review —Seasonality ofborrowing. note 3. All revenue and results arise from operations Britain, within Great therefore noseparate geographical segments are The accounting policies ofthe reported. The revenue and results of both segments are subject reportable segments are the sameasthe Grou Group’s consolidated financialstatements £159.1 million) derived fromtw amounts of £482.4 million and £228.5 million(2010: to seasonality as detailed in the Operational andfinancial o customers (2010: three customers), eachrepresenting p’s accounting policies whicharedescribed in Years ended 31 December ended31 Years Years ended 31 December ended31 Years 224.4 60.4 33.4 57.2 73.4 £000 400 258 300 538 138 138 2011 2011 40 42 60 accounts 2011 accounts Annual report and Drax Group plc 93 £m

210.8 66.0 36.4 56.2 52.2 £000 440 290 370 2010 2010 251 59 70 70 39 £m 21

Financials Governance Business review 94 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

6. Net finance costs

Years ended 31 December 2011 2010 £m £m Interest payable and similar charges: Interest payable on bank borrowings (15.1) (17.5) Other financing charges (4.4) (4.9) Unwinding of discount on provisions (note 20) (0.6) (0.5) Net finance cost in respect of defined benefit scheme (note 30) (1.0) (1.3) Amortisation of deferred finance costs (9.2) (2.3) Total interest payable and similar charges (30.3) (26.5) Interest receivable: Interest income on bank deposits 2.2 2.2 Total interest receivable 2.2 2.2

Following the refinancing of our letter of credit, working capital and term loan facilities in July 2011 (see note 18), the deferred finance costs in relation to our previous bank facilities have been accelerated. This resulted in a one-time £2.6 million interest charge in the year ended 31 December 2011.

7. Taxation The income tax expense reflects the estimated effective tax rate on profit before tax for the Group for the year ended 31 December 2011 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in the income statement.

Exceptional items Under the Group’s previous financing structure, Drax Holdings Limited (a subsidiary company) was partially funded by a Eurobond payable to another group company. This Eurobond debt structure was unwound in 2008, potentially accelerating additional tax losses with a cash tax benefit of up to £220 million. Because of the risks related to the unwinding of the Eurobond structure, no benefit was recognised in the Group’s financial statements prior to agreement with HMRC. On 5 April 2011, we reached agreement with HMRC, resulting in the resolution of the Eurobond tax position and certain smaller legacy tax matters. Accordingly, we have recognised an exceptional tax credit of £197.9 million in the income statement. This includes a current tax credit of £149.5 million and a deferred tax credit of £48.4 million.

Changes in the rate of corporation tax Following the announcement of the 2011 Budget, the Finance Act 2011 (the “Act”) was enacted by Parliament in July 2011. The Act confirmed reductions in the rate of corporation tax from 27% to 26% from April 2011, and from 26% to 25% from April 2012, both of which were enacted during the year. In addition, in the 2011 Budget, the Government proposed further reductions in the rate of corporation tax from 25% to 23% by 2014. These proposals had not been substantively enacted at the balance sheet date. It is currently expected that each future Finance Bill will reduce the corporation tax rate by 1% until the rate of 23% is effective. Total tax(credit)/charge Exceptional items exceptionalitems Total taxchargebefore corporationrateChange to tax Other Expenses not deductible fortaxpurposes Adjustmentspriorin respectof periods Effects of: Profit beforetaxmultiplied by the rate Profit beforetax below: The taxdiffersfrom thestandard rateofcorporation tax in the UKof26.5%(2010: 28%).The differences are explained Impact of corporation taxrate change on deferred taxon cashflow hedges(note 21) Deferred tax on cashflowhedges (note 21) Deferred tax on actuarial losses ondefined benefit pensionscheme (note 21) income: Tax onitems(credited)/chargedtoothercomprehensive Total tax(credit)/charge Exceptional items — Deferred tax — Currenttax Exceptional items: Tax chargebefore exceptional items — Impact ofcorporation tax rate change — Before impact ofcorporation tax rate change Deferred tax before exceptional items: Current tax before exceptional items Tax (credit)/chargecomprises: of corporation tax in ofcorporation the UKof26.5%(2010: 28%) Years ended 31 December ended31 Years December ended31 Years Years ended 31 December ended31 Years (149.5) (126.5) (126.5) (197.9) (197.9) (48.4) 338.1 26.2 89.6 (16.1) (16.1) (3.8) (0.9) 71.4 71.4 61.3 (2.1) (1.9) 0.4 2011 2011 2011 0.7 accounts 2011 accounts Annual report and Drax Group plc 95 1.3 £m £m £m

254.9 (67.4) (14.4) 88.5 (65.1) 66.5 66.5 66.5 66.5 (0.6) (0.5) (7.6) (7.6) 71.4 2010 2010 2010 (1.7) £m £m £m 1.5 1.7 — — — —

Financials Governance Business review 96 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

8. Dividends

Years ended 31 December 2011 2010 £m £m Amounts recognised as distributions to equity holders in the year (based on the number of shares in issue at the record date): Interim dividend for the year ended 31 December 2011 of 16.0 pence per share paid on 14 October 2011 (2010: 14.1 pence per share paid on 15 October 2010) 58.4 51.5 Final dividend for the year ended 31 December 2010 of 17.9 pence per share paid on 13 May 2011 (2010: 9.6 pence per share paid on 14 May 2010) 65.3 35.0 123.7 86.5

At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment of a final dividend for the year ended 31 December 2011 of 11.8 pence per share (equivalent to approximately £43.1 million) payable on or before 11 May 2012. The final dividend has not been included as a liability as at 31 December 2011.

9. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. In calculating diluted earnings per share the weighted average number of ordinary shares outstanding during the year is adjusted, when relevant, to take account of outstanding share options in relation to the Group’s Approved Savings-Related Share Option Plan (“SAYE Plan”) and contingently issuable shares under the Group’s Executive Share Incentive Plan (“ESIP”) and Bonus Matching Plan (“BMP”). The underlying earnings per share has been calculated after excluding the after tax impact of marking-to-market derivative contracts which are not hedged, and exceptional items. Reconciliations of the earnings and weighted average number of shares used in the calculation are set out below:

Years ended 31 December 2011 2010 £m £m Earnings: Earnings attributable to equity holders of the Company for the purposes of basic and diluted earnings 464.6 188.4 After tax impact of unrealised gains and losses on derivative contracts (64.3) 44.6 Exceptional items (note 7) (197.9) — Underlying earnings attributable to equity holders of the Company 202.4 233.0

Years ended 31 December 2011 2010 Number of shares: Weighted average number of ordinary shares for the purposes of basic earnings per share (millions) 364.9 364.9 Effect of dilutive potential ordinary shares under share plans 2.6 0.7 Weighted average number of ordinary shares for the purposes of diluted earnings per share (millions) 367.5 365.6 Earnings per share — basic (pence) 127 52 Earnings per share — diluted (pence) 126 52 Underlying earnings per share — basic (pence) 56 64 Underlying earnings per share — diluted (pence) 55 64

been taken in perpetuity, assuming no growth rate is applied to thefinal year of theBusiness Plan. The pre-tax rate used to hrefrteya 395. 19 57.2 1.9 52.2 51.4 1.1 3.9 47.6 68.7 3.5 9.6 reinstatement (see note20). Additions in the year ended 31 December 2011 include £23.5 million in relation to therevaluation ofthe provision for 59.2 58.7 £1.1 million(201 — Plant and equipment includes assetsheld under finance lea Assets in the course ofconstruction amounted to £40.0 million at31 December 2011 (2010: £30.4 million). 4.6 0.4 Net bookamountat31December 2011 — (6.5) Net bookamountat31December 2010 53.4 At 31December 2011 Disposals — (10.2) 1.2 Charge for the year At 1January2011 1.5 Disposals — Charge for the year — At 1January2010 (1.4) Accumulated depreciation: 7.8 At 31December 2011 (6.5) 10.0 Transfers (0.1) (6.5) Issues — — Disposals — (21.5) costAdditions at 6.5 At 1January2011 (10.2) (10.2) Transfers 11.5 Issues — Disposals — — Additionscost at At 1January2010 Cost: — (6.5) 11. Property, plantand equipment — (7.8) discount the forecast cash flows fromHaven Power is 12% reflecting areasonable assumption ofthe applicable cost ofcapital. — (10.2) The firstfive years ofcash flows arebasedupon thefive year Business Plan approved bythe Board. Future cash flowshave using pre-tax rates that reflect current market assessments of th in these calculations are those regarding the discount ra (6.5) The recoverableamount ofHavenPowerwas calculated based onavalue in use calculation. The key assumptions used a sensitivity analysis has not been disclosed. or Haven Power). At31 December 2011, the fair value of wasgoodwill significantly in excess ofitsbook value; accordingly Goodwill arising onthe Haven Power acquisition hasbeenallocated to the Haven cash-generating unit(Haven PowerLimited, At 1January2010,31December 2010and31December2011 Cost andcarryingamount: 10. Intangibleassets —goodwill 0: £0.7million). tes and futurecashtes flows.Management estimatesdiscount rates se agreements withacarrying value at31December 2011 of e timevalueof moneyandthe risks specific to the business. Freehold landand Freehold buildings 2. 1,031.1 37.2 1,195.7 127.4 7. 1,386.7 46.0 1,603.6 170.9 1,358.537.9 1,554.6 158.2 7. 1,445.349.3 1,665.8 171.2 38414.212.1 470.1 43.8 3. 1,017.435.8 1,184.2 131.0 331.99.1 377.4 36.4 99369.310.2 419.4 39.9 £m equipment equipment Plant and £m

spare parts Plant Plant accounts 2011 accounts Annual report and Drax Group plc 97 £m

10.7 Total £m £m

Financials Governance Business review 98 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

12. Inventories

As at 31 December 2011 2010 £m £m Coal 103.1 79.2 Biomass 17.9 21.9 Other fuels and consumables 16.6 15.5 137.6 116.6

The cost of inventories recognised as an expense in the year ended 31 December 2011 was £879.5 million (2010: £658.3 million).

