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

Drax Group plc – Annual report – 31 December 2020

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 158. The table below makes adjustments for any non-cash accounting items to reconcile the Group’s net (loss)/profit for the year to the amount of cash generated from the Group’s operations.

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

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

Cash from ROCs is typically realised several months after the ROC is earned; however, through standard ROC sales and ROC purchase arrangements the Group are able to accelerate cash flows over a proportion of these assets. The net impact of ROC purchases and ROC sales on operating cash flows was a £74.0 million outflow (2019: £131.2 million inflow), due to fewer ROCs being sold at the end of 2020 compared to the end of the previous year. This is reflected as an increase (2019: decrease) in ROC assets and is a component of the overall net decrease (2019: decrease) in ROC assets shown in the table above. The level of ROCs generated, purchased and sold during the period is set out in note 3.4. The Group also has access to facilities enabling it to sell ROC trade receivables on a non-recourse basis. These facilities were utilised during the year but no amounts remained outstanding at 31 December 2020 (2019: £nil).

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

From time to time, where market conditions change, the Group can rebase foreign currency contracts (including cross-currency interest rate swaps). In 2020, this generated a working capital outflow due to less cash being released from rebased trades at the end of 2020 than in the prior year. This is reflected as an adjustment to derivative remeasurements in the table on page 187. The total cash benefit released from related trades that remained outstanding at 31 December 2020 was £80.1 million (2019: £106.8 million). This cash benefit includes £24.4 million (2019: £84.3 million) released from foreign currency contracts and £55.7 million (2019: £22.5 million) from cross-currency interest rate swaps.

The Customers business has access to a facility which enables it to accelerate cash flows associated with trade receivables on a non-recourse basis, which generated a net cash inflow of £7.8 million in the year ended 31 December 2020, reflected as a reduction in receivables in the table on page 187 (2019: net cash inflow of £12.8 million reflected as a reduction in receivables in the table on page 187). The facility terms were amended in the prior year, increasing the facility size to £200.0 million from £150.0 million. Utilisation of the facility was £170.0 million at 31 December 2020 (2019: £162.2 million).

The Group has sought to normalise payments across its supplier base resulting in certain suppliers extending payment terms and some reducing terms. Suppliers are able to access a supply chain finance facility provided by a bank, for which funds can be accelerated in advance of the normal payment terms. The facility does not affect the Group’s working capital, as payment terms remain unaltered with the Group. At 31 December 2020, the Group had trade payables of £43.7 million (2019: £33.1 million) related to reverse factoring. The Group also has access to a number of payment facilities to leverage scale and efficiencies in transaction processing, whilst providing a working capital benefit for the Group due to a short extension of payment terms within a normal working capital cycle. The amount outstanding under these facilities at 31 December 2020 was £63.6 million (2019: £90.6 million).