IAS 7 additional information, disclosure of factoring and reverse factoring and collateral effects on operating cash flows

Drax Group plc – Annual report – 31 December 2021

Industry: utility

4.4 Notes to the consolidated cash flow statement (extract)

Cash generated from operations

Cash generated from operations is the starting point of the Group’s cash flow statement on page 187. The table below makes adjustments for any non-cash accounting items to reconcile the Group’s net profit/(loss) for the year to the amount of cash generated from the Group’s operations.

(1) Certain remeasurements of derivative contracts includes the effect of non-cash unrealised gains and losses recognised in the income statement and cash realised from derivative contracts designated into hedge relationships under IFRS 9, where the gain or loss is held in the hedge reserve pending release to the income statement in the period the hedged transaction occurs, as well as rebasing impact.

The Group has a strong focus on cash flow discipline and managing liquidity. The Group enhances its working capital position by managing payables, receivables and inventories to make sure the working capital committed is closely aligned with operational requirements. When compared to the year end position, such measures have been utilised to a broadly consistent level throughout the year unless otherwise stated. The impact of these actions on the cash flows of the Group is described below.

The cash flow impacts described below are based on the estimated impact on the current year when compared to the cash flows that would have been received had the Group not taken these actions. The current year impact is also adjusted to take account of actions taken in prior years, which have accelerated cash flows that would otherwise have been received in the current year had no actions been taken. The intention is to present the overall cumulative impact on the current year cash flow from the actions taken.

Cash from ROCs is typically realised several months after the ROC is earned; however, through standard ROC sales and ROC purchase arrangements the Group is able to accelerate cash flows over a proportion of these assets. The net impact of ROC purchases and ROC sales on operating cash flows was a £22.3 million outflow (2020: £74.0 million outflow), due to fewer ROCs being sold at the end of 2021 compared to the end of the previous year. This is reflected as an increase (2020: increase) in ROC assets and is a component of the overall net increase of £161.8 million (2020: decrease of £23.1 million) in ROC assets shown in the table above. The level of ROCs generated, purchased and sold during the period is set out in note 3.3. The Group also has access to facilities enabling it to sell ROC trade receivables on a non-recourse basis. These facilities were utilised during the year but no amounts remained outstanding at 31 December 2021 (2020: £nil).

Utilisation of both of these methods to accelerate cash flows is higher around the middle of ROC compliance periods (1 April to 31 March) as the Group has generated a large amount of ROCs but energy suppliers do not yet require ROCs to settle their obligation. At the start of the compliance period the Group has not generated large amounts of ROCs, and towards the end of the compliance period energy suppliers are purchasing ROCs to settle their obligation, therefore utilisation of these methods is lower as the Group has less ROCs available.

From time to time, where market conditions change, the Group can rebase foreign currency contracts (including cross-currency interest rate swaps). In 2021, this generated a working capital outflow of £32.0 million (2020: £26.7 million outflow) due to less cash being released from rebased trades at the end of 2021 than in the prior year. This is reflected as an adjustment to derivative remeasurements in the table on page 224. The total cash benefit released from related trades that remained outstanding at 31 December 2021 was £48.1 million (2020: £80.1 million). This cash benefit is made up of £nil (2020: £24.4 million) released from foreign currency contracts and £48.1 million (2020: £55.7 million) from cross-currency interest rate swaps.

The Customers business has access to a £200.0 million facility which enables it to accelerate cash flows associated with amounts receivable from energy supply customers on a non-recourse basis, which generated a net cash inflow of £30.0 million in the year ended 31 December 2021 (2020: net cash inflow of £7.8 million), reflected as a reduction in receivables in the table on page 224. Utilisation of the facility was £200.0 million at 31 December 2021 (2020: £170.0 million).

The Customers’ receivables facility was due to mature in June 2022. Subsequent to the year end the Group has refinanced this facility, extending the maturity to January 2027 and increasing the size of the facility to £300.0 million.

There has been significant volatility in power and commodity markets during 2021. The Group actively manages the liquidity requirements, including collateral, associated with the hedging of power and other commodities. At 31 December 2021 the Group had a net posting of collateral. However, the design of the Group’s trading agreements and methods of lodging collateral resulted in a cash inflow of £168.3 million in 2021 (2020: £12.0 million inflow) reflected as an increase (2020: increase) in payables in the table on page 224. See notes 4.1 and 7.6 for further details on cash collateral receipts and non-cash collateral postings respectively.

The Group has sought to normalise payments across its supplier base resulting in certain suppliers extending payment terms and some reducing terms. Suppliers are able to access a supply chain finance facility provided by a bank, for which funds can be accelerated in advance of the normal payment terms. The facility does not affect the Group’s working capital, as payment terms remain unaltered with the Group. At 31 December 2021, the Group had trade payables of £50.4 million (2020: £43.7 million) related to reverse factoring. The Group also has access to a number of payment facilities to leverage scale and efficiencies in transaction processing, whilst providing a working capital benefit for the Group due to a short extension of payment terms within a normal working capital cycle. The amount outstanding under these facilities at 31 December 2021 was £62.2 million (2020: £63.6 million).

4.1 Cash and cash equivalents

Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets is approximately equal to their fair value. It is the Group’s policy to invest available cash on hand in short-term, low-risk bank accounts or deposit accounts.

Cash collateral is sometimes paid or received in relation to the Group’s commodity and treasury trading activities. When derivative positions are out of the money for the Group, collateral may be required to be paid to the counterparty. When derivative positions are in the money, collateral may be received from counterparties. These positions reverse when contracts are settled and the collateral is returned.

The cash and cash equivalents balance above includes a net £172.8 million (2020: £4.5 million) of collateral receipts from counterparties. The increase in collateral is predominantly due to the significant price increases seen in the power, gas and carbon markets. See note 7.6 for details on collateral requirements the Group has met through its available non-cash credit facilities.

7.6 Contingent assets and liabilities (extract)


In addition to the amount drawn down against the bank loans, certain members of the Group guarantee the obligations of a number of banks in respect of letters of credit issued by those banks to counterparties of the Group. As at 31 December 2021, the Group’s contingent liability in respect of letters of credit issued under the RCF amounted to £74.4 million (2020: £67.8 million).

The Group also guarantees obligations in the form of surety bonds with a number of insurers amounting to £142.1 million (2020: £86.7 million).

Collateral is sometimes required to be provided in relation to the Group’s commodity and treasury trading activities. When derivative positions are out of the money for the Group, collateral may be required to be provided to the counterparty. These positions reverse when contracts are settled, and the collateral is returned. The Group has access to certain facilities to enable it to cover collateral requirements to counterparties through letters of credit or surety bonds.

The letters of credit and surety bond amounts above include amounts utilised to cover commodity trading collateral requirements of £42.5 million (2020: £10.5 million) and £107.1 million (2020: £45.0 million) respectively. See note 4.1 for details on net cash collateral the Group has received from counterparties.