13. ROC assets

ROCs £m Cost and carrying amount: At 1 January 2010 11.7 Generated 42.4 Utilised (1.3) Sold (19.7) At 1 January 2011 33.1 Generated 59.2 Utilised (2.9) Sold (57.3) At 31 December 2011 32.1

14. Trade and other receivables

As at 31 December 2011 2010 £m £m Amounts falling due within one year: Trade receivables 206.5 195.4 Accrued income 55.6 32.8 Prepayments and other receivables 7.2 4.8 269.3 233.0

Trade receivables principally represent sales of electricity to a number of counterparties. At 31 December 2011, the Group had amounts receivable from three (2010: three) significant counterparties, representing 71% (2010: 75%) of trade receivables, all of which paid within 15 days of receipt of invoice in line with agreed terms. Counterparty risk is discussed in note 19. Management does not consider there to be a significant concentration of credit risk and as a result, does not believe that a further credit risk provision is required in excess of the normal provision for doubtful debts of £3.0 million (2010: £2.6 million). This allowance has been determined by reference to past default experience, and includes £3.0 million in relation to Haven Power (2010: £2.6 million). to deliver CO Accruals at 31December2011 include £126.1 million (2010: £146.7 Other payables Accruals Trade payables Amounts fallingduewithinoneyear: 17. Trade andother payables The Group’s policy is to invest available cash in short-term ban equivalents cash and Cash 16. Cashandcash equivalents Short-term investments represent cash held on deposits with a maturity of greater than three months at inception. Short-term investments 15. Short-terminvestments At 31December Provision for receivables impairment Receivables writtenoff At 1January The movement in the allowance fordoubtful debts is laidout inthefollowing table: 2 emissionsallowances. k, building society or other lowrisk deposits. million) with respect to the Group’s estimated net liability As at 31 December 31 at As December ended31 Years As at 31 December 31 at As December 31 at As 228.8 202.8 292.8 30.0 47.3 16.7 (1.6) 2011 2011 2011 2011 2.0 2.6 3.0 accounts 2011 accounts Annual report and Drax Group plc 99 £m £m £m £m

285.0 236.0 239.4 95.0 32.2 13.4 2010 2010 2010 2010 (1.0) 2.4 2.6 £m £m £m £m 1.2

Financials Governance Business review 100 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

18. Borrowings

As at 31 December 2011 2010 £m £m Current: Term loans — 61.6 Revolving credit facility 6.8 — Finance lease liabilities 0.3 0.1 7.1 61.7

As at 31 December 2011 2010 £m £m Non-current: Term loans — 64.9 Finance lease liabilities 0.5 0.4 0.5 65.3

Scheduled term loan repayments of £33.8 million were made on 30 June 2011, and £32.5 million on each of 30 June 2010 and 31 December 2010. These repayments were made in line with the target repayment profile as a result of the levels of cash available for debt service.

Refinancing On 28 July 2011, we completed the refinancing of our letter of credit, working capital and term loan facilities, which were due to mature in December 2012. These facilities were replaced with a £310 million revolving credit facility which matures in April 2014, which can be used for both letters of credit and working capital purposes. The margin over LIBOR on our new facility has reduced from 3.5% to 2%. The existing term loan was repaid in full out of cash in hand and we subsequently drew down £10 million against the new revolving credit facility.

Analysis of borrowings Borrowings at 31 December 2011 and 31 December 2010 consisted principally of amounts drawn down against the revolving credit facility, and bank loans respectively, both held by the Company’s subsidiary Drax Finance Limited as follows:

As at 31 December 2011 Borrowings Deferred before deferred finance Net finance costs costs borrowings £m £m £m Revolving credit facility 10.0(3.2) 6.8 Finance lease liabilities 0.8 — 0.8 Total borrowings 10.8 (3.2) 7.6 Less current portion (10.3) 3.2 (7.1) Non-current borrowings 0.5 — 0.5

As at 31 December 2010 Borrowings Deferred before deferred finance Net finance costs costs borrowings £m £m £m Term loans 135.0 (8.5) 126.5 Finance lease liabilities 0.5 — 0.5 Total borrowings 135.5 (8.5) 127.0 Less current portion (67.6) 5.9 (61.7) Non-current borrowings 67.9 (2.6) 65.3 and derivative contracts. The Group enters into short-termand medium-termforward contracts forthe saleof electricity and the purchase ofcoal,sustainable biomass and CO do not qualify for hedge accounting; largely financial coal and foreign exchange. The unrealised gains andlosses recorded inthe income statem arrivingatoperatingprofit contractsrecognisedin Unrealised gains/(losses)onderivative The amounts recorded in theincome statement inrespect Current portion Total non-current portion Forward foreign currency exchange contracts Commodity contracts Less: non-currentportion Total More than two years More than one year but not more than two years Less than one year Forward foreigncurrency exchange contracts: Less than one year Interest rateswaps: More than two years More than one year but not more than two years Less than one year Commodity contracts: in the balance sheet at31 December 2011 and 31 December 2010wereasfollows: The fairvalues and maturities of theGroup’s derivat approximate their fair values by virtue of being floating rate instruments. principally to amounts drawn down against the revolving credit facility (2010: term loans), the carrying amounts ofwhich short times to maturity. For this reason, their carrying values approximate their fair value. The Group’s borrowings relate Cash andcash equivalents, short-term investments, trade and other Fair value agreements and forwardforeign currency exchange contracts. floating forfixed, orfixed forfloating prices on fixed volumes of coal. TheGroup alsoenters into interest rate swap The Group’s financial instruments comprise borrowings, cash and li debt portfolio. management of risks forthe Group’s operations; andfinancial instrumentsrelating to the financing and risks in theGroup’s The Group issues orholds financialinstruments financial fortwo purposes: instruments relating to the financing and 19. Financialinstruments (2010: £134.3million, under the previous of banksin respectofthe letters ofcredit issued tocounterparties bythose banks of the Group. As at 31December 2011 the In addition to the amount drawn downagainst the revolving Contingent liabilities Group’s contingent liability in respect of letters of credit £200 million letter of credit facility). ive financial instrumentsive financial which aremarked-to-market and recorded 2 emissions allowances, as wellfinancial coal contracts to swap issued under the revolving credit facilityamounted to £126.1 mill of derivativeswhich aremarked-to-market were asfollows: credit facility, the Group guarantees the obligations ofanumber ent arise from aproportion of ourderivative contracts which quid resources, itemsthat arise directly from its operations receivables, and trade and other payables generallyhaveotherreceivables, andtrade 2. (95.6) 120.6 Assets 1.)4.5 (10.6) 0. (78.0) 101.7 3. (100.9) 131.6 1.)5.3 (11.0) 04 0.8 (0.4) As at 31 December 2011 89(17.6) 18.9 06(4.5) 10.6 . (0.5) 0.4 £m (0.3) — ———— Liabilities £m Years ended 31 December ended31 Years

2.)1.5 (25.8) 2.)0.6 (25.4) 138.4 (199.4) 89.8 Assets Assets 24.8 (25.8) 87.8 (167.5) 112.6 (197.9) 04 0.9 (0.4) 19.3 (0.3) 2011 As at 31 December 31 2010 at As 0.3 (0.5) accounts 2011 accounts Annual report and Drax Group plc 101 £m 0.1 (0.4) 6.1 (0.3) £m — (4.6)

Liabilities (60.5) ion 2010 £m £m

Financials Governance Business review 102 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

19. Financial instruments (continued) Due to the nature of commodity contracts and the way they are managed, the own use exemption has been applied to a limited number of them, including the five and a quarter year baseload contract with Centrica which commenced on 1 October 2007, and the five year baseload contract with Centrica which commenced on 1 October 2010. − Commodity contracts fair value — The fair value of commodity contracts qualifying as derivative financial instruments, not excluded through the own use exemption, is calculated by reference to forward market prices at the balance sheet date. As contracts are generally short-term, forward market price curves are available for the duration of the contracts. The quoted market price used for financial assets held by the Group is the current bid price; the quoted price for financial liabilities is the current ask price. − Interest rate swaps fair value — The fair value of interest rate swap contracts is determined by discounting the future cash flows using forward interest rate curves at the balance sheet date. − 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. − Embedded derivatives fair value — The Group has also reviewed all contracts for the presence of embedded derivatives. Where contracts were found to contain embedded derivatives, they were considered to be closely related to the economic characteristics and risks of the host contract, and therefore do not require separate valuation from their host contracts. All financial instruments that are measured subsequent to initial recognition at fair value, have been grouped into Level 2, as defined below, based on the degree to which fair value is observable. Categorisation within the 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 as follows: Level 1 — fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 — fair value measurements are those derived from inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 — fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The fair value of commodity contracts and forward foreign currency exchange contracts is determined by comparison between forward market prices and the contract price; therefore these contracts are categorised as Level 2. The fair value of interest rate swap contracts is determined by discounting future cash flows using forward interest rate curves at the balance sheet date. These are also categorised as Level 2 inputs. There have been no transfers during the year between Level 1, 2 or 3 category inputs.

Risk The Group’s activities expose it to a variety of financial risks including commodity price risk, interest rate risk, foreign currency risk, liquidity risk, counterparty risk and credit risk. The Group’s overall risk management programme focuses on the unpredictability of commodity and financial markets and seeks to manage potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by the Risk Management Committees as detailed in Principal risks and uncertainties which identify, evaluate and hedge financial risks in close co-operation with the Group’s trading function under policies approved by the Board of directors.

Commodity price risk The Group is exposed to the effect of fluctuations in commodity prices, particularly the price of electricity, the price of coal, sustainable biomass and other fuels, and the price of CO2 emissions allowances. Price variations and market cycles have historically influenced the financial results of the Group and are expected to continue to do so.

The Group has a policy of making forward power sales with corresponding purchases of fuel and CO2 emissions allowances when profitable to do so. All commitments to sell power under fixed price contracts are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from fluctuations in the price of electricity. The Group purchases coal, sustainable biomass and other fuels under either fixed or variable priced contracts with different maturities from a variety of domestic and international sources. All international physical coal purchase contracts transacted at a fixed price and financial coal contracts exchanging floating price coal for fixed price amounts are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from fluctuations in the price of coal. All physical biomass and domestic coal purchase contracts are currently entered into and held for the purpose of the Group’s own purchase, sale or usage requirements and are therefore designated as own use. for businessrequirements. The Group maintains amixture of cashand cash equivalents, a of directors. Liquidity needs are monitored using ofoperationalcash regular flows forecasting and financing commitments. The treasuryfunction isresponsible for liquidity, funding Liquidity risk of CO are designated as cashflow hedges in order to reduce the Group’s cash flowexposure resulting fromfluctuations in the price the Group’s: If sterling exchange rates had been 5%stronger/weaker against othercurrencies, and Foreign currencysensitivity contracts. in euros. Exchange rate exposures aremanaged within approved policy parameters utilising foreign currency exchange this risk with interest rate hedges onaproportion of Historically the Group has been exposed to interest rate risk principall Interest raterisk assets for the yearended31 December 2011would decrease/increase by £0.8 million (2010:increa If interest rates had been 1%higher/lower and wereheldall other constant, variables the Group’s profitafter taxandnet amount of liability outstanding at the balance sheet date was outstanding for the whole year. non-derivative instruments at the balance sheet date. For rate floating liabilities, the analysis is prepared assuming the The sensitivity analysis below has been determined based on theexposure tointerestrates for both derivatives and Interest ratesensitivity in note 18. Information about the Group’s instruments that areexposed raterisk to interest and their repayment schedules is included swaps linked to the previous term loans wereclosedout and no newinterest rate swaps have beentakenout since. repaid itsoutstanding term loan balance, and drew down £10 million agains If commodityprices hadbeen 5%higher/lower and sheet date. items at the balance sheet date. Theanalysis is based on the Gr The sensitivity analysis below has been determined based on Commodity price sensitivity of domestic and international sources. All commitments to purchase CO The Group purchases CO purchases in US dollars, biomass purchases in Canadian and US dollars and euros, and CO Foreign currency exchange contracts are entered into tohedge sub Foreign currencyrisk mainly as aresult of the changes in interest payable during the period. − − − −     of thechanges in thefairvalue of hedged foreign currency exchange contracts. other equity reserves woulddecrease/increase by £4.9 million (2010: decrease/increase by £0.9 million)as aresult purposes ofmeeting commitments under financial coalcontracts; and by £6.1 million). This ismainlyattributable to the Group’s exposure toforeign currency exchange contracts for the profit after tax for the year ended31December of thechanges in thefairvalue of commitments tosell power a other equity reserves woulddecrease/increase by £25.7 million (2 by £17.3 million). This is mainly attributable totheGroup’s exposure tofinancial coal derivatives; and profit after tax for the year ended31December 2011would 2 emissions allowances. 2 emissions allowances underfixed price withdifferentmaturitydatesfrom contracts arange 2011 would decrease/increase 2011would by £21.2 million (2010: increase/decrease all other variableswere heldconstant, the Group’s: its debt facilities.Onrefinancing in its debt July 2011 (see note 18), theGrou and settlement management under policies approved bythe Board the exposure tocommodityprices for outstanding monetary increase/decreasemilliondecrease/increase by£61.2 (2010: nd committed facilities in order toensure sufficientfunding oup’s commodity financial instruments held at each balance nd the Group’s exposure tofinancial coalderivatives. stantially all ofthe Group’s fixed price international coal 010: decrease/increase by £9.3 million)mainly as a result y inrelation to its bank debt, and has sought to mitig 2 emissions allowances underfixed pricecontracts t a newrevolving creditfacility. The interest rate all othervariableswere heldconstant, 2 emissions allowances purchases se/decrease by £0.2 million) accounts 2011 accounts Annual report and Drax Group plc 103 p ate

Financials Governance Business review 104 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

19. Financial instruments (continued) The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the balance sheet date.

As at 31 December 2011 Within 3 months— 3 months 1 year 1—5 years Total £m £m £m £m Revolving credit facility, gross value 10.0 — — 10.0 Finance lease liabilities, carrying value 0.1 0.2 0.5 0.8 Borrowings, contractual maturity 10.1 0.2 0.5 10.8 Trade and other payables 260.7 31.4 0.7 292.8 270.8 31.6 1.2 303.6

As at 31 December 2010 Within 3 months— 3 months 1 year 1—5 years Total £m £m £m £m Term loans, gross value — 67.5 67.5 135.0 Finance lease liabilities, carrying value — 0.1 0.4 0.5 Add interest payments — 8.9 4.0 12.9 Borrowings, contractual maturity — 76.5 71.9 148.4 Trade and other payables 232.2 52.8 — 285.0 232.2 129.3 71.9 433.4

Interest payments are calculated based on forward interest rates estimated at the balance sheet date using publicly available information. The interest rates payable at the balance sheet dates were as follows:

As at 31 December 2011 2010 % p.a. % p.a. Revolving credit facility 3.12 — Term loans — 7.45

The following tables set out details of the expected contractual maturity of derivative financial instruments which are marked-to-market based on the undiscounted net cash inflows/(outflows). Where the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to projected commodity prices, interest rates, or foreign currency exchange rates, as illustrated by the yield or other forward curves existing at the reporting date.

As at 31 December 2011 Within 1 year 1—2 years >2 years Total £m £m £m £m Commodity contracts, net 197.8 60.9 (0.9) 257.8 Forward foreign currency exchange contracts, net 224.7 138.9 381.8 745.4 422.5 199.8 380.9 1,003.2

As at 31 December 2010 Within 1 year 1—2 years >2 years Total £m £m £m £m Commodity contracts, net 186.2 45.0 (14.6) 216.6 Interest rate swaps (3.2) (1.4) — (4.6) Forward foreign currency exchange contracts, net 148.0 87.4 50.1 285.5 331.0 131.0 35.5 497.5 The Group is also exposed to the risk ofcollateral calls against itstrading contracts should the Group’s creditworthiness Group consists of shareholders’ equity excluding the hedge reserve, together with net debt or, whenthe Group hasnet cash, Total shareholders’ equity, excluding hedge reserve Net cash Short-term investments Cash andcash equivalents Borrowings priorities, and as such,our performance is detailed within the Business review. The capital structure oftheGroup is as follo Consolidated statement ofchanges inequity). Maintaining an optimal supporting capital structure isone ofthe Group’s key Company comprises issued capital,capitalreserves, retained p cash andequivalents in note 16 and short-term investments shareholders’ equity excluding the hedgereserve, Netdebt/cash less comprisesborrowingsnet cash. disclosed in note 18, maximising the return to stakeholders through theoptimisation The Group manages its capital to ensure itisable as agoingto continue concern, and maintain itscredit ratingwhile management Capital maturity profile. andthe onecounterparty with any requirements, maximuminvestment minimumrating by setting out credit riskexposure policiesmanage These approvedpolicies. Board within maximise thereturn to undertaken is cash of surplus The investment credit default swaps. company guarantee, letter ofcredit, deed ofcharge, or cash co rating an investment grade Counterparties without exposure is controlled by counterparty limits that are reviewed and approved by the trading and risk management committee. Trade and other receivables are stated gross of theprovision for doubtful debts of£3.0million (2010:£2.6million). Credit Derivative financial instruments Trade and other receivables Short-term investments Cash andcash equivalents Financial assets: as summarised below: The Group’s exposure to credit riskis limited tothecarrying offinancial amount assets recognised at the balancesheet date, Credit risk irrespective oftheGroup’s underlying credit rating. enables itto enter into trading contracts without to the requirement post collateral up to afixed amount of £135 million, the Group entered into atrading agreement with Barclays Bank PLCon 5May 2010, asamended on22 July 2011, which volume of business traded through itssupplycompany, which Haven is Power, lessexposed to collateral calls. In addition, and to transact more fixedmargin contracts which are less exposed to commodity price movements; and increasing the Group has undertaken anumber ofactions— refining itstradin deteriorate and itscounterparties demand collateral to protect their exposure tothe Group. In order to mitigate this risk the increaseof theGroup.distress or theriskprofile The failure ofone or moreofthese counterparties to perform thei supplie coalfromother securing with costsassociated additional wouldbe there contracts, againstthe and/or failstodeliver requirement under contracts with a number of UK suppliers.Thereis arisk that if a large supplier falls into financialdiffic exposed tothe risk of non-performance bythese thirdpartysuppliers. TheGroup purchases a significant portion of itscoal As the Group relies onthird party suppliers for the delivery of coal, sustainable biomass and othergoods and services, it is Counterparty risk The Group enters intofixed price and fixed margincontractsthe sale ofelectricity for to a number ofcounterparties. are normally requiredare normally to provide credit support in theform ofaparent g strategytoconcentrate on rofits/accumulated losses, excluding the hedge reserve(see llateral. Where deemed appropriate the Group has purchased of the debt and equity balance. Thecapital structure of the in note 15.Equityattributableto the shareholders ofthe r contractual obligations may cause the Group financial more credit-efficient structures As at 31 December 31 at As As at 31 December 31 at As 1,240.1 202.8 202.8 225.2 272.3 636.7 131.6 30.0 30.0 (7.6) 2011 2011 accounts 2011 accounts Annual report and Drax Group plc 105 £m £m

898.5 204.0 705.0 (127.0) 236.0 236.0 235.6 138.4 ulty ulty rs. 95.0 95.0 2010 2010 ws: £m £m

Financials Governance Business review 106 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

20. Provisions

Reinstatement £m Carrying amount: At 1 January 2010 5.9 Unwinding of discount 0.5 At 1 January 2011 6.4 Adjustment for change in discount rate 23.5 Unwinding of discount 0.6 At 31 December 2011 30.5

The provision for reinstatement represents the estimated decommissioning, demolition and site remediation costs at the end of the useful economic life of the Group’s generating assets, on a discounted basis. The amount provided represents the present value of the expected costs. The initial provision and subsequent estimation increases are capitalised within property, plant and equipment and are being depreciated over the useful lives of the related assets. The unwinding of the discount is included in finance costs (note 6). The provision is estimated using the assumption that the reinstatement will take place between 2039 and 2045, and has been estimated using existing technology at current prices. The discount rate applied is a risk free rate, reflecting the fact that the estimated future cash flows have built in the risks specific to the liability.

21. Deferred tax

The movements in deferred tax assets and liabilities during each year are shown below. Deferred tax assets and liabilities are offset where there is a legally enforceable right of offset and there is an intention to settle the balances net.

Deferred tax liabilities/(assets) Accelerated Financial capital Non trade Other Other instruments allowances losses liabilities assets Total £m £m £m £m £m £m At 1 January 2010 65.5 262.1 — 17.6 (11.6) 333.6 (Credited)/charged to the income statement (15.9) (7.5) — — 1.4 (22.0) Credited to equity in respect of actuarial losses — — — — (1.7) (1.7) Credited to equity in respect of cash flow hedges (65.7) — — — — (65.7) At 1 January 2011 (16.1) 254.6 — 17.6 (11.9) 244.2 Charged/(credited) to the income statement 25.5 (19.5) (31.6) (14.5) 1.8 (38.3) Credited to equity in respect of actuarial losses — — — — (0.9) (0.9) Credited to equity in respect of cash flow hedges (1.2) — — — — (1.2) At 31 December 2011 8.2 235.1 (31.6) 3.1 (11.0) 203.8

Deferred tax assets are recognised to the extent that the realisation of the related tax benefit through future associated taxable profits is probable (note 3 (B)).

As described in note 7, we reached agreement with HMRC during 2011 on the resolution of the Eurobond tax position. This has resulted in the recognition of a deferred tax asset in respect of the non trading losses incurred on the unwinding of the Eurobond debt structure. The Group did not recognise deferred tax assets with an estimated value of £3.0 million at 31 December 2011 (2010: £3.2 million) in respect of trading losses that are carried forward against future taxable income. Bonus Matching Planto an individual whose employment wi SIP 385,589 (20,541) Shares in the Company held under trust and under the Company’s control as a result of the SIP were as follows: in 2010,or 2011. — the cost ofMatchingshares borne bythe Group.no Therewere awards under the SIP Partnership and Matchingshare plan Matching shares wereawardedtoemploy Between 2007 and 2009,qualifying employees could buy £1,500 up worthto of Partnership shares in any one tax year. Share IncentivePlan(“SIP”) SAYE BMP ESIP SIP Costs recognised in the income statement in relation to share-based payments are asfollows: 23. Share-basedpayments employment withthe Group had Related Share Option Plan were exercised early,an issue resulting ofthe samein number of shares to one individual whose 6,098 shares, issued tosix individuals). Additionally, on 28September 2011, a total of 274 options under the Group’s Savings- On 1 April 2011, a total of2,456 shares were issued in satisfac share schemesIssued underemployee No shareholdershave waived their rightsto dividends. The Company hasshares only of11 ordinary one classare ofshares, which At 31December Issued underemployeeshare schemes At 1January The movement in allotted and fully paid share capital of the Company during each year was as follows: 2011 —364,862,718 ordinary shares of11 2010 —364,859,988 ordinary shares of 11 Issued andfully paid: 865,238,823 ordinaryshares of 11 Authorised: 22. Issuedequity

terminated due toredundancy. 16 ⁄ 29 penceeach 1 January January 1 (number) (number) 16 Shares held at held at ⁄ 16 29 ees to match any Partnership shares theybought, inaratio ofone-to-one, with 2011 ⁄ penceeach 29 pence each pence during yearduring (number) acquired Shares th the Group hadterminated dueto retirement (1 September2010: tion ofshares vesting in accordance with the rules ofthe Group’s during yearduring transferred (number) Shares 16 ⁄ 31 December 6,4 ,6 21,990 2,465 42 365,048 29 pence each,carrying no income. right tofixed (number) Shares held at 2011 31 December Years ended 31 December ended31 Years Cost at at Cost £000 364,859,988 364,862,718 2011 As at 31 December 31 at As Years ended 31 December ended31 Years (number) 31 December 2,730 100.0 2011 Nominal value at 42.1 42.1 2011 2011 0.2 3.2 3.5 £000 accounts 2011 accounts Annual report and Drax Group plc 107 0.1 £m £m 2011 — —

364,859,988 364,853,890 31 December (number) value at 6,098 Market 100.0 £000 42.1 42.1 2010 2010 2010 2011 0.4 0.2 2.0 0.2 2.8 £m £m —

Financials Governance Business review 108 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

23. Share-based payments (continued) Executive Share Incentive Plan (“ESIP”) Between 2006 and 2008 the Group operated the ESIP. Under the ESIP, annual awards of performance shares were made at £nil consideration to executive directors and other senior staff up to a normal maximum of 100% of salary. Shares vested according to whether the Group’s Total Shareholder Return (“TSR”) matched or outperformed an index (determined in accordance with the scheme rules) over three years. The fair value of the 2008, 2007 and 2006 ESIP awards, of £1.2 million, £0.9 million and £1.9 million respectively have been charged to the income statement on a straight-line basis over the corresponding three year vesting periods.

Bonus Matching Plan (“BMP”) The BMP was introduced in 2009 to replace the ESIP. Under the BMP, annual awards of performance and service-related shares are made at £nil consideration to executive directors and other senior staff up to a normal maximum of 150% of their annual bonus. A proportion of the shares vesting is conditional upon whether the Group’s TSR matches or outperforms an index (determined in accordance with the scheme rules) over three years. From 2011, a proportion of the shares vesting will be conditional upon performance against the internal Balanced Corporate Scorecard. The fair value of the 2011, 2010 and 2009 BMP awards of £5.5 million, £3.0 million and £2.8 million respectively are being charged to the income statement on a straight-line basis over the corresponding three year vesting periods. Movements in the number of share options outstanding for the ESIP and BMP awards are as follows:

2011 2010 ESIP BMP ESIP BMP (number) (number) (number) (number) At 1 January 442,799 2,278,856 754,925 981,932 Granted — 2,054,644 — 1,404,989 Forfeited — (65,533) (36,180) (101,967) Exercised — (2,456) — (6,098) Expired (442,799) — (275,946) — At 31 December — 4,265,511 442,799 2,278,856

Savings-Related Share Option Plan (“SAYE Plan”) In April 2011 and April 2010, participation in the SAYE Plan was offered to all qualifying employees. Options were granted for employees to acquire shares at a price of 321 pence (2010: 310.5 pence), representing a discount of 20% to the prevailing market price determined in accordance with the scheme rules. The options are exercisable at the end of three or five year savings contracts. The fair value of the 2011 and 2010 options granted in connection with the SAYE Plan of £0.2 million and £0.6 million, respectively, is being charged to the income statement over the life of the relevant contracts. The only previous grant under the SAYE Plan, in July 2006 at an exercise price of 636 pence, resulted in a fair value of £0.5 million being charged to the income statement over the life of the respective contracts. Movements in the number of share options outstanding for the SAYE plans are as follows:

2011 2010 SAYE 3 Year SAYE 5 Year SAYE 3 Year SAYE 5 Year (number) (number) (number) (number) At 1 January 668,521 906,343 — 464,449 Granted 138,242 114,159 701,877 730,811 Forfeited (50,942) (66,454) (33,356) (288,917) Exercised (274) — — — Expired — (165,159) — — At 31 December 755,547 788,889 668,521 906,343

Group’s accounting forfinancial instruments is included in notes 3 and19. or loss. For power salescontracts, this is when the underlying poweris delivered. Further information in relationto the held within the hedge reserve are then released as the related contract matures and thehedged transaction impacts profit market at each period end fortheeffective portion of the hedge,which is generally 100% ofthe relevant contract. Amounts currency exchange contracts. Amounts are recognised inthe hedge reserve as the designated contracts are marked-to- The Group’s cash flowhedgesrelate to commodity contracts At 31December Related deferred tax,net (note 21) — Interest rate swaps — Forwardforeign currency exchange contracts — Commoditycontracts Released from equity: — Forwardforeign currency exchange contracts — Commoditycontracts Gains/(losses) recognised: At 1January 25. Hedgereserve The share premium and the merger reserve arose on the financial restructuring ofthe Group which took place in2005. The capitalredemption reserve arose when the Group completed ashare buy-back programme in2007. At 1Januaryand31December 24. Otherreserves Committee report. Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration SAYE of vesting; and ESIP andBMP SIP The fairvalue of share-based paymentawards was determined asfollows: Fair valueofshare-basedpaymentawards —based on price paid at award dates; —Black-Scholes model whichcompares exercise price to share price at the date of grant. — Monte-Carlo valuation model, which takes into account the estimated probability ofdifferent levels aia eepinrsreSaepeim Merger reserve Sharepremium Capital redemption reserve 2011 1.5 £m (principally commitments to sellpower)and forward foreign 2010 £m 1.5 420.7 2011 £m 420.7 2010 £m Years ended 31 December ended31 Years (68.6) 710.8 59.5 70.5 63.3 2011 2011 0.6 accounts 2011 accounts Annual report and Drax Group plc 109 0.1 1.2 £m £m —

226.4 (167.2) (68.3) 710.8 59.5 65.7 2010 2010 (1.0) 3.9 £m £m —

Financials Governance Business review 110 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

25. Hedge reserve (continued) The expected release profile from equity of post-tax hedging gains and losses is as follows:

As at 31 December 2011 Within 1 year 1—2 years >2 years Total £m £m £m £m Commodity contracts 59.6 3.9 — 63.5 Forward foreign currency exchange contracts 0.2 (0.2) (0.2) (0.2) 59.8 3.7 (0.2) 63.3

As at 31 December 2010 Within 1 year 1—2 years >2 years Total £m £m £m £m Commodity contracts 42.0 13.8 4.3 60.1 Forward foreign currency exchange contracts (0.3) (0.1) (0.2) (0.6) 41.7 13.7 4.1 59.5

26. Retained profits/(accumulated losses)

Years ended 31 December 2011 2010 £m £m At 1 January (276.6) (376.8) Profit for the year 464.6 188.4 Actuarial losses on defined benefit pension scheme (note 30) (3.7) (6.2) Deferred tax on actuarial losses on defined benefit pension scheme (note 21) 0.9 1.7 Equity dividends paid (note 8) (123.7) (86.5) Net movements in equity associated with share-based payments 3.5 2.8 At 31 December 65.0 (276.6)

Net cashat31December Decrease in borrowings (Decrease)/increase inshort-term investments (Decrease)/increase incash and cashequivalents January Net cash/(debt)at1 28. Reconciliationofnetcash Cash generatedfromoperations Defined benefit pension scheme contributions Decrease/(increase) in ROCassets Total (increase)/decrease inworking capital Increase inpayables receivablesIncrease in (Increase)/decrease ininventories Changes inworkingcapital inworkingmovement capital Operating cashflowsbefore Non-cash charge forshare-based payments Defined benefit pension scheme current service cost Unrealised (gains)/losses on derivativecontracts Depreciation and loss on disposal of property, plant and equipment Tax (credit)/charge Interest receivable Interest payable andsimilar charges Adjustments for: theyear Profit for 27. Cashgeneratedfromoperations Years ended 31 December ended31 Years Years ended 31 December ended31 Years (126.5) 204.0 225.2 464.6 342.5 (89.8) 281.9 (65.0) (33.2) (36.6) (10.4) (21.0) 119.4 (51.2) 57.2 30.3 (2.2) 2011 2011 5.4 6.4 3.5 accounts 2011 accounts Annual report and Drax Group plc 111 1.0 £m £m

204.0 484.7 399.0 (54.4) 188.4 (25.4) 155.6 40.0 60.5 66.5 (21.4) 62.8 26.5 62.5 114.7 52.2 77.6 (7.6) (2.2) 2010 2010 2.8 4.3 £m £m

Financials Governance Business review 112 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

29. Employees and directors Staff costs (including executive directors) Years ended 31 December 2011 2010 £m £m Included in other operating and administrative expenses (note 5): Wages and salaries 55.6 52.7 Social security costs 6.0 4.3 Other pension costs (note 30) 8.3 6.2 Share-based payments (note 23) 3.5 2.8 73.4 66.0

Average monthly number of people employed (including executive directors) Years ended 31 December 2011 2010 (number) (number) Operations 582 593 Retail services 352 298 Business services 162 153 1,096 1,044

30. Retirement benefit obligations The Group operates an approved defined benefit scheme on behalf of the Drax Power Group (“DPG”) of the Electricity Supply Pension Scheme (“ESPS”). This scheme was closed to new members as from 1 January 2002 unless they qualify through being existing members of another part of the ESPS. The Group also operates a defined contribution scheme.

Defined benefit scheme The most recent actuarial valuation of the DPG ESPS was 31 March 2010. This has been updated as at 31 December 2011 to reflect relevant changes in assumptions. The principal assumptions were as follows:

As at 31 December 2011 2010 % p.a. % p.a. Discount rate 4.8 5.3 Inflation (RPI) 3.1 3.5 Rate of increase in pensions in payment and deferred pensions 3.0 3.3 Rate of increase in pensionable salaries 4.1 4.5 Expected return on plan assets 5.2 5.9

The mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions are that a member who retired in 2011 at age 60 will live on average for a further 26 years (2010: 26 years) after retirement if they are male, and for a further 28 years (2010: 28 years) after retirement if they are female. Similarly life expectancy at age 60 for male and female non-pensioners (currently aged 45) is assumed to be 27 years and 29 years respectively (2010: 27 years and 29 years respectively). Group pays an equal amount to the DPG ESPS. employees sacrifice pay equal to the contributions that they would otherwise have paid to the DPGESPS, and inreturn the Employee contributions reduced from1 April 2011 following the introduction of asalarysacrifice arrangement, whereby December Defined benefit obligationat31 Benefits paid Actuarial losses Interest cost Employee contributions Current service cost Defined benefitJanuary obligationat1 Changes in the present value of thedefined benefit obligation are asfollows: Cumulative lossesrecognised inthestatementofcomprehensiveincomeat 31December Actuarial losses ondefined benefit pensionscheme recognised inthe year Cumulative actuarial losses on defined benefit pension scheme at 1 January The amounts recognised inthe statement ofcomprehensive income are as follows: The actualreturn onplan assets wasagain of £8.5 million (2010:gainof £10.5 million). Total amounts recognised inthe incomestatement Total included infinancecosts Expected return onplan assets Interest cost Included in finance costs(note 6): Total included inother operating and administrative expenses Current service cost Included in staffcosts(note 29): as follows: The amounts recognised inthe income statement, within othe Net liabilityrecognisedinthebalancesheet Fair value of planassets Defined benefit obligation The amounts recognised inthe balance sheet aredetermined asfollows: r operating andadministrative expenses and financecosts, are Years ended 31 December ended31 Years December 31 at As Years ended 31 December ended31 Years December ended31 Years (145.4) 182.4 182.4 (59.9) 167.2 (63.6) 37.0 (3.8) (7.9) (3.7) 0.4 2011 2011 2011 2011 8.9 5.4 8.9 5.4 5.4 6.4 4.3 accounts 2011 accounts Annual report and Drax Group plc 113 1.0 £m £m £m £m

(129.9) (59.9) 146.5 (53.7) 167.2 167.2 37.3 (2.6) (6.2) 2010 2010 2010 2010 8.4 8.4 9.6 5.6 (7.1) 4.3 4.3 4.3 1.0 £m £m £m £m 1.3

Financials Governance Business review 114 Drax Group plc Annual report and accounts 2011

Notes to the consolidated financial statements

30. Retirement benefit obligations (continued) Changes in the fair value of plan assets are as follows:

Years ended 31 December 2011 2010 £m £m Fair value of plan assets at 1 January 129.9 113.4 Expected return on plan assets 7.9 7.1 Actuarial gains 0.6 3.4 Employer contributions 10.4 7.6 Employee contributions 0.4 1.0 Benefits paid (3.8) (2.6) Fair value of plan assets at 31 December 145.4 129.9

Employer contributions included payments to reduce the actuarial deficit of £5.4 million (2010: £3.7 million). The major categories of plan assets as a percentage of total plan assets were as follows:

As at 31 December 2011 2010 % % Equities 35.8 40.5 Fixed interest bonds 49.4 42.4 Hedge funds 11.0 13.0 Cash 3.8 4.1

The pension plan assets do not include any ordinary shares issued by Drax Group plc or any property occupied by the Group. The Group employs a building block approach in determining the long-term rate of return on pension plan assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation for the scheme. The net liability recognised in the balance sheet is particularly sensitive to the discount rate assumption, which is determined by reference to market yields at the balance sheet date on high quality corporate bonds, allowing for the duration of the scheme’s liabilities. It is estimated that an increase of 0.5% in the discount rate would have the effect of decreasing the net liability recognised in the balance sheet by approximately £16 million (2010: £15 million) and a decrease of 0.5% in the discount rate would increase the net liability recognised in the balance sheet by £19 million (2010: £17 million). The history of experience adjustments is as follows:

As at 31 December 2011 2010 2009 2008 2007 £m £m £m £m £m Defined benefit obligation (182.4) (167.2) (146.5) (114.4) (118.6) Fair value of plan assets 145.4 129.9 113.4 93.8 105.1 Deficit (37.0) (37.3) (33.1) (20.6) (13.5) Experience adjustments on plan liabilities (4.3) (9.6) (23.1) 13.2 (1.1) Experience adjustments on plan assets 0.6 3.4 8.0 (26.1) (2.2)

Defined contribution scheme Pension costs for the defined contribution scheme are as follows:

Years ended 31 December 2011 2010 £m £m Total included in staff costs (note 29) 2.9 1.9

The Group expects to contribute £13.9 million to its pension plans during the 12 months ended 31 December 2012. The Company intends to fund the deficit, agreed at the last triennial valuation, over the period to 31 December 2018. There wereno other transactions with directors forthe periods coveredbytheseconsolidated financialstatements. (2010: £6.0million); nosecurity or guarantee was provided. from Eaga plc totalled £5.3million(2010: £5.0 million), with atotal of£10.2million outstanding at31 December 2011 completion ofthe acquisition of thatcompany by Carillion plc. During the year ended31 December 2011, servicespurchased On 21 April 2011, Charles Berry resigned as the Chairman and as adirector ofEaga Limited (formerly Eaga plc), upon the non-market related vesting conditions. income statement, determined based on the fairvalue of the related awards at the dateof grant (note 23),asadjustedfor Amounts receivable under incentive schemes represents the expenses arising from share-based paymentsincluded in the Company contributions tomoney purchase pension schemes Aggregate amounts receivable under share-based incentive schemes Salaries andshort-term benefits remuneration of individual directors, together with the directors’ interests in thesharecapital ofDrax Group plc, is provide in aggregatefor eachof the categories specified24 “Related in partydisclosures”.IAS Further information about the The remuneration ofthe directors,whoareconsidered tobe thekey management personnel ofthe Group, is setout below Remuneration of keymanagementpersonnel statements. Transactions between subsidiaries andbetween the Co for eachare disclosed innote 3 tothe Company’s separate financial statements whichfollow theseconsolidated financial The Company’s subsidiary undertakings including the name, country of incorporation andproportion of ownership interest Subsidiary companies 32. Relatedparty transactions After five years Within twotofiveyears Within one year The future aggregate minimum lease payments undernon-cancellable operating leases are as follows: Future commitments topurchase fuelunder fixed and variable priced contracts Future support contracts notprovided in thefinancial statements Contracts placed forfuture capitalexpenditure notprovided in thefinancial statements 31. Capitalandotherfinancialcommitments in the audited partof the Remuneration Committee report. mpany and itssubsidiaries are As at 31 December 31 at As December 31 at As Years ended 31 December ended31 Years eliminatedconsolidation. on 1,400.7 4,728 3,317 1,145 68.4 22.9 £000 266 11.4 2011 2011 2011 0.9 7.2 3.3 accounts 2011 accounts Annual report and Drax Group plc 115 £m £m 1,345.7 2,749 3,562 £000 39.7 72.7 595 2010 2010 2010 d 218 0.4 3.8 5.7 £m £m 1.5

Financials Governance Business review 116 Drax Group plc Annual report and accounts 2011

Company – Independent auditor’s report

To the members of Drax Group plc We have audited the parent Company financial statements of Drax Group plc for the year ended 31 December 2011 which comprise the parent Company balance sheet and the related notes 1 to 7. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ responsibilities statement, the directors are responsible for the preparation of the parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our Report. Opinion on financial statements In our opinion the parent Company financial statements: − give a true and fair view of the state of the parent Company’s affairs as at 31 December 2011; − have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and − have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: − the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and − the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the parent Company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: − adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or − the parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or − certain disclosures of directors’ remuneration specified by law are not made; or − we have not received all the information and explanations we require for our audit. Other matters We have reported separately on the Group financial statements of Drax Group plc for the year ended 31 December 2011.

Carl D Hughes MA FCA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, UK 20 February 2012 Company balance sheet Chief Executive Finance Director FinanceDirector TonyQuinlan ExecutiveChief Dorothy Thompson Signed on behalf oftheBoard of directors: These financial statements were approved by the Board ofdirectors on 20February2012. Total equityshareholders’ funds Profit andloss account Share premiumaccount Capital redemption reserve Called-up share capital Capital andreserves Net assets Net current assets Amounts due to other group companies Current liabilities Cash at bank and inhand Amounts duefrom other group companies Current assets Investment in subsidiaries Fixed assets

Notes Notes 4 5 5 5 5 3 December 31 at As 420,688 469,766 479,395 479,395 42,148 (2,790) 15,057 12,419 12,318 9,629 1,502 £000 2011 101 accounts 2011 accounts Annual report and Drax Group plc 117

466,096 420,688 474,388 474,388 10,050 10,564 10,630 42,148 (2,338) 8,292 1,502 £000 2010 66

Financials Governance Business review 118 Drax Group plc Annual report and accounts 2011

Notes to the Company balance sheet

1. Summary of significant accounting policies The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law. The principal accounting policies are summarised below, and have been consistently applied to both years presented.

(A) Cash flow statement The cash flows of the Group are included in the Consolidated cash flow statement of Drax Group plc, whose accounts are publicly available. Accordingly, the Company has taken advantage of the exemption under FRS 1 “Cash flow statements” not to publish a cash flow statement.

(B) Related party transactions The Company has taken advantage of the exemption granted by paragraph 3(b) of FRS 8 “Related party disclosures” not to disclose transactions with other group companies.

(C) Fixed asset investments Fixed asset investments in subsidiaries are stated at cost less, where appropriate, provision for impairment.

2. Profit and loss account As permitted by Section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account for the year. The Company’s profit and loss account was approved by the Board on 20 February 2012. Drax Group plc reported a profit for the year ended 31 December 2011 of £125.1 million, or £0.6 million before dividends received from other group companies (2010: a profit for the year of £0.5 million). The Company has no employees other than the directors, whose remuneration was paid by a subsidiary undertaking and a proportion was re-charged to the Company. The amount re-charged during the year was £593,000 (2010: £578,000). The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2011 was £20,000 (2010: £20,000).

3. Fixed asset investments

Subsidiary undertakings £000 Carrying amount: At 1 January 2011 466,096 Capital contribution 3,670 At 31 December 2011 469,766

The capital contribution consists of two elements: a £0.1 million capital injection into a new subsidiary, and £3.6 million in relation to the share-based payment charge associated with the Executive Share Incentive Plan, Savings-Related Share Option Plan and Bonus Matching Plan schemes, which arises because the beneficiaries of the scheme are employed by subsidiary companies. For more information see note 23 to the consolidated financial statements. * Additions inyear. Additions * byguarantee. Limited (7) December 16 year end. (6) 24October year end. (5) 100% 100% 25October year end. (4) Formerly Drax Investments Limited. (3) end. year December 30 (2) 100% Ordinary undertaking. Heldbyanintermediate subsidiary Ordinary (1) Notes: Jersey Englandand Wales 100% below. as indicated except 100% Ordinary 100% All subsidiary undertakings operate in their country of incorporation. All subsidiary undertakings have31December yearends, England and Wales Ordinary Ordinary Salerosa Two Limited (non-trading company) Ordinary England and Wales Englandand Wales Salerosa One Limited (non-trading company) Englandand Wales Biomass InternationalDrax company) Inc.(non-trading * Drax Biomass International Limited (non-trading company) * Drax (International)Limited (holding company) * Drax Power International Limited (non-trading company) Haven Power Nominees Limited (non-trading company) Haven Power Limited(trading company, power retail) BondPower Limited (non-trading company) Drax Biomass(Tyneside) Limit Drax Biomass(Immingham) Limited (non-trading company) Drax Biomass(Selby) Lim Drax Biomass Developments Limited (holding compan Drax FuelSupplyLimited Drax Ouse (dormant company) Drax Power Limited (trading company, power generation) Drax Limited (holding company) Drax Holdings Limited (holding company) Drax Intermediate Holdings Limited (holding company) Drax Group Limited (holding company) Drax GCoLimited (non-trading company) Drax Finance Limited(holding company) of Name andnature business Subsidiary undertakings

(trading company,fuel supply) ited (non-trading company) d(o-rdn opn) EgadadWls riay 100% Ordinary Englandand Wales ed (non-trading company) (1) (1) nln n ae Odnr 100% Ordinary Englandand Wales amnIlns riay 100% Ordinary Cayman Islands (1) amnIlns riay 100% Ordinary Cayman Islands (1) (1)(2) nln n ae — England and Wales amnIlns riay 100% Ordinary Cayman Islands (6) (1)(6) () (5) EgadadWls riay 100% Ordinary Englandand Wales * EgadadWls riay 100% Ordinary Englandand Wales * (1) (1) ) nln n ae Odnr 100% Ordinary Englandand Wales y) nln n ae Odnr 100% Ordinary Englandand Wales (1) (1)

(1)(3) amnIlns riay 100% Ordinary Cayman Islands * (1) () (4) (1) () (5) nln n ae Odnr 100% Ordinary Englandand Wales nln n ae Odnr 100% Ordinary Englandand Wales (1) nln n ae Odnr 100% Ordinary Englandand Wales Country of incorporation and of Country nln n ae Odnr 100% Ordinary England and Wales registration registration S Odnr 100% Ordinary USA Type of share Type of share accounts 2011 accounts Annual report and Drax Group plc 119 (7) 100% Group effective shareholding

Financials Governance Business review 120 Drax Group plc Annual report and accounts 2011

Notes to the Company balance sheet

4. Called-up share capital

As at 31 December 2011 2010 £000 £000 Authorised:

16 865,238,823 ordinary shares of 11 ⁄29 pence each 99,950 99,950 Issued and fully paid:

16 2010 — 364,859,988 ordinary shares of 11 ⁄29 pence each — 42,148

16 2011 — 364,862,718 ordinary shares of 11 ⁄29 pence each 42,148 — 42,148 42,148

The movement in allotted and fully paid share capital of the Company during each year was as follows:

Years ended 31 December 2011 2010 (number) (number) At 1 January 364,859,988 364,853,890 Issued under employee share schemes 2,730 6,098 At 31 December 364,862,718 364,859,988

16 The Company has only one class of shares, which are ordinary shares of 11 ⁄29 pence each, carrying no right to fixed income. No shareholders have waived their rights to dividends.

Issued under employee share schemes On 1 April 2011, a total of 2,456 shares were issued in satisfaction of shares vesting in accordance with the rules of the Group’s Bonus Matching Plan to one individual whose employment with the Group had terminated due to retirement (1 September 2010: 6,098 shares, issued to six individuals). Additionally, on 28 September 2011, a total of 274 options under the Group’s Savings-Related Share Option Plan were exercised early, resulting in an issue of the same number of shares to one individual whose employment with the Group had terminated due to redundancy.

5. Analysis of movements in equity shareholders’ funds

Capital Share redemption Share Profit and loss capital reserve premium account Total £000 £000 £000 £000 £000 At 1 January 2010 42,147 1,502 420,688 93,463 557,800 Share capital issued (note 4) 1 — — (1) — Retained profit for the year — — — 534 534 Credited to equity for share-based payments — — — 2,525 2,525 Equity dividends paid (note 6) — — — (86,471) (86,471) At 1 January 2011 42,148 1,502 420,688 10,050 474,388 Retained profit for the year — — — 125,125 125,125 Credited to equity for share-based payments — — — 3,570 3,570 Equity dividends paid (note 6) — — — (123,688) (123,688) At 31 December 2011 42,148 1,502 420,688 15,057 479,395

subsidiary undertakings of the Company. The Company itself is not a guarantor ofthe Group’s debt. (detailed innote18to the consolidated financial statements),which is guaranteed and secured directly byeach ofthe princip The Company has granted acharge over the shares in itssubsidiary, Drax Finance Limited, in respect ofthe Group’s debt The guarantees havebeen issued for £nil consideration and the Company has not charged the subsidiaryfor the guarantees. The Company has provided unsecured guarantees to third parties in respect of contracts held by a subsidiary company. 7. Contingentliabilities £43.1 million) payable onor before 11 May 2012.The finaldividend ha payment of a finaldividendfor the yearended 31 December 2011 At theforthcoming Annual General Meeting the Board toshareholdersthat willrecommend a resolutionispassedtoapprove 13 May2011(2010:9.6pence per share paid on 14 May2010) Final dividend for the year ended31December 2010of17.9pence pershare paid on 14 October 2011 (2010: 14.1 pence pershare paidon15October 2010) Interim dividend forthe year ended 31 December 2011 of 16.0 pence per share paidon (based onthe number ofsharesinissueattherecorddate): Amounts recognised asdistributionsto shareholders intheyear 6. Dividends of 11.8pence per share (equivalent to approximately s not been included as a liability asat31December 2011. Years ended 31 December ended31 Years 123,688 58,378 65,310 £000 2011 accounts 2011 accounts Annual report and Drax Group plc 121

35,026 51,445 86,471 £000 2010 al

Financials Governance Business review 122 Drax Group plc Annual report and accounts 2011

Shareholder information

Key dates for 2012 At the date of publication of this document, the following are the proposed key dates in the 2012 financial calendar:

Annual General Meeting 18 April Ordinary shares marked ex-dividend(1) 25 April Record Date for entitlement to the final dividend(1) 27 April Payment of final dividend(1) 11 May Interim Management Statement mid May Financial half year end 30 June Announcement of half year results 31 July Interim Management Statement mid November Financial year end 31 December Notes: (1) The ex-dividend and record dates and the payment of the final dividend are all subject to shareholders approving the final dividend at the forthcoming Annual General Meeting.

Other significant dates, or amendments to the proposed dates above, will be posted on the Company’s website as and when they become available.

Results announcements Results announcements are issued to the London Stock Exchange and are available on its news service. Shortly afterwards, they are available under “Regulatory news” within the Investor section on the Company’s website.

Share price Shareholders can access the current share price of Drax Group plc ordinary shares on our website at www.draxgroup.plc.uk. During Stock Exchange trading hours the price shown on the website is subject to a delay of approximately 15 minutes and outside trading hours it is the last available price. The table below provides an indication of fluctuations in the Drax Group plc share price during the course of 2011, and the graph provides an indication of the trend of the share price throughout the year.

Closing price on Low during the year High during the year Closing price on 31 December 2010 (24 March 2011) (16 November 2011) 31 December 2011 368.3 pence 371.9 pence 581.5 pence 545.0 pence

Share price graph(1) as at 31 December 2011

600

500

400 Share price (p) price Share 300 Jan 11Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11

Notes: (1) The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.

Market capitalisation The market capitalisation, based on the number of shares in issue and the closing middle market price at 31 December 2011, was approximately £2.0 billion. Drax Group plc, as well the name andaddress inwhich the shares are held. When contacting Equiniti by telephone or inwriting it is advisable to have your shareholder reference to hand and quote − − Equiniti can be contacted as follows: − at www.draxgroup.plc.uk/investor/sharehol A range offrequentlyasked shareholder questions canalsobe foundon the Drax website We areable to offer arange of services and tailor thecommunications to meet your needs. Registering for electronic communications does notmean that you can no longer receive papercopies of documents. − − − − − − − Further information can beobtaineddirectlyfromthe charity at www.sharegift.org. capital gains tax implications (i.e. nogain or loss) ongifts ofshares to charity and it is possible toobtain income tax rel to dispose charitably of smallparcels of shares,likely costmore whichwouldmost to sellthan they are worth. There are no ShareGift (registered charity No. 1052686) is an independent charity which provides a freeservice forshareholders wishing ShareGift shares are held by third party registered holders to mustbe that directed registered holder and not to Drax or Equiniti. the third party registered holder, whowillthen nominate you. All communications by beneficial owners ofshares where the Companiesunderthe wish, receiveinformationrights Section 146of Act If your shares areregistered in the name ofa third party (i “informationBeneficial ownersand rights” − Once registeredwithShareview you are able to: The registration process is easy viaEquiniti’s secure websitewww.shareview.com. Registering for online communications allows you tohave more contro Online communications − regarding; Shareholders should contactEquiniti directly if theyhave a and for dividend payments. Drax’s share register is maintained byEquiniti Limited (“Equin Drax shareholder queries on “Contact Us” onourwebsite,ordirect bye-mail to [email protected]. Printed copies of reports can be requested by writing to theCompany Secretary at the registered office, by clicking Copies ofall financial reports wepublish are available from the date ofpublication and can be downloaded from ourwebsite. reports Financial             Write to Equiniti atEquiniti Limited, Aspect or +44 121 4157047 fromoutside the UK. other providers’ costsmayvary. Lines are open from8.30amto5.30pm,Monday to Friday — excluding Bank Holidays); Call Equiniti on 0871 3842030fromwithin the UK (callstothis number cost 8 pence per minute fromaBTlandline, Death ofaregistered shareholder. Payment of dividends direct to a bank or building society account; buy or sell shares online. Lost or out-of-date dividendcheques; amend theway you receive dividends; and Lost sharecertificates; amend someof yourpersonalamend details; Change of name oraddress; elect how Drax communicates with you; Transfer ofshares; der_info/shareholderfaq. House, SpencerRoad,Lancing,West Sussex BN99 6DA. .e. an ISAprovider or other nominee company) you may, if you query relatingquery to their Drax shareholding. In particular queries iti”), who is primarily responsib l over theadministration ofyourshareholding. 2006. In order forthis to happen, you must contact le forupdating the share regis accounts 2011 accounts Annual report and Drax Group plc 123 ief. ter

Financials Governance Business review 124 Drax Group plc Annual report and accounts 2011

Shareholder information

Share frauds (“Boiler room scams”) In recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence offering to purchase their shares at apparently inflated prices. It is often the case that the caller, or message in the correspondence claims that they represent a majority shareholder who is looking to take over the Company. Some Drax Group plc shareholders have received such communications in the latter part of 2011 and the early part of 2012. At the time of this report, the Company was not the subject of a take-over attempt, hostile or otherwise, and approaches such as those experienced by our shareholders are usually made by unauthorised companies and individuals. The approaches can be very persistent and extremely persuasive. Shareholders should be very wary of any unsolicited advice, offers to buy shares at a premium or offers of free reports into the Company. If you receive any unsolicited investment advice or any offers to purchase your shares: − make sure you get the correct name of the person and organisation; − check that they are properly authorised by the Financial Services Authority (”FSA”) before getting involved. You can check at www.fsa.gov.uk/register; − the FSA also maintains on its website a list of unauthorised overseas firms who are targeting, or have targeted, UK investors and any approach from such organisations should be reported to the FSA so that this list can be kept up to date and any other appropriate action can be considered. If you deal with an unauthorised firm, you would not be eligible to receive payment under the Financial Services Compensation Scheme; − do not provide any personal details to callers e.g. bank details, full address; − do not send your share certificates to anyone; and − report the matter to the FSA either by calling 0845 606 1234 (cost of calls may vary) or visiting www.fsa.gov.uk/pages/consumerinformation.

The FSA advises that, if it sounds too good to be true, it probably is. The FSA also recommend ten steps to help protect shareholders and consumers from scams such as this. More detailed information on this or similar activity can be found on the FSA website (details above).

(1) Ordinary shares of 11 of shares Ordinary (1) Notes: Total 5,000,001 and above 500,001–5,000,000 100,001–500,000 10,001–100,000 5,001–10,000 1,001–5,000 501–1,000 201–500 101–200 1–100 Range Total Institutional and corporate holders Private shareholders Analysis of shareholders The categories of ordinary shareholders and theof ranges andsize Shareholder profile as at 31 December 2011 Shareholders by

16

percentage ownership percentage ⁄ 29 penceeach. 99.20% shareholders: Institutional 0.80% shareholders: Private shareholders shareholders as at 31 December 2011 Shareholders bynumber Number of Number of shareholdings as at 31 December 2011are set out below: 2,924 2,924 ,5 32 2,921,8080.80 53.28 1,558 ,6 67 361,940,91099.20 46.72 1,366 5 .99,582,7822.63 8.69 254 2 13 515,6640.14 21.37 625 2 .430,618,331 8.39 4.34 194,3210.05 127 18.16 531 6 .726,5010.01 5.57 163 1 .4846,8710.23 4.04 118 1 11 2,036,1090.56 31.16 911 1 .65,8510.00 3.86 113 023 106,349,47029.15 2.39 70 204 214,686,81858.84 0.41 12 100.00 100.00 % % 364,862,718 364,862,718 Number of Number of shares shares As at 31 December 2011 As at 31 December 2011 1,558 shareholders: Private 1,366 shareholders: Institutional accounts 2011 accounts Annual report and Drax Group plc 125 (1) (1)

100.00 100.00 % %

Financials Governance Business review 126 Drax Group plc Annual report and accounts 2011

Shareholder information

Company information, professional advisers and service providers

Drax Group plc Registered office and trading address Drax Power Station Selby North Yorkshire YO8 8PH Telephone +44 (0)1757 618381 Fax +44 (0)1757 612192 www.draxgroup.plc.uk Registration details Registered in England and Wales Company Number: 5562053 Company Secretary Philip Hudson Enquiry e-mail address [email protected]

Professional advisers and service providers Auditor Deloitte LLP 2 New Street Square, London EC4A 3BZ Bankers Barclays Bank PLC 1 Churchill Place, Canary Wharf, London E14 5HP Brokers Deutsche Bank AG Winchester House, 1 Great Winchester Street, London EC2N 2DB

UBS Investment Bank 1 Finsbury Avenue, London EC2M 2PP Financial PR Brunswick Group LLP 16 Lincoln’s Inn Fields, London WC2A 3ED Registrars Equiniti Limited Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA Remuneration PricewaterhouseCoopers LLP 1 Embankment Place, London WC2N 6RH Solicitors Norton Rose LLP 3 More London Riverside, London SE1 2AQ

Glossary

Drax Group plc and its subsidiaries. Drax Groupplcand itssubsidiaries. Group are higherthantheagreedtariff. ifelectricityprices money toconsumers generatorsreturn tosee the potential can beatwo-way mechanism thathas electricity inthemarket.TheFiTCfD fromselling the generator’srevenues to madeinaddition payment wouldbe at themarketprice).TheFeed-inTariff selltheirelectricity they tariff (assuming receivesanagreed ensure thegenerator where variablepaymentsaremade to setatafixedlevel A long-termcontract for Difference(FiT CfD) Feed-inwith Contracts Tariff boiler walls. situatedinthe burners mills) tothe pulverising the directly (thatis,avoiding biomassisfed The processwhereby Direct injection co-firing exchange trades. andpower Contracts withcounterparties Bilateral contracts ofnetmerchantsales. byvolume divided bilateralcontracts from Revenue derived Average captureprice 8oftheGridCode. Condition in Connection within acceptablelimits.Theyaredescribed electricitysupplies secure maintaining and demandor used forbalancingsupply Grid toNational Services provided Ancillary services

ocdotg planned outages. excluding inplantavailability Any reduction Forced outage contracts. onderivative unrealised gains/(losses) beforeinterest, tax, depreciation Profit EBITDA Drax Groupplc. Company order tobalancethesystemminute in market participants’bidsandoffers, through reduce generation/consumption, or generation/consumption additional the SystemOperatorcancallupon which marketthrough The sub-setofthe Balancing Mechanism available forgeneration. Average percentageoftimetheunitswere Availability Standards. Reporting Financial International IFRSs maintain systemfrequency. byNationalGridto Services purchased service response Frequency of property, plant and equipment and andequipment of property,plant ondisposal gains/(losses) and amortisation, by minute.

of coal and other fuels including CO of coalandotherfuelsincluding thecost (being marginal costofproduction in themarketforsalesofelectricityand thepriceavailable The differencebetween Dark green spread to thesystem. week remainingpermanentlysynchronised perday,sevendays 24hours Running Baseload charges). sales (includesimbalance byvolumeofnet Power revenuesdivided Average achievedprice renewable sources. renewable sources. from qualifying generated supplies Climate ChangeLevyexemptelectricity of Certificates.Evidence Levy Exemption LECs (“DUoS”). useofsystemcharges and distribution services useofsystemcharges(“BSUoS”) balancing system charges(“TNUoS”), useof network Includes transmission Grid charges outagecapacity. capacity, lessplanned a percentageofthemaximumtheoretical expressedas restrictions forced outagesor due to The capacitywhichisnotavailable Forced outage rate gasemissions. greenhouse all capable ofbeingextendedtocover of CO reduce emissions acrosstheEUto mechanism introduced TradingSchemeisa The EUEmissions EU ETS emissions allowances). 2 accounts 2011 accounts Annual report and Drax Group plc 127 ; thescheme is 2

Financials Governance Business review 128 Drax Group plc Annual report and accounts 2011

Glossary

Load factor Lost time injury rate Net Balancing Mechanism Net sent out generation as a percentage of The frequency rate is calculated on the Net volumes attributable to accepted bids maximum sales. following basis: lost time injuries/hours and offers in the Balancing Mechanism. worked times 100,000. Lost time injuries are defined as occurrences where the injured party is absent from work for more than 24 hours.

Net cash/(debt) Net merchant sales Net sales Comprises cash and cash equivalents, Net volumes attributable to bilateral The aggregate of net merchant sales and short-term investments less overdrafts contracts and power exchange trades. net Balancing Mechanism. and borrowings net of deferred finance costs.

Occupational health and safety Planned outage Planned outage rate assessment series (OHSAS) The OHSAS specification gives A period during which scheduled The capacity not available due to planned requirements for an occupational health maintenance is executed according to the outages expressed as a percentage of the and safety management system to enable plan set at the outset of the year. maximum theoretical capacity. an organisation to control occupational health and safety risks and improve its performance.

Pond fines Power exchange trades Power revenues Coal dust and waste coal from the cleaning Power sales or purchases transacted on The aggregate of bilateral contracts and and screening process which can be used the APX UK power trading platform. Balancing Mechanism income/expense. for coal-fired power generation.

ROCs Summer Technical availability Renewables Obligation Certificates. The calendar months April to September. Total availability after planned and forced outages.

Through-the-mill co-firing Total recordable injury rate (TRIR) UK NAP The process whereby biomass passes first The frequency rate is calculated on the UK National Allocation Plan. through the pulverising mills before going following basis: (lost time injuries + worst to the burners situated in the boiler walls. than first aid)/hours worked x 100,000.

Underlying earnings per share Winter Calculated as profit attributable to equity The calendar months October to March. holders, adjusted to exclude the after tax impact of unrealised gains and losses on derivative contracts, and exceptional items, divided by the weighted average number of ordinary shares outstanding during the period.

Design and production: Radley Yeldar | www.ry.com Print: Park Communications Ltd This report has been printed on Cocoon Silk which is 100% recycled and FSC certified. This report was printed by an FSC and ISO 14001 accredited printer using vegetable oil and soya based inks. FSC – Forest Stewardship Council. This ensures that there is an audited chain of custody from the tree in the well-managed forest through to the finished document in the printing factory. ISO 14001 – A pattern of control for an environmental management system against which an organisation can be certified by a third party. Drax Group plc Drax Power Station Selby North Yorkshire YO8 8PH Telephone: +44 (0)1757 618381 Fax: +44 (0)1757 612192 www.draxgroup.plc.uk